UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(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, 1998
                                                        OR
         (  )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number: 333-11625
                        ---------------------------------

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

             (Exact name of registrant as specified in its charter)

          Delaware                                     94-3240473       
          --------                                     ----------       
(State or other Jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)
         50 California Street
         Suite 2020
         San Francisco, California                   94111                      
      (Address of principal executive office)        (zip code)

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

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

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
Common Stock $0.01 par value                             American Stock Exchange
                                  (Approved for listing upon notice of issuance)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (P. 229.405 of this chapter) is not contained herein, and will
not be contained,  to the best of registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[  ].

As of March 31, 1999, the aggregate market value of the  Registrant's  shares of
Common Stock,  $.001 par value,  held by  nonaffiliates  of the  registrant  was
approximately  $6,681,330.  At that date 1,484,740 shares were outstanding.  The
shares are listed and publicly traded on the American Stock Exchange.


<PAGE>



                                                 TABLE OF CONTENTS


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

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

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

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

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

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

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

         MORTGAGE CONDUIT BUSINESS.......................................7

              General....................................................7

              Marketing and Production...................................8

              Underwriting...............................................9

              Whole Loan Sales..........................................10

         WAREHOUSE LENDING BUSINESS.....................................10

         HEDGING........................................................11

         SERVICING......................................................11

              Servicing Portfolio.......................................12

              Geographical Distribution.................................13

              Interest..................................................13

              Maturity..................................................13

              Delinquencies.............................................14

         REGULATION.....................................................14

         COMPETITION....................................................15

         EMPLOYEES......................................................15

     ITEM 2.  PROPERTIES................................................15

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     ITEM 3.  LEGAL PROCEEDINGS.........................................15

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.......16

     ITEM 5.  MARKET FOR REGISTRANT'S COMMON
     EQUITY AND RELATED STOCKHOLDER MATTERS.............................16

PART II.................................................................18

     ITEM 6.  SELECTED FINANCIAL DATA...................................18

     ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
     OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................21

         GENERAL........................................................21

              Predecessors..............................................21

              Organization..............................................21

              Operating Strategy........................................21

              Loan Origination and Loan Servicing.......................22

              Contingencies and Commitments.............................22

         RESULTS OF OPERATIONS..........................................22

         YEAR ENDED DECEMBER 31, 1998
         COMPARED TO YEAR ENDED DECEMBER 31, 1997.......................23

         YEAR ENDED DECEMBER 31, 1997
         COMPARED TO YEAR ENDED DECEMBER 31, 1996.......................23

         INFLATION .....................................................24

         LIQUIDITY AND CAPITAL RESOURCES................................24

         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1998...........................24

         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1997...........................25

         YEAR 2000......................................................25

     ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............26

     ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.............27

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PART III................................................................28

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...........28

         DIRECTORS......................................................28

         EXECUTIVE OFFICERS.............................................29

     ITEM 11.  EXECUTIVE COMPENSATION...................................31

         COMPENSATION OF OFFICERS.......................................31

         COMPENSATION OF DIRECTORS......................................31

              Director Fees.............................................31

              Committee and Other Meeting Fees..........................31

              Reimbursements............................................31

     ITEM 12.  SECURITY OWNERSHIP OF
     CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................31

     ITEM 13.  CERTAIN RELATIONSHIPS
     AND RELATED TRANSACTIONS...........................................32

              Arrangements and Transactions with CAAI...................32

              Investment in Related Mortgage Banking Firms..............33

              Sale and Purchase of Loans................................33

              Other Business Activities.................................34

PART IV.................................................................35

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS
     SCHEDULES, AND REPORTS ON FORM 8-K.................................35

              (a)(Financial Statements..................................35

              (a)(3) Exhibits...........................................35

         SIGNATURES.....................................................37


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

ITEM 1.  BUSINESS

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

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

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

         References  to  financial  information  of the Trust for the year ended
1997 and 1998,  reflect the  financial  operations of the Trust and its Mortgage
Investment and Mortgage Warehouse  businesses and the Trust's equity interest in
the  Mortgage  Conduit  Business  conducted  by CAFC.  References  to  financial
information  of the  Trust  for the  year  ended  1996,  reflect  the  financial
operations of the Trust and its Predecessors.

         MORTGAGE INVESTMENT BUSINESS

         General. The Trust, through its Mortgage Investment Business,  acquires
mortgage  loans  which  are  principally  nonconforming,   A-  B/C  credit-rated
residential  mortgage loans with a maximum 75% combined  loan-to-value ratio for
long-term investment. The Mortgage Investment Business invests in both first and
second mortgage loans. Income is earned principally from the net interest income
received  by The Trust on  mortgage  loans held in its  portfolio  and from fees
received in connection with their  origination.  Such  acquisitions are financed
with a portion of the Trust's  capital.  Loans,  other than  warehouse  lines of
credit  repurchase  financing  obtained by CAFC,  are  restricted by the Trust's
Bylaws to 20% of the  Trust's  Net  Capital  Contributions.  CAFC  supports  the
investment  objectives  of  the  Trust  by  supplying  substantially  all of the
mortgage loans held by the Trust. (See "Mortgage Conduit Business.")

                  Mortgage  Loan  Portfolio.  The Trust (a)  through its Manager
originates  mortgage  loans,  through its Advisor's main office in San Francisco
and its branch  office in San  Diego,  California  and  through  its  network of
mortgage brokers and  correspondents,  and (b) invests a substantial  portion of
its portfolio in  non-conforming  mortgage loans and second mortgage loans.  The
Trust  also  purchases  such  loans  from third  parties,  including  CAFC,  for
long-term  investment.  Management believes that  non-conforming  mortgage loans
provide an attractive net earnings profile and produce higher yields without

                                        5
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commensurately higher credit risks when compared with conforming mortgage loans.
The investment  portfolio of the Mortgage Investment Business consists primarily
of "B" and "C" grade mortgage loans. The Trust believes that a structural change
in the mortgage  banking  industry has occurred  which has increased  demand for
higher yielding  non-conforming mortgage loans. This change has been caused by a
number of factors,  including:  (1) investors' demand for higher yielding assets
due to  historically  low interest rates over the past few years;  (2) increased
securitization of high-yielding  non-conforming mortgage loans by the investment
banking  industry;  (3)  quantification  and development of standardized  credit
criteria by credit  rating  agencies  for  securities  backed by  non-conforming
mortgage loans; and (4) increased  competition in the  securitization  industry,
which  has  reduced   borrower   interest   rates  and  fees,   thereby   making
non-conforming  mortgage loans more  affordable.  The Trust's  Manager owns a 1%
economic interest and 100% of the of voting control of CAFC.

         Financing.  The Mortgage Investment Business is financed principally by
the Trust's capital.  The Trust's Bylaws restrict the encumbrance of the Trust's
assets to 20% of the Trust's Net Capital Contributions. The Trust's portfolio of
mortgage  loans at December 31, 1998 was and  currently  still is  unencumbered.
Such restriction does not apply to CAFC which utilizes warehouse lines of credit
from commercial lenders.

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

         The Trust,  through CAFC, has obtained  financing with two  third-party
commercial  lenders,  at interest rates that are  consistent  with its financing
objectives  described  herein,  and has established  financing  facilities under
which such lenders are required to enter into new reverse repurchase  agreements
as needed by CAFC during a specified period of time. CAFC's warehouse repurchase
financings  are  guaranteed  by the Trust.  For a discussion of the terms of the
Trust's reverse repurchase facilities,  see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Trust also extends a warehouse  reverse  repurchase  facility to
CAFC  which at  December  31,  1998  aggregated  $2,414,435  million.  A reverse
repurchase agreement,  although structured as a sale and repurchase  obligation,
acts as a financing  vehicle under which CAFC  effectively  pledges its mortgage
loans as collateral to secure a short-term loan.  Generally,  the other party to
the  agreement  makes the loan in an amount equal to a percentage  of the market
value of the pledged collateral.

         Reverse repurchase  agreements take the form of a sale of securities to
the lender at a discounted price in return for the lender's  agreement to resell
the same  securities  to the  borrower  at a future  date (the  maturity  of the
borrowing) at an agreed price.  In the event of the  insolvency or bankruptcy of
the Trust,  certain  reverse  repurchase  agreements  may  qualify  for  special
treatment under the Bankruptcy Code, the effect of which is, among other things,
to allow  the  creditor  under  such  agreements  to avoid  the  automatic  stay
provisions of the Bankruptcy Code and to foreclose on the collateral  agreements
without  delay.  In the event of the insolvency or bankruptcy of a lender during
the term of a reverse repurchase agreement,  the lender may be permitted,  under
the  Bankruptcy  Code, to repudiate the contract,  and the Trust's claim against
the lender for damages  therefrom may be treated  simply as one of the unsecured
creditors.  In  addition,  if the  lender is a broker or dealer  subject  to the
Securities  Investor Protection Act of 1970, the Trust's ability to exercise its
rights to recover its securities under a reverse  repurchase  agreement or to be
compensated  for any  damages  resulting  from the  lender's  insolvency  may be
further  limited  by  such  statute.  If the  lender  is an  insured  depository
institution subject to the Federal Deposit Insurance Act, the

                                        6
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Trust's ability to exercise its rights to recover its securities under a reverse
repurchase  agreement  or to be  compensated  for  damages  resulting  form  the
lender's  insolvency  may be limited by such statute  rather than the Bankruptcy
Code.  The effect of these  various  statutes  is,  among other  things,  that a
bankrupt lender,  or its conservator or receiver,  may be permitted to repudiate
or disaffirm its reverse repurchase  agreements,  and the Trust's claims against
the bankrupt lender for damages resulting therefrom may be treated simply as one
of an unsecured creditor. Should this occur, the Trust's claims would be subject
to significant delay and, if and when received,  may be substantially  less than
the damages actually suffered by the Trust.

         To  reduce  its  exposure  to the  credit  risk of  reverse  repurchase
agreement lenders, the Trust has entered into two such agreements with two major
warehouse lenders and a third with the Trust. Notwithstanding these measures, no
assurance  can be given that the Trust  will be able to avoid  such third  party
risks.

         MORTGAGE CONDUIT BUSINESS

         General.  CAFC was  organized  on June 27, 1997 and began its  mortgage
origination and whole loan sales operations on a start-up basis in August, 1997.
The Mortgage  Conduit  Business  consists  primarily of the  origination and the
purchase and sale of A- and B/C credit  rated  mortgage  loans  secured by first
liens and second liens on single  (one-to-four)  family  residential  properties
that are  originated  in  accordance  with  its  underwriting  guidelines.  As a
non-conforming mortgage loan conduit, the Trust's Mortgage Conduit Business acts
as a conduit  between  the  originators  of such  mortgage  loans and  permanent
investors in such loans. Capital Alliance Advisors, Inc. contracts with CAFC for
its  management  and  for  its  mortgage   origination,   loan   processing  and
underwriting,  and  secondary  sales  services.  The  Management  believes  that
non-conforming   A-  and  B/C  credit  rated  mortgage   loans,   when  properly
underwritten,  provide an  attractive  net earnings  profile,  producing  higher
yields without  disproportionately higher credit risks when compared to mortgage
loans that  qualify for  purchase by FNMA or FHLMC.  The Trust's  policy for its
Mortgage  Investment  Business,  which limits the financing or leveraging of its
mortgage loan portfolio,  does not apply to its Mortgage  Conduit Business since
such mortgage loans are generally held in CAFC for less than sixty days prior to
their sale to permanent  investors  who  securitize  such loans in the secondary
market and their acquisition or funding will generally be facilitated  through a
warehouse line of credit or reverse repurchase agreements.

         Correspondents originate and close mortgage loans under CAFC's mortgage
loan programs on a loan-by-loan basis.  Correspondents  include mortgage bankers
and mortgage brokers.  During the partial years ended December 31, 1997 and 1998
, CAFC acquired from its correspondents  (primarily  mortgage brokers) or funded
directly  (through its Manager)  $1,722,200  and  $9,603,114,  respectively,  of
non-conforming mortgage loans.

         All non-conforming loans purchased or originated by CAFC which meet the
Trust's  underwriting  guidelines,  including  its  75%  Combined  Loan-to-Value
limitation, are made available for sale to the Trust at fair market value at the
date of sale and  subsequent  transfer  to the  Trust.  See  "Item  13.  Certain
Relationships  and Certain  Transactions."  Loans not purchased by the Trust for
its Mortgage  Investment  Business will be sold in the secondary  market through
whole loan sales.  During the partial year of operations in 1997, CAFC sold four
loans to the Trust totaling  $326,750.  During 1998, nine loans were sold to the
Trust  totaling  $1,252,250.  Whole  loan  sales  by CAFC  during  1998  totaled
$4,175,007 as compared to $1,206,200 in 1997.

         The Mortgage Conduit  Business  acquires all of the servicing rights on
loans it  originates  or purchases  and such  servicing  rights will normally be
relinquished when loans are sold into the secondary market. The Mortgage Conduit
Business generally has no on-going risk of loss after a whole loan sale

                                        7
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other than liability with respect to normal warranties and representations given
in such sales and for fraud in the origination process.

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

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

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

         A  substantial  portion  of the  mortgage  loans  to be  originated  or
purchased through the Mortgage Conduit Business are expected to be "A-", "B" and
"C" grade  non-conforming  mortgage loans. Such non-conforming loans may involve
some greater risk as a result of underwriting and product  guidelines which will
differ  from  those  applied  by  FNMA  and  FHLMC  primarily  with  respect  to
loan-to-value ratios, borrower income or credit history, required documentation,
interest rates, and borrower occupancy of the mortgaged  property.  The Mortgage
Conduit  Business  generally  will not originate or acquire  mortgage loans with
principal  balances  above $300,000  since such loans  generally  entail greater
credit risks than other  non-conforming  loans although it is not precluded from
doing so.

         In  general,   "A-",  "B"  and  "C"  grade  loans  are   non-conforming
residential  mortgage  loans made to borrowers  with lower  credit  ratings than
borrowers of higher  quality,  or so called "A" grade  mortgage  loans,  and are
normally  subject  to  higher  rates of loss  and  delinquency  than  the  other
non-conforming  loans to be  purchased by the Mortgage  Conduit  Business.  As a
result,  "A-",  "B" and "C" grade loans normally bear a higher rate of interest,
and may be subject to higher fees  (including  greater  prepayment fees and late
payment  penalties),  than  non-conforming  loans of "A"  quality.  In  general,
greater  emphasis  is  placed  upon  the  credit  history  of  the  borrower  in
underwriting  "A-", "B" and "C" grade mortgage  loans than in  underwriting  "A"
grade loans. In addition, "A-", "B" and "C" grade loans are generally subject to
lower loan-to-value ratios than "A" grade loans.

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

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

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

         At December 31, 1998 the Trust's loan portfolio totaled $8,986,645 with
an average loan size of $124,814 an average weighted yield of 12.43%, an average
maturity of 14.06 months and a combined  loan-to-value  ratio of 70.69%.  71% of
the portfolio were first deeds of trust and 29% were second deeds of trust.

         The highest concentration of nonconforming mortgage loans originated or
purchased by the Trust  relates to properties  located in California  because of
the generally higher property values and mortgage loan balances prevalent there.
The Trust's Manager through its  correspondent  and broker network accounted for
100% of the total  mortgage  loans  acquired by the Trust  during the year ended
December  31,1998,  and  together  with CAFC (which is also managed by CAAI) for
100% of the total  mortgage  loans  acquired by the Trust  during the year ended
December 31, 1998.  CAFC and the Trust's  Manager are  affiliates  of the Trust.
(See "Item 13. Certain Relationships and Certain Transactions.")

         Underwriting.   The  Trust  has  developed   origination  and  purchase
guidelines  for the  acquisition of mortgage loans by the Trust for the Mortgage
Investment  Business.  Subject to certain  exceptions,  each loan purchased must
conform to the Trust's  loan  eligibility  requirements  with  respect to, among
other  things,  loan amount,  type of property,  loan-to-value  ratio,  type and
amount of insurance,  credit history of the borrower,  income ratios, sources of
funds, appraisals and loan documentation.

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

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

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

         Whole Loan Sales.  The  Mortgage  Conduit  Business  conducted  by CAFC
primarily  uses a warehouse  repurchase  financing  from the Trust and warehouse
financing from two other commercial warehouse lenders to finance the origination
or acquisition of mortgage loans from  correspondents.  When a sufficient volume
of mortgage loans (generally  packages of $1 million to $2 million) with similar
characteristics has been accumulated, CAFC sells such packages to investors at a
premium in whole loan sale transactions on a service-released basis.

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

         WAREHOUSE LENDING BUSINESS

         The Trust's third line of business is its Warehouse  Lending  Business.
Such  operations  consist  primarily of warehouse  financing for its  affiliated
mortgage  bankers,  including  CAFC  and  Sierra  Capital  Funding,  LLC and its
separate divisions ("SCF/LLC"), all of which act as correspondents of the Trust.
The  non-conforming  mortgage  loans funded with such  warehouse  financing  are
acquired by the Trust for its

                                       10
<PAGE>
portfolio  when such  loans  meet its  investment  criteria.  Warehouse  lending
facilities  provide  repurchase  financing  for mortgage  loans from the time of
closing  the  loan  to the  time  of its  sale  or  other  settlement  with  the
pre-approved  investor.  The Trust's warehouse financing is non-recourse and the
Trust can only look to the sale or liquidation of the mortgage loans as a source
of  repayment  or  repurchase.  Any claim of the Trust as a secured  lender in a
bankruptcy  proceeding may be subject to adjustment and delay.  Borrowings under
the warehouse  facilities are presented on the Trust's balance sheets as finance
receivables.

         The  Trust  provides  a $3  million  warehouse  line to CAFC.  The CAFC
warehouse  financing  balance  outstanding  on  the  Trust's  balance  sheet  is
structured  to  qualify  under  the REIT  asset  tests  and to  generate  income
qualifying  under the 75% gross income test. The terms of the warehouse line are
based on the rate of the Mortgage  Note plus a fee of $50 or such other fee (not
to exceed $500) as the parties may agree and with an advance rate of 100% of the
fair value of the mortgage  loans  outstanding.  The terms of the Trust's  other
warehouse  financing,  including  the  amount,  are  determined  based  upon the
financial  strength,  historical  performance  and other  qualifications  of the
borrower. (See "--Mortgage Investment Business-- Financing.")

         At December 31, 1998, the Trust had $2,414,435 of warehouse  facilities
utilizing reverse repurchase agreements outstanding to CAFC, and $820,100 to SCA
and $1,472,563 to Equity 1-2-3,  divisions of SCF/LLC, and $450,000 to Calliance
Mortgage  Trust  ("CMT").  The Trust  finances its  Warehouse  Lending  Business
through equity and may utilize reverse repurchase agreements in the future.

         HEDGING

         The  Mortgage  Conduit  Business to date has  originated  or  purchased
primarily  fixed-rate  mortgage  loans.  All of the  mortgage  loans held by the
Mortgage  Investment  Business  carry  fixed  rates  and have  relatively  short
maturities.  The  average  weighted  maturity  of  loans  held  in the  Mortgage
Investment  Business at December 31, 1998 was 14.06 months. As the production of
fixed-rate mortgage loans increases or if maturities increase, it is anticipated
that  various  hedging  strategies  will be  implemented  to provide  protection
against  interest  rate risks.  The nature and quantity of hedging  transactions
will be  determined by the Manager based on various  factors,  including  market
condition,  the expected volume of mortgage loan  originations and purchases and
the period of time required to accumulate and to sell mortgage loans.

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

         SERVICING

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

                                       11

<PAGE>



     Servicing  Portfolio.  The following  table sets forth certain  information
regarding the Trust's servicing portfolio of loans for the periods shown.



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                                       12
<PAGE>
                                   PERIOD FROM
                                 JANUARY 1, 1996
                               YEARS ENDED THROUGH
           DECEMBER 31, 1996, DECEMBER 31, 1997, AND DECEMBER 31, 1998
<TABLE>
<CAPTION>

                                          December 31, 1996 December 31, 1997 December 31, 1998
                                          ----------------- ----------------- ------------------

<S>                                            <C>           <C>           <C>        
Beginning servicing portfolio ..............   $ 4,725,895   $ 4,696,238   $ 4,915,186
Loans added to the servicing portfolio .....   $ 1,952,384   $ 3,254,256   $10,342,300

Loans sold, servicing released and principal
    paydowns (1) ...........................   $ 1,982,041   $ 3,035,308   $ 6,270,841

Ending servicing portfolio .................   $ 4,696,238   $ 4,915,186   $ 8,986,645

Number of loans serviced ...................            50            45            72
Average loan size ..........................   $    93,925   $   109,226   $   124,815
<FN>
     (1) Includes normal loan payoffs, principal amortization, prepayments, less
reserves and foreclosures. The Trust does not charge a prepayment penalty on its
loans.
</FN>
</TABLE>
     Geographical  Distribution.  The following  table sets forth the geographic
distribution of the Trust's servicing portfolio at the dates presented:
<TABLE>
<CAPTION>
                  December 31, 1998                       December 31, 1997                        December 31, 1996
          ---------------------------------     -------------------------------------     -----------------------------------
              Number         Percentage              Number          Percentage                Number          Percentage
  State         of               of                    of                of                      of                of
  -----                                                                                                              
               Loans         Portfolio               Loans            Portfolio                 Loans          Portfolio
               -----         ---------               -----            ---------                 -----          ---------
<S>             <C>             <C>                    <C>              <C>                      <C>              <C>
   CA           69              95%                    45               100%                     49               94%
   OR            1               1%                    0                  0%                      0                0%
   UT            2               4%                    0                  0%                      1                6%
</TABLE>

         Interest.  The weighted average  interest for the Trust's  portfolio of
loans in its Mortgage  Investment  Business at December 31, 1998 was 12.43%,  at
December 31, 1997 it was 12.32%, and at December 31, 1996 it was 12.99%.

         Maturity.  The weighted  average  maturity of the Trust's  portfolio of
loans in its Mortgage Investment Business at December 31, 1998 was 14.06 months,
at December 31, 1997 it was 18.75 months,  and at December 31, 1996 it was 17.62
months.  The  following  table shows the Trust's  loan  maturities  at the dates
presented.
<TABLE>
<CAPTION>
                             December 31, 1998                    December 31, 1997                   December 31, 1996
                     ----------------------------------    --------------------------------    -------------------------------

       Terms              Amount         Percentage             Amount       Percentage             Amount       Percentage
         of                 of               of                   of              of                  of             of
       Loans               Loans          Portfolio              Loans        Portfolio             Loans         Portfolio
       -----               -----          ---------              -----        ---------             -----         ---------

<S>                       <C>                  <C>             <C>                 <C>             <C>                <C>   
0-12 months                $5,530,300           61.54%          $2,651,900          53.95%          $1,568,128         33.39%

13-24 months                1,429,900           15.91%             896,412          18.24%             918,874         19.57%

25-36 months                  824,712            9.18%             636,349          12.95%           1,321,192         28.13%

37-48 months                     None            0.00%                None          00.00%                None         00.00%

Over 48 months              1,201,733           13.37%             730,525          14.86%             888,044         18.91%
                          -----------           ------             -------          ------             -------         -----
                           $8,986,645             100%          $4,915,186            100%          $4,696,238           100%

</TABLE>
                                       13
<PAGE>
     Delinquencies. The following table shows the Trust's delinquency statistics
for its servicing portfolio at the dates presented.

<TABLE>
<CAPTION>
                            December 31, 1998                   December 31, 1997                   December 31, 1996
                     -------------------------------    ---------------------------------    --------------------------------

       Loans                 Number   Percentage                  Number      Percentage         Number        Percentage
  Delinquent For:          of Loans   of Portfolio              of Loans    of Portfolio         of Loans      of Portfolio
  --------------           --------   ------------              --------    ------------         --------      ------------


<S>                             <C>            <C>                   <C>            <C>                 <C>             <C>
30-59 days                        6              5%                    6              7%                  5               6%

60-89 days                        2              2%                    2              3%                  3               7%
                                                                                                                         5%%

90 days+                          3              3%                    2              6%                  2               7%
                                ---            ----                 ----            ----                ===             ====

Totals:                          11             10%                   10             16%                 10              20%

</TABLE>
<TABLE>
<CAPTION>

                             December 31, 1998                   December 31, 1997                   December 31, 1996
                       ------------------------------    ---------------------------------    -------------------------------
                           Number      Percentage                  Number      Percentage         Number        Percentage
                          of Loans     of Portfolio              of Loans    of Portfolio         of Loans     of Portfolio
                          --------     ------------              --------    ------------         --------     ------------

<S>                             <C>            <C>                   <C>            <C>                 <C>           <C>
Foreclosures                       2              3%                    3              9%                  5             14%
pending:
Bankruptcies                       1              1%                    2              3%                  2              3%
                                 ===           =====                  ===            ====                ===            ====
pending:
Total
delinquencies,
foreclosures and
bankruptcies:                     14             14%                   15             28%                 17             38%

</TABLE>

         REGULATION

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

         Because the Trust's business is highly  regulated,  the laws, rules and
regulations  applicable  to the Trust are subject to regular  modifications  and
change.  There are currently proposed various laws, rules and regulations which,
if  adopted,  could  impact  the  Trust.  There can be no  assurance  that these
proposed laws, rules and regulations,  or other such laws, rules or regulations,
will not be  adopted  in the  future  which  could  make  compliance  much  more
difficult or  expensive,  restrict  the Trust's  ability to  originate,  broker,
purchase or sell loans,  further  limit or restrict  the amount of  commissions,
interest and other charges earned on loans  originated,  brokered,  purchased or
sold by the Trust,  or otherwise  affect the business or prospects of the Trust.
Also,  members  of  Congress  and  government  officials  have from time to time
suggested the elimination of the mortgage interest  deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the

                                       14
<PAGE>
Trust's  loans are made to borrowers for the purpose of  consolidating  consumer
debt or financing  other  consumer  needs,  the  competitive  advantages  of tax
deductible interest, when compared with alternative sources of financing,  could
be eliminated or seriously impaired by such government action. Accordingly,  the
reduction or  elimination  of these tax benefits  could have a material  adverse
effect on the demand for loans of the kind offered by the Trust.

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

         COMPETITION

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

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

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

         EMPLOYEES

         The Trust has no employees. The Manager employs and provides all of the
persons  required for the  operation  of the Trust and its  Mortgage  Investment
Business.  At March 30,  1999,  the  Manager  employed 12 persons  plus  several
contract personnel.  Additional employees will be required to staff the Mortgage
Conduit  Business.  None of the  Manager's  employees is subject to a collective
bargaining agreement. The Manager believes that its relations with its employees
are satisfactory.

ITEM 2.  PROPERTIES

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

         The Manager  also  leases  space for its San Diego,  California  branch
office on a short-term basis.

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

ITEM 3.  LEGAL PROCEEDINGS

         None.


                                       15
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         No matters  were  submitted to a vote of the Trust's  security  holders
during the last quarter of its fiscal year ended December 31, 1998.

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

         The Trust's  Common Stock was listed and began  trading on the American
Stock  Exchange under the symbol "CAA" on October 1, 1998. The range of high and
low sale prices of the Common  Stock as quoted on the  American  Stock  Exchange
were: Fourth Quarter of 1998: High-8, Low-4; First Quarter of 1999: High -5-5/8,
Low-4.5. At March 31, 1999 the Trust had issued and outstanding 1,484,740 shares
of the Trust's  Common Stock which were issued for  $11,877,920  and warrants to
acquire an additional 148,474 shares of Common Stock.

         On March 22,  1999,  there  were  approximately  153  holders of record
(including  holders who are nominees for an  undetermined  number of  beneficial
owners) of the  Trust's  Common  Stock and 139  holders of record of the Trust's
Preferred Stock which is not publicly traded. The Trust believes that its Common
Stock is beneficially held by an excess of 700 shareholders.

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

         The Trust  declared and on January 15, 1998 paid its initial  quarterly
dividend on the Trust's  Common Stock for the quarter ended December 31, 1997 at
$.054 per share,  which  dividend  covered the period  from  December 4, 1997 to
December  31, 1997 only and did not reflect a full  quarter of  operations.  The
Trust paid  quarterly  dividends  on the Trust's  Common  Stock for the quarters
ending March 31, 1998,  June 30, 1998,  September 30, 1998 and December 31, 1998
at $.17 per share. The Trust during 1998 paid 12 consecutive  monthly  dividends
on the Trust's Preferred Stock at an average of $.07 per share per month.

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

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

                                       16
<PAGE>
declared after the Trustees have declared  Distributions on Common Shares in the
amount of the Matching Distribution (i.e. excess  Distributions)  generally will
be allocated such that the amount of Distributions per share paid to or declared
to the holders of the Preferred Shares and Common Shares for the subject quarter
are  equal.  The  Distribution  Preferences  of  the  Preferred  Shares  is  not
cumulative.

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



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                                       17

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

ITEM 6.  SELECTED FINANCIAL DATA

         The following table presents selected historical  financial data of the
Trust  and its  Predecessors.  The  combined  information  gives  effect  to the
combination of Capital Alliance Income Trust I and Capital Alliance Income Trust
II  (collectively,  the  "Predecessors")  with the Trust due to common boards of
directors and management.

         The selected historical combined financial data set forth below for the
Trust for each of the years in the period  ended  December 31, 1995 and the four
months ended April 30, 1996 are derived from the audited financial statements of
the  Predecessors.  The  selected  financial  data for the  eight  months  ended
December  31, 1996 and for the years ended  December  31, 1997 and  December 31,
1998 are derived from audited financial statements of the Trust.

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



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                                       18
<PAGE>
                             SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
Five Year Financial Summary                           Combined (Predecessors)
                                                      Year Ended December 31

                                                       1994               1995
                                                   ----------         ----------
<S>                                                <C>                <C>       
Operations: 

Revenue ..................................         $  174,997         $  489,363

Net income ...............................            147,056            414,414

Per Share Data:

Net Income

    Basic ................................               --                 --

    Diluted ..............................               --                 --

Balance Sheet Data:

Mortgage notes receivable ................         $1,889,485         $4,790,070

Total assets .............................          3,148,661          6,254,052

Total liabilities ........................             55,741            164,022

Shareholders' capital ....................          3,092,920          6,090,030
</TABLE>


                          (continued on following page)







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                                       19
<PAGE>
                             SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
Five Year               Combined (Predecessors) Successor           Successor         Successor
Financial Summary         Four Months Ended  Eight Months Ended     Year Ended       Year Ended
                            April 30, 1996    December 31, 1996  December 31, 1997 December 31, 1998
                            --------------    -----------------  ----------------- -----------------
<S>                         <C>              <C>                 <C>                 <C>        
Operations:

Revenue .................   $   273,709      $   490,300         $   776,405         $ 1,677,233

Net income ..............       226,643          373,132             535,789         $ 1,003,706

Per Share Data:

    Basic ...............          --               --                  --                 .351

    Diluted .............          --               --                  --                 .341

Balance Sheet Data:

Mortgage notes receivable   $ 4,757,895      $ 4,696,238         $ 4,915,186         $ 8,986,645

Total assets ............     6,267,251        6,702,261          10,132,419          16,804,983

Total liabilities .......       263,316          756,073             311,096             757,532

Shareholder's capital ...     6,003,935        5,946,188           9,821,323          16,047,451

</TABLE>


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                                       20
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

         GENERAL

         Predecessors.  The Trust resulted from the  consolidation of CAIT I and
CAIT II (the  "Combination")  on April 30,  1996  when the  Trust  ("Successor")
exchanged  shares of preferred stock for all of the outstanding  whole shares of
CAIT I and CAIT II. Holders of fractional  shares of CAIT I and CAIT II received
cash in lieu of fractional shares of preferred stock of the Trust and all assets
and liabilities of CAIT I and CAIT II were transferred to the Trust.  CAIT I and
CAIT II were both  privately-held  mortgage  investment  trusts  which  invested
primarily  in  non-conforming  loans  secured  by deeds of trust on  residential
property.  CAIT I and CAIT were formed and managed by Capital Alliance Advisors,
Inc.  ("CAAI") which also manages the Trust and  originates,  services and sells
the Trust's  mortgage loans.  The Trust was incorporated in Delaware on December
12, 1995.

         Organization.  Effective  February 12, 1997,  the Trust  registered its
common shares with the Securities and Exchange  Commission  under the Securities
Act of 1933 , as amended in connection  with a "best efforts"  offering of up to
1,500,000  common  shares  at $8.00  per  share.  Listing  of the  shares on the
American  Stock  Exchange  has been  approved  subject  to  official  notice  of
issuance. The Trust actively commenced marketing its shares during May 1997.

         On April 15, 1997 the Trust formed its non-qualified REIT subsidiary to
conduct its mortgage conduit  business.  On June 27, 1997 the Trust  capitalized
CAFC with real estate in exchange for 2,000 shares of Series "A" Preferred Stock
having a 99% economic  interest in CAFC. The Trust's Manager invested $1,000 for
1,000 Common Shares of CAFC having a 1% economic interest in CAFC.

         On December 4, 1997 the Trust's  common  share  offering  exceeded  the
Minimum Subscription Amount of $4,000,000 and 522,497 common shares were issued.
This was the initial offering of common shares.  As of December 31, 1997 562,760
shares were outstanding,  $4,051,878 of net proceeds were received and the trust
recognized a $57,081  reduction of deferred  offering  costs.  On September  30,
1998,  the Common Share  offering was  terminated.  During 1998,  921,980 Common
Shares were issued and  $6,638,256  of net proceeds  were received and the Trust
recognized a $176,050  reduction of deferred  offering costs. As of December 31,
1998, 1,484,740 Common Shares were outstanding.

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

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

                                       21
<PAGE>
         Home mortgage  loans rated A-, B or C tend to have higher rates of loss
and  delinquency,  but also offer higher rates of interest and higher  secondary
market  premiums  than loans to borrowers of higher credit  quality.  Management
believes that  non-conforming  mortgage loans can produce overall higher returns
after adjustment for potentially higher rates of loss than the returns available
on conforming loans. Management also believes there is increased investor demand
for high-yield  non-conforming mortgage loans on account of: (1) investor demand
for higher yields arising from  historically low nominal interest rates over the
past few years and (2) increased securitization of high-yielding  non-conforming
mortgage loans by the investment banking industry.

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

         Contingencies and Commitments.

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

         As of December 31, 1997, the Trust's real estate  investments  included
one  property  held  for  sale  at a  capitalized  cost of  $322,550  and a loan
portfolio of  $4,915,186  consisting of  forty-five  loans,  of which four loans
totaling  $441,127 or 8.97% of the portfolio were  delinquent.  There were three
delinquent loans which were in the process of foreclosure at December 31, 1997.

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

         The Trust generally issues loan commitments only on a conditional basis
and  generally  funds  such  loans  promptly  upon  removal  of all  conditions.
Accordingly, the Trust did not have any commitments to fund loans as of December
31, 1998 and December 31, 1997.

         RESULTS OF OPERATIONS

         The  results of  operation  for the four  months  ended  April 30, 1996
represent the combined financial  statements of the Predecessors.  The financial
statements  for the eight  months  ended  December  31,  1996 and the year ended
December 31, 1997 are the operating results of the Successor.  In the comparison
that follows,  references to the year ended  December 31, 1996 refer to the four
months ended April 30, 1996  (Predecessors)  and the eight months ended December
31, 1996 (Successor)  added together.  The operations of the  Predecessors  have
been  combined  due to the  common  management  and  directors.  The  historical
information presented herein is not necessarily indicative of future operations.

                                       22
<PAGE>
         YEAR ENDED DECEMBER 31, 1998
         COMPARED TO YEAR ENDED DECEMBER 31, 1997

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

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

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

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

         YEAR ENDED DECEMBER 31, 1997
         COMPARED TO YEAR ENDED DECEMBER 31, 1996

         Revenues for the year ended  December 31, 1997 increased to $776,405 as
compared to $764,009 for 1996,  primarily as a result of increased  other income
offsetting lower interest income.

         Other income for the year ended December 31, 1997  increased  primarily
from  origination  income received from borrowers and secondarily  from premiums
from the sale of portfolio  loans and higher rental income from real estate held
for sale. Prior to the Combination,  origination  income received from borrowers
inured to the Manager.

         At year end December 31, 1997 the mortgage notes receivable balance was
greater than the year end December 31, 1996 mortgage notes  receivable  balance.
At year end  December  31, 1997 the real  estate held for sale  balance was less
than the year end December 31, 1996 real estate held for sale balance.  However,
1997's  interest  income was  constrained  by an average  annual  mortgage notes
receivable  balance that was lower than 1996's  average  annual  mortgage  notes
receivable  balance and during 1997 the Trust  maintained a higher  average real
estate owned  balance than the average  real estate owned  balance  during 1996.
This  allocation of the Trust's  assets and a reduction of the loan  portfolio's
weighted  average interest rate from 12.99% to 12.32% during 1997 contributed to
lower interest income and resulted in higher rental income.

         Expenses for the year ended  December 31, 1997 increased to $259,611 as
compared to $164,234 for the  previous  year.  The increase in 1997  compared to
1996 is primarily due to the financing and operating  expenses  associated  with
real estate owned, and from different compensation arrangements with the Manager
prior to the  commencement  of the Trust's  current  offering.  The Trust's 1996
expenses also included  $46,448 as a loan loss provision.  During 1997 the trust
did not change its reserve for loan loss,  but  recognized a $18,995  cumulative
gain from the disposition of real estate held for sale. The gain from

                                       23
<PAGE>
sale of real estate held was reported as a separate line item and did not reduce
1997's expenses or increase 1997's revenues.

         Net income for the year  ended  December  31,  1997 was  $535,789.  Net
Income for the year ended December 31, 1996 was $599,775.

         INFLATION

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

         LIQUIDITY AND CAPITAL RESOURCES

         Management believes that cash flow from operations,  the mortgage loans
that are paid off, the  disposition of real estate owned plus the extension of a
$3,000,000  warehouse  lines of credit with  Warehouse  Lending  Corporation  of
America  for the  Mortgage  Conduit  Business  will be  sufficient  to meet  the
liquidity needs of the Trust's businesses for the next twelve months.

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

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

         The principal source of the Trust's enhanced liquidity are the proceeds
from the issuance of common  stock.  From January 1, 1998 through  September 30,
1998, the Trust  received net common stock proceeds of $6,638,256.  Management's
strategy  is to invest  the  common  stock  proceeds  primarily  in the  Trust's
Mortgage  Investment  Business.  In the  interim,  the  Trust's has used the net
proceeds  of its  current  public  offering  to provide  funding for the Trust's
recently  established  Warehouse  Lending Business and to invest in subordinated
debt of a strategic partner mortgage banking firm which yields 15% per annum. At
December 31, 1998 the Trust had $2,414,435 of warehouse  facilities  outstanding
to CAFC, $820,100 to SCA, $1,472,564 to Equity 1-2-3, and $450,000 to CMT.

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

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

         Net cash  provided by  financing  activities  during the twelve  months
ended  December  31,  1998 was  $5,326,324.  The  principal  source of cash from
financing activities were the gross proceeds of $7,375,840

                                       24
<PAGE>
from the issuance of common stock.  Dividends of $1,143,018  and  organizational
and offering  costs of $747,406  were the leading  users of cash from  financing
activities.

         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1997

         As of  January  1,  1997,  the  Trust  had  $66,798  of cash  and  cash
equivalents.  After taking into effect the various transactions discussed below,
cash and cash  equivalents at December 31, 1997 were  $1,748,485.  The following
summarizes  the changes in net cash provided by operating  activities,  net cash
used for investing activities and net cash provided by financing activities.

         The principal source of the Trust's enhanced liquidity are the proceeds
from the issuance of common stock.  From  December 4, 1997 through  December 31,
1997, the Trust  received net common stock proceeds of $4,051,878.  Management's
strategy  is to invest  the  common  stock  proceeds  primarily  in the  Trust's
Mortgage  Investment  Business.  In the  interim,  the Trust's  will use the net
proceeds  of its  current  public  offering  to provide  funding for the Trust's
recently  established  Warehouse  Lending Business and to invest in subordinated
debt of a strategic partner mortgage banking firm which yields 15% per annum. At
December 31, 1997 the Trust had $717,757 of warehouse facilities  outstanding to
CAFC and $1,468,200 to SCA.

         Net cash provided by the operating  activities during the twelve months
ended  December  31, 1997 was  $432,320.  Net income of $535,789 was the primary
supplier of cash and the largest user of cash from operating  activities was the
$68,619 reduction in other liabilities.

         Net cash used in investing  activities  during the twelve  months ended
December  31,  1997  was  $2,027,557.  The  principal  generators  of cash  from
investment  activities were $2,625,113  provided from the repayments of mortgage
notes receivable and net sales proceeds of $791,416 from the disposition of real
estate before  mortgage  relief.  Investments in new mortgage  notes  receivable
utilized $ $3,254,256 and the  previously  described  warehouse  lines of credit
extended to CAFC and SCA utilized $2,185,957.

         Net cash  provided by  financing  activities  during the twelve  months
ended  December  31,  1997 was  $3,276,924.  The  principal  source of cash from
financing  activities were the gross proceeds of $4,502,087 from the issuance of
common stock.  Dividends of $606,853 and  organizational  and offering  costs of
$499,161 were the leading users of cash from financing activities.

         YEAR 2000

         The Trust's primary use of software  systems is for accounting and loan
documentation.  The Trust's  software  systems,  local area network,  and client
server is widely used and is Year 2000 compliant. Therefore, management believes
that the risk of Year 2000  compliance is not  significant  as it relates to its
computer software system, network and personal computers.

         The Trust does not expect Year 2000 initiative costs to exceed $5,000.

         At this  time,  no  estimate  can be made as to any  potential  adverse
impact from the failure of  borrowers  and  third-party  service  providers  and
vendors to prepare for the Year 2000.

                                       25
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

         Selected Quarterly Financial Data required by Item 302(a) of Regulation
S-K is set forth in the financial  statements filed as part of Registrant's Form
10-Qs for the quarters  ended March 31, 1998,  June 30, 1998 and  September  30,
1998 are incorporated herein by reference and filed as part of this report.

         The  unaudited  1997 and 1998 fourth  quarter  operating  statement  is
presented  below  with  the  accompanying  notes  to  the  operating   statement
incorporated  herein by reference to the Financial  Statements with  Independent
Auditor's Report for the three year period ended December 31, 1998.

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

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

                                                           Three Months Ended
                                                               December 31
                                                           1998           1997
                                                           ----           ----
<S>                                                     <C>           <C>      
REVENUES
     Interest income ..............................     $ 476,943     $ 147,511
     Origination income ...........................        45,270        21,163
     Other income .................................         2,950        11,465
                                                        ---------     ---------

        Total revenues ............................       525,163       180,139

EXPENSES
     Loan servicing and origination
        fees to related party .....................        28,901        46,036
     Interest expense .............................        17,596         2,456
     Provisions for loan losses ...................       170,000          --
     Operating expenses of real estate owned ......         6,061        (2,069)
     General and Administrative ...................        46,339         4,257
                                                        ---------     ---------
        Total expenses ............................       268,897        50,680

NET INCOME BEFORE GAIN
     ON REAL ESTATE OWNED .........................       256,266       129,453
GAIN ON REAL ESTATE OWNED .........................         3,181         2,325
                                                        ---------     ---------
NET INCOME ........................................     $ 259,447     $ 131,778

NET INCOME PER PREFERRED SHARE ....................     $    0.23     $    0.24

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

BASIC EARNINGS PER
     COMMON SHAR ..................................          .077          --

DILUTED EARNINGS PER
     COMMON SHARE .................................          .067          --
</TABLE>

                                       26

<PAGE>



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         None.



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]

                                       27

<PAGE>



--------------------------------------------------------------------------------
                                    ITEM III
--------------------------------------------------------------------------------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         DIRECTORS

         Thomas B. Swartz, 67; Chairman and Chief Executive Officer(1)

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

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

         Class II Director since 1995;  current term expires in 1998;  President
(1996 to date) and Executive Vice President  (1989 to 1996) and Chief  Operating
Officer, Capital Alliance Advisors, Inc.; Executive Vice-President,  Trustee and
Chief Operating  Officer of Capital Alliance Income Trust I (1991 to 1996)and of
Capital Alliance Income Trust II (1994 to 1996); President and Director,  Sierra
Capital  Acceptance  (1995 to date);  President,  Director  and Chief  Operating
Officer  of  Sierra  Capital  Companies  and  of  Capital  Alliance  Investments
Incorporated (a NASD broker-dealer and Registered  Investment  Advisor) (1984 to
date);  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).

Douglas A. Thompson, 55; Executive Vice-President, Director and Chief Investment
Officer(2)

         Class III Director  since 1995;  current term expires  1999;  Executive
Vice-President, Capital Alliance Advisors, Inc. (1995 to date); Trustee, Capital
Alliance  Income  Trust I and Capital  Alliance  Income Trust II (1995 to 1996);
Founder, First Blackhawk Financial, Inc. (mortgage banking firm) (1992 to 1995);
Owner, The Paradigm Group and Investors Mortgage Exchange, Danville,  California
(whole loan  brokerage for private and  institutional  clients)  (1990 to date);
Vice President,  Principal Residential Advisors,  Danville,  California (1988 to
1990);  Secondary  Mortgage  Specialist,   Morgan  Stanley  &  Co.  (1985-1988);
Investment Banking/Mortgage Specialist, Merrill Lynch Pierce Fenner & Smith, Los
Angeles,  California  (1982 to 1985 ); Manager.  Watson  Mortgage,  Bakersfield,
California (1981 to 1982); California Real Estate Broker (1992 to date); Member,
Pepperdine  University Board (1988 to 1991);  B.S.E.,  1967,  Abeline  Christian
University; M.A., 1969 University of Southern California.

                                       28
<PAGE>
Stanley C. Brooks, 49; Director(2)

         Class II Director since 1996; current term expires 1998;  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,  Securities  Industry
Association (1995 to date);  Member,  Regional  Investment  Bankers  Association
(1990 to  date);  Licensed  Principal,  NASD  (1970 to date);  California  State
Polytechnic Institute, B.S. Business Administration 1970. Mr. Brooks was elected
to the Board of Directors  pursuant to the  Underwriting  Agreement  between the
Trust and Brookstreet  Securities  Corporation as the Managing  Broker-Dealer of
the Trust's current public offering of its Common Stock.

Harvey Blomberg, 58; Director(1)(2)

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

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

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

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

         EXECUTIVE OFFICERS

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

         Name                       Age             Position

         Thomas B. Swartz           67           Chairman and Chief
                                                 Executive Officer

         Dennis R. Konczal          49           President and Chief
                                                 Operating Officer

         Douglas A. Thompson        55           Executive Vice-President
                                                 and Chief Investment Officer

         Richard J. Wrensen         43           Senior Vice President
                                                 and Chief Financial Officer

         Linda St. John             43           Operations Officer
                                                 and Secretary

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

                                       29
<PAGE>
         Thomas B. Swartz, 67; Chairman and Chief Executive Officer

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

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

         Class II Director since 1995;  current term expires in 1998;  President
(1996 to date) and Executive Vice President  (1989 to 1996) and Chief  Operating
Officer, Capital Alliance Advisors, Inc.; Executive Vice-President,  Trustee and
Chief Operating  Officer of Capital Alliance Income Trust I (1991 to 1996)and of
Capital Alliance Income Trust II (1994 to 1996); President and Director,  Sierra
Capital  Acceptance  (1995 to date);  President,  Director  and Chief  Operating
Officer  of  Sierra  Capital  Companies  and  of  Capital  Alliance  Investments
Incorporated (a NASD broker-dealer and Registered  Investment  Advisor) (1984 to
date);  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).

Douglas A. Thompson, 55; Executive Vice-President, Director and Chief Investment
Officer

         Class III Director  since 1995;  current term expires  1999;  Executive
Vice-President, Capital Alliance Advisors, Inc. (1995 to date); Trustee, Capital
Alliance  Income  Trust I and Capital  Alliance  Income Trust II (1995 to 1996);
Founder, First Blackhawk Financial, Inc. (mortgage banking firm) (1992 to 1995);
Owner, The Paradigm Group and Investors Mortgage Exchange, Danville,  California
(whole loan  brokerage for private and  institutional  clients)  (1990 to date);
Vice President,  Principal Residential Advisors,  Danville,  California (1988 to
1990);  Secondary  Mortgage  Specialist,   Morgan  Stanley  &  Co.  (1985-1988);
Investment Banking/Mortgage Specialist, Merrill Lynch Pierce Fenner & Smith, Los
Angeles,  California  (1982 to 1985 ); Manager.  Watson  Mortgage,  Bakersfield,
California (1981 to 1982); California Real Estate Broker (1992 to date); Member,
Pepperdine  University Board (1988 to 1991);  B.S.E.,  1967,  Abeline  Christian
University; M.A., 1969 University of Southern California.

Richard J. Wrensen, 43, Senior Vice-President and Chief Financial Officer

         Senior  Vice-President  and Chief Financial  Officer,  Capital Alliance
Advisors,  Inc. and its Affiliates (including Capital Alliance Income Trust Ltd.
and  of  Sierra  Capital   Companies  and  its   affiliates)   (1997  to  date);
Vice-President of Finance,  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).

                                       30
<PAGE>
Linda St. John, 43, Operations Officer and Secretary

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

ITEM 11.  EXECUTIVE COMPENSATION

         COMPENSATION OF OFFICERS

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

         COMPENSATION OF DIRECTORS

     Director Fees. The Trust pays each  unaffiliated  Director an annual fee of
$5,000. In 1998 Messrs. Brooks and Blomberg each received $5,000 as a Director's
fee.

     Committee  and Other  Meeting  Fees.  The Directors are also entitled to be
paid $500 for each director's or committee  meeting  attended in person and $300
if attended by telephonic means.  During 1998 Mr. Brooks was paid $1,400 and Mr.
Blomberg was paid $1,900 in committee and other meeting fees.

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

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

ITEM 12.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain  information  known to the Trust
with respect to beneficial ownership of the Trust's Common Shares as of December
31, 1998,  and as adjusted to reflect the sale of Common  Shares  being  offered
hereby, by (1) each person known to the Trust to beneficially own more than five
percent  of the  Trust's  Common  Shares,  (2) each  Director,  (3) the  Trust's
executive  officers,  and (4) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
name have, to the knowledge of the Trust,  sole voting and investment power with
respect to the shares  beneficially  owned,  subject to community  property laws
where applicable.



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                                       31
<PAGE>
<TABLE>
<CAPTION>
                                                                 Percentage of
                                                               Shares Beneficially
                                                Number of            Owned               
                                                  Shares             -----               
                                               Beneficially    Before     After
                                                  Owned       Offering Offering(1)
                                                  -----       --------------------

Name of Beneficial Owner

<S>                                               <C>             <C>       <C>
Thomas B. Swartz (1)(4)....................       1,086           0         0
Dennis R. Konczal (4)......................           0           0         0
Douglas A. Thompson (4)....................           0           0         0
Stanley C. Brooks (2)......................           0           0         0
Harvey Blomberg............................           0           0         0
All directors and executive officers as a
  group (5 persons)........................           0           0         0
Thomas Morford (3).........................           0           0         0
<FN>
--------------------

(1)      Mr. Swartz owns beneficially  3,004 shares of Series A Preferred Shares
         as of December 31, 1998,  representing  less than 1% of the outstanding
         Series A Preferred Shares.

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

(3)      Mr.  Morford  owns  beneficially  50,000  shares of Series A  Preferred
         Shares as of December 31, 1996,  representing  7.7% of the  outstanding
         Series A Preferred Shares.

(4)      Capital Alliance Advisors, Inc., the Trust's Manager, owns beneficially
         6,437  shares of Series A  Preferred  Shares as of  December  31,  1998
         representing 1% of the outstanding  Series A Preferred Shares.  Messrs.
         Swartz,  Konczal and Thompson are officers and directors of the Manager
         and collectively own a majority of the outstanding Common Shares of the
         Manager.
</FN>
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

         Arrangements  and  Transactions  with CAAI.  CAAI is the Manager of the
Trust  and  provides  (a)  management  and  advisory  services  to the  Trust in
accordance with the Management  Agreement and (b) mortgage  origination and loan
servicing services to the Trust in accordance with the Mortgage  Origination and
Servicing  Agreement.  As  previously  described,  the Trust  will  utilize  the
mortgage  banking  experience,  management  expertise  and  resources of CAAI in
conducting  its  Mortgage  Investment  and its  Mortgage  Conduit  Business.  In
addition,  a majority of the  Directors and the officers of the Trust also serve
as Directors and/or officers of CAAI. However, Unaffiliated Directors constitute
a majority of the Audit  Committee of the Board of Directors of the Trust.  CAAI
owns all of the voting  common  stock and a 1% economic  interest  in CAFC,  the
Trust's  Mortgage  Conduit  Subsidiary.  The  Trust  owns all of the  non-voting
preferred stock  representing 99% of the economic interest in CAFC. CAAI has the
power to elect all of the  directors  of CAFC and the  ability  to  control  the
outcome of all matters for which the consent of the holders of the common  stock
of such  subsidiary is required.  CAAI and/or the officers and directors of CAFC
who may be officers and directors of the Trust,  will be separately  compensated
for their  management  services to the subsidiary and will provide  origination,
financing  and  administrative  services  to  the  subsidiary  through  separate
agreements  and an  intercompany  allocation of the cost of such  services.  The
Trustees, the
                                       32
<PAGE>
Manager and their  affiliates have fiduciary  duties and obligations  which will
require them to resolve any conflicts of interest by exercising  the utmost good
faith and integrity. Additionally, the Bylaws provide that the Manager must upon
request by the Directors  disclose any investments  which are within the purview
of the Trust's investment policies.

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

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

         Investment in Related Mortgage Banking Firms. The Trust, as a result of
strategic investments totaling $200,000 by its predecessors, CAIT I and CAIT II,
holds 20,000 Class "B" Preferred Shares of Sierra Capital Acceptance, a division
of  Sierra  Capital  Funding,   LLC,  a  Delaware  limited   liability   company
("SCF/LLC").  SCF/LLC in 1997 merged with Sierra Capital Acceptance,  a Delaware
business trust ("SCA"), in which the predecessors originally invested.).  SCA is
a  wholesale   mortgage  banking  firm  specializing  in  A-,  B/C  credit-rated
non-conforming  residential  mortgages.  The SCF/LLC-SCA  investment held by the
Trust has a 15%  distribution  preference  (which has been paid quarterly) and a
liquidation  preference.  SCA contracts with the Manager to provide origination,
underwriting,   processing,  funding  and  sale  of  A-  and  B/C  credit  rated
non-conforming  residential  mortgages to CAFC and the Trust. Messrs. Swartz and
Konczal are principals, directors and officers of the SCA division of SCF/LLC as
well as of the Trust and its Manager.

         The Trust has also committed and made a strategic  investment  totaling
$300,000 ($225,000 of which has been made) of subordinated debt in Equity 1-2-3,
located in Laguna Hills, California.  Equity 1-2- 3 is a retail mortgage banking
firm  specializing in A- to B/C  credit-rated  residential  home equity mortgage
loans.  The  Trust's  investment  has  a  15%  distribution   preference  and  a
liquidation  preference.  Equity 1-2-3  utilizes  direct-mail  advertising,  the
Internet and  telemarketing  for origination of its mortgage loans. The business
of Equity 1-2-3 is similar to and may be competitive  with CAFC and the Trust in
the  origination,  purchasing  and sale of A-, B/C  credit-rated  non-conforming
residential mortgages. Messrs. Swartz and Konczal are principals,  directors and
officers  of the Equity  1-2-3  division  of SFC/LLC as well as of the Trust and
Manager. SCSI Corporation, which is controlled by Messrs. Swartz and Konczal, is
the Managing  Member of SCF/LLC and has  committed a $100,000  investment in the
common shares of Equity 1-2-3, $75,000 of which has been made.

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

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

                                       33
<PAGE>
         Other  Business  Activities.  The Bylaws provide that the Directors and
the Trust's  agents,  officers  and  employees  may engage with or for others in
business  activities of the types  conducted by the Trust and that they will not
have any obligation to present to the Trust any investment  opportunities  which
come to them other than in their  capacities as Directors  regardless of whether
those opportunities are within the Trust's investment policies. Each Director is
required to disclose any  interest he has, and any interest  known to him of any
person of which he is an Affiliate,  in any investment  opportunity presented to
the Trust.



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]

                                       34
<PAGE>
--------------------------------------------------------------------------------
                                     PART IV
--------------------------------------------------------------------------------

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

(a)(1)   Financial Statements.  The following Company financial statements are 
          filed as part of this report:

         Independent Auditors' Report F-1
         Balance Sheets F-2
         Statements of Operation F-3
         Statements of Changes in Stockholders' Equity F-4-5
         Statements of Cash Flows F-6
         Notes to Financial Statements F-7

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

(a)(3)   Exhibits.

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

                                       35
<PAGE>
(1)      These exhibits were previously  contained in Registrant's  Registration
         Statement  filed on Form S-11 with the Commission on September 9, 1996,
         and are incorporated by reference herein.

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

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

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

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

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

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

(b)      Reports on Form 8-K.

         None.

(c)      See a(3) above.

(d)      Financial Statement Schedules.

         None.
                                       36
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(D) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, hereunto duly authorized.

                                        Capital Alliance Income Trust, Ltd.
Dated:  April 10, 1999                  A Real Estate Investment Trust

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


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

/s/ Thomas B. Swartz                        Dated:       April 10, 1999
---------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer


s/s Richard J. Wrensen                      Dated:       April 10, 1999
-----------------------
Richard J. Wrensen
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/ Dennis R. Konczal                       Dated:       April 10, 1999
----------------------
Dennis R. Konczal*
President and Director


/s/ Douglas A. Thompson                     Dated:       April 10, 1999
------------------------
Douglas A. Thompson*
Executive Vice-President and Director


/s/ Stanley C. Brooks                       Dated:       April 10, 1999
----------------------
Stanley C. Brooks*
Director


/s/ Harvey Blomberg                         Dated:       April 10, 1999
--------------------
Harvey Blomberg*
Director

                                       37
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying balance sheets of Capital Alliance Income Trust
Ltd., A Real Estate Investment Trust (see Note 1 to the financial statements) as
of December 31, 1998 and 1997, and the related statements of operations, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Trust's  management.  Our  responsibility  is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Capital Alliance Income Trust
Ltd., A Real Estate  Investment  Trust as of December 31, 1998 and 1997, and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted  accounting
principles.




NOVOGRADAC & COMPANY LLP
San Francisco, California
April 6, 1999


<PAGE>


                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                                 Balance Sheets

                                                                                           December 31,
                                                                                  ----------------------------
                                                                                         1997            1998
                                                                                         ----            ----
<S>                                                                                <C>            <C>         
ASSETS
     Cash and cash equivalents .................................................   $  1,748,485   $    570,710
     Restricted cash ...........................................................        205,356        594,693
     Accounts receivable .......................................................         95,207        193,241
     Due from affiliates .......................................................           --          103,301
     Notes receivable:
         Note receivable to related party ......................................           --          225,000
         Warehouse lines of credit to related parties ..........................      2,185,957      5,157,098
         Mortgage notes receivable .............................................      4,915,186      8,986,645
         Allowance for loan losses .............................................           --         (170,000)
                                                                                                  ------------
              Net receivable ...................................................      7,196,350     14,198,743
     Real estate owned .........................................................        322,550        149,663
     Security deposits .........................................................           --           32,133
     Investments in affiliates .................................................        469,150        831,936
     Origination costs .........................................................           --          120,217
     Organization costs (net of accumulated amortization of $11,955 at
         December 31, 1998 and $7,551 at December 31, 1997) ....................         14,478         10,346
     Deferred offering costs ...................................................        176,050           --
                                                                                   ------------   ------------

     Total assets ..............................................................   $ 10,132,419   $ 16,804,983
                                                                                   ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities
         Mortgage note holdbacks ...............................................   $    205,356   $    594,693
         Due to affiliates .....................................................         82,966           --
         Other liabilities .....................................................         22,774        162,839
                                                                                   ------------   ------------
     Total liabilities .........................................................        311,096        757,532
                                                                                   ------------   ------------

     Stockholders' Equity
         Preferred  stock,  $.01 par value  (liquidation  value $9.50 per share)
         675,000 shares authorized; 641,283 shares issued; 631,757 and
         641,283 shares outstanding at December 31, 1998 and 1997 ..............          6,413          6,413
         Additional paid in capital-preferred stock ............................      5,868,711      5,868,711
         Less:  treasury stock, 9,526 shares at cost ...........................           --          (86,944)

         Common stock, $.01 par value
         5,000,000 shares authorized; 1,484,740 and 562,760 shares issued
         and outstanding at December 31, 1998 and 1997 .........................          5,628         14,847
         Additional paid in capital-common stock ...............................      3,940,571     10,244,424
                                                                                   ------------   ------------
     Total stockholders' equity ................................................      9,821,323     16,047,451
                                                                                   ------------   ------------

     Total liabilities and stockholders' equity ................................   $ 10,132,419   $ 16,804,983
                                                                                   ============   ============
</TABLE>

                             See accompanying notes.
                                       F-2

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


                                                    Combined
                                                 (Predecessors)              (Successor)
                                                  -----------  ---------------------------------------
                                                  Four Months  Eight Months
                                                     Ended       Ended        Year Ended   Year Ended
                                                   April 30,  December 31,   December 31, December 31, 
                                                   ---------  ----------     ------------ ------------
                                                      1996       1996           1997        1998
                                                      ----       ----
<S>                                              <C>          <C>          <C>          <C>       
REVENUES
     Interest income .........................   $  242,136   $  440,064   $  655,225   $1,243,495
     Interest income from affiliates .........        7,500       22,500       45,624      409,278
     Other income (loss) .....................       24,073       27,736       75,556       24,460
                                                 ----------   ----------   ----------   ----------
         Total revenues ......................      273,709      490,300      776,405    1,677,233
                                                 ----------   ----------   ----------   ----------

EXPENSES
     Loan servicing fees to related party ....       20,107       40,244      102,027      131,864
     Management fees to related party ........         --           --         48,343      143,484
     Interest expense ........................         --         23,932       46,060       34,607
     Provision for loan loss .................       20,000       26,448         --        205,855
     Operating expenses of real estate owned .         --           --         31,821       10,466
     Taxes ...................................         --           --          6,629       26,920
     General and administrative ..............        6,959       26,544       24,731      123,512
                                                 ----------   ----------   ----------   ----------
         Total expenses ......................       47,066      117,168      259,611      686,708
                                                 ----------   ----------   ----------   ----------

INCOME BEFORE GAIN ON REAL ESTATE OWNED
                                                    226,643      373,132      516,794    1,000,525
     Gain on real estate owned ...............         --           --         18,995        3,181
                                                 ----------   ----------   ----------   ----------

NET INCOME ...................................   $  226,643   $  373,132   $  535,789   $1,003,706
                                                 ==========   ==========   ==========   ==========


NET INCOME PER PREFERRED SHARE ...............   $    0.350   $    0.582   $    0.835   $    0.945

WEIGHTED AVERAGE PREFERRED SHARES  OUTSTANDING
                                                    646,971      641,464      641,283      626,873

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

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

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

 WEIGHTED AVERAGE COMMON SHARES
      OUTSTANDING - DILUTED EARNINGS
     PER SHARE ...............................         --           --         45,219    1,206,886
</TABLE>

                             See accompanying notes.
                                       F-3

<PAGE>


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

                                   Combined
                                (Predecessors)                                             Successor
                                --------------                ------------------------------------------------------------------
                                                                                          (Preferred)
                                                                                           Additional
                                     Class A         Class B   Preferred    Preferred      Paid in         Retained
                                      Amount         Amount     Shares        Stock        Capital         Earnings          Total
                                      ------         ------     ------        -----        -------         --------          -----
<S>                               <C>           <C>            <C>         <C>            <C>            <C>            <C>        
BALANCE AS OF JANUARY 1, 1996 ... $ 6,087,073   $     2,957         --     $      --      $      --      $      --      $ 6,090,030
Redemption of class "A" shares ..     (44,825)         --           --            --             --             --          (44,825)
Organizational and offering costs      (5,625)         --           --            --             --             --           (5,625)
Net income, four months ended
  April 30, 1996 ................     224,376         2,267         --            --             --             --          226,643
Dividends .......................    (259,061)       (3,227)        --            --             --             --         (262,288)
                                  -----------   -----------  -----------   -----------    -----------    -----------    -----------

BALANCE AS OF  APRIL 30, 1996 ...   6,001,938         1,997         --            --             --             --        6,003,935
Exchange to preferred shares ....  (6,001,938)       (1,997)     643,730         6,437      5,997,498           --             --
Redemption of shares ............        --            --         (2,447)          (24)       (23,162)          --          (23,186)
Organizational and offering costs        --            --           --            --           (2,314)          --           (2,314)
Net income, eight months ended
  December 31, 1996 .............        --            --           --            --             --          373,132        373,132
Dividends .......................        --            --           --            --          (32,247)      (373,132)      (405,379)
                                  -----------   -----------  -----------   -----------    -----------    -----------    -----------

BALANCE AS OF DECEMBER 31, 1996 . $      --     $      --        641,283   $     6,413    $ 5,939,775    $      --      $ 5,946,188
                                                ===========  ===========   ===========    ===========    ===========    ===========

</TABLE>
                             See accompanying notes.
                                       F-4


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

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


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


BALANCE AS OF DECEMBER 31, 1998      1,484,740   $     14,847   $ 10,244,424         641,283   $      6,413   $  5,868,711
                                  ============   ============   ============    ============   ============   ============

                                                       Successor
                                     -------------------------------------------

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


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


BALANCE AS OF DECEMBER 31, 1998   $       --      $    (86,944)   $ 16,047,451
                                  ============    ============    ============
</TABLE>


                             See accompanying notes.
                                       F-5



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

                                                                      Combined       
                                                                   (Predecessors)                       (Successor)
                                                                  --------------------------------------------------------------
                                                                                     Eight Months
                                                                   Four Months          Ended       Year Ended        Year Ended
                                                                       Ended         December 31,   December 31,     December 31,
                                                                  April 30, 1996        1996           1997             1998
                                                                  --------------    -------------    ---------        -------
<S>                                                               <C>             <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income ................................................   $    226,643    $    373,132    $    535,789    $  1,003,706
    Adjustments to reconcile net income to net cash
    provided by operating activities:
       Amortization ...........................................            187           3,216           4,335           4,404
       Amortization ...........................................            187           3,216           4,335           4,404
       Gain on real estate owned ..............................           --              --           (18,995)         (3,181)
       (Increase) decrease in interest receivable .............        (43,733)          7,485          14,799         (98,034)
       Accrued interest capitalized to real estate owned ......           --           (83,681)        (24,513)         (6,950)
       Provision for loan loss ................................         20,000          26,448            --           205,855
       Increase in organization costs .........................           --              --              --              (272)
       Increase in security deposits ..........................           --              --              --           (32,133)
       Increase (decrease) in due to /from affiliates .........         10,476         (40,653)        (10,476)       (114,119)
       Increase (decrease) in other liabilities ...............         (3,227)          4,762         (68,619)        140,065
                                                                  ------------    ------------    ------------    ------------
           Net cash provided by operating activities ..........        210,346         290,709         432,320       1,099,341
                                                                  ------------    ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
    (Increase) decrease in restricted cash ....................        (92,046)        121,159        (140,247)       (389,337)
    Increase (decrease) in mortgage note holdbacks ............         92,045        (121,336)        140,365         389,337
    Increase in origination costs .............................           --              --              --          (120,217)
    Increase in warehouse lines of credit .....................           --              --        (2,185,957)     (2,971,141)
    Increase in investments ...................................           --              --              --          (286,848)
    Increase in related party note receivable .................           --              --              --          (225,000)
    Return of capital on related party investment .............           --              --            19,965            --
    Investments in mortgage notes receivable ..................     (1,022,056)     (1,952,384)     (3,254,256)    (10,342,300)
    Repayments of mortgage notes receivable ...................      1,066,231       1,336,796       2,625,113       6,270,841
    Net proceeds from sale of real estate owned ...............           --           229,129         791,416          77,181
    Capital costs of real estate owned ........................           --           (50,230)        (23,956)         (5,956)
                                                                  ------------    ------------    ------------    ------------
       Net cash provided by (used in) investing activities ....         44,174        (436,866)     (2,027,557)     (7,603,440)
                                                                  ------------    ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Note payable to related party .............................           --              --            72,148         (72,148)
    Payment of mortgage notes payable .........................           --          (210,546)       (191,297)           --
    Redemption of shares ......................................        (44,825)        (23,186)           --              --
    Receipt of subscriptions receivable .......................        265,511            --              --              --
    Purchase of treasury stock ................................           --              --              --           (86,944)
    Proceeds from issuance of shares ..........................           --              --         4,502,087       7,375,840
    Organizational and offering costs .........................         (5,625)       (185,205)       (499,161)       (747,406)
    Common dividends paid .....................................           --              --              --          (550,484)
    Preferred dividends paid ..................................       (262,288)       (405,379)       (606,853)       (592,534)
                                                                  ------------    ------------    ------------    ------------
       Net cash provided by (used in) financing activities ....        (47,227)       (824,316)      3,276,924       5,326,324
                                                                  ------------    ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH ...............................        207,293        (970,473)      1,681,687      (1,177,775)
CASH AT BEGINNING OF PERIOD ...................................        829,978       1,037,271          66,798       1,748,485
                                                                  ------------    ------------    ------------    ------------

CASH AT END OF PERIOD .........................................   $  1,037,271    $     66,798    $  1,748,485    $    570,710
                                                                  ============    ============    ============    ============

SUPPLEMENTAL CASH FLOW INFORMATION:
    Interest expense paid .....................................   $       --      $     19,554    $     43,604    $     28,224
    Taxes paid ................................................   $       --      $      2,814    $        800    $     15,238

NON-CASH INVESTING AND FINANCING ACTIVITY (See Note 3):
    Deferred offering costs accrued ...........................   $       --      $     71,589    $       --      $       --
    Deferred offering costs offset against proceeds of offering   $       --      $       --      $    555,888    $    185,524

</TABLE>
                             See accompanying notes.
                                       F-6
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1998


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

     Capital  Alliance  Income Trust Ltd., A Real Estate  Investment  Trust (the
     "Trust"),  a Delaware  corporation,  primarily  invests in  mortgage  loans
     secured  by  real  estate.  The  Trust  was  formed  December  12,  1995 to
     facilitate the combination of the mortgage investment operations of Capital
     Alliance Income Trust I, a Delaware  business trust,  and Capital  Alliance
     Income Trust II, a Delaware  business trust,  (collectively  referred to as
     the  "Predecessors",  individually  referred  to as "CAIT I" and "CAIT II",
     respectively).  CAIT  I and  CAIT  II  were  both  privately-held  mortgage
     investment  trusts which  invested  primarily in loans  secured by deeds of
     trust on one-to-four  unit  residential  properties.  The Manager,  Capital
     Alliance Advisors, Inc. (the "Manager") originates,  services and sells the
     Trust's loans.

     The effective  date of the  combination  (the  "Combination")  was midnight
     April 30,  1996,  pursuant to the  issuance  of a permit by the  California
     Commissioner of Corporations  which qualified the issuance of the preferred
     shares of the Trust issued in the Combination. Under the Agreement and Plan
     of Reorganization  among the Trust and the  Predecessors,  each outstanding
     share of the  Predecessors'  Class "A"  shares was  exchanged  into one (1)
     share of the Trust's Series A preferred stock (the "Preferred  Shares") and
     the outstanding shares of the Predecessors' Class "B" shares were exchanged
     into  Preferred  Shares  equal to one percent  (1%) of the total  number of
     Preferred Shares to be issued in the Combination of the Predecessors.

     At midnight April 30, 1996, the Trust  ("Successor")  exchanged 347,715 and
     296,015  Preferred  Shares  for all  whole  shares  of CAIT I and  CAIT II,
     respectively.  Thereafter,  all assets and liabilities of the  Predecessors
     were transferred to the Trust.

     Effective  February 12, 1997,  the Trust  registered its common shares with
     the  Securities and Exchange  Commission  pursuant to the Securities Act of
     1933,  as amended in  connection  with a "best  efforts"  offering of up to
     1,500,000  common  shares at $8.00 per share and  warrants  to  purchase an
     additional 150,000 common shares at $5.60 per share.

2.   Basis of presentation
     ---------------------

     The operations of the Predecessors have been combined with the Trust due to
     the common management and directors. The Combination has been accounted for
     as a purchase.  CAIT I is considered  the acquiring  entity and CAIT II the
     acquired entity. The purchase price represents the net assets of CAIT II as
     of April 30, 1996  approximating  $2,771,351.  This amount is the  carrying
     amount of assets less  liabilities,  which  approximates fair market value.
     Therefore,  there is no excess purchase price or Goodwill.  The fair market
     value of net assets acquired was used to determine the purchase price since
     the  value  of the  Trust's  Preferred  Shares  exchanged  is  not  readily
     determinable  and the fair value of net  assets  acquired  is more  clearly
     evident.
                                       F-7
<PAGE>
3.   Summary of significant accounting policies & nature of operations
     -----------------------------------------------------------------

     The financial statements for the four months ended April 30, 1996 represent
     the combined financial statements of the Predecessors (immediately prior to
     the merger).  The financial  statements for the periods subsequent to April
     30, 1996 represent the financial  statements of the Trust (Successor) after
     the merger described in Note 1.

     Use of estimates.  The  preparation  of financial  statements in conformity
     with generally accepted  accounting  principles requires management to make
     estimates and assumptions that affect the amounts reported in the financial
     statements and accompanying  notes.  Actual results could differ from those
     estimates.

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

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

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

     Loan loss reserve.  Management reviews its loan loss provision periodically
     and the Trust  maintains an allowance for losses on notes  receivable at an
     amount that management  believes is sufficient to protect against losses in
     the loan portfolio.  Accounts  receivable deemed  uncollectible are written
     off or  reserved.  The Trust does not accrue  interest  income on  impaired
     loans (Note 7). At December 31, 1998,  management  determined that $170,000
     in loan loss reserve was appropriate.

     Real estate owned.  Real estate owned results from foreclosure of loans and
     at time of foreclosure is recorded at the lower of carrying  amount or fair
     value  of the  property  minus  estimated  costs  to  sell.  Subsequent  to
     foreclosure,  the foreclosed  asset value is  periodically  reviewed and is
     adjusted to fair value.  No depreciation is taken on the real estate owned.
     Income and  expenses  related to real estate owned are recorded as interest
     income,  interest  expense and general and  administrative  expenses on the
     Statements of Operations.

                                       F-8
<PAGE>
3. Summary of significant accounting policies & nature of operations (continued)
   -----------------------------------------------------------------------------

     Investments.  Prior to December 31, 1997,  the Trust held an  investment in
     Sierra Capital  Acceptance  ("SCA").  On December 31, 1997, SCA completed a
     tax-free  merger with  Sierra  Capital  Funding,  LLC  ("SCF"),  a Delaware
     limited liability  company which originates and sells residential  mortgage
     loans,  by exchanging  all of the Class A and Class B shares of SCA for the
     common  and  preferred  shares  of the  Sierra  Division  of SCF.  SCA will
     continue  operations  as a separate  operating  division of SCF.  The Trust
     holds an  investment  in the Sierra  Division of SCF,  which  receive a 15%
     interest  distribution per annum. Sierra Capital Services,  Inc., a related
     party,  owns 99% of the  common  shares of the Sierra  Division  of SCF and
     maintains voting control.

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

     Organizational costs. Organization costs are capitalized and amortized on a
     straight-line basis over five years.

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

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

     State  taxes.  During  1998 the  state  of  Delaware  imposed  a tax on the
     increased  capitalization  of the  Trust.  The Trust  made  four  quarterly
     payments  totaling $14,375.  In addition,  the Trust paid $863 in franchise
     tax to the state of California in 1998.

     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
     100% 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.

                                       F-9
<PAGE>
3. Summary of significant accounting policies & nature of operations (continued)
   -----------------------------------------------------------------------------

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

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

     For the eight-month  period ended December 31, 1996, the  distributions per
     Preferred  Share are allocated  87.202% as ordinary income and 12.798% as a
     return of capital for tax purposes.  For the year ended  December 31, 1997,
     the  distributions  per Preferred  Share are allocated  87.673% as ordinary
     income and  12.327% as a return of capital for tax  purposes.  For the year
     ended  December  31,  1998,  the  distributions  per  Preferred  Share  are
     allocated 100% as ordinary income for tax purposes.  The  distributions per
     Common  Share are  allocated  74.693% as  ordinary  income and 25.307% as a
     return of capital for tax purposes.

     Reclassifications.  Certain 1997 amounts have been  reclassified to conform
     with 1998 classifications. Such reclassifications had no effect on reported
     net income.

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

     Pursuant to mortgage loan agreements between the Trust and its borrowers, a
     portion of the loan proceeds are held by the Trust in  segregated  accounts
     to be disbursed to borrowers upon completion of improvements on the secured
     property.  As of December 31, 1998 and 1997,  mortgage note  holdbacks from
     the  consummation of mortgage loans made amounted to $594,693 and $205,356,
     respectively.

5.   Interest receivable
     -------------------

     Interest   receivable   consist  of  accrued  interest  on  mortgage  notes
     receivable and other amounts due from borrowers.





                                      F-10
<PAGE>
6.   Warehouse lines of credit to related parties
     ---------------------------------------------

     The Trust entered into a loan  purchase  agreement on November 1, 1997 with
     Sierra Capital Acceptance LLC ("SCA"), a division of Sierra Capital Funding
     LLC, a related party. Under the terms of the agreement,  the Trust advances
     funds to SCA to acquire  mortgage  loans secured by real estate.  The Trust
     then  acquires  all of SCA's right,  title and interest in such loans.  SCA
     must  reacquire the loans from the Trust at a preset price.  As of December
     31, 1998 and 1997,  the Trust  advanced  to SCA  $820,100  and  $1,468,200,
     respectively. Annual interest per annum on this warehouse line of credit is
     at prime plus one half of one  percent for the first 60 days and prime plus
     four percent after 60 days.  Interest is payable monthly.  The Trust earned
     interest  in the  amount of  $55,343  during  1998,  of which  $18,723  was
     outstanding as of December 31, 1998.

     The Trust entered into a loan purchase  agreement on December 12, 1997 with
     Capital  Alliance  Funding  Corporation  ("CAFC").  Under  the terms of the
     agreement,  the Trust  advances  funds to CAFC to  acquire  mortgage  loans
     secured by real estate.  The Trust then acquires all of CAFC's right, title
     and interest in such loans. CAFC must reacquire the loans from the Trust at
     a preset  price.  As of December 31, 1998 and 1997,  the Trust  advanced to
     CAFC  $2,414,435 and $717,757,  respectively.  Annual interest per annum on
     this warehouse line of credit is equal to the interest rate of the mortgage
     loans  pledged and is payable  monthly.  The Trust  earned  interest in the
     amount of $187,316  during 1998,  of which  $65,400 was  outstanding  as of
     December 31, 1998.

     The Trust entered into a loan  purchase  agreement on February 1, 1998 with
     Equity 1-2-3,  a division of Sierra  Capital  Funding LLC, a related party.
     Under the terms of the agreement,  the Trust advances funds to Equity 1-2-3
     to acquire  mortgage loans secured by real estate.  The Trust then acquires
     all of Equity1-2-3's  right, title and interest in such loans. Equity 1-2-3
     must  reacquire the loans from the Trust at a preset price.  As of December
     31, 1998,  the Trust advanced to Equity 1-2-3  $1,472,563 of funds.  Annual
     interest  per annum on this  warehouse  line of credit is at prime plus one
     percent  for the first 60 days and prime plus four  percent  after 60 days.
     Interest is payable  monthly.  The Trust  earned  interest in the amount of
     $92,026  during 1998, of which $37,360 was  outstanding  as of December 31,
     1998.

     The Trust  entered into a loan  purchase  agreement on January 1, 1998 with
     Calliance  Mortgage  Trust ("CMT").  Under the terms of the agreement,  the
     Trust  advances  funds to CMT to  acquire  mortgage  loans  secured by real
     estate.  The Trust then acquires all of CMT's right,  title and interest in
     such loans.  CMT must reacquire the loans from the Trust at a preset price.
     As of December  31,  1998,  the Trust  advanced  to CMT  $450,000 of funds.
     Annual  interest per annum on this warehouse line of credit is equal to the
     interest  rate of the mortgage  loans pledged and is payable  monthly.  The
     Trust earned  interest in the amount of $22,093  during 1998,  all of which
     was outstanding as of December 31, 1998.

                                      F-11
<PAGE>
7.   Mortgage notes receivable
     -------------------------

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

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

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

                                            Combined
                                          (Predecessors)                         (Successor)                      
                                             April 30,        December 31,      December 31,       December 31,
                                                1996               1996              1997                1998     
                                          ----------------    -------------     ---------------    ---------------
<S>                                      <C>                  <C>               <C>                <C>            
       Balance, beginning of period      $       4,790,070    $   4,725,895     $     4,696,238    $     4,915,186
       Additions during period:
          New mortgage loans                     1,022,056        1,952,384           3,254,256         10,342,300
       Deductions during period:
          Collections of principal               1,086,231        1,336,796           2,405,113          5,997,178
          Foreclosures, net of reserve                 ---          645,245             410,195            273,663
          Cost of mortgages sold                       ---              ---             220,000                ---
                                          ----------------    -------------     ---------------    ---------------
       Balance, close of period           $      4,725,895    $   4,696,238     $     4,915,186    $     8,986,645
                                          ================    =============     ===============    ===============

</TABLE>

                                      F-12
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1998




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

     The Trust's  mortgage notes receivable all relate to loans secured by deeds
     of trust on single  family  residences.  The  following is a summary of the
     Trust's mortgage notes receivable at December 31, 1998.
<TABLE>
<CAPTION>

                                                                                                                    Principal amount
                                                                            Monthly                         Carrying   of loans with
                                                              Final         payment  Prior  Face amount of  amount        delinquent
Principal outstanding                    Interest rate    maturity date      terms   liens   mortgage(s)   of mortgage(s) principal
---------------------                    -------------    -------------- ---------- ------- -----------    -----------   or interest
                                                                                                                          (Note A)
                                                                                                                      --------------
<S>                                      <C>               <C>              <C>      <C>    <C>          <C>          <C>          
Individual loans greater than                                                                                                      
$269,599 (3% of total mortgage                                                                                                     
notes receivable of $8,986,645): ......       12.50%          04/01/00      $ 3,620  First  $  347,500   $  347,500   $       --   
                                              12.00%          09/01/99      $ 3,410   None     341,000      341,000           --   
                                              12.50%          07/01/99      $ 3,125  First     300,000      300,000           --   
Loans from $200,000-$269,599 ..........  8.0% to 13.75%     0 to 58 months                   2,370,950    2,370,950      250,000   
Loans from $100,000-$199,999 ..........  10.0% to 13.5%     0 to 58 months                   4,023,600    4,023,600      359,600   
Loans from $50,000-$99,999 ............  11.0% to 16.0%     0 to 53 months                   1,178,250    1,178,250       67,900   
Loans from $18,650-$49,999 ............  11.75% to 15.0%    2 to 51 months                     425,345      425,345       39,953   
                                                                                            ----------   ----------   ------------ 
                                                                                                                                   
 Total Mortgage Notes Receivable at December 31, 1998                                       $8,986,645   $8,986,645   $    717,453 
                                                                                            ==========   ==========   ============ 
                                                                                                        
                                    
<FN>
(A)        Delinquent  loans are loans  where the monthly  interest  payments in  
           arrears are 90 or more days overdue.  As of December 31, 1998,  there  
           were five  loans  totaling  $467,453  of  principal  and  $22,122  of  
           interest that were 90 to 180 days  delinquent  on interest  payments.  
           One loan  with the  principal  amount  of  $250,000  and  $34,075  of  
           interest  has  been  delinquent  for over 180  days.  Management  has
           reviewed  all  of the  delinquent  loans  and  believes  that  in all
           instances  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.
</FN>
</TABLE>
                                      F-13



<PAGE>




8. Loan loss reserve
   ------------------

     The  Trust  measures  impairment  based  on the fair  value of the  related
     collateral  since all loans  subject  to this  measurement  are  collateral
     dependent. Management believes $170,000 of loan loss reserve is adequate to
     reflect the probable impairment in all receivable as of December 31, 1998.

     Activity in the loan loss reserve was as follows:
<TABLE>
<CAPTION>

                                            Combined
                                          (Predecessors)                          (Successor)                      
                                              April 30,        December 31,     December 31,      December 31,
                                                1996               1996              1997                1998     
                                          ----------------    -------------     ---------------    ---------------
<S>                                       <C>                 <C>               <C>                <C>            
       Balance, beginning of period       $         12,000    $      32,000     $           ---    $           ---
       Provision for loan loss                      20,000           26,448                 ---            170,000
       Transfer to foreclosed asset                    ---         (58,448)                 ---                ---
                                          ----------------    -------------     ---------------    ---------------
       Balance, end of period             $         32,000    $         ---     $           ---    $       170,000
                                          ================    =============     ===============    ===============
</TABLE>

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

     During 1996 the Trust foreclosed on five mortgage notes receivable and sold
     one of the  foreclosed  properties in October  1996.  During 1997 the Trust
     foreclosed on three mortgage notes  receivable,  sold three  properties and
     contributed  three properties to capitalize CAFC. At December 31, 1997, the
     Trust  owned  one  property.  During  1998 the  Trust  foreclosed  on three
     mortgage notes receivable, sold one property and contributed two properties
     to capitalize CAFC. At December 31, 1998, the Trust owned one property. The
     following  table shows the cash and non-cash  activities in the real estate
     owned account.

     As of  January  1, 1997 the Trust  held  mortgage  notes  payable  totaling
     $578,395.  The notes are secured by  residential  properties  with interest
     accruing  at 8.25% to 8.95% per annum.  During 1997 one loan of $91,297 was
     paid in full upon the sale of the real estate  owned and the  remainder  of
     $487,098 was  contributed  to capitalize  CAFC.  There was no mortgage note
     payable in 1998.


                                      F-14


<PAGE>



9.    Real estate owned (continued)
      -----------------------------

     A reconciliation of real estate owned is as follows:
<TABLE>
<CAPTION>
                                                                            1996           1997           1998
                                                                            ----           ----           ----

<S>                                                                     <C>            <C>              <C>        
     Real estate owned at beginning of year                             $         ---  $   1,312,520    $   322,550
     Foreclosed mortgage notes, net of reserve (non-cash)                     618,797        410,195        273,663
     Accrued interest capitalized (non-cash)                                   83,681         24,513          6,950
     Mortgage notes payable (non-cash)                                        578,395        195,728        292,949
     Mortgage notes payable (cash paid)                                       210,546        100,000            ---
     Capital costs of real estate owned (cash paid)                            50,230         23,956          5,956
     Gain on sale (non-cash)                                                      ---         18,995          3,181
                                                                        -------------  -------------    -----------
                                                                            1,541,649      2,085,907        905,249
                                                                        -------------  -------------    -----------
     Less: Proceeds from sale of real estate owned (net of closing
     costs of $2,819, $24,584 and $25,871 in 1998, 1997 and 1996,
     respectively)                                                            229,129        791,416         77,181
     Book value of properties transferred to CAFC (non-cash)                      ---        971,941        678,405
                                                                        -------------  -------------    -----------
                                                                              229,129      1,763,357        755,586
                                                                        -------------  -------------    -----------

     Real estate owned at end of year                                   $   1,312,520  $     322,550    $   149,663
                                                                        =============  =============    ===========
</TABLE>

10.  Gain on real estate owned
     -------------------------

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


11.  Investment in affiliates
     ------------------------

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

     CAFC  commenced  operations  in the second  quarter of 1997.  To capitalize
     CAFC,  the  Trust  contributed  three  real  estate  properties  with a net
     carrying amount of $289,114 (fair value of $971,941 less the  corresponding
     mortgage  loans of $682,827) in 1997. In 1998,  the Trust  contributed  two
     real estate  properties net of liabilities equal to $385,940 (book value of
     $678,405 less adjustment of $35,855 and the corresponding mortgage loans of
     $256,610).
                                      F-15

<PAGE>
11.  Investment in affiliates (continued)
     ------------------------------------
<TABLE>
<CAPTION>

                                        CAPITAL ALLIANCE FUNDING CORPORATION

                                                  1997            1998
                                                  ----            ----

<S>                                            <C>            <C>          
     Total assets                              $  1,521,158   $   5,144,909
                                               ============   =============

     Total liabilities                         $  1,252,008   $   4,512,973

     Total stockholders' equity                     269,150         631,936
                                               ------------   -------------

     Total liabilities and equity              $  1,521,158   $   5,144,909
                                               ============   =============

     Revenue                                   $    111,725   $    496,433
     Expenses                                       (95,278)      (435,924)
     Other income and expenses
          Loss on sale of assets                    (16,447)       (83,663)
                                               ------------    -----------
     Net income (loss)                         $        ---    $   (23,154)
                                               ============    ===========
</TABLE>

     As  described  in Note 3, the Trust also holds an  investment  in preferred
     shares of Sierra Capital  Acceptance,  a division of Sierra Capital Funding
     LLC,  totaling $200,000 and receives  distribution  equal to 15% return per
     annum. For the four months ended April 30, 1996, the Predecessors  received
     guaranteed  distribution  of  $7,500  from this  investment.  For the eight
     months ended December 31, 1996,  the Trust earned  interest of $22,500 from
     this  investment.  For each of the years ended  December 31, 1998 and 1997,
     the Trust earned $30,000 from this investment.  Distributions  are reported
     as interest.

12.  Related party transactions
     --------------------------

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

     The Manager is entitled to a management fee equal to one-twelfth  (1/12) of
     1% annually of the book value of  mortgages,  mortgage-related  investments
     and real property ("Gross  Mortgage  Assets") of the Trust plus one-twelfth
     (1/12) of  one-half  percent  (1/2%) of the book value of the  non-mortgage
     assets of the Trust  computed at the end of each month.  The Trust paid the
     Manager  a  management  fee of  $143,484  and  $48,343  for the year  ended
     December 31, 1998 and 1997, respectively.

                                      F-16
<PAGE>
12.  Related party transactions (continued)
     --------------------------------------

     Also, the Manager  receives a loan  origination  and servicing fee equal to
     one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
     computed at the end of each month.  Prior to February 12, 1997, the Manager
     received  a loan  origination  and  servicing  fee  equal to  0.083% of the
     monthly (1% annually)  value of all assets less  liabilities  and reserves.
     During the four months ended April 30, 1996, the Predecessors  paid $20,107
     to the Manager.  During the eight months ended December 31, 1996, the Trust
     paid  $40,244 to the  Manager.  For the years ended  December  31, 1998 and
     1997,  the Trust paid a loan  servicing  fee of $63,020 and $102,027 to the
     Manager,  respectively.  As of December  31,  1998,  the Trust  capitalized
     $120,217 of loan origination fees.

     Additionally, the Predecessors paid the Manager for organizing the business
     and marketing their  securities.  For the four months ended April 30, 1996,
     the  Predecessors  paid $5,625 to the  Manager.  For the eight months ended
     December  31,  1996,  the Trust paid $2,314 to the Manager for  liabilities
     incurred by the Predecessors.

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

     During 1998,  the Trust  advanced  $225,000 to Equity 1-2-3,  a division of
     Sierra  Capital  Funding  LLC, a related  party,  and recorded it as a note
     receivable. The note bears interest at 15 percent per annum and interest is
     payable  quarterly.  $22,500 of interest was earned and received  from this
     note in 1998.

     On  occasions  the Trust and its  affiliates  had related  receivables  and
     payables arising from ordinary  business  transactions.  As of December 31,
     1998, the Trust had a receivable of $7,500 from Sierra Capital  Acceptance,
     a payable of $36,756 to Capital Alliance Funding Corporation, and a payable
     of  $11,018  to the  Manager.  As of  December  31,  1997,  the Trust had a
     receivable  of $2,500 from  Sierra  Capital  Acceptance,  a  receivable  of
     $34,029 from Capital Alliance Funding Corporation,  a payable of $39,465 to
     the Manager, and a payable of $7,882 to Calliance Mortgage Trust.

     As  described  in Note 6, the  Trust  advanced  $2,185,957  of funds  under
     warehouse lines of credit to related parties and earned interest of $15,624
     on such  financing for the year ended December 31, 1997. For the year ended
     December 31, 1998, the Trust advanced  $5,157,098 of funds under  warehouse
     lines of credit to related  parties and earned interest of $356,778 on such
     financing.

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

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

                                      F-17
<PAGE>
13.  Preferred, common and treasury stock (continued)
     ------------------------------------------------

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

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

     The  Preferred  Shares  are  redeemable  by a  shareholder,  subject to the
     consent  of the  Board of  Directors,  annually  on June 30 for  redemption
     requests  received by May 15 of such year.  The Board of  Directors  may in
     their  sole  discretion  deny,  delay,  postpone  or  consent to any or all
     requests for redemption. The redemption amount to be paid for redemption of
     such Preferred Shares is the adjusted net capital  contribution plus unpaid
     accrued dividends,  divided by the aggregate net capital contributions plus
     accrued  but  unpaid   dividends   attributable  to  all  Preferred  Shares
     outstanding, multiplied by the net asset value of the Trust attributable to
     the  Preferred  Shares  which shall be that  percentage  of the Trust's net
     asset value that the aggregate  adjusted net capital  contributions  of all
     Preferred  Shares bears to the adjusted  net capital  contributions  of all
     Shares  outstanding.  A  liquidation  charge  is  charged  by the  Trust in
     connection  with each  redemption as follows:  3% of  redemption  amount in
     1996, 2% of redemption amount in 1997, 1% of redemption amount in 1998; and
     none thereafter.

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

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

                                      F-18
<PAGE>
13.  Preferred, common and treasury stock (continued)
     ------------------------------------------------

     liquidation,  dissolution  or winding up of the Trust,  unless the Warrants
     have  been  exercised.  The Trust may  refuse  to allow the  exercise  of a
     Warrant if the effect of such exercise would disqualify the Trust as a REIT
     under the Internal Revenue Code.

     Under  the 1998  Incentive  Stock  Option  Plan,  adopted  by the  board of
     directors and approved by stockholders, options for the purchase of a total
     of 150,000 Common Shares of the Trust were granted effective  September 30,
     1998. Officers and employees of the Manager, and Directors of the board are
     the eligible recipients of the options. The options have a term of 10 years
     with a first exercise date six (6) months after the date of the grant.  The
     initial  options for the purchase of 75,000  Common Shares can be exercised
     at $8.00 per share.  The options for the  purchase of  remaining  75,000 of
     Common Shares can be exercised at the closing  price of the Trust's  Common
     Shares on the American Stock Exchange on April 1, 1999, which was $4.50 per
     share.

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

14.  Earnings per share
     ------------------

     The following  table  represents a  reconciliation  of the  numerators  and
     denominators of the basic and diluted earnings per common share.
<TABLE>
<CAPTION>
                                                         Combined
                                                      (Predecessors)                  (Successor)
                                                      --------------   ------------------------------------------------
                                                      Four Months      Eight Months
                                                         Ended             Ended          Year Ended       Year Ended
                                                     April 30, 1996    December 31,     December 31,      December 31,
                                                           1996              1997             1998
                                                                           ----              ----             ----
<S>                                                   <C>                <C>             <C>               <C>          
    Numerator:  
      Net income                                      $   226,643        $    373,132    $     535,789     $   1,003,706
      Preferred dividends attributable              
            to income                                     226,643             373,132          535,789           592,534
                                                      -----------        ------------    -------------     -------------
      Numerator for basic and diluted
           earnings per share-   income
      available to  common stockholders               $       ---        $        ---    $         ---     $     411,172
                                                      ===========        ============    =============     =============
      Denominator:
           Basic weighted average                             ---                 ---           45,219         1,171,733
      shares
           Effect of dilutive warrants                        ---                 ---              ---            35,153
                                                      -----------        ------------    -------------     -------------
           Diluted weighted average shares                    ---                 ---           45,219         1,206,886
                                                      ===========        ============    =============     =============

      Basic earnings  per common share                        ---                 ---              ---     $       0.351
                                                      ===========        ============    =============     =============
      Diluted earnings  per common share                      ---                 ---              ---     $       0.341
                                                      ===========        ============    =============     =============

</TABLE>

                                      F-19
<PAGE>
15.  Year 2000
     ---------

     The worldwide  challenge facing  organizations  commonly referred to as the
     Year 2000 (Y2K) issue is a result of problems that may be encountered  with
     date-related  transactions  on systems  that have  historically  recognized
     years  using two digits  versus four  digits  (i.e.,  98 rather than 1998).
     These systems will  potentially  recognize "00" as the year 1900 instead of
     2000. On the surface the Y2K problem  sounds simple  enough;  however,  the
     implications  of this  problem are far  reaching  and could  impact a broad
     range of business services and activities.

     Like other  organizations  and individuals  around the world, the Trust and
     its operations could be adversely  affected if the computer systems it uses
     and those used by  significant  third parties  (e.g.,  vendors,  customers,
     third party  administrators,  etc.) do not properly  process and  calculate
     date-related  information  and data.  Management  is assessing its computer
     systems and business  processes and intends to initiate  actions to address
     the Y2K needs of the Trust as they are identified.

     Management is also  assessing the actions being taken by third parties that
     are  significant to its business.  At this time,  management is not able to
     determine the impact, including the costs of remediation,  of the Y2K issue
     on the Trust.  Management  intends to fund the costs of needed Y2K  efforts
     from cash  flows  from  operations  and these  costs  will be  expensed  as
     incurred.

                                      F-20