UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB-A
                          Amendment No.1 to Form 10-KSB

(Mark One)
   [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                                     For the fiscal year ended December 31, 2006
                                       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
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

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

  100 Pine Street
  Suite 2450
  San Francisco, California                                94111
-----------------------------------------   ------------------------------------
  (Address of principal executive office)                (zip code)

Issuer's telephone number           (415) 288-9595
--------------------------------------------------------------------------------

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

Securities registered pursuant to Section 12(g) of the Act: None.

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

Registrant  meets the condition of General  Instruction  G(1)(a) and (b) of Form
10-KSB and is filing this form 10-KSB pursuant to its reduced disclosure format.

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

Indicate by check mark whether the  registrant  is a shell company as defined in
Rule 12b-2 of the exchange Act).
                                 Yes [ ] No[X]

Issuer's revenues for its most recent fiscal year were $2,478,609.

As of  March 2,  2007,  the  issuer's  common  shares  closed  at $8.65  and the
aggregate  market value of the issuer's shares of Common Stock,  $.01 par value,
held by non-affiliates of the issuer was approximately  $2,396,050. At that date
approximately  380,532 common shares were  outstanding and 277,000 common shares
were held by non-affiliates.

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                          <C>
PART I ....................................................................................   4

ITEM 1. DESCRIPTION OF BUSINESS ...........................................................   4
   General ................................................................................   4

MORTGAGE INVESTMENT BUSINESS ..............................................................   4
   General ................................................................................   4
   Mortgage Loan Portfolio ................................................................   4
   Financing ..............................................................................   5

MORTGAGE BANKING BUSINESS .................................................................   5
   General ................................................................................   5

HEDGING ...................................................................................   5

SERVICING .................................................................................   5
   Servicing Portfolio ....................................................................   6
   Geographical Distribution ..............................................................   6
   Interest ...............................................................................   6
   Maturity ...............................................................................   6
   Delinquencies ..........................................................................   7

REGULATION ................................................................................   7

STRATEGY AND COMPETITION ..................................................................   7

EMPLOYEES .................................................................................   7

SELECTED FINANCIAL DATA ...................................................................   8

ITEM 2. DESCRIPTION OF PROPERTY ...........................................................   8

ITEM 3. LEGAL PROCEEDINGS .................................................................   8

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS ...............................   9

PART II ...................................................................................  10

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .........................  11

OVERVIEW ..................................................................................  11

CRITICAL ACCOUNTING POLICIES ..............................................................  11
   Operating Strategy .....................................................................  12
   Loan Origination .......................................................................  12
   Loan Servicing .........................................................................  12
   Contingencies and Commitments ..........................................................  13

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005 .....................  13

LIQUIDITY AND CAPITAL RESOURCES ...........................................................  14

LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2006 ......................  14

LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2005 ......................  14

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .................................  15
   Market Risk ............................................................................  15
   Asset and Liability Management .........................................................  16

ITEM 7. FINANCIAL STATEMENTS ..............................................................  16
</TABLE>

                                        2

<PAGE>

<TABLE>
<S>                                                                                          <C>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES ...............................................................................  18

ITEM 8A. CONTROLS AND PROCEDURES ..........................................................  18

PART III ..................................................................................  18

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT ....................................................  18

DIRECTORS .................................................................................  18

AUDIT COMMITTEE-FINANCIAL EXPERTS .........................................................  19

ITEM 10. EXECUTIVE COMPENSATION ...........................................................  20

COMPENSATION OF OFFICERS ..................................................................  20

COMPENSATION OF DIRECTORS .................................................................  20
   Director Fees ..........................................................................  20
   Committee and Other Meeting Fees .......................................................  20
   Reimbursements .........................................................................  20

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ...............................................................  20
   (a)   Equity Compensation Plan Information .............................................  20
   (b)   Security Ownership of Certain Non-Management or Non-Affiliate Beneficial Owners ..  21
   (c)   Security Ownership of Management .................................................  21
   (d)   Changes in Control ...............................................................  22

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................................  22
   Arrangements and Transactions with Directors, Officers, Members of the Former Manager
   and Other Affiliates ...................................................................  22
   Other Business Activities ..............................................................  22

PART IV ...................................................................................  23

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .................................................  23
   (a)   Exhibits .........................................................................  23
   (b)   Reports on Form 8-K ..............................................................  23
   (c)   Miscellaneous Exhibits ...........................................................  24

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...........................................  24

SIGNATURES ................................................................................  24

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 ............................................................  26

CERTIFICATION OF FORM 10-KSB OF CAPITAL ALLIANCE INCOME TRUST LTD., .......................  27

CERTIFICATION OF FORM 10-KSB OF CAPITAL ALLIANCE INCOME TRUST LTD., .......................  28

CONSENT OF ROTHSTEIN, KASS & COMPANY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ...  29

</TABLE>

                                        3

<PAGE>

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

ITEM 1. DESCRIPTION OF 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.  The
Trust was  incorporated  in Delaware on December 12, 1995. On April 15, 1997 the
Trust formed CAFC, a REIT subsidiary, to conduct a mortgage banking business. On
March 31, 2006,  CAFC suspended the  origination of mortgages for the benefit of
the Company.

      Capital Alliance Income Trust Ltd., A Real Estate  Investment  Trust, is a
specialty  mortgage  finance  company,   which,  together  with  its  subsidiary
emphasizes two areas referred to herein as (1) the Mortgage  Investment Business
and (2) the  Mortgage  Banking  Business.  During  2006 and 2005,  all  mortgage
investments  originated  by the Company were  originated  by CAFC and  portfolio
investments  were  sold to the  Trust by CAFC at par.  The  Trust  conducts  the
Mortgage  Investment  Business,  which  invests  for the  Trust's  portfolio  of
collateral-oriented,  high-yielding,  non-conforming  residential mortgage loans
and home equity loans.  The Mortgage  Banking  Business,  which  originated  and
purchased  as  a  wholesale  mortgage  banker,   conforming  and  non-conforming
residential  mortgage  loans is conducted  through  CAFC.  Prior to December 29,
2006, the Trust and CAFC were externally  advised by Capital Alliance  Advisors,
Inc. ("CAAI" or "Former Manager").  On December 29, 2006, the Former Manager was
terminated and the Company became self advised.

MORTGAGE INVESTMENT BUSINESS

General
-------

      The Trust's Mortgage  Investment  Business,  acquires mortgage loans which
are  principally  non-conforming  residential  mortgage loans with a maximum 75%
combined  loan-to-value  ratio for investment.  The Mortgage Investment Business
invests in both first and junior  mortgage loans.  Income is earned  principally
from the net interest  income  received on mortgage loans held in its portfolio.
Such  acquisitions are financed with  shareholders'  equity and borrowings.  The
Bylaws  restricted  borrowings,   other  than  warehouse  lines  of  credit  and
repurchase  financing  obtained by CAFC, to four (4) times the  Company's  total
shareholders' equity.

Mortgage Loan Portfolio
-----------------------

      The Mortgage  Investment  Business  invests a  substantial  portion of its
portfolio in  non-conforming  first and junior  mortgage  loans.  Although these
investments  may be  acquired  from  unaffiliated  third  parties  or the Former
Manager,   Management  believes  that  non-conforming   mortgage  loans  provide
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 currently  originated or purchased for the Trust's
portfolio have a combined loan-to-value, at the time of origination, of not more
than 75% of the  collateral's  value.  Mortgage  loans  that  defer  part of the
interest  payment  (negative  amortization)  are not  acquired,  if the  maximum
deferred  payment  balance,  when added to the  original  mortgage  balance will
exceed  75%  of  the  collateral's  value  at  the  time  of  origination.   The
collateral's  value is verified by  independent  appraisal.  During  2006,  CAFC
transferred  12 loans  with a total  nominal  value of  $6,108,330  that did not
satisfy CAIT's standard underwriting criteria.

      As of December 31, 2006 the Mortgage  Investment  Business loan  portfolio
totaled  $17,121,939 with an average loan size of $439,024,  an average weighted
yield of  11.16%,  a  weighted  average  adjusted  maturity  of 24 months  and a
weighted  average  combined  loan-to-value  ratio of 72%.  First  deeds of trust
comprised  50% of the  portfolio's  dollar  value  and  junior  deeds  of  trust
comprised  50%. As of December 31, 2005 the Mortgage  Investment  Business  loan
portfolio totaled $19,991,245 with an average loan size of $425,346,  an average
weighted yield of 11.17%, a weighted average adjusted  maturity of 32 months and
a weighted  average  combined  loan-to-value  ratio of 70%. First deeds of trust
comprised  57% of the  portfolio's  dollar  value  and  junior  deeds  of  trust
comprised  43%.  These  mortgage  loans are  concentrated  in California  due to
California's prevalence of higher property values and mortgage loan balances.

                                        4

<PAGE>

Financing
---------

      The Mortgage Investment  Business is financed by the shareholders'  equity
and bank borrowings. The Bylaws restrict the encumbrance of the Company's assets
to four (4) times its total shareholders' equity after excluding lines of credit
and other financing  obtained by CAFC.  Additional  lines of credit secured by a
portion of the investment  mortgage loan portfolio at rates  consistent with the
financing objectives described herein may be sought.

MORTGAGE BANKING BUSINESS

General
-------

      On  November  11,  2004,  the  Trust was  notified  that its  entire  CAFC
investment  would be acquired by the common  shareholder of CAFC.  Subsequently,
the Trust  determined  that CAFC  required  reporting as an asset held for sale.
However,  CAFC's  common  shareholder  withdrew its offer to acquire the Trust's
investment in CAFC during the 4th Quarter of 2005 and the Trust instead acquired
the common shares of CAFC. Subsequently,  the Trust's Board of Directors decided
to discontinue CAFC's Mortgage Banking Business and monetize its assets.

      The  Mortgage  Banking  Business  consisted  of the  origination  and  the
purchase and sale of conforming  and  non-conforming  mortgage  loans secured by
first  liens  and  junior  liens  on  single  (one-to-four)  family  residential
properties.  The  Mortgage  Banking  Business  provided  a conduit  between  the
originators of such mortgage loans and permanent  investors in such loans.  CAAI
contracted  with  CAFC  to  provide  management,   mortgage  origination,   loan
processing, underwriting, and secondary sales services.

      CAFC  purchased or originated  each loan from mortgage  bankers,  mortgage
brokers or  existing  borrower  relationships.  The  Mortgage  Banking  Business
assumed  the  potential  risk of  delinquency  and/or  credit  losses as well as
interest  rate  risk in the  event of a delay in the  sale of such  loans.  Such
on-going  risks,  upon the sale of a loan  will  pass to the  purchaser  without
recourse to CAFC. CAFC's  origination risk was minimized by the relatively short
period that such loans were held prior to sale.  Loans not  purchased by for the
Mortgage  Investment  Business were sold in the secondary  market  through whole
loan sales or to an affiliate of the Former Manager, Calliance Realty Fund, LLC.
However,  to suspend  CAFC's  operations  during 2006,  twelve (12) loans with a
total nominal value of $6,108,330 were  transferred to CAIT that did not satisfy
CAIT's standard underwriting criteria or investment objectives.  These loans had
a lower yield or a cumulative loan-to-value greater than seventy-five percent.

      The Mortgage  Banking  Business  acquired all of the  servicing  rights on
loans it  originated or purchased and such  servicing  rights were  relinquished
when loans were sold into the secondary  market.  The Mortgage  Banking Business
generally  had 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, fraud in the origination process or early default on such mortgage loan.

HEDGING

      Most mortgage loans held by the Mortgage  Investment  Business carry fixed
rates and have  relatively  short  maturities.  As the  portfolio of  fixed-rate
mortgage loans increases or if the portfolio's scheduled 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  Company  based  on  various  factors,
including market  condition,  the expected volume of mortgage loan  originations
and purchases for investment and the mortgage volume and 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  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 a
period of  rising  and  fluctuating  interest  rates.  Therefore,  the  Mortgage
Investment  Business may be prevented from effectively hedging its interest rate
risks, without significantly reducing its return on equity.

SERVICING

      The Company acquires mortgage loans with mortgage  servicing  rights.  Any
mortgage  loan sold by the  Company is sold with the loan's  mortgage  servicing
rights released.  The Company does not separately  acquire or maintain servicing
rights. The Company's loan servicing responsibilities is currently outsourced to
the Former Manager. Loan servicing

                                        5

<PAGE>

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.  With the written approval of the Company, all or a portion
of the  aforementioned  servicing  responsibilities  may be subcontracted by the
Former Manager.

Servicing Portfolio
-------------------

      The following tables set forth certain  information  regarding the Trust's
Mortgage Investment Business servicing portfolio of loans for the years ended.

                                         December 31, 2005   December 31, 2006
                                         -----------------   -----------------

Beginning servicing portfolio               $ 19,053,474        $ 19,991,245
Loans added to the servicing portfolio        15,879,353           8,269,966

Loans sold, servicing released and
  principal paydowns (1)                      14,941,582          11,139,272
                                            ------------        ------------

Ending servicing portfolio                  $ 19,991,245        $ 17,121,939
                                            ============        ============

Number of loans serviced                              47                  39
Average loan size                           $    425,346        $    439,024

      (1) Includes normal loan payoffs, prepayments,  principal amortization and
foreclosures.

Geographical Distribution
-------------------------

      The following table sets forth the geographic  distribution of the Trust's
Mortgage Investment Business servicing portfolio at the dates presented:

                            December 31, 2005            December 31, 2006
                          --------------------         --------------------
                           Number     $-% of            Number     $-% of
   State                  of loans   Portfolio         of loans   Portfolio
   -------                --------   ---------         --------   ---------

   CA                        45          97%              34         96%
   Other                      2           3%               5          4%
                            ---        ----              ---       ----

   Totals:                   47         100%              39        100%
                            ===        ====              ===       ====

Interest
--------

      The weighted average interest for the Trust's Mortgage Investment Business
portfolio  of loans at December 31, 2005 was 11.17% and at December 31, 2006 was
11.16%.

Maturity
--------

      The weighted average adjusted maturity of the Trust's Mortgage  Investment
Business  portfolio  of loans at December 31, 2005 was 32 months and at December
31, 2006 was 24 months.  The following table shows the Trust's maximum scheduled
loan maturities at the dates presented.

                              December 31, 2005            December 31, 2006
                          ------------------------     ------------------------
       Terms                 Amount       $-% of          Amount       $-% of
     of Loans               of loans     Portfolio       of loans     Portfolio
   ------------           ------------   ---------     ------------   ---------

   0-12 months               4,055,780       20%          6,838,011       40%
   13-24 months              5,286,537       26%          2,164,381       13%
   25-36 months              3,579,435       18%          1,347,685        8%
   37-48 months              1,389,308        7%          1,570,024        9%
   Over 48                   5,680,185       28%          5,201,838       30%
                          ------------     ----        ------------     ----

      Totals:             $ 19,991,245      100%       $ 17,121,939      100%
                          ============     ====        ============     ====

                                        6

<PAGE>

Delinquencies
-------------

      The  following  table  shows  the  Trust's  Mortgage  Investment  Business
delinquency statistics for its servicing portfolio at the dates presented.

                            December 31, 2005            December 31, 2006
                          --------------------         --------------------
        Loans              Number     $-% of            Number     $-% of
   Delinquent For:        of loans   Portfolio         of loans   Portfolio
   ---------------        --------   ---------         --------   ---------

      31-60 days            10          28%               2           5%
      61-90 days             4           3%               3          12%
       91 days +             4(1)        9%               9(2)       22%
                           ---         ---              ---         ---
    Totals:                 18          40%              14          39%
                           ===         ===              ===         ===

      (1)   None of the 91 days+  delinquent  loans  were  either  satisfied  or
            brought current by February 28, 2006.
      (2)   Four of the 91 days+  delinquent  loans  were  either  satisfied  or
            brought current by February 28, 2007.

REGULATION

      The  Company 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 Company has not  requested a legal  opinion from counsel
indicating that, it will be exempt from the Investment Trust Act.

      Because the Company's  business is highly  regulated,  the laws, rules and
regulations  applicable to the Company are subject to regular  modifications and
change.  There are currently proposed various laws, rules and regulations which,
if adopted,  could  impact the  Company.  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 Company'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  Company,  or  otherwise  affect the  business or  prospects  of the
Company.  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  Company'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 Company.

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

STRATEGY AND COMPETITION

      The  Company's  management  is  reassessing  its  ability to  successfully
compete  in  the  high  yielding  Mortgage  Investment  Business.  The  Mortgage
Investment  Business  faces  competition  from  other  financial   institutions,
including  but  not  limited  to  banks,  investment  banks,  specialty  finance
companies and private mortgage  investors.  Many of the institutions  with which
the  Company  competes  have  significantly  greater  financial  resources.  The
appropriate  diversification  of the  Company's  assets  into other real  estate
investment trust permissible assets will be considered.

EMPLOYEES

      At December 31, 2006, the Company has one employee.  At December 31, 2005,
the Former Manager employed 19 persons.  None of the Former Manager's  employees
were subject to a collective bargaining agreement. The Company's employee is not
subject to a collective  bargaining agreement and the relation with its employee
is satisfactory.

                                        7

<PAGE>

SELECTED FINANCIAL DATA

      The following table presents  selected  historical  financial data derived
from the audited  financial  statements of the Company with CAFC reported by the
equity method of accounting for the years ended December 31, 2002 and 2003. CAFC
is consolidated for the years ended December 31, 2004, 2005 and 2006.

      The  historical  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>
                                                             Year Ended December 31
                                    ------------------------------------------------------------------------
Financial Summary                       2002           2003           2004           2005           2006
                                    ------------   ------------   ------------   ------------   ------------
<S>                                 <C>            <C>            <C>            <C>            <C>
Operations:

Revenue                             $  2,866,253   $  2,605,765   $  3,903,488   $  3,797,885   $  2,478,609
Net income                             1,108,264        909,530        669,871       (307,308)    (1,631,428)

Per Share Data:

Weighted average basic earnings     $       1.81   $       1.40   $       0.80   ($      1.13)  ($      4.28)
Weighted average diluted earnings   $       1.50   $       1.19   $       0.69   ($      1.13)  ($      4.28)

Consolidated Balance Sheet Data:

Mortgage notes receivable           $ 19,906,391   $ 20,556,488   $ 19,053,474   $ 26,318,616   $ 17,121,939
Total assets                          25,973,457     26,612,605     25,769,248     30,956,866     18,464,100
Total liabilities                     11,713,401     12,401,943     11,694,078     18,023,873      7,029,374
Stockholders' equity                  14,260,056     14,210,662     14,075,170     12,932,993     11,154,226
Common share equity                    8,675,739      8,626,345      8,490,853      7,522,516      5,871,539
Common shares                            424,144        434,769        442,325        390,032        380,532
Common share book value             $      20.45   $      19.84   $      19.20   $      19.29   $      15.43
</TABLE>

ITEM 2. DESCRIPTION OF PROPERTY

      The Company's  executive and administrative  offices - located at 100 Pine
Street, Suite 2450, San Francisco,  California, 94111 - consist of approximately
1,000 square feet.

      The Company rents its offices from the Former  Manager.  The lease term is
until  December 31, 2009 but CAIT has the option to terminate  the  agreement on
January 1, 2008. The Company's Board of Directors believes that the terms rental
is at least as favorable as could have been obtained from an unaffiliated  third
party. The Company's  Management believes that these facilities are adequate for
its  immediate  needs and that  alternate  space at  reasonable  rental rates is
available, if necessary.

ITEM 3. LEGAL PROCEEDINGS

      The Trust is involved in two legal proceedings as of December 31, 2006.

      CAFC was named as defendant in a case filed in the Superior Court, Alameda
County,  State of  California on December 7, 2004.  Plaintiff  alleged that CAFC
made a fraudulent loan to him by cross  collateralizing two separate properties.
The cross  collateralization  was  necessary  to grant the  borrower the desired
loan,  since  there was  insufficient  equity in the  primary  property  used as
collateral for the loan. Two amended  complaints  have been filed in addition to
the initial one. The Plaintiff has represented  himself.  After CAFC was allowed
by the court to foreclose on the primary  collateral  and the borrowing was paid
in full, Plaintiff, upon the Court's insistence,  obtained counsel and has filed
an

                                        8

<PAGE>

amended  complaint,  which is pending.  The Plaintiff was deposed in May of 2006
and the discovery process is still ongoing.

      On April 14, 2006,  CAIT and CAFC were served a summons  alleging that the
Company  was  involved  with  misleading  a  former  mortgage  holder.  Upon the
satisfaction  of their  mortgage  claim from the proceeds of a Company  provided
mortgage, the former mortgage holder released their escrow settlement to the new
purchaser without  re-recording  their  subordinate  mortgage claim. On July 14,
2006, the property was sold at a Trustee sale and the Company's loan was paid in
full. The former  mortgage  holder's  unrecorded  claim was not satisfied at the
aforementioned  Trustee sale. The Company believes the former mortgage  holder's
action is without merit.

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

      The following  table  summarizes  the October 18, 2006  shareholder  vote.
Approximately, 56% of the eligible shareholders participated in the voting.

                                                     Approve         Withhold
                                                 -------------------------------
                   Proposal                       votes      %     votes     %
--------------------------------------------------------------------------------
1  Election of Director: Swartz                  133,722   40.9   193,056   59.1

1  Election of Director: Blomberg                133,862   41.0   192,916   59.0

      Although  neither  candidate  received  a majority  of the vote,  both Mr.
      Swartz and Mr.  Blomberg  were  approved as Trust  Directors.  The Trust's
      Bylaws provide for the approval of the nominee(s) receiving the most votes
      if 50% or more of the  shareholders  participate in the vote. Mr. Blomberg
      has  subsequently  resigned from the Board of  Directors.  As of March 28,
      2007,  Mr. Swartz remains on the Board of Directors and continues to serve
      as Chairman of the Board.

<TABLE>
<CAPTION>
                                                        For           Against        Abstain
                                                 ----------------------------------------------
                   Proposal                       votes      %     votes      %     votes    %
-----------------------------------------------------------------------------------------------
<S>                                              <C>       <C>    <C>       <C>     <C>     <C>
2  Liquidate and Dissolve Corporation             91,068   33.3   215,421   65.9    2,673   0.8

3  Restructure for "Self Advised Management"     294,076   90.0    30,128    9.2    2,574   0.8

4  Renew "External Management" Contract           96,836   29.6   222,698   68.1    7,244   2.2
</TABLE>

      Proposals 2, 3, and 4 were referendums on the shareholders  organizational
      / management preferences.
      Proposal 2  proposed  that the Trust be  liquidated  and  dissolved.  This
      referendum failed.
      Proposal 3 proposed that the Trust convert from an externally advised REIT
      to a self advised REIT. This referendum passed.
      Proposal 4 proposed that the Trust renew its existing Restated  Management
      Agreement  and  remain  externally   advised.   This  referendum   failed.
      Consistent  with the approval of Proposal 3, the Trust's Board of Director
      terminated the Former  Manager and initiated  self  management on December
      29, 2006.

<TABLE>
<CAPTION>
                                                        For           Against        Abstain
                                                 ----------------------------------------------
                   Proposal                       votes      %     votes      %     votes    %
-----------------------------------------------------------------------------------------------
<S>                                              <C>       <C>      <C>      <C>   <C>     <C>
5  Election of Auditors                          289,709   88.7     1,664    0.5   35,405  10.8
</TABLE>

                                        9

<PAGE>

--------------------------------------------------------------------------------
                                     PART II
--------------------------------------------------------------------------------

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  quarterly  high and low sale  prices of the  Common  Stock as quoted on the
American Stock Exchange for the last three years follows:

                                                           Dividend per
         Year        Quarter          High        Low      Common Share
         ------   --------------   ----------   --------   ------------
                       1st           20.90       17.96         0.45
         2004          2nd           20.35       16.00         0.45
                       3rd           17.87       16.71         0.30
                       4th           17.50       13.25         0.00
                       1st           14.64       13.30         0.10
         2005          2nd           13.90       11.70         0.00
                       3rd           11.75        8.49         0.00
                       4th            8.75        7.34         0.00
                       1st            8.50        7.01         0.00
         2006          2nd           10.20        7.52         0.00
                       3rd           18.99        7.13         0.00
                       4th           11.00        7.85         0.00
         2007     Jan.1 - Mar.2      10.50        8.03         0.00

      On  December  31,  2006,  there  were  approximately  60 holders of record
(including  holders who are nominees for an  undetermined  number of  beneficial
owners) of the Common Stock and 135 holders of record (including holders who are
nominees  for an  undetermined  number of  beneficial  owners) of the  Preferred
Stock, which is not publicly traded. The Company believes that its Preferred and
Common Stock is beneficially held by in excess of 500 shareholders.

      To  maintain  its  qualification  as  a  REIT,  annual   distributions  to
stockholders  of at least 90% of its taxable  income (which may not  necessarily
equal net income as calculated in accordance  with GAAP),  determined  after the
application  of any net  operating  loss carry  forward,  without  regard to the
deduction  for  dividends  paid and excluding any net capital gains or loan loss
reserves,  are required.  The Board of Directors  meets to determine  Common and
Preferred shared dividend distributions.  Any taxable income remaining after the
distribution  of the dividends will be  distributed  annually on or prior to the
date of the first regular Common dividends payment date of the following taxable
year. The dividend  policy is subject to revision at the discretion of the Board
of Directors.  Any  distributions  in excess of those  required to maintain REIT
status will be made at the  discretion of the Board of Directors and will depend
on the financial condition of the Company and such other factors as the Board of
Directors deems relevant.

      The Board of Directors has not  established a minimum  distribution  level
for the Common  Stock.  During  2006,  no dividends  per share on Preferred  and
Common Stock were declared and paid. During 2005,  dividends per share on Common
Stock  were  declared  and paid  for the  quarters  ending  March  31,  June 30,
September  30, and December 31 at $0.10,  $0.00,  $0.00 and $0.00  respectively.
Dividends on Preferred  Stock were declared and paid for five monthly  dividends
during the period January 2005 to May 2005 at an average of approximately  $.151
per share per month.

      Holders of the Preferred  Shares are entitled to a dividend  preference in
an  amount  equal  to  an  "annualized  return"  on  the  Adjusted  Net  Capital
Contribution of Preferred  Shares at each dividend record date during such year.
The  annualized  return is the lesser of: (a)  10.25%,  (b) 1.50% over the Prime
Rate (determined on a not less than quarterly basis), or (c) the rate set by the
Board of Directors. The preferred dividend preference is not cumulative.

      After declaring  dividends for a given year to the Preferred Shares in the
amount of the dividend preference,  no further  distributions may be declared on
the Preferred  Shares for the subject year until the dividends  declared on each
Common Share for that year equals the  dividend  preference  for each  Preferred
Share for such year. Any  Distributions  associated  with a payment date that is
declared after the Directors have declared Distributions on Common Shares in the

                                       10

<PAGE>

amount of the  additional  dividend  generally  will be allocated  such that the
amount of dividends per share to the Preferred  Shares and Common Shares for the
subject  year  is  equal.  The  Preferred  Shares  additional  dividend  is  not
cumulative.

      Distributions  to stockholders  are generally  taxable as ordinary income,
although a portion of such  distributions  may be  designated as capital gain or
may constitute a tax-free return of capital.

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

      Certain   statements   contained   herein  are  not  based  on  historical
information,  and certain statements  contained in future filings by the Company
with the SEC, in the Company's  press  releases or in the  Company's  public and
stockholder communications may not be based on historical facts and are "forward
looking  statements"  within the  meaning of the Private  Securities  Litigation
Reform Act of 1995. Forward looking statements may be identified by reference to
a future  period or  periods,  or by the use of  forward  looking  terms such as
"may", "will",  "expect",  "anticipate",  or similar terms. Actual results could
materially differ from those in the forward-looking  statements due to a variety
of factors.

      Preparation of Company's financial  statements is based upon the operating
results  of the Trust and CAFC.  Management's  discussion  and  analysis  of the
operating results for the years ended December 31, 2006 and 2005 follows.

OVERVIEW

      In May of 1997, the Trust registered its common shares with the Securities
and Exchange Commission under the Securities Act of 1933. On September 30, 1998,
the initial  public  offering of Common Shares was  completed.  Since October 1,
1998, the common shares have been listed on the American Stock Exchange.

      From 1997 through 2003, the Trust's financial  statement  reported CAFC by
the equity method of  accounting.  The equity  method of  accounting  records an
equity  investment at cost and adjusts it by the investment's  share of earnings
or losses and decreases it by dividends received.

      For the year ended 2004, the Trust implemented  reporting CAFC pursuant to
the requirement of Financial Accounting  Standards No.144 ("FAS 144").  Pursuant
to the asset for  disposal  criteria of FAS 144,  CAFC's  operating  results are
consolidated  with  the  Trust's  operating  results  to  report  the  Company's
consolidated  statement of  operations  and CAFC's  assets and  liabilities  are
included in the Company's balance sheet.

      During the first quarter of 2006, the Trust  announced its intent to cease
mortgage  banking  loan  originations  by  CAFC  and  to  monetize  CAFC's  loan
inventory.  Subsequently,  any  loans not sold into the  secondary  market  were
transferred to the Trust.  During 2006,  CAFC  transferred 12 loans with a total
nominal  value  of  $6,108,330  that  did not  satisfy  the  Trust's  investment
standards.

      The Board of Directors  believes that suspending  CAFC's mortgage  banking
operations will provide numerous benefits. These benefits include: restoring the
Trust  to its  original  intent  as an  investor  in  non-conforming  mortgages;
reducing a source of volatility in the Trust's reported net income; reducing the
cost of annual  audits and  quarterly  reviews;  reducing  the costs of Sarbanes
Oxley compliance; reducing the number of related party transactions; simplifying
the process of cost  allocation;  and accelerating the compilation and reporting
of operating  results.  The costs of disposing of the Trust's investment in CAFC
include:  the loss of CAFC's  potential  profitability;  less  control  over the
mortgage  investment  supply chain;  and  restrictions  of the Trust's access to
CAFC's funding agreement.

CRITICAL ACCOUNTING POLICIES

      The  accounting  and  reporting  policies of the Company are in accordance
with accounting  principles  generally accepted in the United States of America.
The Company's significant  accounting policies are described in the notes to the
financial  statements.  Certain  accounting  policies require management to make
significant  estimates  and  assumptions,  which have a  material  impact on the
carrying  value of certain  assets and  liabilities,  and the Company  considers
these to be critical accounting policies. The estimates and assumptions used are
based on historical  experience and other factors,  which management believes to
be reasonable under the circumstances. Actual results could differ significantly
from these estimates and assumptions,  which could have a material impact on the
carrying value of assets and  liabilities at the balance sheet dates and results
of operations for the reporting periods.

                                       11

<PAGE>

      The  following  are  critical  accounting  policies  that require the most
significant  estimates and assumptions  that are  particularly  susceptible to a
significant  change in the  preparation of the financial  statements and are not
presented in their relative order of importance.

Revenue  recognition.  Interest  income  accrues as it is  earned.  Loans may be
placed on a nonaccrual  status when any portion of the  principal or interest is
three  scheduled  payments  past due or earlier  when  concern  exists as to the
ultimate  collectibility  of principal or interest.  Nonaccrual status loans are
returned to an accrual status when principal and interest become current and are
anticipated to be fully collectible.

Allowance for Loan Losses.  A provision for loan losses is based on management's
evaluation  of an amount  that is  adequate  to absorb  losses  inherent  in the
existing loan portfolio. The evaluation, which includes a review of all loans on
which full  collection  may not be  reasonably  assumed,  considers  among other
matters, general economic conditions, the fair market value or the estimated net
realizable value of the underlying collateral, past loan loss experience, trends
in loan delinquency and other factors that warrant  recognition in providing for
an adequate loan loss allowance.

Allowance for Doubtful Accounts.  An allowance for accounts receivable claims is
based on management's evaluation of the likelihood of collection. The evaluation
is based on the payee's ability and willingness to pay the claim in full as well
as the costs associated with possible legal action.

Real estate owned. Real estate owned represents property acquired in foreclosure
of  mortgage  notes  receivable.  The real estate is carried at the lower of the
value of the mortgage note  receivable  less selling costs on the real estate or
fair market value. Certain estimates and assumptions are required in determining
the cost to sell or in estimating the fair market value of the real estate.

Stock option.  Stock options granted prior to December 15, 2005 were issued with
exercise prices no less than the market price of the Trust's common stock on the
dates of grant. Because the exercise price is fixed at or above market price and
other key terms are fixed,  use of the  intrinsic-value  method was utilized and
the Trust did not recognize an expense for these options.  If the terms of these
options were changed,  variable  accounting might need to be used, and the Trust
might  then need to begin  recognizing  compensation  expense  for the  options.
Options  granted after  December 15, 2005 were issued with  exercise  prices not
less than the market  price of the Trust's  common  stock on the dates of grant.
These options are subject to a mandatory expense calculation.

      The Audit  Committee of the Trust's  Board of Directors  has discussed and
approved the critical  accounting  policies and the  development,  selection and
disclosure of the estimates  and  alternatives  prior to filing this report with
the Securities and Exchange Commission.

Operating Strategy
------------------

      As  a  portfolio   lender,   the  Company  has   invested  in   California
non-conforming mortgage loans on one-to-four unit residential properties secured
by first and second  deeds of trust.  Historically,  the Trust has  limited  its
mortgage  investment to a cumulative  loan to value ratio ("CLTV") that does not
exceed  75%  of the  underlying  collateral.  Prospectively,  the  Company  will
consider expanding its investment policy to other REIT permissible assets.

      CAFC's loan originating  operations were suspended in the first quarter of
2006. Substantial disposal of CAFC's assets occurred throughout 2006.

Loan Origination
----------------

      Since the  suspension of loans  originations  by CAFC,  the Former Manager
provided whole loans for the Mortgage Investment Business. On December 29, 2006,
the  Former  Manager  was  terminated.  Prospectively,  portfolio  loans  may be
acquired  from  unaffiliated  third  parties or the Former  Manager.  The Former
Manager and CAFC  accounted for 100% of the loans  acquired by the Trust in 2005
and 2006.

Loan Servicing
--------------

      Mortgage loan  servicing  consists of collecting  payments from  borrowers
making  required  advances,  accounting  for  principal  and interest  payments,
holding  borrowed   proceeds  in  escrow  until  fulfillment  of  mortgage  loan
requirements,  contacting  delinquent  borrowers,  supervising  foreclosures and
property  dispositions in the event of unremedied  defaults and performing other
administrative  duties.  The  Company  does not  acquire  or  maintain  a loan's
servicing rights, unless the mortgage loan is owned by the Company. Although the
Former Manager was terminated from management responsibility,

                                       12

<PAGE>

loan  servicing is  outsourced  to the Former  Manager.  All or a portion of the
aforementioned servicing responsibilities  contracted to the Former Manager, may
be subcontracted by the Former Manager. The Former Manager is paid $50 per month
per loan file for Loan  Servicing.  The Loan  Servicing  Agreement is cancelable
with 30 days notice prior to the end of a calendar quarter.

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

      Mortgage  banking  loans  are held for sale  into the  secondary  mortgage
market.  Mortgage  investment  loans  consist  of  portfolio  loans  held  until
prepayment,  maturity or  foreclosure.  As of December  31,  2006,  the Mortgage
Investment  Business portfolio totaled  $17,121,939,  consisting of 39 loans, of
which 12 loans  totaling  $5,874,559  or 34% of the  portfolio  loan  value were
delinquent over 60 days. As of February 28, 2007,  five of the delinquent  loans
were brought  current or paid off and seven loans totaling  $4,470,837 or 26% of
the December 31, 2006 portfolio balance remained delinquent.  As of December 31,
2006, the Trust held one property as a real estate investment for sale.

      As of December  31,  2005,  the  Mortgage  Investment  Business  portfolio
totaled $19,991,245 consisting of 47 loans, of which 8 loans totaling $2,436,699
or 12% of the portfolio loan value were  delinquent over 60 days. As of February
28, 2006, two of the delinquent  loans were brought  current or paid off and six
loans  totaling  $2,144,548  or 10% of the December 31, 2005  portfolio  balance
remained  delinquent.  As of December 31, 2005, the Trust held one property as a
real estate investment for sale.

      Loan loss reserves are estimates based on the  anticipated  sales price of
the foreclosed property that includes a discount from the latest appraised value
of the property, less the sum of priority liens, costs of disposition,  the face
amount of the Company's  mortgage loan and accrued  interest  receivable.  As of
December 31, 2006 and 2005, the Company reserved an allowance for loan losses of
$730,000 and $390,000, respectively.

      On December 14, 2005 the Trust  unconditionally  guaranteed CAFC's sale of
mortgage loans to Lehman Brothers Bank. During 2005 no loans were sold to Lehman
Brothers  Bank  pursuant  to this  guarantee.  During  2006,  two (2)  loans for
$2,500,000 were sold pursuant to this guarantee.

      As of December  31,  2006,  the  following  table  summarizes  the Trust's
outstanding repayment obligations.

<TABLE>
<CAPTION>
       Maximum Other                                Amount of Commitment Expiration Per Period
         Commercial                Total       -------------------------------------------------
      Commitments (a)             Amounts       Less than                     3 - 5     After 5
  as of December 31, 2006        Committed       1 year       1 - 3 years     years      years
----------------------------   -------------   -----------   -------------   -------   ---------
<S>                            <C>             <C>           <C>             <C>       <C>
Bank loans payable (b)          $ 6,767,821         0           6,767,821       0          0

Warehousing facilities               0              0              0            0          0

Total Commercial Commitments    $ 6,767,821         0         $ 6,767,821       0          0
</TABLE>

(a)   Commercial  commitments  are funding  commitments  that could  potentially
      require registrant performance in the event of demands by third parties or
      contingent  events,  such as  under  lines  of  credit  extended  or under
      guarantees of debt.

(b)   The Mortgage Investment Business'  outstanding  obligations as of December
      31, 2006 due in 1-3 years were $6,767,821.

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

      Revenues for the year ended  December 31, 2006  decreased to $2,478,609 as
compared to $3,797,885 for 2005. During 2006,  interest income declined $446,323
due to CAIT's smaller loan portfolio as well as lower interest  yields.  Service
release premiums decreased $313,861 due to the termination of CAFC.

      Expenses for the year ended  December 31, 2006  decreased to $3,780,414 as
compared to $4,005,209  for the previous  year. The decrease in 2006 compared to
2005  is  due  to  the   discontinuance  of  CAFC's   operations.   General  and
administrative  costs  were  higher due to the one time  termination  payment of
$500,000  to the Former  Manager  and the  allowance  for  doubtful  accounts of
$230,000. No allowance for doubtful accounts was reported in 2005.

                                       13

<PAGE>

      During 2006 and 2005,  there were real estate owned losses of $207,592 and
$76,084 and real estate expenses of $122,031 and $23,900, respectively.

      Net Loss for the year ended December 31, 2006 was $1,631,428. Net Loss for
the year ended December 31, 2005 was $307,308.

      At year ended December 31, 2006, the Company's  mortgage notes  receivable
balance was $9,321,677 less than the mortgage notes  receivable  balance for the
year ended  December 31, 2005. At year ended  December 31, 2006, the real estate
owned balance was $1,733,350 less than the year ended December 31, 2005 balance.

LIQUIDITY AND CAPITAL RESOURCES

      During 2005, the Company had access to a $25,000,000  repurchase facility.
This facility matures on June 30, 2007. However, the facility was retired during
the second  quarter of 2006.  During  2005,  the Trust also secured a $7,000,000
term  facility,  with a November  14,  2007  maturity  and a one year  extension
option.  Management believes that cash flow from operations,  the mortgage loans
that are paid off, additional credit facilities that may be obtained during 2007
and, if necessary,  the limited sale of investment  mortgages will be sufficient
to meet the  liquidity  needs of the  company's  businesses  for the next twelve
months.

LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2006

      As of  January  1,  2006,  the  Trust  had  $1,626,247  of cash  and  cash
equivalents.  After taking into effect the various transactions discussed below,
cash and cash  equivalents  at December 31, 2006 were  $599,943.  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 increased liquidity was from investing
activities. The primary use of cash was operating and financing activities.

      Net cash used by the operating  activities  during the year ended December
31, 2006 was  $1,531,302.  The increased  non-cash  provision for loan losses of
$392,309, the increased non-cash allowance for doubtful accounts of $230,000 and
the decrease in other assets of $91,267 were the primary  sources of cash. A net
loss of  $1,631,428,  the increase in accounts  receivable of $285,195,  and the
change in related party accounts of $341,082 were the primary uses of cash.

      Net cash of  $4,409,001  was provided by investing  activities.  Decreased
mortgage  notes  receivable  provided  $9,321,677  and a decrease in real estate
owned provided $1,733,350. A decrease in warehousing facilities used $4,842,646,
a decrease in net  mortgage  payable  used  $962,127 and a decrease in warehouse
financing from a related party used $950,000.

      Net cash used in financing  activities  during the year ended December 31,
2006 was $3,904,003. Paying down bank lines of credit of $3,707,176 and treasury
stock  purchases  of  $196,827  were  the  only  uses  of  cash  from  financing
activities.

LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2005

      As  of  January  1,  2005,  the  Trust  had  $155,462  of  cash  and  cash
equivalents.  After taking into effect the various transactions discussed below,
cash and cash  equivalents at December 31, 2005 were  $1,626,247.  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 increased liquidity was from financing
activities. A nominal source of cash was operating and investing activities.

      Net cash  provided  by the  operating  activities  during  the year  ended
December 31, 2005 was $53,658.  The change in related party accounts of $364,252
and the  increased  non-cash  provision  for loan  losses of  $215,000  were the
primary

                                       14

<PAGE>

sources of cash. A net loss of $307,308,  the decrease in other  liabilities  of
$104,356,  and the increase in other assets of $104,649 were the primary uses of
cash.

      Net cash of  $11,158  was  provided  by  investing  activities.  Increased
mortgage notes  receivable  used  $3,397,597 and a decrease in mortgage  payable
used $3,073,572.  An increase in warehousing  facilities provided $4,842,646 and
warehouse financing from a related party provided $950,000.

      Net cash provided by financing  activities  during the year ended December
31, 2005 was $1,405,969. Treasury stock purchases of $618,318 and dividends paid
of $203,169 were the largest uses of cash from financing activities. The primary
provider of cash from financing  activities was $2,227,456 drawn from bank lines
of credit.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk
-----------

      Market risk is the  exposure to loss  resulting  from  changes in interest
rates,  credit spreads,  foreign exchange rates,  commodity  prices,  and equity
prices.  The  Company's  primary  market risks are interest rate risk and credit
risk of the Mortgage Investment Business.

      Interest  Risk.  Interest  rate risk is highly  sensitive to many factors,
including  governmental,  monetary and tax policies,  domestic and international
economic and political  considerations  and other factors  beyond the control of
the Company.  Changes in the general level of the U.S.  Treasury yield curve can
have  significant  effects on the market  value of the  Trust's  portfolio.  The
majority of the Company's  assets are fixed-rate  loans. The Company's loans are
valued on the December 31, 2006 balance sheet at the lower of cost or market.

      As U.S. Treasury  securities are priced to a lower yield and/or the spread
to U.S. Treasuries used to price the Company's assets are decreased,  the market
value of the its  mortgage  loans may  increase.  Conversely,  as U.S.  Treasury
securities  are priced to a higher  yield  and/or the spread to U.S.  Treasuries
used to price  the  Company's  assets  is  increased,  the  market  value of its
mortgage  loans may  decline.  Changes in the level of the U.S.  Treasury  yield
curve can also affect,  among other things,  the prepayment  assumptions used to
value  certain  loans.  In addition,  changes in the general level of the United
States Prime Rate can affect the Company's net interest income.  The majority of
the Trust's liabilities are floating rate based on a spread over the Prime Rate.
As the level of the Prime Rate  increases or decreases,  the Company's  interest
expense will move in the same direction.

      On account of the relatively  short adjusted  weighted average maturity of
the  mortgage   investment   portfolio  (24  months),  a  variety  of  financial
instruments  available to limit the effects of interest rate fluctuations on its
operations have not been utilized.  The use of these types of derivatives  (such
as interest rate swaps, caps, floors and other interest rate exchange contracts)
to hedge  interest-earnings  assets and/or  interest-bearing  liabilities  carry
risks, including the risk that the net losses on a hedge position may exceed the
amount  invested in such  instruments.  As the level of variable  rate  mortgage
financing of the  portfolio  increases or the weighted  average  maturity of the
portfolio increases,  the Company may utilize a variety of financial instruments
to limit the effects of interest rate fluctuations.

      Credit Risk.  Credit risk is the  exposure to loss from loan  defaults and
foreclosures.  Default and  foreclosure  rates are subject to a wide  variety of
factors, including, but not limited to, property values,  supply/demand factors,
construction trends, consumer behavior, regional economics,  interest rates, the
strength of the  American  economy and other  factors  beyond the control of the
Trust.

      All loans are subject to a certain probability of default and foreclosure.
An  increase  in the  Company's  default  rates may reduce the book value of the
Company's  assets,  earnings and cash flow available to fund  operations and pay
dividends.

      The Company manages credit risk through the underwriting process, limiting
loans in the mortgage  investment  portfolio  (including the maximum deferral of
interest),   establishing   loss  assumptions  and  carefully   monitoring  loan
performance.  Nevertheless,  the Company  assumes that a certain  portion of its
loan  originations  will default and adjusts the allowance for loan losses based
on that assumption.

                                       15

<PAGE>

Asset and Liability Management
------------------------------

      Asset and liability  management is concerned with the timing and magnitude
of the maturity of assets and liabilities. In general,  management's strategy is
to  approximately  match  the  term  of  the  mortgage  investment   portfolio's
liabilities to the portfolio's adjusted weighted average maturity (24 months).

      The  majority of the  investment  mortgage  loans pay a fixed rate and the
income from such assets are relatively  unaffected by interest rate changes. The
associated  liabilities  are currently  under variable rate lines of credit that
reset  monthly.  Given this  relationship  between assets and  liabilities,  the
interest rate sensitivity gap is highly negative.  This implies that a period of
falling  short term  interest  rates will tend to increase net interest  income,
while a period of rising  short term rates will tend to reduce the net  interest
income.

ITEM 7. FINANCIAL STATEMENTS

      The following Company consolidated  financial statements are filed as part
of this report:

   Report of Independent Registered Public Accounting Firm ............  F-1
   Consolidated Balance Sheets ........................................  F-2
   Consolidated Statements of Operations ..............................  F-3
   Consolidated Statements of Changes in Stockholders' Equity .........  F-4
   Consolidated Statements of Cash Flows ..............................  F-5
   Notes to Consolidated Financial Statements .........................  F-6

      The  unaudited  2006  and  2005  fourth  quarter  operating  statement  is
presented  on the  next  page  with  the  accompanying  notes  to the  operating
statement  incorporated  herein by reference to the  Financial  Statements  with
Independent Auditor Reports for the two year period ended December 31, 2006.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       16

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.
                         A REAL ESTATE INVESTMENT TRUST
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                               December 31
                                                           2006           2005
                                                       ------------   -----------
<S>                                                    <C>            <C>
REVENUES
   Interest income                                     $    406,735   $   582,065
   Loan origination income                                        -       161,559
   Service release premium                                    7,500        65,439
   Other income                                               6,391        13,516
                                                       ------------   -----------
      Total revenues                                        420,626       822,579

EXPENSES

   Loan servicing fees to related party                     116,378        87,442
   Management fees to related parties                        49,489        71,590
   Interest expense on loans                                116,402       314,192
   Interest expense on loans from related party                   -        16,437
   Loan origination costs                                       (92)       83,383
   Provisions for loan losses                               426,810       135,983
   Wages and salaries                                             -       160,247
   Taxes                                                     13,250         9,994
   General and administrative                               858,278       142,415
                                                       ------------   -----------
      Total expenses                                      1,580,515     1,021,683
                                                       ------------   -----------

INCOME (LOSS) FROM CONTINUING OPERATIONS               $ (1,159,889)  $  (199,104)

   Operating expenses of real estate owned                  (49,671)            -
   (Loss) on real estate owned                              (68,609)            -
                                                       ------------   -----------
      Total loss and income from real estate owned         (118,280)            -
                                                       ------------   -----------
NET INCOME (LOSS)                                      $ (1,278,169)  $  (199,104)
                                                       ============   ===========
PREFERRED DIVIDENDS                                    $          -   $         -
                                                       ------------   -----------
NET INCOME (LOSS) AVAILABLE TO COMMON                  $ (1,278,169)  $  (199,104)
                                                       ============   ===========

BASIC EARNINGS PER COMMON SHARE                        $      (3.36)  $     (0.50)
                                                       ============   ===========
DILUTED EARNINGS PER COMMON SHARE                      $      (3.36)  $     (0.50)
                                                       ============   ===========

DIVIDENDS PAID PER PREFERRED SHARE                     $       0.00   $      0.00
                                                       ============   ===========
DIVIDENDS PAID PER COMMON SHARE                        $       0.00   $      0.00
                                                       ============   ===========

BASIC COMMON SHARES                                         380,532       393,232
                                                       ============   ===========
DILUTED COMMON SHARES                                       380,532       393,232
                                                       ============   ===========
</TABLE>

                 See accompanying notes to financial statements.

                                       17

<PAGE>

            Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Capital Alliance
Income  Trust  Ltd.,  A Real  Estate  Investment  Trust (the  "Company"),  as of
December  31,  2006  and  2005  and  the  related  consolidated   statements  of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 2006.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements,   assessing,  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Capital
Alliance  Income Trust Ltd., A Real Estate  Investment  Trust as of December 31,
2006 and 2005 and the consolidated  results of its operations and its cash flows
for  each of the  years  in the  two-year  period  ended  December  31,  2006 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Rothstein, Kass & Company, P.C.
-----------------------------------

Roseland, New Jersey
March 28, 2007, except for Note 19, which is as of October 12, 2007.

                                      F-1

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                          Consolidated Balance Sheets
                           December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                       2006           2005
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>
ASSETS
   Cash and cash equivalents                                                       $    599,943   $  1,626,247
   Restricted cash                                                                      123,037        280,923
   Marketable securities                                                                    899         19,577
   Accounts receivable                                                                1,000,937        715,742
   Allowance for doubtful accounts                                                     (230,000)             -
   Other assets, net                                                                          -         91,267
   Due from related party                                                                     -         2,244
   Notes receivable:
      Mortgage notes receivable                                                      17,121,939     26,443,616
      Allowance for loan losses                                                        (782,309)      (390,000)
                                                                                   ------------   ------------
         Net notes receivable                                                        16,339,630     26,053,616
   Real estate owned                                                                    245,000      1,978,350
   Investments in related party                                                               -          5,000
   Origination costs, net                                                               124,654        183,900
                                                                                   ------------   ------------
   Total assets                                                                    $ 18,204,100   $ 30,956,866
                                                                                   ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY

   Liabilities
         Mortgage note holdbacks                                                   $    123,037   $    280,923
         Bank loans payable                                                           6,767,821     10,474,997
         Warehousing facilities                                                               -      4,842,646
         Warehousing facilities from related party                                            -        950,000
         Mortgage payable                                                                     -        962,127
         Due to related party                                                                 -        343,326
         Other liabilities                                                              159,016        169,854
                                                                                   ------------   ------------
   Total liabilities                                                                  7,049,874     18,023,873

   Stockholders' equity
      Preferred stock, $.01 par value;1,600,000 shares authorized;
         213,820 shares issued and outstanding at December 31, 2006 and 2005              2,138          2,138
      Additional paid in capital - preferred stock                                    5,509,728      5,509,728
      Less treasury stock: 16,919 and 4,139 preferred shares at
         December 31, 2006 and 2005 at cost                                            (229,179)      (101,389)
      Common stock, $.01 par value; 2,000,000 shares authorized;
         500,032 shares issued and outstanding at December 31, 2006 and 2005              5,001          5,001
      Additional paid in capital - common stock                                       9,394,576      9,370,911
      Less treasury stock: 119,500 and 110,000 common shares at
         December 31, 2006 and 2005, respectively                                    (1,699,771)    (1,630,734)
      Accumulated other comprehensive income (loss)                                         137        (25,686)
   Accumulated deficit                                                               (1,828,404)      (196,976)
                                                                                   ------------   ------------
   Total stockholders' equity                                                        11,154,226     12,932,993
                                                                                   ------------   ------------
   Total liabilities and stockholders' equity                                      $ 18,204,100   $ 30,956,866
                                                                                   ============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-2

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                      Consolidated Statements of Operations
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                       2006           2005
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>
REVENUES
   Interest income                                                                 $  2,179,779   $  2,626,102
   Loan origination income                                                              190,474        702,195
   Service release premium                                                               93,297        407,158
   Other income                                                                          15,059         62,430
                                                                                   ------------   ------------
      Total revenues                                                                  2,478,609      3,797,885

EXPENSES
   Loan servicing fees to related parties                                               449,388        515,372
   Management fees to related parties                                                   231,163        339,098
   Interest expense on loans                                                            931,112      1,229,572
   Interest expense on loans from related parties                                        38,402         16,438
   Loan origination costs                                                                80,557        246,495
   Provision for loan losses                                                            522,840        329,483
   Wages and salaries                                                                   152,643        613,431
   Taxes                                                                                 41,845         40,760
   Amortization                                                                           5,550              -
   General and administrative                                                         1,326,914        674,560
                                                                                   ------------   ------------
      Total expenses                                                                  3,780,414      4,005,209
                                                                                   ------------   ------------

LOSS FROM CONTINUING OPERATIONS                                                      (1,301,805)      (207,324)

   Operating expenses of real estate owned                                             (122,031)       (23,900)
   Loss on real estate owned                                                           (207,592)       (76,084)
                                                                                   ------------   ------------
      Total loss from real estate owned                                                (329,623)       (99,984)
                                                                                   ------------   ------------

NET LOSS                                                                           $ (1,631,428)  $   (307,308)
                                                                                   ============   ============
PREFERRED DIVIDENDS                                                                           -        159,395
                                                                                   ------------   ------------
NET LOSS AVAILABLE TO COMMON                                                       $ (1,631,428)  $   (466,703)
                                                                                   ============   ============
BASIC EARNINGS PER COMMON SHARE                                                    $      (4.28)  $      (1.13)
                                                                                   ============   ============
DILUTED EARNINGS PER COMMON SHARE                                                  $      (4.28)  $      (1.13)
                                                                                   ============   ============
DIVIDENDS PAID PER PREFERRED SHARE                                                 $          -   $       0.76
                                                                                   ============   ============
DIVIDENDS PAID PER COMMON SHARE                                                    $          -   $       0.10
                                                                                   ============   ============
BASIC COMMON SHARES                                                                     381,453        413,801
                                                                                   ============   ============
DILUTED COMMON SHARES                                                                   381,453        432,795
                                                                                   ============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                  Statements of Changes in Stockholders' Equity
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                     Preferred                           Common
                                                                     Additional                         Additional
                                            Preferred   Preferred     Paid in      Common    Common      Paid in
                                             Shares       Stock       Capital      Shares     Stock      Capital
                                            ---------   ---------   -----------   --------   -------   -----------
<S>                                         <C>         <C>         <C>           <C>        <C>       <C>
BALANCE, JANUARY 1, 2005                     210,644     $ 2,138    $ 5,669,123    442,325   $ 5,001   $ 9,414,685
Acquisition of treasury stock                   (963)          -              -    (52,293)        -             -
Net income                                         -           -              -          -         -             -
Dividends                                          -           -       (159,395)         -         -       (43,774)
Unrealized gain / (loss)                           -           -              -          -         -             -
                                            --------     -------    -----------   --------   -------   -----------

BALANCE, DECEMBER 31, 2005                   209,681       2,138      5,509,728    390,032     5,001     9,370,911
Acquisition of treasury stock                (12,780)          -              -     (9,500)        -             -
Net (loss)                                         -           -              -          -         -             -
Issuance of common stock option                    -           -              -          -         -        23,665
Unrealized gain / (loss)                           -           -              -          -         -             -
                                            --------     -------    -----------   --------   -------   -----------

BALANCE, DECEMBER 31, 2006                   196,901     $ 2,138    $ 5,509,728    380,532   $ 5,001   $ 9,394,576
                                            ========     =======    ===========   ========   =======   ===========

<CAPTION>
                                                           Accumulated
                                                              Other
                                              Treasury     Comprehensive    Accumulated                  Comprehensive
                                               Stock       Income (Loss)      Deficit        Total       Income (Loss)
                                            ------------   -------------   ------------   ------------   ------------
<S>                                         <C>            <C>             <C>            <C>            <C>
BALANCE, JANUARY 1, 2005                    $ (1,113,805)    $ (12,306)    $    110,334   $ 14,075,170
Acquisition of treasury stock                   (618,318)            -                -       (618,318)
Net income                                             -             -         (307,310)      (307,310)      (307,310)
Dividends                                              -             -                -       (203,169)             -
Unrealized gain / (loss)                               -       (13,380)               -        (13,380)       (13,380)
                                            ------------     ---------     ------------   ------------   ------------
                                                                                                         $   (320,690)
                                                                                                         ============
BALANCE, DECEMBER 31, 2005                    (1,732,123)      (25,686)        (196,976)    12,932,993
Acquisition of treasury stock                   (196,827)            -                -       (196,827)
Net (loss)                                             -             -       (1,631,428)    (1,631,428)    (1,631,428)
Issuance of common stock option                        -             -                -         23,665              -
Unrealized gain / (loss)                               -        25,823                -         25,823         25,823
                                            ------------     ---------     ------------   ------------   ------------
                                                                                                         $ (1,605,605)
                                                                                                         ============
BALANCE, DECEMBER 31, 2006                  $ (1,928,950)    $     137     $ (1,828,404)  $ 11,154,226
                                            ============     =========     ============   ============
</TABLE>

           See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                      Consolidated Statements of Cash Flows
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                2006           2005
                                                                           -------------   ------------
<S>                                                                        <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net Income (Loss)                                                       $  (1,631,428)  $   (307,308)
   Adjustments to reconcile net income (loss) to net cash (used in)
      provided by operating activities:
      Provision for loan losses                                                  392,309        215,000
      Provision for doubtful accounts                                            230,000              -
      Stock-based compensation expense                                            23,665              -
      (Increase) decrease in accounts receivable                                (285,195)        (9,281)
      (Increase) decrease in other assets                                         91,267       (104,649)
      Change in due to / due from related parties                               (341,082)       364,252
      Increase (decrease) in other liabilities                                   (10,838)      (104,356)
                                                                           -------------   ------------
         Net cash (used in) provided by operating activities                  (1,531,302)        53,658

CASH FLOWS FROM INVESTING ACTIVITIES
      Sale of (investment in) marketable securities                               18,678        (17,853)
      (Increase) decrease of investment in related party                           5,000         (5,000)
      (Increase) decrease in origination costs                                    85,069         59,999
      Increase (decrease) in warehousing facilities                           (4,842,646)     4,842,646
      Increase (decrease) in warehousing facilities to related party            (950,000)       950,000
      (Increase) decrease in net real estate owned                             1,733,350        652,535
      Increase (decrease) in mortgage payable                                   (962,127)    (3,073,572)
      (Increase) decrease in mortgage notes receivable                         9,321,677     (3,397,597)
                                                                           -------------   ------------
         Net cash provided by investing activities                             4,409,001         11,158

CASH FLOWS FROM FINANCING ACTIVITIES
      Net proceeds from bank loans                                            (3,707,176)     2,227,456
      Purchase of treasury stock                                                (196,827)      (618,318)
      Preferred dividends paid                                                         -       (159,395)
      Common dividends paid                                                            -        (43,774)
                                                                           -------------   ------------
         Net cash provided by (used in) by financing activities               (3,904,003)     1,405,969
                                                                           -------------   ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (1,026,304)     1,470,785

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 1,626,247        155,462
                                                                           -------------   ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $     599,943   $  1,626,247
                                                                           =============   ============

SUPPLEMENTAL CASH FLOW INFORMATION:
      Cash paid for interest                                               $     346,660   $        668
                                                                           =============   ============
      Cash paid for taxes                                                  $      24,439   $     24,886
                                                                           =============   ============

NON-CASH INVESTING AND FINANCING ACTIVITIES
   Foreclosures, net of reserves                                           $     300,000   $    988,758
                                                                           =============   ============
   Assumption of debt on real estate owned                                 $           -   $    962,127
                                                                           =============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      References to the "Company" refer to Capital Alliance Income Trust Ltd., A
      Real Estate Investment Trust (the "Trust"),  a Delaware  corporation,  and
      Capital Alliance Funding Corporation ("CAFC"), collectively. 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  as the loan's  primary  collateral.  On April 11,
      1997, the Trust formed a non-qualified REIT subsidiary, CAFC, to conduct a
      mortgage  banking  business.  As of December 31, 2006 and 2005,  the Trust
      owns all of CAFC's  common and preferred  shares.  As of December 31, 2006
      and 2005, the Trust and CAFC are  consolidated in the Company's  financial
      statements.

      Prior to December 29, 2006, the Company was externally  advised by Capital
      Alliance Advisors,  Inc. (the "Former Manager",  "CAAI").  On December 29,
      2006,  the Former  Manager  was  terminated  and the  Company  became self
      advised.

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

      Basis of accounting.  The Company prepares its financial statements on the
      accrual  basis  of  accounting   consistent  with  accounting   principles
      generally accepted in the United States of America. The Company's year-end
      for tax and financial reporting purposes is December 31.

      Use of estimates.  The preparation of consolidated financial statements in
      conformity with  accounting  principles  generally  accepted in the United
      States of America  requires  management to make estimates and  assumptions
      that affect the reported  amounts of assets and liabilities and disclosure
      of  contingent  assets  and  liabilities  at the date of the  consolidated
      financial  statements  and the  reported  amounts of revenues and expenses
      during the  reporting  period.  Actual  results  could  differ  from those
      estimates.

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

      Marketable  securities.  Marketable  securities  are  classified as either
      trading, or available-for-sale. Management has not acquired any securities
      classified as trading securities.  Trading securities,  if acquired, would
      be  reported  at fair  value,  and  changes in their  fair value  would be
      reported in the statement of operations. Available-for-sale securities are
      reported  at fair value with  unrealized  gains and losses  excluded  from
      earnings and reported in accumulated other comprehensive income.  Realized
      gains  and  losses  on  sales  of  both  trading  and   available-for-sale
      securities are determined on an average cost basis and are reported in the
      statement of operations.

      Concentration  of credit risk. The Company 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.

      Allowance  for  loan  loss  reserve.  Management  reviews  its  loan  loss
      provision  periodically and the Company  maintains an allowance for losses
      on mortgage  notes  receivable  at an amount that  management  believes is
      sufficient  to  protect  against  potential  losses  inherent  in the loan
      portfolio. The Company's actual losses may differ from the estimate. Notes
      receivable  deemed  uncollectible  are written  off.  The Company does not
      accrue interest income on impaired loans.

      Allowance  for  doubtful  accounts.  Management  reviews the its  accounts
      receivable  periodically  and the Trust has established an allowance for a
      receivable  that may not be  collectible.  The Trust's  actual  losses may
      differ from the estimate.

                                      F-6

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      Real estate owned.  Real estate owned results from foreclosure of mortgage
      notes  receivable  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 rental  income,  interest  expense  and  operating
      expenses  of  real  estate  owned  in  the   consolidated   statements  of
      operations.

      Origination costs. Origination costs relating to investment mortgage notes
      receivable  are  capitalized  and amortized  over the term of the mortgage
      notes receivable.  Origination costs relating to mortgages  identified for
      sale in the secondary  mortgage  market are  capitalized and expensed upon
      sale.

      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  comparing  the  mortgage  note
      receivable  interest rate to current interest rates at which similar loans
      would be made to borrowers  with similar  credit  ratings and for the same
      remaining  maturities.  For loans  payable,  fair  value is  estimated  by
      comparing the current applicable  interest rates to the current applicable
      borrowing  rates.  It was  determined  that  the  difference  between  the
      carrying amount and the fair value of loans payable is immaterial.

      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 90% 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 consolidated financial statements.

      State taxes. The state of Delaware imposed a tax on the  capitalization of
      the Trust.  The  Company  expensed  $22,961 and $20,000 for these taxes in
      2006 and 2005.  During 2006 and 2005, the Company expensed $800 and $2,400
      for California Franchise taxes.

      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.  However,  if the  mortgage's  collateral is
      considered   insufficient  to  satisfy  the  outstanding  balance,   after
      estimated  foreclosure  and selling  costs,  interest is not accrued.  The
      Trust's loan  origination  income is deferred and recognized over the life
      of the loan. CAFC's loan origination  income is recognized at origination.
      CAFC's service release premium is recognized at the time of the mortgage's
      sale into the secondary market.

                                      F-7

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      Stock-Based  Compensation.  In December  2004,  the  Financial  Accounting
      Standards  Board  ("FASB")   issued  SFAS  No.  123(R),   "Accounting  for
      Stock-Based Compensation (Revised)." SFAS No. 123(R) supersedes APB No. 25
      and its  related  implementation  guidance.  SFAS No.  123(R)  establishes
      standards for the accounting for transactions in which an entity exchanges
      its  equity   instruments  for  goods  or  services.   It  also  addresses
      transactions  in which an entity incurs  liabilities in exchange for goods
      or  services  that  are  based on the fair  value of the  entity's  equity
      instruments  or that  may be  settled  by the  issuance  of  those  equity
      instruments.   SFAS  No.  123(R)  focuses   primarily  on  accounting  for
      transactions in which an entity obtains  employee  services in share-based
      payment transactions.  SFAS No. 123(R) requires a public entity to measure
      the cost of employee  services received in exchange for an award of equity
      instruments  based on the grant-date fair value of the award (with limited
      exceptions).  That cost will be recognized over the period during which an
      employee  is required  to provide  service in  exchange  for the award the
      requisite  service period  (usually the vesting  period).  No compensation
      costs are recognized  for equity  instruments  for which  employees do not
      render the requisite service.  The grant-date fair value of employee share
      options and similar  instruments  will be estimated  using  option-pricing
      models  adjusted  for the  unique  characteristics  of  those  instruments
      (unless  observable market prices for the same or similar  instruments are
      available).  If  an  equity  award  is  modified  after  the  grant  date,
      incremental compensation cost will be recognized in an amount equal to the
      excess of the fair value of the modified  award over the fair value of the
      original award immediately  before the  modification.  The Company adopted
      SFAS No. 123(R),  effective  January 1, 2006.  Based on stock options that
      vested  during  2006,  the  Company  recorded   approximately  $23,665  in
      additional  compensation  expense for the year ended  December  31,  2006,
      under SFAS No. 123(R).

      Prior to January 1, 2006 the Company  followed  SFAS No. 123,  "Accounting
      for  Stock-Based  Compensation."  The  provisions  of SFAS No. 123 allowed
      companies to either  expense the estimated  fair value of stock options or
      to continue to follow the intrinsic  value method set forth in APB Opinion
      25,  "Accounting  for Stock Issued to Employees"  ("APB 25"), but disclose
      the pro  forma  effect  on net  income  (loss)  had the fair  value of the
      options been expensed.

      Had compensation cost for the Company's stock option plans been determined
      based on the fair  value at the grant or issue  date  prior to  January 1,
      2006 and consistent with the provisions of SFAS No. 123(R),  the Company's
      net income and income per share  would have been  reduced to the pro forma
      amounts indicated below:

<TABLE>
<CAPTION>
                                                                    2006          2005
                                                                ------------   ----------
<S>                                                             <C>            <C>
         Net loss as reported                                   $ (1,607,763)  $ (466,307)
         Less:

            Total stock based compensation expense determined
            under the fair value method for all awards               (23,665)           -
                                                                ------------   ----------

         Net Loss, pro forma                                    $ (1,631,428)  $ (466,307)
                                                                ============   ==========
         Loss per share:
            Basic loss per share as reported                    $      (4.28)  $    (1.13)
                                                                ------------   ==========
            Diluted loss per share as reported                  $      (4.28)  $    (1.13)
                                                                ------------   ==========
            Basic loss per share - pro forma                             N/A   $    (1.13)
                                                                ------------   ==========
            Diluted loss per share - pro forma                           N/A   $    (1.13)
                                                                ------------   ==========
</TABLE>

      Since no options were issued or vested during 2005, the reported operating
      results are identical to the pro forma  amounts.  (See "Recent  accounting
      pronouncements"  within Note 2 below).  Since FAS 123 became  mandatory in
      2006, pro forma reporting is not applicable.

      Reclassifications.  Certain 2005 amounts have been reclassified to conform
      to the 2006 presentation. Such reclassifications had no effect on reported
      net income or earnings per share.

                                      F-8

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      Recent accounting  pronouncements.  In December 2004, the FASB issued FASB
      Statement  No.153  "Exchange  of  Non-monetary  Assets"  ("FAS  153"),  an
      amendment of APB Opinion No.29 "Accounting for Non-monetary Transactions".
      The  amendments  made by FAS 153 are based on the principle that exchanges
      of  non-monetary  assets should be measured based on the fair value of the
      assets exchanged.  Further,  the amendments eliminate the narrow exception
      for  non-monetary  exchanges of similar  productive  assets and replace it
      with a broader exception for exchanges of non-monetary  assets that do not
      have commercial  substance.  FAS 153 is effective for  non-monetary  asset
      exchanges  occurring  in fiscal  periods  beginning  after June 15,  2005.
      Earlier   application  is  permitted  for  non-monetary   asset  exchanges
      occurring in fiscal periods after the date of issuance.  The provisions of
      FAS 153 shall be applied  prospectively.  The Company does not believe the
      adoption  of FAS 153  will  have a  significant  impact  on the  Company's
      overall results of operations or financial position.

      In March 2005, the FASB issued FASB Interpretation No.47,  "Accounting for
      Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies the
      term conditional  asset  retirement  obligations as used in FASB Statement
      No. 143,  "Accounting  for Asset  Retirement  Obligations".  The Company's
      adoption  of FIN 47 did not have a  material  impact  on the  consolidated
      financial statements.

      In May 2005,  the FASB issued FASB No.154,  "Accounting  Changes and Error
      Corrections"  ("FAS154"),  which replaces APB Opinion  No.20,  "Accounting
      Changes" and FASB No.3 "Reporting Accounting Changes in Interim Financials
      Statements". This Standard retained accounting guidance related to changes
      in estimates, changes in reporting entity and error corrections.  However,
      changes in accounting  principles must be accounted for retrospectively by
      modifying  the  financial   statements  of  prior  periods  unless  it  is
      impracticable  to do so. FAS 154 is effective for accounting  changes made
      in fiscal years  beginning  after  December 15, 2005. The Company does not
      believe  adoption  of FAS  154  will  have  a  significant  impact  on the
      Company's overall results of operations or financial position.

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

      Pursuant  to  mortgage  loan  agreements   between  the  Company  and  its
      borrowers, a portion of the proceeds are held by the Company in segregated
      accounts to be disbursed to borrowers upon  completion of  improvements on
      the secured  property.  As of December  31, 2006 and 2005,  mortgage  note
      holdbacks  from the  consummation  of  mortgage  loans  made  amounted  to
      $123,037 and $280,923, respectively.

4.    Marketable securities
      ---------------------

      Marketable  securities  consist of equity securities and are accounted for
      as available-for-sale securities. During the year ended December 31, 2006,
      a net loss of $13,914 was realized from the sale of equity securities.  As
      of December  31, 2006,  the  marketable  securities  totaled  $899,  which
      includes an unrealized  gain of $137.  During the year ended  December 31,
      2005, a net loss of $174 was realized from the sale of equity  securities.
      As of December 31, 2005 the marketable  securities totaled $19,577,  which
      includes an unrealized  loss of $13,380.  Unrealized  gains and losses are
      excluded from  earnings and reported in  accumulated  other  comprehensive
      income.

5.    Accounts receivable
      -------------------

      Accounts  receivable  consists  of  accrued  interest  on  mortgage  notes
      receivable,  other  amounts due from  borrowers  and a  receivable  from a
      custodial  account.  As of December 31, 2006 and 2005,  accrued  interest,
      other amounts due from borrowers and the custodial account receivable were
      $1,000,937 and $715,742  respectively.  During 2006, the Trust established
      an  allowance   for  doubtful   accounts  of  $230,000  to  recognize  the
      collectibility  of the  receivable  as well as the costs  associated  with
      possible legal action.

                                      F-9

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

6.    Warehousing facilities to related parties
      -----------------------------------------

      The Trust entered into a loan purchase agreement on December 12, 1997 with
      CAFC.  Under the terms of the agreement,  the Trust advanced funds to CAFC
      to acquire mortgage loans secured by real estate.  The Trust then acquired
      all of CAFC's right,  title and interest in such loans.  CAFC is obligated
      to reacquire the loans from the Trust at a preset price. The interest rate
      on this  line of credit  varies  with  market  conditions  and is  payable
      monthly. As of December 31, 2006 and 2005 the applicable interest rate was
      11.25% and 10.25%,  respectively.  The Trust earned interest in the amount
      of $1,563 and $81,767 during 2006 and 2005, respectively,  of which $0 and
      $0 was outstanding as of December 31, 2006 and 2005, respectively.

      CAFC  received an advance of $0 and $950,000  from  Calliance  Realty Fund
      ("CRF") as of  December  31,  2006 and 2005,  respectively.  CRF charges a
      variable  interest  rate of prime  plus  3.00% on all  advances.  CAFC had
      pledged a mortgage  note  receivable  to  collateralize  the balance.  The
      advance was  callable by CRF upon 30 days written  notice.  As of December
      31, 2006 and 2005, the Prime rate was 8.25% and 7.25%, respectively.  CAFC
      expensed  interest of $30,275 and $12,139 in 2006 and 2005,  respectively.
      As of  December  31,  2006  and  2005  accrued  interest  was $0  and  $0,
      respectively.

      The aforementioned  warehouse  facilities revolve monthly and are paid off
      as the mortgage loans held are sold or repaid by the loan's borrower.

7.    Mortgage notes receivable
      -------------------------

      Reconciliation  of the mortgage  notes  receivable  balances for the years
      ended December 31, 2006 and 2005 follows:

                                                      2006            2005
                                                 -------------   -------------
         Balance, beginning of year              $  26,443,616   $  19,053,474
         Additions during period:
            Originations                            21,542,427      65,213,362
            CAFC adjustment                                  -       4,674,462
         Deductions during period:
            Collections of principal                  (120,010)    (14,207,241)
            Repayments                             (11,223,490)     (3,302,412)
            Sales                                  (19,220,604)    (44,253,688)
            Foreclosures, net of reserve              (300,000)       (734,341)
                                                 -------------   -------------
         Balance, end of year                    $  17,121,939   $  26,443,616
                                                 =============   =============

      As of December 31, 2006, the Trust's mortgage notes receivable  balance is
      $17,121,939.  As of  December  31,  2005,  the  Company's  mortgage  notes
      receivable balance is $26,443,616. The mortgage notes receivable represent
      home equity loans primarily  secured by deeds of trust on one-to-four unit
      residential  real estate.  The Company 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 usually due as a
      balloon payment at loan maturity.

                                      F-10

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

The Company's  mortgage  notes  receivable  balance  relates to loans secured by
deeds of trust on one-to-four  unit residential  properties.  The following is a
summary of the Trust's mortgage notes receivable balance at December 31, 2006:

<TABLE>
<CAPTION>
                                                                                Final        Monthly
            Principal outstanding                        Interest rate      maturity date    payment   Lien Priority
----------------------------------------------------   ----------------   ----------------  --------   -------------
<S>                                                    <C>                <C>               <C>        <C>
Individual loans greater than $499,999:                     10.50%             05/01/36     $ 17,500       First
                                                            11.25%             03/01/07       16,523       First
                                                            12.50%             10/01/07       15,625      Second
                                                            13.50%             04/01/08       12,084      Second
                                                            12.25%             12/01/06       10,157      Second
                                                            12.50%             01/01/21        9,343      Second
                                                            10.50%             10/01/08        6,563       First
                                                            11.00%             10/01/07        6,646       First
                                                            13.00%             11/01/07        7,583       First
                                                            10.50%             06/01/10        4,375      Second
Loans from $400,000-$499,999                            6.95% to 12.75%   24 to 166 months
Loans from $300,000-$399,999                            6.38% to 11.75%   13 to 333 months
Loans from $200,000-$299,999                           10.00% to 13.50%     0 to 45 months
Loans from $100,000- 199,999                            7.75% to 12.00%    2 to 319 months
Loans up to $99,999                                     7.00% to 17.75%   32 to 269 months
Total Mortgage Notes Receivable at December 31, 2006

<CAPTION>
                                                                          Carrying           Amount of
                                                       Face amount of     amount of    delinquent principal
            Principal outstanding                        mortgage(s)     mortgage(s)         (Note A)
----------------------------------------------------   --------------   ------------   --------------------
<S>                                                    <C>              <C>            <C>
Individual loans greater than $499,999:                    2,000,000    $  1,999,975       $         -
                                                           1,762,500       1,762,500         1,762,500
                                                           1,500,000       1,500,000                 -
                                                           1,075,000       1,074,143                 -
                                                             995,000         995,000           995,000
                                                             800,000         896,975                 -
                                                             750,000         750,000           750,000
                                                             725,000         724,895                 -
                                                             700,000         700,000                 -
                                                             500,000         500,000                 -
Loans from $400,000-$499,999                               1,405,000       1,399,428           480,000
Loans from $300,000-$399,999                               2,026,443       1,966,209           345,000
Loans from $200,000-$299,999                               1,735,000       1,845,618         1,030,618
Loans from $100,000- 199,999                                 694,642         571,459           134,852
Loans up to $99,999                                          596,553         435,648            76,589
                                                        ------------    ------------       -----------
Total Mortgage Notes Receivable at December 31, 2006    $ 17,265,137    $ 17,121,939       $ 5,874,559
                                                        ============    ============       ===========
</TABLE>

(A) Delinquent  loans are loans where the monthly  interest  payments in arrears
are 90 or more days  overdue.  As of December 31,  2006,  there were twelve (12)
loans totaling  $5,874,559 of principal and $195,859 of interest that were 61 to
180 days delinquent on interest payments. There was one loan that was delinquent
for over 180 days.  Management  has  reviewed  all of the  delinquent  loans and
believes that 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.

                                      F-11

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

The Company's  mortgage  notes  receivable  balance  relates to loans secured by
deeds of trust on one-to-four  unit residential  properties.  The following is a
summary of the Trust's mortgage notes receivable balance at December 31, 2005:

<TABLE>
<CAPTION>
                                                                               Final         Monthly
            Principal outstanding                       Interest rate      maturity date     payment   Lien Priority
----------------------------------------------------   ---------------   ----------------   --------   -------------
<S>                                                    <C>               <C>                <C>        <C>
Individual loans greater than $499,999:                    11.00%             01/01/11      $ 15,583        First
                                                           10.50%             01/01/07        13,125        First
                                                           11.25%             10/01/07        14,063       Second
                                                            8.99%             04/01/08        10,563        First
                                                           13.50%             04/01/08        12,085       Second
                                                           11.00%             12/01/06         9,121       Second
                                                          11.875%             05/01/06         8,313       Second
                                                           12.50%             01/01/21         8,333       Second
                                                           10.50%             10/01/08         6,563        First
                                                           13.00%             03/01/06         7,583        First
                                                           11.75%             09/01/07         5,630        First
                                                           14.00%             02/01/06         6,542        First
                                                            7.50%             10/01/35         5,938        First
                                                           10.50%             06/01/10         4,375       Second
                                                            6.00%             02/01/36         3,500        First
                                                            6.08%             11/01/35         3,324        First
                                                            6.63%             11/01/35         2,783        First
Loans from $400,000-$499,999                           1.00% to 12.75%   19 to 359 months
Loans from $300,000-$399,999                           6.23% to 11.75%    8 to 358 months
Loans from $200,000-$299,999                           9.00% to 13.50%    3 to 358 months
Loans from $100,000- 199,999                           6.75% to 12.00%    5 to 355 months
Loans up to $99,999                                    5.75% to 14.50%    1 to 281 months
Total Mortgage Notes Receivable at December 31, 2005

<CAPTION>
                                                                          Carrying           Amount of
                                                       Face amount of     amount of    delinquent principal
            Principal outstanding                        mortgage(s)     mortgage(s)         (Note A)
----------------------------------------------------   --------------   ------------   --------------------
<S>                                                    <C>              <C>            <C>
Individual loans greater than $499,999:                    1,700,000    $  1,699,991       $         -
                                                           1,500,000       1,500,000                 -
                                                           1,500,000       1,500,000                 -
                                                           1,410,000       1,410,000                 -
                                                           1,075,000       1,074,259                 -
                                                             995,000         995,000                 -
                                                             840,000         840,000           840,000
                                                             800,000         800,000                 -
                                                             750,000         750,000                 -
                                                             700,000         700,000                 -
                                                             575,000         575,000                 -
                                                             518,900         560,700                 -
                                                             950,000         948,586                 -
                                                             500,000         500,000                 -
                                                             700,000         700,000                 -
                                                             656,808         655,808                 -
                                                             504,000         504,000                 -
Loans from $400,000-$499,999                               2,353,000       2,319,984           480,000
Loans from $300,000-$399,999                               3,280,443       3,272,641           300,000
Loans from $200,000-$299,999                               2,780,414       2,780,414           706,800
Loans from $100,000- 199,999                               1,459,280       1,376,779                 -
Loans up to $99,999                                        1,154,080         980,454           109,899
                                                        ------------    ------------       -----------
Total Mortgage Notes Receivable at December 31, 2005    $ 26,701,367    $ 26,443,616       $ 2,436,699
                                                        ============    ============       ===========
</TABLE>

(A) Delinquent  loans are loans where the monthly  interest  payments in arrears
are 90 or more days overdue. As of December 31, 2005, there were eight (8) loans
totaling  $2,436,700  of principal  and $76,353 of interest  that were 61 to 180
days  delinquent on interest  payments.  There are no loans that were delinquent
for over 180 days.  Management  has  reviewed  all of the  delinquent  loans and
believes that 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.

                                      F-12

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

8.    Allowance for loan losses
      -------------------------

      The  allowance  for loan  losses is based on the fair value of the related
      collateral  since  all  loans  subject  to this  estimate  are  collateral
      dependent.  Management  believes a $730,000 and $390,000 loan loss reserve
      is adequate  protection  against potential losses inherent in the mortgage
      notes receivable balances as of December 31, 2006 and 2005,  respectively.
      Actual losses may differ from the estimate.

      A  reconciliation  of the  allowance  for loan  losses for the years ended
      December 31, 2006 and 2005 follows:

<TABLE>
<CAPTION>
                                                                                   2006           2005
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
      Provision for loan losses
         as reported on consolidated statements of operations                       522,840        329,483
      CAFC consolidation adjustments                                               (102,398)       180,000
      Write-off of uncollectible loans (net)                                        (28,133)      (294,483)
                                                                               ------------   ------------
      Total adjustments to allowance                                                392,309        215,000
      Balance, beginning of year                                               $    390,000   $    175,000
                                                                               ------------   ------------
      Balance, end of year                                                     $    782,309   $    390,000
                                                                               ============   ============
</TABLE>

9.    Real estate owned
      -----------------

      As of January 1, 2005,  the Company owned one property.  During 2005,  the
      Company sold one property and foreclosed on another property. During 2005,
      a previously  written-off  property's  title was transferred for a gain of
      $6,000.  As of December 31, 2005,  the Company owned one property.  During
      2006, the Company sold one property and foreclosed on another property.

      A  reconciliation  of the real  estate  owned  account  shows its cash and
      non-cash activities for the years ended December 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                                   2006            2005
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
      Balance, beginning of year                                               $  1,978,350   $    680,000
      Additions
      Foreclosed mortgage notes, net of reserve (non-cash)                          300,000        988,758
      Assumption of senior debt                                                           -        962,127
      Repayment of senior debt                                                     (962,127)      (551,992)
      Gain (loss) on sale (non-cash)                                               (165,031)       (54,669)
                                                                               ------------   ------------
                                                                                  1,151,192      2,024,294
      Less: Proceeds from sale of real estate owned (net of closing costs)         (906,192)       (45,944)
                                                                               ------------   ------------
      Balance, end of year                                                     $    245,000   $  1,978,350
                                                                               ============   ============
</TABLE>

10.   Bank loans payable
      ------------------

      As of June 30,  2004,  CAFC  obtained  a  three-year  $25,000,000  funding
      agreement.  The  agreement  provides  an advance  rate of up to 80% on the
      notes outstanding balance at an interest rate floor of 5.00% and a ceiling
      of the Prime Rate plus 4.0%.  A Tri-Party  Financing  and  Indemnification
      Agreement among CAFC,  CRF, and the Trust,  allowed both CRF and the Trust
      to utilize this funding agreement for a fee of 3 basis points per month of
      the  end of the  month's  financed  mortgage  notes  receivable  principal
      balance.  All  benefits  and  costs of  ownerships  and  financing  of the
      financed  loans  including the risk of principal loss inured to either CRF
      or the Trust.  CAFC is not held liable for the borrowings of either CRF or
      the Trust per the Tri-Party Financing and Indemnification Agreement. As of
      December 31, 2006 and 2005, the outstanding  balance  assigned to CAFC was
      $0 and $0,  respectively.  As of December 31, 2006 and 2005,  the facility
      had a  balance  of $0 and  $12,379,527,  respectively,  and the  Trust had
      borrowed $0 and $8,601,477  respectively.  The facility was retired in the
      second quarter of (2006.)

                                      F-13

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

10.   Bank loans payable (continued)
      ------------------------------

      As of November 15, 2005,  the Trust  obtained a two-year  term  $7,000,000
      credit  facility  with a one year  extension.  The  facility  provides  an
      advance rate of up to 80% on the notes outstanding  balance at an interest
      rate of one-month  LIBOR plus 2.00%. As of December 31, 2006 and 2005, the
      LIBOR rate was 5.32 % and 4.35%, respectively. Interest is payable monthly
      with  $39,606 and $662  accrued  and  payable as of December  31, 2006 and
      2005.  As of December  31, 2006 and 2005,  the  facility  had a balance of
      $6,767,821 and $1,873,520, respectively.

      The above  warehouse  facilities  revolve  monthly and are paid off as the
      mortgage loans held are sold or repaid by the loan's borrower.

      On December 14, 2005 the Trust guaranteed CAFC's sale of mortgage loans to
      Lehman  Brothers  Bank,  FSB  ("Bank").  The Trust is liable  for the face
      amount of any note sold to the Bank. During 2005 no loans were sold to the
      Bank,  pursuant  to this  guarantee.  During  2006,  two (2) loans  with a
      principal balance of $2,500,000 were sold pursuant to this guarantee.

11.   Warehouse lines of credit
      -------------------------

      As of December  31,  2006 and 2005,  CAFC had  borrowed $0 and  $4,842,646
      respectively under a $5,000,000 funding agreement.  The agreement provides
      a 100% advance rate on the notes  outstanding  balance at an interest rate
      of Prime plus 1.50% with a floor of 6.00%.  As of  December  31,  2006 and
      2005,  the Prime  rate was  8.25% and  7.25%,  respectively.  Interest  is
      payable monthly with $0 and $50,827 accrued and payable as of December 31,
      2006 and 2005,  respectively.  The facility is  cancelable by either party
      upon 30 days written notice.

      As of December 31, 2005,  CAFC had borrowed $0 under a funding  agreement.
      The agreement provides a 95% advance rate on the notes outstanding balance
      at an interest rate of 9.5%.  Interest is payable  monthly with $0 accrued
      and payable as of December 31, 2005.  The facility was retired  during the
      fourth quarter of 2005.

      On November 15, 2005, CAFC entered into a $5,000,000  warehouse  facility.
      The facility  provides a 98% advance rate on the notes  outstanding  at an
      interest  rate of the average  one month LIBOR plus 3.00%.  As of December
      31, 2005 the one month LIBOR was 4.36% and the facility had an outstanding
      balance of $0. The facility was retired during the third quarter of 2006.

      The above  warehouse  facilities  revolve  monthly and are paid off as the
      mortgage loans held are sold or repaid by the loan's borrower.

12.   Mortgage payable
      ----------------

      During  2005,  the Trust  foreclosed  on a property and assumed a mortgage
      note payable in the amount of $962,127 with an annual  interest rate of 8%
      with a monthly  principal and interest  payment of $8,253.  The Trust sold
      the property  during the third  quarter of 2006.  The Trust  foreclosed on
      another property in 2006. The assumed mortgage's  principal balances as of
      December 31, 2006 and 2005 were $0 and $962,127, respectively.

13.   Related party transactions
      --------------------------

      The Former Manager,  which is owned by two directors - Messrs.  Swartz and
      Konczal - provided  management and advisory services and received fees for
      these  services  from the Trust.  The Former  Manager was also entitled to
      reimbursement from the Trust for clerical and  administrative  services at
      cost based on relative utilization of facilities and personnel. The Former
      Manager was also reimbursed by CAFC for direct expenses and administrative
      services.  On December  29,  2006,  the Former  Manager's  management  and
      advisory  service  contracts were terminated and the Trust paid the Former
      Manager  a one time  termination  fee of  $500,000  which is  reported  in
      General and  administrative  expenses in the  consolidated  statements  of
      operations.

      The Former Manager  received 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
      management  fee  also  included  reimbursement  for the  direct  costs  of
      overseeing the

                                      F-14

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      administration and disposition of real estate owned by the Trust and CAFC.
      The Trust's management fee was $196,943 and $231,315,  for the years ended
      December 31, 2006 and 2005, respectively.

      The Former  Manager  also earned a REO  management  fee for  managing  and
      servicing the  properties  that the Trust and CAFC have  obtained  through
      foreclosure  of mortgage  notes held.  The fee for these services was $500
      per month for each  property  held by the Trust and CAFC.  The Trust's REO
      management fee was $6,000 and $4,500 in 2006 and 2005, respectively.

      The Former  Manager's  incentive  compensation for each fiscal quarter was
      25% of the net  income of the Trust in excess of an  annualized  return on
      common  equity for such quarter  equal to the ten year U.S.  Treasury Rate
      plus 2.00%, provided that the payment of such incentive  compensation does
      not reduce the Trust's annualized return on common equity for such quarter
      to less than the ten year U.S. Treasury Rate after the preferred  dividend
      has been paid. The incentive compensation for 2006 and 2005 was $0 and $0,
      respectively.

      The Former Manager earned an  administration  fee up to 25 basis points on
      mortgages  funded for the benefit of CAFC as defined in the First  Amended
      Residential  Mortgage Loan Services  Agreement.  CAFC expensed $28,220 and
      $103,283  for these costs in 2006 and 2005,  respectively.  These fees are
      reported as part of the management fees.

      The Former Manager  received 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.  During 2006 and 2005, the Trust
      capitalized 32.5% of this fee as origination costs and amortized them over
      the average  life of the  portfolio.  The  remaining  67.5% of the fee was
      expensed as the portion attributed for servicing.

      For the  years  ended  December  31,  2006 and 2005,  the Trust  paid loan
      origination and servicing fees of $390,629 and $455,369,  respectively. In
      2006 and 2005, the Trust expensed $263,675 and $307,344,  respectively, as
      servicing fees and $150,295 and $208,028, respectively, as amortization of
      loan  origination  costs.  As of  December  31,  2006 and 2005,  the Trust
      capitalized $126,954 and $148,025 of loan origination fees, respectively.

      On occasion,  the Trust and its  affiliates  had related  receivables  and
      payables arising from ordinary business  transactions.  As of December 31,
      2005, the Trust had a payable of $2,162 to the Former Manager. No interest
      is charged on these inter-company  accounts.  These amounts are eliminated
      in the Company's financial statements.

      As described in Note 6, CAFC  received an advance of $0 and $950,000  from
      CRF as of December 31, 2006 and 2005, respectively. CRF charges a variable
      interest rate of prime plus 3.00% on all advances. As of December 31, 2006
      and 2005, the Prime rate was 8.25% and 7.25%, respectively.  CAFC expensed
      interest  of $30,275  and  $12,139 in 2006 and 2005,  respectively.  As of
      December 31, 2006 and 2005 accrued interest was $0 and $0, respectively.

      During 2001 CAFC paid a $5,000  deposit  for an option to purchase  Sierra
      Capital Corporate Advisors ("SCCA").  SCCA is owned by Messrs.  Swartz and
      Konczal,  two of CAIT's  directors.  On  December  29, 2006 the option was
      transferred to the Former Manager for $5,000.

      During the fourth quarter of 2005, CAFC financed a $700,000 first mortgage
      at 6.00% on the personal  residence of Mr.  Konczal,  a Trust Director and
      then the  Company's  President  and Chief  Operating  Officer.  During the
      second quarter of 2006, the financing was sold into the secondary mortgage
      market at a loss. During 2006, Mr. Konczal  reimbursed CAFC $7,500 for the
      loss on the transaction.

      During the first quarter of 2006, Mr. Wrensen, the Trust's Chief Financial
      Officer,  oversaw the purchase of 8,520 Preferred  Shares by the Trust and
      the purchase of 4,260  Preferred  Shares by other  investors at a price of
      ten dollars per share. Subsequent to the transaction, the Trust's Board of
      Directors requested that Mr. Wrensen repurchase the 4,260 Preferred Shares
      from the other  investors.  Mr.  Wrensen  was  unable to  reacquire  these
      shares.  During  the  fourth  quarter of 2006,  the Trust  acquired  4,260
      Preferred Shares from Mr. Wrensen at a price of ten dollars per share.

                                      F-15

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      Mr.  Swartz,  the  Trust's  former  Chief  Executive  Officer  and current
      Chairman,  provides  legal  counsel to the Company.  During 2006 and 2005,
      neither  Mr.  Swartz  nor  his law  firm,  Thomas  B.  Swartz,  Inc.,  was
      compensated for these services.

      The Company  entered  into an  agreement  to  sublease  space for up to 36
      months with the Former Manager. The lease has an option to cancel with 180
      days  notice on  January  1,  2008.  The  following  table  describes  the
      obligations of the lease without cancellation.

                             2007       2008       2009       Total
                           --------   --------   --------   ---------
            Year ending
            December 31    $ 35,776   $ 36,592   $ 37,408   $ 109,776

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

      The  Preferred  Shareholders  are entitled to a dividend  preference in an
      amount  equal  to  an  annualized  return  on  the  adjusted  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).  The  annualized  return is the lesser of: (a) 10.25%,  (b)
      1.50 % over the Prime Rate (determined on a not less than quarterly basis)
      or (c) the rate set by the  Board of  Directors.  The  preferred  dividend
      preference is non-cumulative.

      After declaring  dividends for a given year to the Preferred  Shareholders
      in the amount of the  dividend  preference,  no further  dividends  may be
      declared on the Preferred Shares for the subject year, until the dividends
      declared on each Common Share for that year equals the dividend preference
      for each Preferred Share for such year. Any additional dividends generally
      will be  allocated  such that the  amounts of  dividends  per share to the
      Preferred  Shareholders  and Common  Shareholders for the subject year are
      equal.  The  Preferred  Shareholder's  additional  dividends,  if any, are
      non-cumulative.

      Preferred   Shareholders   are   entitled  to  receive   all   liquidating
      distributions  until they have received an 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 have been reduced to zero. Any
      subsequent  liquidating  distributions  will  be  allocated  among  Common
      Shareholders and Preferred Shareholders pro rata.

      The  Preferred  Shares are  redeemable  by a  shareholder,  subject to the
      consent  of the  Board  of  Directors,  annually  on June  30 for  written
      redemption  requests  received  by May  15 of  such  year.  The  Board  of
      Directors may in its 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/or  options and to  prohibit  the  transfer of shares to persons  that
      would result in a violation of the Trust's shareholding requirements.  The
      Bylaws  provide that only with the explicit  approval of the Trust's Board
      of Directors may a shareholder own more than 9.8% of the total outstanding
      shares.

      As of January 1, 2006 and 2005,  the Trust's net Preferred  Stock balances
      were 209,681 and 210,644, respectively.  During 2006 and 2005, the Trust's
      Preferred Stock purchases totaled 12,780 and 963 shares, respectively.  As
      of December 31, 2006 and 2005,  the Trust's net Preferred  Stock  balances
      were 196,901 and 209,681.

                                      F-16

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

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

      As of January 1, 2006 and 2005, the Trust's net Common Stock balances were
      390,032  and  439,454,  respectively.  During  2006 and 2005,  the Trust's
      cumulative  Common  Stock  purchases  totaled  9,500  and  52,293  shares,
      respectively.  During 2006 and 2005, 0 and 2,871 Common Stock options were
      exercised, respectively. As of December 31, 2006 and 2005, the Trust's net
      Common Stock balances were 380,532 and 390,032 shares, respectively.

15.   Common stock options
      --------------------

      The 1998  Incentive  Stock  Option Plan  ("Plan")  adopted by the Board of
      Directors  and approved by  stockholders,  provided  non-qualified  Common
      Stock  options  for the  purchase of 247,500  Common  Shares of the Trust.
      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  generally two (2) to six (6) months after the
      date of the grant. Under the terms of the Plan, the exercise price of each
      option will not be less than 100% of the Common Shares closing stock price
      on the date of grant.

      The  activity in the Plan for the years ended  December  31, 2006 and 2005
      are as follows:

<TABLE>
<CAPTION>
                                                                     Weighted average
                                                         Options      exercise price
                                                        ---------    ----------------
<S>                                                     <C>          <C>
         Outstanding at January 1, 2005                   173,595         $ 10.67
            Granted                                             -               -
            Exercised                                           -               -
            Forfeited                                           -               -
                                                        ---------         -------
         Outstanding at December 31, 2005                 173,595           10.67
                                                        ---------         -------
            Granted                                        19,062           10.65
            Exercised                                           -               -
            Forfeited                                     (31,473)         (10.54)
                                                        ---------         -------
         Outstanding at December 31, 2006                 161,220         $ 10.69
                                                        =========         =======
         Outstanding options exercisable as of
            January 1, 2005                               173,595         $ 10.67
            December 31, 2005                             173,595         $ 10.67
            December 31, 2006                             161,220         $ 10.69
</TABLE>

      Stock  options for 12,375  shares  remain  awardable.  All the granted but
      unexercised stock options are exercisable.

      The following table  summarizes  information with respect to stock options
      outstanding at December 31, 2006:

<TABLE>
<CAPTION>
                                                                 Options outstanding
                                              -----------------------------------------------------------
                                                                   Weighted-average          Weighted-
                                                                 remaining contractual   average exercise
                                              Number of shares       life (years)              price
                                              -----------------------------------------------------------
<S>                                           <C>                <C>                     <C>
              Range of exercise prices
                    $9.00 - $9.06                  101,220               3.61                $  9.03
                    $13.50                          60,000               1.73                  13.50
                                                   -------               ----                -------
                                                   161,220               2.91                $ 10.69
                                                   =======               ====                =======
</TABLE>

                                      F-17

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

16.   Earnings per share
      ------------------

      The following  table  represents a  reconciliation  of the  numerators and
      denominators  of the basic and diluted  earnings  per common share for the
      years ended December 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                    2006          2005
                                                                ------------   ----------
<S>                                                             <C>            <C>
         Numerator:
         Net income                                             $ (1,631,429)  $ (307,308)
         Preferred dividends attributable to income                       --     (159,395)
                                                                ------------   ----------
         Numerator for basic and diluted  Earnings per share-
            income available to common stockholders             $ (1,631,429)  $ (466,703)
                                                                ============   ==========
         Denominator:
            Basic weighted average shares                            381,453      413,801
            Dilutive effect of options                                    --       18,994
                                                                ------------   ----------
            Diluted weighted average shares                          381,453      432,795
                                                                ============   ==========
         Basic earnings per common share                        $      (4.28)  $    (1.13)
                                                                ============   ==========
         Diluted earnings  per common share                     $      (4.28)  $    (1.13)
                                                                ============   ==========
</TABLE>

17.   Selected quarterly financial data (unaudited)
      ---------------------------------------------

      Selected  quarterly  financial  data are present  below by quarter for the
      years ended December 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                                              For the year ended December 31, 2006
                                                              ------------------------------------
                                                  Total          4th Qtr       3rd Qtr     2nd Qtr       1st Qtr
                                               ------------   ------------   ----------   ----------   ----------
<S>                                            <C>            <C>            <C>          <C>          <C>
      Revenue                                  $  2,478,609   $    420,626   $  541,022   $  656,554   $  860,407

      Income (loss) from real estate owned         (329,623)      (118,280)     100,867      (27,746)    (284,464)

         Net income (loss)                       (1,631,428)    (1,278,169)      20,772        3,460     (377,491)

         Preferred dividends                             --             --           --           --           --
                                               ------------   ------------   ----------   ----------   ----------
         Net income (loss) applicable to
         common stock                          $ (1,631,428)  $ (1,278,169)  $   20,772   $    3,460   $ (377,491)
                                               ============   ============   ==========   ==========   ==========

      Basic earnings per share                 $      (4.28)  $      (3.36)  $     0.05   $     0.01   $    (0.98)

      Diluted earnings per share               $      (4.28)  $      (3.36)  $     0.05   $     0.01   $    (0.98)
</TABLE>

<TABLE>
<CAPTION>
                                                              For the year ended December 31, 2005
                                                              ------------------------------------
                                                  Total          4th Qtr       3rd Qtr     2nd Qtr       1st Qtr
                                               ------------   ------------   ----------   ----------   ----------
<S>                                            <C>            <C>            <C>          <C>          <C>
      Revenue                                  $  3,797,885   $    822,581   $1,080,346   $1,048,119   $  846,839

      Income (loss) from asset held for sale        (99,984)            --        6,000      (74,639)     (31,345)
         and real estate owned

         Net income (loss)                         (307,308)      (199,104)     (85,721)     (39,837)      17,355

         Preferred dividends                        159,395             --           --       66,318       93,077
                                               ------------   ------------   ----------   ----------   ----------
         Net income (loss) applicable to
         common stock                          $   (466,703)  $   (199,105)  $  (85,721)  $ (106,155)  $  (75,722)
                                               ============   ============   ==========   ==========   ==========

      Basic earnings per share                 $      (1.13)  $      (0.50)  $    (0.21)  $    (0.24)  $    (0.17)

      Diluted earnings per share               $      (1.13)  $      (0.50)  $    (0.21)  $    (0.24)  $    (0.17)
</TABLE>

                                      F-18

<PAGE>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

18.   Contingencies
      -------------

      The Trust is involved in two legal proceedings as of December 31, 2006.

      CAFC was named as defendant in a case filed in the Superior Court, Alameda
      County,  State of California on December 7, 2004.  Plaintiff  alleged that
      CAFC made a fraudulent loan to him by cross  collateralizing  two separate
      properties.  The  cross  collateralization  was  necessary  to  grant  the
      borrower  the desired  loan,  since there was  insufficient  equity in the
      primary  property used as collateral for the loan. Two amended  complaints
      have  been  filed in  addition  to the  initial  one.  The  Plaintiff  has
      represented  himself.  After CAFC was allowed by the court to foreclose on
      the primary collateral and the borrowing was paid in full, Plaintiff, upon
      the  Court's  insistence,  obtained  counsel  and  has  filed  an  amended
      complaint,  which is pending. The Plaintiff was deposed in May of 2006 and
      the discovery process is still ongoing.

      On April 14, 2006,  CAIT and CAFC were served a summons  alleging that the
      Company was involved with  misleading a former mortgage  holder.  Upon the
      satisfaction  of their  mortgage  claim  from the  proceeds  of a  Company
      provided  mortgage,  the former  mortgage  holder  released  their  escrow
      settlement to the new purchaser  without  re-recording  their  subordinate
      mortgage  claim. On July 14, 2006, the property was sold at a Trustee sale
      and the  Company's  loan was paid in full.  The former  mortgage  holder's
      unrecorded claim was not satisfied at the aforementioned Trustee sale. The
      Company believes the former mortgage holder's action is without merit.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      F-19

<PAGE>

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                   Notes to Consolidated Financial Statements
                 For the years ended December 31, 2006 and 2005

19.   Restatement
      -----------

     The Company has restated its consolidated statements of cash flows, as
     previously reported in its Form 10-KSB filed for the years ended December
     31, 2006 and 2005. The consolidated statement of cash flows partially
     aggregated CAFC's investing activities as a discontinuance of operations.
     As a result of such error, the Company has restated CAFC's aggregated
     balances into the appropriate line items within the operating, investing
     and financing cash flows under the appropriate guidance within SFAS 95.


      The following is a reconciliation  of the consolidated  statements of cash
      flows as previously  reported in the  Company's  Form 10-KSB as of and for
      the years ended December 31, 2006 and 2005, to the consolidated statements
      of cash  flows as  reported  in the  accompanying  consolidated  financial
      statements included in the Company's Form 10-KSB-A:

<TABLE>
<CAPTION>
                                                                          "As Previously
                                                                             Reported"                   "As Restated"
                                                                            December 31,                  December 31,
                                                                               2006        Adjustments        2006
                                                                          --------------   -----------   -------------
<S>                                                                       <C>              <C>           <C>
      CASH FLOWS FROM INVESTING ACTIVITIES
         Sale of (investment in) marketable securities                            18,678                        18,678
         (Increase) decrease of investment in related party                        5,000                         5,000
         (Increase) decrease in origination costs                                 59,246        25,823          85,069
         Discontinuance of operations of CAFC                                     25,823       (25,823)              -
         Increase (decrease) in warehousing facilities                        (4,842,646)                   (4,842,646)
         Increase (decrease) in warehousing facilities to related party         (950,000)                     (950,000)
         (Increase) decrease in net real estate owned                          1,733,350                     1,733,350
         Increase (decrease) in mortgage payable                                (962,127)                     (962,127)
         (Increase) decrease in mortgage notes receivable                      9,321,677                     9,321,677
                                                                          --------------   -----------   -------------
            Net cash provided by investing activities                          4,409,001             -       4,409,001
                                                                          ==============   ===========   =============
</TABLE>

<TABLE>
<CAPTION>
                                                                          "As Previously
                                                                             Reported"                   "As Restated"
                                                                            December 31,                  December 31,
                                                                               2006        Adjustments        2006
                                                                          --------------   -----------   -------------
<S>                                                                       <C>              <C>           <C>
      CASH FLOWS FROM INVESTING ACTIVITIES
         Sale of (investment in) marketable securities                           (17,853)                      (17,853)
         (Increase) decrease of investment in related party                       (5,000)                       (5,000)
         (Increase) decrease in origination costs                                 59,999                        59,999
         Discontinuance of operations of CAFC                                  2,459,653    (2,459,653)              -
         Increase (decrease) in warehousing facilities                         4,842,646                     4,842,646
         Increase (decrease) in warehousing facilities to related party          950,000                       950,000
         (Increase) decrease in net real estate owned                            652,535                       652,535
         Increase (decrease) in mortgage payable                                (551,922)   (2,521,650)     (3,073,572)
         (Increase) decrease in mortgage notes receivable                     (8,378,900)    4,981,303      (3,397,597)
                                                                          --------------   -----------   -------------
            Net cash provided by investing activities                             11,158             -          11,158
                                                                          ==============   ===========   =============
</TABLE>

                                      F-20


<PAGE>
ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURES

      None.

ITEM 8A. CONTROLS AND PROCEDURES

(a)   Evaluation  of  Disclosure  Controls  and  Procedures.  The Trust's  Chief
Executive  Officer,  President  and  Chief  Accounting  Officer,  based on their
evaluation of the Trust's  disclosure  controls and procedures within 90 days of
the filing date of this annual report,  have evaluated the effectiveness of such
controls and procedures. Based on such evaluations, they have concluded that the
Trust's disclosure  controls and procedures have effectively  operated to ensure
that all  material  information  relating  to the Trust and its  operations  and
financial  condition has been made known to them by other officers and employees
within the Trust and its Directors on a timely basis.

(b)   Changes in Internal  Controls.  There were no  significant  changes in the
Trust's internal  controls or in other factors that could  significantly  affect
those  controls  subsequently  to the date of the  evaluation  set forth in item
8(a).

ITEM 8B. OTHER INFORMATION

      None

--------------------------------------------------------------------------------
                                    PART III
--------------------------------------------------------------------------------

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

DIRECTORS

Richard J. Wrensen,  51;  President,  Chief Executive  Officer,  Chief Financial
Officer and Director(1)

      Class III Director  since 2000;  President,  Chief  Executive  Officer and
Chief  Financial  Officer,  Capital  Alliance  Income  Trust;  Former  Executive
Vice-President and Chief Financial Officer,  Capital Alliance Advisors, Inc. and
its  Affiliates  (1997 to  2006);  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).

Thomas B. Swartz, 75; Chairman and Director (1)

      Class I Director since 1995; Chairman and Chief Executive Officer, Capital
Alliance  Advisors,  Inc. (1989 to date);  Chairman,  Sierra Capital  Acceptance
(1995 to 2000); 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  (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);  L.L.B.,  University of California at Berkeley  Boalt
School  of Law  (1959);  Lieutenant,  U.S.N.R.  1954-1956  (active)  and to 1967
(reserve); A.B., Yale University, (1954).

James L. Grainer, 52; Director (1)(2)(3)(4)

      Class III Director  since 2006;  President  and Chief  Financial  Officer,
Greenshift  Corporation,  a publicly listed alternative energy and environmental
consulting firm (2004 to present);  Chief Financial Officer, Polo Linen (2003 to
2004);  Managing Director of Investment  Banking,  Zanett  Securities  (merchant
banking  firm)  (2001  to  2003);   Managing  Director  of  Investment  Banking,
Prudential  Securities  (1992 to 2001);  Senior Tax  Manager,  Deloitte & Touche
(1979 to 1992); New York State licensed Certified Public Accountant (1979).

                                       18

<PAGE>

Dennis R. Konczal, 56; Director

      Class II Director since 1995;  President (1996 to date) and Executive Vice
President (1989 to 1996) and Chief Operating Officer, Capital Alliance Advisors,
Inc.;  President  and  Director,  Sierra  Capital  Acceptance  (1995  to  2000);
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).

Stanley C. Brooks, 59; Director (2)(3)(4)

      Class  II  Director  since  1996;  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,  Private  Ledger  Financial
Services (1976 to 1983);  Member,  National Futures  Association (1991 to date);
Member,  National  Investment  Bankers  Association  (1990  to  date);  Licensed
Principal,  NASD (1976 to date); B.S. Business Administration,  California State
Polytechnic Institute (1970).

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

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

(3)   Also is an  Independent  Director as defined in Rule 121A of the  American
      Stock Exchange.

(4)   Also is an Audit Committee Financial Expert

AUDIT COMMITTEE - FINANCIAL EXPERTS

      Relevant qualifying experience of the designated Audit Committee Financial
Expert, in addition to that set forth above under Item 9, is as follows:

James L. Grainer

      President  and  Chief   Financial   Officer  of  Greenshift   Corporation;
Responsible  for  the  regulatory  filings  of  Greenshift  Corporation  and its
subsidiaries;  A licensed  Certified Public  Accountant with extensive audit and
tax experience with both publicly held and privately owned diversified financial
service and investment companies.

Stanley C. Brooks

      Chairman,  President,  and Registered  Financial  Principal of Brookstreet
Securities  Corporation;  Responsible  for  arranging all  financings  obtained,
managing cash flow, preparing and filing with the SEC monthly focus reports, and
the  monthly  closing  and  reviewing  of the  books of  Brookstreet  Securities
accounting record, ledgers, and financial statements.

EXECUTIVE OFFICERS

The  following  persons  currently  serve as  Executive  Officers.  The  Trust's
Executive Officers hold office at the discretion of the Directors.

<TABLE>
<CAPTION>
Name                   Age   Position
----                   ---   --------
<S>                    <C>   <C>
Richard Wrensen         51   President, Chief Executive Officer and Chief Financial Officer

Gregory Bronshvag       39   Vice President Operations and Secretary

Andrea Barney           33   Controller and Principal Accounting Officer
</TABLE>

                                       19

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

COMPENSATION OF OFFICERS

      At December 31, 2006, the Trust has one full time  employee.  During 2006,
no compensation was paid by the Company to any employee.

COMPENSATION OF DIRECTORS

Director Fees
-------------

      The Trust pays each Independent Director an annual retainer of $10,000. In
2006 Messrs.  Brooks,  Blomberg,  Grainer and Looper received  $10,000,  $9,167,
$3,333 and $4,791,  respectively,  as a  Director's  retainer.  In 2005  Messrs.
Brooks, Blomberg, and Looper each received $10,000 as a Director's retainer.

Committee and Other Meeting Fees
--------------------------------

      The Independent Directors are also entitled to $500 for each director's or
committee  meeting  attended in person  (commencing  February 27, 2006, a $3,500
supplemental  award  may be  paid  per  meeting  to  Independent  Directors  for
attending meetings held in California) and $300 if attended by telephonic means.
During 2006,  total  committee  and meeting fees for Messrs.  Brooks,  Blomberg,
Grainer and Looper were  $5,800,  $6,100,  $0 and $5,500,  respectively.  During
2005, total committee and meeting fees for Messrs.  Brooks,  Blomberg and Looper
was $1,800, $2,100 and $1,800, respectively.

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

(a)   Equity Compensation Plan Information
      ------------------------------------

<TABLE>
<CAPTION>
                                  Number of securities                           Number of securities remaining
                                   to be issued upon        Weighted-average      available for future issuance
                                exercise of outstanding     exercise price of      under equity compensation
                                 options, warrants and    outstanding options,    plans (excluding securities
                                        right*             warrants and rights     reflected in column (a)) *
                                -----------------------   --------------------   ------------------------------
                                         Column                   Column                     Column
                                          (a)                      (b)                        (c)
<S>                             <C>                       <C>                    <C>
  Equity compensation plans
 approved by security holders           161,220                  $ 10.69                       0

Equity compensation plans not
 approved by security holders              0                       N/A                         0

            Total                       161,220                  $ 10.69                       0
</TABLE>

      * Reflects status of Plan as of December 31, 2005.

                                       20

<PAGE>

(b)   Security Ownership of Certain  Non-Management or Non-Affiliate  Beneficial
      --------------------------------------------------------------------------
      Owners
      ------

      The following table sets forth certain information known to the Trust with
      respect to beneficial ownership of the Trust's Common Shares and Preferred
      Shares as of December 31, 2006 by each  Non-Management  or  Non-Affiliated
      Beneficial Owner:

<TABLE>
<CAPTION>
                                               Number of Shares     Percentage of Shares
                                                   of Stock               of Stock
                                              Beneficially Owned     Beneficially Owned
                                              -------------------   --------------------
      Name of Beneficial Owner                Common    Preferred   Common     Preferred
      ------------------------                -------   ---------   -------    ---------
      <S>                                     <C>       <C>         <C>        <C>
      Estate of Thomas Morford (1) .......       0        16,334       0          8.3%
</TABLE>

      ----------
      (1)   Mr. Morford's estate is a private investor.

(c)   Security Ownership of Management
      --------------------------------

      The following table sets forth certain information known to the Trust with
      respect to beneficial ownership of the Trust's Common Shares and Preferred
      Shares as of December 31, 2006 by (1) each Management  person known to the
      Trust to  beneficially  own more than five  percent of the Trust's  Common
      Shares or Preferred 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
      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>
                                               Number of Shares     Percentage of Shares
                                                   of Stock               of Stock
                                              Beneficially Owned     Beneficially Owned

      Name of Beneficial Owner                Common    Preferred   Common     Preferred
      ------------------------                -------   ---------   -------    ---------
      <S>                                     <C>       <C>         <C>        <C>
      Richard J. Wrensen (1) .............     81,825         686    21.5%         *
      Thomas B. Swartz (2)(4) ............      5,133       1,879     1.3%         *
      Dennis R. Konczal (3)(4) ...........     17,632         984     4.5%         *
      Stanley C. Brooks (5) ..............          0           0       0          0
      James L. Grainer ...................          0           0       0          0
      All directors and executive officers
      as a group (5 persons) (6) .........    130,208       7,210    34.2%       3.7%
</TABLE>

      * Represents less than 1% of outstanding shares.

      ----------
      (1) Mr.  Wrensen  has  unexercised  options to purchase  29,320  shares of
      Common Stock, all of which he has the right to acquire within 60 days from
      the date hereof.  Mr.  Wrensen's spouse owns 10,000 shares of Common Stock
      and 3,464 Series "A"  Preferred  Shares,  in which Mr.  Wrensen  claims no
      beneficial  interest.  Such  holdings  represent  2.6% of the  outstanding
      Common Shares and 1.8% of the outstanding Preferred Shares.

      (2) Mr. Swartz has unexercised options to purchase 50,816 shares of Common
      Stock,  all of which he has the right to  acquire  within 60 days from the
      date hereof.  Mr.  Swartz's spouse owns 633 shares of Series "A" Preferred
      Shares in which Mr. Swartz claims no  beneficial  interest.  Such holdings
      represent less than 1% of the outstanding Preferred Shares.

      (3) Mr.  Konczal  has  unexercised  options to purchase  19,062  shares of
      Common Stock, all of which he has the right to acquire within 60 days from
      the date hereof and the rights per Amendments No.2.

                                       21

<PAGE>

      (4) Capital  Alliance  Advisors,  Inc., the Trust's Former  Manager,  owns
      beneficially  25,618 Shares of Common stock and 3,661 shares of Series "A"
      Preferred Shares,  representing 6.7% of the outstanding  Common Shares and
      1.9% of the outstanding  Series "A" Preferred Shares.  Messrs.  Swartz and
      Konczal are officers and  directors of Capital  Alliance  Advisors Inc and
      collectively own all the outstanding Common Shares. The Former Manager has
      unexercised  options to purchase 11,135 shares of Common Stock and has the
      right to acquire such Shares within 60 days from the date hereof.

      (5) Mr. Brooks has unexercised options to purchase 12,375 shares of Common
      Stock.

      (6) The totals  include the Common and  Preferred  Shares owned by Capital
      Alliance Advisors Inc.

(d)   Changes in Control
      ------------------

      None

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Arrangements and Transactions  with Directors,  Officers,  Members of the Former
--------------------------------------------------------------------------------
Manager and Other Affiliates
----------------------------

      Mr. Wrensen as the Company's  President and Chief Executive Officer is not
an Independent  Director.  Messrs. Swartz and Konczal, as former officers of the
Company,  are  not  Independent  Directors.   Messrs.  Brooks  and  Grainer  are
Independent Directors and constitute 100% of the Audit Committee of the Board of
Directors of the Trust.  Currently,  the Trust is one Independent Director short
of the American Stock Exchange  ("Exchange") listing  requirement.  The Exchange
has allowed the Trust until April 5, 2007 to fill the vacancy. The Trust expects
to satisfy the  Exchange's  listing  requirement on of before April 5, 2007. The
Directors 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 Directors must,
upon  request by the Board of  Directors,  disclose  any  investments  which are
within the purview of the Trust's investment policies.

      Capital  Alliance  Advisors,  Inc  ("CAAI")  is the Former  Manager of the
Company and provided (a) management and advisory  services to the Trust and CAFC
in accordance  with the Management  Agreements with each entity and (b) mortgage
origination and loan servicing services to the Trust and CAFC in accordance with
the  Mortgage  Origination  and  Servicing  Agreements  with each  entity  until
December 29, 2006.  The Company may continue to purchase  mortgage loans for its
Mortgage  Investment  Business from CAAI. Two of the Trust's Directors,  Messrs.
Swartz and Konczal, are owners, directors and officers of CAAI.

      CAAI also has interests that may conflict with those of the Trust. Messrs.
Swartz and Konczal are also involved in other  businesses,  including  Calliance
Realty  Fund,  LLC whose  Mortgage  Division  invests in  mortgages  encumbering
commercial  and mixed-use  properties as well as  residential  properties.  Such
investments may conflict with their fiduciary responsibilities to the Company as
these activities may generate business  opportunities,  profits or other rewards
and the Company will not share in such remuneration.

      It is the expectation of the Company that any agreements and transactions,
taken as a whole,  between  the  Company,  on the one hand,  and its  Directors,
Officers,  Former Manager or its affiliates,  on the other hand, will be fair to
all parties.

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
they  have,  and any  interest  known to them of any person of which they are an
Affiliate, in any investment opportunity presented to the Trust.

      The  Company's  Code of  Business  Conduct  and  Ethics  is  posted on the
Company's web address: www.caitreit.com.

                                       22

<PAGE>

--------------------------------------------------------------------------------
                                     PART IV
--------------------------------------------------------------------------------

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

      Exhibit No.

      3.1    Certificate of Incorporation and Amendment No. 1(1)
      3.2    Bylaws of the Registrant(1)
      3.3    Certificate of Amendment of Certificate of Incorporation(5)
      4.1    Form of Stock Certificate of Common Shares of the Registrant(2)
      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)
      23.4   Consent of Landels Ripley & Diamond, LLP(4)
      23.5   Consent of Rothstein, Kass & Company, LLP
      23.6   Consent of Novogradac & Company LLP(4)
      24.1   Power of Attorney of Thomas B. Swartz(1)
      24.2   Power of Attorney of Dennis R. Konczal(1)
      24.7   Power of Attorney of Richard J. Wrensen(6)
      24.8   Power of Attorney of James L. Grainer

(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. 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.

(5)   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.

(6)   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 is
      incorporated by reference herein.

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

      Form 8-K was filed on:

            o     December  15, 2006 due to the  resignation  of an  independent
                  director.

            o     January  3, 2007 due to the  press  release  announcing  a new
                  President  and Chief  Executive  Officer and the Trust's  self
                  management.

            o     January 12, 2007 due to the notice of non-compliance  from the
                  American Stock Exchange.

            o     February 6, 2007 due to the letter to the shareholders.

                                       23

<PAGE>

(c)   Miscellaneous Exhibits
      ----------------------

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The  Company's  independent  auditors  also  provided to the Trust's Audit
Committee  the written  disclosures  required by  Independence  Standards  Board
Standard No. 1 (Independence Discussions with Audit Committees).

      The Company's independent auditors, Rothstein, Kass & Company, LLP audited
the  financial  statements  for the year ended  December 31, 2006 and 2005.  The
Audit  Committee has determined  that the provision of the services  provided by
Rothstein,  Kass  &  Company,  LLP as  set  forth  herein  are  compatible  with
maintaining Rothstein,  Kass & Company's,  LLP independence and the prohibitions
on  performing  non-audit  services  set  forth  in the  Sarbanes-Oxley  Act and
relevant Securities and Exchange Commission rules.

      Audit Fees. The known and expected fees for the fiscal year ended December
31, 2006 audit,  review of form 10-KSB, and the quarterly review of Forms 10-QSB
were $68,016. Fees for the fiscal year ended December 31, 2005 were $90,625.

      Audit Related Fees.  Aggregate  fees for all other audit related  services
rendered by  Novogradac & Company LLP for fiscal  years ended  December 31, 2006
and 2005 were $5,500 and $2,500, respectively.

      Tax Fees.  Aggregate  fees for all tax  services  for fiscal  years  ended
December 31, 2006 and 2005 were $9,500 and $6,400, respectively.

      All Other Fees. Aggregate fees for all other services for the fiscal years
ended December 31, 2006 and 2005 were $0 and $0, respectively.

      Based  upon the  Audit  Committee's  discussion  with  management  and the
independent  auditors and the Audit Committee review of the  representations  of
management and the report of the independent accountants to the Audit Committee,
the Audit Committee  recommended that the Board of Directors include the Trust's
audited financial statements in the Trust's Annual Report on Form 10-KSB for the
year ended December 31, 2005 filed with the Securities and Exchange Commission.

                                   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: October 12, 2007                  A Real Estate Investment Trust

By: /s/ Richard J. Wrensen               By: /s/ Andrea Barney
    ---------------------------------        ----------------------------------
     Richard J. Wrensen                       Andrea Barney
     Chief Executive Officer                  Principal Accounting Officer
     Chief Financial Officer                  Controller

                                       24

<PAGE>

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/ Richard J. Wrensen                       Dated: October 12, 2007
-----------------------------------------
Richard J. Wrensen
President, Chief Executive Officer, Chief
Financial Officer and Director

/s/ James L. Grainer                         Dated: October 12, 2007
-----------------------------------------
James L. Grainer
Director

/s/ Thomas B. Swartz *                       Dated: October 12, 2007
-----------------------------------------
Thomas B. Swartz
Chairman and Director

/s/ Dennis R. Konczal *                      Dated: October 12, 2007
-----------------------------------------
Dennis R. Konczal
Director

A majority of the Board of Directors

* By: /s/ Richard J. Wrensen
     -------------------------------
       Richard J. Wrensen
       Attorney-in-fact
       October 12, 2007

                                       25

<PAGE>

                                  CERTIFICATION

          CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Capital  Alliance Income Trust Ltd. (the
"Company")  on Form  10-KSB-A for the period  ending  December 31, 2006 as filed
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
I, Richard J Wrensen,  Chief Executive Officer and President of the Company, and
I, Andrea Barney,  Principal  Accounting  Officer and Controller of the Company,
certify,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

      (1)   The Report fully compiles with the  requirements of section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The  information  contained in the Report  fairly  presents,  in all
            material respects,  the financial condition and result of operations
            of the Company.

Date: October 12, 2007

                                  /s/ Richard J. Wrensen
                                  -------------------------------------
                                  Richard J. Wrensen
                                  President and Chief Executive Officer

                                  /s/ Andrea Barney
                                  -------------------------------------
                                  Andrea Barney
                                  Principal Accounting Officer and Controller

                                       26

<PAGE>

       CERTIFICATION OF FORM 10-KSB OF CAPITAL ALLIANCE INCOME TRUST LTD.,
                     A REAL ESTATE INVESTMENT TRUST FOR THE
                         PERIOD ENDING DECEMBER 31, 2006

I, Richard J. Wrensen, certify that:

1.    I have  reviewed  this Form  10-KSB-A,  dated  October 12, 2007 of Capital
      Alliance Income Trust, Ltd., A Real Estate Investment Trust;

2.    Based on my knowledge,  this report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  report,  fairly  present  in all  material
      respects the financial condition,  results of operations and cash flows of
      the small  business  issuer as of, and for, the periods  presented in this
      report;

4.    The  small  business  issuer's  other  certifying  officer(s)  and  I  are
      responsible  for  establishing  and  maintaining  disclosure  controls and
      procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) and
      internal  control  over  financial  reporting  (as defined in Exchange Act
      Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

      a.    Designed such  disclosure  controls and  procedures,  or caused such
            disclosure   controls  and  procedures  to  be  designed  under  our
            supervision,  to ensure that  material  information  relating to the
            small business issuer, including its consolidated  subsidiaries,  is
            made  known to us by  others  within  those  entities,  particularly
            during the period in which this report in being prepared;

      b.    Designed such internal control over financial  reporting,  or caused
            such internal control over financial  reporting to be designed under
            our  supervision,  to provide  reasonable  assurance  regarding  the
            reliability of financial  reporting and the preparation of financial
            statements  for  external  purposes  in  accordance  with  generally
            accepted accounting principals;

      c.    Evaluated  the   effectiveness   of  the  small  business   issuer's
            disclosure  controls and procedures and presented in this report our
            conclusions about the  effectiveness of the disclosure  controls and
            procedures, as of the end of the period covered by this report based
            on such evaluation; and

      d.    Disclosed in this report any change in the small  business  issuer's
            internal  control over financial  reporting that occurred during the
            small  business  issuer's  most  recent  fiscal  quarter  (the small
            business  issuer's  fourth  fiscal  quarter in the case of an annual
            report) that has  materially  affected,  or is reasonably  likely to
            materially affect, the small business issuer's internal control over
            financial reporting; and

      5.    The small business  issuer's other certifying  officer(s) and I have
            disclosed,  based on our most recent  evaluation of internal control
            over financial  reporting,  to the small business  issuer's auditors
            and the audit  committee  of the small  business  issuer's  board of
            directors (or persons performing the equivalent functions):

      a.    All significant  deficiencies and material  weaknesses in the design
            or operation of internal controls over financial reporting which are
            reasonably  likely to adversely  affect the small business  issuer's
            ability  to  record,   process,   summarize  and  report   financial
            information; and

      b.    Any fraud,  whether or not  material,  that  involves  management or
            other  employees who have a significant  role in the small  business
            issuer's   internal   controls   internal   control  over  financial
            reporting.

Dated: October 12, 2007

      /s/ Richard J. Wrensen
      ----------------------
      Richard J. Wrensen
      President and Chief Executive Officer

                                       27

<PAGE>

       CERTIFICATION OF FORM 10-KSB OF CAPITAL ALLIANCE INCOME TRUST LTD.,
                     A REAL ESTATE INVESTMENT TRUST FOR THE
                         PERIOD ENDING DECEMBER 31, 2006

I, Andrea Barney, certify that:

1.    I have  reviewed  this Form  10-KSB-A,  dated  October 12, 2007 of Capital
      Alliance Income Trust, Ltd., A Real Estate Investment Trust;

2.    Based on my knowledge,  this report does not contain any untrue  statement
      of a material fact or omit to state a material fact  necessary to make the
      statements made, in light of the circumstances under which such statements
      were made,  not  misleading  with  respect  to the period  covered by this
      report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  report,  fairly  present  in all  material
      respects the financial condition,  results of operations and cash flows of
      the small  business  issuer as of, and for, the periods  presented in this
      report;

4.    The  small  business  issuer's  other  certifying  officer(s)  and  I  are
      responsible  for  establishing  and  maintaining  disclosure  controls and
      procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) and
      internal  control  over  financial  reporting  (as defined in Exchange Act
      Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

      a.    Designed such  disclosure  controls and  procedures,  or caused such
            disclosure   controls  and  procedures  to  be  designed  under  our
            supervision,  to ensure that  material  information  relating to the
            small business issuer, including its consolidated  subsidiaries,  is
            made  known to us by  others  within  those  entities,  particularly
            during the period in which this report in being prepared;

      b.    Designed such internal control over financial  reporting,  or caused
            such internal control over financial  reporting to be designed under
            our  supervision,  to provide  reasonable  assurance  regarding  the
            reliability of financial  reporting and the preparation of financial
            statements  for  external  purposes  in  accordance  with  generally
            accepted accounting principals;

      c.    Evaluated  the   effectiveness   of  the  small  business   issuer's
            disclosure  controls and procedures and presented in this report our
            conclusions about the  effectiveness of the disclosure  controls and
            procedures, as of the end of the period covered by this report based
            on such evaluation; and

      d.    Disclosed in this report any change in the small  business  issuer's
            internal  control over financial  reporting that occurred during the
            small  business  issuer's  most  recent  fiscal  quarter  (the small
            business  issuer's  fourth  fiscal  quarter in the case of an annual
            report) that has  materially  affected,  or is reasonably  likely to
            materially affect, the small business issuer's internal control over
            financial reporting; and

      5.    The small business  issuer's other certifying  officer(s) and I have
            disclosed,  based on our most recent  evaluation of internal control
            over financial  reporting,  to the small business  issuer's auditors
            and the audit  committee  of the small  business  issuer's  board of
            directors (or persons performing the equivalent functions):

      a.    All significant  deficiencies and material  weaknesses in the design
            or operation of internal controls over financial reporting which are
            reasonably  likely to adversely  affect the small business  issuer's
            ability  to  record,   process,   summarize  and  report   financial
            information; and

      b.    Any fraud,  whether or not  material,  that  involves  management or
            other  employees who have a significant  role in the small  business
            issuer's   internal   controls   internal   control  over  financial
            reporting.

Dated: October 12, 2007

      /s/ Andrea Barney
      -----------------
      Andrea Barney
      Principal Accounting Officer and Controller

                                       28

<PAGE>

                                                                    Exhibit 23.5

              CONSENT OF ROTHSTEIN, KASS & COMPANY LLP, INDEPENDENT
                        REGISTERED PUBLIC ACCOUNTING FIRM

      We consent to the  incorporation  of our report  dated March 28, 2007 with
respect to the  financial  statements of Capital  Alliance  Income Trust Ltd., A
Real Estate  Investment  Trust  included in this Annual Report (Form 10-KSB) for
the year ended December 31, 2006.

/s/ Rothstein, Kass & Company, LLP
----------------------------------

San Francisco, California
March 28, 2007, except for Note 19, which is as of October 12, 2007


                                       29