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


                                  FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED:     MARCH 31, 1998

                                         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       (IRS 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)                  21,523,723 as of April 22, 1998


<PAGE>


                        THORNBURG MORTGAGE ASSET CORPORATION
                                     FORM 10-Q


                                       INDEX




                                                                        Page
PART I.     FINANCIAL INFORMATION

   Item 1.  Financial Statements

               Balance Sheets at March 31, 1998 and December 31, 1997...   3

               Statements of Operations for the three months ended
               March 31, 1998 and March 31, 1997........................   4

               Statement of Shareholders' Equity for the three months
               ended March 31, 1998.....................................   5

               Statements of Cash Flows for the three months ended
               March 31, 1998 and March 31, 1997........................   6

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

   Item 2.  Management's Discussion and Analysis of
            Financial Condition and Results of Operations...............  15



PART II.    OTHER INFORMATION

   Item 1.  Legal Proceedings...........................................  27

   Item 2.  Changes in Securities ......................................  27

   Item 3.  Defaults Upon Senior Securities ............................  27

   Item 4.  Submission of Matters to a Vote of Security Holders.........  27

   Item 5.  Other Information...........................................  27

   Item 6.  Exhibits and Reports on Form 8-K............................  27


   SIGNATURES  .........................................................  28



<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

THORNBURG MORTGAGE ASSET CORPORATION

BALANCE SHEETS
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                               March 31, 1998    December 31, 1997
                                                             ------------------  -----------------
<S>                                                            <C>               <C>
ASSETS

   Adjustable-rate mortgage ("ARM") assets: (Notes 2 and 3)
     ARM securities                                            $     4,598,677   $     4,519,707
     ARM loans held for securitization                                 227,702           118,987
                                                                 -------------     -------------
                                                                     4,826,379         4,638,694
                                                                 -------------     -------------

   Cash and cash equivalents                                             2,506            13,780
   Accrued interest receivable                                          39,251            38,353
   Prepaid expenses and other                                            2,671               289
                                                                 -------------     -------------
                                                               $     4,870,807   $     4,691,116
                                                                 =============     =============


LIABILITIES

   Reverse repurchase agreements (Note 3)                      $     4,470,099   $     4,270,170
   Other borrowings (Note 3)                                             9,161            10,018
   Accrued interest payable                                             18,127            39,749
   Dividends payable (Note 6)                                            9,708            11,810
   Accrued expenses and other                                            1,212             1,215
                                                                 -------------     -------------
                                                                     4,508,307         4,332,962

SHAREHOLDERS' EQUITY (Note 6)

   Preferred stock:  par value $.01 per share;
     2,760 shares  authorized;  9.68% Cumulative
     Convertible  Series A, 2,760 and 2,760 issued
     and  outstanding, respectively; aggregate
     preference in liquidation $69,000                                  65,805            65,805
   
   Common stock: par value $.01 per share;
     47,240 shares authorized, 21,371 and 20,280
     shares issued and outstanding, respectively                           214               203
   
   Additional paid-in-capital                                          333,453           315,240

   Accumulated other comprehensive income                              (32,231)          (19,445)

   Notes receivable from stock sales                                    (4,632)           (2,698)

   Retained earnings (deficit)                                            (109)             (951)
                                                                 -------------     -------------
                                                                       362,500           358,154
                                                                 -------------     -------------
                                                               $     4,870,807   $     4,691,116
                                                                 =============     =============
</TABLE>



See Notes to Financial Statements.


<PAGE>


THORNBURG MORTGAGE ASSET CORPORATION

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


<TABLE>
<CAPTION>
                                                       Three  Months  Ended
                                                             March 31,
                                                         1998         1997
                                                     -----------   ----------
<S>                                                  <C>           <C>       
Interest income from ARM assets and cash             $    76,315   $   48,999
Interest expense on borrowed funds                       (64,889)     (37,667)
                                                       ---------    --------- 
   Net interest income                                    11,426       11,332
                                                       ---------    ---------

Realized gain (loss) on:
  Sale of ARM securities (Note 2)                          1,528            4
  Provision for credit losses on ARM assets (Note 2)        (387)        (190)
Management fee (Note 7)                                   (1,028)        (811)
Performance fee (Note 7)                                    (759)        (857)
Other operating expenses                                    (284)        (183)
                                                       ---------    --------- 
   NET INCOME                                        $    10,496   $    9,295
                                                       =========    =========


Net income                                           $    10,496   $    9,295
Dividend on preferred stock                               (1,670)      (1,241)
                                                       ---------    ----------
Net income available to common shareholders          $     8,826   $    8,054
                                                       =========    =========

Basic earnings per share                             $      0.42   $     0.49
                                                       =========    =========

Primary earnings per share                           $      0.42   $     0.49
                                                       =========    =========

Average number of common shares outstanding               20,797       16,311
                                                       =========    ========= 
</TABLE>



See Notes to Financial Statements.


<PAGE>


THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY

Three Months Ended March 31, 1998
(In thousands, except share data)


<TABLE>
<CAPTION>
                                                                                  Notes
                                                                  Accumulated   Receivable
                                                     Additional      Other        From       Retained
                                 Preferred  Common     Paid-in   Comprehensive    Stock      Earnings/  Comprehensive
                                   Stock    Stock      Capital      Income        Sales      (Deficit)      Income       Total
                                 --------- --------  ----------  -------------  ----------  -----------  ------------  ---------
<S>                              <C>       <C>       <C>         <C>            <C>         <C>          <C>           <C>      
Balance, December 31, 1997       $  65,805 $    203  $  315,240  $    (19,445)  $  (2,698)  $     (951)                $ 358,154

Comprehensive income:
   Net income                                                                                   10,496   $     10,496     10,496
   Other comprehensive income:

    Available-for-sale assets:
      Fair value adjustment, net
      of amortization                    -        -         -         (12,448)         -          -           (12,448)   (12,448)
    Deferred gain on sale of
      hedges, net of amortization        -        -         -            (338)         -          -              (338)      (338)
                                                                                                            ----------
   Other comprehensive income (loss)                                                                       $   (2,290)
                                                                                                            ==========

Issuance of common stock (Note 5)        -       11      18,213           -        (1,934)        -                       16,290

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


Dividends declared on common
  stock - $0.375 per share               -        -         -             -            -       (7,984)                    (7,984)
                                     =======   ======   ========    ==========   ========    ========                    =======
Balance, December 31, 1998          $ 65,805  $   214  $ 333,453   $  (32,231)  $  (4,632)  $    (109)                 $ 362,500
                                     =======   ======   ========    ==========   ========    ========                    =======

</TABLE>


See Notes to Financial Statements.


<PAGE>




THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                                 March 31,
                                                            1998         1997
                                                        -----------   ----------
<S>                                                     <C>           <C>
Operating Activities:
  Net Income                                            $    10,496   $    9,295
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Amortization                                             10,107        4,359
    Net (gain) loss from investing activities                (1,141)         186
    Change in assets and liabilities:
      Accrued interest receivable                              (898)      (6,152)
      Prepaid expenses and other                             (2,382)        (285)
      Accrued interest payable                              (21,622)       2,784
      Accrued expenses and other                                 (3)         459
                                                          ----------   ---------
      Net cash provided by (used in) operating activities    (5,443)      10,646
                                                          ----------   ---------

Investing Activities:
  Available-for-sale ARM securities:
   Purchases                                               (693,744)    (670,565)
   Proceeds on sales                                        191,825          633
   Proceeds from calls                                       54,879         -
   Principal payments                                       330,536      127,054
  Held-to-maturity ARM securities:
   Principal payments                                        16,152       18,140
ARM loans:
   Purchases                                               (120,025)        -
   Principal payments                                        11,234         -
Purchase of interest rate cap agreements                       (294)        (398)
                                                          ----------    --------
      Net cash provided by (used in) investing activities  (209,437)    (525,136)
                                                          ----------    --------

Financing Activities:
  Net borrowings from reverse repurchase agreements         199,929      477,047
  Net repayments of other borrowings                           (857)        (793)
  Proceeds from preferred stock issued                         -          65,809
  Proceeds from common stock issued                          16,290        2,029
  Dividends paid                                            (11,756)      (7,299)
                                                         ----------   ----------
   Net cash provided by (used in) financing activities      203,606      536,793
                                                         ----------   ----------

Net increase (decrease) in cash and cash equivalents        (11,274)      22,303

Cash and cash equivalents at beginning of period             13,780        3,693
                                                         ----------   ----------
Cash and cash equivalents at end of period              $     2,506   $   25,996
                                                          =========    =========
</TABLE>

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


See Notes to Financial Statements


<PAGE>


NOTES TO FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

         CASH AND CASH EQUIVALENTS

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

         ADJUSTABLE-RATE MORTGAGE ASSETS

            The Company's  adjustable-rate mortgage ("ARM") assets are comprised
            of  both  ARM  securities  and  ARM  loans,   primarily  secured  by
            single-family residential housing.

            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 most of its ARM securities  should be designated
            as  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 might  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 as  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.

            Management  has the intent and  ability  to hold the  Company's  ARM
            loans for the  foreseeable  future  and until  maturity  or  payoff.
            Therefore,  they are carried at their unpaid principal 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 assets 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 limits its exposure to credit losses on its portfolio of
            ARM  securities  by only  purchasing  ARM  securities  that  have an
            investment  grade  rating at the time of purchase and have some form
            of credit  enhancement or are guaranteed by an agency of the federal
            government.  An investment  grade security  generally has a security
            rating of BBB or Baa or  better  by at least  one of two  nationally
            recognized  rating  agencies,  Moody's  Investor  Services,  Inc. or
            Standard & Poor's, Inc. (the "Rating Agencies").  Additionally,  the
            Company  has also  purchased  ARM loans and limits its  exposure  to
            credit losses by  restricting  its whole loan purchases to ARM loans
            generally originated to "A" quality underwriting  standards or loans
            that have at least  five  years of pay  history  and/or  low loan to
            property  value ratios.  The Company  further 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.

            The Company monitors the  delinquencies and losses on the underlying
            mortgage loans backing its ARM assets. If the credit  performance of
            the underlying mortgage loans is not as expected,  the Company 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 assets  portfolio.  The provision
            is based on management's  assessment of numerous  factors  affecting
            its portfolio of ARM assets  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  for ARM  securities 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.  The Company also makes a
            monthly provision for possible credit losses on its portfolio of ARM
            loans which is an increase to the reserve for possible  loan losses.
            The provision  for possible  credit losses on loans is based on loss
            statistics  of the real estate  industry for similar  loans,  taking
            into   consideration   factors   including,   but  not  limited  to,
            underwriting  characteristics,  seasoning,  geographic  location and
            current and projected economic conditions.  When a loan or a portion
            of a loan is deemed to be  uncollectible,  the portion  deemed to be
            uncollectible   is  charged   against  the  reserve  and  subsequent
            recoveries, if any, are credited to the reserve.

            Provisions  for credit losses do not reduce  taxable income and thus
            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.

         DERIVATIVE FINANCIAL INSTRUMENTS

            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
            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
            assets are initially  carried at their fair value as of the time the
            Cap   Agreements   and  the  related   assets  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  assets are carried at fair value
            with unrealized gains and losses reported as a separate component of
            equity,  consistent with the reporting of such assets.  The carrying
            value  of the Cap  Agreements  are  included  in ARM  assets  on the
            balance sheet.  The Company  purchases Cap Agreements by incurring a
            one-time fee or premium.  The  amortization  of the premium paid for
            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  complies  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
            on that portion of its income that is  distributed  to  shareholders
            and as long as certain asset,  income and stock  ownership tests are
            met.

         NET EARNINGS PER SHARE

            Basic EPS amounts are computed by dividing net income  (adjusted for
            dividends  declared  on  preferred  stock) by the  weighted  average
            number of common shares outstanding.  Diluted EPS amounts assume the
            conversion,  exercise  or  issuance of all  potential  common  stock
            instruments  unless the effect is to reduce a loss or  increase  the
            earnings per common share.

            Following is information  about the  computation of the earnings per
            share data for the 3 month  periods  ended  March 31,  1998 and 1997
            (Amounts in thousands except per share data):

<TABLE>
<CAPTION>
                                                                               Earnings
                                                    Income        Shares      Per Share
                                                 ------------- ------------- -------------
<S>                                              <C>           <C>           <C>
            Three Months Ended March 31, 1998
            ---------------------------------
            Net income                           $     10,496

            Less preferred stock dividends             (1,670)
                                                  ------------
            Basic EPS, income available to
              common shareholders                       8,826        20,797   $        0.42
                                                                                ===========
            Effect of dilutive securities:
              Stock options                                              18
                                                  ------------ -------------
            Diluted EPS                          $      8,826        20,815   $        0.42
                                                  ============ =============    ===========

            Three Months Ended March 31, 1997
            ---------------------------------
            Net income                           $      9,294

            Less preferred stock dividends             (1,242)
                                                  ------------
            Basic EPS, income available to
              common stockholders                       8,052        16,311   $        0.49
                                                                    ===========
            Effect of dilutive securities:
              Stock options                                             153
                                                  ------------ -------------
            Diluted EPS                           $      8,052       16,464   $        0.49
                                                  ============ =============    ===========
</TABLE>

            The Company has granted  options to  directors  and  officers of the
            Company and employees of the Manager to purchase  32,763 and 115,920
            shares of common  stock at  average  prices of $16.52 and $20.00 per
            share   during  the   quarters   ended  March  31,  1998  and  1997,
            respectively.  The conversion of preferred stock was not included in
            the  computation  of  diluted  EPS  because  such  conversion  would
            increase the diluted EPS.

         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.

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

         The following  tables  present the Company's ARM assets as of March 31,
         1998  and  December  31,  1997.  The  ARM   securities   classified  as
         available-for-sale   are  carried  at  their  fair  value,   while  the
         held-to-maturity  ARM  securities  and ARM loans are  carried  at their
         amortized cost basis (dollar amounts in thousands):

            March 31, 1998:
<TABLE>
<CAPTION>
                                                ARM Securities              
                                    ---------------------------------------
                                    Available-     Held-to-
                                     for-Sale      Maturity       Total         ARM Loans
                                    ------------  -----------  -------------   ------------
<S>                                 <C>           <C>           <C>            <C>        
            Amortized cost basis    $ 4,245,122   $   377,120   $ 4,622,242    $   227,803
            Allowance for losses         (1,502)         -           (1,502)          (101)
                                     -----------   -----------   -----------    -----------
              Amortized cost, net     4,243,620       377,120     4,620,740        227,702
                                     -----------   -----------   -----------    -----------
            Gross unrealized gains        7,079         3,808        10,887            -
            Gross unrealized losses     (32,184)         (728)      (32,912)           -
                                     ===========   ===========   ===========    ===========
              Fair value            $ 4,218,515   $   380,200   $ 4,598,715    $   227,702
                                     ===========   ===========   ===========    ===========

              Carrying value        $ 4,218,515   $   377,120   $ 4,595,635    $   227,702
                                     ===========   ===========   ===========    ===========
  
            December 31, 1997:
                                                ARM Securities              
                                    ---------------------------------------
                                    Available-     Held-to-
                                     for-Sale      Maturity       Total         ARM Loans
                                    ------------  -----------  -------------   ------------
            Amortized cost basis    $ 4,147,384   $   395,803   $ 4,543,187    $   119,029
            Allowance for losses         (1,739)         -           (1,739)           (42)
                                     -----------   -----------   -----------    -----------
              Amortized cost, net     4,145,645       395,803     4,541,448        118,987
                                     -----------   -----------   -----------    -----------
            Gross unrealized gains       11,075         5,609        16,684            -
            Gross unrealized losses     (32,816)       (2,859)      (35,675)           -
                                     ===========   ===========   ===========    ===========
              Fair value            $ 4,123,904   $   398,553   $ 4,522,457    $   118,987
                                     ===========   ===========   ===========    ===========

              Carrying value        $ 4,123,904   $   395,803   $ 4,519,707    $   118,987
                                     ===========   ===========   ===========    ===========
</TABLE>
 
         During  the  quarter  ended  March  31,  1998,  the  Company   realized
         $1,786,000  in gains  and  $258,000  in  losses  on the sale of  $190.3
         million of ARM securities.  During the same period of 1997, the Company
         realized $4,000 in gains on the sale of $629,000 of ARM securities. All
         of the ARM securities sold were classified as available-for-sale.

         As of March 31, 1998, 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 $1,502,000. At March 31, 1998,
         the Company is providing  for  potential  future  credit  losses on two
         assets that have an aggregate  carrying value of $12.6  million,  which
         represent  less  than  0.3% of the  Company's  total  portfolio  of ARM
         assets.  Both of these assets are performing and one has some remaining
         credit  support  that  mitigates  the  Company's  exposure to potential
         future credit  losses.  Additionally,  during the first three months of
         1998, the Company,  in accordance with its credit policies,  recorded a
         $59,000  provision for potential  credit losses on its loan  portfolio,
         although no actual losses have been  realized in the loan  portfolio to
         date. The following table summarizes the activity for the allowance for
         losses on ARM loans  for the  quarter  ended  March  31,  1998  (dollar
         amounts in thousands):

                                 Beginning balance     $      42
                                 Provision for losses         59
                                 Charge-offs, net              0
                                                        --------
                                 Ending balance        $     101
                                                        ========

         As of March 31, 1998, the Company had  commitments  to purchase  $134.2
         million of ARM assets.

         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 6.24% as of March 31, 1998 and 6.38% as of December 31,
         1997.

         As of March 31, 1998 and December 31, 1997,  the Company had  purchased
         Cap Agreements  with a remaining  notional amount of $4.181 billion and
         $4.156 billion, respectively. The notional amount of the Cap Agreements
         purchased  decline  at a rate  that  is  expected  to  approximate  the
         amortization of the ARM assets. Under these Cap Agreements, the Company
         will  receive  cash  payments  should  the  one-month,  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  10.15%.  The Company's ARM assets portfolio
         had an average lifetime interest rate cap of 11.37%. The Cap Agreements
         had an average  maturity of 2.9 years as of March 31, 1998. The initial
         aggregate   notional   amount  of  the  Cap   Agreements   declines  to
         approximately  $3.360 billion over the period of the agreements,  which
         expire between 1999 and 2004. 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, five of which are rated AAA, and one is 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 March 31, 1998,  the Company had  outstanding  $4.470  billion of
         reverse repurchase agreements with a weighted average borrowing rate of
         5.75% and a weighted average  remaining  maturity of 2.6 months.  As of
         March 31, 1998,  $1.868  billion of the  Company's  reverse  repurchase
         agreements 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.  In addition,  as of March 31, 1998, $174.4 million of the
         Company's reverse  repurchase  agreements were  collateralized by whole
         loans  under one year  financing  agreements  that are  indexed  to the
         one-month  LIBOR rate and  reprice  either  daily or once a month.  The
         reverse repurchase  agreements at March 31, 1998 were collateralized by
         ARM assets with a carrying value of $4.723 billion,  including  accrued
         interest.

         At March 31, 1998, the reverse repurchase  agreements had the following
         remaining maturities (dollars in thousands):

                             Within 30 days        $  1,508,509
                             30 to 90 days            1,626,327
                             91 days to one year      1,335,263
                                                    -----------
                                                   $  4,470,099
                                                    ===========

         As of March 31, 1998,  the Company was a  counterparty  to two interest
         rate swap  agreements  having an  aggregate  notional  balance  of $260
         million and a weighted average remaining term of 11.5 months,  although
         they are cancelable monthly.  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. Since these agreements are cancelable monthly, they have no
         effect on the average  period to the next  repricing  of the  Company's
         borrowings.  The average  period to the next repricing of the Company's
         borrowings was 36 days as of March 31, 1998.

         The  Company  has  a  line  of  credit  agreement  which  provides  for
         short-term  borrowings  of up to  $25  million  collateralized  by  the
         Company's  principal  and interest  receivables.  As of March 31, 1998,
         there was no balance outstanding under this agreement.

         As of March 31,  1998,  the  Company  had  financed  a  portion  of its
         portfolio of interest  rate cap  agreements  with $9.2 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 7.90% and have a weighted average remaining maturity of 1.8
         years. The other borrowings  financing cap agreements at March 31, 1998
         were  collateralized  by ARM securities  with a carrying value of $14.1
         million,  including  accrued  interest and $500  thousand of cash.  The
         aggregate  maturities of these other borrowings are as follows (dollars
         in thousands):

                             1998         $      3,652
                             1999                4,877
                             2000                  632
                                            ----------
                                         $       9,161
                                            ==========

         During  the  quarter  ended  March 31,  1998,  the total  cash paid for
         interest was $85.7 million.

NOTE 4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  table  presents the carrying  amounts and estimated fair
         values of the  Company's  financial  instruments  at March 31, 1998 and
         December  31,  1997.   Financial  Accounting  Standard  Board  ("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 (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                        March 31, 1998            December 31, 1997
                                   -------------------------   ------------------------
                                     Carrying       Fair          Carrying      Fair
                                      Amount        Value          Amount       Value
                                   ------------  -----------   -----------  -----------
<S>                                <C>           <C>           <C>          <C>
            Assets:
              ARM assets            $ 4,823,337  $ 4,826,417   $ 4,634,612  $ 4,639,513
              Cap agreements             3,042         1,161         4,082        1,931

            Liabilities:
              Other borrowings           9,161         8,990        10,018       10,321
              Swap agreements             (44)           210           (50)         184
</TABLE>

         The above carrying amounts for assets are combined in the balance sheet
         under the caption adjustable-rate  mortgage 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 values for ARM loans are based on
         market prices for similar  securitized loans,  adjusted for differences
         in loan characteristics. 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.



<PAGE>


NOTE 5.  COMMON AND PREFERRED STOCK

         During the quarter ended March 31, 1998, the Company  issued  1,027,000
         shares  of  common  stock  under its  dividend  reinvestment  and stock
         purchase plan and received net proceeds of $16.3 million.

         During the quarter  ended  March 31,  1998,  stock  options for 128,377
         shares of common stock were exercised at an average price of $15.80 for
         cash and notes  receivable.  The Company  received net cash proceeds of
         $21,000  and  $1.9  million  of  notes   receivable  were  executed  in
         connection with the exercise of these options.

         On March 24, 1998,  the Company  declared a first  quarter  dividend of
         $0.375  per  common  share  which was paid on April 10,  1998 to common
         shareholders of record as of March 31, 1998. Additionally,  the Company
         declared  a  first  quarter   dividend  of  $0.605  per  share  to  the
         shareholders  of the Series A 9.68%  Cumulative  Convertible  Preferred
         Stock which was also paid on April 10, 1997 to  preferred  shareholders
         of record as of March 31, 1997.  For federal  income tax purposes  such
         dividends  are ordinary  income to the  Company's  common and preferred
         shareholders,  subject to year-end  allocations of the common  dividend
         between  ordinary  income and capital  gain  income,  depending  on the
         character of the Company's full year income.

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.

         The Company issued DERs at the same time as ISOs and NQSOs based upon a
         formula  defined in the Plan.  During 1998 the number of DERs issued is
         based on 35% of the ISOs and NQSOs granted  during 1998.  The number of
         PSRs issued are based on the level of the  Company's  dividends  and on
         the price of the Company's stock on the related  dividend  payment date
         and is  equivalent  to the  cash  that  otherwise  would be paid on the
         outstanding DERs and previously issued PSRs.

         During the quarter  ended  March 31,  1998,  there were 32,763  options
         granted to buy common  shares at an  average  exercise  price of $16.52
         along with 11,473 DERs.  As of March 31, 1998,  the Company had 585,381
         options  outstanding at exercise prices of $9.375 to $22.625 per share,
         436,698 of which were exercisable.  The weighted average exercise price
         of the options  outstanding  was $17.77 per share.  As of the March 31,
         1998, there were 71,554 DERs granted,  of which 42,574 were vested, and
         2,012 PSRs  granted.  In  addition,  the  Company  recorded  an expense
         associated  with the DERs and the PSRs of $17,000 for the quarter ended
         March 31, 1998.

         Notes  receivable  from stock sales  result  from the  Company  selling
         shares of common stock through the exercise of stock options  partially
         for consideration  for notes receivable.  The notes have maturity terms
         ranging from 3 years to 9 years and accrue interest at rates that range
         from 5.40% to 6.00% per annum. In addition, the notes are full recourse
         promissory  notes  and are  secured  by a pledge  of the  shares of the
         Common Stock acquired.  Interest, which is credited to paid-in-capital,
         is payable  quarterly,  with the  balance  due at the  maturity  of the
         notes.  The payment of the notes will be accelerated only upon the sale
         of the shares of Common Stock  pledged for the notes.  The notes may be
         prepaid at any time at the option of each borrower.



<PAGE>


NOTE 7.  TRANSACTIONS WITH AFFILIATES

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

         The Company  pays the Manager an annual  base  management  fee based on
         average  shareholders'  equity,  adjusted for liabilities  that are not
         incurred to finance assets ("Average  Shareholders' Equity" or "Average
         Net Invested  Assets" as defined in the Agreement)  payable  monthly in
         arrears  as  follows:  1.1%  of  the  first  $300  million  of  Average
         Shareholders'  Equity, plus 0.8% of Average  Shareholders' Equity above
         $300 million.

         For the  quarters  ended March 31, 1998 and 1997,  the Company paid the
         Manager $1,028,000 and $811,000,  respectively, in base management fees
         in accordance with the terms of the Agreement.

         The Manager is also entitled to earn performance based  compensation in
         an amount equal to 20% of the Company's  annualized net income,  before
         performance  based  compensation,  above an annualized Return on Equity
         equal to the ten year U.S.  Treasury  Rate plus 1%. For purposes of the
         performance fee  calculation,  equity is generally  defined as proceeds
         from issuance of common stock before  underwriter's  discount and other
         costs of issuance, plus retained earnings. For the quarters ended March
         31, 1998 and 1997, the Company paid the Manager  $759,000 and $857,000,
         respectively,  in performance based compensation in accordance with the
         terms of the Agreement.



<PAGE>


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

Certain  information  contained in this Quarterly Report on Form 10-Q constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933,  as  amended,  and Section 21E of the  Exchange  Act,  which can be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"expect,"  "anticipate,"  "estimate," or "continue" or the negatives  thereof or
other variations thereon or comparable terminology. Investors are cautioned that
all forward-looking  statements involve risks and uncertainties  including,  but
not limited to, risks  related to the future level and  relationship  of various
interest rates,  prepayment rates and the timing of new programs. The statements
in the "Risk Factors" of the Company's Prospectus Supplement dated July 14, 1997
constitute  cautionary  statements  identifying  important  factors,   including
certain risks and uncertainties, with respect to such forward-looking statements
that could cause the actual results,  performance or achievements of the Company
to differ materially from those reflected in such forward-looking statements.

GENERAL

Thornburg  Mortgage Asset Corporation (the "Company") is a mortgage  acquisition
company  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  ARM 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 approximately 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 has also acquired 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 assets 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.

On March 23, 1998, the Board of Directors approved an expansion of the Company's
investment  strategies to include portfolio  investments in "Hybrid ARMs", which
are loans or  securities  backed by Hybrid ARM  loans.  Hybrid ARM loans have an
interest  rate that is fixed for an  initial  period of time,  generally  3 to 5
years, and then convert to an adjustable-rate for the balance of the term of the
loan. The Company will not invest more than 20% of its ARM assets in Hybrid ARMs
and will limit its interest rate repricing  mismatch (the difference between the
remaining  fixed-rate  period of a Hybrid ARM and the maturity of the fixed-rate
liability funding a Hybrid ARM) to approximately one year.

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

FINANCIAL CONDITION

At March 31,  1998,  the Company  held total  assets of $4.871  billion,  $4.826
billion of which  consisted  of ARM assets,  as  compared to $4.691  billion and
$4.639 billion, respectively, at December 31, 1997. Since commencing operations,
the Company has purchased either ARM securities  (backed by agencies of the U.S.
government or privately-issued,  generally publicly registered, mortgage assets,
most of which are rated AA or higher by at least one of the Rating  Agencies) or
ARM loans generally originated to "A" quality underwriting  standards.  At March
31, 1998, 92.3% of the assets held by the Company were High Quality assets,  far
exceeding the Company's  investment  policy minimum  requirement of investing at
least  70% of its total  assets in High  Quality  ARM  assets  and cash and cash
equivalents.  Of the ARM assets currently owned by the Company, 85.9% are in the
form of adjustable-rate  pass-through  certificates.  The remainder are floating
rate classes of CMOs,  investments  in floating rate classes of trusts backed by
mortgaged-backed assets or ARM loans.



<PAGE>


The  following  table  presents a schedule of ARM assets owned at March 31, 1998
and December 31, 1997 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.

                       ARM ASSETS BY ISSUER AND CREDIT RATING
                            (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                 March 31, 1998          December 31, 1997
                            ------------------------- -------------------------
                             Carrying     Portfolio    Carrying     Portfolio
                               Value         Mix         Value         Mix
                            ------------  ----------- ------------  -----------
<S>                         <C>           <C>         <C>           <C>
HIGH QUALITY:
  FHLMC/FNMA                $ 3,141,567         65.1% $ 3,117,937         67.2%
  Privately Issued:
   AAA/Aaa Rating               576,392         12.0      476,615         10.3
   AA/Aa Rating                 735,452         15.2      782,206         16.8
                             -----------  -----------  ----------   -----------
     Total Privately Issued   1,311,844         27.2    1,258,821         27.1
                             -----------  -----------  ----------   -----------

                             -----------  -----------  ----------   -----------
     Total High Quality       4,453,411         92.3    4,376,758         94.3
                             -----------  -----------  ----------   -----------

OTHER INVESTMENT:
  Privately Issued:
   A Rating                      95,951          2.0      115,055          2.5
   BBB/Baa Rating                38,076          0.8       17,625          0.4
   BB/Ba Rating and Other        11,239          0.2       10,269          0.2
  Whole loans                   227,702          4.7      118,987          2.6
                             -----------  -----------  -----------  -----------
     Total Other Investment     372,968          7.7      261,936          5.7
                             -----------  -----------  -----------  -----------
       Total ARM Portfolio  $ 4,826,379        100.0% $ 4,638,694        100.0%
                             ===========  ===========  ===========  ===========
</TABLE>

As of March  31,  1998,  the  Company  had  reduced  the  cost  basis of its ARM
securities  by  $1,502,000  due to potential  future  credit  losses (other than
temporary declines in fair value). The Company is providing for potential future
credit losses on two securities  that have an aggregate  carrying value of $12.6
million,  which represent less than 0.3% of the Company's total portfolio of ARM
assets.  Both of these  assets  continue  to  perform  and one has some  minimal
remaining credit support to mitigate the Company's  exposure to potential future
credit losses.

Additionally, during the three months ended March 31, 1998, the Company recorded
a $59,000 provision for potential credit losses on its loan portfolio,  although
no actual losses have been realized in the loan portfolio to date. The Company's
credit  reserve policy  regarding ARM loans is to record a monthly  provision of
0.15% (annualized rate) on the outstanding principal balance of loans (including
loans  securitized  by the Company for which the Company has retained first loss
exposure),  subject to  adjustment on certain loans or pools of loans based upon
factors such as, but not limited to, age of the loans, borrower payment history,
low  loan-to-value  ratios and quality of underwriting  standards applied by the
originator.



<PAGE>


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

                                           ARM ASSETS BY INDEX
                                      (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                           March 31, 1998            December 31, 1997
                                      -------------------------   -------------------------
                                       Carrying     Portfolio      Carrying     Portfolio
                                         Value         Mix          Value         Mix
                                      ------------  -----------   ------------  -----------
<S>                                   <C>           <C>           <C>           <C>
INDEX:
  One-month LIBOR                     $   404,008          8.4%   $   115,198          2.5%
  Three-month LIBOR                        89,438          1.9         31,215          0.7
  Six-month LIBOR                       1,369,898         28.4      1,489,802         32.1
  Six-month Certificate of Deposit        256,874          5.3        278,386          6.0
  Six-month Constant Maturity Treasury     64,266          1.3         66,669          1.4
  One-year Constant Maturity Treasury   2,139,444         44.3      2,271,914         49.0
  Cost of Funds                           502,451         10.4        385,510          8.3
                                       ===========  ===========    ===========  ===========
                                      $ 4,826,379        100.0%   $ 4,638,694        100.0%
                                       ===========  ===========    ===========  ===========
</TABLE>

The portfolio had a current  weighted average coupon of 7.47% at March 31, 1998.
The portfolio, on a weighted average basis, was "fully indexed," as of March 31,
1998,  based upon the current  composition  of the portfolio and the  applicable
indices. As of December 31, 1997, the portfolio had a weighted average coupon of
7.56%.  If the portfolio had been "fully  indexed," the weighted  average coupon
would have been approximately 7.64%, based upon the composition of the portfolio
and the applicable indices at that time.

At December 31, 1997,  the current yield of the ARM assets  portfolio was 6.24%,
compared  to 6.38% as of December  31,  1997,  with an average  term to the next
repricing  date of 101 days as of December 31, 1997,  compared to 110 days as of
December 31, 1997. 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.

The reduction in the yield as of March 31, 1998,  compared to December 31, 1997,
is primarily because of the higher rate of ARM portfolio  prepayments which have
occurred  during the first  quarter of 1998.  The  higher  level of  prepayments
increased the amount of premium amortization expense and increased the impact of
non-interest  earning assets in the form of principal payment  receivables.  The
constant  prepayment  rate ("CPR") of the Company's ARM portfolio was 27% during
the first  quarter of 1998  compared  to 24% during the fourth  quarter of 1997.
Higher  premium   amortization  and  a  higher  balance  of  principal   payment
receivables  decreased  the ARM  portfolio  yield by 0.05% as of March 31,  1998
compared to the end of 1997,  which was partially  offset by a 0.01% decrease in
the net cost of hedging.

During the quarter ended March 31, 1998, the Company purchased $693.7 million of
ARM securities,  96.8% of which were High Quality assets,  and $120.0 million of
ARM loans generally originated to "A" quality underwriting standards or seasoned
loans  with over five years of good  payment  history  and/or low  loan-to-value
ratios.  Of the ARM  assets  acquired  during  the first  three  months of 1998,
approximately  49% were  indexed to LIBOR,  31% were  indexed to a Cost of Funds
Index,  18% were  indexed to U.S.  Treasury  bill rates and the  remaining 2% to
other indices.  Although a larger proportion of fixed-rate loans compared to ARM
loans are being  originated in the current market,  the Company has continued to
find sufficient  attractive ARM asset acquisition  opportunities to reinvest its
cash flows and to continue its asset growth while  maintaining  the high quality
credit profile of the ARM portfolio.

The  Company  sold ARM assets in the  amount of $190.3  million at a net gain of
$1,528,000  during the first quarter of 1998.  These sales reflect the Company's
desire to manage the portfolio  with a view to enhancing the total return of the
portfolio. The Company monitors the performance of its individual ARM assets and
selectively  sells an asset when there is an  opportunity  to replace it with an
ARM  asset  that has an  expected  higher  long-term  yield  or more  attractive
interest rate characteristics.  Most of the ARM assets sold in the first quarter
of 1998 were  prepaying  faster than  expected  and,  as a group,  86% or $163.5
million  of the ARMs  sold had  yields at the time of sale  approximately  0.37%
below the  portfolio  average yield at the time.  The Company is presented  with
investment  opportunities  in  the  ARM  assets  market  on a  daily  basis  and
management evaluates such opportunities  against the performance of its existing
ARM assets.  At times,  the Company is able to  identify  opportunities  that it
believes will improve the total return of its ARM assets  portfolio by replacing
selected  assets.  In managing the  portfolio,  the Company may at times realize
either  gains or losses in the  process of  replacing  selected  assets  when it
believes it has identified better  investment  opportunities in order to improve
long-term total return.

For the quarter ended March 31, 1998, the Company's mortgage assets paid down at
an approximate  average annualized  constant  prepayment rate of 27% compared to
22% for the quarter ended March 31, 1997 and 24% for the quarter ended  December
31, 1997. When prepayment  experience exceeds  expectations,  the Company has 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 price of the  Company's  portfolio  of ARM assets  classified  as
available-for-sale  declined by 0.07% from a negative adjustment of 0.52% of the
portfolio as of December 31, 1997, to a negative adjustment of 0.59% as of March
31,  1998.  This  price  decline  was  primarily  because  of  increased  future
prepayment  expectations which have the effect of shortening the average life of
the Company's ARM assets and  decreasing  their market value.  The amount of the
negative   adjustment   to  fair   value  on  the  ARM  assets   classified   as
available-for-sale  increased  from $21.7  million as of December 31,  1997,  to
$25.1 million as of March 31, 1998.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with  the  lifetime  interest  rate  caps of its ARM  assets  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 assets to
continue to rise in a high interest rate  environment just as the Company's cost
of  borrowings  would  continue to rise,  since the  borrowings  do not have any
interest rate cap limitation. At March 31, 1998, the Cap Agreements owned by the
Company had a remaining notional balance of $4.181 billion with an average final
maturity  of 2.9  years,  compared  to a  remaining  notional  balance of $4.156
billion  with an average  final  maturity  of 3.1 years at  December  31,  1997.
Pursuant to the terms of the Cap  Agreements,  the  Company  will  receive  cash
payments if the one-month,  three-month or six-month LIBOR index increases above
certain  specified  levels,  which  range  from  7.50%  to  13.00%  and  average
approximately  10.15%.  The fair  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 fair value
of the  Company's  ARM  assets.  At March 31,  1998,  the fair  value of the Cap
Agreements  was $1.2 million,  $11.1 million less than the amortized cost of the
Cap Agreements.



<PAGE>


The  following  table  presents  information  about the  Company's Cap Agreement
portfolio as of March 31, 1998:

                     CAP AGREEMENTS STRATIFIED BY STRIKE PRICE
                            (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                          Cap                          Weighted
            Hedged        Weighted      Agreement                       Average
          ARM Assets       Average       Notional        Strike        Remaining
          Balance (1)     Life Cap       Balance         Price           Term
         -------------   -----------   -------------   -----------   --------------
<S>      <C>                <C>        <C>                  <C>            <C>      
         $   654,612          9.00%    $   477,310          7.50%          2.1 Years
             500,891         10.05         442,754          8.00           3.8
             145,898         10.53         195,912          8.50           2.0
             197,110         10.11         311,777          9.00           1.7
             151,509         10.82         153,870          9.50           2.5
             322,863         11.02         324,745         10.00           4.1
             453,445         11.43         458,369         10.50           2.6
             443,852         12.03         385,404         11.00           3.6
             356,626         12.53         571,616         11.50           4.2
             555,755         12.96         579,064         12.00           2.8
             227,401         13.54         183,885         12.50           2.2
             226,839         14.43          95,902         13.00           1.9
              98,930         None             N/A          N/A             N/A
           -----------   -----------     -----------   -----------   --------------
         $ 4,335,732         11.37%    $ 4,180,608         10.15%          2.9 Years
           ===========   ===========     ===========   ===========   ==============
<FN>
         -------------
         (1)   90% of the ARM Assets' balance, which approximates the financed
               portion.
</FN>
</TABLE>

As of March 31, 1998, the Company was a  counterparty  to two interest rate swap
agreements  having an aggregate  notional balance of $260 million and a weighted
average  remaining term of 11.5 months,  although they are  cancelable  monthly.
Under 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. Since these agreements are cancelable  monthly,  they have
no  effect  on  the  average  period  to the  next  repricing  of the  Company's
borrowings. The average period to the next repricing of the Company's borrowings
was 36 days as of March 31, 1998.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998

For the quarter ended March 31, 1998, the Company's net income was  $10,496,000,
or $0.42 per share (Basic EPS), based on a weighted average of 20,797,000 shares
outstanding.  That compares to $9,295,000, or $0.49 per share (Basic EPS), based
on a weighted  average of 16,311,000  shares  outstanding  for the quarter ended
March 31,  1997.  Net  interest  income  for the  quarter  totaled  $11,426,000,
compared to  $11,332,000  for the same period in 1997.  Net  interest  income is
comprised of the interest  income earned on mortgage  investments  less interest
expense  from  borrowings.  During the first three  months of 1998,  the Company
recorded a gain on the sale of ARM  securities  of  $1,528,000  as compared to a
gain of $4,000  during the same period of 1997.  Additionally,  during the first
quarter of 1998, the Company  reduced its earnings and the carrying value of its
ARM assets by  reserving  $387,000  for  potential  credit  losses,  compared to
$190,000 during the first quarter of 1997. During the first quarter of 1998, the
Company  incurred  operating  expenses  of  $2,071,000,  consisting  of  a  base
management  fee of  $1,028,000,  a  performance-based  fee of $759,000 and other
operating  expenses of  $284,000.  During the same  period of 1997,  the Company
incurred operating  expenses of $1,851,000,  consisting of a base management fee
of $811,000, a performance-based fee of $857,000 and other operating expenses of
$183,000.  Total operating  expenses decreased as a percentage of average assets
to 0.16% for the three months  ended March 31,  1998,  compared to 0.25% for the
same period of 1997.

The  Company's  return on average  common equity was 10.9% for the quarter ended
March 31,  1998  compared  to 13.40% for the  quarter  ended  March 31, 1997 and
compared to 11.63% for the prior  quarter ended  December 31, 1997.  The primary
reason for the lower  return on average  common  equity is the  Company's  lower
interest rate spread,  discussed  further below,  partially offset by the higher
level of gains recorded this quarter on the sale of ARM securities and the lower
performance fee earned by the Manager. The table below highlights the historical
trend and the components of return on average common equity (annualized) and the
10-year U S Treasury  average  yield  during each  respective  quarter  which is
applicable to the computation of the performance fee:

                 COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

<TABLE>
<CAPTION>
                                                                                                                         ROE in
                                                                                                                        Excess of
                       Net                  Gain (Loss)                                              Net     10-Year     10-Year   
                    Interest   Provision      on ARM         G & A      Performance   Preferred    Income/   US Treas.   US Treas.
    For The         Income/   For Losses/     Sales/      Expense (2)/      Fee/      Dividend/    Equity    Average     Average
  Quarter Ended     Equity      Equity        Equity         Equity        Equity      Equity       (ROE)     Yield       Yield
  -------------     --------  -----------   -----------   ------------  -----------   ---------   --------   --------   ---------
<S>                  <C>       <C>              <C>           <C>           <C>        <C>          <C>        <C>         <C>  
  Mar 31, 1996       13.37%         -           0.03%         1.04%         1.27%         -         11.08%     5.90%       5.18%
  Jun 30, 1996       13.14%         -            -            1.00%         0.92%         -         11.22%     6.72%       4.50%
  Sep 30, 1996       13.42%        0.34%        0.88%         1.03%         1.07%         -         11.86%     6.78%       5.08%
  Dec 31, 1996       14.99%        1.32%        1.38%         1.46%         1.23%         -         12.37%     6.35%       6.02%
  Mar 31, 1997       18.85%        0.32%        0.01%         1.65%         1.43%        2.07%      13.40%     6.55%       6.85%
  Jun 30, 1997       19.48%        0.34%        0.03%         1.81%         1.25%        2.67%      13.45%     6.71%       6.74%
  Sep 30, 1997       17.66%        0.30%        0.45%         1.64%         1.24%        2.23%      12.70%     6.26%       6.44%
  Dec 31, 1997       15.62%        0.33%        1.06%         1.59%         1.01%        2.12%      11.63%     5.92%       5.71%
  Mar 31, 1998       14.13%        0.48%        1.89%         1.62%         0.94%        2.06%      10.91%     5.60%       5.31%

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

The decline in the  Company's  return on common equity from the first quarter of
1997 to the first  quarter of 1998 is  primarily  due to the  decline in the net
interest   spread   between   the   Company's    interest-earning   assets   and
interest-bearing  liabilities  from 0.98% as of March 31,  1997,  to 0.50% as of
March 31, 1998. The primary  reasons for this decline  continue to be the change
in the relationship  between the one-year U. S. Treasury yield and LIBOR and the
impact of  increased  ARM  prepayment  speeds.  From March 31, 1997 to March 31,
1998, the one-year U.S.  Treasury yield  declined by  approximately  0.41% while
LIBOR rates  applicable  to the  Company's  borrowings  decreased by only 0.03%,
creating a negative spread as of March 31, 1998 of -0.31.  Approximately  45% of
the  Company's  ARM assets are indexed to the one-year U. S. Treasury bill yield
and, therefore, the yield on such assets declined with the index. To put this in
historical  perspective,  the one-year U.S.  Treasury bill yield had a spread of
-0.26% to the average of the one-and  three-month  LIBOR rate as of December 31,
1997,  compared  to having a spread of -0.02% at  December  31,  1996,  0.04% on
average during 1996 and -0.07% on average during 1995. For the five-year  period
from 1993 to 1997, the average spread was 0.15%.  The Company does not know when
or if the relationship  between the one-year U. S. Treasury bill yield and LIBOR
will  return to these  historical  norms,  but the  Company's  spreads  would be
expected to improve if that occurs.  The Company's ARM portfolio  yield also was
lower  during the first  quarter of 1998  compared to the first  quarter of 1997
because of an increase in the  prepayment  rate of ARM assets.  During the first
quarter of 1998, the average prepayment rate was 27%, compared to 22% during the
comparable period in 1997. The impact of this was to increase the average amount
of  non-interest-earning  assets in the form of principal payments receivable as
well  as to  increase  the  amortization  expense  related  to  writing  off the
Company's premiums and discounts.  The Company generally  amortizes its premiums
and discounts on a monthly basis based on the most recent three-month average of
the prepayment  rate of its ARM assets,  thereby  adjusting its  amortization to
current market conditions, which is reflected in the yield of the ARM portfolio.

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.  Since the Company,  as a REIT,  pays its dividends
based on  taxable  earnings,  the  dividends  may at times be more or less  than
reported  earnings.  As of March 31, 1998, the Company had a retained deficit of
$109,000 because its dividends, which consisted entirely of taxable income, were
higher  than its  reported  earnings,  principally  because  of loss  provisions
recorded that are not deductible for tax purposes until actually  realized.  The
following  table  provides a  reconciliation  between the Company's  earnings as
reported  based on generally  accepted  accounting  principals and the Company's
taxable income before it's common dividend deduction:

            RECONCILIATION OF REPORTED NET INCOME TO TAXABLE NET INCOME
                           (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                             Three Month Period Ending March 31,
                                             -----------------------------------
                                                    1998             1997
                                             ----------------   ----------------
<S>                                          <C>                <C>             
Net income                                   $         10,496   $         9,295
  Additions:
     Provision for credit losses                          387               190
  Deductions:
     Dividend on Series A Preferred Shares             (1,670)           (1,241)
     Actual credit losses on ARM securities              (565)              (18)
     Net compensation related items                        (3)              -
                                              ----------------    -------------- 
Taxable net income                           $          8,645   $         8,226
                                              ================    ============== 
</TABLE>

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

                              COMMON DIVIDEND SUMMARY
                (Dollar amounts in thousands, except per share data)

<TABLE>
<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, 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           8,226         0.50           0.48          95%          1,505
   Jun 30, 1997           8,573         0.51           0.49          99%          1,603
   Sep 30, 1997           9,737         0.51           0.50         100%          1,560
   Dec 31, 1997           9,207         0.46           0.50         110%            629
   Mar 31, 1998           8,645         0.42           0.375         93%          1,290

<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>

As of March 31, 1998, 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 6.24%,  compared  to 6.65% as of March 31,
1997-- a decrease of 0.41%,  and  compared to 6.38% as of December 31, 1997 -- a
decrease of 0.14%.  The Company's cost of funds as of March 31, 1998, was 5.74%,
compared to 5.67% as of March 31, 1997 -- an increase of 0.07%,  and compared to
5.91% as of December  31, 1997 -- a decrease of 0.17%.  The higher cost of funds
as of  year-end  was  primarily  the  result of  financing  a portion of the ARM
portfolio  over 1997  year-end  at a time when LIBOR  interest  rates  increased
suddenly  late in November due to year-end  market  pressures.  Fortunately  the
Company,  expecting  this to occur,  had already  financed most of its portfolio
over year-end  before the LIBOR  increase and,  thus, was able to avoid the full
potential  impact of the higher market interest  rates.  Subsequent to year-end,
LIBOR interest rates have generally  returned to their previous level,  which is
reflected in a decrease in the Company's  cost of funds as of March 31, 1998. As
a result of these  changes,  the Company's  net interest  spread as of March 31,
1998 was 0.50%,  compared to 0.98% as of March 31, 1997 and compared to 0.47% as
of the end of 1997.



<PAGE>


The following  table  highlights the  components of net interest  spread and the
annualized yield on net  interest-earning  assets as of each applicable  quarter
end:

  COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)
                            (Dollar amounts in millions)

<TABLE>
<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, 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%
   Sep 30, 1997       4,143.7       7.63%         7.65%       1.07%       6.58%     5.79%     0.79%        1.22%
   Dec 31, 1997       4,548.9       7.64%         7.56%       1.18%       6.38%     5.91%     0.47%        0.96%
   Mar 31, 1998       4,859.7       7.47%         7.47%       1.23%       6.24%     5.74%     0.50%        0.92%
 
<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>

                 COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<TABLE>
<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, 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%
      Sep 30, 1997      0.85%        0.12%       0.15%        (0.05)%        1.07%
      Dec 31, 1997      0.94%        0.14%       0.14%        (0.04)%        1.18%
      Mar 31, 1998      0.98%        0.16%       0.13%        (0.04)%        1.23%
</TABLE>


<PAGE>


The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the quarters ended March 31, 1998 and 1997:

                      AVERAGE BALANCE AND RATE TABLE
                       (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                              For the Quarter Ended     For the Quarter Ended
                                                 March 31, 1998              March 31, 1997
                                              ---------------------     ---------------------
                                               Average    Effective      Average    Effective
                                               Balance      Rate         Balance      Rate
                                              ----------- ---------     ----------- ---------
<S>                                           <C>            <C>        <C>             <C>
      Interest Earning Assets:
         Adjustable-rate mortgage assets      $ 4,847,192     6.29%     $ 2,936,247     6.65%
         Cash and cash equivalents                 12,546     4.42           14,348     5.27
                                               ----------    -----        ---------    -----
                                                4,859,739     6.28        2,950,595     6.64
                                               ----------    -----        ---------    ----- 
      Interest Bearing Liabilities:
         Borrowings                             4,479,208     5.79        2,670,033     5.64
                                               ----------    -----       ----------    -----
      Net Interest Earning Assets and Spread  $   380,531     0.49%     $   280,562     1.00%
                                               ==========    =====       ==========    =====

      Yield on Net Interest Earning Assets (1)                0.94%                     1.54%
                                                             =====                     =====

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

Although the yield on the Company's  interest-earning  assets  declined to 6.28%
during the first quarter of 1998 from 6.64% during the first quarter of 1997 and
the Company's  cost of funds  increased to 5.79% from 5.64% during the same time
periods, its net interest income increased,  primarily due to the increased size
of the Company's portfolio. Net interest income increased by $94,000, which is a
combination of rate and volume variances.  There was a combined unfavorable rate
variance of $3,708,000, which consisted of an unfavorable variance of $2,696,000
resulting  from the lower yield on the Company's ARM assets  portfolio and other
interest-earning assets and an unfavorable variance of $1,012,000 resulting from
an increase in the Company's  cost of funds.  The increased  average size of the
Company's  portfolio  during the first three months of 1998 compared to the same
period  of 1997  contributed  to higher  net  interest  income in the  amount of
$3,803,000.  The average  balance of the Company's  interest-earning  assets was
$4.860  billion  during the first  quarter of 1998  compared  to $2.951  billion
during the first quarter of 1997 -- an increase of 66%.

During the first quarter of 1998, the Company  realized a net gain from the sale
of ARM  securities  in the amount of $1,528,000 as compared to $4,000 during the
first quarter of 1997. Most of the ARMs sold were sold for portfolio  management
reasons  because the  average  yield on 86% of the ARMs sold was 0.37% below the
average portfolio yield at the time of sale. Most of the gain, $1.4 million,  is
from  selling  the other 14% of the ARMs sold,  which  increased  the  Company's
retained  earnings  from a  deficit  at year end of  $951,000  to a  deficit  of
$109,000 as of March 31, 1998. Additionally, the Company recorded an expense for
credit losses in the amount of $387,000 during the quarter ended March 31, 1998,
compared to $190,000  during the same period of 1997. The Company  increased its
provision on the two ARM  securities  for which it has been providing for credit
losses to $300,000 and, in accordance  with its credit reserve policy for loans,
also  recorded a provision of $59,000 on its ARM loan  portfolio  and $28,000 on
its portfolio of loans  securitized by the Company on which the Company retained
the first credit loss exposure.

For the quarter ended March 31, 1998, the Company's ratio of operating  expenses
to average  assets was 0.16% as compared  to 0.25% for the same  quarter of 1997
and as compared to 0.17% for the previous  quarter ended  December 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 Company pays the Manager an annual
base  management  fee,  generally  based on average  shareholders'  equity,  not
assets,  as defined in the Management  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.  Since this management
fee is based on shareholders'  equity and not assets,  this fee increases as the
Company  successfully  accesses  capital  markets and raises  additional  equity
capital  and is,  therefore,  managing a larger  amount of  invested  capital on
behalf of its shareholders.  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  U.S.  Treasury  rate during the
quarter  plus 1%.  During  the  first  quarter  of 1998,  the  Manager  earned a
performance fee of $759,000. During the first quarter of 1998, after paying this
performance fee, the Company's return on common equity was 10.91%.  As presented
in  the  following  table,  the  performance  fee  is a  variable  expense  that
fluctuates  with the Company's  return on  shareholders'  equity relative to the
average  10-year U.S.  Treasury rate. As the Company's  return on  shareholders'
equity declined during the first quarter of 1998,  compared to the first quarter
of 1997, the  performance fee also declined,  to an annualized  0.06% of average
assets compared to 0.11% during the same period in 1997.

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

                        ANNUALIZED OPERATING EXPENSE RATIOS

<TABLE>
<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, 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%
   Sep 30, 1997             0.12%             0.09%               0.21%
   Dec 31, 1997             0.12%             0.05%               0.17%
   Mar 31, 1998             0.10%             0.06%               0.16%
</TABLE>



<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary source of funds for the quarters ended March 31, 1998 and
1997 consisted of reverse  repurchase  agreements,  which totaled $4.470 billion
and  $2.936  billion  at  the  respective  quarter  ends.  The  Company's  other
significant  source  of funds for the  quarters  ended  March 31,  1998 and 1997
consisted of payments of principal and interest from its ARM assets portfolio in
the amounts of $442.0 million and $194.2 million,  respectively.  In the future,
the Company  expects its primary sources of funds will consist of borrowed funds
under  reverse  repurchase  agreement  transactions  with  one- to  twelve-month
maturities,  of monthly  payments of  principal  and  interest on its ARM assets
portfolio  and  possibly  asset sales as needed.  The  Company's  liquid  assets
generally consist of unpledged ARM assets, cash and cash equivalents.

The borrowings  incurred at March 31, 1998 had a weighted  average interest cost
of 5.75%,  which  includes the cost of interest rate swaps,  a weighted  average
original term to maturity of 5.5 months and a weighted average remaining term to
maturity of 2.6 months.  As of March 31, 1998,  $1.868  billion of the Company's
reverse  repurchase   agreements  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.  In
addition,  as of  March  31,  1998,  $174.4  million  of the  Company's  reverse
repurchase  agreements  were  collateralized  by  whole  loans  under  one  year
financing  agreements  that are indexed to the one-month  LIBOR rate and reprice
either daily or once a month.

The Company has borrowing  arrangements with 24 different financial institutions
and on March 31, 1998,  had borrowed funds under reverse  repurchase  agreements
with 18 of these  firms.  Because  the Company  borrows  money based on the fair
value of its ARM assets and because  increases in short-term  interest rates can
negatively impact the valuation of ARM assets,  the Company's  borrowing ability
could be limited and lenders may initiate  margin calls in the event  short-term
interest  rates  increase or the value of the Company's ARM assets  declines for
other reasons. Additionally,  certain of the Company's ARM assets are rated less
than AA by the Rating  Agencies  and have less  liquidity  than  assets that are
rated AA or higher.  Other  mortgage  assets which are rated AA or higher by the
Rating  Agencies  derive their credit rating based on a mortgage pool  insurer's
rating. As a result of either changes in interest rates, credit performance of a
mortgage pool or a downgrade of a mortgage pool issuer,  the Company may find it
difficult to borrow against such assets and, therefore,  may be required to sell
certain mortgage assets in order to maintain liquidity. If required, these sales
could be at prices  lower than the  carrying  value of the  assets,  which would
result in losses. For the quarter ended March 31, 1998, the Company had adequate
cash flow, liquid assets and unpledged  collateral with which to meet its margin
requirements during such periods. Further, the Company believes it will continue
to have  sufficient  liquidity  to meet its future  cash  requirements  from its
primary  sources of funds for the  foreseeable  future  without  needing to sell
assets.

In December 1996, the Company's  Registration Statement on Form S-3, registering
the sale of up to $200 million of  additional  equity  securities,  was declared
effective by the Securities and Exchange Commission. This registration statement
includes the possible  issuances of common stock,  preferred stock,  warrants or
shareholder  rights.  As of March 31, 1998,  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 "DRP")
designed to provide a convenient  and  economical  way for  existing  common and
preferred  shareholders to automatically  reinvest their dividends in additional
shares of common stock and for new and existing  shareholders to purchase shares
at a discount to the current market price of the common stock, as defined in the
DRP. As a result of  participation  during the first three months of 1998 in the
DRP, the Company issued  1,027,000 new shares of common stock and received $16.3
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 repricing 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  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,  resulting  in an
increased  yield on its mortgage  assets.  Therefore,  in rising  interest  rate
environments  where prepayments are declining,  not only would the interest rate
on the ARM assets  portfolio  increase to  re-establish a spread over the higher
interest  rates,  but the yield also would 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 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  assets  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 8% to
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 assets will, over time, reprice 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.

OTHER MATTERS

As of March 31, 1998,  the Company  calculates  its  Qualified  REIT Assets,  as
defined in the Internal  Revenue Code of 1986,  as amended (the  "Code"),  to be
99.9% 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  99.8% of its 1998  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.  The  Company  also met all REIT  requirements
regarding  the  ownership of its common stock and the  distributions  of its net
income.  Therefore,  as of March 31,  1998,  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. The Company
calculates that it is in compliance with this requirement.

PART II.    OTHER INFORMATION

Item 1. Legal Proceedings
            At March 31, 1998, there were no pending legal proceedings to which
            the Company was a party or of which any of its property was subject.

Item 2.  Changes in Securities
            Not applicable

Item 3.  Defaults Upon Senior Securities
            Not applicable

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

Item 5.  Other Information
            None

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

      (a)   Exhibits
              None

      (b)   Reports on Form 8-K
              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:  April 22, 1998              By:    /s/ Larry A. Goldstone
                                          -----------------------
                                          Larry A. Goldstone
                                          President and Chief Operating Officer
                                          (authorized officer of registrant)




Dated:  April 22, 1998              By:   /s/ Richard P. Story
                                          --------------------
                                          Richard P. Story,
                                          Chief Financial Officer and Treasurer
                                          (principal accounting officer)