______________________________________________________________________________

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


                                  FORM 10-Q


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

For the quarterly period ended:     September 30, 1997

                                      OR

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

For the transition period from                   to               
                               -----------------    -----------------
Commission File Number:   001-11914


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

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

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

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

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

Indicate by check mark whether the  Registrant (1) has filed all documents and
reports  required  to be  filed  by  Section  13 or  15(d)  of the  Securities
Exchange  Act of 1934  during the  preceding  12 months  (or for such  shorter
period that the  Registrant  was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days.
 
                        (1) Yes     X          No     
                        (2) Yes     X          No 
 
                    APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($.01 par value)                19,752,188 as of October 30, 1997

                        THORNBURG MORTGAGE ASSET CORPORATION
                                     FORM 10-Q


                                       INDEX




                                                                           Page
PART I.  FINANCIAL INFORMATION

   Item 1.  Financial Statements

               Balance Sheets at September 30, 1997 and December 31, 1996     3

               Statements of Operations for the three months and nine
               months ended September 30, 1997 and September 30, 1996         4

               Statement of Stockholders' Equity for the three months and
               nine months ended September 30, 1997                           5

               Statements of Cash Flows for the three months and nine
               months ended September 30, 1997 and September 30, 1996         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                                                28

   Item 2.  Changes in Securities                                            28

   Item 3.  Defaults Upon Senior Securities                                  28

   Item 4.  Submission of Matters to a Vote of Security Holders              28

   Item 5.  Other Information                                                28

   Item 6.  Exhibits and Reports on Form 8-K                                 28


   SIGNATURES                                                                29

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

THORNBURG MORTGAGE ASSET CORPORATION

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

                                                  September 30,       December 31,
                                                      1997                1997
                                                ------------------  -----------------
<S>                                             <C>                 <C>
ASSETS

   ARM assets (Notes 2 and 3)                   $      4,463,002    $     2,727,875
   Cash and cash equivalents                              20,427              3,693
   Accrued interest receivable                            37,274             23,563
   Prepaid expenses and other                                478                227
                                                ------------------  -----------------
                                                $      4,521,181    $     2,755,358
                                                ==================  =================


LIABILITIES

   Reverse repurchase agreements (Note 3)       $      3,980,910    $     2,459,132
   Other borrowings (Note 3)                              11,319             14,187
   Payable for securities purchased                      120,557             32,683
   Accrued interest payable                               24,571             18,747
   Dividends payable (Note 6)                             11,450              7,299
   Accrued expenses and other                              9,019              1,112
                                                ------------------  -----------------
                                                       4,157,826          2,533,160
                                                ------------------  -----------------


SHAREHOLDERS' EQUITY (Note 6)

   Preferred stock: par value $.01 per share;
      2,760,000 shares authorized; 9.68%
      Cumulative Convertible Series A, 2,760,000
      and none issued and outstanding,
      respectively                                        65,805                -
   Common stock: par value $.01 per share;
      47,240,000 shares authorized, 19,560,892
      and 16,219,241 shares issued and
      outstanding, respectively                              196                162
   Additional paid-in-capital                            301,911            233,177
   Available-for-sale securities:
      Unrealized gain (loss) (Note 2)                     (8,003)           (15,807)
      Realized deferred hedging gain                       3,441              4,541
   Retained  earnings                                          5                125
                                                ------------------  -----------------
                                                         363,355            222,198
                                                ------------------  -----------------

                                                $      4,521,181    $     2,755,358
                                                ==================  =================
</TABLE>

See Notes to Financial Statements.

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF OPERATIONS
 (In thousands, except share data)

<TABLE>
<CAPTION>

                                       Three Months Ended        Nine Months Ended
                                          September 30,            September 30,
                                        1997        1996          1997        1996
                                    ----------- ------------  ----------- -----------
<S>                                 <C>         <C>           <C>         <C>
Interest income from ARM assets
  and cash                          $    68,088  $   40,173   $  174,710  $  108,556
Interest expense on borrowed funds      (54,862)    (32,221)    (137,977)    (87,188)
                                    ------------ -----------  ----------- -----------
   Net interest income                   13,226       7,952       36,733      21,368
                                    ------------ -----------  ----------- -----------

Gain (loss) on sale of ARM assets           335         520          360         533
Provision for credit losses                (223)       (200)        (623)       (200)
Management fee (Note 5)                    (974)       (430)      (2,661)     (1,194)
Performance fee (Note 5)                   (931)       (631)      (2,569)     (1,727)
Other operating expenses                   (251)       (183)        (689)       (452)
                                    ------------ -----------  ----------- -----------

   NET INCOME                       $    11,182  $    7,028   $   30,551  $   18,328
                                    ============ ===========  =========== ===========



Net income                          $    11,182  $    7,028   $   30,551  $   18,328
Dividend on preferred stock              (1,670)        -         (4,581)        -
                                    ------------ -----------  ----------- -----------

Net income available to common
  shareholders                      $     9,512  $    7,028   $   25,970  $   18,328
                                    ============ ===========  =========== ===========

Net income per common share         $       0.50 $      0.44  $      1.49 $      1.27
                                    ============ ===========  =========== ===========

Average number of common shares
  outstanding                         19,152,374  16,080,363   17,437,270  14,425,873
                                    ============ ===========  =========== ===========
</TABLE>

See Notes to Financial Statements.

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months and Nine Months Ended September 30, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
                                                              Available-for-Sale
                                                                  Securities
                                                           -------------------------
                                                                          Realized
                                              Additional    Unrealized    Deferred
                       Preferred    Common     Paid-in         Gain       Gain From    Retained
                         Stock       Stock     Capital        (Loss)       Hedging     Earnings     Total
                      -----------  --------  ------------  ------------  -----------  ----------  ---------
<S>                   <C>          <C>       <C>           <C>           <C>          <C>         <C>
Balance,
  December 31, 1996   $      -     $   162   $   233,177   $   (15,807)  $    4,541   $     125   $222,198

Series A preferred
  stock issued, net
  of issuance
  cost (Note 5)           65,805       -             -             -            -           -       65,805

Issuance of common
  stock (Note 5)             -          11        20,407           -            -           -       20,418

Available-for-Sale
  Securities:  Fair
  value adjustment,
  net of amortization        -         -             -           5,756          -           -        5,756

  Deferred gain on
    sale of hedges,
    net of
    amortization             -         -             -             -           (742)        -         (742)

Net income                   -         -             -             -            -        19,369     19,369

Dividends declared on
  preferred stock -
  $1.055 per share           -         -             -             -            -        (2,912)    (2,912)

Dividends declared on
  common stock -
  $0.97 per share            -         -             -             -            -       (16,309)   (16,309)
                      -----------  --------  ------------  ------------  -----------  ----------  ---------
Balance,
  June 30, 1997           65,805       173       253,584       (10,051)       3,799         273    313,583

Issuance of common
  stock (Note 5)             -          23        48,327           -            -           -       48,350

Available-for-Sale
  Securities:  Fair
  value adjustment,
  net of amortization        -         -             -           2,048          -           -        2,048

  Deferred gain on
    sale of hedges,
    net of
    amortization             -         -             -             -           (358)        -         (358)

Net income                   -         -             -             -            -        11,182     11,182

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

Dividends declared on
  common stock -
  $0.50 per share            -         -             -             -            -        (9,780)    (9,780)
                      -----------  --------  ------------  ------------  -----------  ----------  ---------
Balance,
  September 30, 1997  $   65,805   $   196   $   301,911   $    (8,003)  $    3,441   $       5   $363,355
                      ===========  ========  ============  ============  ===========  ==========  =========

</TABLE>

See Notes to Financial Statements.

THORNBURG MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                  Three Months Ended           Nine Months Ended
                                                     September 30,                September 30,
                                                  1997          1996           1997          1996
                                              ------------  ------------   ------------  ------------
<S>                                           <C>           <C>            <C>           <C>
Operating Activities:
  Net Income                                  $    11,182   $     7,028    $    30,551   $    18,328
  Adjustments to reconcile net income to
    net cash provided by operating
    activities:
      Amortization                                  6,962         3,432         16,134        10,210
      Net (gain) loss from investing             
      activities                                     (112)         (320)           263          (333)
      Change in assets and liabilities:
        Accrued interest receivable                 2,377)       (2,026)       (13,711)       (2,783)
        Prepaid expenses and other                    (91)         (791)          (249)         (864)
        Accrued interest payable                    5,298         1,529          5,824         2,774
        Accrued expenses and other                  3,140         1,231          7,907         1,274
                                              ------------  ------------  -------------  ------------
          Net cash provided by operating
          activities                               24,002        10,083         46,719        28,606
                                              ------------  ------------  -------------  ------------


Investing Activities:
  Available-for-sale assets:
    Purchase of ARM assets                       (786,268)     (310,220)    (2,256,576)   (1,068,522)
    Proceeds on sales of ARM assets                73,915        26,047        108,217        32,586
    Principal payments on ARM assets              208,511       107,298        494,546       327,880
  Held-to-maturity assets:
    Principal payments on adjustable-rate      
    mortgage assets                                14,207        27,191         44,732        94,697
  ARM Loans:
    Purchase of ARM loans                         (31,325)          -          (45,075)          -
    Principal payments on ARM loans                   337           -              337           -
  Purchase of interest rate cap agreements         (1,234)          -           (3,128)         (423)
                                              ------------  ------------  -------------  ------------
          Net cash provided by (used in)      
          investing activities                   (521,857)     (149,684)    (1,656,947)     (613,782)
                                              ------------  ------------  -------------  ------------


Financing Activities:
  Net borrowings from reverse repurchase
  agreements                                      469,338       137,677      1,521,778       546,919
  Net borrowings from (repayments of)
  other borrowings                                   (825)         (762)        (2,869)       (3,056)
  Proceeds from preferred stock issued                -             -           65,805           -
  Proceeds from common stock issued                48,350         2,456         68,768        55,560
  Dividends paid                                  (10,145)       (6,375)       (26,520)      (15,979)
                                              ------------  ------------  -------------  ------------
          Net cash provided by (used in)
          financing activities                    506,718       132,996      1,626,962       583,444
                                              ------------  ------------  -------------  ------------


Net increase (decrease) in cash and cash
equivalents                                         8,863        (6,605)        16,734        (1,732)

Cash and cash equivalents at beginning of
period                                             11,564         8,533          3,693         3,660

                                              ------------  ------------  -------------  ------------
Cash and cash equivalents at end of period    $    20,427   $     1,928   $     20,427   $     1,928
                                              ============  ============  =============  ============
<FN>
Supplemental disclosure of cash flow information
and non-cash activities are included in Note 3.
</FN>
</TABLE>

See Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS

NOTE 1.  SIGNIFICANT ACCOUNTING POLICIES

   CASH AND CASH EQUIVALENTS

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

   ADJUSTABLE-RATE MORTGAGE ASSETS

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

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

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

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

   CREDIT RISK

     The Company  limits its exposure to credit  losses on its  portfolio of ARM
     assets 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 or Standard
     & Poor's (the "Rating  Agencies").  Additionally,  the Company may purchase
     ARM loans and limit its exposure to credit losses by restricting  its whole
     loan  purchases  to  ARM  loans  originated  to  "A"  quality  underwriting
     standards.  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,  and  currently  has less than 5% of its  portfolio  invested in
     Other Investments.  Other Investments generate a higher yield,  believed to
     be commensurate with the additional  credit risk of such  investments.  The
     majority of the  Company's  portfolio  is  comprised of ARM assets that are
     either  guaranteed  by an agency  of the  federal  government  or are rated
     within  one of the two  highest  rating  categories  by at least one of the
     Rating Agencies.

     The  Company  monitors  the  delinquencies  and  losses  on the  underlying
     mortgages  of  its  ARM  securities.  If  the  credit  performance  of  the
     underlying  mortgage loans is not as good 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  securities  portfolio.  The provision is based on
     management's  assessment of numerous factors affecting its portfolio of ARM
     securities  including,  but not limited to, current and projected  economic
     conditions,  delinquency  status,  credit  losses  to  date  on  underlying
     mortgages  and  remaining  credit  protection.  The  provision  is  made by
     reducing the cost basis of the individual  security for the decline in fair
     value which is other than  temporary,  and the amount of such write-down is
     recorded as a realized loss,  thereby reducing  earnings.  The Company also
     makes a monthly  provision  for possible  credit losses on its portfolio of
     whole 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
     securities are initially carried at their fair value as of the time the Cap
     Agreements and the related  securities  are designated as  held-to-maturity
     with an adjustment to equity for any unrealized gains or losses at the time
     of the designation.  Any adjustment to equity is thereafter  amortized into
     interest  income  as a yield  adjustment  in a manner  consistent  with the
     amortization  of any  premium  or  discount.  The Cap  Agreements  that are
     classified as a hedge against available-for-sale  securities are carried at
     fair  value  with  unrealized  gains  and  losses  reported  as a  separate
     component of equity, consistent with the reporting of such securities.  The
     carrying  value of the Cap  Agreements  are  included  in ARM assets on the
     balance sheet. The amortization of the carrying value of the Cap Agreements
     is  included in interest  income as a contra item (i.e.,  expense)  and, as
     such, reduces interest income over the lives of the Cap Agreements.

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

     INTEREST RATE SWAP AGREEMENTS

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

   INCOME TAXES

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

   NET INCOME PER SHARE

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

   USE OF ESTIMATES

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

   RECENT ACCOUNTING PRONOUNCEMENTS

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
     Statement of  Financial  Accounting  No. 128,  Earnings Per Share (SFAS No.
     128). SFAS No. 128 supersedes APB Opinion No. 15,  Earnings Per Share,  and
     specifies the  computation,  presentation  and disclosure  requirements for
     earnings per share (EPS) for entities  with  publicly  held common stock or
     potential  common  stock.  SFAS No. 128 will replace  Primary EPS and Fully
     Diluted EPS with Basic EPS and Diluted EPS, respectively. SFAS No. 128 will
     require dual  presentation  of Basic EPS and Diluted EPS on the face of the
     income statement for all entities with complex capital structures. SFAS No.
     128 also will require a reconciliation  of the numerator and denominator of
     the  Basic  EPS  to the  numerator  and  denominator  of  the  Diluted  EPS
     computation.  SFAS No. 128 will be effective for financial  statements  for
     periods ending after December 15, 1997.

     In February 1997,  the FASB issued SFAS No. 129,  Disclosure of Information
     about  Capital  Structure.   This  statement   establishes   standards  for
     disclosing information about an entity's capital structure.

     On June 30,  1997,  the FASB issued SFAS No. 130,  Reporting  Comprehensive
     Income.  This  statement  requires  companies  to  classify  items of other
     comprehensive  income by their nature in a financial  statement and display
     the  accumulated  balance of other  comprehensive  income  separately  from
     retained earnings and additional paid-in capital in the equity section of a
     statement of financial position.

     The Company  intends to comply with the  requirements  of these  statements
     which are effective for periods ending after December 15, 1997. The Company
     has determined that these statements will not result in material changes to
     the Company's financial position and results of operations.

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

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

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

<TABLE>
<CAPTION>
            September 30, 1997:
                                             ARM Securities
                                       -------------------------
                                        Available-    Held-to-
                                         for-Sale     Maturity     ARM Loans       Total
                                       ------------ ------------  -----------  ------------
            <S>                        <C>          <C>           <C>          <C>
            Amortized cost basis       $ 4,012,390  $   414,576   $   44,712   $ 4,471,678
            Allowance for losses            (1,521)         -            (13)       (1,534)
                                       ------------ ------------  -----------  ------------
              Amortized cost, net        4,010,869      414,576       44,699     4,470,144
                                       ------------ ------------  -----------  ------------
            Gross unrealized gains          15,427        8,342          -          23,769
            Gross unrealized losses        (22,569)      (3,118)         -         (25,687)
                                       ------------ ------------  -----------  ------------
              Fair value               $ 4,003,727  $   419,800   $   44,699   $ 4,468,226
                                       ============ ============  ===========  ============


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

     During the quarter ended September 30, 1997, the Company realized  $446,000
     in gains  and  $111,000  in  losses  on the sale of  $73.6  million  of ARM
     securities which were classified as available-for-sale.

     As of September 30, 1997, the Company had reduced the cost basis of its ARM
     securities  due to potential  future credit  losses  (other than  temporary
     declines in fair value) in the amount of $1,521,000,  including a provision
     for credit losses of $210,000  during the quarter ended September 30, 1997.
     At this time,  the Company is providing for potential  future credit losses
     on two securities  that have an aggregate  carrying value of $14.5 million,
     which  represent  less than 0.3% of the  Company's  total  portfolio of ARM
     assets. Both of these securities are performing and have varying degrees of
     remaining credit support that mitigate the Company's  exposure to potential
     future credit losses. Additionally,  during the third quarter, the Company,
     in accordance with its credit  policies,  recorded a $13,000  provision for
     potential  credit losses on its loan  portfolio,  although no actual losses
     have been realized in the loan portfolio to date.

     As of September 30, 1997,  the Company had $99.4 million of  commitments to
     purchase ARM securities.
 
     The  average  effective  yield  on the  ARM  assets  owned,  including  the
     amortization  of the  net  premium  paid  for the  ARM  assets  and the Cap
     Agreements, was 6.58% as of September 30, 1997 and 6.64% as of December 31,
     1996.

     As of September  30, 1997 and December 31, 1996,  the Company had purchased
     Cap  Agreements  with a  remaining  notional  amount of $3.922  billion and
     $2.266  billion,  respectively.  The notional  amount of the Cap Agreements
     purchased  generally  decline at a rate that is expected to approximate the
     amortization of the ARM securities. Under these Cap Agreements, the Company
     will receive  cash  payments  should  either the  three-month  or six-month
     London  InterBank  Offer Rate  ("LIBOR")  increase above the contract rates
     specified  in the Cap  Agreements,  which  range  from  7.50% to 13.00% and
     average  approximately  10.04%.  The Company's ARM assets  portfolio had an
     average lifetime  interest rate cap of 11.71% as of September 30, 1997. The
     initial  aggregate  notional  amount of the Cap Agreements  will decline to
     approximately  $2.945  billion  over the  period of the  agreements,  which
     expire between 1999 and 2004. The Company purchased these Cap Agreements by
     incurring  a  one-time  fee,  or  premium.  The  premium is  amortized,  or
     expensed,  over the lives of the Cap  Agreements  and reduces the  interest
     income on the Company's ARM assets during the period of  amortization.  The
     Company has credit risk to the extent  that the  counterparties  to the Cap
     Agreements do not perform their  obligations  under the Cap Agreements.  If
     one of the counterparties  does not perform,  the Company would not receive
     the cash to which it would  otherwise be entitled  under the  conditions of
     the  Cap  Agreement.  In  order  to  mitigate  this  risk  and  to  achieve
     competitive  pricing,  the Company has entered into Cap Agreements with six
     different  counterparties,  five of which are rated AAA and one of which 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 September 30, 1997,  the Company had  outstanding  $3.981  billion of
     reverse  repurchase  agreements with a weighted  average  borrowing rate of
     5.76% and a  weighted  average  remaining  maturity  of 3.7  months.  As of
     September  30,  1997,  $1.220  billion  of the  Company's  borrowings  were
     variable-rate term reverse repurchase  agreements with original  maturities
     that range from three months to two years. The interest rates of these term
     reverse repurchase  agreements are indexed to either the one-, two-, three-
     or six-month  LIBOR rate and reprice  accordingly.  The reverse  repurchase
     agreements at September 30, 1997 were collateralized by ARM securities with
     a carrying value of $4.189 billion, including accrued interest.

     At September 30, 1997, the reverse repurchase  agreements had the following
     remaining maturities (dollars in thousands):
<TABLE>
                         <S>                      <C>
                         Within 30 days           $     847,781
                         30 to 90 days                  870,617
                         90 days to one year          2,262,512
                                                  -------------
                                                  $   3,980,910
                                                  =============
</TABLE>

     As of September  30, 1997,  the Company had entered into two interest  rate
     swap agreements having an aggregate  notional balance of $250 million and a
     weighted  average  remaining term of 2.6 months.  In accordance  with these
     agreements,  the Company will pay a fixed rate of interest  during the term
     of these  agreements  and receive a payment  that varies  monthly  with the
     one-month  LIBOR rate. As a result of entering into these  agreements,  the
     Company has reduced the interest  rate  variability  of its cost to finance
     its ARM  securities  by  increasing  the  average  period  until  the  next
     repricing of its borrowings from 63 days to 68 days.

     Additionally,  during the quarter  ended  September  30, 1997,  the Company
     entered into three interest rate swap agreements that substantially  offset
     the terms of three other outstanding  interest rate swap agreements.  These
     offsetting  agreements  have identical  repricing  dates and variable rates
     that  negate each other and  partially  offsetting  fixed  rates  that,  on
     aggregate,  generate an immaterial amount of net income to the Company over
     their remaining  terms.  The three  previously  outstanding swap agreements
     upon which the Company pays the fixed rate and  receives the variable  rate
     are cancelable each month by the  counterparty.  The offsetting  agreements
     entered into during the third  quarter are  cancelable  by the Company each
     month  beginning  in  February  of 1998.  All six of these swap  agreements
     mature during the first quarter of 1999.

     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 September 30, 1997,  there was no balance
     outstanding under this agreement.

     As of  September  30,  1997,  the  Company  had  financed  a portion of its
     portfolio  of  interest  rate cap  agreements  with $11.3  million of other
     borrowings which require  quarterly or semi-annual  payments until the year
     2000.  These  borrowings have a weighted  average fixed rate of interest of
     7.91% and have a weighted  average  remaining  maturity  of 2.3 years.  The
     other  borrowings  financing  cap  agreements  at  September  30, 1997 were
     collateralized  by ARM  securities  with a carrying value of $15.2 million,
     including accrued interest, and $500,000 of cash and cash equivalents.  The
     aggregate  maturities of these other  borrowings are as follows (dollars in
     thousands):
<TABLE>
                              <S>         <C>
                              1997        $      1,301
                              1998               4,509
                              1999               4,877
                              2000                 632
                                          ------------
                                          $     11,319
                                          ============
</TABLE>

     During  the  quarter  ended  September  30,  1997,  the total cash paid for
     interest was $59.5 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 September 30, 1997 and December
     31,  1996.  SFAS  No.  107,  Disclosures  About  Fair  Value  of  Financial
     Instruments, defines the fair value of a financial instrument as the amount
     at which the instrument could be exchanged in a current transaction between
     willing  parties,  other than in a forced or  liquidation  sale (dollars in
     thousands):
<TABLE>
<CAPTION>
                                    September 30, 1997            December 31, 1996
                                --------------------------   --------------------------
                                  Carrying        Fair         Carrying        Fair
                                   Amount        Value          Amount        Value
                                ------------  ------------   ------------  ------------
            <S>                 <C>           <C>            <C>           <C>
            Assets:
              ARM assets        $ 4,458,317   $ 4,465,956    $ 2,689,727   $ 2,692,521
              Cap agreements          4,685         2,270          5,465         2,535

            Liabilities:
              Other borrowings       11,319        11,560         14,187        14,744
              Swap agreements            32           428             (7)          440
</TABLE>

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

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

NOTE 5.  COMMON AND PREFERRED STOCK

     In January  1997,  the Company  issued  2,760,000  shares of Series A 9.68%
     Cumulative Convertible Preferred Stock at a price of $25 per share pursuant
     to its  Registration  Statement on Form S-3 declared  effective in December
     1996. Net proceeds from this issuance totaled $65.8 million.  The dividends
     are cumulative  commencing on the issue date and are payable quarterly,  in
     arrears. The dividends per share are equal to the greater of (i) $0.605 per
     quarter,  or (ii) the quarterly  dividend  declared on the Company's common
     stock.  Each share is  convertible  at the option of the holder at any time
     into one share of common stock.  The preferred shares are redeemable by the
     Company on and after  December 31, 1999,  in whole or in part,  as follows:
     (i) for one share of common  stock  plus  accumulated,  accrued  but unpaid
     dividends,  provided  that for 20  trading  days  within  any  period of 30
     consecutive  trading  days the closing  price of the common stock equals or
     exceeds the conversion price of $25, or (ii) for cash at the issue price of
     $25,  plus any  accumulated,  accrued  but  unpaid  dividends  through  the
     redemption date. In the event of liquidation,  the holders of the preferred
     shares will be entitled to receive out of the assets of the Company,  prior
     to any distribution to the common shareholders,  the issue price of $25 per
     share in cash, plus any accumulated, accrued and unpaid dividends.

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

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

     During the quarter ended  September 30, 1997,  the Company  issued  151,963
     shares of common stock under its Dividend  Reinvestment  and Stock Purchase
     Plan and received net proceeds of $3.2  million.  For the nine month period
     ended September 30, 1997, the Company issued 367,801 shares of common stock
     under this plan and received net proceeds of $7.4 million.

     On September 17, 1997,  the Company  declared a third  quarter  dividend of
     $0.50  per  common  share  which  was paid on  October  10,  1997 to common
     shareholders of record as of September 30, 1997. Additionally,  the Company
     declared a dividend of $0.605 per share to the shareholders of the Series A
     9.68%  Cumulative  Convertible  Preferred Stock for the third quarter which
     was also paid on October 10, 1997 to preferred shareholders of record as of
     September  30, 1997.  For federal  income tax purposes  such  dividends are
     ordinary income to the Company's common and preferred shareholders.

NOTE 6.  STOCK OPTION PLAN

     The  Company  has a Stock  Option and  Incentive  Plan (the  "Plan")  which
     authorizes  the  granting  of options to  purchase  an  aggregate  of up to
     1,800,000  shares,  but not more than 5% of the  outstanding  shares of the
     Company's  common stock.  The Plan authorizes the Board of Directors,  or a
     committee  of the Board of  Directors,  to grant  Incentive  Stock  Options
     ("ISOs") as defined under section 422 of the Internal Revenue Code of 1986,
     as amended, options not so qualified ("NQSOs"),  Dividend Equivalent Rights
     ("DERs"),  Stock  Appreciation  Rights  ("SARs"),  and Phantom Stock Rights
     ("PSRs"). The exercise price for any options granted under the Plan may not
     be less  than 100% of the fair  market  value of the  shares of the  common
     stock at the time the option is granted.  Options  become  exercisable  six
     months  after the date  granted  and will  expire ten years  after the date
     granted,   except  options  granted  in  connection  with  an  offering  of
     convertible  preferred stock, in which case such options become exercisable
     if and when the convertible preferred stock is converted into common stock.

     During the quarter  ended  September  30, 1997,  there were 88,200  options
     granted to buy common  shares at an  exercise  price of $22.625  along with
     22,050 DERs.  As of September  30,  1997,  the Company had 855,066  options
     outstanding at exercise  prices of $9.375 to $22.625 per share,  614,746 of
     which were exercisable.  The weighted average exercise price of the options
     outstanding is $17.03 per share. There were 12,000 options exercised during
     the quarter ended September 30, 1997 by Mr. Stuart Sherman, a member of the
     Company's  Board of  Directors,  at an exercise  price of $15 for which the
     Company  received  proceeds of $180,000.  As of the quarter ended September
     30, 1997, there were 60,081 DERs granted,  of which 31,101 were vested, and
     199 PSRs granted.  In addition,  the Company recorded an expense associated
     with the DERs and the PSRs of $20,000  for both the  three- and  nine-month
     periods ending September 30, 1997.

NOTE 7.  TRANSACTIONS WITH AFFILIATES

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

     The Company pays the Manager an annual base management fee based on average
     shareholders'  equity,  adjusted for  liabilities  that are not incurred to
     finance  assets  ("Average  Shareholders'  Equity" or "Average Net Invested
     Assets" as defined in the Agreement) payable monthly in arrears as follows:
     1.1% of the first $300 million of Average  Shareholders'  Equity, plus 0.8%
     of Average Shareholders' Equity above $300 million.
 
     For the quarters  ended  September 30, 1997 and 1996,  the Company paid the
     Manager  $974,000 and $430,000,  respectively,  in base  management fees in
     accordance  with the terms of the  Agreement.  For the nine  month  periods
     ended  September  30,  1997 and 1996,  the Company  paid the  Manager  base
     management fees of $2,661,000 and $1,194,000, respectively.

     The Manager is also entitled to earn performance  based  compensation in an
     amount  equal  to  20% of  the  Company's  annualized  net  income,  before
     performance based compensation,  above an annualized Return on Equity equal
     to the ten year U.S. Treasury Rate plus 1%. For purposes of the performance
     fee calculation,  equity is generally  defined as proceeds from issuance of
     common  stock  before  underwriter's  discount and other costs of issuance,
     plus retained earnings. For the quarters ended September 30, 1997 and 1996,
     the Company  paid the  Manager  $931,000  and  $631,000,  respectively,  in
     performance  based  compensation  in  accordance  with  the  terms  of  the
     Agreement.  For the nine month periods  ended  September 30, 1997 and 1996,
     the Company paid the Manager  performance based compensation in the amounts
     of $2,569,000 and $1,727,000, respectively.

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

This  Report on Form 10-Q  contains  forward-looking  statements  which are made
pursuant to the safe harbor  provisions  of the  Private  Securities  Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking  statements
involve risks and uncertainties including,  without limitation, risks related to
future  interest  rates,  prepayment  rates and the timing of new programs.  For
additional information regarding these and other risks, reference is made to the
Company's Prospectus Supplement dated July 14, 1997.

GENERAL

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

The  Company's  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
          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 securities  originated and
held in its investment  portfolio.  The Company plans on securitizing  the loans
that it  acquires  in order to  continue  its  current  strategy  of owning high
quality,  liquid ARM  securities  and financing  them in the reverse  repurchase
market because the Company  believes this strategy will increase the portfolio's
total  return and result in a higher net  spread  when  considering  the cost of
financing  and credit  provisions.  In pursuing  this  strategy the Company will
likely  have a higher  degree of credit  risk  than  when  acquiring  securities
directly from the market. However, any additional credit risk will be consistent
with the Company's  objectives of  maintaining a portfolio  with a high level of
credit quality that provides an attractive return on equity.

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

FINANCIAL CONDITION

At September 30, 1997, the Company held total assets of $4.521  billion,  $4.463
billion of which  consisted  of ARM assets,  as  compared to $2.755  billion and
$2.728 billion, respectively, at December 31, 1996. Since commencing operations,
the Company has purchased either ARM securities which have been either backed by
agencies  of  the  U.S.   government,   privately-issued   (generally   publicly
registered)  mortgage  securities,  most of which  are  rated AA or higher by at
least  one  of the  Rating  Agencies  or ARM  loans  originated  to "A"  quality
underwriting  standards.  At September 30, 1997,  95.7% of the Company's  assets
were High Quality  assets as compared  with the Company's  investment  policy of
investing at least 70% of its total assets in High  Quality ARM  securities  and
cash and cash  equivalents.  All of the ARM  securities  currently  owned by the
Company are in the form of ARM pass-through certificates.

The  following  table  presents a schedule of ARM assets owned at September  30,
1997 and  December  31, 1996  classified  by High  Quality and Other  Investment
assets and further classified by type of issuer and by ratings categories.
<TABLE>
<CAPTION>
                          ARM PORTFOLIO BY ISSUER AND CREDIT RATING
                                   (amounts in thousands)

                                    September 30, 1997        December 31, 1996
                                 -------------------------  -------------------------
                                  Carrying     Portfolio     Carrying     Portfolio
                                    Value         Mix          Value         Mix
                                 ------------  -----------  ------------  -----------
<S>                              <C>                <C>     <C>                <C>
HIGH QUALITY:
  FHLMC/FNMA                     $ 3,089,614         69.2%  $ 1,474,842         54.1%
  Privately Issued Securities:
    AAA/Aaa Rating                   344,046          7.7       260,031          9.5
    AA/Aa Rating                     843,858         18.9       862,727         31.6
                                 ------------  -----------  ------------  -----------
      Total Privately Issued       1,187,904         26.6     1,122,758         41.1
                                 ------------  -----------  ------------  -----------

                                 ------------  -----------  ------------  -----------
      Total High Quality           4,277,518         95.8     2,597,600         95.2
                                 ------------  -----------  ------------  -----------

OTHER INVESTMENT:
  Privately Issued Securities:
    A Rating                         113,014          2.6       106,531          3.9
    BBB/Baa Rating                    18,012          0.4        14,017          0.5
    BB/Ba rating                       9,721          0.2         9,727          0.4
  Whole loans                         44,737          1.0           -            -
                                 ------------  -----------  ------------  -----------
      Total Other Investment         185,484          4.2       130,275          4.8
                                 ------------  -----------  ------------  -----------
                             
      Total ARM Portfolio        $ 4,463,002        100.0%  $ 2,727,875        100.0%
                                 ============  ===========  ============  ===========
</TABLE>

As of  September  30,  1997,  the  Company had reduced the cost basis of its ARM
assets due to potential  future credit losses (other than temporary  declines in
fair value) in the amount of $1,521,000,  including provisions for credit losses
of $210,000 for ARM  securities  and $13,000 for ARM loans  recorded  during the
quarter ended September 30, 1997.  During the third quarter of 1997, the Company
realized  actual  credit  losses of $18,000 on one senior class of a multi-class
pass-through  security that is secured by single family  loans.  However,  it is
possible  that these  losses  will be  reimbursed  at some future date if future
deposits  to a reserve  fund  credit  enhancement  account  exceed  future  loss
experience.  At this time, the Company is providing for potential  future losses
on two securities, the aforementioned senior class of a multi-class pass-through
security and one other, that have an aggregate  carrying value of $14.5 million,
which is less than 0.3% of the Company's total portfolio of ARM securities. Both
of these  securities are performing and have varying degrees of remaining credit
support that mitigate the Company's exposure to potential future credit losses.

The following table classifies the Company's  portfolio of ARM assets by type of
interest rate index.
<TABLE>
<CAPTION>
                                  ARM PORTFOLIO BY INDEX
                                  (amounts in thousands)

                                           September 30, 1997          December 31, 1996
                                       --------------------------  -------------------------
                                         Carrying      Portfolio     Carrying     Portfolio
                                           Value          Mix         Value          Mix
                                       -------------  -----------  ------------  -----------
<S>                                    <C>                 <C>     <C>                <C>
INDEX:
  One-month LIBOR                      $        -           -   %  $    10,646          0.4%
  Six-month LIBOR                         1,538,130         34.5     1,252,884         45.9
  Six-month Certificate of Deposit          232,643          5.2        69,348          2.6
  Six-month Constant Maturity Treasury       67,881          1.5         8,841          0.3
  One-year Constant Maturity Treasury     2,263,010         50.7     1,238,892         45.4
  Cost of Funds                             361,338          8.1       147,264          5.4
                                        ------------  -----------  ------------  -----------
                                        $ 4,463,002        100.0%  $ 2,727,875        100.0%
                                        ============  ===========  ============  ===========
</TABLE>

The ARM portfolio had a current  weighted  average  coupon of 7.65% at September
30, 1997. If the ARM portfolio were "fully indexed," the weighted average coupon
would be 7.63%, based upon the current  composition of the ARM portfolio and the
applicable indices at September 30, 1997.

At September 30, 1997,  the current  yield of the ARM  portfolio was 6.58%.  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.

During the quarter  ended  September  30,  1997,  the Company  purchased  $786.3
million of ARM securities,  98.5% of which were High Quality  assets,  and $31.3
million of ARM loans originated to "A" quality  underwriting  standards.  Of the
ARM assets acquired during the third quarter,  approximately  50% are indexed to
US Treasury rates,  33% are indexed to LIBOR, 12% are indexed to a Cost of Funds
Index and the  remaining 5% to other  miscellaneous  indices.  Although a larger
proportion of fixed rate loans as compared to ARM loans are being  originated in
the current market, the Company has continued to find sufficient  attractive ARM
asset acquisition  opportunities to continue its asset and earnings growth while
maintaining  the high credit quality  profile of the ARM portfolio.  The Company
has placed particular emphasis on acquiring seasoned ARM assets, which are loans
that were  originated  over five years ago.  These ARM  assets are  expected  to
prepay at a slower rate than newly originated ARM assets.  The Company believes,
partially  as a result of this  strategy,  that it has been  experiencing  lower
prepayment  activity in its ARM portfolio  than it otherwise  would have,  which
contributes to a higher and more stable ARM portfolio yield.

The Company also sold $73.6 million of ARM securities  during the third quarter,
all  of  which  were  High  Quality  ARM  securities  and  were   classified  as
available-for-sale,  for a net gain of  $335,000.  The Company  tracks the total
return  performance  of each ARM asset on a monthly basis and regularly  selects
assets to be sold based on the overall  performance  of  individual  assets.  In
general,  the assets  selected for sale during the third quarter were  primarily
selected based on their prepayment characteristics.

During the nine month period ended  September  30, 1997,  the Company  purchased
$2,256.6 million of ARM securities, 98.5% of which were High Quality assets, and
$45.1 million of ARM loans originated to "A" quality underwriting standards. The
Company also sold $107.9 million of ARM securities  during the nine month period
ended September 30, 1997, $89.8 million of High Quality ARM securities and $18.1
million   of   Other   Investments,    all   of   which   were   classified   as
available-for-sale, at a net gain of $360,000.

For both the three month and nine month  periods ended  September 30, 1997,  the
Company's  mortgage  assets  continued  to pay  down at an  approximate  average
annualized  constant  prepayment  rate  of  22%,  which  approximates  long-term
expectations.   In  the  event  that  actual   prepayment   experience   exceeds
expectations due to sustained increased prepayment  activity,  the Company would
have to amortize its premiums over a shorter time period, resulting in a reduced
yield to maturity on the Company's ARM assets.  Conversely, if actual prepayment
experience is less than the assumed constant  prepayment rate, the premium would
be amortized over a longer time period, resulting in a higher yield to maturity.
The Company  monitors its  prepayment  experience on a monthly basis in order to
adjust the amortization of the net premium, as appropriate.

The fair value of the  Company's  ARM  securities  portfolio  increased  by $7.6
million  during the quarter ended  September 30, 1997. As of September 30, 1997,
the  Company's  ARM  securities  portfolio  available-for-sale,   including  the
applicable  Cap  Agreements,  had a net  unrealized  market  value  loss of $7.1
million,  or 0.18% of the  securities  available-for-sale,  as compared to a net
unrealized  market  value  loss of $14.7  million  or  0.65%  of the  securities
available-for-sale, as of December 31, 1996.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with the lifetime  interest  rate caps of its ARM  portfolio  should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect  of the  lifetime  or  maximum  interest  rate  cap  limitation.  The Cap
Agreements purchased by the Company will allow the yield on the ARM portfolio to
continue to rise in a high interest rate  environment just as the Company's cost
of  borrowings  would  continue to rise,  since the  borrowings  do not have any
interest rate cap limitation. At September 30, 1997, the Cap Agreements owned by
the Company had a remaining  notional  balance of $3.922 billion with an average
final  maturity of 3.3 years,  as compared  to a remaining  notional  balance of
$2.266 billion with an average final maturity of 3.0 years at December 31, 1996.
Pursuant to the terms of the Cap  Agreements,  the  Company  will  receive  cash
payments if the  three-month or six-month  LIBOR index  increases  above certain
specified  levels  which  range from 7.50% to 13.00% and  average  approximately
10.04%.  The expense of the Company's  hedging activity amounted to $885,000 and
decreased  the yield on the ARM  portfolio  by 0.09%  during the  quarter  ended
September 30, 1997. In general,  the fair value of Cap Agreements increases when
market  interest  rates  increase  and  decreases  when  market  interest  rates
decrease, helping to partially offset changes in the fair value of the Company's
ARM  portfolio.  At September 30, 1997 the fair value of the Cap  Agreements was
$2.3 million,  $11.2 million less than the amortized cost of the Cap Agreements.
The  following  table  presents  information  about the  Company's Cap Agreement
portfolio as of September 30, 1997:
<TABLE>
<CAPTION>
                     CAP AGREEMENTS STRATIFIED BY STRIKE PRICE

                                                                    Weighted
     Hedged          Weighted     Cap Agreement                      Average
 ARM Securities       Average        Notional        Strike         Remaining
  Balance (1)        Life Cap        Balance          Price           Term
----------------   -----------   ---------------   -----------   ---------------
<C>                    <C>       <C>                   <C>             <C>
$   367,445,000         9.56%    $  366,786,000         7.50%          2.5 Years
    357,915,000        10.09        170,000,000         8.00           3.8
    103,173,000        10.54        207,821,000         8.50           1.9
    247,461,000        10.13        337,651,000         9.00           2.2
    155,353,000        10.84        159,482,000         9.50           3.0
    321,281,000        11.03        332,309,000        10.00           4.6
    463,351,000        11.48        478,318,000        10.50           3.1
    435,698,000        11.99        397,884,000        11.00           4.0
    437,863,000        12.54        578,154,000        11.50           4.7
    594,190,000        12.95        600,965,000        12.00           3.3
    242,283,000        13.53        193,575,000        12.50           2.7
    257,847,000        14.40         98,679,000        13.00           2.4
----------------   -----------   ---------------   -----------   ---------------
$ 3,983,860,000        11.71%    $3,921,624,000        10.04%          3.3 Years
================   ===========   ===============   ===========   ===============
<FN>
----------------
(1)  90% of the ARM securities' balance which approximates the financed
     portion.
</FN>
</TABLE>

As of September  30, 1997,  the Company had entered into two interest  rate swap
agreements  having an aggregate  notional balance of $250 million and a weighted
average remaining term of 2.6 months.  In accordance with these agreements,  the
Company  will pay a fixed rate of interest  during the term of these  agreements
and receive a payment that varies monthly with the one-month  LIBOR Index. As of
September  30, 1997,  the average cost of the  Company's  borrowings  was 5.79%,
which includes the impact of the interest rate swap  agreements.  As a result of
entering into these agreements the Company extended the weighted average term to
the next re-pricing date of its borrowing from 63 days to 68 days.

Additionally,  during the quarter ended  September 30, 1997, the Company entered
into three interest rate swap agreements that substantially  offset the terms of
three  other  outstanding  interest  rate  swap  agreements.   These  offsetting
agreements  have identical  repricing  dates and variable rates that negate each
other and  partially  offsetting  fixed rates that,  on  aggregate,  generate an
immaterial  amount of net income to the Company over their remaining  terms. The
three  previously  outstanding  swap  agreements upon which the Company pays the
fixed rate and  receives  the  variable  rate are  cancelable  each month by the
counterparty.  The offsetting  agreements  entered into during the third quarter
are cancelable by the Company each month  beginning in February of 1998. All six
of these swap agreements mature during the first quarter of 1999.

In  January  1997,  the  Company  issued  2,760,000  shares  of  Series  A 9.68%
Cumulative Convertible Preferred Stock at a price of $25 per share. Net proceeds
from this  issuance  totaled  $65.4  million.  In May 1997,  the Company  issued
861,850 shares of common stock at a price of $19.50 per share. Net proceeds from
this issuance totaled $16.2 million.  In July 1997, the Company issued 2,100,000
shares of common stock at a price of $22.625 per share and received net proceeds
of $45.0  million.  Primarily  as a result  of these  issuances  of  common  and
preferred stock, the Company's  shareholders'  equity,  excluding the fair value
adjustment for assets held as available-for sale, has grown to $371.4 million as
of  September  30,  1997 from  $238.0  million as of December  31,  1996.  As of
September  30, 1997,  the  Company's  ratio of  shareholders'  equity to assets,
excluding the fair value adjustment for assets held as  available-for  sale, was
8.20% as compared to 8.59% as of December 31, 1996.  The ratio of  shareholders'
equity to assets as of  September  30,  1997  reflects  the high  level of asset
acquisition  opportunities  that the Company has been able to take  advantage of
during 1997.

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

For the  quarter  ended  September  30,  1997,  the  Company's  net  income  was
$11,182,000 as compared to $7,028,000 for the quarter ended  September 30, 1996.
Net income available to common shareholders, after the $0.605 per share dividend
to preferred  shareholders,  increased to  $9,512,000  or $0.50 per common share
based on weighted  average common shares of 19,152,374  from $7,028,000 or $0.44
per common share based on weighted  average  common shares of 16,080,363 for the
quarter ended  September 30, 1996.  This is an increase in net income per common
share  available to common  shareholders  of 14%.  Net  interest  income for the
quarter  totaled  $13,226,000  as compared to $7,952,000  for the same period in
1996,  an increase of 66%.  Net  interest  income is  comprised  of the interest
income  earned on  mortgage  investments  and cash less  interest  expense  from
borrowings. During the third quarter of 1997, the Company recorded a gain on the
sale of ARM securities of $335,000 as compared to a gain of $520,000  during the
third  quarter  of 1996.  Additionally,  during the third  quarter of 1997,  the
Company  reduced its earnings and the carrying  value of its ARM  securities  by
reserving  $223,000 for potential credit losses as compared to $200,000 for this
same time period in 1996. For the quarter ended  September 30, 1997, the Company
incurred operating expenses of $2,156,000 consisting of a base management fee of
$974,000,  a performance  based fee of $931,000 and other operating  expenses of
$251,000.  During  the same  period  of 1996,  the  Company  incurred  operating
expenses of  $1,244,000  consisting  of a base  management  fee of  $430,000,  a
performance based fee of $631,000 and other operating expenses of $183,000.

The Company's  return on average  common equity was 12.70% for the quarter ended
September  30,  1997 as  compared  to 11.86%  for the same  period in 1996.  The
Company's  return on  average  common  equity for the nine  month  period  ended
September 30, 1997 was 13.15% as compared to 11.42% for the same period in 1996.
The table below  highlights the historical trend and the components of return on
average common equity (annualized):
<TABLE>
<CAPTION>
                 COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

                   Net    Provision     Gain                                                Net
                Interest     For       (Loss)          G & A     Permformance  Preferred  Income/
   For The      Income/    Losses/     on ARM      Expense (2)/      Fee/      Dividend/  Equity
Quarter Ended   Equity     Equity    Sales/Equity     Equity        Equity      Equity     (ROE)
-------------  ---------  ---------  ------------  ------------  ------------  ---------  -------
<S>              <C>         <C>       <C>             <C>           <C>         <C>       <C>
Mar 31, 1995      2.58%      -         -1.47%          1.02%         -           -          0.09%
Jun 30, 1995      5.51%      -          -              1.04%         -           -          4.47%
Sep 30, 1995      9.85%      -          0.09%          1.07%         0.34%       -          8.54%
Dec 31, 1995     11.94%      -          0.11%          1.05%         0.97%       -         10.03%
Mar 31, 1996     13.37%      -          0.03%          1.04%         1.27%       -         11.08%
Jun 30, 1996     13.14%      -          -              1.00%         0.92%       -         11.22%
Sep 30, 1996     13.42%      0.34%      0.88%          1.03%         1.07%       -         11.86%
Dec 31, 1996     14.99%      1.32%      1.38%          1.46%         1.23%       -         12.37%
Mar 31, 1997     18.85%      0.32%      0.01%          1.65%         1.43%       2.07%     13.40%
Jun 30, 1997     19.48%      0.34%      0.03%          1.81%         1.25%       2.67%     13.45%
Sep 30, 1997     17.66%      0.30%      0.45%          1.64%         1.24%       2.23%     12.70%
<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 second quarter of
1997 to the third  quarter  of 1997 is due to the  decline  in the net  interest
spread  between the  Company's  interest  earning  assets and  interest  bearing
liabilities  from 0.90% as of June 30, 1997 to 0.79% as of  September  30, 1997.
The primary  reason for this decline in the net  interest  spread has to do with
the current  relationship  between the one-year U. S.  Treasury  rate and LIBOR.
During  the  third  quarter,  the  one-year  U. S.  Treasury  rate  declined  by
approximately  0.20%  whereas  LIBOR  rates  remained   substantially  the  same
throughout  the  quarter.  Approximately  50% of the  Company's  ARM  assets are
indexed to the one-year U. S.  Treasury rate and,  therefore,  the yield on such
assets declined with the index.  Conversely,  the interest rate on the Company's
borrowings  is generally  LIBOR based and,  thus,  did not change  significantly
during  the  third  quarter.  To put this in  perspective,  the  one-year  U. S.
Treasury rate had a spread of -0.24% to the average of the one- and  three-month
LIBOR rate as of September  30, 1997 as compared to having a spread of -0.06% at
June 30, 1997,  -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 1992 to 1996, the
average  spread  was 0.20%.  The  Company  does not know when or if the  current
relationship between the one-year U. S. Treasury rate and LIBOR will revert back
to these  historical  norms,  but the Company's  spreads are expected to rebound
when and if the relationship does revert.

For the quarter ended  September  30, 1997,  the  Company's  taxable  income was
$9,737,000 or $0.51 per weighted  average share  outstanding.  Taxable income in
the third  quarter of 1997  excludes  the loss  provisions  of  $223,000  and an
expense  of  $20,000  for DERs and PSRs but  includes  actual  credit  losses of
$18,000.  For the quarter ended September 30, 1996, the Company's taxable income
was $6,708,000 or $0.42 per weighted average share  outstanding.  Taxable income
in the third  quarter of 1996  included  the effect of $520,000 of capital  loss
carry forwards from 1995 and excluded the loss  provisions of $200,000  recorded
during  the  third  quarter  of  1996.  The  Company  generally  passes  through
substantially all of its earnings to shareholders  without paying federal income
tax at the  corporate  level,  and as a REIT,  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.

The following table  highlights the quarterly  dividend history of the Company's
common shares:
<TABLE>
<CAPTION>
                              COMMON DIVIDEND SUMMARY
                 ($ in thousands, except per common share amounts)

                                                 Common         Common        Cumulative
                  Taxable      Taxable Net      Dividend       Dividend     Undistributed
  For The           Net         Income Per      Declared        Pay-out        Taxable
Quarter Ended    Income (1)      Share (2)    Per Share (2)    Ratio (3)      Net Income
-------------  -------------  --------------  -------------  -------------  -------------
<S>            <C>            <C>             <C>                  <C>          <C>
Mar 31, 1995   $     701      $     0.06      $    0.15            252%          (874)
Jun 30, 1995       1,993            0.17           0.15             89%          (634)
Sep 30, 1995       3,791            0.32           0.25             79%           139
Dec 31, 1995       4,535            0.37           0.38            102%            41
Mar 31, 1996       5,118            0.41           0.40             97%           188
Jun 30, 1996       6,169            0.42           0.40            103%           (18)
Sep 30, 1996       6,708            0.42           0.40             96%           250
Dec 31, 1996       8,164            0.50           0.45             89%         1,115
Mar 31, 1997       8,224            0.50           0.48             95%         1,505
Jun 30, 1997       8,573            0.51           0.49             99%         1,603
Sep 30, 1997       9,737            0.51           0.50            100%         1,560
<FN>
-------------
(1)  Taxable net income after preferred dividends.
(2)  Weighted average common shares outstanding.
(3)  Common dividend declared divided by applicable quarter's taxable income
     available to common shareholders.
</FN>
</TABLE>

The primary  reasons for the rise in the Company's  net interest  income for the
third  quarter of 1997 as compared  to the same period of 1996 was the  combined
effect  of the  increased  size of the  Company's  balance  sheet  as well as an
increase in the yield on the Company's portfolio of ARM assets, partially offset
by an increase in the Company's cost of funds.  Net interest income increased by
$5,274,000.  Of this increase,  the increased average size of the Company during
the third quarter of 1997 as compared to 1996 contributed to higher net interest
income  in the  amount of  $5,006,000.  The  average  balance  of the  Company's
interest  earning  assets was $4.144 billion during the third quarter of 1997 as
compared to $2.506  billion  during the same period of 1996, an increase of 65%.
Additionally,  $1,006,000 is the result of the higher yield on the Company's ARM
assets portfolio and other interest earning assets. This was partially offset by
an increase to the Company's cost of funds which had an impact of $738,000 for a
combined  favorable  rate  variance  of  $268,000.  The  yield on the  Company's
interest earning assets during the quarter ended September 30, 1997 was 6.57% as
compared to 6.41% during the same period of 1996. During these same periods, the
Company's  cost of funds  increased  to 5.79% in 1997  from  5.66% in 1996.  The
Company's  yield on net interest  earning  assets,  which includes the impact of
shareholders' equity,  was 1.28% for the third  quarter of 1997 as  compared to
1.27% for the same period of 1996.

The following  table  highlights the  components of net interest  spread and the
annualized  yield on net interest  earning assets as of each applicable  quarter
end (dollars in millions):
<TABLE>
<CAPTION>
     COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)

                                ARM Assets
                         --------------------------                             Yield on
               Average   Wgt. Avg.                   Yield on                      Net
               Interest   Fully     Weighted  Yield  Interest  Cost      Net    Interest
  As of the    Earning   Indexed    Average    Adj.  Earning    of    Interest  Earning
Quarter Ended   Assets    Coupon     Coupon    (2)    Assets   Funds   Spread    Assets
-------------  --------  ---------  --------  -----  --------  -----  --------  --------
<S>            <C>         <C>        <C>     <C>      <C>     <C>     <C>        <C>
Mar 31, 1995   $1,748.7    8.46%      6.33%   0.26%    6.07%   6.33%   -0.26%     0.49%
Jun 30, 1995    1,809.7    7.94%      6.77%   0.40%    6.37%   6.21%    0.16%     0.55%
Sep 30, 1995    1,864.3    7.93%      7.24%   0.58%    6.66%   6.04%    0.62%     1.04%
Dec 31, 1995    1,975.6    7.51%      7.42%   0.69%    6.73%   6.05%    0.68%     1.11%
Mar 31, 1996    2,025.8    7.56%      7.48%   0.99%    6.49%   5.60%    0.89%     1.32%
Jun 30, 1996    2,248.2    7.83%      7.28%   0.85%    6.43%   5.59%    0.84%     1.32%
Sep 30, 1996    2,506.0    7.80%      7.31%   0.80%    6.51%   5.71%    0.80%     1.32%
Dec 31, 1996    2,624.4    7.61%      7.57%   0.93%    6.64%   5.72%    0.92%     1.34%
Mar 31, 1997    2,950.6    7.93%      7.53%   0.89%    6.65%   5.67%    0.98%     1.54%
Jun 30, 1997    3,464.1    7.75%      7.57%   0.90%    6.67%   5.77%    0.90%     1.39%
Sep 30, 1997    4,143.7    7.63%      7.65%   1.07%    6.58%   5.79%    0.79%     1.22%
<FN>
------------
(1)  Yield on Net Interest  Earning  Assets is computed by dividing  annualized net
     interest income by the average daily balance of interest earning assets.
(2)  Yield  adjustments  include the impact of amortizing  premiums and  discounts,
     the cost of  hedging  activities,  the  amortization  of  deferred  gains from
     hedging  activities  and the  impact of  principal  payment  receivables.  The
     following  table presents these  components of the yield  adjustments  for the
     dates presented in the table above:
</FN>
</TABLE>
<TABLE>
<CAPTION>
          COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

                                                 Amort. of
                          Impact of               Deferred
               Premium/   Principal              Gain from    Total
  As of the    Discount    Payments    Hedging    Hedging     Yield
Quarter Ended    Amort.   Receivable   Activity   Activity  Adjustment
-------------  ---------  ----------   --------  ---------  ----------
<S>              <C>        <C>          <C>       <C>         <C>
Mar 31, 1995     0.22%      0.02%        0.21%     -0.19%      0.26%
Jun 30, 1995     0.26%      0.03%        0.28%     -0.17%      0.40%
Sep 30, 1995     0.37%      0.06%        0.31%     -0.16%      0.58%
Dec 31, 1995     0.43%      0.10%        0.32%     -0.16%      0.69%
Mar 31, 1996     0.77%      0.11%        0.31%     -0.20%      0.99%
Jun 30, 1996     0.67%      0.07%        0.27%     -0.16%      0.85%
Sep 30, 1996     0.57%      0.08%        0.25%     -0.10%      0.80%
Dec 31, 1996     0.69%      0.09%        0.23%     -0.08%      0.93%
Mar 31, 1997     0.63%      0.13%        0.19%     -0.07%      0.89%
Jun 30, 1997     0.66%      0.13%        0.16%     -0.05%      0.90%
Sep 30, 1997     0.85%      0.12%        0.15%     -0.05%      1.07%
</TABLE>
 
As of  September  30, 1997,  the  Company's  yield on its ARM assets  portfolio,
including the impact of the amortization of premiums and discounts,  the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment receivables,  was 6.58% as compared to 6.67% as of June 30,
1997, a decrease of 0.09%.  The Company's cost of funds as of September 30, 1997
was 5.79% as compared to 5.77% as of June 30, 1997,  an increase of 0.02%.  As a
result of these changes,  the Company's net interest  spread as of September 30,
1997 was 0.79% as  compared to 0.90% as of June 30,  1997,  a decrease of 0.11%.
This reduction in the net interest  spread is primarily due to the  relationship
between the one-year U. S. Treasury rate and LIBOR as discussed above.

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 September 30, 1997 and 1996:
<TABLE>
<CAPTION>
                              AVERAGE BALANCE AND RATE TABLE
                                  (Amounts in thousands)

                                              For the Quarter       For the Quarter
                                              Ended September       Ended September
                                                  30, 1997              30, 1996
                                          ---------------------  ---------------------
                                           Average    Effective   Average    Effective
                                           Balance      Rate      Balance      Rate
                                          ----------  ---------  ----------  ---------
<S>                                       <C>            <C>     <C>            <C>
Interest Earning Assets:
  Adjustable-rate mortgage assets         $4,116,223     6.58%   $2,489,894     6.42%
  Cash and cash equivalents                   27,524     5.66        16,106     5.42
                                          ----------  ---------  ----------  ---------
                                           4,143,747     6.57     2,506,000     6.41
                                          ----------  ---------  ----------  ---------
Interest Bearing Liabilities:
  Borrowings                               3,788,879     5.79     2,276,228     5.66

                                          ----------  ---------  ----------  ---------
Net Interest Earning Assets and Spread    $  354,868     0.78%   $  229,772     0.75%
                                          ==========  =========  ==========  =========

Yield on Net Interest Earning Assets (1)                 1.28%                  1.27%
                                                      =========              =========
<FN>
(1)  Yield on Net Interest Earning Assets is computed by dividing annualized net
     interest income by the average daily balance of interest earning assets.
</FN>
</TABLE>

During the third quarter of 1997, the Company  realized a net gain from the sale
of ARM  securities  in the amount of  $335,000 as compared to a gain of $520,000
during the third quarter of 1996. Additionally,  the Company recorded an expense
for credit losses in the amount of $223,000  during the quarter ended  September
30, 1997,  although the Company only  incurred  actual  credit losses of $18,000
during the quarter, as compared to an expense for credit losses in the amount of
$200,000  during the same period in 1996.  The Company  provided for  additional
credit  losses  because  its  review  of  underlying  ARM  collateral  indicates
potential for some loss on two ARM securities,  which are being carried at their
current market value of $14.5  million,  or 0.3% of the Company's ARM portfolio.
The  Company  also has a policy to  regularly  record a provision  for  possible
credit losses on its portfolio of ARM loans.

For the quarter  ended  September  30, 1997,  the  Company's  ratio of operating
expenses to average  assets was 0.21% as compared to 0.20% for the same  quarter
of 1996 and as compared to 0.22% for the previous  quarter  ended June 30, 1997.
The Company's  expense  ratios are among the lowest of any company  investing in
mortgage  assets,  giving  the  Company  what it  believes  to be a  significant
competitive   advantage  over  more  traditional   mortgage   portfolio  lending
institutions  such as banks and  savings  and  loans,  enabling  the  Company to
operate  with less  risk,  such as credit  and  interest  rate  risk,  and still
generate an attractive  return on equity when compared to these more traditional
mortgage portfolio lending institutions.

The following table  highlights the quarterly  trend of operating  expenses as a
percent of average assets:
<TABLE>
<CAPTION>
                        ANNUALIZED OPERATING EXPENSE RATIOS

                      Management Fee
                          & Other            Performance             Total
    For The              Expenses/              Fee/            G & A Expense/
 Quarter Ended        Average Assets       Average Assets       Average Assets
----------------     ----------------     ----------------     ----------------
<S>                        <C>                  <C>                  <C>
Mar 31, 1995               0.10%                0.00%                0.10%
Jun 30, 1995               0.10%                0.00%                0.10%
Sep 30, 1995               0.10%                0.03%                0.13%
Dec 31, 1995               0.10%                0.09%                0.19%
Mar 31, 1996               0.09%                0.12%                0.21%
Jun 30, 1996               0.10%                0.09%                0.19%
Sep 30, 1996               0.10%                0.10%                0.20%
Dec 31, 1996               0.13%                0.11%                0.24%
Mar 31, 1997               0.14%                0.11%                0.25%
Jun 30, 1997               0.13%                0.09%                0.22%
Sep 30, 1997               0.12%                0.09%                0.21%
</TABLE>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997

For the nine month period ended September 30, 1997, the Company's net income was
$30,551,000 as compared to  $18,328,000  for the same period of 1996. Net income
available  to  common  shareholders,  after the  $1.66  per  share  dividend  to
preferred  shareholders  for the period from January 24, 1997 (date of issuance)
through  September 30, 1997,  increased to $25,970,000 or $1.49 per common share
based on weighted  average common shares of 17,437,270 from $18,328,000 or $1.27
per common share based on weighted  average  common shares of 14,425,873 for the
nine month period ended  September  30, 1996.  This is an increase in net income
available to common  shareholders  per common share of 17%. Net interest  income
for the first nine months of 1997 totaled $36,733,000 as compared to $21,368,000
for the same  period  in 1996,  an  increase  of 72%.  Net  interest  income  is
comprised of the interest  income earned on mortgage  investments and cash, less
interest  expense  from  borrowings.  During the first nine months of 1997,  the
Company recorded a gain on the sale of ARM securities of $360,000 as compared to
a net gain of $533,000 during the same period of 1996. Additionally,  during the
first nine months of 1997, the Company  reduced  earnings and the carrying value
of its ARM  assets by  $623,000  for  projected  credit  losses as  compared  to
$200,000 during the same period of 1996. The Company incurred operating expenses
of $5,919,000  for the nine month  period,  consisting  principally  of the base
management  fee of  $2,661,000,  a  performance  fee  of  $2,569,000  and  other
miscellaneous  expenses  of  $689,000  as  compared  to  operating  expenses  of
$3,373,000  for the same  period  in 1996,  consisting  principally  of the base
management  fees of  $1,194,000,  a  performance  fee of  $1,727,000  and  other
miscellaneous expenses of $452,000.

As  discussed  above,  the  primary  reasons for the rise in the  Company's  net
interest  income for the nine month period ended  September 30, 1997 as compared
to the same period of 1996 was the combined  effect of the increased size of the
Company as well as an increase in the yield on the  Company's  portfolio  of ARM
assets,  partially  offset by an increase in the  Company's  cost of funds.  Net
interest  income  increased by  $15,365,000.  Of this  increase,  the  increased
average size of the Company's  investment portfolio during the first nine months
of 1997 as compared to 1996  contributed  to higher net  interest  income in the
amount of  $12,972,000.  The average balance of the Company's  interest  earning
assets was $3.519  billion  during the first nine  months of 1997 as compared to
$2.260 billion during the same period of 1996, an increase of 56%. Additionally,
$3,620,000  is the  result  of the  higher  yield on the  Company's  ARM  assets
portfolio and other interest  earning  assets.  This was partially  offset by an
increase to the Company's  cost of funds which had an impact of $1,227,000 for a
combined  favorable  rate  variance of  $2,393,000.  The yield on the  Company's
interest  earning  assets during the nine month period ended  September 30, 1997
was 6.62% as compared  to 6.40%  during the same  period of 1996.  Also,  during
these same periods,  the Company's cost of funds increased to 5.74% in 1997 from
5.66%  in 1996.  The  Company's  yield on net  interest  earning  assets,  which
includes the impact of  shareholders' equity,  rose to 1.39% for the first nine
months of 1997 from 1.26% for the same period of 1996.

As of the end of the quarter ended  September 30, 1997,  the Company's  yield on
its ARM  portfolio,  including  the impact of the  amortization  of premiums and
discounts,  the cost of hedging, the amortization of deferred gains from hedging
activity and the impact of principal payment receivables,  was 6.58% as compared
to 6.64% as of December  31, 1996, a decrease of 0.06%.  The  Company's  cost of
funds as of September 30, 1997 was 5.79% as compared to 5.72% as of December 31,
1996,  an increase of 0.07%.  As a result of these  changes,  the  Company's net
interest  spread as of  September  30, 1997 was 0.79% as compared to 0.92% as of
December 31, 1996, a decrease of 0.13%.

The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the nine month periods ended September 30, 1997 and September 30, 1996:
<TABLE>
<CAPTION>
                              AVERAGE BALANCE AND RATE TABLE
                                  (Amounts in thousands)

                                             For the Nine Month   For the Nine Month
                                               Period Ended         Period Ended
                                             September 30, 1997   September 30, 1996
                                          ---------------------  --------------------
                                           Average    Effective   Average    Effective
                                           Balance       Rate     Balance       Rate
                                          ----------  ---------  ----------  ---------
<S>                                       <C>            <C>     <C>            <C>
Interest Earning Assets:
  Adjustable-rate mortgage assets         $3,498,843     6.62%   $2,245,058     6.41%
  Cash and cash equivalents                   20,643     5.61        14,935     5.27
                                          ----------  ---------  ----------  ---------
                                           3,519,486     6.62     2,259,993     6.40
                                          ----------  ---------  ----------  ---------
Interest Bearing Liabilities:
  Borrowings                               3,204,859     5.74     2,053,632     5.66

                                          ----------  ---------  ----------  ---------
Net Interest Earning Assets and Spread    $  314,627     0.88%   $  206,361     0.74%
                                          ==========  =========  ==========  =========

Yield on Net Interest Earning Assets (1)                 1.39%                  1.26%
                                                      =========              =========
<FN>
(1)  Yield on Net Interest Earning Assets is computed by dividing annualized net
     interest income by the average daily balance of interest earning assets.
</FN>
</TABLE>

The increase in the  Company's  operating  expenses is  primarily  the result of
increased  management  and  performance  fees  paid  to the  Manager  which  are
commensurate  with the increased  equity base of the Company and the increase in
the Company's  return on equity.  In order for the Manager to earn a performance
fee,  the rate of return  to the  shareholders,  as  defined  in the  Management
Agreement,  must  exceed the  average  ten-year  U.S.  Treasury  rate during the
quarter  plus 1%.  During the first nine months of 1997,  the  Manager  earned a
performance  fee of $2,569,000 as compared to $1,727,000  during the same period
of 1996.  During the nine month period ended  September  30, 1997,  after paying
this  performance  fee, the Company's  return on average  common equity  reached
13.15% as compared to 11.42% during the same period of 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary source of funds for the quarters ended September 30, 1997
and 1996  consisted  of reverse  repurchase  agreements,  which  totaled  $3.981
billion and $2.328 billion at the respective  quarter ends. The Company's  other
significant  source of funds for the quarters ended  September 30, 1997 and 1996
consisted of payments of principal  and interest  from its ARM  portfolio in the
amounts of $294.9 million and $176.4 million,  respectively.  In the future, the
Company expects its primary sources of funds will continue to consist of monthly
payments of principal and interest on its ARM  portfolio  and of borrowed  funds
under  reverse  repurchase  agreement  transactions  with  one to  twelve  month
maturities and possibly from asset sales as needed.  The Company's liquid assets
generally consist of unpledged ARM assets, cash and cash equivalents.

The borrowings  incurred at September 30, 1997 had a weighted  average  interest
cost of 5.79%,  which  includes  the cost of  interest  rate  swaps,  a weighted
average original term to maturity of 6.8 months and a weighted average remaining
term to maturity of 3.7 months.  As of September 30, 1997, $1.220 billion of the
Company's borrowings were variable-rate term reverse repurchase  agreements with
original  maturities  that range from three  months to two years.  The  interest
rates of these term  reverse  repurchase  agreements  are  indexed to either the
one-, two-, three- or six-month LIBOR rate and reprice accordingly.

The Company has borrowing  arrangements  with twenty-four  different  investment
banking firms and commercial  banks and at September 30, 1997 had borrowed funds
under reverse  repurchase  agreements  with fifteen of these firms.  Because the
Company  borrows funds based on the fair value of its ARM assets,  the Company's
borrowing  ability  could  be  adversely  affected  as  a  result  of  either  a
significant  increase in short-term  interest  rates or a credit  downgrade of a
mortgage pool or a mortgage pool insurer,  either of which would reduce the fair
value of the  Company's  ARM  securities.  If such a decrease  in fair value was
significant  enough,  it could  require  the  Company to sell assets in order to
maintain  liquidity.  For the quarter ended  September 30, 1997, the Company had
adequate cash flow,  liquid assets and unpledged  collateral  with which to meet
its margin requirements.  Further, the Company has always maintained  sufficient
liquidity to meet its cash  requirements  from its primary  sources of funds and
believes it will be able to do so in the future.

In  January  1997,  the  Company  issued  2,760,000  shares  of  Series  A 9.68%
Cumulative  Convertible  Preferred Stock at a price of $25 per share pursuant to
its Registration  Statement on Form S-3 declared effective in December 1996. Net
proceeds from this issuance totaled $65.8 million.

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

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

The Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "Plan")
designed to provide a convenient  and  economical  way for  existing  common and
preferred  shareholders to  automatically  invest their dividends into shares of
common  stock and to purchase  common  shares at a 3% discount  from the current
market  price,  as  defined  in the  Plan.  As a result  of third  quarter  1997
participation in the Plan, the Company issued 151,963 new shares of common stock
and received  $3.2 million of new equity  capital.  During the nine month period
ended  September 30, 1997, the Company issued 367,801 new shares of common stock
and received $7.4 million of new equity capital.

EFFECTS OF INTEREST RATE CHANGES

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

The  Company's  earnings  can also be affected by  variations  in the amount and
direction  of change among the various  indices  upon which the interest  income
from the  Company's ARM asset  portfolio is generated  and the similar,  but not
identical,  effect on the Company's cost of borrowing.  In general,  the Company
has chosen to invest in diverse assets that are affected by a variety of indices
whereas the cost of the Company's  borrowings most closely corresponds to LIBOR.
This contributes to fluctuations in the spread between the Company's asset yield
and its cost of borrowed  money which can cause both  favorable and  unfavorable
fluctuations in the Company's earnings  depending upon the current  relationship
between the indices.

The rate of prepayment on the Company's mortgage assets may decrease if interest
rates rise, or if the difference between long-term and short-term interest rates
increases.  Decreased  prepayments  would  cause the  Company  to  amortize  the
premiums  paid for its ARM assets  over a longer  time  period  than  otherwise,
resulting in an increased  yield on its mortgage  assets.  Therefore,  in rising
short-term  interest rate  environments  where  prepayments  are declining,  the
interest rate on the ARM portfolio will likely increase to re-establish a spread
over the  higher  interest  rates  and the yield  would  also rise due to slower
prepayments.  This  combined  effect could  significantly  mitigate the negative
effects that rising short-term interest rates might have on earnings.

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

Lastly,  because the Company only invests in ARM assets and  approximately 9% of
such mortgage  assets are purchased  with  shareholders' equity,  the Company's
earnings  over time will tend to  increase  following  periods  when  short-term
interest  rates  have  risen and  decrease  following  periods  when  short-term
interest rates have declined.  This results because the financed  portion of the
Company's portfolio of ARM assets will, over time, re-price to a spread over the
Company's  cost of funds while the  portion of the  Company's  portfolio  of ARM
assets that are purchased with shareholders' equity will generally have a higher
yield  in a  higher  interest  rate  environment  and a lower  yield  in a lower
interest rate environment.

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

OTHER MATTERS

As of September 30, 1997, the Company  calculates its Qualified REIT Assets,  as
defined in the Internal  Revenue Code of 1986,  as amended (the  "Code"),  to be
99.6% 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 99.5% of its 1997 revenue for the first nine months of 1997  qualifies  for
the 75%  source of income  test and 100% of its  revenue  qualifies  for the 95%
source of income test under the REIT rules. Furthermore,  the Company's revenues
during the nine month period ended  September 30, 1997 subject to the 30% income
limitation under the REIT rules amounted to 0.72% of total revenue.  The Company
also met all REIT  requirements  regarding the ownership of its common stock and
the  distributions of its net income.  Therefore,  as of September 30, 1997, the
Company believes that it will continue to qualify as a REIT under the provisions
of the Code.

The  Company at all times  intends to conduct  its  business so as not to become
regulated as an investment  company under the Investment Company Act of 1940. If
the  Company  were to  become  regulated  as an  investment  company,  then  the
Company's use of leverage would be substantially reduced. The Investment Company
Act exempts  entities that are "primarily  engaged in the business of purchasing
or  otherwise  acquiring  mortgages  and other  liens on and  interests  in real
estate" ("Qualifying  Interests").  Under current interpretation of the staff of
the SEC, in order to qualify for this  exemption,  the Company must  maintain at
least 55% of its assets directly in Qualifying  Interests.  In addition,  unless
certain mortgage  securities  represent all the certificates issued with respect
to an underlying pool of mortgages,  such mortgage  securities may be treated as
securities  separate from the  underlying  mortgage  loans and, thus, may not be
considered  Qualifying  Interests  for  purposes of the 55%  requirement.  As of
September 30, 1997, the Company  calculates  that it is in compliance  with this
requirement.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
          At  September  30,  1997, there were no pending legal  proceedings  to
          which  the  Company  was a party or of which any of its  property  was
          subject.

Item 2.  Changes in Securities
          Not applicable

Item 3.  Defaults Upon Senior Securities
          Not applicable

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

Item 5.  Other Information
          None

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

      (a)   Exhibits
            None

      (b)   Reports on Form 8-K
 
            The Registrant has filed the following three Current Reports on Form
            8-K during the period covered by the Form 10-Q:

            (i)  Current  Report on Form 8-K, dated July 3, 1997  regarding  the
                 Registrant's  press release dated July 3, 1997  announcing  the
                 filing  of  a  prospectus  supplement with the  Securities  and
                 Exchange  Commission  for  the  public  offering  of  2,000,000
                 shares  of common  stock.  The press release was included as an
                 Exhibit to the Current Report on Form 8-K.

           (ii)  Current Report on Form 8-K, dated July 10, 1997  regarding  the
                 Registrant's  press release dated  July  10,  1997   announcing
                 the Registrant's earnings for the quarter ending June 30, 1997.
                 The  press  release was included as an Exhibit to  the  Current
                 Report on Form 8-K.

          (iii)  Current  Report on Form 8-K, dated July 14, 1997 regarding  the
                 Underwriting  Agreement entered into by the Registrant on  July
                 14,  1997.  The  Underwriting  Agreement  was  included  as  an
                 Exhibit to the Current Report on Form 8-K.

                                     SIGNATURES

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




                                    THORNBURG MORTGAGE ASSET CORPORATION



Dated:  October 30, 1997            By:  /s/ Larry A. Goldstone
                                         -------------------------------
                                         Larry A. Goldstone,
                                         President and Chief Operating Officer
                                         (authorized officer of registrant)




Dated:  October 30, 1997            By:  /s/ Richard P. Story
                                         -------------------------------
                                         Richard P. Story,
                                         Chief Financial Officer and Treasurer
                                         (principal accounting officer)