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              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:     September 30, 1996

                                      OR

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

For the transition period from ___________ to ___________

Commission File Number:      001-11914


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

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

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

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

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

Indicate by check mark whether the  Registrant  (1) has filed all  documents and
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                    (1) Yes     X             No
                                            ---------     ----------
                                    (2) Yes     X             No
                                            ---------     ----------
APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($.01 par value)                  16,219,241 as of October 30, 1996

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<PAGE>
                       THORNBURG MORTGAGE ASSET CORPORATION
                                     FORM 10-Q

                                       INDEX

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

  Item 1. Financial Statements

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

          Statements of Operations for the three months and nine
          months ended September 30, 1996 and September 30, 1995.......    4

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

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

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

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



PART II.  OTHER INFORMATION

  Item 1. Legal Proceedings............................................   21

  Item 2. Changes in Securities .......................................   21

  Item 3. Defaults Upon Senior Securities .............................   21

  Item 4. Submission of Matters to a Vote of Security Holders..........   21

  Item 5. Other Information............................................   21

  Item 6. Exhibits and Reports on Form 8-K.............................   21


  SIGNATURES..............................................................22

  Exhibit Index...........................................................23

<PAGE>

PART I.       FINANCIAL INFORMATION

Item 1.       Financial Statements

THORNBURG MORTGAGE ASSET CORPORATION

BALANCE SHEETS
(In thousands, except share data)

                                        September 30, 1996    December 31, 1995
ASSETS                                  ------------------    -----------------

    Adjustable-rate mortgage
        securities (Notes 2, 3 and 4)  $      2,557,903      $      1,995,287
    Cash and cash equivalents                     1,928                 3,660
    Accrued interest receivable                  21,561                18,778
    Prepaid expenses and other                    1,124                   260
                                         --------------       ---------------
                                        $     2,582,516      $      2,017,985
                                         ==============       ===============


LIABILITIES

    Reverse repurchase agreements
       (Note 3 and 4)                   $     2,327,773      $      1,780,854
    Other borrowings (Note 3 and 4)              15,390                18,446
    Payable for securities purchased               -                   42,990
    Accrued interest payable                     12,681                 9,907
    Dividends payable (Note 7)                    6,439                 4,632
    Accrued expenses and other                    1,953                   679
                                          -------------        --------------
                                              2,364,236             1,857,508
                                          -------------        --------------


STOCKHOLDERS' EQUITY

    Common stock: par value $.01 per
       share; 50,000,000 shares
       authorized, 16,098,671 and
       12,190,712 shares issued and
       outstanding (Note 6)                         161                   122
    Additional paid-in-capital                  231,228               175,708
    Available-for-sale securities:
       Unrealized gain (loss) (Note 2)          (18,091)              (21,835)
       Realized deferred hedging gain             4,967                 7,009
    Retained  earnings (deficit)                     15                  (527)
                                          -------------        --------------
                                                218,280               160,477
                                          -------------        --------------

                                         $    2,582,516      $      2,017,985
                                          =============       ===============




See Notes to Financial Statements.
<PAGE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF OPERATIONS
(In thousands, except share data)


                                 Three Months Ended          Nine Months Ended
                                    September 30,              September 30,
                                1996         1995          1996         1995
                            -----------   -----------   -----------   ----------

Interest income           $      40,173  $     30,178   $   108,556  $   84,057
Interest expense                 32,221        25,757        87,188      76,020
                            -----------    ----------     ---------   ---------
     Net interest income          7,952         4,421        21,368       8,037
                            -----------    ----------     ---------   ---------

Gain (loss) on sale of
  ARM securities                    320            42           333        (617)

General and administrative expenses:
   Management fee (Note 5)          430           348         1,194       1,037
   Performance fee (Note 5)         631           151         1,727         151
   Other                            183           131           452         363
                            -----------    ----------     ---------   ---------
                                  1,244           630         3,373       1,551
                            -----------    ----------     ---------   ----------

Net income                $       7,028  $      3,833   $    18,328  $    5,869
                            ===========    ==========     =========   ==========

Net income per share      $        0.44  $       0.32   $      1.27  $     0.50
                            ===========    ==========     =========   ==========

Average number of shares
  outstanding                16,080,363    11,946,970    14,425,873  11,867,693
                            ===========   ===========   ===========  ===========






See Notes to Financial Statements.
<PAGE>

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months and Nine Months Ended September 30, 1996
(In thousands, except share data)
                                        Available-for-Sale Sec
                                        ----------------------
                       Common                        Realized
                        Stock Additional Unrealized  Deferred Retained
                         Par   Paid-in      Gain    Gain From Earnings
                        Value  Capital     (Loss)     Hedging (Deficit)  Total
Balance,               ------ ---------- ---------- --------- --------- --------
 December 31, 1995     $  122 $  175,708 $ (21,835) $   7,009 $  (527) $160,477

Issuance of common
 stock (Note 5)            37     53,066        -         -         -    53,103

Available-for-Sale Sec:
 Fair value adjustment,
  net of amortization       -        -        2,339       -         -     2,339

 Deferred gain on sale
  of hedges, net of
  amortization              -        -          -      (1,563)      -    (1,563)

Net income                  -        -          -         -     11,300   11,300

Dividends declared -
 $0.80 per share            -        -          -         -    (11,347) (11,347)

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

Issuance of common
 stock (Note 5)             2      2,454         -         -        -     2,456

Available-for-Sale Sec:
 Fair value adjustment,
  net of amortization       -        -          1,405      -        -     1,405

 Deferred gain on sale
  of hedges, net of
  amortization              -        -            -       (479)     -      (479)

Net income                  -        -            -         -    7,028    7,028

Dividends declared -
 $0.40 per share            -        -            -         -   (6,439)  (6,439)

Balance,              ------- ---------- ----------- --------- ------- --------
 September 30, 1996   $   161 $  231,228 $  (18,091) $   4,967 $    15 $218,280
                      ======= ========== =========== ========= ======= ========


See Notes to Financial Statements.
<PAGE>


THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)
                                   Three Months Ended       Nine Months Ended
                                      September 30,            September 30,
                                    1996        1995         1996        1995
                                 ----------  ----------   ----------  ---------
Operating Activities:
 Net Income                      $    7,028  $    3,833   $   18,328  $   5,869
 Adjs to reconcile net income 
  to net cash provided by
  operating activities:
    Amortization                      3,432       1,538       10,210      2,563
    Net (gain) loss from
      investing activities             (320)        (42)        (333)       617
    Change in assets and liab:
      Accrued interest receivable    (2,026)       (649)      (2,783)    (3,457)
      Prepaid expenses and other       (791)        (34)        (864)      (165)
      Accrued interest payable        1,529        (936)       2,774        579
      Accrued expenses and other      1,231        (235)       1,274         87
       Net cash provided by      ----------  ----------   ----------  ---------
         operating activities        10,083       3,475       28,606      6,093
                                 ----------  ----------   ----------  ---------
Investing Activities:
 Available-for-sale assets:
  Purchase of adj-rate
   mortgage assets                 (310,220)   (220,600)  (1,068,522)  (408,096)
  Proceeds on sales of adj-rate
   mortgage assets                   26,047      16,235       32,586     65,218
  Principal payments on adj-rate
   mortgage assets                  107,298      61,258      327,880    118,735
 Held-to-maturity assets:
  Principal payments on adj-rate
   mortgage assets                   27,191      20,867       94,697     46,930
 Purchase of int rate cap agreements    -          (185)        (423)      (403)
    Net cash provided by (used in)---------  -----------  -----------  --------
     investing activities          (149,684)   (122,425)    (613,782)  (177,616)
                                  ----------  ----------  -----------  ---------
Financing Activities:
 Net borrowings from reverse
  repurchase agreements             137,677      118,606     546,919    170,598
  Repayments of other borrowings       (762)        (705)     (3,056)    (2,501)
  Proceeds from common stock issued   2,456          925      55,560      1,866
  Dividends paid                     (6,375)      (1,783)    (15,979)    (5,316)
    Net cash provided by (used in)----------   ----------  ----------  --------
     financing activities           132,996      117,043     583,444    164,647
                                  ----------   ----------  ----------  --------
Net increase (decrease) in cash
  and cash equivalents               (6,605)      (1,907)     (1,732)    (6,876)

Cash and cash equivalents at
  beginning of period                 8,533        5,879       3,660     10,848

Cash and cash equivalents at     ----------   ----------  ----------  ---------
  end of period                  $    1,928   $    3,972  $    1,928  $   3,972
                                 ==========   ==========  ==========  =========

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



See Notes to Financial Statements
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Note 1.  Significant Accounting Policies

              Cash and cash equivalents

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

              Adjustable-rate mortgage securities

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

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

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

              Credit risk

                  The Company has limited its  exposure to credit  losses on its
                  portfolio of  adjustable-rate  mortgage ("ARM")  securities by
                  only  purchasing  securities  that  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 Company also limits its exposure to credit losses
                  by limiting its investment in investment grade securities that
                  are rated A, or  equivalent,  or BBB, or  equivalent,  ("Other
                  Investments")  to no  more  than  30%  of  the  portfolio  and
                  currently has less than 5% of its portfolio  invested in Other
                  Investments.   Other  Investments  generate  a  higher  yield,
                  believed to be commensurate  to 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  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 effect the  dividends  paid by the
                  Company  to  shareholders  in the period  the  provisions  are
                  taken. Actual losses realized by the Company do reduce taxable
                  income in the  period the actual  loss is  realized  and would
                  effect the dividends paid to shareholders for that tax year.
              
               Interest rate cap agreements

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

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

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

              Interest rate swap agreements

                  The Company enters into interest rate swap agreements in order
                  to manage its interest rate  exposure  when  financing its ARM
                  securities.  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  or state  income tax to the
                  extent of its  distributions  to  shareholders  and as long as
                  certain asset, income and stock ownership tests are met.

              Net income per share

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

              Use of estimates

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


<PAGE>


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

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

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

                                                  Available-for-Sale
                                         --------------------------------------
                 (In thousands)          September 30, 1996   December 31, 1995
                                         ------------------   -----------------
                 Amortized cost basis    $        2,096,873   $       1,440,345
                 Allowance for losses                  (200)             -
                                         ------------------   -----------------
                   Amortized cost, net            2,096,673           1,440,345
                                         ------------------   -----------------
                 Gross unrealized gains               6,282               4,468
                 Gross unrealized losses            (23,214)            (24,800)
                                         ------------------   -----------------
                   Fair Value            $        2,079,741   $       1,420,013
                                         ==================   =================

              During the quarter  ended  September  30,  1996,  the Company sold
              $25.5  million  ARM  securities  for a gain of  $520,000.  For the
              nine-month  period ended September 30, 1996, the Company  realized
              $581,000  in gains  and  $48,000  in  losses  on the sale of $32.1
              million   of   ARM   securities,    which   were   classified   as
              available-for-sale.

              As of September  30, 1996,  the Company has reduced the cost basis
              of its ARM securities due to potential future credit losses in the
              amount of $200,000.  Although no losses have been  realized on any
              of the Company's ARM securities,  the Company's analysis of losses
              on loans  underlying  certain ARM securities  owned by the Company
              relative to the remaining  credit  support  protecting the Company
              from credit  losses  indicates  that there is the  possibility  of
              future losses.

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

                                                     Held-To-Maturity
                                         --------------------------------------
                 (In thousands)          September 30, 1996   December 31, 1995
                                         ------------------   -----------------
                 Amortized cost basis    $          478,163   $         575,274
                 Gross unrealized gains               3,790               3,746
                 Gross unrealized losses             (4,546)             (5,437)
                                         ------------------   -----------------
                   Fair Value            $          477,407   $         573,583
                                         ==================   =================

              As of September 30, 1996, the Company had  commitments to purchase
              $14.1 million of ARM securities.

              The average effective yield on the ARM securities owned, including
              the  amortization  of the net premium paid for the ARM  securities
              and the Cap  Agreements,  was 6.51% as of  September  30, 1996 and
              6.73% as of December 31, 1995.

              As of September  30, 1996 and  December 31, 1995,  the Company had
              purchased  Cap  Agreements  with a  remaining  notional  amount of
              $1,887,788,000  and  $1,461,814,000,  respectively.  The  notional
              amount of the Cap Agreements  purchased  decline at a rate that is
              expected to approximate  the  amortization  of the ARM securities.
              Under these Cap Agreements, the Company will receive cash payments
              should either the three-month or six-month  London InterBank Offer
              Rate  ("LIBOR")  increase  above  the  contract  rates  of the Cap
              Agreements which range from 7.50% to 12.50%. The initial aggregate
              notional  amount of the Cap Agreements  declines to  approximately
              $1,207,457,000  over the period of the  agreements,  which  expire
              between 1999 and 2001. The Company  purchased these Cap Agreements
              by incurring a one-time fee, or premium. The premium is amortized,
              or expensed,  over the lives of the Cap  Agreements  and decreases
              interest income on the Company's ARM securities  during the period
              of  amortization.  The  Company has credit risk to the extent that
              the  counterparties  to the Cap  Agreements  do not perform  their
              obligations under the Cap Agreements. If one of the counterparties
              does not perform,  the Company would not receive the cash to which
              it would  otherwise be entitled  under the  conditions  of the Cap
              Agreement.  In order to mitigate this risk and achieve competitive
              pricing,   the  Company  has  a  policy  of  entering  into  these
              agreements  with several  different  counterparties,  each of whom
              must be rated AA or  better.  The  Company  has  entered  into Cap
              Agreements with six different  counterparties,  three of which are
              rated AAA and three 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 mortgage  securities.  The reverse  repurchase
              agreements  are  collateralized  borrowings  secured by the market
              value of the Company's mortgage securities and bear interest rates
              that have historically moved in close relationship to LIBOR.

              As  of   September   30,   1996,   the  Company  had   outstanding
              $2,327,773,000  of reverse  repurchase  agreements with a weighted
              average  borrowing  cost of 5.65%,  a weighted  average  remaining
              maturity of 5.3 months and a weighted  average  remaining  term to
              the  next  repricing  of  49  days.  As  of  September  30,  1996,
              $1,147,186,000 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 September 30, 1996 were collateralized by
              mortgage  securities  with a  carrying  value  of  $2,434,318,000,
              including accrued interest.

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

              As of  September  30, 1996,  the Company had financed  most of its
              portfolio of Cap Agreements with  $15,390,000 of other  borrowings
              which require  quarterly or  semi-annual  payments  until the year
              2000.  These  borrowings  have a  weighted  average  fixed rate of
              interest of 7.91% and have a weighted average  remaining  maturity
              of 3.3  years.  The Cap  Agreements  at  September  30,  1996 were
              collateralized  by mortgage  securities  with a carrying  value of
              $16,208,000, including accrued interest.

              As of  September  30,  1996,  the  Company  has  entered  into two
              interest rate swap agreements having an aggregate notional balance
              of $300  million  and a  weighted  average  remaining  term of 7.0
              months. In accordance with these agreements,  the Company will pay
              a fixed rate of interest  during the term of these  agreements and
              receive a payment  that varies  monthly with the  one-month  LIBOR
              rate. As a result of entering into these  agreements,  the Company
              has reduced the interest rate  variability  of its cost to finance
              its  adjustable-rate  mortgage  assets by  increasing  the average
              period until the next repricing of its borrowings  from 57 days to
              81 days.

              During the three-month and nine-month  periods ended September 30,
              1996,  the  total  cash  paid for  interest  was  $31,228,000  and
              $84,247,000, respectively.
<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 September
              30,  1996  and  December  31,  1995.   FASB   Statement  No.  107,
              Disclosures About Fair Value of Financial Instruments, defines the
              fair value of a  financial  instrument  as the amount at which the
              instrument  could be  exchanged in a current  transaction  between
              willing parties, other than in a forced or liquidation sale.

                                     September 30, 1996      December 31, 1995
                                    --------------------   ---------------------
                                     Carrying     Fair      Carrying     Fair
               (In thousands)         Amount      Value      Amount      Value
               Assets:              ---------- ----------  ---------- ----------
                 Adj-rate mortgage
                   securities       $2,550,899 $2,553,002  $1,988,127 $1,990,217
                 Cap agreements          7,004      4,145       7,160      3,379

               Liabilities:
                 Other borrowings       15,390     16,023       18,446    19,131
                 Swap agreements            53        339          (33)      580

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

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

Note 5.  Common Stock and Stock Option Plan

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

              During the quarter ended  September 30, 1996,  the Company  issued
              151,013 shares of common stock under its Dividend Reinvestment and
              Stock  Purchase  Plan and  received  net  proceeds of  $2,303,000.
              During the nine-month period ended September 30, 1996, the Company
              issued 226,864 shares under this plan and received net proceeds of
              $3,408,000.

              On April 23,  1996,  the Company  completed  a public  offering of
              3,000,000  shares of its common  stock.  The Company  received net
              proceeds of  $42,348,000.  The offering was managed by PaineWebber
              Incorporated,   EVEREN  Securities,   Inc.,   Principal  Financial
              Securities,  Inc.,  Stifel  Nicolaus & Company,  Incorporated  and
              Thornburg Securities  Corporation (the  "Underwriters").  On April
              29, 1996, the Underwriters notified the Company of their intent to
              exercise their option to purchase an additional  450,000 shares to
              cover  over-allotments  which provided the Company with additional
              net proceeds of $6,321,000.

              The Company has adopted a Stock Option Plan which  authorizes  the
              granting of options to purchase an  aggregate  of up to  1,000,000
              shares,  but not more  than 5% of the  outstanding  shares  of the
              Company's common stock. The exercise price for any options granted
              under the Stock  Option Plan may not be less than 100% of the fair
              market  value of the  shares of the  common  stock at the time the
              option is  granted.  As of  September  30,  1996,  the Company had
              613,413  options  outstanding  at  exercise  prices  of  $9.375 to
              $16.125 per share, 467,113 of which were exercisable. The weighted
              average  exercise price of the options  outstanding is $15.434 per
              share.  The options become  exercisable  six months after the date
              granted  and will  expire  ten years  after the date  granted.  On
              August 2, 1996,  Mr.  Richard H. Keyes,  a former  director of the
              Company,  exercised 10,164 options at an average exercise price of
              $16.00 for which the Company received proceeds of $163,000.

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

Note 6.  Transactions with Affiliates

              The Company has a  Management  Agreement  (the  "Agreement")  with
              Thornburg Mortgage Advisory Corporation ("the Manager"). Under the
              terms of this Agreement,  the Manager,  subject to the supervision
              of the  Company's  Board  of  Directors,  is  responsible  for the
              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% of the first $50 million of Average Shareholders' Equity, plus
             3/4 of 1% of the portion between $50 million and $100 million, plus
             5/8 of 1% of the portion between $100 million and $200 million,plus
             1/2 of 1% of the portion between $200 million and $300 million,plus
             3/8 of 1% of the portion above $300 million.

              For the quarters  ended  September 30, 1996 and 1995,  the Company
              paid the Manager  $430,000  and  $348,000,  respectively,  in base
              management fees in accordance with the terms of the Agreement. For
              the  nine-month  periods ended  September  30, 1996 and 1995,  the
              Company paid the Manager $1,194,000 and $1,037,000,  respectively,
              in base management fees.

              The   Manager  is  also   entitled  to  earn   performance   based
              compensation in an amount equal to 25% of the Company's annualized
              net  income,  before  performance  based  compensation,  above  an
              annualized  Return on Equity  equal to the ten year U.S.  Treasury
              Rate plus 1%. For  purposes of the  performance  fee  calculation,
              equity is  generally  defined as the  proceeds  from  issuance  of
              common  stock,  before  underwriter's  discount and other costs of
              issuance,  plus retained earnings.  For the quarter and nine-month
              period ended  September 30, 1996, the Manager earned a performance
              fee in the amount of $631,000 and  $1,727,000,  respectively.  For
              the quarter and  nine-month  period ended  September 30, 1995, the
              Manager earned a performance fee in the amount of $151,000.

              On  September  18,  1996,  the Board of  Directors  of the Company
              completed  a  study  of  the  management   fees  and  expenses  of
              comparable   companies.   The  study   indicated  that  the  total
              management  fees and other  operating  expenses of the Company are
              below the level of other comparable  companies,  whether the other
              companies were self-managed or externally managed.  The study also
              indicated that the Company's base management fee was significantly
              less  than  any  other  externally  managed  company  and that the
              performance  fee  was  higher.  As a  result  of  the  study,  the
              unaffiliated  directors  decreased the formula for the performance
              based compensation from 25% to 20% of the Company's annualized net
              income, before performance based compensation, above an annualized
              Return  on   Equity  as   described   above.   Additionally,   the
              unaffiliated   directors  simplified  the  formula  for  the  base
              management  fee to 1.10% on the  first  $300  million  of  Average
              Shareholders'  Equity  and 0.80% on Average  Shareholders'  Equity
              above $300 million.  These changes take effect October 1, 1996 and
              are not  expected to result in a  significant  change in the total
              fee  paid  to  the  manager   under  the  present   circumstances.
              Management believes these changes will result in a lower total fee
              to be paid to the Manager under circumstances when the Company has
              a higher return on equity and a higher total fee to be paid to the
              manager  when  return on equity is lower,  but still in line with,
              and probably lower than other comparable companies.

Note 7.  Dividends

              On  September  18,  1996,  the  Company  declared a third  quarter
              dividend  of  $6,439,468  or $0.40  per  share  which  was paid on
              October 10, 1996 to  shareholders  of record as of  September  30,
              1996.  For federal income tax purposes such dividends are ordinary
              income to the Company's shareholders.


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


General

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

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

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

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

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

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

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


Financial Condition

At September 30, 1996, the Company held total assets of $2.583  billion,  $2.558
billion of which consisted of ARM securities,  as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. This increase in assets, and
in particular ARM securities,  is primarily related to the successful completion
of the Company's  $48.7 million public  offering of common shares which occurred
in April of 1996. At September 30, 1996, 95.5% of the assets held by the Company
were High Quality  assets as compared  with the Company's  investment  policy of
investing at least 70% of its total assets in High Quality  mortgage  securities
and cash and cash equivalents. All of the mortgage securities currently owned by
the Company are either in the form of pass-through  certificates or a class of a
multi-class pass-through certificate backed by adjustable-rate mortgages.

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

                             MORTGAGE SECURITIES BY ISSUER AND CREDIT RATING
                                            (Amounts in thousands)

                                   Assets Held as of        Assets Held as of
                                   September 30, 1996       December 31, 1995
                                 ----------------------   ---------------------
                                   Carrying    Portfolio   Carrying   Portfolio
                                    Value         Mix        Value       Mix
      High Quality:              ------------  ---------   ----------  --------
          FHLMC/FNMA             $  1,352,091     52.8%    $  894,433    44.8%
          Privately Issued:
             AAA/Aaa Rating           205,180      8.0        165,196     8.3
             AA/Aa Rating             886,715     34.7        784,633    39.3
                                 ------------  ---------   ----------  --------
             Total Priv. Issued     1,091,895     42.7        949,829    47.6
                                 ------------  ---------   ----------  --------
             Total High Quality     2,443,986     95.5      1,844,262    92.4
                                 ------------  ---------   ----------  --------
      Other Investment:
          Privately Issued:
             A Rating                  89,580      3.5        134,970     6.8
             BBB/Baa Rating            14,291      0.6         16,055     0.8
             BB/Ba Rating              10,046      0.4            -        -
                                 ------------  ---------  -----------  --------
             Total Other Inv.         113,917      4.5        151,025     7.6
                                 ------------  ---------  -----------  --------

             Total Mortgage Sec. $  2,557,903    100.0%   $ 1,995,287   100.0%
                                 ============  =========  ===========  ========

The  increased  amount of High Quality  securities as a percent of the total ARM
securities  portfolio is in part due to upgrades to the credit rating of certain
securities.  During the quarter ended  September 30, 1996,  two of the Company's
ARM  securities,  in the  amount  of  $42.0  million,  were  upgraded  from an A
equivalent  rating to a AA equivalent  rating. At the same time, one security in
the amount of $10.0 million was downgraded from an A rating to a Ba rating.  The
security that was  downgraded  has been on the  Company's  watch list along with
certain other securities.  Management has carefully  reviewed certain securities
it has identified as having an increased  level of credit risk and the potential
for downgrade and has discussed these  particular  investments with the Board of
Directors. At this time, the Company believes that the potential credit exposure
is minimal and is commensurate with the higher yield the Company receives on the
Other Investment segment of the Company's ARM securities portfolio.  The Company
monitors  the  credit  losses on the  underlying  loans of all of its  privately
issued ARM securities and evaluates the adequacy of the remaining credit support
on an ongoing basis.  Although the Company has not realized any credit losses on
any ARM security,  the Company has provided  $200,000 for possible losses during
1996 and will continue to evaluate potential credit exposure.

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

                                              MORTGAGE SECURITIES BY INDEX
                                                 (Amounts in thousands)

                                          Assets Held as of   Assets Held as of
                                          September 30, 1996  December 31, 1995
                                         -------------------- ------------------
                                          Carrying  Portfolio Carrying Portfolio
                                            Value      Mix     Value       Mix
    Index:                               -----------  ------  ----------  -----
     One-month LIBOR                     $    10,550    0.4%  $   10,229   0.5%
     Six-month LIBOR                       1,250,180   48.9    1,494,102   74.9
     Six-month Certificate of Deposit         28,339    1.1       32,349    1.6
     Six-month Constant Maturity Treasury      8,930    0.4          -       -
     One-year Constant Maturity Treasury   1,109,092   43.3      385,066   19.3
     11th District Cost of Funds             150,812    5.9       73,541    3.7
                                         -----------  ------  ----------  ------
                                         $ 2,557,903   100.0% $1,995,287  100.0%
                                         =========    ======= ==========  ======


The portfolio had a current  weighted  average  coupon of 7.31% at September 30,
1996. If the portfolio were "fully  indexed",  the weighted average coupon would
be 7.80%, based upon the current composition of the portfolio and the applicable
indices at September 30, 1996.

For the  month of  September  1996,  the  current  yield  of the ARM  securities
portfolio was 6.51%.  The current yield includes the impact of the  amortization
of applicable  premiums and discounts,  the cost of hedging and the amortization
of deferred gains from hedging activity.

During the quarter and nine-month  period ended  September 30, 1996, the Company
purchased  $310.2 million and $1.069 billion,  respectively,  of ARM securities,
all but  $27.0  million  of  which  were  High  Quality  assets  or 97.5% of the
year-to-date  purchases.  As a result of  purchasing a high  percentage  of High
Quality ARM securities  thus far in 1996, the Company's High Quality assets as a
percent of total assets has reached  95.5%,  the highest  level  reported by the
Company  since the  Company  became  fully  invested  after its  initial  public
offering in 1993. Although the Company continues to evaluate the merits of Other
Investments and will most likely purchase  additional  Other  Investments in the
future, the Company has purchased mostly High Quality  investments in 1996 based
on its evaluation of each available  asset's expected total return,  taking into
consideration price, credit risk, liquidity and other factors deemed appropriate
by the Company for asset selection.

During the quarter ended  September 30, 1996,  the Company sold $25.5 million of
adjustable-rate mortgage securities and realized a gain of $520,000. The sale of
adjustable-rate  mortgage  securities  during  the third  quarter  reflects  the
Company's  desire to constantly  manage the portfolio with a view to enhance the
total return of the portfolio.  The Company constantly  monitors the performance
of  individual  securities  and  selectively  sells  an asset  when  there is an
opportunity to replace it with a security that has an expected higher  long-term
yield or more attractive interest rate sensitivity characteristics.  In the case
of the third quarter sales, the Company was able to sell ARM securities that had
either low lifetime maximum interest rate features or low current coupons and to
replace them with ARM securities with higher maximum  interest rate features and
higher current coupons.  The Company is presented with investment  opportunities
in the ARM securities  market on a daily basis and evaluates such  opportunities
against  the  performance  of its  existing  securities  and at times is able to
identify  opportunities  that the Company believes will improve the total return
of its  ARM  securities  portfolio  by  replacing  selected  securities.  In the
management of the  portfolio,  the Company may at times realize  either gains or
losses in the process of replacing  selected assets when the Company believes it
has identified better investment opportunities in order to improve the long-term
total return.

Over the nine-month  period ending  September 30, 1996,  the  composition of the
Company's  ARM  securities  by  index  has  changed,   reflecting  an  increased
percentage of  investments in ARM  securities  indexed to the one-year  constant
maturity  treasury index and a decreased  percentage of investments in six-month
LIBOR indexed ARM  securities.  This change is largely a reflection of the types
of ARM  securities  that have been either  produced or available for sale during
this nine-month  period,  with new LIBOR ARM production down markedly from prior
years. This change is also a reflection of the Company's strategy of acquiring a
larger percentage of fully indexed ARM securities with lifetime maximum interest
rates above 11%. Most of the LIBOR based ARM securities production does not meet
the Company's current maximum lifetime interest rate requirement. As a result of
the Company's  effort,  the average maximum  lifetime  interest rate cap for the
Company's  portfolio  has increased to 11.36% at September 30, 1996, as compared
to 10.71% at December 31, 1995.

For the quarter ended September 30, 1996, the Company's mortgage securities paid
down at an  approximate  average  annualized  constant  prepayment  rate of 23%,
significantly  below the average rate of 31% during the second  quarter of 1996,
and  close to  long-term  expectations.  In the  event  that  actual  prepayment
experience exceeds long-term expectations, due to sustained increased prepayment
activity,  the Company  would have to amortize its premiums  over a shorter time
period,  resulting  in  a  reduced  yield  to  maturity  on  the  Company's  ARM
securities. Conversely, if actual prepayment experience is less than the assumed
constant  prepayment  rate,  the premium  would be amortized  over a longer time
period,  resulting  in a higher  yield to  maturity.  The Company  monitors  its
prepayment  experience on a monthly basis in order to adjust the amortization of
the net premium as appropriate.

The fair value of the  Company's  portfolio  of ARM  securities  rose during the
quarter  ended  September  30, 1996.  As of September  30, 1996,  the  Company's
portfolio of ARM  securities  available-for-sale,  including the  applicable Cap
Agreements,  had a net unrealized loss of $16,932,000 as compared to $18,255,000
as of June 30,  1996.  At December  31,  1995,  the  Company's  portfolio of ARM
securities available-for-sale had an unrealized loss of $20,332,000.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with  the  lifetime  interest  rate  caps of its ARM  securities  if
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect  of the  lifetime  or  maximum  interest  rate  cap  limitation.  The Cap
Agreements  purchased by the Company will, in effect, allow the yield on the ARM
securities to continue to rise in a high interest rate  environment  just as the
Company's cost of borrowings would continue to rise, since the borrowings do not
have any interest rate cap limitation. At September 30, 1996, the Cap Agreements
owned by the Company had a remaining  notional balance of $1.888 billion with an
average final maturity of 3.3 years, as compared to a remaining notional balance
of $1.461  billion with an average  final  maturity of 4.3 years at December 31,
1995. Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the three month or six month LIBOR  index  increases  above  certain
specified  levels  which  range from 7.50% to 12.50% and  average  approximately
9.66%. The fair market value of these Cap Agreements also tends to increase when
general market  interest rates increase and decrease when market  interest rates
decrease,  helping  to  partially  offset  changes  in the  market  value of the
Company's ARM securities.

During the quarter ended September 30, 1996, the Company  lengthened the average
re-pricing  period of its borrowings to 81 days. The Company was able to do this
by both entering into reverse repurchase agreements with longer re-pricing terms
and by entering into interest  rate swap  agreements.  As of September 30, 1996,
the  Company  has  entered  into two  interest  rate swap  agreements  having an
aggregate notional balance of $300 million and a weighted average remaining term
of 7 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 September 30, 1996,  the
average cost of the Company's borrowings was 5.71%, which includes the impact of
the interest  rate swap  agreements  and reflects both the cost of extending the
re-pricing term of the Company's  borrowings and a slightly higher interest rate
environment in the third quarter of 1996 as compared to the second quarter.

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

For the  quarter  ended  September  30,  1996,  the  Company's  net  income  was
$7,028,000 or $0.44 per share based on a weighted  average of 16,080,363  shares
outstanding  as  compared to  $3,833,000  or $0.32 per share based on a weighted
average of 11,946,970  shares  outstanding  for the quarter ended  September 30,
1995. Net interest income is comprised of the interest income earned on mortgage
investments less interest  expense from borrowings.  Net interest income for the
quarter  totaled  $7,952,000  as compared to  $4,421,000  for the same period in
1995. The Company recorded a net gain on adjustable-rate mortgage securities for
the quarter of  $320,000 as compared to a gain of $42,000 for the third  quarter
of 1995. The Company incurred  operating expenses of $1,244,000 for the quarter,
consisting principally of the base management fee of $430,000, a performance fee
of  $631,000  and other  miscellaneous  expenses  of  $183,000  as  compared  to
operating  expenses  of  $630,000  for  the  same  period  in  1995,  consisting
principally  of the base  management  fees of  $348,000,  a  performance  fee of
$151,000 and other miscellaneous expenses of $131,000.

The primary  reasons for the rise in the  Company's  net interest  income in the
third  quarter of 1996 as compared to the same  quarter in 1995 was the combined
effect of the increased size of the Company's  portfolio of ARM securities and a
decrease in the interest  rate on the  Company's  borrowed  funds.  Net interest
income  increased by  $3,531,000 in the third quarter of 1996 as compared to the
same  period  of 1995.  Of this  increase,  the  increased  average  size of the
Company's  portfolio in the third quarter of 1996 as compared to the same period
in 1995  contributed to higher net interest  income in the amount of $2,014,000.
In addition, $1,809,000 is the result of the lower rate on the Company's cost of
funds,  offset  slightly  by a  lower  yield  on the  Company's  ARM  securities
portfolio  and other  interest  earning  assets  for a combined  favorable  rate
variance of $1,518,000.

As  presented  in the  table  below,  the  Company's  ARM  securities  portfolio
generated a yield of 6.42% during the third quarter of 1996 as compared to 6.48%
for the third quarter of 1995. This decrease of 0.06% is primarily  attributable
to the increase in premium amortization,  a result of prepayment activity, which
offset an increase in the weighted  average coupon on the portfolio that rose to
7.31% as of September 30, 1996 from 7.24% as of September 30, 1995.

The  Company's  cost of funds  during  the  quarter  ended  September  30,  1996
decreased  to 5.66% from  6.09% for the same  quarter  of 1995,  primarily  as a
result of lower short-term interest rates available to the Company for financing
purposes.  The net  effect of the  slightly  lower  yield on the  Company's  ARM
securities  portfolio  and the lower cost of funds  increased  the Company's net
spread to 0.75% for the third  quarter of 1996 from 0.38% for the third  quarter
of 1995. The Company's yield on net interest earning assets,  which includes the
impact of shareholders' equity, rose to 1.27% for the third quarter of 1996 from
0.95% for the third quarter of 1995.

The increase in the  Company's  operating  expenses is  primarily  the result of
achieving sufficient earnings for the Company's  shareholders such that a higher
performance  based fee was earned by the  Manager.  In order for the  Manager to
earn a performance fee, the rate of return on the shareholders'  investment,  as
defined in the  Management  Agreement,  must  exceed  the  average  ten-year  US
Treasury rate during the quarter plus 1%. During the third quarter of 1996,  the
Manager  earned a  performance  fee of  $631,000.  During the three month period
ended  September  30, 1996,  after paying this  performance  fee, the  Company's
return on equity was 11.86%.
<PAGE>

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

                                AVERAGE BALANCE AND RATE TABLE
                                     (Amounts in thousands)

                                 For the Quarter Ended    For the Quarter Ended
                                   September 30, 1996       September 30, 1995
                                 ---------------------    ----------------------
                                   Average   Effective      Average    Effective
                                   Balance      Rate        Balance       Rate
    Interest Earning Assets:     -----------   -------    -----------   --------
      Adj-rate mortgage sec.     $ 2,489,894    6.42%     $ 1,852,503      6.48%
      Cash and cash equivalents       16,106    5.42           11,833      5.91
                                  ----------   -------      ---------    -------
                                   2,506,000    6.41        1,864,336      6.47
                                  ----------   -------      ---------    -------
    Interest Bearing Liabilities:
      Borrowings                   2,276,228    5.66        1,691,829      6.09
    Net Interest Earning Assets   ----------   -------      ---------    -------
      and Spread                $    229,772    0.75%     $   172,507      0.38%
                                  ==========   =======      =========    =======
    Yield on Net Interest
     Earning Assets (1)                         1.27%                      0.95%
                                               =======                   =======

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

Results of Operations For the Nine Months Ended September 30, 1996

For the nine month period ended September 30, 1996, the Company's net income was
$18,328,000 or $1.27 per share based on a weighted average of 14,425,873  shares
outstanding  as  compared to  $5,869,000  or $0.50 per share based on a weighted
average  of  11,867,693  shares  outstanding  for the nine  month  period  ended
September  30,  1995.  Net  interest  income for the first  nine  months of 1996
totaled  $21,368,000  as compared to $8,037,000 for the same period in 1995. The
Company recorded a net gain on adjustable-rate  mortgage securities for the nine
month  period of $333,000 as compared to a loss of $617,000  for the same period
in 1995. The Company incurred  operating  expenses of $3,373,000 for the period,
consisting  principally of the base management fee of $1,194,000,  a performance
fee of $1,727,000  and other  miscellaneous  expenses of $452,000 as compared to
operating  expenses  of  $1,551,000  for the same  period  in  1995,  consisting
principally  of the base  management  fees of $1,037,000,  a performance  fee of
$151,000 and other miscellaneous expenses of $363,000.

The primary  reasons for the rise in the Company's  net interest  income for the
nine month  period  ended  September  30, 1996 as compared to the same period in
1995 was the  combined  effect  of an  increase  in the  yield on the  Company's
portfolio of ARM  securities  and a decrease in the  Company's  cost of funds as
well as the  increased  size of the  Company's  portfolio.  Net interest  income
increased by  $13,331,000.  Of this  increase,  $6,594,000  is the result of the
lower  interest rate on the Company's cost of funds and $2,750,000 is the result
of the higher yield on the Company's ARM securities portfolio and other interest
earning  assets  for a combined  favorable  rate  variance  of  $9,344,000.  The
increased average size of the Company's  portfolio over the nine month period as
compared  to the same  period in 1995 also  contributed  to higher net  interest
income in the amount of $3,987,000.

As  presented  in the  table  below,  the  Company's  ARM  securities  portfolio
generated a yield of 6.41%  during the nine month  period of 1996 as compared to
6.20% for the same period of 1995.  The Company's  cost of funds during the nine
month period ended September 30, 1996 decreased to 5.66% from 6.20% for the same
period  of 1995,  primarily  as a  result  of lower  short-term  interest  rates
available to the Company for  financing  purposes.  The  combined  effect of the
higher yield on the  Company's  ARM  securities  portfolio and the lower cost of
funds  increased  the Company's net spread to 0.74% for the first nine months of
1996 from no spread for the first  nine  months of 1995.  During the  comparable
nine month period of 1995,  the Company  generated net interest  income from the
excess interest earning assets over interest costing liabilities.  The Company's
yield on net interest earning assets, which includes the impact of shareholders'
equity,  rose to 1.26% for the first nine months of 1996 from 0.59% for the same
period of 1995.

The increase in the  Company's  operating  expenses is  primarily  the result of
achieving sufficient earnings for the Company's  shareholders such that a higher
performance  based fee was earned by the  Manager.  In order for the  Manager to
earn a performance fee, the rate of return on the shareholders'  investment,  as
defined in the  Management  Agreement,  must  exceed  the  average  ten-year  US
Treasury  rate during the quarter plus 1%. During the first nine months of 1996,
the  Manager  earned a  performance  fee of  $1,727,000.  During this nine month
period  ended  September  30,  1996,  after  paying this  performance  fee,  the
Company's return on equity was 11.42%.

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 nine month periods ended September 30, 1996 and 1995:

                                         AVERAGE BALANCE AND RATE TABLE
                                            (Amounts in thousands)

                                    For the Nine Month      For the Nine Month
                                       Period Ended            Period Ended
                                    September 30, 1996      September 30, 1995
                                  ----------------------  ----------------------
                                    Average    Effective    Average    Effective
                                    Balance      Rate       Balance      Rate
    Interest Earning Assets:      -----------  ---------  -----------  ---------
      Adj-rate mortgage sec.      $ 2,245,058    6.41%    $ 1,793,951     6.20%
      Cash and cash equivalents        14,935    5.27          13,540     5.86
                                  -----------  ---------  -----------   --------
                                    2,259,993    6.40       1,807,491     6.20
                                  -----------  ---------  -----------   --------
    Interest Bearing Liabilities:
      Borrowings                    2,053,632    5.66       1,635,266     6.20

    Net Interest Earning Assets   -----------  --------    ----------   --------
      and Spread                  $   206,361    0.74%     $  172,225     0.00%
                                  ===========  ========    ==========   ========
    Yield on Net Interest
      Earning Assets (1)                         1.26%                    0.59%
                                               ========                 ========

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

<PAGE>



Liquidity and Capital Resources

The Company's  primary source of funds for the quarters ended September 30, 1996
and 1995  consisted  of reverse  repurchase  agreements,  which  totaled  $2.328
billion and $1.773 billion at the respective  quarter ends. The Company's  other
significant  sources of funds for the quarters ended September 30, 1996 and 1995
consisted of payments of principal and interest  from the ARM  securities in the
amounts of $176.4 million and $113.0 million,  respectively.  In the future, the
Company expects its primary sources of funds will continue to consist of monthly
payments of  principal  and  interest  on its ARM  securities  portfolio  and of
borrowed  funds under  reverse  repurchase  agreement  transactions  with one to
twelve month  maturities and possibly from asset sales as needed.  The Company's
liquid  assets  generally  consist of unpledged  ARM  securities,  cash and cash
equivalents.

The borrowings  incurred at September 30, 1996 had a weighted  average  interest
cost of 5.71%, a weighted  average original term to maturity of 8.3 months and a
weighted average  remaining term to maturity of 5.5 months.  As of September 30,
1996, $1.147 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-six  different  investment
banking firms and commercial  banks and at September 30, 1996 had borrowed funds
under reverse  repurchase  agreements with fourteen of these firms.  Because the
Company  borrows  funds  based on the  fair  value  of its ARM  securities,  the
Company's  borrowing ability could be adversely affected as a result of either a
significant  increase in short-term  interest  rates or a credit  downgrade of a
mortgage pool or a mortgage pool insurer,  either of which would reduce the fair
value of the  Company's  ARM  securities.  If such a decrease  in fair value was
significant  enough,  it could  require  the  Company to sell assets in order to
maintain  liquidity.  For the quarter ended  September 30, 1996, the Company had
adequate cash flow,  liquid assets and unpledged  collateral  with which to meet
its margin requirements.  Further, the Company has always maintained  sufficient
liquidity to meet its cash  requirements  from its primary  sources of funds and
believes it will be able to do so in the future.

The Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically  reinvest their dividends in additional shares of common stock and
to purchase  additional  shares at a 3% discount to the current  market price of
the common stock,  as defined in the Plan. As a result of  participation  in the
Plan,  the  Company  issued  151,013  new  shares of common  stock and  received
proceeds of $2,303,000 of new equity  capital  during the third quarter of 1996.
During the  nine-month  period  ended  September  30, 1996,  the Company  issued
226,864 shares under this plan and received net proceeds of $3,408,000.

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

Effects of Interest Rate Changes

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

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

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

Lastly, because the Company only invests in adjustable-rate  mortgage 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 is because the financed portion of
the Company's  portfolio of ARM securities will, over time,  reprice to a spread
over the Company's cost of money while the portion of the Company's portfolio of
ARM securities that are purchased with shareholder's  equity will generally have
a higher  yield in a higher  interest  rate  environment  and a lower yield in a
lower interest rate environment.

Other Matters

The Company  calculates its Qualified REIT Assets, as defined in the Code, to be
99.8% of its total assets,  as compared to the federal tax  requirement  that at
least 75% of its total  assets must be Qualified  REIT Assets.  The Company also
calculates that 99.5% of its 1996 revenue qualifies for the 75% source of income
test and 100% of its 1996  revenue  qualifies  for the 95% source of income test
under the REIT rules.  Furthermore,  the Company's  revenues in 1996, subject to
the 30%  income  limitation  under  the REIT  rules  amounted  to 0.51% 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
September 30, 1996, the Company believed that it was in full compliance with the
REIT tax  rules  and that it would  continue  to  qualify  as a REIT  under  the
provisions of the Code.

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

PART II.   OTHER INFORMATION

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

Item 2.  Changes in Securities
              Not applicable

Item 3.  Defaults Upon Senior Securities
              Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders
              Not applicable

Item 5.  Other Information
              None

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

         (a)  Exhibits
                  See "Exhibit Index."

         (b)  Reports on Form 8-K
                  None


<PAGE>


                                 SIGNATURES



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




                                    THORNBURG MORTGAGE ASSET CORPORATION



Dated:     October 30, 1996         By: /s/ Larry A. Goldstone
                                        -----------------------
                                        Larry A. Goldstone,
                                        President and Chief Operating Officer
                                        (authorized officer of registrant)




Dated:     October 30, 1996         By: /s/ Richard P. Story
                                        --------------------
                                        Richard P. Story,
                                        Chief Financial Officer and Treasurer
                                        (principal accounting officer)


<PAGE>







                                   Exhibit Index







                                                                    Sequentially
                                                                        Numbered
 Exhibit Number                  Exhibit Description                      Page
----------------  -----------------------------------------------------  ------
      10          Form of Management Agreement as amended Sep. 18, 1996    24