Capital Alliance Income Trust Ltd.,
                         A Real Estate Investment Trust

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



                                                     April 10, 1998



SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C.  20549

Re:      Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
         SEC File No. 333-11625
         Our File No. 76021.0002

Dear Sir/Madam:

Pursuant  to  Sections  13 and  15(d) of the  Securities  Exchange  Act of 1934,
enclosed  for  filing  via  EDGAR  please  find a Form  10-K for the year  ended
December 31, 1997. If you have any questions, please do not hesitate to call.

                                           Very truly yours,

                                           /s/ Thomas B. Swartz

                                           Thomas B. Swartz
                                           Chairman

Enclosures

cc:      Stephen C. Ryan, Esq.

50 California  Street,  Suite 2020 - San Francisco,  CA 94111 - (415) 288-9575 -
fax: (415) 288-9590

<PAGE>

                                  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, 1997
                                                        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           (I.R.S. Employer Identification Number)
of 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 April 10, 1998, the aggregate market value of the  Registrant's  shares of
Common Stock,  $.001 par value,  held by  nonaffiliates  of the  registrant  was
approximately  $6,695,584.  At that date 836,948  shares were  outstanding.  The
shares are approved for listing on the American  Stock  Exchange  upon notice of
issuance but will not trade publicly  until the  conclusion of the  Registrant's
current "best efforts" public offering.
<PAGE>



                                                 TABLE OF CONTENTS


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

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

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

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

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

              Mortgage Loans 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

                                                         2

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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....................................19

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

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

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

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

         Operating Strategy.............................................22

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

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

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

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

     YEAR ENDED DECEMBER 31, 1996
     COMPARED TO YEAR ENDED DECEMBER 31, 1995...........................23

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

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

     LIQUIDITY AND CAPITAL RESOURCES
     FOR THE YEAR ENDED DECEMBER 31, 1997...............................24

     LIQUIDITY AND CAPITAL RESOURCES
     FOR THE YEAR ENDED DECEMBER 31, 1996...............................25

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

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

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

                                        3

<PAGE>
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

              Financial Statements......................................38

         EXHIBIT 24.7...................................................53

                                        4
<PAGE>
                                     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 and
related  companies,  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.

         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
Capital Alliance Advisors,  Inc. ("CAAI"). On April 28, 1997 the Trust commenced
a $12,000,000  initial public offering of its Common Stock (1,500,000  shares at
$8.00 per share with warrants to purchase  150,000  additional  shares of Common
Stock). The Minimum Subscription Amount of $4,000,000 was subscribed on December
4, 1997 and released to the Trust for use in its operations.

         References  to  financial  information  of the Trust for the year ended
1997, 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 Loans  Portfolio.  The Trust (a) originates  mortgage
loans,  through its 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
                                        5
<PAGE>
third parties,  including CAFC, for long-term  investment.  Management  believes
that  non-conforming  mortgage loans provide an attractive net earnings  profile
and produce  higher  yields  without  commensurately  higher  credit  risks when
compared  with  conforming  mortgage  loans.  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 1% and
CAAI has 100% of voting control.

         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.  Such  restriction does
not apply to CAFC.

         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 one  third-party
lender,  at interest  rates that are  consistent  with its financing  objectives
described herein,  and has established a $3.0 million  financing  facility under
which the lender is required to enter into new reverse repurchase  agreements as
needed by CAFC during a specified period of time.  CAFC's  warehouse  repurchase
financing  is  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." A reverse repurchase  agreement,  although  structured as a
sale and  repurchase  obligation,  acts as a financing  vehicle  under which the
Trust  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 Trust's ability to
exercise its rights to
                                        6
<PAGE>
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 intends,  when the amount of liability incurred so
warrants,  to enter into such agreements with several  different  parties and to
follow its own credit exposure procedures.  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  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.
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 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 year ended  December 31, 1997,  CAFC
acquired  from its  correspondents  or funded  directly  $1,722,200  million  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.  Whole  loan sales by CAFC  during  1997
totaled $1,206,200.

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

                                        7
<PAGE>
         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 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 will enable the 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.

         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

                                        8
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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, 1997 the Trust's loan portfolio totaled $4,915,182 with
an average  loan size of  $109,226,  an  average  weighted  yield of 12.32%,  an
average maturity of 18.75 months and a combined  loan-to-value  ratio of 71.12%.
79% of the  portfolio  were first  deeds of trust and 21% were  second  deeds of
trust. The Trust has had the use of fund's from its current public offering only
since  December 4, 1997 and then only to the extent of  $4,000,000  (the Minimum
Subscription Amount) less offering costs and expenses.

         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  31,1996,  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, 1997.  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
                                        9
<PAGE>
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.

         Under  all of the  Trust'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's  Investment  Committee  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 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  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 banks,  including CAFC and Sierra Capital Funding, LLC ("SCF/LL"),  all
of which act as correspondents of the Trust. The  non-conforming  mortgage loans

                                       10
<PAGE>
funded with such warehouse financing are acquired by the Trust for its 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, 1997,  the Trust had $717,750 of warehouse  facilities
utilizing reverse repurchase  agreements  outstanding to CAFC, and $1,468,200 to
SCA, a division of SCF/LLC.  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, 1997 was 18.75 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
                                       11
<PAGE>
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.

     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
                               YEAR ENDED THROUGH
                     DECEMBER 31, 1996 AND DECEMBER 31, 1997

                                            December 31, 1996  December 31, 1997
                                            -----------------  -----------------
Beginning servicing portfolio                      $4,725,895      $4,696,238
Loans added to the servicing portfolio             $1,952,384      $3,254,256

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

Ending servicing portfolio                         $4,696,238      $4,915,186

Number of loans serviced                                   50              45
Average loan size                                  $   93,925        $109,226

     (1) Includes normal loan payoffs, principal amortization, prepayments, less
reserves and foreclosures. The Trust does not charge a prepayment penalty on its
loans.

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

                At December 31, 1997                     At December 31, 1996
       --------------------------------------      -----------------------------

            Number                  Percentage     Number            Percentage
State      of Loans     Amount      of Total      of Loans   Amount    of Total
-----      --------     ------      --------      --------   ------    --------
CA           45       $4,915,186      100%          49    $4,401,788      94%
CO            0                                      0
UT            0                                      1      $294,450       6%

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

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

         At December 31, 1997                      At December 31, 1996
-------------------------------------    --------------------------------------
Terms of Loans       Amount     %of     Terms of Loans   Amount        % of
                    of Loan  Portfolio                  of Loan      Portfolio

0-12 months       $2,651,900   53.95%     0-12 months  $1,568,128     33.39%
13-24 months         896,412   18.24%    13-24 months     918,874     19.57%
25-36 months         636,349   12.95%    25-36 months   1,321,192     28.13%
37-48 months            None    None     37-48 months        None       None
Over 48 months       730,525   14.86%  Over 48 months     888,044      18.91
                  ----------   ------                  ----------    -------
                  $4,915,186     100%                  $4,696,238       100%

                                       13
<PAGE>
     Delinquencies. The following table shows the Trust's delinquency statistics
for its servicing portfolio at the dates presented.
<TABLE>
<CAPTION>
                              At December 31, 1996                    At December 31, 1997
                              --------------------                    --------------------
                        Number of Loans    % of Portfolio      Number of Loans      % of Portfolio
                        ---------------    --------------      ---------------      --------------
Loans delinquent for:
<S>                          <C>              <C>                    <C>                <C>
    30-59 days                  5                6%                     6                  7%
    60-89 days                  3                7%                     2                  3%
    90 days+                    2                7%                     2                  6%
                              ---              ----                   ---                ----
    Totals:                    10               20%                    10                 16%
</TABLE>
<TABLE>
<CAPTION>
                              At December 31, 1996                     At December 31, 1997
                              --------------------                     --------------------
                          Number of Loans   % of Portfolio        Number of Loans      % of Portfolio
                          ---------------   --------------        ---------------      --------------

<S>                           <C>             <C>                     <C>                <C>
Foreclosures pending            5               14%                     3                  9%
Bankruptcies pending            2                3%                     2                  3%
                               ---             ----                    ---                ----

    Total delinquencies,
    foreclosures
    and bankruptcies           17               38%                    15                 28%
</TABLE>

         REGULATION

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

         Because the Trust's business is highly  regulated,  the laws, rules and
regulations  applicable  to the Trust are subject to regular  modifications  and
change.  There are currently proposed various laws, rules and regulations which,
if  adopted,  could  impact  the  Trust.  There can be no  assurance  that these
proposed laws, rules and regulations,  or other such laws, rules or regulations,
will not be  adopted  in the  future  which  could  make  compliance  much  more
difficult or  expensive,  restrict  the Trust's  ability to  originate,  broker,
purchase or sell loans,  further  limit or restrict  the amount of  commissions,
interest and other charges earned on loans  originated,  brokered,  purchased or
sold by the Trust,  or otherwise  affect the business or prospects of the Trust.
Also,  members  of  Congress  and  government  officials  have from time to time
suggested the elimination of the mortgage interest  deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Trust's loans are made to borrowers for
the purpose of  consolidating  consumer debt or financing  other consumer needs,
the  competitive  advantages  of tax  deductible  interest,  when  compared with
alternative  sources of financing,  could be eliminated or seriously impaired by
such
                                       14
<PAGE>
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 27,  1998,  the  Manager  employed  7 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, 1997.

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

         The Trust's  Common Stock is approved for listing on the American Stock
Exchange  upon  notice of  issuance  under the symbol  "CAA".  Since the Trust's
Common Stock,  which is currently being offered in a $12,000,000  "best efforts"
initial public offering at $8.00 per share, has not commenced  trading,  no sale
prices for the Common  Stock are  reported by the American  Stock  Exchange.  At
March 31,  1998 the Trust  had  issued  and  outstanding  826,949  shares of the
Trust's  Common Stock and  warrants to acquire an  additional  82,694  shares of
Common  Stock which were  issued for  $6,615,591.  The initial  shares of Common
Stock were issued on December 4, 1997.

         On March 31,  1998,  there  were  approximately  134  holders of record
(including  holders who are nominees for an  undetermined  number of  beneficial
owners) of the  Trust's  Common  Stock and 164  holders of record of the Trust's
Preferred Stock which is not publicly traded.

         To maintain  its  qualification  as a REIT,  the Trust  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 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  during  1997 also paid 12
consecutive  monthly  dividends on the Trust's  Preferred Stock at an average of
$.079 per share per month.

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

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

                                       16
<PAGE>
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 three-year 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 the year ended  December 31, 1997 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


                                          Combined (Predecessors)
                                          Year Ended December 31

Statement of Operations Data:          1993              1994              1995
                                       ----              ----              ----

Revenue                              $100,582          $174,997         $489,363

Net income                             83,722           147,056          414,414

Net income per Weighted Average 
  Preferred Share                       0.934             0.823            0.938


                                              Combined (Predecessors)
                                                    At December 31

Balance Sheet Data:                     1993             1994              1995
                                        ----             ----              ----

Mortgage notes receivable            $620,500        $1,889,485       $4,790,070

Total assets                        1,071,505         3,148,661        6,254,052

Total liabilities                      29,269            55,741          164,022

Shareholders' capital               1,042,236         3,092,920        6,090,030


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                                       19

<PAGE>
                             SELECTED FINANCIAL DATA

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                                       Combined (Predecessors)            Successor                 Successor
                                       ----------------------             ---------                 ---------
                                          Four Months Ended          Eight Months Ended            Year Ended
                                           April 30, 1996             December 31, 1996         December 31, 1997

Statement of Operations Data:

<S>                                             <C>                         <C>                       <C>     
Revenue                                         $273,709                    $490,300                  $776,405

Net income                                       226,643                     373,132                   535,789

Net income per Weighted Average
   Preferred Share                                 0.350                       0.582                     0.835
</TABLE>
<TABLE>
<CAPTION>
                                       Combined (Predecessor)             Successor                 Successor
                                       ----------------------             ---------                 ---------
                                          At April 30, 1996          At December 31, 1996      At December 31, 1997
Balance Sheet Data:
<S>                                             <C>                       <C>                       <C>       
Mortgage notes receivable                     $4,757,895                  $4,696,238                $4,915,186

Total assets                                   6,267,251                   6,702,261                10,132,419

Total liabilities                                263,316                     756,073                   311,096

Shareholder's capital                          6,003,935                   5,946,188                 9,821,323
</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.

         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, 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.  As of December 31, 1996 the Trust's real estate  investments
included four properties held for sale at a capitalized cost of $1,312,520 and a
loan  portfolio  of  $4,696,283  consisting  of fifty  loans of which  six loans
totaling  $782,031 or 16.65% of the  portfolio  were  delinquent.  There was one
delinquent loan in the process of foreclosure at December 31, 1996.

         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, 1996 and December 31, 1997.

         RESULTS OF OPERATIONS

         The results of operation for the twelve months ended  December 31, 1995
and 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, 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 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.

         YEAR ENDED DECEMBER 31, 1996
         COMPARED TO YEAR ENDED DECEMBER 31, 1995

         Revenues for the year ended  December 31, 1996 increased to $764,009 as
compared  to  $489,363  for 1995.  The  increase  was due to higher  outstanding
mortgage notes receivable and increased loan activity during 1996 as compared to
the previous year.

         Expenses for the year ended  December 31, 1996 increased to $164,234 as
compared  to  $79,949  for 1995.  The  increase  in  expenses  was the result of
increased  loan  servicing  fees  resulting  from the increase in the Trusts net
asset value, increased professional fees and the interest expense on real estate
owned as compared to the same period of the previous  year.  In addition,  total
expenses  for 1996  included a $46,448  loan loss  provision  as  compared  to a
$12,000 for the same period of the previous year.

         Net income for the year  ended  December  31,  1996 was  $599,775.  Net
Income for the year ended December 31, 1995 was $414,414.

                                       23
<PAGE>
         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 remaining net
proceeds  of the public  offering,  the  mortgage  loans that are paid off,  the
disposition  of  real  estate  owned  plus  the  establishment  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, 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  offering  costs of $498,807  were the
leading users of cash from financing activities.

                                       24
<PAGE>
         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1996

         As of January 1, 1996 and December 31, 1996 the Trust had cash and cash
equivalents of $829,978 and $66,798  respectfully.  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.

         Overall the  principal  uses of cash were  investments  in new mortgage
notes  receivable and the payment of dividends,  while the principal  sources of
cash was net income and the  repayment of mortgage  notes  receivable.  The 1996
investment in new mortgage  notes  receivable  totaled  $2,974,440  and dividend
payments  were  $667,667.  The 1996 net income was  $599,775 and  repayments  of
mortgage notes receivable totaled $2,403,027.

         Net cash provided by the operating  activities during the twelve months
ended  December  31, 1996 was  $501,055.  Net income of $599,775 was the primary
supplier of cash and the largest user of cash from operating  activities was the
capitalization  of $83,681 of accrued interest  associated with real estate held
for sale.

         Net cash used in investing  activities  during the twelve  months ended
December 31, 1996 was $392,692. The principal generators of cash from investment
activities  were  $2,403,027  provided  from the  repayments  of mortgage  notes
receivable  and net sales  proceeds of  $229,129  from the  disposition  of real
estate.  Investments in new mortgage notes receivable  utilized $ $2,974,440 and
the capitalized costs of real estate properties held for sale absorbed $50,230.

         Net cash used in financing  activities  during the twelve  months ended
December  31,  1996 was  $871,543.  The only net  source of cash from  financing
activities was the receipt of subscriptions, which totaled 265,511. Dividends of
$667,667 was the leading use of cash from financing activities.

         YEAR 2000

         The  Trust's  primary use of software  systems is for  accounting.  The
Trust's  software system 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.

         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.



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                                       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, 1997,  June 30, 1997 and  September  30,
1997 are incorporated herein by reference and filed as part of this report.

         The  unaudited  1996 and 1997 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, 1997.

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                             STATEMENTS OF OPERATIONS
                                   (unaudited)
                                                                    Combined
                                                (Successor)      (Predecessors)
                                                       Three Months Ended
                                                           December 31
                                                    1997               1996
                                                    ----               ----
<S>                                               <C>               <C>     
REVENUES
     Interest income                              $147,511          $159,953
     Origination income                             21,163             ---
     Other income                                   11,465            29,612
                                                    ------            ------
                
        Total revenues                             180,139           189,565

EXPENSES
     Loan servicing and origination
        fees to related party                       46,036            15,054
     Interest expense                                2,456            23,932
     Provisions for loan losses                        ---            (6,552)
     Operating expenses of real estate owned        (2,069)            ---
     General and Administrative                      4,257             8,683
                                                     -----             -----
                               
        Total expenses                              50,680            41,117

NET INCOME BEFORE GAIN
     ON REAL ESTATE OWNED                          129,453           148,448
 REAL ESTATE OWNED                                   2,325             ---
                                                   -------           -------            
                      

NET INCOME                                        $131,778          $148,448
                                                  ========          ========
         
NET INCOME PER PREFERRED SHARE                      $0.205            $0.231

WEIGHTED AVERAGE
     PREFERRED SHARES OUTSTANDING                  641,283           641,283
</TABLE>

                                       26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         None.



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                                       27

<PAGE>
--------------------------------------------------------------------------------
                                    ITEM III
--------------------------------------------------------------------------------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         DIRECTORS

         Thomas B. Swartz, 66; 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, 48; 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, 54; 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, 48; 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, 56; 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             66         Chairman and Chief
                                               Executive Officer

       Dennis R. Konczal            48         President and Chief
                                               Operating Officer

       Douglas A. Thompson          54         Executive Vice-President
                                               and Chief Investment Officer

       Richard J. Wrensen           42         Chief Financial Officer

       Linda St. John               42         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, 66; 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, 48; 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, 54; 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, 42, Senior Vice-President and Chief Financial Officer

         Senior  Vice-President  and Chief  Financial  Officer,  Sierra  Capital
Companies and its Affiliates  (including  Capital  Alliance  Advisors,  Inc. and
Capital Alliance Income Trust Ltd.) (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

                                       30
<PAGE>
Public Accountant  (1979);  Coopers & Lybrand (1978 to 1979);  B.S.  Accounting,
University  of Florida  (1978);  MBA,  Haas School of  Business  Administration,
University of California, Berkeley (1985).

Linda St. John, 42, 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 1997 Messrs. Brooks and Blomberg each received $2,500 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 1997 Mr. Brooks was paid $800 and Mr.
Blomberg was paid $800 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,
1997, 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.


                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]

                                       31
<PAGE>
<TABLE>
<CAPTION>

                                                                                  Percentage of
                                                     Number of                 Shares Beneficially
                                                       Shares                          Owned
                                                     Beneficially            Before        After
                                                        Owned               Offering    Offering(1)
                                                        -----               --------    -----------
Name of Beneficial Owner
------------------------
<S>                                                    <C>                   <C>          <C>
Thomas B. Swartz (1).......................               0                     0            0
Dennis R. Konczal .........................               0                     0            0
Douglas A. Thompson .......................               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  2,286 shares of Series A Preferred Shares
         as of December 31, 1996,  representing  less than 1% of the outstanding
         Series A Preferred Shares.

(2)      Mr.  Brooks  is the  President  of  the  Managing  Dealer.  (See  "PLAN
         OF DISTRIBUTION").

(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.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

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

                                       32
<PAGE>
         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. The business of SCA is similar to and may be competitive
with CAFC and the Trust in the  origination,  purchasing  and sale of A- and B/C
credit rated non-conforming  residential  mortgages.  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
         Statements of Cash Flows F-5
         Notes to Financial Statements F-6

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

(a)(3)   Exhibits.

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

(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, 1998                       A Real Estate Investment Trust

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


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


/s/ Thomas B. Swartz                        Dated:          April 10, 1998
---------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer


s/s Richard J. Wrensen                      Dated:          April 10, 1998
-----------------------
Richard J. Wrensen
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/ Dennis R. Konczal                       Dated:          April 10, 1998
----------------------
Dennis R. Konczal*
President and Director


/s/ Douglas A. Thompson                     Dated:          April 10, 1998
------------------------
Douglas A. Thompson*
Executive Vice-President and Director


/s/ Stanley C. Brooks                       Dated:          April 10, 1998
----------------------
Stanley C. Brooks*
Director


/s/ Harvey Blomberg                         Dated:          April 10, 1998
--------------------
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.




NOVOGRADAC & COMPANY LLP
San Francisco, California
March 20, 1998

                                       F-1
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

<TABLE>
<CAPTION>
                                 Balance Sheets

                                                                                        December 31,
                                                                                        ------------
                                                                                     1996          1997
                                                                                     ----          ----
<S>                                                                            <C>           <C>        
ASSETS
     Cash and cash equivalents .............................................   $    66,798   $ 1,748,485
     Restricted cash .......................................................        65,109       205,356
     Warehouse lines of credit to related parties ..........................          --       2,185,957
     Accounts receivable ...................................................       110,006        95,207
     Investments in affiliates .............................................       200,000       469,150
     Mortgage notes receivable .............................................     4,696,238     4,915,186
     Real estate owned .....................................................     1,312,520       322,550
     Organization costs (net of accumulated amortization of $3,216 at
         December 31, 1996 and $7,551 at December 31, 1997) ................        18,459        14,478
     Deferred offering costs ...............................................       233,131       176,050
                                                                               -----------   -----------

     Total assets ..........................................................   $ 6,702,261   $10,132,419
                                                                               ===========   ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities
         Mortgage note holdbacks ...........................................   $    64,991   $   205,356
         Due to affiliates .................................................        21,294        82,966
         Other liabilities .................................................        91,393        22,774
         Mortgage notes payable ............................................       578,395          --
                                                                               -----------   -----------

     Total liabilities .....................................................       756,073       311,096
                                                                               -----------   -----------

     Stockholders' Equity
         Preferred stock, $.01 par value (liquidation value $9.50 per share)
         675,000 shares authorized; 641,283 shares issued and outstanding at         6,413         6,413
         December 31, 1997 and 1996
         Additional paid in capital-preferred stock ........................     5,939,775     5,868,711

         Common stock, $.01 par value
         5,000,000 and 2,000,000 shares authorized at December 31, 1997 ....          --           5,628
         and December 31, 1996, respectively; 562,760 shares issued and
         outstanding at December 31, 1997
         Additional paid in capital-common stock ...........................          --       3,940,571
                                                                               -----------   -----------

     Total stockholders' equity ............................................     5,946,188     9,821,323
                                                                               -----------   -----------

     Total liabilities and stockholders' equity ............................   $ 6,702,261   $10,132,419
                                                                               ===========   ===========
</TABLE>


                 See accompanying notes to financial statements.
                                       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
                                                          Year Ended       Ended            Ended            Year Ended
                                                         December 31,    April 30,       December 31,        December 31,
                                                         ------------    ---------       ------------        ------------
                                                             1995          1996              1996                1997
                                                             ----          ----              ----                ----
<S>                                                    <C>             <C>               <C>                <C>        
REVENUES
     Interest income                                   $    463,133    $   242,136       $   440,064        $   655,225
     Interest income from affiliates                            ---          7,500            22,500             45,624
     Other income                                            26,230         24,073            27,736             75,556
                                                       ------------    -----------       -----------        -----------
         Total revenues                                     489,363        273,709           490,300            776,405
                                                       ------------    -----------       -----------        -----------

EXPENSES
     Loan servicing fees to related party                    43,165         20,107            40,244            102,027
     Management fees to related party                           ---            ---               ---             48,343
     Interest expense                                           ---            ---            23,932             46,060
     Provision for loan loss                                 12,000         20,000            26,448                ---
     Operating expenses of real estate owned                    ---            ---               ---             31,821
     General and administrative                              19,784          6,959            26,544             31,360
                                                       ------------    -----------       -----------        -----------
         Total expenses                                      74,949         47,066           117,168            259,611
                                                       ------------    -----------       -----------        -----------

INCOME BEFORE GAIN ON REAL ESTATE OWNED
                                                            414,414        226,643           373,132            516,794
     Gain on real estate owned                                  ---            ---               ---             18,995
                                                       ------------    -----------       -----------        -----------

NET INCOME                                             $    414,414    $   226,643       $   373,132        $   535,789
                                                       ============    ===========       ===========        ===========


NET INCOME PER PREFERRED   SHARE                       $     0.938     $   0.350         $   0.582          $   0.835

WEIGHTED AVERAGE  PREFERRED SHARES  OUTSTANDING
                                                            442,026        646,971           641,464            641,283

BASIC AND DILUTED EARNINGS PER
     COMMON SHARE                                      $       ---      $      ---        $      ---        $       ---

WEIGHTED AVERAGE  COMMON SHARES     OUTSTANDING
                                                                ---            ---               ---             45,219

</TABLE>
                 See accompanying notes to financial statements.
                                       F-3
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

<TABLE>
<CAPTION>
                Statements of Changes in Stockholders' Equity




                                          Combined (Predecessors)                                                  Successor        
                                          -----------------------------------------------------------------------------------------
                                                                                              (Common)                              
                                                                                             Additional                             
                                         Class A       Class B    Common        Common        Paid in       Preferred     Preferred 
                                         Amount        Amount       Shares       Stock        Capital         Shares        Stock   
                                         ------        ------       ------       -----        -------         ------        -----   

<S>                                    <C>            <C>         <C>          <C>          <C>            <C>            <C>       
BALANCE AS OF JANUARY 1, 1995          $  3,090,923   $    1,997         ---   $      ---   $      ---              ---   $     --- 
Corpus contributed                        3,206,999          ---         ---          ---          ---              ---         --- 
Organizational and offering costs          (199,868)         ---         ---          ---          ---              ---         --- 
Dividends                                  (421,251)      (3,184)        ---          ---          ---              ---         --- 
Net income, 1995                            410,270        4,144         ---          ---          ---              ---         --- 
                                       ------------   ----------   ---------   ----------   ----------      -----------   --------- 

BALANCE AS OF DECEMBER 31, 1995           6,087,073        2,957         ---          ---          ---              ---         --- 
Redemption of class "A" shares              (44,825)         ---         ---          ---          ---             ---          --- 
Organizational and offering costs            (5,625)         ---         ---          ---          ---              ---         --- 
Dividends                                  (259,061)      (3,227)        ---          ---          ---              ---         --- 
Net income, four months ended
     April 30, 1996                         224,376        2,267         ---          ---          ---              ---         --- 
                                       ------------  -----------  ----------  -----------  -----------     ------------  ---------- 

BALANCE AS OF  APRIL 30, 1996             6,001,938        1,997         ---          ---          ---              ---         --- 
Exchange to preferred shares             (6,001,938)      (1,997)        ---          ---          ---          643,730       6,437 
Redemption of shares                            ---          ---         ---          ---          ---           (2,447)        (24)
Organizational and offering costs               ---          ---         ---          ---          ---              ---         --- 
Dividends                                       ---          ---         ---          ---          ---              ---         --- 
Net income, eight months ended
     December 31, 1996                          ---          ---         ---          ---          ---              ---         --- 
                                       ------------   ----------   ---------   ----------   ----------      -----------   --------- 

BALANCE AS OF DECEMBER 31, 1996                 ---          ---         ---          ---          ---          641,283       6,413 
Issuance of common shares                       ---          ---   562,760          5,628    4,496,459              ---         --- 
Offering costs                                  ---          ---         ---          ---     (555,888)             ---         --- 
Dividends                                       ---          ---         ---          ---          ---              ---         --- 
Net income, 1997                                ---          ---         ---          ---          ---              ---         --- 
                                       ------------   ----------   ---------   ----------   ----------      -----------   --------- 

BALANCE AS OF DECEMBER 31, 1997        $        ---   $      ---   562,760     $    5,628   $3,940,571          641,283   $   6,413 
                                       ============   ==========   =======     ==========   ==========      ===========   ========= 


<PAGE>

(Remainder of previous table.)

  (Preferred)                                      
   Additional                                      
    Paid in        Retained                        
    Capital        Earnings           Total        
    -------        --------           -----        
                                                   
  <C>          <C>               <C>                               
  $       ---   $        ---     $     3,092,920   
          ---            ---           3,206,999   
          ---            ---            (199,868)  
          ---            ---            (424,435)  
          ---            ---             414,414   
  -----------   ------------     ---------------   
                                                   
          ---            ---           6,090,030   
          ---            ---             (44,825)  
          ---            ---              (5,625)  
          ---            ---            (262,288)  
                                                   
          ---            ---             226,643   
 ------------   ------------    ----------------   
                                                   
          ---            ---           6,003,935   
    5,997,498            ---                 ---   
      (23,162)           ---             (23,186)  
       (2,314)           ---              (2,314)                                                                                  
      (32,247)      (373,132)           (405,379)  
                                                   
          ---        373,132             373,132                  
  -----------   ------------     ---------------   
                                                             
    5,939,775            ---           5,946,188  
          ---            ---           4,502,087   
          ---            ---            (555,888)  
      (71,064)      (535,789)           (606,853)                                                                           
          ---        535,789             535,789                                                                            
  -----------   ------------     ---------------   
                                                                                                                            
 $  5,868,711   $        ---     $     9,821,323   
 ============   ============     ===============       
</TABLE>
                 See accompanying notes to financial statements.
                                       F-4
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                            Statements of Cash Flows

                                                                   Combined (Predecessors)               (Successor)
                                                                   -----------------------               -----------
                                                                                                 Eight Months
                                                               Year Ended       Four Months          Ended          Year Ended
                                                              December 31,         Ended          December 31,     December 31,
                                                                  1995         April 30, 1996        1996                   1997
                                                              -------------    --------------    -------------           -------
<S>                                                           <C>               <C>              <C>               <C>         
  CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                              $    414,414      $    226,643     $    373,132      $    535,789
      Adjustments to reconcile net income to net cash
      provided by operating activities:
         Amortization                                                  560               187            3,216             4,335
         Gain on real estate owned                                     ---               ---              ---           (18,995)
         (Increase) decrease in accounts receivable                (57,162)          (43,733)           7,485            14,799
         Accrued interest capitalized to real estate owned             ---               ---          (83,681)          (24,513)
         Provision for loan loss                                    12,000            20,000           26,448               ---
         Increase (decrease) in due to affiliates                   15,285            10,476          (40,653)          (10,476)
         Increase (decrease) in other liabilities                   18,269            (3,227)           4,762           (68,619)
                                                              ------------      ------------     ------------      ------------
             Net cash provided by operating activities             403,366           210,346          290,709           432,320
                                                              ------------      ------------     ------------      ------------

  CASH FLOWS FROM INVESTING ACTIVITIES
      (Increase) decrease in restricted cash                           922           (92,046)         121,159          (140,247)
      Increase (decrease) in mortgage note holdbacks                  (875)           92,045         (121,336)          140,365
      Increase in warehouse lines of credit                            ---               ---              ---        (2,185,957)
      Increase in investments                                     (200,000)              ---              ---               ---
      Return of capital on related party investment                    ---               ---              ---            19,965
      Investments in mortgage notes receivable                  (3,740,011)       (1,022,056)      (1,952,384)       (3,254,256)
      Repayments of mortgage notes receivable                      827,426         1,066,231        1,336,796         2,625,113
      Net proceeds from sale of real estate owned                      ---               ---          229,129           791,416
      Capital costs of real estate owned                               ---               ---          (50,230)          (23,956)
                                                              ------------      ------------     ------------      ------------
         Net cash provided by (used in) investing activities    (3,112,538)           44,174         (436,866)       (2,027,557)
                                                              ------------      ------------     ------------      ------------

  CASH FLOWS FROM FINANCING ACTIVITIES
      Note payable to related party                                    ---               ---              ---            72,148
      Redemption of shares                                             ---           (44,825)         (23,186)              ---
      Receipt of subscriptions receivable                              ---           265,511              ---               ---
      Proceeds from issuance of shares                           2,941,488               ---              ---         4,502,087
      Payment of mortgage notes payable                                ---               ---         (210,546)         (191,297)
      Organizational and offering costs                           (199,868)           (5,625)        (185,205)         (499,161)
      Dividends paid                                              (424,435)         (262,288)        (405,379)         (606,853)
                                                              ------------      ------------     ------------      ------------
         Net cash provided by (used in) financing activities     2,317,185           (47,227)        (824,316)        3,276,924
                                                              ------------      ------------     ------------      ------------

  NET INCREASE (DECREASE) IN CASH                                 (391,987)          207,293         (970,473)        1,681,687
  CASH AT BEGINNING OF PERIOD                                    1,221,965           829,978        1,037,271            66,798
                                                              ------------      ------------     ------------      ------------

  CASH AT END OF PERIOD                                       $    829,978      $  1,037,271     $     66,798      $  1,748,485
                                                              ============      ============     ============      ============

  SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest expense paid                                   $        ---      $        ---     $     19,554      $     43,604
      Taxes paid                                              $        ---      $        ---     $      2,814      $        800

  NON-CASH INVESTING AND FINANCING ACTIVITY (See Note 12):
      Increase in subscriptions receivable                    $   (265,511)     $        ---     $        ---      $        ---
      Deferred offering costs accrued                         $        ---      $        ---     $     71,589      $        ---
      Deferred offering costs offset against proceeds         $        ---      $        ---     $        ---      $    555,888
          of offering

</TABLE>
                 See accompanying notes to financial statements.
                                       F-5
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1997

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 to CAIT I and CAIT II, respectively, for all whole
     shares of the  Predecessors'  outstanding  Class "A" and Class "B"  shares.
     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-6
<PAGE>
3. Summary of significant accounting policies & nature of operations
   -----------------------------------------------------------------

     The financial  statements for the year ended December 31, 1995 and 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 eight months  ended  December 31, 1996 and for the year
     ended  December 31, 1997  represent the  financial  statements of the Trust
     (Successor) after the merger described in Note 1.

     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.

     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.

     Loan loss reserve.  Management reviews its loan loss provision periodically
     and  the  Trust  maintains  an  allowance  for  losses  on  mortgage  notes
     receivable at an amount that  management  believes is sufficient to protect
     against losses in the loan portfolio  given the individual loan to value of
     the Trust's  loan  portfolio  based on the latest  independent  appraisals.
     Accounts receivable deemed  uncollectible are written off or reserved.  The
     Trust  does not  accrue  interest  income on  impaired  loans  (Note 7). At
     December 31, 1997 and 1996, management determined that no loan loss reserve
     was necessary.

     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.

     Investments.  The Trust  previously  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  Sierra
     common and  preferred  shares of SCF.  SCA will  continue  operations  as a
     separate  operating  division of SCF. The Trust owns 99% of the  non-voting
     Sierra preferred shares of SCF.  SCF-Sierra  Preferred shares receive a 15%
     interest per annum.  Sierra Capital  Services,  Inc., a related party, owns
     99% of the Sierra common shares of SCF and maintains  voting  control.  The
     SCF-Sierra Common shareholders are allocated all net profits and losses and
     are  required  to  contribute  or loan  additional  capital  to  cover  any
     operating losses.
     SCF is taxed as a partnership. The Trust accounts for its investment in SCF
     under the equity method.
                                      F-7
<PAGE>
3.   Summary of significant accounting policies & nature of operations (cont'd)
     ---------------------------------------------------------------------------

     On April 11,  1997 the  Trust  formed  its  non-qualified  REIT  subsidiary
     Capital  Alliance  Funding  Corporation  ("CAFC")  to conduct  its  planned
     mortgage conduit business. The Trust owns 99% of the outstanding Series "A"
     Preferred  Stock (2,000  shares of non-voting  stock) in CAFC.  The Trust's
     Manager owns 1% of the Common Shares (1,000 shares) of CAFC and has 100% of
     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.

     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 shareholders.  The
     Trust must maintain  certain records and request certain  information  from
     its  stockholders  designed to disclose  actual  ownership of its stock. In
     addition the Trust must satisfy certain gross income requirements  annually
     and certain asset tests at the close of each quarter of its taxable year.

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

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

     For the 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 of distributions  per preferred share are allocated 87.673% as ordinary
     income and 12.327% as a return of capital for tax purposes.

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

     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.

     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.  Until the initial  public  offering of
     common stock broke impound,  these costs were deferred.  While the offering
     is underway,  these costs will be offset pro-rata against the proceeds from
     the issuance of common stock and as a reduction  of  stockholders'  equity.
     The initial  public  offering  broke  impound on December 4, 1997.  Through
     December  31,  1997  stockholders'  equity was  adjusted  by  $555,888  for
     deferred  offering  costs.  The  remaining  deferred  costs  will be offset
     against  future  proceeds from the offering  during the remaining  offering
     period.

     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. At that time senior
     debt to which  the  asset is  subject  is  reported  as  mortgage  payable.
     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.

     Reclassifications.  Certain 1995 and 1996 amounts have been reclassified to
     conform with 1997 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, 1997 and 1996,  mortgage note  holdbacks from
     the  consummation  of mortgage loans made amounted to $205,356 and $64,991,
     respectively.

                                      F-9
<PAGE>
5. Warehouse lines of credit to related parties
   --------------------------------------------

     As of December 31, 1997,  the Trust  advanced  $1,468,200  of funds under a
     warehouse  line of credit to Sierra Capital  Acceptance  LLC, a division of
     Sierra Capital Funding LLC, a related party.  Mortgage loans are pledged as
     collateral  and  interest  per annum is at prime  plus  one-percent  and is
     payable monthly.

     As of December 31, 1997, the Trust also advanced  $717,757 of funds under a
     warehouse  line of credit  to CAFC,  a related  party.  Mortgage  loans are
     pledged as collateral  and interest per annum is determined by the interest
     rate of the mortgage loans pledged and is payable monthly.

6.   Accounts receivable
     -------------------

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

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.  The 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.

     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 there was no investment in impaired loans at
     the end of each year.

                                      F-10
<PAGE>
7.   Mortgage notes receivable (continued)
     -------------------------------------

     A reconciliation of mortgage notes receivable is as follows:
<TABLE>
<CAPTION>
                                               Combined (Predecessors)                      (Successor)
                                          ---------------------------------     ----------------------------------
                                            December 31,         April 30,        December 31,       December 31,
                                                1995               1996              1996                1997
                                          ----------------    -------------     ---------------    ---------------
<S>                                      <C>                  <C>               <C>                <C>            
       Balance, beginning of period      $       1,889,485    $   4,790,070     $     4,725,895    $     4,696,238
       Additions during period:
          New mortgage loans                     3,740,011        1,022,056           1,952,384          3,254,256
       Deductions during period:
          Collections of principal                 827,426        1,066,231           1,336,796          2,405,113
          Foreclosures, net of reserve                 ---              ---             618,797            410,195
          Cost of mortgages sold                       ---              ---                 ---            220,000
          Provision for loan loss                   12,000           20,000              26,448                ---
                                          ----------------    -------------     ---------------    ---------------
       Balance, close of period           $      4,790,070    $   4,725,895     $     4,696,238    $     4,915,186
                                          ================    =============     ===============    ===============

     Activity in the loan loss reserve 
       was as follows:

                                            Combined (Predecessors)                       (Successor)
                                            December 31,         April 30,       December 31,        December 31,
                                                1995               1996              1996                1997
                                          ----------------    -------------     ---------------    ----------
       Balance, beginning of period       $            ---    $      12,000     $        32,000    $           ---
       Provision for loan loss                      12,000           20,000              26,448                ---
       Transfer to foreclosed asset                    ---              ---            (58,448)                ---
                                          ----------------    -------------     --------------     ---------------
       Balance, end of period             $         12,000    $      32,000     $           ---    $           ---
                                          ================    =============     ===============    ===============

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

                          Notes to Financial Statements
                For the three-year period ended December 31, 1997

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, 1997.

                                                                            
<TABLE>
<CAPTION>
                                                                                                                    Principal amount
                                                                                                                    of loans subject
                                                   Final        Periodic      Prior   Face amount  Carrying amount   to delinquent
         Description          Interest rate   maturity date  payment terms    liens   of mortgages  of mortgages      principal or
         -----------          -------------  --------------  -------------   ------   ------------    ---------    interest (Note A)
                                                                                                                   -----------------
<S>                                <C>          <C>             <C>           <C>     <C>          <C>              <C>    
Individual loans greater than
$147,456 (3% of total
mortgage notes receivable of       13.75%       01/01/98        $2,658         None   $   250,000  $     250,000 (B)$  250,000
$4,915,186):
                                   12.50%       04/01/98        $1,969         None       189,000        189,000           ---
                                   12.50%       08/01/98        $2,344         First      225,000        225,000           ---
                                   12.00%       09/01/98        $3,410         None       341,000        341,000           ---
                                   12.00%       09/01/98        $2,900         None       290,000        290,000           ---
                                   11.00%       10/01/98        $2,991         None       326,250        326,250           ---
                                   12.00%       09/01/99        $1,850         None       185,000        185,000           ---
                                   11.50%       09/01/99        $1,434         None       149,663        149,663           ---
                                    8.00%       10/01/99        $1,615         None       242,250        242,250           ---
                                   12.50%       09/01/12        $2,162         None       202,394        202,394           ---

Loans from $100,000-$147,456   12.0% to 13.5%    12 to 36 months                          969,100        969,100           ---
Loans from $50,000-$99,999     12.0% to 15.0%    12 to 61 months                        1,182,972      1,182,972       191,127
Loans from $20,000-$49,999     12.0% to 14.0%    12 to 61 months                          362,557        362,557           ---
                                                                                      -----------  -------------    ----------
 Total Mortgage Notes Receivable at December 31, 1997                                 $ 4,915,186  $   4,915,186     $ 441,127
                                                                                      ===========  =============     ==========
<FN>
     (A)  Delinquent  loans are loans  where the  monthly  interest  payments in
          arrears are 90 or more days  overdue.  As of December 31, 1997,  there
          were two loans  totaling  $141,127 of principal and $6,800 of interest
          that were 90 to 180 days  delinquent on interest  payments.  Two loans
          with the  principal  amounts of $300,000 and $18,606 of interest  have
          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.
     (B)  The Trust has agreed to forebear  foreclosure while the real estate is
          improved  for sale.  Pursuant to this  agreement,  the  mortgage  will
          continue to accrue interest and is anticipated to be paid in full when
          the asset is sold.
</FN>
</TABLE>
                                      F-12

<PAGE>
8.   Mortgage notes payable
     ----------------------

     As of December  31, 1996 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.

9.   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 $48,343 for the year ended December 31, 1997.

     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 year ended  December  31, 1997,  the
     Trust paid a loan  servicing  fee of $102,027 to the Manager.  There are no
     loan origination costs paid by the Trust,  since such costs are paid to the
     Manager by the borrowers.

     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  held 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 on March 13, 1998.

     As  described  in Note 3, the  Trust  holds  an  investment  in the  Sierra
     division of Sierra  Capital  Funding LLC and  receives a 15%  interest  per
     annum.  For the four months ended April 30, 1996, the  Predecessors  earned
     interest  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 the year ended December 31, 1997, the Trust earned interest
     of $30,000 from this investment.

                                      F-13
<PAGE>
9.   Related party transactions (continued)
     --------------------------------------

     As  described  in Note 3, the Trust  owns  non-voting  preferred  shares in
     Capital  Alliance  Funding  Corporation.  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). CAFC commenced operations in the second quarter of 1997. For the
     year ended December 31, 1997, the Trust received  distributions  of $19,964
     from CAFC, which was a return of capital.

     As  described  in Note 5, 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.

10.  Preferred stock and common stock
     --------------------------------

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

     After declaration of dividends for a given month to the Preferred Shares in
     the amount of the distribution preference,  no further distributions may be
     declared  on  the  Preferred   Shares  for  the  month  until  the  current
     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  holders  of the  Preferred  Shares and
     Common Shares for the month is equal. The  distribution  preferences of the
     Preferred Shares are not cumulative.

     Holders  of  Preferred  Shares are  entitled  to  receive  all  liquidating
     distributions until the aggregate adjusted net capital  contribution of all
     Preferred  Shares has been reduced to zero.  Thereafter,  holders of Common
     Shares 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 the
     holders of the Common Shares and Preferred Shares 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.

                                      F-14
<PAGE>
10.  Preferred stock and common stock (continued)
     --------------------------------------------

     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
     which would apply after the  conclusion of the initial  public  offering of
     Common Shares.

     One  Shareholder  Warrant  will  be  issued  for  every  10  Common  Shares
     purchased. Each Shareholder Warrant will entitle 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 any  rights  of
     shareholders and they will not be entitled to participate in a distribution
     of the Trust's  assets in a partial or total  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.

11.  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
                                                   Year Ended           Ended               Ended          Year Ended
                                                  December 31,        April 30,          December 31,     December 31,
                                                  ------------        ---------          ------------     ------------
                                                      1995               1996                1996              1997
                                                      ----               ----                ----              ----
<S>                                                <C>               <C>               <C>              <C>         
      Numerator:
           Net income                              $    414,414      $   226,643       $    373,132     $    535,789
           Dividends attributable to income             414,414          226,643            373,132          535,789
                                                   ------------      -----------       ------------     ------------
           Numerator for basic and diluted
               earnings          per
               share-income available to
               common stockholders                          ---              ---                ---             ---
                                                   ============      ===========        ===========    ============
      Denominator:
           Denominator for basic earnings
               per share-weighted average
               shares                                       ---              ---                ---          45,219
                                                   ============      ===========        ===========    ============
      Basic and diluted earnings
           per common share                                 ---              ---                ---             ---
                                                   ============      ===========        ===========    ============

</TABLE>

     The  weighted  average  shares of  warrants  have not been  included in the
     computation  of  diluted  earnings  per share  since the  inclusion  of the
     warrants would not affect the computation.

                                      F-15
<PAGE>
12.  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.  The following  table shows the cash and non-cash
     activities in the real estate owned account.
<TABLE>
<CAPTION>
                                                                                       1996                 1997
                                                                                       ----                 ----
<S>                                                                         <C>                  <C>              
     Real estate owned at beginning of year                                 $             ---    $       1,312,520
     Foreclosed mortgage notes, net of reserve (non-cash)                             618,797              410,195
     Accrued interest capitalized (non-cash)                                           83,681               24,513
     Mortgage notes payable (non-cash)                                                578,395              195,728
     Mortgage notes payable (cash paid)                                               210,546              100,000
     Capital costs of real estate owned (cash paid)                                    50,230               23,956
     Gain on sale (non-cash)                                                              ---               18,995
                                                                             ----------------    -----------------
                                                                                    1,541,649            2,085,907
                                                                             ----------------    -----------------
     Less: Proceeds from sale of real estate owned (net of closing
           costs of $25,871 and $24,584 in 1996 and 1997, respectively)               229,129              791,416
           Fair value of properties transferred to CAFC (non-cash)                        ---              971,941
                                                                             ----------------    -----------------
                                                                                      229,129            1,763,357
                                                                             ----------------    -----------------

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

13.  Gain on real estate owned
     -------------------------

     Three real estate  properties were sold during the year for a combined gain
     of $18,995.

                                      F-16
<PAGE>
                                  EXHIBIT 24.7

                                POWER OF ATTORNEY


         The  undersigned,  whose capacity with Capital Alliance Income Trust, A
Real  Estate  Investment  Trust  (the  "Trust")  is  set  forth  below,   hereby
constitutes  and  appoints  Thomas B. Swartz an Dennis R.  Konczal,  and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents  with  full  power of  substitution,  in the name  and on  behalf  of the
undersigned,  to do any and all  acts  and  things  and to  execute  any and all
instruments  which  said  attorneys  and  agents,  or either  of them,  may deem
necessary or advisable to enable the Trust to comply with the  Securities Act of
1933 ("33 Act"), as amended,  and with the Securities  Exchange Act of 1934 ("34
Act"), as amended, and any rules, regulations and requirements of the Securities
and  Exchange   Commission  in  respect  thereof  in  connection  with  (i)  the
registration  under the '33 Act of shares of common stock in the Trust  ("Common
Shares"),  and warrants to purchase Common Shares (Common  Warrants"),  and (ii)
any and all  amendments  thereto or reports  that the Trust is  required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include  but not be limited to the power and  authority  to sign the name of the
undersigned in the capacity set forth below to a Registration  Statement on Form
S-11 to be filed  with the  Securities  Exchange  Commission  in  respect of the
Common  Shares  and  Common  Warrants  to  any  and  all  amendments  (including
post-effective  amendments) to that Registration Statement and those amendments,
and to any Forms 10-K  required  to be filed by the Trust;  and the  undersigned
hereby ratifies and confirms all that those  attorneys and agents,  or either of
them, shall do or cause to be done by virtue hereof.

         IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on April 10, 1998.


                                                      s/s Richard J. Wrensen
                                                      ----------------------
                                        Name:             Richard J. Wrensen
                                        Position:    Chief Financial Officer

                                       54