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:     MARCH 31, 1997

                                      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)                     16,435,079 as of May 5, 1997

<PAGE>
                      THORNBURG MORTGAGE ASSET CORPORATION
                                    FORM 10-Q


                                      INDEX




                                                                        Page
PART I.     FINANCIAL INFORMATION                                      ------

   Item 1. Financial Statements

            Balance Sheets at March 31, 1997 and December 31, 1996...    3

            Statements of Operations for the three months ended
            March 31, 1997 and March 31, 1996.........................   4

            Statement of Shareholders' Equity for the three months
            ended March 31, 1997......................................   5

            Statements of Cash Flows for the three months ended
            March 31, 1997 and March 31, 1996.........................   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.........................................  23

   Item 2.  Changes in Securities ....................................  23

   Item 3.  Defaults Upon Senior Securities ..........................  23

   Item 4.  Submission of Matters to a Vote of Security Holders.......  23

   Item 5.  Other Information.........................................  23

   Item 6.  Exhibits and Reports on Form 8-K..........................  23


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



<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

THORNBURG MORTGAGE ASSET CORPORATION
<TABLE>

BALANCE SHEETS
(In thousands, except share data)
<CAPTION>

                                           March 31, 1997    December 31, 1996
                                          ----------------   -----------------
<S>                                      <C>                 <C>
ASSETS

   ARM securities (Notes 2 and 3)         $      3,217,621    $      2,727,875
   Cash and cash equivalents                        25,996               3,693
   Accrued interest receivable                      29,716              23,563
   Prepaid expenses and other                          512                 227
                                             -------------       -------------
                                          $      3,273,845    $      2,755,358
                                             =============       =============


LIABILITIES

   Reverse repurchase agreements (Note 3) $     2,936,179     $      2,459,132
   Other borrowings (Note 3)                       13,394               14,187
   Payable for securities purchased                  -                  32,683
   Accrued interest payable                        21,531               18,747
   Dividends payable (Note 6)                       9,076                7,299
   Accrued expenses and other                       1,572                1,112
                                            -------------        -------------
                                                2,981,752            2,533,160


SHAREHOLDERS' EQUITY (Note 6)

   Preferred stock: par value $.01 per
     share; 2,760,000 shares authorized;
     9.68% Cumulative Convertible Series A,
     2,760,000 and none issued and
     outstanding, respectively                     65,809                -
   Common stock: par value $.01 per share;
     47,240,000 shares authorized,
     16,321,578 and 16,219,241 shares issued
     and outstanding, respectively                    163                  162
   Additional paid-in-capital                     235,205              233,177
   Available-for-sale securities:
     Unrealized gain (loss) (Note 2)              (13,564)             (15,807)
     Realized deferred hedging gain                 4,137                4,541
   Retained  earnings                                 343                  125
                                            -------------        -------------
                                                  292,093              222,198
                                            -------------        -------------

                                           $    3,273,845      $     2,755,358
                                            =============        =============
</TABLE>




See Notes to Financial Statements.


<PAGE>


THORNBURG MORTGAGE ASSET CORPORATION
<TABLE>

STATEMENTS OF OPERATIONS
(In thousands, except share data)

<CAPTION>

                                                  Three  Months  Ended
                                                        March 31,
                                                ------------------------
                                                    1997         1996
                                                -----------   ----------
<S>                                             <C>           <C>       
Interest income from ARM securities and cash    $    49,000   $   32,702
Interest expense on borrowed funds                  (37,668)     (26,512)
                                                  ---------    ---------
   Net interest income                               11,332        6,190
                                                  ---------    ---------

Realized gain (loss) on:
  Sale of ARM securities (Note 2)                         4           13
  Provision for credit losses on
    ARM securities (Note 2)                            (190)          -
Management fee (Note 7)                                (811)        (359)
Performance fee (Note 7)                               (857)        (588)
Other operating expenses                               (184)        (125)
                                                  ----------   ----------

   NET INCOME                                   $     9,294   $    5,131
                                                  =========    =========


Net income                                      $     9,294   $    5,131
Dividend on preferred stock                          (1,242)          -
                                                  ---------    --------

Net income available to common shareholders     $     8,052   $    5,131
                                                  =========    =========

Net income per common share                     $      0.49   $     0.42
                                                  =========    =========

Average number of common shares outstanding      16,311,344   12,334,847
                                                 ==========   ==========
</TABLE>





See Notes to Financial Statements.


<PAGE>


THORNBURG MORTGAGE ASSET CORPORATION
<TABLE>

STATEMENTS OF SHAREHOLDERS' EQUITY

Three Months Ended March 31, 1997
(In thousands, except share data)


<CAPTION>
                                                           Available-for-Sale Securities
                                                           -----------------------------
                                               Additional                    Realized
                          Preferred  Common     Paid-in     Unrealized     Deferred Gain  Retained
                            Stock     Stock     Capital     Gain (Loss)     From Hedging  Earnings    Total
Balance,                  ---------  --------  ----------  -------------  --------------  --------  ---------
<S>                       <C>       <C>       <C>        <C>             <C>             <C>       <C>      
  December 31, 1996       $    -     $    162  $  233,177  $    (15,807)  $        4,541  $    125  $ 222,198

Series A preferred stock
  issued, net of issuance
  cost  (Note 5)             65,809       -          -              -                -          -      65,809

Issuance of common
  stock  (Note 5)              -           1        2,028           -                -          -       2,029

Available-for-Sale Sec:
  Fair value adjustment,
    net of amortization        -           -         -           2,243               -          -       2,243

  Deferred gain on sale
    of hedges, net of
    amortization               -           -         -             -                (404)       -        (404)

Net income                     -           -         -             -                 -       9,294      9,294

Dividends declared on
   preferred stock - 
   $0.45 per share             -           -         -             -                 -      (1,242)    (1,242)

Dividends declared on
   common stock - 
   $0.48 per share             -           -         -             -                 -      (7,834)    (7,834)

Balance,                   -------    -------   ---------   -----------    ------------    -------   --------
  March 31, 1997          $ 65,809   $    163  $  235,205  $    (13,564)  $        4,137  $    343  $ 292,093
                           =======    =======   =========   ===========    =============   =======   ========
</TABLE>



See Notes to Financial Statements.


<PAGE>




THORNBURG MORTGAGE ASSET CORPORATION
<TABLE>

STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
                                                   Three Months Ended
                                                        March 31,
                                                ------------------------
                                                    1997         1996
                                                -----------  -----------
<S>                                             <C>          <C>
Operating Activities:
  Net Income                                    $     9,294   $    5,131
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Amortization                                      4,359        3,293
    Net (gain) loss from investing activities           186          (13)
    Change in assets and liabilities:
      Accrued interest receivable                    (6,152)       1,606
      Prepaid expenses and other                       (285)        (117)
      Accrued interest payable                        2,784       (1,084)
      Accrued expenses and other                        460          291
                                                  ---------    ---------
      Net cash provided by operating activities      10,646        9,107
                                                  ---------    ---------


Investing Activities:
  Available-for-sale securities:
   Purchase of ARM securities                      (670,565)    (205,970)
   Proceeds on sales of ARM securities                  633        6,574
   Principal payments on ARM securities             127,054      106,813
  Held-to-maturity securities:
   Principal payments on ARM securities              18,140       30,842
  Purchase of interest rate cap agreements             (398)        (234)
                                                  ----------   ----------
      Net cash provided by (used in)
      investing activities                         (525,136)     (61,975)
                                                  ----------   ----------

Financing Activities:
  Net borrowings from reverse
     repurchase agreements                          477,047       46,430
  Net borrowings from (repayments of)
     other borrowings                                  (793)       7,804
  Proceeds from preferred stock issued               65,809         -
  Proceeds from common stock issued                   2,029        3,618
  Dividends paid                                     (7,299)      (4,632)
                                                  ----------   ----------
   Net cash provided by (used in)
     financing activities                           536,793       53,220
                                                 -----------   ----------


Net increase (decrease) in cash and
     cash equivalents                                22,303         352

Cash and cash equivalents at beginning of period      3,693        3,660
                                                  ---------    ---------
Cash and cash equivalents at end of period      $    25,996   $    4,012
                                                  =========    =========
</TABLE>

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



See Notes to Financial Statements



<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
            adjustable-rate  mortgage ("ARM") securities are  available-for-sale
            in order to be prepared to respond to potential future opportunities
            in the  market,  to sell ARM  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 ARM securities on a quarterly
            basis. All ARM 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 ARM 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 ARM
            securities are amortized into interest  income over the lives of the
            securities using the effective yield method adjusted for the effects
            of estimated prepayments.

            ARM  securities  transactions  are  recorded  on the  date  the  ARM
            securities  are  purchased  or  sold.  Purchases  of new  issue  ARM
            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 ARM securities
            transactions are determined on the specific identification basis.

         CREDIT RISK

            The  Company  has  limited  its  exposure  to  credit  losses on its
            portfolio of ARM securities by only  purchasing ARM securities  that
            have some form of credit enhancement and are either guaranteed by an
            agency of the federal  government or have an investment grade rating
            at the time of purchase,  or the equivalent,  by at least one of two
            nationally recognized rating agencies,  Moody's or Standard & Poor's
            (the  "Rating  Agencies").  The Company  also limits its exposure to
            credit  losses  by  limiting  its  investment  in  investment  grade
            securities  that are rated A, or equivalent,  or BBB, or equivalent,
            ("Other  Investments")  to no more  than  30% of the  portfolio  and
            currently  has  less  than 5% of its  portfolio  invested  in  Other
            Investments.  Other Investments generate a higher yield, believed to
            be commensurate with the additional credit risk of such investments.
            The Company monitors the  delinquencies and losses on the underlying
            mortgages of its ARM  securities  and, if the credit  performance of
            the underlying  mortgage  loans is not as good as expected,  makes a
            provision for possible  credit losses at a level deemed  appropriate
            by  management  to provide for known losses as well as  unidentified
            potential  future  losses  in  its  ARM  securities  portfolio.  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  for the  decline in fair value  which is other
            than  temporary  and the amount of such  write-down is recorded as a
            realized  loss,  thereby  reducing  earnings.  Provisions for credit
            losses do not reduce  taxable income and therefore do not affect 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 affect the dividends paid to shareholders for that tax year.



<PAGE>


         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 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  affect  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.



<PAGE>


NOTE 2.  ADJUSTABLE-RATE MORTGAGE SECURITIES AND INTEREST RATE CAP AGREEMENTS

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

         The following table pertains to the Company's ARM securities classified
         as available-for-sale as of March 31, 1997 and December 31, 1996, which
         are carried at their fair value (dollars in thousands):

                                              Available-for-Sale
                                       ---------------------------------
                                       March 31, 1997  December 31, 1996
                                       --------------  -----------------
               Amortized cost basis    $    2,789,424  $       2,282,991
               Allowance for losses            (1,162)              (990)
                                         -------------      ------------ 
                 Amortized cost, net        2,788,262          2,282,001
                                         ------------       ------------
               Gross unrealized gains           9,023              7,686
               Gross unrealized losses        (21,571)           (22,408)
                                         -------------      ------------ 
                 Fair value            $    2,775,714  $       2,267,279
                                         ============       ============

         During the quarter ended March 31, 1997, the Company realized $4,000 in
         gains on the sale of $629,000 of ARM securities  which were  classified
         as available-for-sale.

         As of March 31, 1997, the Company had reduced the cost basis of its ARM
         securities due to potential  future credit losses (other than temporary
         declines  in fair  value) in the  amount  of  $1,162,000,  including  a
         provision for credit losses of $190,000  during the quarter ended March
         31, 1997. At this time,  the Company is providing for potential  future
         credit losses on three securities that have an aggregate carrying value
         of $17.9 million, which represent less than 0.6% of the Company's total
         portfolio  of  ARM  securities.  All  three  of  these  securities  are
         performing  and have varying  degrees of remaining  credit support that
         mitigates the Company's exposure to potential future credit losses.

         The following table pertains to the Company's ARM securities classified
         as  held-to-maturity  as of March 31, 1997 and December 31, 1996, which
         are carried at their amortized cost basis (dollars in thousands):

                                               Held-to-Maturity
                                       -------------------------------------
                                        March 31, 1997    December 31, 1996
                                       ----------------  -------------------
               Amortized cost basis    $      441,907      $         460,596
               Gross unrealized gains           5,617                  4,169
               Gross unrealized losses         (3,722)                (4,306)
                                         ------------           ------------
                 Fair value            $      443,802      $         460,459
                                         ============           ============

         As of March 31, 1997,  the Company had $19.5 million of  commitments to
         purchase 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, was 6.65% as of March 31, 1997 and 6.64% as of December 31,
         1996.

         As of March 31, 1997 and December 31, 1996,  the Company had  purchased
         Cap Agreements  with a remaining  notional amount of $2.538 billion and
         $2.266 billion, 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 13.00%
         and  average   approximately   10.17%.  The  Company's  ARM  securities
         portfolio  had an average  lifetime  interest  rate cap of 11.60% as of
         March  31,  1997.  The  initial  aggregate  notional  amount of the Cap
         Agreements will decline to approximately $1.760 billion 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  reduces  the  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 to achieve  competitive
         pricing,  the  Company  has  entered  into  Cap  Agreements  with  five
         different  counterparties,  three of which are rated AAA,  two of which
         are rated AA.

NOTE 3.  REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

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

         As of March 31, 1997,  the Company had  outstanding  $2.936  billion of
         reverse repurchase agreements with a weighted average borrowing rate of
         5.61% and a weighted average  remaining  maturity of 3.6 months.  As of
         March  31,  1997,  $1.261  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.  The
         reverse repurchase  agreements at March 31, 1997 were collateralized by
         ARM  securities  with a  carrying  value of $3.086  billion,  including
         accrued interest.

         At March 31, 1997, the reverse repurchase  agreements had the following
         remaining maturities (dollars in thousands):

                             Within 30 days     $  1,121,132
                             30 to 90 days           818,483
                             90 days to one year     824,604
                             Over one year           171,960
                                                 -----------
                                                $  2,936,179
                                                 ===========

         As of March 31, 1997,  the Company had entered into eight interest rate
         swap agreements having an aggregate  notional balance of $1.040 billion
         and a weighted average remaining term of 6.0 months. In accordance with
         these agreements,  the Company will pay a fixed rate of interest during
         the term of these  agreements and receive a payment that varies monthly
         with the  one-month  LIBOR  rate.  As a result of  entering  into these
         agreements,  the Company has reduced the interest rate  variability  of
         its cost to finance its ARM securities by increasing the average period
         until the next repricing of its borrowings from 44 days to 103 days.

         The  Company  has  a  line  of  credit  agreement  which  provides  for
         short-term  borrowings  of up to  $25  million  collateralized  by  the
         Company's  principal  and interest  receivables.  As of March 31, 1997,
         there was no balance outstanding under this agreement.

         As of March 31,  1997,  the  Company  had  financed  a  portion  of its
         portfolio of interest rate cap  agreements  with $13.4 million 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 2.8
         years. The other borrowings  financing cap agreements at March 31, 1997
         were  collateralized  by ARM securities  with a carrying value of $17.0
         million,  including accrued interest. The aggregate maturities of these
         other borrowings are as follows (dollars in thousands):

                             1997         $      3,376
                             1998                4,509
                             1999                4,877
                             2000                  632
                                            ----------
                                          $     13,394
                                            ==========

         During  the  quarter  ended  March 31,  1997,  the total  cash paid for
         interest was $36.9 million.



<PAGE>


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 March 31, 1997 and
         December 31, 1996. 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 (dollars in thousands):
<TABLE>
<CAPTION>

                                         March 31, 1997           December 31, 1996
                                    ------------------------  ------------------------
                                     Carrying       Fair       Carrying       Fair
                                      Amount        Value       Amount        Value
                                    -----------  -----------  -----------  -----------
<S>                                 <C>          <C>          <C>          <C> 
            Assets:
              ARM securities        $ 3,211,632  $ 3,216,165  $ 2,689,727  $ 2,692,521
              Cap agreements              5,989        3,351        5,465        2,535

            Liabilities:
              Other borrowings           13,394       13,637       14,187       14,744
              Swap agreements                57         (571)          (7)         440
</TABLE>

         The above carrying amounts for assets are combined in the balance sheet
         under the  caption  ARM  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 amortized cost.

         The fair values of the Company's ARM  securities and cap agreements are
         based on market prices  provided by 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 AND PREFERRED STOCK


         In January 1997, the Company issued  2,760,000 shares of Series A 9.68%
         Cumulative  Convertible  Preferred  Stock at a price  of $25 per  share
         pursuant to its Registration  Statement on Form S-3 declared  effective
         in  December  1996.  Net  proceeds  from this  issuance  totaled  $65.8
         million.  Upon  completion  of this  issuance of preferred  stock,  the
         Company had $173 million of its  securities  registered for future sale
         under this registration statement.

         During the quarter  ended March 31, 1997,  the Company  issued  102,337
         shares  of  common  stock  under its  dividend  reinvestment  and stock
         purchase plan and received net proceeds of $2.0 million.

         In October 1995, the Company entered into a Sales Agency Agreement with
         PaineWebber   Incorporated.   In  accordance   with  the  Sales  Agency
         Agreement,  PaineWebber agreed to sell, at the direction and discretion
         of the Company,  up to  1,174,969  additional  shares of the  Company's
         common  stock.  During 1997,  the Company has not sold any shares under
         this Sales Agency Agreement.

         On March 14, 1997,  the Company  declared a first  quarter  dividend of
         $0.48 per  common  share  which  was paid on April  10,  1997 to common
         shareholders of record as of March 31, 1997. Additionally,  the Company
         declared  a  dividend  of $0.45  per share to the  shareholders  of the
         Series A 9.68% Cumulative  Convertible  Preferred Stock for the partial
         period of January 24, 1997 (date of  issuance)  through  March 31, 1997
         which was also  paid on April 10,  1997 to  preferred  shareholders  of
         record as of March 31,  1997.  For  federal  income tax  purposes  such
         dividends  are ordinary  income to the  Company's  common and preferred
         shareholders.



<PAGE>


NOTE 6.  STOCK OPTION PLAN

         The Company has a Stock  Option Plan and  Incentive  Plan (the  "Plan")
         which authorizes the granting of options to purchase an aggregate of up
         to 1,800,000 shares,  but not more than 5% of the outstanding shares of
         the Company's common stock. The Plan authorizes the Board of Directors,
         or a committee  of the Board of  Directors,  to grant  Incentive  Stock
         Options  ("ISOs") as defined under section 422 of the Internal  Revenue
         Code of 1986, as amended, options not so qualified ("NQSOs"),  Dividend
         Equivalent Rights ("DERs"),  Stock  Appreciation  Rights ("SARs"),  and
         Phantom  Stock  Rights  ("PSRs").  The  exercise  price for any options
         granted  under the 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.  Options become  exercisable six months after the date granted
         and will  expire  ten years  after  the date  granted,  except  options
         granted in connection with an offering of convertible  preferred stock,
         in  which  case  such  options  become  exercisable  if  and  when  the
         convertible preferred stock is converted into common stock.

         During the quarter  ended March 31, 1997,  there were  115,920  options
         granted to buy common shares at an exercise price of $20 in conjunction
         with  the  issuance  of  the  Series  A  9.68%  Cumulative  Convertible
         Preferred  Stock along with 28,980 DERs. In that these options and DERs
         were granted in conjunction with the issuance of convertible  preferred
         stock,  neither  the  options  nor  the  DERs  will  be  vested  by the
         recipients  until the convertible  preferred  shares are converted into
         common shares.  As of March 31, 1997,  the Company had 742,666  options
         outstanding at exercise  prices of $9.375 to $20 per share,  613,413 of
         which were  exercisable.  The weighted  average  exercise  price of the
         options  outstanding  is  $16.21  per  share.  There  were  no  options
         exercised during the first quarter of 1997.

NOTE 7.  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 management of the day-to-day
         operations  of the Company and provides all 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  shareholders'  equity,  adjusted for liabilities  that are not
         incurred to finance assets ("Average  Shareholders' Equity" or "Average
         Net Invested  Assets" as defined in the Agreement)  payable  monthly in
         arrears  as  follows:  1.1%  of  the  first  $300  million  of  Average
         Shareholders'  Equity, plus 0.8% of Average  Shareholders' Equity above
         $300 million.

         For the  quarters  ended March 31, 1997 and 1996,  the Company paid the
         Manager $811,000 and $359,000, respectively, in base management fees in
         accordance with the terms of the Agreement.

         The Manager is also entitled to earn performance based  compensation in
         an amount equal to 20% of the Company's  annualized net income,  before
         performance  based  compensation,  above an annualized Return on Equity
         equal to the ten year U.S.  Treasury  Rate plus 1%. For purposes of the
         performance fee  calculation,  equity is generally  defined as proceeds
         from issuance of common stock before  underwriter's  discount and other
         costs of issuance, plus retained earnings. For the quarters ended March
         31, 1997 and 1996, the Company paid the Manager  $857,000 and $588,000,
         respectively,  in performance based compensation in accordance with the
         terms of the Agreement.

         Thornburg Securities  Corporation,  an affiliate of the Manager, was an
         underwriter  in the  January  1997  public  offering  of the  Company's
         Preferred  Stock.  Thornburg  Securities  Corporation  was not the lead
         underwriter  and  did  not  participate  in  any  negotiations  of  the
         underwriters' compensation or the terms of either offering.



<PAGE>


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


This  Report on Form 10-Q  contains  forward-looking  statements  which are made
pursuant to the safe harbor  provisions  of the  Private  Securities  Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking  statements
involve risks and uncertainties including,  without limitation, risks related to
future  interest  rates,  prepayment  rates and the timing of new programs.  For
additional information regarding these and other risks, reference is made to the
Company's Prospectus Supplement dated January 20, 1997.

GENERAL

Thornburg Mortgage Asset Corporation (the "Company") is a specialized  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 ARM
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,  invests in ARM securities and seeks to generate
income based on the difference between the yield on its ARM securities portfolio
and the 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
or state 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  adjustable  and variable rate mortgage  securities  and short-term
investments. High Quality means:

   (1)securities  that are unrated but are guaranteed by the U.S.  Government
      or issued or guaranteed by an agency of the U.S. Government;
   (2)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"); 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,  as determined by the Manager (as defined below) and approved by
      the Company's Board of Directors.

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

   (1)adjustable  or  variable  rate  pass-through   certificates,   multi-class
      pass-through  certificates  or CMOs  backed  by  loans  on  single-family,
      multi-family,  commercial or other real estate-related  properties so long
      as 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;
   (2)ARM loans secured by first liens on single-family  residential properties,
      generally  underwritten  to "A" quality  standards,  and  acquired for the
      purpose of future securitization; or
   (3)a limited  amount,  currently  $20 million as  authorized  by the Board of
      Directors,  of less than  investment  grade classes of ARM securities that
      are  created  as  a  result  of  the  Company's   loan   acquisition   and
      securitization efforts.

Since inception,  the Company has generally  invested less than 15% of its total
assets in Other  Investment  assets.  The Company  believes  that, due to recent
changes in the  mortgage  industry and the current  real estate  environment,  a
strategy to selectively  increase its investment in Other Investment  assets can
provide  attractive  benefits to the Company such that the total return of these
investments  would be commensurate  with their higher risk and not significantly
affect  the  Company's  overall  high  quality  portfolio.   The  Company's  ARM
securities  portfolio is currently comprised of less than 5% of Other Investment
assets  and,  therefore,  the  Company  may  increase  its  investment  in Other
Investment assets,  specifically classes of multiclass pass-throughs,  which may
benefit from future credit rating upgrades as senior classes of these securities
pay off,  or have  the  potential  to  increase  in  value  as a  result  of the
appreciation  of underlying  real estate  values.  The Company may also begin to
acquire ARM loans for the purpose of future  securitization  into ARM securities
for the Company's investment  portfolio.  The Company believes that its strategy
to increase its  investment in Other  Investment  assets and to  securitize  ARM
loans that it acquires will provide the Company with higher yielding investments
and give the Company greater control over the types of ARM securities originated
and held in its investment portfolio. In pursuing this strategy the Company will
likely  have to accept a higher  degree of credit  risk than it has in the past.
However,  the Company  remains  committed to  maintaining a high level of credit
quality, consistent with its objectives of avoiding substantial credit risk, and
providing an attractive return on equity.

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").

FINANCIAL CONDITION

At March 31,  1997,  the Company  held total  assets of $3.274  billion,  $3.218
billion of which consisted of ARM securities,  as compared to $2.755 billion and
$2.728 billion, respectively, at December 31, 1996. Since commencing operations,
the Company has purchased only ARM  securities  which have been either backed by
agencies  of  the  U.S.  government  or  privately-issued   (generally  publicly
registered)  mortgage  securities,  most of which  are  rated AA or higher by at
least one of the Rating Agencies. At March 31, 1997, 95.2% 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  ARM
securities and cash and cash  equivalents.  All of the ARM securities  currently
owned  by  the  Company  are  in  the  form  of   adjustable-rate   pass-through
certificates.

The following  table  presents a schedule of ARM  securities  owned at March 31,
1997 and  December  31, 1996  classified  by High  Quality and Other  Investment
assets and further classified by type of issuer and by ratings categories.

<TABLE>
                   ARM SECURITIES BY ISSUER AND CREDIT RATING
                             (amounts in thousands)

<CAPTION>
                                      March 31, 1997         December 31, 1996
                                   ----------------------  ----------------------
                                    Carrying    Portfolio   Carrying    Portfolio
                                      Value        Mix        Value        Mix
                                   ----------  ----------  ----------  ----------
<S>                                <C>         <C>         <C>         <C>
     HIGH QUALITY:
       FHLMC/FNMA                  $1,956,986      60.8%    $1,474,842     54.1%
       Privately Issued:
         AAA/Aaa Rating               262,962       8.2        260,031      9.5
         AA/Aa Rating                 847,394      26.3        862,727     31.6
                                    ---------   --------     ---------  --------
           Total Privately Issued   1,110,356      34.5      1,122,758     41.1
                                    ---------   --------     ---------  --------

           Total High Quality       3,067,342      95.3      2,597,600     95.2
                                    ---------   --------     ---------  --------

      OTHER INVESTMENT:
        Privately Issued:
          A Rating                    127,051       4.0        106,531      3.9
          BBB/Baa Rating               13,808       0.4         14,017      0.5
          BB/Ba Rating                  9,420       0.3          9,727      0.4
                                    ---------   --------     ---------  --------
           Total Other Investment     150,279       4.7        130,275      4.8
                                    ---------   --------     ---------  --------


           Total ARM Securities    $3,217,621     100.0%    $2,727,875    100.0%
                                    =========   ========     =========   =======
</TABLE>


As of March  31,  1997,  the  Company  had  reduced  the  cost  basis of its ARM
securities due to potential future credit losses (other than temporary  declines
in fair value) in the amount of  $1,162,000,  including  a provision  for credit
losses of $190,000  recorded during the quarter ended March 31, 1997. During the
first quarter of 1997, the Company  realized  actual credit losses of $18,000 on
one  senior  class of a  multi-class  pass-through  security  that is secured by
single  family  loans.  However,  it is  possible  that  these  losses  will  be
reimbursed  at some  future  date if future  deposits  to a reserve  fund credit
enhancement  account exceed future loss experience.  Although the Company limits
its exposure to credit losses by acquiring  primarily  securities that are rated
AA or better,  the Company also invests in Other Investments that generally have
a higher yield than securities rated AA or better, currently less than 5% of the
Company's total assets,  which are more likely to experience  credit losses from
time  to  time.  The  Company  believes  that  the  total  return  on the  Other
Investments  purchased by the Company provides a yield that is commensurate with
the added credit exposure.  The Company's analysis of losses on loans underlying
certain ARM  securities  owned by the Company  relative to the remaining  credit
support  protecting  the Company from credit losses  indicates that there is the
possibility  of future  losses.  At this  time,  the  Company is  providing  for
potential  future  losses on three  securities  that have an aggregate  carrying
value of $17.9 million, which is less than 0.6% of the Company's total portfolio
of ARM securities. All three of these securities are performing and have varying
degrees of remaining  credit  support that  mitigates the Company's  exposure to
potential future credit losses.

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

<TABLE>
                             ARM SECURITIES BY INDEX
                             (amounts in thousands)

<CAPTION>
                                                 March 31, 1997           December 31, 1996
                                            -----------------------  -----------------------
                                              Carrying    Portfolio    Carrying    Portfolio
                                                Value        Mix         Value        Mix
                                            ------------- ---------  ------------  ---------
<S>                                         <C>           <C>        <C>           <C>
      INDEX:
        One-month LIBOR                      $     10,902     0.3%   $     10,646     0.4%
        Six-month LIBOR                         1,219,121    37.9       1,252,884    45.9
        Six-month Certificate of Deposit           70,027     2.2          69,348     2.6
        Six-month Constant Maturity Treasury       44,840     1.4           8,841     0.3
        One-year Constant Maturity Treasury     1,645,794    51.1       1,238,892    45.4
        11th District Cost of Funds               226,937     7.1         147,264     5.4
                                              -----------  -------    -----------  -------
                                             $  3,217,621   100.0%   $  2,727,875   100.0%
                                              ===========  =======    ===========  =======
</TABLE>

The portfolio had a current  weighted average coupon of 7.53% at March 31, 1997.
If the  portfolio  were "fully  indexed," the weighted  average  coupon would be
7.93%,  based upon the current  composition  of the portfolio and the applicable
indices at March 31, 1997.

At March 31, 1997, the current yield of the ARM securities  portfolio was 6.64%.
The current yield includes the impact of the amortization of applicable premiums
and discounts,  the cost of hedging, the amortization of the deferred gains from
hedging activity and the impact of principal payment receivables.

As a result of  issuing  the  Series A 9.68%  Cumulative  Convertible  Preferred
Stock,  which  provided  the  Company  with net  proceeds  of $65.8  million  of
additional  shareholders'  equity during the quarter  ended March 31, 1997,  the
Company  purchased  $670.6  million  of ARM  securities,  97% of which were High
Quality  assets.  The Company also sold $629,000 of High Quality ARM  securities
for a net gain of $4,000 during the quarter ended March 31, 1997.

For the quarter ended March 31, 1997,  the Company's  mortgage  securities  paid
down at an approximate average annualized constant prepayment rate of 22%, which
was  close to  long-term  expectations.  In the  event  that  actual  prepayment
experience exceeds  expectations 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 increased during the
quarter ended March 31, 1997. As of March 31, 1997,  the Company's  portfolio of
ARM securities available-for-sale,  including the applicable Cap Agreements, had
a  net  unrealized   loss  of  $12.5   million,   or  0.45%  of  the  securities
available-for-sale,  as compared to a net  unrealized  loss of $14.7  million or
0.65% of the securities available-for-sale, as of December 31, 1996.

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 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 March 31, 1997, the Cap Agreements owned by the
Company had a remaining notional balance of $2.538 billion with an average final
maturity of 2.9 years,  as compared  to a remaining  notional  balance of $2.266
billion  with an average  final  maturity  of 3.0 years at  December  31,  1996.
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 13.00% and  average  approximately
10.17%.  The expense of the Company's  hedging activity amounted to $754,000 and
decreased the yield on the ARM securities  portfolio by 0.14% during the quarter
ended March 31, 1997. In general  market  interest  rates  increase and decrease
when market interest rates decrease,  helping to partially offset changes in the
fair value of the Company's ARM securities.  At March 31, 1997 the fair value of
the Cap Agreements was $3.4 million,  $10.3 million less than the amortized cost
of the Cap  Agreements.  The  following  table  presents  information  about the
Company's Cap Agreement portfolio as of March 31, 1997:

<TABLE>
                    CAP AGREEMENTS STRATIFIED BY STRIKE PRICE

<CAPTION>
         Hedged         Weighted     Cap Agreement         Weighted
     ARM Securities     Average         Notional           Average
       Balance (1)      Life Cap       Balance (2)       Strike Price    Remaining Term
    ----------------   ----------    --------------    ---------------   --------------
<S> <C>                <C>           <C>               <C>               <C>      
    $    395,510,000     9.57%       $  398,547,000         7.50%             3.0 Years
         130,116,000    10.36           139,212,000         8.50              2.9
         273,676,000    10.13           365,126,000         9.00              2.8
         128,385,000    10.83           114,866,000         9.50              2.7
         254,113,000    11.04           175,000,000        10.00              4.9
         410,127,000    11.51           363,810,000        10.50              3.0
         224,278,000    12.00           221,826,000        11.00              2.0
         316,076,000    12.57            50,000,000        11.50              2.9
         437,640,000    12.93           467,831,000        12.00              2.6
         182,187,000    13.54           141,697,000        12.50              3.3
         130,594,000    14.11           100,000,000        13.00              2.9
        ------------   -------         ------------      --------           ------
    $  2,882,702,000    11.60%       $2,538,015,000        10.17%             2.9 Years
       =============   =======        =============      =========          ======

<FN>
      (1)  90% of the ARM securities' balance which approximates the financed portion.
      (2)  Subsequent  to March 31, 1997,  the Company  purchased  additional
           Cap  Agreements  in order  to hedge  ARM  securities  purchased  in the
           quarter ended March 31, 1997. The Company  purchased $35 million with a
           strike price of 10.50%,  $250 million with a strike price of 11.50% and
           $60 million with a strike price of 12.50%
</FN>
</TABLE>

As of March 31,  1997,  the Company had entered  into eight  interest  rate swap
agreements having an aggregate notional balance of $1.040 billion and a weighted
average remaining term of six months.  In accordance with these agreements,  the
Company  will pay a fixed rate of interest  during the term of these  agreements
and receive a payment that varies monthly with the one-month  LIBOR Index. As of
March 31, 1997, the average cost of the Company's  borrowings  was 5.67%,  which
includes  the  impact  of the  interest  rate  swap  agreements.  As a result of
entering into these agreements the Company extended the weighted average term to
the next re-pricing date of its borrowing from 44 days to 103 days.

In  January  1997,  the  Company  issued  2,760,000  shares  of  Series  A 9.68%
Cumulative  Convertible  Preferred Stock at a price of $25 per share pursuant to
an effective  Registration  Statement.  Net proceeds from this issuance  totaled
$65.8 million. Primarily as a result of the issuance of the preferred stock, the
Company's  shareholders' equity,  excluding the fair value adjustment for assets
held as  available-for  sale,  has grown to $305.7  million as of March 31, 1997
from $238.0 million as of December 31, 1996. As of March 31, 1997, the Company's
ratio of shareholders' equity to assets, excluding the fair value adjustment for
assets held as available-for sale, was 9.30% as compared to 8.59% as of December
31, 1996.



<PAGE>


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997

For the quarter ended March 31, 1997, the Company's net income was $9,294,000 as
compared  to  $5,131,000  for the  quarter  ended  March 31,  1996.  Net  income
available  to  common  shareholders,  after  the  9.68%  dividend  to  preferred
shareholders,  increased  to  $8,052,000  or $0.49  per  common  share  based on
weighted average common shares of 16,311,344 from $5,131,000 or $0.42 per common
share based on weighted  average  common  shares of  12,334,847  for the quarter
ended March 31,  1996.  This is an increase  in net income  available  to common
shareholders per common share of 17% despite an increase in the weighted average
common shares  outstanding of 32%. Net interest  income for the quarter  totaled
$11,332,000  as compared to $6,190,000  for the same period in 1995, an increase
of 83%. Net  interest  income is  comprised  of the  interest  income  earned on
mortgage investments and cash less interest expense from borrowings.  During the
first quarter of 1997, the Company recorded a gain on the sale of ARM securities
of $4,000 as compared to $13,000 during the first quarter of 1996. Additionally,
during the first quarter of 1997, the Company reduced  earnings and the carrying
value of its ARM  securities by $190,000 for projected  credit  losses.  For the
quarter  ended  March 31,  1997,  the  Company  incurred  operating  expenses of
$1,852,000  consisting of a base management fee of $811,000, a performance based
fee of $857,000 and other operating expenses of $184,000. During the same period
of 1996, the Company incurred operating  expenses of $1,072,000  consisting of a
base management fee of $359,000,  a performance  based fee of $588,000 and other
operating  expenses of $125,000.  Total operating expenses decreased to 16.3% of
net interest  income for the first  quarter of 1997 as compared to 17.3% for the
same period of 1996, also contributing to the Company's improved net earnings.

Additionally,  for the quarter  ended  March 31,  1997,  the Company  declared a
dividend of  $1,242,000 or $0.45 per share to the  shareholders  of the Series A
9.68% Cumulative  Convertible  Preferred Stock for the partial period of January
24, 1997 (date of issuance) through March 31, 1997.

The  Company's  return on average  common  equity  reached  13.4%,  it's highest
quarterly  level ever,  for the quarter  ended March 31,  1997.  The table below
highlights the  historical  trend and the components of return on average common
equity (annualized):

<TABLE>
                 COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

<CAPTION>
                     Net                    Gain (Loss)  
                   Interest    Provision      on ARM       G & A        Performance   Preferred        Net 
      For The      Income/    For Losses/    Sales/      Expense (2)/     Fee/        Dividend/      Income/
   Quarter Ended    Equity       Equity       Equity       Equity         Equity       Equity      Equity (ROE)
   -------------   --------   -----------   -----------  ------------   -----------   ---------    ------------
<S>                <C>        <C>           <C>          <C>            <C>           <C>          <C>
   Mar 31, 1995      2.58%         -           -1.47%       1.02%            -            -            0.09%
   Jun 30, 1995      5.51%         -             -          1.04%            -            -            4.47%
   Sep 30, 1995      9.85%         -            0.09%       1.07%          0.34%          -            8.54%
   Dec 31, 1995     11.94%         -            0.11%       1.05%          0.97%          -           10.03%
   Mar 31, 1996     13.37%         -            0.03%       1.04%          1.27%          -           11.08%
   Jun 30, 1996     13.14%         -             -          1.00%          0.92%          -           11.22%
   Sep 30, 1996     13.42%       0.34%          0.88%       1.03%          1.07%          -           11.86%
   Dec 31, 1996     14.99%       1.32%          1.38%       1.46%          1.23%          -           12.37%
   Mar 31, 1997     18.85%       0.32%          0.01%       1.65%          1.43%        2.07%         13.40%

<FN>
   (1)  Average common equity excludes unrealized gain(loss) on available-for-sale ARM securities.
   (2)  Excludes performance fees.
</FN>
</TABLE>

For the  quarter  ended  March  31,  1997,  the  Company's  taxable  income  was
$8,224,000 or $0.50 per weighted  average share  outstanding.  Taxable income in
the first quarter of 1997 excludes the loss  provisions of $190,000 but includes
actual  credit  losses of $18,000.  For the quarter  ended March 31,  1996,  the
Company's  taxable  income was  $5,118,000  or $0.41 per weighted  average share
outstanding.  As a REIT, the Company is required to declare dividends  amounting
to 85% of each year's  taxable  income by the end of each  calendar  year and to
have declared dividends  amounting to 95% of its taxable income for each year by
the time it files its applicable  tax return and,  therefore,  generally  passes
through substantially all of its earnings to shareholders without paying federal
income tax at the corporate level.



<PAGE>


The following table  highlights the quarterly  dividend history of the Company's
common shares:

<TABLE>
                             COMMON DIVIDEND SUMMARY
                ($ in thousands, except per common share amounts)

<CAPTION>
                                                     Common        Common         
                     Taxable         Taxable        Dividend      Dividend         Cumulative  
      For The          Net         Net Income       Declared      Pay-out         Undistributed
   Quarter Ended    Income (1)    Per Share (2)   Per Share (2)   Ratio (3)     Taxable Net Income
   --------------- ------------  --------------   -------------   --------      ------------------
<S>                <C>           <C>              <C>             <C>           <C> 
   Mar 31, 1995   $      701     $     0.06       $      0.15         252%             (874)
   Jun 30, 1995        1,993           0.17              0.15          89%             (634)
   Sep 30, 1995        3,791           0.32              0.25          79%              139
   Dec 31, 1995        4,535           0.37              0.38         102%               41
   Mar 31, 1996        5,118           0.41              0.40          97%              188
   Jun 30, 1996        6,169           0.42              0.40         103%              (18)
   Sep 30, 1996        6,708           0.42              0.40          96%              250
   Dec 31, 1996        8,164           0.50              0.45          89%            1,115
   Mar 31, 1997        8,224           0.50              0.48          95%            1,505

<FN>
   (1) Taxable net income after preferred dividends.
   (2) Weighted average common shares outstanding.
   (3) Common dividend declared divided into applicable quarter's taxable income available to common shareholders.
</FN>
</TABLE>

The primary  reasons for the rise in the Company's  net interest  income for the
first  quarter of 1997 as compared  to the same period of 1996 was the  combined
effect of the increased  size of the Company as well as 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 $5,142,000.  Of this increase,
the  increased  average size of the Company  during the first quarter of 1997 as
compared  to 1996  contributed  to higher net  interest  income in the amount of
$3,808,000.  The average  balance of the Company's  interest  earning assets was
$2.951  billion  during the first quarter of 1997 as compared to $2.026  billion
during the same period of 1996,  an increase of 46%.  Additionally,  $927,000 is
the result of the higher yield on the  Company's  ARM  securities  portfolio and
other  interest  earning assets and $406,000 is the result of the lower interest
rate on the Company's  cost of funds for a combined  favorable  rate variance of
$1,333,000.  The yield on the  Company's  interest  earning  assets  during  the
quarter  ended March 31,  1997 was 6.64% as  compared  to 6.46%  during the same
period of 1996.  Also,  during these same periods,  the Company's  cost of funds
decreased  to 5.64% in 1997  from  5.73% in  1996.  The  Company's  yield on net
interest earning assets, which includes the impact of shareholders' equity, rose
to 1.54% for the first quarter of 1997 from 1.22% for the same period of 1996.



<PAGE>


The following  table  highlights the  components of net interest  spread and the
annualized  yield on net interest  earning assets as of each applicable  quarter
end (dollars in millions):

<TABLE>
   COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)

<CAPTION>
                                            ARM Securities
                     Average    -----------------------------------   Yield on                         Yield on
                    Interest      Wgt. Avg.     Weighted              Interest               Net     Net Interest
     As of the       Earning    Fully Indexed   Average     Yield      Earning   Cost of   Interest     Earning
   Quarter Ended     Assets        Coupon        Coupon     Adj.(2)    Assets     Funds     Spread      Assets
   -------------   ----------   -------------   ---------  --------   ---------  -------   --------  ------------
<S>                <C>          <C>             <C>        <C>        <C>        <C>       <C>       <C>  
   Mar 31, 1995    $  1,748.7       8.46%         6.33%      0.26%      6.07%     6.33%     -0.26%       0.49%
   Jun 30, 1995       1,809.7       7.94%         6.77%      0.40%      6.37%     6.21%      0.16%       0.55%
   Sep 30, 1995       1,864.3       7.93%         7.24%      0.58%      6.66%     6.04%      0.62%       1.04%
   Dec 31, 1995       1,975.6       7.51%         7.42%      0.69%      6.73%     6.05%      0.68%       1.11%
   Mar 31, 1996       2,025.8       7.56%         7.48%      0.99%      6.49%     5.60%      0.89%       1.32%
   Jun 30, 1996       2,248.2       7.83%         7.28%      0.85%      6.43%     5.59%      0.84%       1.32%
   Sep 30, 1996       2,506.0       7.80%         7.31%      0.80%      6.51%     5.71%      0.80%       1.32%
   Dec 31, 1996       2,624.4       7.61%         7.57%      0.93%      6.64%     5.72%      0.92%       1.34%
   Mar 31, 1997       2,950.6       7.93%         7.53%      0.89%      6.65%     5.67%      0.98%       1.54%

<FN>
   (1)Yield on Net Interest  Earning  Assets is computed by dividing  annualized
      net  interest  income by the average  daily  balance of  interest  earning
      assets.
   (2)Yield   adjustments   include  the  impact  of  amortizing   premiums  and
      discounts,  the cost of hedging  activities,  the amortization of deferred
      gains  from  hedging  activities  and  the  impact  of  principal  payment
      receivables.  The following  table presents these  components of the yield
      adjustments for the dates presented in the table above:
</FN>
</TABLE>

<TABLE>
               COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM SECURITIES

<CAPTION>
                                Impact of               Amort. of
                      Premium/  Principal             Deferred Gain     Total
        As of the     Discount  Payments    Hedging    from Hedging     Yield
      Quarter Ended    Amort.   Receivable  Activity     Activity     Adjustment
      -------------  ---------  ----------  --------  -------------  -----------
<S>                  <C>        <C>         <C>       <C>            <C>  
      Mar 31, 1995     0.22%      0.02%      0.21%        (0.19)%       0.26%
      Jun 30, 1995     0.26%      0.03%      0.28%        (0.17)%       0.40%
      Sep 30, 1995     0.37%      0.06%      0.31%        (0.16)%       0.58%
      Dec 31, 1995     0.43%      0.10%      0.32%        (0.16)%       0.69%
      Mar 31, 1996     0.77%      0.11%      0.31%        (0.20)%       0.99%
      Jun 30, 1996     0.67%      0.07%      0.27%        (0.16)%       0.85%
      Sep 30, 1996     0.57%      0.08%      0.25%        (0.10)%       0.80%
      Dec 31, 1996     0.69%      0.09%      0.23%        (0.08)%       0.93%
      Mar 31, 1997     0.63%      0.13%      0.19%        (0.07)%       0.89%
</TABLE>
  

As of the end of the quarter ended March 31, 1997,  the  Company's  yield on its
ARM securities  portfolio,  including the impact of the amortization of premiums
and  discounts,  the cost of hedging,  the  amortization  of deferred gains from
hedging activity and the impact of principal payment  receivables,  was 6.65% as
compared to 6.64% as of the end of 1996,  an increase  of 0.01%.  The  Company's
cost of funds as of March 31, 1997 was 5.67% as compared to 5.72% as of December
31, 1996, a decrease of 0.05%.  As a result of these changes,  the Company's net
interest  spread  as of March  31,  1997 was  0.98% as  compared  to 0.92% as of
December 31, 1996, an increase of 0.06%.



<PAGE>


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 quarters ended March 31, 1997 and 1996:

<TABLE>
                      AVERAGE BALANCE AND RATE TABLE
                          (Amounts in thousands)

<CAPTION>
                                            For the Quarter Ended       For the Quarter Ended
                                               March 31, 1997               March 31, 1996
                                            ----------------------    ------------------------
                                              Average    Effective        Average    Effective
                                              Balance      Rate           Balance       Rate
                                            ------------ ---------    -------------  ---------
<S>                                         <C>          <C>          <C>            <C>
      Interest Earning Assets:
         ARM securities                      $ 2,936,247    6.65%     $   2,012,676    6.46%
         Cash and cash equivalents                14,348    5.27             13,086    5.61
                                              ----------   ------       -----------   ------
                                               2,950,595    6.64          2,025,762    6.46
                                              ----------   ------       -----------   ------
      Interest Bearing Liabilities:
         Borrowings                            2,670,033    5.64          1,850,508    5.73
                                              ----------  -------      ------------   ------
      Net Interest Earning Assets and Spread $   280,562    1.00%     $     175,254    0.73%
                                              ==========  =======      ============   ======

      Yield on Net Interest Earning Assets (1)              1.54%                      1.22%
                                                          =======                     ======
<FN>

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

During the first quarter of 1997, the Company  realized a net gain from the sale
of ARM  securities  in the amount of $4,000 as  compared  to $13,000  during the
first quarter of 1996. Additionally,  the Company recorded an expense for credit
losses in the  amount of  $190,000  during the  quarter  ended  March 31,  1997.
Although the Company has only incurred  actual credit losses of $18,000 to date,
the Company's review of the underlying ARM collateral indicates the potential of
some loss on three ARM securities that have an aggregate carrying value of $17.9
million, or 0.6% of the Company's ARM securities portfolio.

For the quarter ended March 31, 1997, the Company's ratio of operating  expenses
to average  assets was 0.25% as compared  to 0.21% for the same  quarter of 1996
and as compared to 0.24% for the previous  quarter ended  December 31, 1996. The
Company's  expense  ratios  are among the  lowest of any  company  investing  in
mortgage  assets,  giving  the  Company  what it  believes  to be a  significant
competitive   advantage  over  more  traditional   mortgage   portfolio  lending
institutions  such as banks and  savings  and  loans,  enabling  the  Company to
operate  with less  risk,  such as credit  and  interest  rate  risk,  and still
generate an attractive  return on equity when compared to these more traditional
mortgage  portfolio  lending  institutions.  The typical  expense ratios of such
lending institutions range between 2.50% and 3.50%.

The following table  highlights the quarterly  trend of operating  expenses as a
percent of average assets:

<TABLE>
                       ANNUALIZED OPERATING EXPENSE RATIOS

<CAPTION>
                    Management Fee &                            Total
      For The       Other Expenses/    Performance Fee/   G & A Expense/
   Quarter Ended    Average Assets      Average Assets    Average Assets
   -------------    ----------------   ----------------   --------------
<S>                 <C>                <C>                <C>  
   Mar 31, 1995          0.10%              0.00%              0.10%
   Jun 30, 1995          0.10%              0.00%              0.10%
   Sep 30, 1995          0.10%              0.03%              0.13%
   Dec 31, 1995          0.10%              0.09%              0.19%
   Mar 31, 1996          0.09%              0.12%              0.21%
   Jun 30, 1996          0.10%              0.09%              0.19%
   Sep 30, 1996          0.10%              0.10%              0.20%
   Dec 31, 1996          0.13%              0.11%              0.24%
   Mar 31, 1997          0.14%              0.11%              0.25%
</TABLE>



<PAGE>




LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary source of funds for the quarters ended March 31, 1997 and
1996 consisted of reverse  repurchase  agreements,  which totaled $2.936 billion
and  $1.827  billion  at  the  respective  quarter  ends.  The  Company's  other
significant  source  of funds for the  quarters  ended  March 31,  1997 and 1996
consisted  of  payments  of  principal  and  interest  from  its ARM  securities
portfolio in the amounts of $194.2 million and $175.1 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 March 31, 1997 had a weighted  average interest cost
of 5.67%,  which  includes the cost of interest rate swaps,  a weighted  average
original term to maturity of 7.9 months and a weighted average remaining term to
maturity of 3.8 months.  As of March 31, 1997,  $1.261  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.

The Company has borrowing  arrangements  with  twenty-two  different  investment
banking  firms and  commercial  banks and at March 31, 1997 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  March 31,  1997,  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.

In  January  1997,  the  Company  issued  2,760,000  shares  of  Series  A 9.68%
Cumulative  Convertible  Preferred Stock at a price of $25 per share pursuant to
its effective  Registration  Statement.  Net proceeds from this issuance totaled
$65.8 million.  Upon completion of this issuance of preferred stock, the Company
had $173  million  of its  securities  registered  for  future  sale  under this
registration statement.

The Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "Plan")
designed to provide a convenient  and  economical  way for  existing  common and
preferred  shareholders to  automatically  invest their dividends into shares of
common  stock and to purchase  common  shares at a 3% discount  from the current
market  price,  as  defined  in the  Plan.  As a result  of first  quarter  1997
participation in the Plan, the Company issued 102,337 new shares of common stock
and received $2.0 million of new equity capital.

In  October  1995,  the  Company  entered  into a Sales  Agency  Agreement  with
PaineWebber  Incorporated.  In  accordance  with  the  Sales  Agency  Agreement,
PaineWebber  agreed to sell, at the direction and discretion of the Company,  up
to 1,174,969  additional shares of the Company's common stock.  During 1997, the
Company has not sold any shares under this Sales Agency Agreement.

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 behind changes in the indices due to the
notice period  provided to ARM  borrowers  when the interest rate on their loans
are scheduled to change.  The periodic cap only affects 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 ARM securities over a longer time period than
otherwise,   resulting  in  an  increased  yield  on  its  mortgage  securities.
Therefore, in rising short-term interest rate environments where prepayments are
declining,  the  interest  rate  on the ARM  securities  portfolio  will  likely
increase to  re-establish a spread over the higher  interest rates and the yield
would  also  rise  due  to  slower  prepayments.   This  combined  effect  could
significantly  mitigate the 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,
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.

Lastly,  because the Company only invests in ARM assets and  approximately 9% 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 results because the financed  portion of the
Company's portfolio of ARM securities will, over time, re-price to a spread over
the Company's cost of funds while the portion of the Company's  portfolio of ARM
securities  that are purchased with  shareholders'  equity will generally have a
higher yield in a higher interest rate  environment and a lower yield in a lower
interest rate environment.

Changes in  interest  rates also  affect  the fair  value of the  Company's  ARM
securities  and certain  liabilities.  In general,  when interest rates rise the
Company's  ARM  securities  will likely  decrease in value  initially,  and then
recover a portion of their value as their interest rate coupons adjust to market
interest  rates,  but may not recover  all of the  decline in value  because the
adjusted  interest  rate coupons will be closer to the life time caps on the ARM
securities. 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 a significant  increase in short-term  interest  rates.  A substantial
decrease in the fair value of the  Company's  ARM  securities  could require the
Company  to sell  assets  in order to  maintain  liquidity.  Additionally,  when
interest rates rise, the Company's hedging instruments and other borrowings will
likely increase in value. The converse impact on the fair value of the Company's
ARM  securities  and certain  liabilities  will likely occur when interest rates
decline.  Changes in interest  rates have little if any effect on the fair value
of the Company's cash, cash equivalents or reverse repurchase  agreements due to
the short term nature of these financial instruments.

OTHER MATTERS

As of March 31, 1997,  the Company  calculates  its  Qualified  REIT Assets,  as
defined in the Internal  Revenue Code of 1986,  as amended (the  "Code"),  to be
99.3% of its total assets, as compared to the Code requirement that at least 75%
of its total assets must be Qualified REIT Assets.  The Company also  calculates
that  99.6% of its 1997  revenue  for the first  quarter  qualifies  for the 75%
source of income  test and 100% of its revenue  qualifies  for the 95% source of
income test under the REIT rules. Furthermore, the Company's revenues during the
quarter ended March 31, 1997 subject to the 30% income limitation under the REIT
rules  amount  to  0.01%  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 March 31, 1997, the Company believes that it
will 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 of 1940. 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 March
31, 1997, the Company calculates that it is in compliance with this requirement.

PART II.    OTHER INFORMATION

Item 1. Legal Proceedings
         At March 31, 1997, 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
                   Not applicable

Item 5.  Other Information
         None

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

      (a)   Exhibits
            None

      (b)   Reports on Form 8-K

         The  Registrant  has filed  the  following  Current  Report on Form 8-K
         during the period covered by this Form: 10-Q:

         (i)Current  Report on Form 8-K,  dated  January 22, 1997  regarding the
            Underwriting Agreement entered into by the Registrant on January 20,
            1997. The  Underwriting  Agreement,  Articles  Supplementary  and an
            Amendment to the 1992 Stock Option Plan dated December 19, 1996 were
            included as Exhibits to this Current Report on Form 8-K.


<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:  May 5, 1997                 By:/s/ Larry A. Goldstone
                                       -----------------------
                                       Larry A. Goldstone
                                       President and Chief Operating Officer
                                       (authorized officer of registrant)




Dated:  May 5, 1997                 By:/s/ Richard P. Story
                                       --------------------
                                       Richard P. Story,
                                       Chief Financial Officer and Treasurer
                                       (principal accounting officer)