1

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


                                  FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED:     JUNE 30, 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)                   19,548,892 as of July 31, 1997

<PAGE>


26


                      THORNBURG MORTGAGE ASSET CORPORATION
                                    FORM 10-Q


                                      INDEX




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

   Item 1. Financial Statements

               Balance Sheets at June 30, 1997 and December 31, 1996....   3

               Statements of Operations for the three months and six
               months ended June 30, 1997 and June 30, 1996.............   4

               Statement of Stockholders' Equity for the three months
               and six months ended June 30, 1997.......................   5

               Statements of Cash Flows for the three months and six
               months ended June 30, 1997 and June 30, 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...........................................  25

   Item 2.  Changes in Securities ......................................  25

   Item 3.  Defaults Upon Senior Securities ............................  25

   Item 4.  Submission of Matters to a Vote of Security Holders.........  25

   Item 5.  Other Information...........................................  25

   Item 6.  Exhibits and Reports on Form 8-K............................  25


   SIGNATURES  .........................................................  26





<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
THORNBURG MORTGAGE ASSET CORPORATION

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

                                               June 30, 1997      December 31, 1996
                                             -----------------    -----------------
<S>                                          <C>                  <C>
ASSETS

   ARM assets (Notes 2 and 3)                $     3,825,748       $     2,727,875
   Cash and cash equivalents                          11,564                 3,693
   Accrued interest receivable                        34,897                23,563
   Prepaid expenses and other                            387                   227
                                               -------------         -------------
                                             $     3,872,596       $     2,755,358
                                               =============         =============


LIABILITIES

   Reverse repurchase agreements (Note 3)    $     3,511,572       $     2,459,132
   Other borrowings (Note 3)                          12,144                14,187
   Payable for securities purchased                     -                   32,683
   Accrued interest payable                           19,273                18,747
   Dividends payable (Note 6)                         10,145                 7,299
   Accrued expenses and other                          5,879                 1,112
                                               -------------         -------------
                                                   3,559,013             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    65,805                 -
   Common stock: par value $.01 per share;
     47,240,000 shares authorized, 17,296,929
     and 16,219,241 shares issued and outstanding,
     respectively                                        173                   162
   Additional paid-in-capital                        253,584               233,177
   Available-for-sale securities:
     Unrealized gain (loss) (Note 2)                 (10,051)              (15,807)
     Realized deferred hedging gain                    3,799                 4,541
   Retained  earnings                                    273                   125
                                               -------------         -------------
                                                     313,583               222,198
                                               -------------         -------------

                                             $     3,872,596       $     2,755,358
                                               =============         =============
</TABLE>




See Notes to Financial Statements.



<PAGE>

<TABLE>
THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF OPERATIONS
 (In thousands, except share data)
<CAPTION>
                                           Three  Months  Ended    Six Months Ended
                                                 June 30,              June 30,
                                          ---------------------  ---------------------
                                             1997      1996        1997         1996
                                          ---------  ----------  ---------   ---------
<S>                                       <C>        <C>         <C>         <C>   
Interest income from ARM assets and cash  $  57,623  $  35,680   $ 106,622   $  68,382
Interest expense on borrowed funds          (45,448)   (28,455)    (83,115)    (54,967
                                            --------  ---------   ---------  ---------
   Net interest income                       12,175      7,225      23,507      13,415
                                            --------   --------   ---------  ---------

Gain (loss) on sale of ARM assets                21       -             25          13
Provision for credit losses                    (210)      -           (400)        -
Management fee (Note 5)                        (876)      (405)     (1,687)       (764)
Performance fee (Note 5)                       (781)      (508)     (1,638)     (1,096)
Other operating expenses                       (254)      (143)       (437)       (268)
                                            --------  ---------   ---------  ---------

   NET INCOME                             $  10,075  $   6,169   $  19,370   $  11,300
                                            =======   ========    ========    ========


Net income                                $  10,075  $   6,169   $  19,370   $  11,300
Dividend on preferred stock                  (1,670)       -        (2,912)         -
                                            --------  --------    ---------   --------
Net income available to 
common shareholders                       $   8,405  $   6,169   $  16,458   $  11,300
                                            =======   ========    ========    ========

Net income per common share               $    0.50  $    0.42   $    0.99   $    0.83
                                            =======   ========    ========    ========
Average number of common shares 
outstanding                              16,816,873 14,844,227  16,565,505  13,589,537
                                         ========== ==========  ==========  ==========

</TABLE>




See Notes to Financial Statements.



<PAGE>

<TABLE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

Three  Months and Six Months  Ended June 30, 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
                         ---------   -------   ----------  ------------  -------------  --------   ----------
<S>                      <C>         <C>       <C>         <C>           <C>            <C>        <C>
Balance,
  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 adj., 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

Series A preferred stock,
  adjustment to issuance
  cost  (Note 5)                  (4)     -           -            -               -          -            (4)

Issuance of common
  stock  (Note 5)                -        10       18,379          -               -          -        18,389

Available-for-Sale Sec.:
  Fair value adj., net
     of amortization             -        -           -          3,513             -          -         3,513

  Deferred gain on sale of
   hedges, net of amort.         -        -           -            -              (338)        -         (338)

Net income                       -        -           -            -               -      10,075       10,075

Dividends declared on 
  preferred stock - 
  $0.605 per share               -        -           -            -               -      (1,670)      (1,670)

Dividends declared on
  common stock - 
  $0.49 per share                -        -           -            -               -      (8,475)      (8,475)
                             -------   -----     --------    ---------         -------   -------    ---------
Balance, June 30, 1997     $  65,805  $  173   $  253,584  $   (10,051)       $  3,799  $    273   $  313,583
                             =======   =====     ========    =========         =======   =======    =========

</TABLE>

See Notes to Financial Statements.


<PAGE>

<TABLE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
                                            Three Months Ended     Six Months Ended
                                                 June 30,              June 30,
                                          --------------------   --------------------
                                             1997      1996        1997       1995
                                          ---------  ---------   ---------  ---------
<S>                                      <C>         <C>         <C>        <C>
Operating Activities:
  Net Income                              $  10,075  $   6,169   $  19,370  $  11,300
  Adj to reconcile net income to
    net cash provided by operating
    activities:
      Amortization                            4,813      3,480       9,172      6,778
      Net(gain)loss from investing
        activities                              189        -           375        (13)
    Change in assets and liabilities:
      Accrued interest receivable            (5,182)    (2,363)    (11,334)      (757)
      Prepaid expenses and other                127         (6)       (158)       (73)
      Accrued interest payable               (2,258)     2,329         526      1,245
      Accrued expenses and other              4,306       (248)      4,766         43
                                            -------   --------    --------   --------
        Net cash provided by operating
          activities                         12,070      9,361      22,717     18,523
                                            -------   --------    --------   --------

Investing Activities:
  Available-for-sale assets:
   Purchase of ARM assets                  (813,493)  (552,332) (1,484,058)  (758,302)
   Proceeds on sales of ARM assets           33,669       -         34,302      6,539
   Principal payments on ARM assets         158,981    113,769     286,035    220,582
  Held-to-maturity assets:
   Principal payments on ARM assets          12,385     36,664      30,525     67,506
  Purchase of int. rate cap agreements       (1,496)      (189)     (1,894)      (423)
                                           --------   --------    --------   --------
      Net cash provided by (used in)
        investing activities               (609,954)  (402,088) (1,135,090)  (464,098)
                                           --------   --------  ----------   --------

Financing Activities:
  Net borrowings from reverse
    repurchase agreements                   575,393    362,812   1,052,440    409,242
  Net borrowings from (repayments of)
    other borrowings                         (1,250)   (10,098)     (2,044)    (2,294)
  Proceeds from preferred stock issued           (4)       -        65,805        -
  Proceeds from common stock issued          18,389     49,506      20,418     53,104
  Dividends paid                             (9,076)    (4,972)    (16,375)    (9,604)
                                           ---------  --------   ---------   --------
   Net cash provided by (used in)
     financing activities                   583,452    397,248   1,120,244    450,448
                                           --------   --------   ---------   --------

Net increase (decrease) in cash and
  cash equivalents                          (14,432)     4,521       7,871      4,873

Cash and cash equivalents at beginning
   of period                                 25,996      4,012       3,693      3,660
                                           --------   --------    --------   --------
Cash and cash equivalents at end
   of period                              $  11,564  $   8,533   $  11,564  $   8,533
                                           ========   ========    ========   ========

</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 fair value.

         ADJUSTABLE-RATE MORTGAGE ASSETS

            The  Company's   adjustable-rate  mortgage  ("ARM")  assets  may  be
            comprised of both ARM securities and ARM loans.

            The Company's  policy is to classify  each of its ARM  securities as
            available-for-sale  as they are  purchased and then monitor each ARM
            security for a period of time, generally six to twelve months, prior
            to making a  determination  as to whether the ARM  security  will be
            classified   as   held-to-maturity.    Management   has   made   the
            determination that certain 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.

            ARM loans that management has the intent and ability to hold for the
            foreseeable future and until maturity or payoff are carried at their
            unpaid principle  balances,  net of unamortized  premium or discount
            and allowance for loan losses.

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

            ARM asset  transactions  are recorded on the date the ARM assets are
            purchased  or sold.  Purchases of new issue ARM  securities  and ARM
            loans are recorded when all significant  uncertainties regarding the
            characteristics of the assets are removed,  generally shortly before
            settlement date. Realized gains and losses on ARM asset 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,  BBB, or equivalent,  or
            ARM loans originated to "A" quality  underwriting  standards ("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.

         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  assets  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 assets 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 assets 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 ASSETS AND INTEREST RATE CAP AGREEMENTS

         Investments  in ARM  assets  consists  of ARM loans and ARM  securities
         backed by ARM loans, primarily on single-family residential housing.

         The  following  tables  present the Company's ARM assets as of June 30,
         1997  and  December  31,  1996.  The  ARM   securities   classified  as
         available-for-sale  are carried at their fair value, the ARM securities
         classified as  held-to-maturity  and the ARM loans are carried at their
         amortized cost basis (dollars in thousands):
<TABLE>

            June 30, 1997:
<CAPTION>
                                        ARM Securities
                                   ------------------------
                                   Available-     Held-to-
                                    for-Sale      Maturity    ARM Loans       Total
                                   ------------  ----------  -----------   -----------
<S>                                <C>           <C>          <C>          <C>        
            Amortized cost basis   $  3,393,255  $  429,184   $   13,749   $ 3,836,188
            Allowance for losses         (1,330)       -            -           (1,330)
                                    -----------   ---------    ---------     ---------
              Amortized cost, net     3,391,925     429,184       13,749     3,834,858
                                    -----------   ---------    ---------     ---------
        
            Gross unrealized gains       12,619       6,934         -           19,553
            Gross unrealized losses     (21,729)     (3,387)        -          (25,116)
                                    -----------   ---------    ---------     ---------
         
              Fair value           $  3,382,815  $  432,731   $   13,749   $ 3,829,295
                                    ===========   =========    =========     =========
</TABLE>

<TABLE>
            December 31, 1996:
<CAPTION>
                                        ARM Securities
                                   ------------------------
                                   Available-     Held-to-
                                    for-Sale      Maturity    ARM Loans       Total
                                   ------------  ----------  -----------   -----------
<S>                                <C>           <C>          <C>          <C>        
            Amortized cost basis   $  2,282,991  $  460,596   $     -      $ 2,743,587
            Allowance for losses           (990)       -            -             (990)
                                    -----------   ---------    ---------     ---------
              Amortized cost, net     2,282,001     460,596         -        2,742,597
                                    -----------   ---------    ---------     ---------
        
            Gross unrealized gains        7,686       4,169         -           11,855
            Gross unrealized losses     (22,408)     (4,306)        -          (26,714)
                                    -----------   ---------    ---------     ---------
         
              Fair value           $  2,267,279  $  460,459   $     -      $ 2,727,738
                                    ===========   =========    =========     =========
</TABLE>

         During the quarter ended June 30, 1997, the Company realized $21,000 in
         gains  on the  sale of  $33.6  million  of ARM  securities  which  were
         classified as available-for-sale.

         As of June 30, 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  $1,330,000,  including  a
         provision for credit  losses of $210,000  during the quarter ended June
         30, 1997. At this time,  the Company is providing for potential  future
         credit losses on two securities  that have an aggregate  carrying value
         of $14.7 million, which represent less than 0.4% of the Company's total
         portfolio of ARM assets.  Both of these  securities  are performing and
         have varying  degrees of remaining  credit  support that  mitigates the
         Company's exposure to potential future credit losses.

         As of June 30, 1997,  the Company had $76.0 million of  commitments  to
         purchase ARM securities.

         The average  effective  yield on the ARM assets  owned,  including  the
         amortization  of the net  premium  paid for the ARM  assets and the Cap
         Agreements,  was 6.67% as of June 30, 1997 and 6.64% as of December 31,
         1996.

         As of June 30, 1997 and December 31,  1996,  the Company had  purchased
         Cap Agreements  with a remaining  notional amount of $3.447 billion and
         $2.266 billion, respectively. The notional amount of the Cap Agreements
         purchased  generally  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  10.44%.  The Company's ARM assets portfolio
         had an  average  lifetime  interest  rate cap of  11.68% as of June 30,
         1997. The initial aggregate  notional amount of the Cap Agreements will
         decline  to  approximately  $2.552  billion  over  the  period  of  the
         agreements,  which expire between 1999 and 2004. 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 assets 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  six   different
         counterparties,  four of which are rated AAA and 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 assets. The reverse  repurchase  agreements are secured
         by the market value of the Company's ARM assets and bear interest rates
         that have historically moved in close relationship to LIBOR.

         As of June 30,  1997,  the Company had  outstanding  $3.512  billion of
         reverse repurchase agreements with a weighted average borrowing rate of
         5.76% and a weighted average  remaining  maturity of 3.1 months.  As of
         June  30,  1997,  $1.244  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 June 30, 1997 were  collateralized by
         ARM  securities  with a  carrying  value of $3.705  billion,  including
         accrued interest.

         At June 30, 1997, the reverse  repurchase  agreements had the following
         remaining maturities (dollars in thousands):
                            
                             Within 30 days        $  1,149,124
                             30 to 90 days            1,527,868
                             90 days to one year        834,580
                                                    -----------
                                                   $  3,511,572
                                                    ===========

         As of June 30, 1997,  the Company had entered into nine  interest  rate
         swap agreements having an aggregate  notional balance of $1.090 billion
         and a weighted average remaining term of 3.1 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 37 days to 61 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 June 30, 1997,
         there was no balance outstanding under this agreement.

         As of June  30,  1997,  the  Company  had  financed  a  portion  of its
         portfolio of interest rate cap  agreements  with $12.1 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 2.5
         years. The other  borrowings  financing cap agreements at June 30, 1997
         were  collateralized  by ARM securities  with a carrying value of $15.9
         million,  including accrued interest. The aggregate maturities of these
         other borrowings are as follows (dollars in thousands):

                             1997         $      2,126
                             1998                4,509
                             1999                4,877
                             2000                  632
                                            ----------
                                          $     12,144

         During  the  quarter  ended  June 30,  1997,  the  total  cash paid for
         interest was $47.3 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 June 30,  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>

                                        June 30, 1997          December 31, 1996
                                   ------------------------  ------------------------
                                     Carrying      Fair       Carrying       Fair
                                      Amount       Value       Amount        Value
                                   -----------  -----------  -----------  -----------
<S>                                <C>          <C>          <C>          <C>
            Assets:
              ARM assets           $ 3,820,702  $ 3,826,870  $ 2,689,727  $ 2,692,521
              Cap agreements             5,046        2,425        5,465        2,535

            Liabilities:
              Other borrowings          12,144       12,403       14,187       14,744
              Swap agreements              (33)          93           (7)         440
</TABLE>

         The above carrying amounts for assets are combined in the balance sheet
         under  the  caption  ARM  assets.   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. The dividends are cumulative  commencing on the issue date and
         are payable quarterly, in arrears. The dividends per share are equal to
         the greater of (i) $0.605 per quarter,  or (ii) the quarterly  dividend
         declared on the Company's  common stock.  Each share is  convertible at
         the  option of the  holder at any time into one share of common  stock.
         The  preferred  shares  are  redeemable  by the  Company  on and  after
         December 31, 1999, in whole or in part,  as follows:  (i) for one share
         of  common  stock  plus  accumulated,  accrued  but  unpaid  dividends,
         provided  that for 20 trading days within any period of 30  consecutive
         trading  days the closing  price of the common  stock equals or exceeds
         the  conversion  price of $25,  or (ii) for cash at the issue  price of
         $25, plus any  accumulated,  accrued but unpaid  dividends  through the
         redemption  date.  In the  event of  liquidation,  the  holders  of the
         preferred  shares  will be entitled to receive out of the assets of the
         Company,  prior to any  distribution  to the common  shareholders,  the
         issue price of $25 per share in cash, plus any accumulated, accrued and
         unpaid dividends.

         In May 1997,  the Company  issued  861,850  shares of common stock at a
         price of $19.50 per share  pursuant to its  Registration  Statement  on
         Form S-3 declared  effective in December  1996.  Net proceeds from this
         issuance totaled $16.2 million.

         In July 1997, the Company issued  2,100,000 shares of common stock at a
         price of $22.625 per share  pursuant to its  Registration  Statement on
         Form S-3 declared  effective in December  1996.  Net proceeds from this
         issuance  totaled $45.0  million.  Upon  completion of this issuance of
         common stock, the Company had $109 million of its securities registered
         for future sale under this Registration Statement.

         During the quarter  ended June 30,  1997,  the Company  issued  113,501
         shares  of  common  stock  under its  dividend  reinvestment  and stock
         purchase  plan and received net proceeds of $2.2  million.  For the six
         month period ended June 30, 1997,  the Company issued 215,838 shares of
         common stock under this plan and received net proceeds of $4.2 million.

         On June 18, 1997,  the Company  declared a second  quarter  dividend of
         $0.49  per  common  share  which  was paid on July 10,  1997 to  common
         shareholders of record as of June 30, 1997.  Additionally,  the Company
         declared a  dividend  of $0.605  per share to the  shareholders  of the
         Series A 9.68%  Cumulative  Convertible  Preferred Stock for the second
         quarter which was also paid on July 10, 1997 to preferred  shareholders
         of record as of June 30, 1997.  For federal  income tax  purposes  such
         dividends  are ordinary  income to the  Company's  common and preferred
         shareholders.

NOTE 6.  STOCK OPTION PLAN

         The Company has a Stock Option 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 June 30,  1997,  there were  36,200  options
         granted to buy common shares at an exercise  price of $19.50 along with
         9,051 DERs.  As of June 30,  1997,  the  Company  had  778,866  options
         outstanding at exercise  prices of $9.375 to $20 per share,  626,746 of
         which were  exercisable.  The weighted  average  exercise  price of the
         options  outstanding  is $16.36 per  share.  There have been no options
         exercised during 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 June 30, 1997 and 1996,  the Company  paid the
         Manager $876,000 and $405,000, respectively, in base management fees in
         accordance  with the terms of the Agreement.  For the six month periods
         ended  June 30,  1997 and  1996,  the  Company  paid the  Manager  base
         management fees of $1,687,000 and $764,000, respectively.

         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 June
         30, 1997 and 1996, the Company paid the Manager  $781,000 and $508,000,
         respectively,  in performance based compensation in accordance with the
         terms of the  Agreement.  For the six month periods ended June 30, 1997
         and 1996, the Company paid the Manager  performance based  compensation
         in the amounts of $1,638,000 and $1,096,000, respectively.



<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 July 14, 1997.

GENERAL

Thornburg Mortgage Asset Corporation (the "Company") is a specialized  financial
institution that primarily  invests in  adjustable-rate  mortgage ("ARM") assets
comprised of ARM securities and ARM loans,  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 assets and
seeks to generate  income based on the  difference  between the yield on its ARM
assets 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  assets  portfolio  may  consist  of  either  agency or
privately  issued  (generally   publicly   registered)   mortgage   pass-through
securities,   multiclass   pass-through   securities,   collateralized  mortgage
obligations  ("CMOs"),  ARM loans 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 ARM  portfolio's  overall  high credit  quality.  The  Company's  ARM
portfolio is currently comprised of less than 4% of Other Investment assets. The
Company may increase its  investment in Other  Investment  assets,  specifically
classes of multi-class pass-through certificates,  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 also expects to acquire additional 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   characteristics  of  the  ARM  securities
originated  and  held  in  its  investment  portfolio.   The  Company  plans  on
securitizing  the  loans  that it  acquires  in order to  continue  its  current
strategy of owning high quality, liquid ARM securities and financing them in the
reverse  repurchase  market  because the Company  believes  this  strategy  will
increase  the  portfolio's  total  return and result in a higher net spread when
considering  the cost of  financing  and credit  provisions.  In  pursuing  this
strategy the Company  will likely have a higher  degree of credit risk than when
acquiring  securities directly from the market.  However,  any additional credit
risk will be consistent with the Company's objectives of maintaining a portfolio
with a high  level of credit  quality  that  provides  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 June 30,  1997,  the  Company  held total  assets of $3.873  billion,  $3.826
billion of which  consisted  of ARM assets,  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,   privately-issued   (generally   publicly
registered)  mortgage  securities,  most of which  are  rated AA or higher by at
least  one  of the  Rating  Agencies  or ARM  loans  originated  to "A"  quality
underwriting  standards.  At June 30, 1997,  96.1% of the Company's  assets 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 assets owned at June 30, 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 PORTFOLIO BY ISSUER AND CREDIT RATING
                             (amounts in thousands)
<CAPTION>

                                       June 30, 1997          December 31, 1996
                                   ----------------------  ----------------------
                                    Carrying    Portfolio   Carrying    Portfolio
                                      Value        Mix        Value        Mix
                                   ----------   ---------  ----------   ---------
<S>                                <C>          <C>        <C>          <C>
    HIGH QUALITY:
       FHLMC/FNMA                  $2,481,097      64.9%   $1,474,842      54.1%
       Privately Issued Sec.:
          AAA/Aaa Rating              332,658       8.7       260,031       9.5
          AA/Aa Rating                866,650      22.6       862,727      31.6
                                    ---------   --------    ---------   --------
             Total Privately Issued 1,199,308      31.3     1,122,758      41.1
                                    ---------   --------    ---------   --------

             Total High Quality     3,680,405      96.2     2,597,600      95.2
                                    ---------   --------    ---------   --------

      OTHER INVESTMENT:
         Privately Issued Sec.:
            A Rating                  115,197       3.0       106,531       3.9
            BBB/Baa Rating              6,664       0.2        14,017       0.5
            BB/Ba rating                9,723       0.2         9,727       0.4
         Whole loans                   13,759       0.4           -          -
                                    ---------   --------    ---------   --------
            Total Other Investment    145,343       3.8       130,275       4.8
                                    ---------   --------    ---------   --------

            Total ARM Portfolio    $3,825,748     100.0%   $2,727,875     100.0%
                                    =========   ========    =========   ========
</TABLE>

As of June  30,  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  $1,330,000,  including  a provision  for credit
losses of $210,000  recorded during the quarter ended June 30, 1997.  During the
second quarter of 1997, the Company  realized actual credit losses of $42,000 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.  At this time, the Company is
providing for potential  future losses on two securities  that have an aggregate
carrying value of $14.7 million,  which is less than 0.4% of the Company's total
portfolio of ARM  securities.  Both 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 assets by type of
interest rate index.

<TABLE>
                             ARM PORTFOLIO BY INDEX
                             (amounts in thousands)
<CAPTION>
                                                 June 30, 1997           December 31, 1996
                                              --------------------     ---------------------
                                              Carrying   Portfolio     Carrying    Portfolio
                                                 Value       Mix          Value        Mix
                                              ----------  ---------    ----------   --------
<S>                                           <C>         <C>          <C>          <C> 
      INDEX:
        One-month LIBOR                       $     -           -  %   $   10,646       0.4%
        Six-month LIBOR                        1,301,198       34.0     1,252,884      45.9
        Six-month Certificate of Deposit         205,991        5.4        69,348       2.6
        Six-month Constant Maturity Treasury      42,956        1.1         8,841       0.3
        One-year Constant Maturity Treasury    2,000,043       52.3     1,238,892      45.4
        11th District Cost of Funds              275,560        7.2       147,264       5.4
                                              ----------   ---------   ----------   --------
                                              $3,825,748      100.0%   $2,727,875     100.0%
                                               =========   =========    =========   ========
</TABLE>

The ARM portfolio  had a current  weighted  average  coupon of 7.57% at June 30,
1997. If the ARM portfolio  were "fully  indexed," the weighted  average  coupon
would be 7.75%, based upon the current  composition of the ARM portfolio and the
applicable indices at June 30, 1997.

At June 30, 1997, the current yield of the ARM portfolio was 6.67%.  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  presented  in the  table  below,  the  interest  rate  coupon on each of the
Company's  ARM assets is scheduled  to reprice at least once a year.  As of June
30, 1997, the weighted average repricing  frequency of the ARM portfolio was 8.5
months as compared to 8.0 months as of December 31, 1996. The lengthening of the
repricing  frequency  reflects  the fact that the  predominant  ARM loan product
currently being  originated for sale by mortgage loan originators is tied to the
one-year Constant Maturity Treasury Index and reprices once a year.

<TABLE>
                      ARM PORTFOLIO BY REPRICING FREQUENCY
                             (amounts in thousands)

<CAPTION>
                                       June 30, 1997          December 31, 1996
                                   ---------------------   ----------------------
                                    Carrying   Portfolio     Carrying   Portfolio
                                      Value       Mix          Value       Mix
                                   ----------  ----------  ----------   ---------
<S>                                <C>         <C>         <C>           <C>
      FREQUENCY:
        Every month                $  216,095        5.7%  $  157,910        5.8%
        Every six months            1,866,995       48.8    1,528,042       56.0
        Every twelve months         1,742,658       45.6    1,041,923       38.2
                                    ---------   ---------   ---------   ---------
                                   $3,825,748      100.0%  $2,727,875      100.0%
                                    =========   =========   =========   =========
</TABLE>

During the quarter ended June 30, 1997, the Company  purchased $799.8 million of
ARM securities,  100% of which were High Quality assets and $13.7 million of ARM
loans originated to "A" quality  underwriting  standards.  The Company also sold
$33.6 million of ARM  securities,  $16.2 million of High Quality ARM  securities
and  $17.4  million  of Other  Investments,  all of  which  were  classified  as
available-for-sale  for a net gain of $21,000  during the quarter ended June 30,
1997.

During the six month period ended June 30, 1997, the Company purchased  $1,470.4
million of ARM  securities,  98.5% of which were High  Quality  assets and $13.7
million of ARM loans  originated  to "A"  quality  underwriting  standards.  The
Company also sold $34.3 million of ARM securities, $16.2 million of High Quality
ARM  securities  and  $18.1  million  of Other  Investments,  all of which  were
classified as available-for-sale  for a net gain of $25,000 during the six month
period ended June 30, 1997.

For the quarter and six month period ended June 30, 1997, the Company's mortgage
assets  continued  to pay down at an  approximate  average  annualized  constant
prepayment rate of 22%, which approximates 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 assets.  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 June 30, 1997. As of June 30, 1997, the Company's portfolio of ARM
securities  available-for-sale,  including the applicable Cap Agreements,  had a
net   unrealized   loss  of  $9.1   million,   or   0.27%   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  portfolio  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 portfolio to
continue to rise in a high interest rate  environment just as the Company's cost
of  borrowings  would  continue to rise,  since the  borrowings  do not have any
interest rate cap limitation.  At June 30, 1997, the Cap Agreements owned by the
Company had a remaining notional balance of $3.447 billion with an average final
maturity of 3.2 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
10.44%.  The expense of the Company's  hedging activity amounted to $836,000 and
decreased  the yield on the ARM portfolio by 0.10% during the quarter ended June
30, 1997.  In general,  the fair value of Cap  Agreements  increase  when 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
portfolio.  At June  30,  1997 the fair  value  of the Cap  Agreements  was $2.4
million,  $11.5 million less than the amortized cost of the Cap Agreements.  The
following table presents information about the Company's Cap Agreement portfolio
as of June 30, 1997:

<TABLE>
                    CAP AGREEMENTS STRATIFIED BY STRIKE PRICE
<CAPTION>
        Hedged        Weighted     Cap Agreement                    Weighted
     ARM Securities    Average        Notional                       Average
      Balance (1)     Life Cap        Balance       Strike Price  Remaining Term
   ----------------   --------    ---------------   ------------  --------------
<S><C>                <C>         <C>               <C>           <C>  
   $   375,169,000      9.57%     $   380,798,000       7.50%         2.7 Years
       219,661,000     10.31          219,312,000       8.50          2.1
       261,490,000     10.13          350,190,000       9.00          2.5
       148,186,000     10.83          112,118,000       9.50          2.4
       297,947,000     11.03          254,172,000      10.00          4.8
       464,530,000     11.50          482,498,000      10.50          3.3
       349,578,000     11.96          342,725,000      11.00          3.7
       406,267,000     12.57          399,763,000      11.50          3.9
       525,510,000     12.94          610,063,000      12.00          3.5
       194,813,000     13.53          195,379,000      12.50          3.0
       176,012,000     14.15           99,527,000      13.00          2.6
     -------------   -------         ------------    --------      ------
   $ 3,419,163,000    11.68%       $ 3,446,545,000     10.44%        3.2 Years
     =============   =======        ==============   ========      ======
<FN>
      (1) 90% of the ARM securities' balance which approximates the
          financed portion.
</FN>
</TABLE>

As of June 30,  1997,  the  Company  had entered  into nine  interest  rate swap
agreements having an aggregate notional balance of $1.090 billion and a weighted
average remaining term of three 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
June 30, 1997,  the average cost of the Company's  borrowings  was 5.77%,  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 37 days to 61 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
$65.4 million. In May 1997, the Company issued 861,850 shares of common stock at
a price of  $19.50  per  shares,  also  pursuant  to an  effective  Registration
Statement. Net proceeds from this issuance totaled $16.2 million. Primarily as a
result  of  these  issuances  of  common  and  preferred  stock,  the  Company's
shareholders'  equity,  excluding the fair value  adjustment  for assets held as
available-for  sale, has grown to $323.6 million as of June 30, 1997 from $238.0
million as of December 31, 1996.  As of June 30, 1997,  the  Company's  ratio of
shareholders'  equity to assets,  excluding the fair value adjustment for assets
held as  available-for  sale,  was 8.34% as compared to 8.59% as of December 31,
1996. The ratio of  shareholders'  equity to assets as of June 30, 1997 reflects
the high level of asset acquisition  opportunities  that the Company was able to
take advantage of during the second quarter of 1997 and is at the low end of the
range of 8% to 10% that the Company plans to operate at, in accordance  with its
investment  policies.  In July 1997, the Company issued  2,100,000 new shares of
common  stock at a price of $22.625 per share and received net proceeds of $45.0
million,  which was fully  invested  and  leveraged  at the time of receipt as a
result of the second  quarter  acquisitions  and was applied to the  outstanding
commitments  to purchase ARM  securities  as of June 30, 1997.  In general,  the
Company  expects  to  continue  to acquire  additional  ARM assets in advance of
raising  new  capital  in order to  maximize  shareholder  value  and  return by
minimizing the length of the investment period normally  associated with raising
new capital, without exceeding any of its investment policies.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997

For the quarter ended June 30, 1997, the Company's net income was $10,075,000 as
compared to $6,169,000 for the quarter ended June 30, 1996. Net income available
to  common  shareholders,  after  the $0.65  per  share  dividend  to  preferred
shareholders,  increased  to  $8,405,000  or $0.50  per  common  share  based on
weighted average common shares of 16,816,873 from $6,169,000 or $0.42 per common
share based on weighted  average  common  shares of  14,844,227  for the quarter
ended  June 30,  1996.  This is an  increase  in net  income  per  common  share
available to common  shareholders  of 19%.  Net interest  income for the quarter
totaled  $12,175,000  as compared to $7,225,000  for the same period in 1996, an
increase of 69%. Net interest  income is comprised of the interest income earned
on mortgage  investments and cash less interest expense from borrowings.  During
the  second  quarter  of 1997,  the  Company  recorded a gain on the sale of ARM
securities  of $21,000 as compared to no gain or loss during the second  quarter
of 1996.  Additionally,  during the second quarter of 1997, the Company  reduced
earnings and the carrying  value of its ARM securities by $210,000 for projected
credit  losses.  For the  quarter  ended June 30,  1997,  the  Company  incurred
operating  expenses  of  $1,911,000  consisting  of a  base  management  fee  of
$876,000,  a performance  based fee of $781,000 and other operating  expenses of
$254,000.  During  the same  period  of 1996,  the  Company  incurred  operating
expenses of  $1,056,000  consisting  of a base  management  fee of  $405,000,  a
performance based fee of $508,000 and other operating expenses of $143,000.


<PAGE>


The Company's  return on average  common  equity  reached  13.45%,  it's highest
quarterly  level ever, for the quarter ended June 30, 1997 as compared to 11.22%
for the same period in 1996. 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%
   Jun 30, 1997    19.48%      0.34%         0.03%        1.81%        1.25%         2.67%       13.45%
<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 June 30, 1997, the Company's taxable income was $8,573,000
or $0.51 per weighted  average share  outstanding.  Taxable income in the second
quarter of 1997  excludes the loss  provisions  of $210,000 but includes  actual
credit  losses of $42,000.  For the quarter  ended June 30, 1996,  the Company's
taxable income was $6,169,000 or $0.42 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.

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     Cumulative
                     Taxable       Taxable        Dividend      Dividend   Undistributed
      For The          Net        Net Income      Declared       Pay-out      Taxable
   Quarter Ended    Income (1)   Per Share (2)  Per Share (2)   Ratio (3)    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
   Jun 30, 1997        8,573         0.51              0.49         99%         1,603

<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
second  quarter of 1997 as compared to the same period of 1996 was the  combined
effect  of the  increased  size of the  Company's  balance  sheet  as well as an
increase in the yield on the Company's portfolio of ARM assets, partially offset
by an increase in the Company's cost of funds.  Net interest income increased by
$4,950,000.  Of this increase,  the increased average size of the Company during
the  second  quarter  of 1997 as  compared  to 1996  contributed  to higher  net
interest  income  in the  amount  of  $4,079,000.  The  average  balance  of the
Company's  interest  earning assets was $3.464 billion during the second quarter
of 1997 as  compared  to $2.248  billion  during  the same  period  of 1996,  an
increase of 54%.  Additionally,  $1,711,000 is the result of the higher yield on
the Company's ARM assets portfolio and other interest  earning assets.  This was
partially  offset by an  increase  to the  Company's  cost of funds which had an
impact of $841,000 for a combined favorable rate variance of $870,000. The yield
on the Company's  interest earning assets during the quarter ended June 30, 1997
was 6.65% as compared  to 6.35%  during the same  period of 1996.  Also,  during
these same periods,  the Company's cost of funds increased to 5.76% in 1997 from
5.60%  in 1996.  The  Company's  yield on net  interest  earning  assets,  which
includes  the  impact of  shareholders'  equity,  rose to 1.41%  for the  second
quarter of 1997 from 1.29% for the same period of 1996.

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 Assets 
                    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%
   Jun 30, 1997       3,464.1       7.75%        7.57%    0.90%       6.67%    5.77%      0.90%       1.39%

<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>



<PAGE>


<TABLE>
                 COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<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%
      Jun 30, 1997      0.66%       0.13%      0.16%       (0.05)%         0.90%
</TABLE>

As of the end of the quarter ended June 30, 1997, the Company's yield on its ARM
assets  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 6.67% as compared
to 6.65% as of March 31, 1997, an increase of 0.02%. The Company's cost of funds
as of June 30,  1997 was 5.77% as  compared  to 5.67% as of March 31,  1997,  an
increase of 0.10%.  As a result of these  changes,  the  Company's  net interest
spread as of June 30, 1997 was 0.90% as compared to 0.98% as of March 31,  1997,
a decrease of 0.08%.  This decrease in the net interest spread was offset by the
continued  growth of the Company and more efficient use of capital  enabling the
Company to actually  increase its return on equity  despite an increase in short
term  interest  rates  by the  Federal  Reserve  Bank of 0.25% in March of 1997.
During the second quarter of 1997 the Company's  average equity to average total
assets ratio was 9.03% as compared to 9.72% during the first quarter of 1997.

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 June 30, 1997 and 1996:

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

<CAPTION>
                                      For the Quarter Ended     For the Quarter Ended
                                          June 30, 1997              June 30, 1996
                                      ----------------------    ---------------------
                                         Average   Effective      Average    Effective
                                         Balance      Rate        Balance       Rate
                                      ------------ ---------    -----------  ---------
      <S>                             <C>            <C>        <C>           <C>
      Interest Earning Assets:
         ARM assets                   $ 3,444,058     6.66%     $ 2,232,603    6.36%
         Cash and cash equivalents         20,059     5.78           15,612    4.83
                                       ----------    ------      ----------   ------  
                                        3,464,117     6.65        2,248,215    6.35
                                       ----------    ------      ----------   ------
      Interest Bearing Liabilities:
         Borrowings                     3,155,664     5.76        2,034,159    5.60
                                       ----------    ------      ----------   ------
      Net Interest Earning Assets
         and Spread                   $   308,453     0.89%     $   214,056    0.75%
                                       ==========    ======      ==========   ======
      Yield on Net Interest
        Earning Assets (1)                            1.41%                    1.29%
                                                     ======                   ======
<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 second quarter of 1997, the Company realized a net gain from the sale
of ARM securities in the amount of $21,000 as compared to no gain or loss during
the second quarter of 1996.  Additionally,  the Company  recorded an expense for
credit losses in the amount of $210,000  during the quarter ended June 30, 1997,
although the Company only incurred  actual  credit losses of $42,000  during the
quarter. The Company provided for additional credit losses because its review of
underlying  ARM  collateral  indicates  potential  for  some  loss  on  two  ARM
securities,  which are being  carried  at their  current  market  value of $14.7
million, or 0.4% of the Company's ARM portfolio.

For the quarter ended June 30, 1997, the Company's  ratio of operating  expenses
to average  assets was 0.22% as compared  to 0.19% for the same  quarter of 1996
and as compared to 0.25% for the  previous  quarter  ended March 31,  1997.  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 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%
   Jun 30, 1997          0.13%             0.09%             0.22%
</TABLE>

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997

For the six month  period  ended June 30,  1997,  the  Company's  net income was
$19,370,000  as compared to  $11,300,000  for the first half of 1996. Net income
available  to  common  shareholders,  after the  $1.05  per  share  dividend  to
preferred  shareholders  for the period from January 24, 1997 (date of issuance)
through June 30, 1997,  increased to $16,458,000 or $0.99 per common share based
on weighted  average common shares of 16,565,505  from  $11,300,000 or $0.83 per
common share based on weighted  average  common shares of 13,589,537 for the six
month period ended June 30, 1996. This is an increase in net income available to
common  shareholders  per common share of 19%. Net interest income for the first
half of 1997 totaled  $23,507,000 as compared to $13,415,000 for the same period
in 1996,  an increase of 75%. Net  interest  income is comprised of the interest
income  earned on  mortgage  investments  and cash less  interest  expense  from
borrowings.  During the first half of 1997,  the Company  recorded a gain on the
sale of ARM  securities  of $25,000 as compared to a net gain of $13,000  during
the first half of 1996. Additionally, during the first half of 1997, the Company
reduced  earnings and the carrying  value of its ARM  securities by $400,000 for
projected credit losses.  The Company incurred  operating expenses of $3,762,000
for the six month period,  consisting  principally of the base management fee of
$1,687,000,  a performance fee of $1,638,000 and other miscellaneous expenses of
$437,000 as compared to operating  expenses of $2,128,000 for the same period in
1996,  consisting  principally  of the  base  management  fees  of  $764,000,  a
performance fee of $1,096,000 and other miscellaneous expenses of $268,000.

As  discussed  above,  the  primary  reasons for the rise in the  Company's  net
interest  income for the six month period ended June 30, 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 assets,
partially  offset by an increase in the  Company's  cost of funds.  Net interest
income increased by $10,092,000. Of this increase, the increased average size of
the Company during the second quarter of 1997 as compared to 1996 contributed to
higher net interest  income in the amount of $7,905,000.  The average balance of
the Company's  interest  earning assets was $3.207 billion during the first half
of 1997 as  compared  to $2.137  billion  during  the same  period  of 1996,  an
increase of 50%.  Additionally,  $2,643,000 is the result of the higher yield on
the Company's ARM assets portfolio and other interest  earning assets.  This was
partially  offset by an  increase  to the  Company's  cost of funds which had an
impact of $456,000 for a combined  favorable  rate variance of  $2,186,000.  The
yield on the Company's interest earning assets during the six month period ended
June 30,  1997 was 6.65% as  compared  to 6.40%  during the same period of 1996.
Also, during these same periods,  the Company's cost of funds increased to 5.71%
in 1997 from 5.66% in 1996. The Company's yield on net interest  earning assets,
which includes the impact of shareholders'  equity,  rose to 1.47% for the first
half of 1997 from 1.26% for the same period of 1996.

As of the end of the quarter ended June 30, 1997, the Company's yield on its ARM
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 6.67% as compared to 6.64%
as of December 31, 1996, an increase of 0.03%. The Company's cost of funds as of
June 30,  1997 was  5.77% as  compared  to 5.72% as of  December  31,  1996,  an
increase of 0.05%.  As a result of these  changes,  the  Company's  net interest
spread as of June 30, 1997 was 0.90% as  compared  to 0.92% as of  December  31,
1996, a decrease of 0.02%.

The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the six month periods ended June 30, 1997 and June 30, 1996:

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

<CAPTION>
                                       For the Six Month        For the Six Month
                                         Period Ended             Period Ended
                                         June 30, 1997            June 30, 1996
                                     ---------------------    ---------------------
                                       Average   Effective      Average   Effective
                                       Balance      Rate        Balance      Rate
                                     ----------- ---------     ---------- ---------
<S>                                  <C>             <C>      <C>             <C>
      Interest Earning Assets:
         ARM assets                  $ 3,190,153     6.65%    $ 2,122,639     6.41%
         Cash and cash equivalents        17,203     5.57          14,349     5.19
                                       3,207,356     6.65       2,136,988     6.40
                                       ---------    ------      ---------    ------
      Interest Bearing Liabilities:
         Borrowings                    2,912,848     5.71       1,942,333     5.66

      Net Interest Earning Assets
          and Spread                 $   294,508    0.94%     $   194,655     0.74%
                                       =========   ======       =========    ======
      Yield on Net Interest
           Earning Assets (1)                       1.47%                     1.26%
                                                   ======                    ======

<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>

The increase in the  Company's  operating  expenses is  primarily  the result of
increased  management  and  performance  fees  paid  to the  Manager  which  are
commensurate  with the increased  equity base of the Company and the increase in
the Company's  return on equity.  In order for the Manager to earn a performance
fee,  the rate of return  to the  shareholders,  as  defined  in the  Management
Agreement,  must exceed the average ten-year US Treasury rate during the quarter
plus 1%. During the first half of 1997, the Manager earned a performance  fee of
$1,638,000 as compared to $1,096,000  during the same period of 1996. During the
six month  period ended June 30, 1997,  after paying this  performance  fee, the
Company's  return on average  common equity reached 13.42% as compared to 11.16%
during the same period of 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary  source of funds for the quarters ended June 30, 1997 and
1996 consisted of reverse  repurchase  agreements,  which totaled $3.512 billion
and  $2.190  billion  at  the  respective  quarter  ends.  The  Company's  other
significant  source  of funds  for the  quarters  ended  June 30,  1997 and 1996
consisted of payments of principal  and interest  from its ARM  portfolio in the
amounts of $228.2 million and $186.4 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  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 assets, cash and cash equivalents.

The borrowings incurred at June 30, 1997 had a weighted average interest cost of
5.77%,  which  includes  the cost of  interest  rate swaps,  a weighted  average
original term to maturity of 6.2 months and a weighted average remaining term to
maturity of 3.3 months.  As of June 30, 1997,  $1.244  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-three  different  investment
banking firms and commercial banks and at June 30, 1997 had borrowed funds under
reverse repurchase  agreements with fifteen of these firms.  Because the Company
borrows funds based on the fair value of its ARM assets, the Company's borrowing
ability could be adversely affected as a result of either a significant increase
in  short-term  interest  rates or a credit  downgrade  of a mortgage  pool or a
mortgage  pool  insurer,  either of which  would  reduce  the fair  value of the
Company's  ARM  securities.  If such a decrease  in fair  value was  significant
enough,  it could  require  the  Company  to sell  assets  in order to  maintain
liquidity.  For the quarter  ended June 30, 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 Registration  Statement on Form S-3 declared effective in December 1996. Net
proceeds from this issuance totaled $65.8 million.

In May 1997,  the Company  issued  861,850  shares of common stock at a price of
$19.50 per share  pursuant to its  Registration  Statement  on Form S-3 declared
effective  in December  1996.  Net proceeds  from this  issuance  totaled  $16.2
million.

In July 1997, the Company issued  2,100,000 shares of common stock at a price of
$22.625 per share  pursuant to its  Registration  Statement on Form S-3 declared
effective  in December  1996.  Net proceeds  from this  issuance  totaled  $45.0
million.  Upon completion of this issuance of common stock, the Company had $109
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  second  quarter  1997
participation in the Plan, the Company issued 113,501 new shares of common stock
and  received  $2.2 million of new equity  capital.  During the six month period
ended June 30, 1997,  the Company  issued 215,838 new shares of common stock and
received $4.2 million of new equity capital.

EFFECTS OF INTEREST RATE CHANGES

Changes in interest rates impact the Company's  earnings in various ways.  While
the Company only invests in ARM assets,  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 assets 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 assets 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 assets 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 assets  over a longer  time  period  than  otherwise,
resulting in an increased  yield on its mortgage  assets.  Therefore,  in rising
short-term  interest rate  environments  where  prepayments  are declining,  the
interest rate on the ARM 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 assets 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  assets.  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 assets,  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 assets 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
assets 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 assets
and certain liabilities.  In general, when interest rates rise the Company's ARM
assets 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  assets.  Because  the
Company  borrows funds based on the fair value of its ARM assets,  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 assets 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  assets  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 June 30, 1997,  the Company  calculates  its  Qualified  REIT  Assets,  as
defined in the Internal  Revenue Code of 1986,  as amended (the  "Code"),  to be
99.8% 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
six month period ended June 30, 1997 subject to the 30% income  limitation under
the REIT rules amounted to 0.78% of total revenue. The Company also met all REIT
requirements  regarding the ownership of its common stock and the  distributions
of its net income.  Therefore, as of June 30, 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 June
30, 1997, the Company calculates that it is in compliance with this requirement.



<PAGE>


PART II.    OTHER INFORMATION

Item 1. Legal Proceedings
         At June 30, 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
      (a)   The Annual  Meeting of  Shareholders  of the  Company was held on
            May 2, 1996.

      (c)   The following matters were voted on at the Annual Meeting:
         (1)   Election of Directors
                                                           Votes
                                                   -----------------------
                              Nominee                For          Withheld
                        -------------------------  ----------     --------
                        H. Garrett Thornburg, Jr.  14,415,980       85,620
                        Joseph H. Badal            14,414,680       86,920
                        Owen M. Lopez              14,409,574       92,026
                        Stuart C. Sherman          14,412,649       88,951

         (2) Amendments  to the  registrant's  amended and restated  1992
            Stock Option Plan
                                                 Votes
                               ----------------------------------------
                                   For          Against        Abstain
                               ----------       --------       --------
                               13,176,394        818,206        158,168


Item 5.  Other Information
         None

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

      (a)   Exhibits
            None

      (b)   Reports on Form 8-K
            None


<PAGE>


                                   SIGNATURES



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




                                    THORNBURG MORTGAGE ASSET CORPORATION



Dated:  July 31, 1997               By:    /s/ Larry A. Goldstone
                                          -----------------------
                                       Larry A. Goldstone,
                                       President and Chief Operating Officer
                                       (authorized officer of registrant)




Dated:  July 31, 1997               By:   /s/ Richard P. Story
                                          --------------------
                                       Richard P. Story,
                                       Chief Financial Officer and Treasurer
                                       (principal accounting officer)