<PAGE>




               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                  FORM 10-Q


   X  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934

For the quarterly period ended:     June 30, 1996

                                      OR

      TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from                   to               

Commission File Number:   001-11914


                     THORNBURG MORTGAGE ASSET CORPORATION
            (Exact name of Registrant as specified in its Charter)

                 Maryland                   85-0404134
     (State or other jurisdiction of     (I.R.S. Employer
      incorporation or organization)  Identification Number)

            119 E. Marcy Street
           Santa Fe, New Mexico                87501
 (Address of principal executive offices)   (Zip Code)

      Registrant's telephone number, including area code (505) 989-1900

              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the  Registrant (1) has filed all documents and
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.
 
                        (1) Yes     X          No     
                        (2) Yes     X          No     

                    APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding of each of the issuer's  classes of
common stock, as of the last practicable date.

Common Stock ($.01 par value)                   16,088,507 as of July 24, 1996



<PAGE>

                        THORNBURG MORTGAGE ASSET CORPORATION
                                     FORM 10-Q


                                       INDEX




                                                                          Page
PART I.     FINANCIAL INFORMATION

   Item 1.  Financial Statements

     Balance Sheets at June 30, 1996 and December 31, 1995 ...............  3

     Statements of Operations for the three months and six months ended
     June 30, 1996 and June 30, 1995 .....................................  4

     Statement of Stockholders' Equity for the three months and six months
     ended June 30, 1996 .................................................  5

     Statements of Cash Flows for the three months and six months ended
     June 30, 1996 and June 30, 1995 .....................................  6

     Notes to Financial Statements .......................................  7

   Item 2.  Management's Discussion and Analysis of
            Financial Condition and Results of Operations................. 13



PART II.    OTHER INFORMATION

   Item 1.  Legal Proceedings ..........................................   20

   Item 2.  Changes in Securities ......................................   20

   Item 3.  Defaults Upon Senior Securities ............................   20

   Item 4.  Submission of Matters to a Vote of Security Holders ........   20

   Item 5.  Other Information ..........................................   20

   Item 6.  Exhibits and Reports on Form 8-K ...........................   20


   SIGNATURES  .........................................................   21

   Exhibit Index........................................................   22



<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

THORNBURG MORTGAGE ASSET CORPORATION

BALANCE SHEETS
(In thousands, except share data)

                                               June 30, 1996  December 31, 1995
ASSETS
 
   Adjustable-rate mortgage securities
     (Notes 2, 3 and 4)                           $2,410,280        $1,995,287
   Cash and cash equivalents                           8,533             3,660
   Accrued interest receivable                        19,535            18,778
   Prepaid expenses and other                            458               260
                                                  ----------        ----------
                                                  $2,438,806        $2,017,985
                                                  ==========        ==========


LIABILITIES

   Reverse repurchase agreements
     (Note 3 and 4)                               $2,190,096        $1,780,854
   Other borrowings (Note 3 and 4)                    16,152            18,446
   Payable for securities purchased                     --              42,990
   Accrued interest payable                           11,152             9,907
   Dividends payable (Note 7)                          6,375             4,632
   Accrued expenses and other                            722               679
                                                  ----------        ----------
                                                   2,224,497         1,857,508
                                                  ----------        ----------


STOCKHOLDERS' EQUITY

   Common stock: par value $.01 per share;
     50,000,000 shares authorized, 15,937,494
     and 12,190,712 shares issued and
     outstanding (Note 6)                                159               122
   Additional paid-in-capital                        228,774           175,708
   Available-for-sale securities:
     Unrealized gain (loss) (Note 2)                 (19,496)          (21,835)
     Realized deferred hedging gain                    5,446             7,009
   Retained  earnings (deficit)                         (574)             (527)
                                                  ----------        ----------
                                                     214,309           160,477
                                                  ----------        ----------

                                                  $2,438,806        $2,017,985
                                                  ==========        ==========




See Notes to Financial Statements.



<PAGE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF OPERATIONS
 (In thousands, except per share data)


                                     Three  Months  Ended     Six Months Ended
                                           June 30,               June 30,
                                        1996       1995       1996       1995  
                                       -------    -------    -------    ------- 

   Interest income                    $ 35,680   $ 27,998   $ 68,382   $ 53,878
   Interest expense                     28,455     25,541     54,967     50,262
                                        ------     ------     ------     ------
      Net interest income                7,225      2,457     13,415      3,616
                                        ------     ------     ------     ------

   Gain (loss) on sale of
     adjustable-rate
     mortgage securities                  --         --           13       (659)

   General and admin. expenses:
     Management fee (Note 5)               405        344        764        689
     Performance fee (Note 5)              508       --        1,096       --
     Other                                 143        120        268        232
                                         -----      -----      -----      -----
                                         1,056        464      2,128        921
                                         -----      -----      -----      -----

   Net income                         $  6,169   $  1,993   $ 11,300   $  2,036
                                      ========   ========   ========   ========

   Net income per share               $   0.42   $   0.17   $   0.83   $   0.17
                                      ========   ========   ========   ========

   Average number of shares
     outstanding                        14,844     11,873     13,589     11,827
                                      ========   ========   ========   ========






See Notes to Financial Statements.




<PAGE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months and Six Months Ended June 30, 1996
(In thousands, except share data)


                                     Available-for-Sale Sec.   
                                     -----------------------   
                                                   Realized
                    Common Additional              Deferred  Retained
                     Stock   Paid-in  Unrealized  Gain From  Earnings
                  Par Value  Capital  Gain(Loss)    Hedging  (Deficit)    Total 
                  ---------  -------  ----------  ---------  ---------  --------
Balance,
 December 31, 1995   $  122 $ 175,708 $ (21,835) $  7,009  $    (527) $ 160,477

Issuance of common
 stock  (Note 5)          2     3,595      --        --         --        3,597

Available-for-Sale
Securities:
 Fair value adj.,
 net of amortization   --        --       2,010      --         --        2,010

 Deferred gain on
 sale of hedges, net
 of amortization       --        --        --        (830)      --         (830)

Net income             --        --        --        --        5,131      5,131

Dividends declared -
 $0.40 per share       --        --        --        --       (4,972)    (4,972)

Balance,
                     ------ --------- ---------- --------  ---------- ---------
  March 31, 1996        124   179,303   (19,825)    6,179       (368)   165,413

Issuance of common
  stock  (Note 5)        35    49,471      --        --         --       49,506

Available-for-Sale
Securities:
 Fair value adj.,
 net of amortization   --        --         329      --         --          329

 Deferred gain on
 sale of hedges, net
 of amortization       --        --        --        (733)      --         (733)

Net income             --        --        --        --        6,169      6,169

Dividends declared -
  $0.40 per share      --        --        --        --       (6,375)    (6,375)

Balance,
                     ------ --------- ---------- --------  ---------- ---------
  June 30, 1996      $  159 $ 228,774 $ (19,496) $  5,446  $    (574) $ 214,309
                     ====== ========= =========  ========  =========  =========




See Notes to Financial Statements.


<PAGE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)
                                    Three Months Ended     Six Months Ended
                                        June 30,               June 30,
                                     1996       1995         1996        1995  
                                  ---------   --------    --------    --------- 
Operating Activities:
  Net Income                      $  6,169    $  1,993    $ 11,300    $   2,036
  Adjustments to reconcile
   net income to net cash
   provided by oper 
   activities:
    Amortization                     3,480         771       6,778        1,025
    Net (gain) loss from
     investing activities             --          --           (13)         659
    Change in assets and liab.:
      Accrued interest
       receivable                   (2,363)     (2,987)       (757)      (2,808)
      Prepaid expenses and
       other                            (6)        (37)        (73)        (131)
      Accrued interest
       payable                       2,329         465       1,245        1,515
      Accrued expenses and
       other                          (248)        355          43          322
       Net cash provided by
                                   -------     -------     -------      -------
        operating activities         9,361         560      18,523        2,618
                                   -------     -------     -------      -------


Investing Activities:
  Available-for-sale assets:
   Purchase of adj.-rate
    mortgage assets               (552,332)   (150,144)   (758,302)    (187,496)
   Proceeds on sales of
     adj.-rate
     mortgage assets                  --         4,912       6,539       48,983
   Principal payments on
     adj.-rate
     mortgage assets               113,769      29,931     220,582       57,477
  Held-to-maturity assets:
   Principal payments on
    adj.-rate
    mortgage assets                 36,664      10,225      67,506       26,063
  Purchase of interest rate
    cap agreements                    (189)       (218)       (423)        (218)
      Net cash provided by
       (used in) investing         -------     -------     -------      -------
       activities                 (402,088)   (105,294)   (464,098)     (55,191)
                                   -------     -------     -------      -------


Financing Activities:
  Net borrowings from
   (repayments of) reverse
   repurchase agreements           362,812      99,674     409,242       51,992
  Net borrowings from
   (repayments of) other
   borrowings                      (10,098)     (1,168)     (2,294)      (1,796)
  Proceeds from common
   stock issued                     49,506         873      53,104          941
  Dividends paid                    (4,972)     (1,767)     (9,604)      (3,533)
   Net cash provided by
    (used in) financing            -------     -------     -------      -------
    activities                     397,248      97,612     450,448       47,604
                                   -------     -------     -------      -------


Net increase (decrease) in
 cash and cash equivalents           4,521      (7,122)      4,873       (4,969)

Cash and cash equivalents
 at beginning of period              4,012      13,001       3,660       10,848

Cash and cash equivalents         --------    --------    --------    ---------
 at end of period                 $  8,533    $  5,879    $  8,533    $   5,879
                                  ========    ========    ========    =========

Supplemental disclosure of cash flow information
and non-cash activities are included in Note 3.
 
 

See Notes to Financial Statements



                                       1
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Note 1.  Significant Accounting Policies

         Cash and cash equivalents

            Cash and cash  equivalents  includes  cash on hand and highly liquid
            investments  with original  maturities of three months or less.  The
            carrying  amount  of  cash  equivalents  approximates  their  value.
         
         Adjustable-rate mortgage securities

            The  Company's   policy  is  to  classify  each  of  its  assets  as
            available-for-sale as they are purchased and then monitor each asset
            for a period  of time,  generally  six to  twelve  months,  prior to
            making a  determination  whether  the asset  will be  classified  as
            held-to-maturity. Management has made the determination that certain
            securities are available-for-sale in order to be prepared to respond
            to potential future  opportunities in the market, to sell securities
            in order to optimize the portfolio's  total return and to retain its
            ability to respond to economic  conditions  that require the Company
            to sell  assets  in  order  to  maintain  an  appropriate  level  of
            liquidity.   Management   re-evaluates  the  classification  of  the
            securities  on a  quarterly  basis.  All  securities  classified  as
            held-to-maturity  are  carried at the fair value of the  security at
            the time the  designation  is made and any fair value  adjustment to
            the cost  basis as of the date of the  classification  is  amortized
            into  interest  income  as  a  yield   adjustment.   All  securities
            designated  available-for-sale  are  reported  at fair  value,  with
            unrealized gains and losses excluded from earnings and reported as a
            separate component of shareholders' equity.

            Premiums  and  discounts   associated   with  the  purchase  of  the
            securities are amortized into interest  income over the lives of the
            securities using the effective yield method adjusted for the effects
            of estimated  prepayments.  

            Securities  transactions are recorded on the date the securities are
            purchased or sold.  Purchases of new issue  securities  are recorded
            when all significant  uncertainties regarding the characteristics of
            the securities  are removed,  generally  shortly  before  settlement
            date.  Realized  gains and  losses on  securities  transactions  are
            determined on the specific identification basis.

         Credit Risk

            The  Company  has  limited  its  exposure  to  credit  losses on its
            portfolio of  adjustable-rate  mortgage  ("ARM")  securities by only
            purchasing securities that are either guaranteed by an agency of the
            federal  government or have an  investment  grade rating by at least
            one  of  two  nationally  recognized  rating  agencies,  Moody's  or
            Standard & Poor's. The Company monitors the delinquencies and losses
            on the  underlying  mortgages  and makes a  provision  for  possible
            credit losses at a level deemed appropriate by management to provide
            for known losses as well as unidentified potential losses in its ARM
            securities  portfolio if the  impairment  is deemed to be other than
            temporary.  The  provision is based on  management's  assessment  of
            numerous   factors   affecting  its  portfolio  of  ARM   securities
            including,  but not  limited  to,  current  and  projected  economic
            conditions,  delinquency status, credit losses to date on underlying
            mortgages and remaining credit protection.  The provision is made by
            reducing the cost basis of the individual security and the amount of
            such write down reduces  earnings.  Provisions  for credit losses do
            not reduce  taxable income and therefore do not effect the dividends
            paid by the Company to shareholders in the period the provisions are
            taken.  Actual  losses  realized  by the  Company do reduce  taxable
            income in the period the actual  loss is realized  and would  effect
            the dividends paid to shareholders for that tax year.

         Interest rate cap agreements

            The  Company  purchases  interest  rate  cap  agreements  (the  "Cap
            Agreements")  to  limit  the  Company's  risks  associated  with the
            lifetime or maximum interest rate caps of its ARM securities  should
            interest rates rise above specified levels.  The Cap Agreements,  in
            effect,  reduce the effect of the  lifetime  cap feature so that the
            yield on the ARM  securities  will continue to rise in high interest
            rate  environments as the Company's cost of borrowings also continue
            to rise.  The Company's  borrowings  do not have a similar  interest
            rate cap limitation.

                                       2
<PAGE>

            The Cap  Agreements  classified as a hedge against  held-to-maturity
            securities are initially  carried at their fair value as of the time
            the Cap  Agreements  and the related  securities  are  designated as
            held-to-maturity  with an  adjustment  to equity for any  unrealized
            gains or losses at the time of the  designation.  Any  adjustment to
            equity  is  thereafter  amortized  into  interest  income as a yield
            adjustment  in a  manner  consistent  with the  amortization  of any
            premium or discount.  The Cap  Agreements  that are  classified as a
            hedge  against  available-for-sale  securities  are  carried at fair
            value  with  unrealized  gains and  losses  reported  as a  separate
            component  of  equity,   consistent   with  the  reporting  of  such
            securities. The carrying value of the Cap Agreements are included in
            ARM  securities  on  the  balance  sheet.  The  amortization  of the
            carrying value of the Cap Agreements is included in interest  income
            as a contra  item (i.e.  expense)  and,  as such,  reduces  interest
            income over the lives of the Cap Agreements.

            Realized gains and losses  resulting from the termination of the Cap
            Agreements  that are hedging assets  classified as  held-to-maturity
            are deferred as an adjustment  to the carrying  value of the related
            assets and are amortized into interest  income over the terms of the
            related  assets.  Realized  gains  and  losses  resulting  from  the
            termination of such agreements that are hedging assets classified as
            available-for-sale are initially reported in a separate component of
            equity,  consistent  with the  reporting  of those  assets,  and are
            thereafter amortized as a yield adjustment.

         Interest rate swap agreements

            The Company  enters into interest  rate swap  agreements in order to
            manage its interest  rate  exposure  when  financing its ARM assets.
            Revenues and expenses  from the interest  rate swap  agreements  are
            accounted for on an accrual basis and recognized as a net adjustment
            to interest expense.

         Income taxes

            The  Company  has  elected to be taxed as a Real  Estate  Investment
            Trust  ("REIT")  and  intends to comply with the  provisions  of the
            Internal  Revenue Code of 1986, as amended (the "Code") with respect
            thereto.  Accordingly,  the  Company  will not be subject to Federal
            income tax to the extent of its distributions to shareholders and as
            long as certain asset, income and stock ownership tests are met.

         Net income per share

            Net  income  per share is  computed  by  dividing  net income by the
            weighted   average   number  of  common   shares  and  common  share
            equivalents (e.g., stock options),  if dilutive,  outstanding during
            the period.

         Use of estimates

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



                                       3
<PAGE>

Note 2.  Adjustable-Rate Mortgage Securities and Interest Rate Cap Agreements

         Investments  in ARM  securities  consist  of  mortgage  certificates
         secured by ARMs primarily on single-family residential housing.

         The  following  table  pertains  to  the  Company's  ARM  securities
         classified  as  available-for-sale  as of June 30, 1996 and December
         31, 1995, which are carried at their fair value:

                                                Available-for-Sale      
                                         --------------------------------------
               (In thousands)             June 30, 1996       December 31, 1995
                                         ---------------      ----------------- 
               Amortized cost basis      $     1,922,561      $       1,440,345
               Gross unrealized gains              5,526                  4,468
               Gross unrealized losses           (23,761)               (24,800)
                                         ---------------      -----------------
               Fair Value                $     1,904,326      $       1,420,013
                                         ===============      =================


         During the quarter  ended June 30,  1996,  the Company did not sell any
         ARM  securities.  For the  six-month  period ended June 30,  1996,  the
         Company  realized $61,000 in gains and $48,000 in losses on the sale of
         $6.5   million   of  ARM   securities,   which   were   classified   as
         available-for-sale.

         The following table pertains to the Company's ARM securities classified
         as  held-to-maturity  as of June 30, 1996 and December 31, 1995,  which
         are carried at their amortized cost basis:

                                                     Held-To-Maturity 
                                         ---------------------------------------
               (In thousands)              June 30, 1996       December 31, 1995
                                         ---------------       -----------------
               Amortized cost basis      $       505,954        $       575,274
               Gross unrealized gains              5,192                  3,746
               Gross unrealized losses            (4,814)                (5,437)
                                         ---------------        ---------------
               Fair Value                $       506,332        $       573,583
                                         ===============        ===============

         As of June 30,  1996,  the Company had  commitments  to purchase  $70.0
         million of ARM securities.
 
         The average effective yield on the ARM securities owned,  including the
         amortization of the net premium paid for the ARM securities and the Cap
         Agreements  as well as the impact of  providing  for  potential  credit
         losses,  was  6.43% as of June 30,  1996 and 6.73% as of  December  31,
         1995.

         As of June 30, 1996 and December 31,  1995,  the Company had  purchased
         Cap Agreements with a remaining  notional amount of $1,935,505,000  and
         $1,461,814,000, respectively. The notional amount of the Cap Agreements
         purchased  decline  at a rate  that  is  expected  to  approximate  the
         amortization  of the ARM securities.  Under these Cap  Agreements,  the
         Company will receive cash  payments  should either the  three-month  or
         six-month  London  InterBank  Offer Rate  ("LIBOR")  increase above the
         contract rates of the Cap Agreements  which range from 7.50% to 12.50%.
         The initial aggregate notional amount of the Cap Agreements declines to
         approximately  $1,207,457,000 over the period of the agreements,  which
         expire  between  1999  and  2001.  The  Company   purchased  these  Cap
         Agreements  by  incurring a one-time  fee,  or premium.  The premium is
         amortized,  or  expensed,  over  the  lives of the Cap  Agreements  and
         decreases  interest  income on the Company's ARM securities  during the
         period of amortization.  The Company has credit risk to the extent that
         the   counterparties  to  the  Cap  Agreements  do  not  perform  their
         obligations under the Cap Agreements. If one of the counterparties does
         not perform,  the Company  would not receive the cash to which it would
         otherwise be entitled  under the  conditions of the Cap  Agreement.  In
         order to  mitigate  this  risk and  achieve  competitive  pricing,  the
         Company   has  entered   into  Cap   Agreements   with  six   different
         counterparties,  three of which  are  rated  AAA and three of which are
         rated AA.




                                      4
<PAGE>

Note 3.  Reverse Repurchase Agreements and Other Borrowings

         The Company has entered into reverse  repurchase  agreements to finance
         most of its mortgage securities.  The reverse repurchase agreements are
         secured by the market value of the Company's  mortgage  securities  and
         bear interest rates that have historically  moved in close relationship
         to LIBOR.

         As of June 30,  1996,  the Company had  outstanding  $2,190,096,000  of
         reverse repurchase agreements with a weighted average borrowing cost of
         5.57% and a weighted  average  remaining  maturity  of 5.8 months and a
         weighted average remaining term to the next repricing of 52 days. As of
         June  30,  1996,   $1,159,461,000  of  the  Company's  borrowings  were
         variable-rate   term  reverse   repurchase   agreements  with  original
         maturities that range from six months to two years.  The interest rates
         of these term reverse  repurchase  agreements are indexed to either the
         one, three or six month LIBOR rate and reprice accordingly. The reverse
         repurchase  agreements at June 30, 1996 were collateralized by mortgage
         securities with a carrying value of  $2,301,012,000,  including accrued
         interest.

         The  Company  has  a  line  of  credit  agreement  which  provides  for
         short-term  borrowings  of  up to  $25,000,000  collateralized  by  the
         Company's principal and interest  receivables.  At June 30, 1996, there
         was no balance outstanding under this agreement.

         As of June 30, 1996,  the Company had financed most of its portfolio of
         Cap  Agreements  with  $16,152,000  of other  borrowings  which require
         quarterly or semi-annual payments until the year 2000. These borrowings
         have a  weighted  average  fixed rate of  interest  of 7.91% and have a
         weighted average remaining maturity of 3.6 years. The Cap Agreements at
         June  30,  1996  were  collateralized  by  mortgage  securities  with a
         carrying value of $17,239,000, including accrued interest.

         During the three-month  and six-month  periods ended June 30, 1996, the
         total  cash  paid  for  interest  was  $25,483,000   and   $53,018,000,
         respectively.

Note 4.  Fair Value of Financial Instruments

         The following  table  presents the carrying  amounts and estimated fair
         values of the  Company's  financial  instruments  at June 30,  1996 and
         December 31, 1995. FASB Statement No. 107, Disclosures About Fair Value
         of  Financial  Instruments,  defines  the  fair  value  of a  financial
         instrument as the amount at which the instrument  could be exchanged in
         a current transaction  between willing parties,  other than in a forced
         or liquidation sale.

                                  June 30, 1996            December 31, 1995    
                             ------------------------  -------------------------
                               Carrying      Fair       Carrying        Fair
    (In thousands)              Amount       Value       Amount         Value 
    Assets:                  -----------  -----------  -----------   -----------
     Adjustable-rate
      mortgage securities    $ 2,402,087  $ 2,405,454  $ 1,988,127   $ 1,990,217
     Cap agreements                8,193        5,204        7,160         3,379

    Liabilities:
     Other borrowings             16,152       16,739       18,446        19,131
     Swap agreements                --           --            (33)          580

         The above carrying amounts for assets are combined in the balance sheet
         under the caption "adjustable-rate  mortgage securities".  The carrying
         amount for assets categorized as available-for-sale is their fair value
         whereas  the  carrying  amount  for  assets  held-to-maturity  is their
         unamortized cost.

<PAGE>

         The fair values of the Company's ARM  securities and Cap Agreements are
         based on market prices  provided by nationally  recognized  third-party
         pricing  services  and  certain  dealers  who  make  markets  in  these
         financial  instruments.  The fair value of the Company's long-term debt
         and  interest  rate  swap  agreements,   which  are  off-balance  sheet
         financial  instruments,  are based on market values provided by dealers
         who are  familiar  with  the  terms  of the  long-term  debt  and  swap
         agreements.  The fair values  reported  reflect  estimates  and may not
         necessarily be indicative of the amounts the Company could realize in a
         current  market   exchange.   Cash  and  cash   equivalents,   interest
         receivable,  reverse  repurchase  agreements and other  liabilities are
         reflected in the financial  statements at their amortized  cost,  which
         approximates their fair value because of the short-term nature of these
         instruments.

Note 5.  Common Stock and Stock Option Plan

         On October 9, 1995,  the Company  entered into a one-year  Sales Agency
         Agreement with PaineWebber  Incorporated.  In accordance with the Sales
         Agency Agreement, PaineWebber agreed to sell up to 1,174,969 additional
         shares of the  Company's  common stock,  representing  10% of aggregate
         market  value of the  Company's  common  stock held by  non-affiliates.
         During the quarter  ended June 30,  1996,  the Company did not sell any
         shares under this Sales Agency  Agreement.  During the six-month period
         ended June 30, 1996,  the Company sold 207,500  shares under this Sales
         Agency Agreement and received net proceeds of $3,118,000.

         During the  quarter  ended June 30,  1996,  the Company  issued  43,997
         shares  of  common  stock  under its  dividend  reinvestment  and stock
         purchase  plan and  received  net  proceeds  of  $626,000.  During  the
         six-month  period ended June 30, 1996, the Company issued 75,851 shares
         under this plan and received net proceeds of $1,105,000.

         On April 23, 1996, the Company completed a public offering of 3,000,000
         shares of its common  stock.  The  Company  received  net  proceeds  of
         $42,358,000.  The  offering  was managed by  PaineWebber  Incorporated,
         EVEREN Securities,  Inc., Principal Financial Securities,  Inc., Stifel
         Nicolaus & Company,  Incorporated and Thornburg Securities  Corporation
         (the "Underwriters").  On April 29, 1996, the Underwriters notified the
         Company  of their  intent  to  exercise  their  option to  purchase  an
         additional 450,000 shares to cover  over-allotments  which provided the
         Company with additional net proceeds of $6,321,000.

         The  Company  has  adopted a Stock  Option  Plan which  authorizes  the
         granting of options to purchase an aggregate of up to 1,000,000 shares,
         but not more than 5% of the outstanding  shares of the Company's common
         stock.  The  exercise  price for any  options  granted  under the Stock
         Option Plan may not be less than 100% of the fair  market  value of the
         shares of the  common  stock at the time the option is  granted.  As of
         June 30, 1996, the Company had 624,413 options  outstanding at exercise
         prices  of  $9.375  to  $16.125  per  share,   468,647  of  which  were
         exercisable.  The  weighted  average  exercise  price  of  the  options
         outstanding is $15.442 per share.  The options become  exercisable  six
         months  after the date granted and will expire ten years after the date
         granted.  On June 25, 1996, Mr. Richard H. Keyes, a former  director of
         the Company,  exercised  13,382 options at an average exercise price of
         $14.98 for which the Company received proceeds of $201,000.

         In the quarter ended March 31, 1996,  the Company was required to adopt
         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
         Stock-Based  Compensation".  This statement  applies to transactions in
         which an entity  grants  shares of its common  stock,  stock options or
         other equity  instruments  to its  employees and requires the entity to
         compute a compensation cost based on the fair value of the award on the
         date of the grant.  The entity can either  recognize this  compensation
         expense or  continue to account  for such  awards  using the  intrinsic
         value method of accounting  while  providing a pro forma  disclosure of
         net income and earnings per share based on the fair value  method.  The
         Company has  elected to  continue to account for its stock  option plan
         using the  intrinsic  value  method and in the  quarter  and  six-month
         period ended June 30, 1996,  the  compensation  expense that would have
         been recognized under the fair value method was immaterial.



<PAGE>

Note 6.  Transactions with Affiliates

         The Company has a Management Agreement (the "Agreement") with Thornburg
         Mortgage Advisory Corporation ("the Manager").  Under the terms of this
         Agreement,  the Manager,  subject to the  supervision  of the Company's
         Board of Directors, is responsible for the day-to-day operations of the
         Company and provides personnel and office space. The Agreement provides
         for an annual  review  by the  unaffiliated  directors  of the Board of
         Directors of the Manager's performance under the Agreement.

         The Company  pays the Manager an annual  base  management  fee based on
         Average Net  Invested  Assets  (generally  defined as total assets less
         total debts incurred to finance  assets)  payable monthly in arrears as
         follows:

            1% of the first $50 million of Average Net Invested assets, plus
            3/4 of 1% of the portion between $50 million and $100 million, plus
            5/8 of 1% of the portion between $100 million and $200 million, plus
            1/2 of 1% of the portion between $200 million and $300 million, plus
            3/8 of 1% of the portion above $300 million.

         For the  quarters  ended June 30, 1996 and 1995,  the Company  paid the
         Manager $405,000 and $344,000, respectively, in base management fees in
         accordance with the terms of the Agreement.  For the six-month  periods
         ended June 30, 1996 and 1995, the Company paid the Manager $764,000 and
         $689,000, respectively, in base management fees.

         The Manager is also entitled to earn performance based  compensation in
         an amount equal to 25% of the Company's  annualized net income,  before
         performance  based  compensation,  above an annualized Return on Equity
         (generally  defined as proceeds  from  issuance of common  stock before
         underwriter's  discount  and  other  costs of  issuance  plus  retained
         earnings),  equal to the ten year U.S.  Treasury  Rate plus 1%. For the
         quarter and six-month  period ended June 30, 1996, the Manager earned a
         performance fee in the amount of $508,000 and $1,096,000, respectively.
         The  Manager  did  not  earn  any  performance  fee in the  quarter  or
         six-month period ended June 30, 1995.

Note 7.  Dividends

         On June 19, 1996,  the Company  declared a second  quarter  dividend of
         $6,374,998  or  $0.40  per  share  to be  paid  on  July  10,  1996  to
         shareholders  of record as of June 28,  1996.  For  federal  income tax
         purposes  such   dividends   are  ordinary   income  to  the  Company's
         shareholders.


<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS


General

Thornburg  Mortgage  Asset  Corporation  (the  "Company")  is a special  purpose
financial  institution that primarily invests in adjustable-rate  mortgage (ARM)
securities,   thereby   indirectly   providing   capital  to  the  single-family
residential  housing  market.  ARM  securities  represent  interests in pools of
adjustable-rate  mortgage loans,  which often include guarantees or other credit
enhancements against losses from loan defaults.  While the Company is not a bank
or savings and loan,  its business  purpose,  strategy,  method of operation and
risk profile are best understood in comparison to such institutions. The Company
leverages its equity capital using borrowed funds,  invest in ARM securities and
seeks to generate  income based on the  difference  between the yield on its ARM
securities portfolio and cost of its borrowings.  The corporate structure of the
Company differs from most lending  institutions in that the Company is organized
for tax purposes as a real estate  investment  trust  ("REIT")  and,  therefore,
generally  passes  through  substantially  all of its  earnings to  shareholders
without paying federal income tax at the corporate level.

The  Company's  mortgage  securities  portfolio  may consist of either agency or
privately  issued  (generally   publicly   registered)   mortgage   pass-through
securities,   multiclass   pass-through   securities,   Collateralized  Mortgage
Obligations  ("CMOs") or  short-term  investments  that either mature within one
year or have an interest rate that reprices within one year.

The  Company's  investment  policy is to invest at least 70% of total  assets in
High Quality ARM securities and short-term investments. High Quality means:

   (1)   securities  which  are  rated  within  one of the  two  highest  rating
         categories by at least one of either  Standard & Poor's  Corporation or
         Moody's Investors Service, Inc. (the "Rating Agencies"); 
   (2)   securities  that are unrated but are guaranteed by the U.S.  Government
         or issued or guaranteed by an agency of the U.S. Government; or
   (3)   securities  that are unrated or whose ratings have not been updated but
         are determined to be of comparable  quality (by the rating standards of
         at least one of the Rating  Agencies) to a High Quality rated  mortgage
         security.

The remainder of the Company's  investment  portfolio,  comprising not more than
30% of total assets, may consist of Other Investment assets, which may include:

   (1)   loans secured by first liens on  single-family  residential  properties
         acquired  for the  purpose  of  securitization  into  investment  grade
         securities; or
   (2)   pass-through  securities  or CMOs  backed  by  loans  on  single-family
         residential  properties  or on  multi-family,  commercial or other real
         estate-related  properties if they are rated at least  Investment Grade
         at the time of purchase.  "Investment Grade" generally means a security
         rating of BBB or Baa or better by at least one of the Rating Agencies.

The  Company  does not invest in REMIC  residuals  or other CMO  residuals  and,
therefore does not create excess inclusion income or unrelated  business taxable
income for tax  exempt  investors.  Therefore,  the  Company is a mortgage  REIT
eligible for purchase by tax exempt  investors,  such as pension  plans,  profit
sharing  plans,  401(k) plans,  Keogh plans and Individual  Retirement  Accounts
("IRAs").



<PAGE>

Financial Condition

At June 30,  1996,  the  Company  held total  assets of $2.439  billion,  $2.410
billion of which consisted of ARM securities,  as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. This increase in assets, and
in particular ARM securities,  is primarily related to the successful completion
of the Company's  public  offering of common  shares which  occurred in April of
1996.  The Company  received  $48.7  million of capital from this latest  public
offering,  enabling the Company to continue its growth.  At June 30, 1996, 94.6%
of the assets held by the Company were High Quality  assets as compared with the
Company's  investment  policy of  investing  at least 70% of its total assets in
High  Quality  mortgage  securities  and cash and cash  equivalents.  All of the
mortgage  securities  currently  owned by the  Company are either in the form of
pass-through  certificates or a class of a multi-class  pass-through certificate
backed by adjustable-rate mortgages.

The following table presents a schedule of ARM securities owned at June 30, 1996
and December 31, 1995 classified by High Quality and Other Investment assets and
further classified by those issued by an agency of the U.S. Government and those
privately  issued,  generally  publicly  registered  mortgage  securities,  and,
lastly,  classified according to the rating categories as determined by at least
one of the Rating Agencies.

                   MORTGAGE SECURITIES BY ISSUER AND CREDIT RATING
                               (Amounts in thousands)
 
                                     Assets Held as of       Assets Held as of
                                       June 30, 1996         December 31, 1995  
                                   ---------------------   ---------------------
                                   Carrying    Portfolio   Carrying   Portfolio
                                      Value        Mix        Value       Mix  
                                   --------    ---------   --------   ----------
      High Quality:
         FHLMC/FNMA               $1,232,387      51.1%   $  894,433       44.8%
         Privately Issued:
           AAA/Aaa Rating            290,921      12.1       165,196        8.3
           AA/Aa Rating              756,006      31.4       784,633       39.3 
             Total Privately      ----------     -----    ----------      ------
              Issued               1,046,927      43.5       949,829       47.6 
                                  ----------     -----    ----------      ------
             Total High Quality    2,279,314      94.6     1,844,262       92.4 
                                  ----------     -----    ----------      ------

      Other Investment:
         Privately Issued:
           A Rating                  115,929       4.8       134,970        6.8
           BBB/Baa Rating             15,037       0.6        16,055        0.8 
             Total Other          ----------     -----    ----------      ------
              Investment             130,966       5.4       151,025        7.6 
                                  ----------     -----    ----------      ------
             Total Mortgage 
              Securities          $2,410,280     100.0%   $1,995,287      100.0%
                                  ==========     ======   ==========      ======

The following table classifies the Company's portfolio of ARM securities by type
of interest rate index.

                            MORTGAGE SECURITIES BY INDEX
                               (Amounts in thousands)
 
                                 Assets Held as of          Assets Held as of
                                   June 30, 1996            December 31, 1995  
                                 --------------------     ---------------------
                                 Carrying   Portfolio     Carrying    Portfolio
                                   Value       Mix          Value        Mix  
      Index:                   ----------   ---------   ----------    ---------
One-month LIBOR                $   10,462         0.4   $   10,229         0.5%
Six-month LIBOR                 1,330,826        55.2    1,494,102        74.9
Six-month Certificate
  of Deposit                       27,635         1.1       32,349         1.6
One-year Constant
  Maturity Treasury               888,088        36.9      385,066        19.3
11th District Cost
  of Funds                        153,269         6.4       73,541         3.7
                               ----------       ------  ----------       ------
                               $2,410,280       100.0%  $1,995,287       100.0%
                               ==========       ======  ==========       ======

The portfolio had a current  weighted  average coupon of 7.28% at June 30, 1996.
If the  portfolio  were "fully  indexed"  the weighted  average  coupon would be
7.83%,  based upon the current  composition  of the portfolio and the applicable
indices at June 30, 1996.

For the month of June 1996,  the current yield of the ARM  securities  portfolio
was  6.43%.  The  current  yield  includes  the  impact of the  amortization  of
applicable  premiums and discounts,  the cost of credit provisions,  the cost of
hedging and the amortization of deferred gains from hedging activity.

<PAGE>

During the  quarter  and six month  period  ended  June 30,  1996,  the  Company
purchased  $552.3 million and $758.3 million,  respectively,  of ARM securities,
all of which  were High  Quality  assets.  As a result of  purchasing  only High
Quality ARM securities  thus far in 1996, the Company's High Quality assets as a
percent of total assets has reached  94.6%,  the highest  level  reported by the
Company  since the  Company  became  fully  invested  after its  initial  public
offering in 1993. Although the Company continues to evaluate the merits of Other
Investments and will most likely purchase Other  Investments in the future,  the
Company  has  purchased  only  High  Quality  investments  in 1996  based on its
evaluation  of  each  available  asset's  expected  total  return,  taking  into
consideration price, credit risk, liquidity and other factors deemed appropriate
by the Company for asset selection.

Over the six-month period ending June 30, 1996, the composition of the Company's
ARM  securities  by index has changed,  reflecting  an increased  percentage  of
investments in ARM securities indexed to the one-year constant maturity treasury
index and a decreased  percentage of investments in six-month  LIBOR indexed ARM
securities.  This change is largely a reflection of the types of ARM  securities
that have been either  produced  or  available  for sale  during this  six-month
period,  with new LIBOR ARM  production  down  markedly  from prior years.  This
change is also a  reflection  of the  Company's  strategy of  acquiring a larger
percentage of fully indexed ARM securities with lifetime  maximum interest rates
above 11%. Most of the LIBOR based ARM securities  production  does not meet the
Company's current maximum lifetime interest rate requirement. As a result of the
Company's  effort,  the  average  maximum  lifetime  interest  rate  cap for the
Company's  portfolio  has  increased to 11.24% at June 30, 1996,  as compared to
10.71% at December 31, 1995.

For the quarter ended June 30, 1996, the Company's mortgage securities paid down
at an approximate  average annualized  constant prepayment rate of 31%, slightly
below the  average  rate  during  the first  quarter  of 1996,  but still  above
long-term expectations.  The Company believes that this was primarily due to the
lag between the decline in short-term and long-term interest rates and the delay
to the next  repricing  date of the Company's ARM  securities  which resulted in
higher  mortgage  rates  for  ARM  borrowers  relative  to  fixed-rate  mortgage
alternatives.  These conditions  generally create  attractive  opportunities for
consumers to refinance  ARMs into  fixed-rate  mortgages.  Toward the end of the
first quarter,  long-term interest rates increased and short-term interest rates
remained  substantially  the same.  The Company  expects this change in interest
rates will slow down the prepayments of the Company's ARM securities. During May
and June the rate of prepayment on the  Company's ARM  securities  portfolio did
begin to show signs of slowing  down,  but because of the  apparent  pipeline of
loans already in the process of being re-financed at the time rates rose late in
the first quarter, the full impact of an expected slow down in the prepayment of
ARM loans was not  realized  by the Company in the second  quarter.  Preliminary
prepayment data for July suggests a further slowing of prepayments in the months
ahead.  The  constant  prepayment  rate  assumption  is  used to  calculate  the
estimated yield to maturity on the mortgage securities. In the event that actual
prepayment   experience  exceeds  the  assumption  due  to  sustained  increased
prepayment  activity,  the Company  would have to amortize its  premiums  over a
shorter time period,  resulting in a reduced  yield to maturity on the Company's
ARM securities.  Conversely,  if actual  prepayment  experience is less than the
assumed  constant  prepayment rate, the premium would be amortized over a longer
time period,  resulting in a higher yield to maturity.  The Company monitors its
prepayment  experience on a monthly basis in order to adjust the amortization of
the net premium as appropriate.

The fair value of the  Company's  portfolio  of ARM  securities  rose during the
quarter ended June 30, 1996. As of June 30, 1996, the Company's portfolio of ARM
securities  available-for-sale,  including the applicable Cap Agreements,  had a
net  unrealized  loss of  $18,235,000.  At  December  31,  1995,  the  Company's
portfolio  of ARM  securities  available-for-sale  had  an  unrealized  loss  of
$20,332,000.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with the lifetime  interest rate caps of its ARM  securities  should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect  of the  lifetime  or  maximum  interest  rate  cap  limitation.  The Cap
Agreements  purchased by the Company will, in effect, allow the yield on the ARM
securities to continue to rise in a high interest rate  environment  just as the
Company's cost of borrowings would continue to rise, since the borrowings do not
have any interest  rate cap  limitation.  At June 30, 1996,  the Cap  Agreements
owned by the Company had a remaining  notional balance of $1.935 billion with an
average final maturity of 3.6 years, as compared to a remaining notional balance
of $1.461  billion with an average  final  maturity of 4.3 years at December 31,
1995. Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the three month or six month LIBOR  index  increases  above  certain
specified  levels  which  range from 7.50% to 12.50% and  average  approximately
9.65%. The fair market value of these Cap Agreements also tends to increase when
general market  interest rates increase and decrease when market  interest rates
decrease,  helping  to  partially  offset  changes  in the  market  value of the
Company's ARM securities.


<PAGE>

Results of Operations For the Three Months Ended June 30, 1996

For the quarter ended June 30, 1996,  the Company's net income was $6,169,000 or
$0.42 per share based on a weighted average of 14,844,227 shares  outstanding as
compared  to  $1,993,000  or $0.17  per share  based on a  weighted  average  of
11,873,557 shares  outstanding for the quarter ended June 30, 1995. Net interest
income is comprised of the interest income earned on mortgage  investments  less
interest  expense from  borrowings.  Net interest income for the quarter totaled
$7,225,000  as compared to $2,457,000  for the same period in 1995.  The Company
incurred   operating   expenses  of  $1,056,000  for  the  quarter,   consisting
principally  of the  base  management  fee of  $405,000,  a  performance  fee of
$508,000 and other  miscellaneous  expenses of $143,000 as compared to operating
expenses of $464,000 for the same period in 1995, consisting  principally of the
base management fees of $344,000 and other  miscellaneous  expenses of $120,000.
There was no performance based fee paid in the comparable period in 1995.

The primary  reason for the rise in the  Company's  net  interest  income in the
second  quarter of 1996 as compared to the same quarter in 1995 was the combined
effect of an increase in the yield on the Company's  portfolio of ARM securities
and a decrease in the Company's cost of funds.  Net interest income increased by
$4,768,000 in the second quarter of 1996 as compared to the same period of 1995.
Of this  increase,  $2,621,000  is the result of the lower rate on the Company's
cost of funds and  $732,000 is the result of the higher  yield on the  Company's
ARM  securities  portfolio  and other  interest  earning  assets  for a combined
favorable rate variance of $3,352,000. The increased average size of the Company
in the  second  quarter  of 1996 as  compared  to the same  period  in 1995 also
contributed to higher net interest income in the amount of $1,415,000.

As  presented  in the  table  below,  the  Company's  ARM  securities  portfolio
generated  a yield of 6.36%  during the second  quarter of 1996 as  compared  to
6.19% for the  second  quarter  of 1995.  This  increase  of 0.17% is  primarily
attributable  to the increase in the weighted  average  coupon on the  portfolio
that  rose to 7.28% as of June 30,  1996  from  6.77% as of June 30,  1995.  The
benefit to net interest income from this 0.51% increase in the weighted  average
coupon was partially  offset by the  acceleration of the amortization of the net
premium paid for the ARM  securities as a result of the increased  prepayment of
ARM  securities  experienced by the Company during the second quarter of 1996 as
compared to the same period in 1995.

The Company's  cost of funds during the quarter ended June 30, 1996 decreased to
5.60% from 6.24% for the same  quarter of 1995,  primarily  as a result of lower
short-term interest rates available to the Company for financing  purposes.  The
combined  effect of the higher yield on the Company's ARM  securities  portfolio
and the lower cost of funds  increased the Company's net spread to 0.75% for the
second quarter of 1996 from a negative 0.05% for the second quarter of 1995. The
Company's  yield on net interest  earning  assets,  which includes the impact of
shareholders'  equity,  rose to 1.29% for the second  quarter of 1996 from 0.54%
for the second quarter of 1995.

The increase in the  Company's  operating  expenses is  primarily  the result of
achieving  sufficient  earnings  for  the  Company's  shareholders  such  that a
performance  based fee was earned by the Manager.  During the second  quarter of
1995, the Manager did not earn a performance based fee. In order for the Manager
to earn a performance fee, the rate of return to the shareholders, as defined in
the  Management  Agreement,  must exceed the average  ten-year US Treasury  rate
during the  quarter  plus 1%.  During the second  quarter of 1996,  the  Manager
earned a performance  fee of $508,000.  During the three month period ended June
30, 1996,  after paying this performance fee, the Company's return on equity was
11.22%.

The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the quarter ended June 30, 1996 and June 30, 1995:

 
<PAGE>


                      AVERAGE BALANCE AND RATE TABLE
                          (Amounts in thousands)
 
                               For the Quarter Ended    For the Quarter Ended
                                   June 30, 1996             June 30, 1995   
                               -----------------------  ----------------------
                                   Average   Effective     Average   Effective
                                   Balance      Rate       Balance      Rate   
Interest Earning Assets:         ----------  ---------   ----------  --------- 
Adjustable-rate mortgage
securities                       $2,232,603     6.36%    $1,799,815     6.19 %
Cash and cash equivalents            15,612     4.83%         9,849     5.76
                                 ----------    ------    ----------    -------
                                  2,248,215     6.35      1,809,664     6.19
                                 ----------    ------    ----------    -------
Interest Bearing Liabilities:
Borrowings                        2,034,159     5.60      1,638,529     6.24
                                 ----------    ------    ----------    -------
Net Interest Earning Assets
and Spread                       $  214,056     0.75%    $  171,135    (0.05)%
                                 ==========    ======    ==========    =======
Yield on Net Interest Earning Assets (1)        1.29%                   0.54%
                                               ======                  =======

   (1)   Yield on Net  Interest  Earning  Assets is computed by dividing  
         annualized net interest income by the average daily balance of interest
         earning assets.

Results of Operations For the Six Months Ended June 30, 1996

For the six month  period  ended June 30,  1996,  the  Company's  net income was
$11,300,000 or $0.83 per share based on a weighted average of 13,589,537  shares
outstanding  as  compared to  $2,036,000  or $0.17 per share based on a weighted
average of 11,827,398 shares outstanding for the six month period ended June 30,
1995. Net interest  income for the first six months of 1996 totaled  $13,415,000
as compared to  $3,616,000  for the same  period in 1995.  The Company  incurred
operating expenses of $2,128,000 for the period,  consisting  principally of the
base  management  fee of $764,000,  a performance  fee of  $1,096,000  and other
miscellaneous expenses of $268,000 as compared to operating expenses of $921,000
for the same period in 1995, consisting  principally of the base management fees
of  $689,000  and  other  miscellaneous  expenses  of  $232,000.  There  was  no
performance based fee paid in the comparable period in 1995.

As  discussed  above,  the  primary  reason  for the rise in the  Company's  net
interest income in the first half of 1996 as compared to the same period in 1995
was the combined  effect of an increase in the yield on the Company's  portfolio
of ARM securities  and a decrease in the Company's  cost of funds.  Net interest
income increased by $9,800,000 in the first half of 1996 as compared to the same
period of 1995. Of this increase,  $4,786,000 is the result of the lower rate on
the Company's  cost of funds and $3,036,000 is the result of the higher yield on
the Company's ARM securities  portfolio and other interest  earning assets for a
combined  favorable rate variance of $7,822,000.  The increased  average size of
the  Company in the first half of 1996 as  compared  to the same  period in 1995
also contributed to higher net interest income in the amount of $1,978,000.

As  presented  in the  table  below,  the  Company's  ARM  securities  portfolio
generated  a yield of 6.41%  during the first half of 1996 as  compared to 6.06%
for the first half of 1995. This increase of 0.35% is primarily  attributable to
the  increase in the  weighted  average  coupon on the  portfolio  as  discussed
earlier.  Again,  the benefit to net interest income from this 0.51% increase in
the weighted  average  coupon was partially  offset by the  acceleration  of the
amortization  of the net premium paid for the ARM  securities as a result of the
increased  prepayment of ARM  securities  experienced  by the Company during the
first half of 1996 as compared to the same period in 1995.

The  Company's  cost of funds  during the six month  period  ended June 30, 1996
decreased to 5.66% from 6.26% for the same period of 1995, primarily as a result
of lower  short-term  interest  rates  available  to the Company  for  financing
purposes.  The  combined  effect  of  the  higher  yield  on the  Company's  ARM
securities  portfolio  and the lower cost of funds  increased  the Company's net
spread to 0.74% for the first half of 1996 from a  negative  0.20% for the first
half of 1995. The Company's yield on net interest earning assets, which includes
the  impact of  shareholders'  equity,  rose to 1.26% for the first half of 1996
from 0.41% for the same period of 1995.

<PAGE>

The increase in the  Company's  operating  expenses is  primarily  the result of
achieving  sufficient  earnings  for  the  Company's  shareholders  such  that a
performance based fee was earned by the Manager.  During the first half of 1995,
the Manager  did not earn a  performance  based fee as a result of the  earnings
level of the Company.  In order for the Manager to earn a  performance  fee, the
rate of return to the shareholders, as defined in the Management Agreement, must
exceed the average  ten-year US Treasury rate during the quarter plus 1%. During
the first half of 1996,  the Manager  earned a  performance  fee of  $1,096,000.
During the six month period ended June 30, 1996,  after paying this  performance
fee, the Company's return on equity was 11.16%.

The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the six month periods ended June 30, 1996 and June 30, 1995:

                      AVERAGE BALANCE AND RATE TABLE
                          (Amounts in thousands)

                                  For the Six Month        For the Six Month
                                    Period Ended             Period Ended
                                    June 30, 1996            June 30, 1995   
                               -----------------------  ----------------------
                                   Average   Effective     Average   Effective
                                   Balance      Rate       Balance      Rate   
Interest Earning Assets:         ----------  ---------   ----------  ---------
  Adjustable-rate mortgage 
     securities                  $2,122,639     6.41%    $1,764,675     6.06 %
  Cash and cash equivalents          14,349     5.19         14,393     5.83
                                 ----------    ------    ----------    -------
                                  2,136,988     6.40      1,779,068     6.06
                                 ----------    ------    ----------    -------
Interest Bearing Liabilities:
  Borrowings                      1,942,333     5.66      1,606,985     6.26
                                 ----------    ------    ----------    -------
Net Interest Earning Assets
 and Spread                      $  194,655     0.74%    $  172,083    (0.20)%
                                 ==========    ======    ==========    =======
Yield on Net Interest Earning Assets (1)        1.26%                   0.41 %
                                               ======                  =======

(1) Yield on Net Interest Earning Assets is computed by dividing  annualized net
    interest income by the average daily balance of interest earning assets.




Liquidity and Capital Resources

The Company's  primary  source of funds for the quarters ended June 30, 1996 and
1995 consisted of reverse  repurchase  agreements,  which totaled $2.190 billion
and  $1.654  billion  at  the  respective  quarter  ends.  The  Company's  other
significant  sources  of funds for the  quarters  ended  June 30,  1996 and 1995
consisted of payments of principal and interest  from the ARM  securities in the
amounts of $186.4 million and $67.8 million,  respectively.  In the future,  the
Company expects its primary sources of funds will continue to consist of monthly
payments of  principal  and  interest  on its ARM  securities  portfolio  and of
borrowed  funds under  reverse  repurchase  agreement  transactions  with one to
twelve month  maturities and possibly from asset sales as needed.  The Company's
liquid  assets  generally  consist of unpledged  ARM  securities,  cash and cash
equivalents.

The borrowings incurred at June 30, 1996 had a weighted average interest cost of
5.59%, a weighted average original term to maturity of 8.6 months and a weighted
average  remaining term to maturity of 6.1 months.  As of June 30, 1996,  $1.159
billion of the Company's  borrowings were  variable-rate term reverse repurchase
agreements  with original  maturities that range from three months to two years.
The interest  rates of these term reverse  repurchase  agreements are indexed to
either the one, three or six-month LIBOR rate and reprice accordingly.


<PAGE>

The Company has borrowing  arrangements  with twenty-four  different  investment
banking firms and commercial banks and at June 30, 1996 had borrowed funds under
reverse repurchase  agreements with fourteen of these firms. Because the Company
borrows  funds  based on the fair  value of its ARM  securities,  the  Company's
borrowing  ability  could  be  adversely  affected  as  a  result  of  either  a
significant  increase in short-term  interest  rates or a credit  downgrade of a
mortgage pool or a mortgage pool insurer,  either of which would reduce the fair
value of the  Company's  ARM  securities.  If such a decrease  in fair value was
significant  enough,  it could  require  the  Company to sell assets in order to
maintain  liquidity.  For the  quarter  ended June 30,  1996,  the  Company  had
adequate cash flow,  liquid assets and unpledged  collateral  with which to meet
its margin requirements.  Further, the Company has always maintained  sufficient
liquidity to meet its cash  requirements  from its primary  sources of funds and
believes it will be able to do so in the future.

The Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically  reinvest their dividends in additional shares of common stock and
to purchase  additional  shares at a 3% discount to the current  market price of
the common stock,  as defined in the Plan. As a result of  participation  in the
Plan, the Company issued 43,997 new shares of common stock and received proceeds
of $626,000 of new equity capital during the second quarter of 1996.  During the
six-month  period ended June 30, 1996,  the Company  issued  75,851 shares under
this plan and received net proceeds of $1,105,000.

On October 9, 1995, the Company  entered into a one-year Sales Agency  Agreement
with PaineWebber  Incorporated.  In accordance with the Sales Agency  Agreement,
PaineWebber  agreed to sell up to 1,174,969  additional  shares of the Company's
common stock, representing 10% of aggregate market value of the Company's common
stock held by  non-affiliates.  During the  quarter  ended  June 30,  1996,  the
Company did not sell any shares  under this Sales Agency  Agreement.  During the
six-month period ended June 30, 1996, the Company sold 207,500 shares under this
Sales Agency Agreement and received net proceeds of $3,118,000.

On April 23, 1996, the Company  completed a public offering of 3,000,000  shares
of its common  stock.  The Company  received  net proceeds of  $42,358,000.  The
offering  was managed by  PaineWebber  Incorporated,  EVEREN  Securities,  Inc.,
Principal Financial  Securities,  Inc., Stifel Nicolaus & Company,  Incorporated
and Thornburg Securities  Corporation (the  "Underwriters").  On April 29, 1996,
the  Underwriters  notified the Company of their intent to exercise their option
to purchase an additional 450,000 shares to cover over-allotments which provided
the Company with additional net proceeds of $6,321,000.

Effects of Interest Rate Changes

Changes in interest rates impact the Company's  earnings in various ways.  While
the Company only invests in ARM securities, rising short-term interest rates may
temporarily  negatively  affect the Company's  earnings and  conversely  falling
short-term interest rates may temporarily increase the Company's earnings.  This
impact  can  occur  for  several  reasons  and  may be  mitigated  by  portfolio
prepayment  activity as discussed below.  First,  the Company's  borrowings will
react to changes in interest  rates  sooner than the  Company's  ARM  securities
because the weighted average next re-pricing date of the borrowings is usually a
shorter time period.  Second,  interest rates on ARM loans are generally limited
to an increase of either 1% or 2% per adjustment period (commonly referred to as
the periodic cap) and the Company's  borrowings do not have similar limitations.
Third, the Company's ARM securities lag changes in the indices due to the notice
period  provided  to ARM  borrowers  when the  interest  rate on  their  loan is
scheduled to change.  The periodic cap only effects the Company's  earnings when
interest rates move by more than 1% per six-month period or 2% per year.

The rate of  prepayment  on the Company's  mortgage  securities  may decrease if
interest  rates rise, or if the  difference  between  long-term  and  short-term
interest  rates  increases.  Decreased  prepayments  would  cause the Company to
amortize the premiums paid for its mortgage  securities  slower than  otherwise,
resulting in an increased yield on its mortgage securities. Therefore, in rising
interest rate environments  where prepayments are declining,  not only would the
interest rate on the ARM securities  portfolio increase to re-establish a spread
over the  higher  interest  rates,  but the yield  would also rise due to slower
prepayments.  The combined  effect could  significantly  mitigate other negative
effects that rising short-term interest rates might have on earnings.

Conversely,  the rate of  prepayment on the Company's  mortgage  securities  may
increase if interest rates decline,  or if the difference  between long-term and
short-term  interest rates  diminishes.  Increased  prepayments  would cause the
Company to amortize the premiums  paid for its mortgage  securities  faster than
otherwise,   resulting  in  a  reduced   yield  on  its   mortgage   securities.
Additionally,  to the extent  proceeds of prepayments  cannot be reinvested at a
rate of interest at least equal to the rate  previously  earned on such mortgage
securities, the Company's earnings may be adversely affected.


<PAGE>

Lastly, because the Company only invests in adjustable-rate  mortgage assets and
approximately  10% of such  mortgage  assets are  purchased  with  shareholders'
equity, the Company's earnings over time will tend to increase following periods
when short-term  interest rates have risen and decrease  following  periods when
short-term interest rates have declined. This is because the financed portion of
the Company's  portfolio of ARM securities will, over time,  reprice to a spread
over the Company's cost of money while the portion of the Company's portfolio of
ARM securities that are purchased with shareholder's  equity will generally have
a higher  yield in a higher  interest  rate  environment  and a lower yield in a
lower interest rate environment.

Other Matters

The Company  calculates its Qualified REIT Assets, as defined in the Code, to be
99.5% of its total assets,  as compared to the federal tax  requirement  that at
least 75% of its total  assets must be Qualified  REIT Assets.  The Company also
calculates that 99.5% of its 1996 revenue qualifies for the 75% source of income
test and 100% of its 1996  revenue  qualifies  for the 95% source of income test
under the REIT rules.  Furthermore,  the Company's  revenues in 1996, subject to
the 30%  income  limitation  under  the REIT  rules  amounted  to 0.09% of total
revenue.  The Company also met all REIT requirements  regarding the ownership of
its common stock and the distributions of its net income.  Therefore, as of June
30, 1996, the Company  believed that it was in full compliance with the REIT tax
rules and that it would  continue to qualify as a REIT under the  provisions  of
the Code.

The  Company at all times  intends to conduct  its  business so as not to become
regulated as an  investment  company  under the  Investment  Company Act. If the
Company were to become  regulated as an investment  company,  then the Company's
use of leverage  would be  substantially  reduced.  The  Investment  Company 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 Interests").  Under current interpretation of the staff of the SEC,
in order to qualify for this  exemption,  the Company must maintain at least 55%
of its assets  directly in Qualifying  Interests.  In addition,  unless  certain
Mortgage  Securities  represent all the  certificates  issued with respect to an
underlying  pool of  mortgages,  such  Mortgage  Securities  may be  treated  as
securities  separate from the  underlying  Mortgage  Loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement.  As of June
30, 1996, the Company calculates that it is in compliance with this requirement.

PART II.    OTHER INFORMATION

Item 1. Legal Proceedings
         At June 30,  1996,  there were no pending  legal  proceedings  to which
         the Company was a party or of which any of its property  was subject.

Item 2.  Changes in Securities
         Not applicable

Item 3.  Defaults Upon Senior Securities
         Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders
         (a)   The Annual  Meeting of  Shareholders  of the  Company was held on
               May 2,1996.

         (c)   The following matters were voted on at the Annual Meeting:
               (1)   Election of Directors
                                                          Votes         
                                                 -----------------------  
                            Nominee                 For        Withheld 
                        --------------           ----------   ----------
                        James H. Lorie           11,411,651       83,272

Item 5.  Other Information
         None

Item 6.  Exhibits and Reports on Form 8-K:

         (a)   Exhibits
               See "Exhibit Index."
  
         (b)   Reports on Form 8-K
               None

<PAGE>



                                     SIGNATURES



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized,




                                    THORNBURG MORTGAGE ASSET CORPORATION



Dated:  July 24, 1996               By:/s/ H. Garrett Thornburg, Jr.          
                                       --------------------------------------
                                       H. Garrett Thornburg, Jr.,
                                       Chairman of the Board of Directors and
                                       Chief Executive Officer
                                       (authorized officer of registrant)




Dated:  July 24, 1996               By:/s/ Richard P. Story                    
                                       -------------------------------------   
                                       Richard P. Story,
                                       Chief Financial Officer and Treasurer
                                       (principal accounting officer)



<PAGE>



                                   Exhibit Index







                                                                  Sequentially
                                                                    Numbered
   Exhibit Number                        Exhibit Description           Page   
   --------------   -----------------------------------------      -----------
         10         Form of 1992 Stock Option Plan as amended           
                      May 2, 1996                                       23