==============================================================================

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

                                  FORM 10-K

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

      FOR THE FISCAL YEAR ENDED:    DECEMBER 31, 1996

                                      OR

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

      FOR THE TRANSITION PERIOD FROM                   TO

                      COMMISSION FILE NUMBER: 001-11914

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

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

                   119 E. MARCY STREET, SUITE 201
                      SANTA FE, NEW MEXICO                    87501
               (Address of principal executive offices)     (Zip Code)

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

         Securities registered pursuant to Section 12(b) of the Act:

          Title of Each Class               Name of Exchange on Which Registered
----------------------------------------    ------------------------------------
Common Stock ($.01 par value)                      New York Stock Exchange
Series A 9.68% Cumulative Convertible
Preferred Stock ($.01 par value)                   New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all 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.     Yes     X      No
                                           ---------      ---------

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
Regulation S-K is not contained herein,  and will not be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

At March 18,  1997,  the  aggregate  market  value of the  voting  stock held by
non-affiliates was $347,768,744,  based on the closing price of the common stock
on the New York Stock Exchange.

Number of shares of Common Stock outstanding at March 18, 1997:  16,321,578

DOCUMENTS INCORPORATED BY REFERENCE:

   Portions of the Registrant's definitive Proxy Statement dated March 24, 1997,
   issued  in  connection  with  the  Annual  Meeting  of  Shareholders  of  the
   Registrant to be held on April 24, 1997, are  incorporated  by reference into
   Parts I and III.

==============================================================================
<PAGE>
                     THORNBURG MORTGAGE ASSET CORPORATION

                         1996 FORM 10-K ANNUAL REPORT

                              TABLE OF CONTENTS


                                    PART I
                                                                          Page
                                                                         -------
   ITEM 1.  BUSINESS....................................................    3

   ITEM 2.  PROPERTIES..................................................   13

   ITEM 3.  LEGAL PROCEEDINGS...........................................   13

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   13

                                   PART II

   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
               AND RELATED SHAREHOLDER MATTERS..........................   14

   ITEM 6.  SELECTED FINANCIAL DATA.....................................   15

   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS............   16

   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   25

   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE......................   25

                                   PART III

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   25

   ITEM 11. EXECUTIVE COMPENSATION......................................   25

   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT...............................................   25

   ITEM 13. CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS.............   25

                                   PART IV

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
               REPORTS ON FORM 8-K......................................   26

   FINANCIAL STATEMENTS.................................................   F-1

   SIGNATURES

   EXHIBIT INDEX


<PAGE>
                                       PART I


ITEM 1.  BUSINESS

GENERAL

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

OPERATING POLICIES AND STRATEGIES

Investment Strategies

The Company's investment strategy is to purchase ARM securities and, possibly at
some future date, ARM loans  originated  and serviced by other mortgage  lending
institutions.  Increasingly,  mortgage  lending is being  conducted  by mortgage
lenders who  specialize in the  origination  and servicing of mortgage loans and
then sell these loans to other  mortgage  investment  institutions,  such as the
Company. The Company believes it has a competitive  advantage in the acquisition
and  investment of these  mortgage  securities and mortgage loans because of the
low cost of its operations relative to traditional mortgage investors like banks
and savings and loans.  Like  traditional  financial  institutions,  the Company
seeks to generate income for distribution to its shareholders primarily from the
difference between the interest income on its ARM assets and the financing costs
associated with carrying its ARM assets.

The  Company  purchases  ARM  securities  from   broker-dealers   and  financial
institutions  that regularly make markets in these  securities.  The Company can
also purchase ARM securities from other mortgage  suppliers,  including mortgage
bankers,  banks, savings and loans,  investment banking firms, home builders and
other firms involved in originating, packaging and selling mortgage loans.

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

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

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

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

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

Since  inception,  the Company has generally  invested less than 15%,  currently
less than 5%,  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 without
commensurately  higher risk.  The Company may increase its  investment  in Other
Investment assets,  specifically classes of multiclass pass-throughs,  which may
benefit from future credit rating upgrades as senior classes of these securities
pay off,  or have  the  potential  to  increase  in  value  as a  result  of the
appreciation  of underlying  real estate  values.  The Company may also begin to
acquire ARM loans for the purpose of future  securitization  into ARM securities
for the Company's  investment portfolio pursuant to its strategy discussed under
"Portfolio of Mortgage Securities - Pass-Through Certificates - Privately Issued
ARM  Pass-Through  Certificates."  The  Company  believes  that its  strategy to
increase its investment in Other  Investment  assets and to securitize ARM loans
that it acquires will provide the Company with higher  yielding  investments and
give the Company greater control over the types of ARM securities originated and
held in its  investment  portfolio.  In pursuing  this strategy the Company will
likely  have to accept a higher  degree of credit  risk than it has in the past.
However,  the Company  remains  committed to  maintaining a high level of credit
quality, consistent with its objectives of avoiding substantial credit risk, and
providing an attractive return on equity.

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

Financing Strategies

The Company  employs a  leveraging  strategy to increase its assets by borrowing
against its ARM securities and then uses the proceeds to acquire  additional ARM
securities.  By leveraging its portfolio in this manner,  the Company expects to
maintain an  equity-to-assets  ratio of 10%, and not less than 8%, when measured
on a historical cost basis.  The Company  believes that this level of capital is
sufficient  to allow the  Company  to  continue  to  operate  in  interest  rate
environments  in which the Company's  borrowing rates might exceed its portfolio
yield.  These  conditions  could occur when the interest rate adjustments on the
ARM securities  lag the interest rate  increases in the Company's  variable rate
borrowings or when the interest rate of the Company's  variable rate  borrowings
are mismatched  with the interest rate indices of the Company's ARM  securities.
The Company also  believes  that this  capital  level is adequate to protect the
Company  from having to sell  assets  during  periods  when the value of its ARM
securities are declining. If the ratio of the Company's  equity-to-total assets,
measured on a historical cost basis, falls below 8%, then, subject to the source
of income limitations applicable to the Company as a REIT, the Company will take
action to increase its equity-to-assets  ratio to 8% of total assets or greater,
when measured on a historical cost basis, through normal portfolio amortization,
sale of assets or other steps as necessary.

The  Company's ARM  securities  are financed  primarily at short-term  borrowing
rates and can be financed utilizing reverse repurchase  agreements,  dollar-roll
agreements,  borrowings  under  lines of credit and other  secured or  unsecured
financings which the Company may establish with approved  institutional lenders.
To date, reverse repurchase agreements have been the primary source of financing
utilized by the Company to finance its ARM securities. Generally, upon repayment
of each reverse  repurchase  agreement the ARM securities used to  collateralize
the financing  will  immediately  be pledged to secure a new reverse  repurchase
agreement.  The  Company  has  established  lines of credit  and  collateralized
financing agreements with twenty-four different financial institutions.

Reverse  repurchase  agreements take the form of a simultaneous  sale of pledged
securities  to a lender  at an agreed  upon  price in  return  for the  lender's
agreement  to resell the same  securities  back to the borrower at a future date
(the maturity of the borrowing) at a higher price.  The price  difference is the
cost of borrowing  under these  agreements.  In the event of the  insolvency  or
bankruptcy  of a lender  during  the  term of a  reverse  repurchase  agreement,
provisions of the Federal Bankruptcy Code, if applicable,  may permit the lender
to consider the agreement to resell the  securities to be an executory  contract
that, at the lender's  option,  may be either assumed or rejected by the lender.
If a bankrupt lender rejects its obligation to resell pledged  securities to the
Company,  the  Company's  claim  against  the lender for the  damages  resulting
therefrom may be treated as one of many  unsecured  claims  against the lender's
assets.  These  claims  would be subject to  significant  delay and, if and when
payments are received,  they may be substantially less than the damages actually
suffered  by the  Company.  To  mitigate  this  risk  the  Company  enters  into
collateralized  borrowings with only financially sound institutions  approved by
the Board of  Directors,  including a majority of  unaffiliated  directors,  and
monitors the financial  condition of such  institutions  on a regular,  periodic
basis.

The Company  mitigates  its  interest-rate  risk from  borrowings  by  selecting
maturities that approximately match the interest-rate  adjustment periods on its
ARM securities.  Accordingly,  borrowings bear variable or short-term fixed (one
year or less) interest rates.  Generally,  the borrowing  agreements require the
Company  to  deposit  additional  collateral  in the event the  market  value of
existing  collateral  declines,  which,  in  dramatically  rising  interest rate
markets, could require the Company to sell assets to reduce the borrowings.

The Company's Bylaws limit borrowings,  excluding the collateralized  borrowings
in the form of reverse repurchase  agreements,  dollar-roll agreements and other
forms of collateralized  borrowings discussed above, to no more than 300% of the
Company's net assets, on a consolidated  basis, unless approved by a majority of
the unaffiliated directors.  This limitation generally applies only to unsecured
borrowings  of the Company.  For this  purpose,  the term "net assets" means the
total  assets  (less  intangibles)  of the  Company  at cost,  before  deducting
depreciation or other non-cash reserves,  less total liabilities,  as calculated
at the end of each quarter in  accordance  with  generally  accepted  accounting
principles.  Accordingly,  the 300% limitation on unsecured  borrowings does not
affect the  Company's  ability to finance its total  assets with  collateralized
borrowings.

Hedging Strategies

The Company makes use of hedging  transactions to mitigate the impact of certain
adverse changes in interest rates on its net interest  income.  In general,  ARM
securities have a maximum lifetime  interest rate cap, or ceiling,  meaning that
each ARM security contains a contractual  maximum rate. The borrowings  incurred
by the  Company to  finance  its ARM  securities  portfolio  are not  subject to
equivalent interest rate caps. Accordingly,  the Company purchases interest rate
cap  agreements  to prevent the  Company's  borrowing  costs from  exceeding the
lifetime maximum interest rate on its ARM securities.  These agreements have the
effect of  offsetting a portion of the Company's  borrowing  costs if prevailing
interest rates exceed the rate specified in the cap agreement.  An interest rate
cap agreement is a contractual  agreement  whereby the Company pays a fee, which
may at times be financed,  typically to either a commercial  bank or  investment
banking  firm,  in  exchange  for the  right to  receive  payments  equal to the
difference  between a contractually  specified cap rate level and a periodically
determined future interest rate times a contractually  specified  principal,  or
notional,  amount.  These  agreements  also may  appreciate in value as interest
rates  rise,  though  not  usually  by as much as the  market  value  of its ARM
securities  would decline,  which would offset some of the decline in the market
value of the Company's portfolio of ARM securities at such a time.

In  addition,  ARM  securities  are also  generally  subject to  periodic  caps.
Periodic caps generally  limit the maximum  interest rate change on any interest
rate adjustment  date to either a maximum of 1% per semiannual  adjustment or 2%
per  annual  adjustment.  The  borrowings  incurred  by the  Company do not have
similar periodic caps. The Company  generally does not hedge against the risk of
its borrowing costs rising above the periodic interest rate cap level on the ARM
securities  because the contractual  future interest rate adjustments on the ARM
securities will cause their interest rates to increase over time and reestablish
the ARM securities' interest rate to a spread over the then current index rate.

The Company has also entered into interest rate swap  agreements.  In accordance
with the terms of the swap agreements, the Company pays a fixed rate of interest
during the term of the  agreements  and receives a payment  that varies  monthly
with the one month LIBOR Index.  These  agreements have the effect of fixing the
Company's borrowing costs on a similar amount of swaps owned by the Company and,
as a result,  the  Company  has reduced the  interest  rate  variability  of its
borrowings.  The Company may also use interest rate swap agreements from time to
time to change from one interest  rate index to another  interest rate index and
thus  decrease  further the basis risk between the Company's  interest  yielding
assets and the financing of such assets.

The ARM  securities  held by the  Company  were  generally  purchased  at prices
greater than par. The Company is  amortizing  the  respective  premiums paid for
these  securities  over their  expected  lives using the level  yield  method of
accounting.  To the  extent  that  the  prepayment  rate  on the  Company's  ARM
securities differs from expectations,  the Company's net interest income will be
affected. Prepayments generally increase when mortgage interest rates fall below
the  interest  rates  on ARM  loans,  such as  those  that  back  the  Company's
portfolio.  To the extent there is an increase in prepayment rates, resulting in
a  shortening  of the  expected  lives  of the  Company's  ARM  securities,  the
Company's net income and, therefore, the amount available for dividends could be
adversely affected.  In an attempt to mitigate the adverse effect of an increase
in  prepayments  on ARM  securities  acquired above par, the Company has entered
into transactions where it purchases ARM securities at prices below par, however
the Company's  portfolio of ARM  securities is currently  held at a net premium.
The Company may also  purchase  limited  amounts of  "principal  only"  mortgage
derivative securities backed by either fixed-rate mortgages or ARM securities as
a hedge  against the  adverse  effect of  increased  prepayments.  To date,  the
Company has chosen not to purchase  any  "principal  only"  mortgage  derivative
securities.

The Company may enter into other hedging-type  transactions  designed to protect
its  borrowings  costs or portfolio  yields from  interest  rate  changes.  Such
transactions may include the purchase or sale of interest rate futures contracts
or options on interest  rate futures  contracts.  The Company may also  purchase
"interest only" mortgage derivative  securities or other derivative products for
purposes of mitigating risk from interest rate changes.  The Company has not, to
date, entered into these types of transactions, but may do so in the future. The
Company  will not invest in any  futures  transactions  unless the  Company  and
Thornburg  Mortgage  Advisory  Corporation  (the  "Manager") are exempt from the
registration  requirements of the Commodities  Exchange Act or otherwise  comply
with the provisions of that Act.

Hedging transactions currently utilized by the Company generally are designed to
protect the  Company's  net interest  income  during  periods when the Company's
borrowing  costs  exceed  the  maximum  lifetime   interest  rates  on  its  ARM
securities.  The  Company  does not  intend to hedge for  speculative  purposes.
Further,  no hedging strategy can completely insulate the Company from risk, and
certain of the federal income tax requirements  that the Company must satisfy to
qualify  as a REIT  limit the  Company's  ability  to hedge,  particularly  with
respect to hedging against periodic cap risk. The Company carefully monitors and
may have to limit its  hedging  strategies  to ensure  that it does not  realize
excessive hedging income, or hold hedging assets having excess value in relation
to total assets.  See "Federal  Income Tax  Considerations  -  Requirements  for
Qualification as a REIT".

Securitization of Mortgage Loans

The  Company  may  create,   through   securitization,   ARM   securities   with
substantially all ARM loans it may acquire.  The Company intends to purchase ARM
loans for  securitization  when it believes  that it can earn a higher  yield on
these mortgage  securities  created  through  securitization  than on comparable
mortgage  securities  purchased  in the  market  or in order to  facilitate  its
compliance  with its  exemption  from the  Investment  Company Act of 1940.  See
"Operating  Restrictions"  below.  Following  the  securitization  process,  the
Company  intends to hold the newly  created  ARM  securities  in its  investment
portfolio and will retain a limited  amount of the risk of future credit loss as
part of its securitization program.

Operating Restrictions

The Board of Directors has established the Company's  operating policies and any
revisions in the operating  policies and strategies  require the approval of the
Board of Directors,  including a majority of the unaffiliated directors.  Except
as otherwise restricted, the Board of Directors has the power to modify or alter
the operating policies without the consent of shareholders.  Developments in the
market which affect the operating  policies and strategies  mentioned  herein or
which  change  the  Company's  assessment  of the  market may cause the Board of
Directors  (including a majority of the  unaffiliated  directors)  to revise the
Company's operating policies and financing strategies.

In the event the rating of an ARM security held by the Company is reduced by the
Rating Agencies to below Investment Grade after acquisition by the Company,  the
asset may be  retained  in the  Company's  investment  portfolio  if the Manager
recommends that it be retained and the  recommendation  is approved by the Board
of Directors (including a majority of the unaffiliated directors).

The Company has elected to qualify as a REIT for tax  purposes.  The Company has
adopted  certain  compliance   guidelines  which  include  restrictions  on  the
acquisition,  holding and sale of assets. Prior to the acquisition of any asset,
the Company determines whether such asset will constitute a Qualified REIT Asset
as defined by the  Internal  Revenue  Code of 1986,  as  amended  (the  "Code").
Substantially  all the assets that the Company has acquired and will acquire for
investment  are expected to be Qualified  REIT  Assets.  This policy  limits the
investment strategies that the Company may employ.

The Company closely monitors its purchases of ARM securities and the income from
such assets, including from its hedging strategies, so as to ensure at all times
that it maintains its  qualification  as a REIT. The Company  developed  certain
accounting systems and testing procedures with the help of qualified accountants
and tax experts to facilitate its ongoing compliance with the REIT provisions of
the  Code.  See  "Federal   Income  Tax   Considerations   -  Requirements   for
Qualification  as a REIT". No changes in the Company's  investment  policies and
operating policies and strategies,  including credit criteria for mortgage asset
investments,  may be  made  without  the  approval  of the  Company's  Board  of
Directors, including a majority of the unaffiliated directors.

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. The
Investment  Company  Act exempts  entities  that are  "primarily  engaged in the
business of purchasing or otherwise  acquiring  mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current interpretation
of the staff of the SEC,  in order to qualify  for this  exemption,  the Company
must maintain at least 55% of its assets  directly in Qualifying  Interests.  In
addition,  unless certain  mortgage  securities  represent all the  certificates
issued with respect to an underlying pool of mortgages, such mortgage securities
may be treated as securities  separate from the  underlying  mortgage loans and,
thus,  may  not be  considered  Qualifying  Interests  for  purposes  of the 55%
requirement.  The Company closely  monitors its compliance with this requirement
and intends to maintain its exempt  status.  Up to the present,  the Company has
been  able to  maintain  its  exemption  through  the  purchase  of  whole  pool
government  agency and  privately  issued ARM  securities  that  qualify for the
exemption.  See "Portfolio of Mortgage Securities - Pass-Through  Certificates -
Privately Issued ARM Pass-Through Certificates."

The Company  does not  purchase  any assets from or enter into any  servicing or
administrative  agreements  (other  than  the  Management  Agreement)  with  any
entities  affiliated  with the  Manager.  Any  changes in this  policy  would be
subject to  approval  by the Board of  Directors,  including  a majority  of the
unaffiliated directors.

                          PORTFOLIO OF MORTGAGE SECURITIES

As of December 31,  1996,  ARM  securities  comprised  approximately  99% of the
Company's  total  assets.  The Company has  invested in the  following  types of
mortgage securities in accordance with the operating policies established by the
Board  of  Directors  and  described  in  "Business  -  Operating  Policies  and
Strategies Operating Restrictions."

PASS-THROUGH CERTIFICATES

The  Company's  investments  in mortgage  securities  are  concentrated  in High
Quality ARM pass-through certificates which account for approximately 61% of ARM
securities  held. These High Quality ARM  pass-through  certificates  consist of
Agency Certificates and privately issued ARM pass-through certificates that meet
the  High  Quality  credit   criteria.   These  High  Quality  ARM  pass-through
certificates  acquired by the Company represent interests in ARM loans which are
secured   primarily  by  first  liens  on  single-family   (one-to-four   units)
residential  properties,  although the Company may also acquire ARM pass-through
certificates secured by liens on other types of real estate-related  properties.
The ARM pass-through  certificates acquired by the Company are generally subject
to periodic interest rate adjustments, as well as periodic and lifetime interest
rate caps which  limit the  amount an ARM  security's  interest  rate can change
during any given period.

The following is a discussion of each type of pass-through  certificate  held by
the Company as of December 31, 1996:

FHLMC ARM Programs

FHLMC is a shareholder-owned government sponsored enterprise created pursuant to
an Act of Congress on July 24, 1970. The principal activity of FHLMC consists of
the purchase of first lien, conventional  residential mortgages,  including both
whole loans and participation  interests in such mortgages and the resale of the
loans and participations in the form of guaranteed mortgage  securities.  During
1996, FHLMC issued $6.4 billion of FHLMC ARM certificates and as of December 31,
1996,   there  was  $52.5  billion  of  all  types  of  FHLMC  ARM  certificates
outstanding, of which FHLMC held $10.6 billion in its own portfolio.


Each  FHLMC  ARM  Certificate  issued  to date has been  issued in the form of a
pass-through  certificate  representing  an undivided  interest in a pool of ARM
loans  purchased  by  FHLMC.  The ARM  loans  included  in each  pool are  fully
amortizing, conventional mortgage loans with original terms to maturity of up to
40  years  secured  by  first  liens  on  one-to-four  unit  family  residential
properties  or  multi-family  properties.  The  interest  rate paid on FHLMC ARM
Certificates  adjust  periodically  on the first day of the month  following the
month in which the interest rates on the underlying mortgage loans adjust.

FHLMC  guarantees to each holder of its ARM  Certificates  the timely payment of
interest at the  applicable  pass-through  rate and ultimate  collection  of all
principal on the holder's pro rata share of the unpaid principal  balance of the
related  ARM  loans,  but does not  guarantee  the timely  payment of  scheduled
principal of the underlying  mortgage loans.  The obligations of FHLMC under its
guarantees  are  solely  those of FHLMC and are not backed by the full faith and
credit of the U.S. Government. If FHLMC were unable to satisfy such obligations,
distributions  to  holders of FHLMC ARM  Certificates  would  consist  solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly  distributions to holders of FHLMC ARM Certificates would be affected by
delinquent payments and defaults on such mortgage loans.

FNMA ARM Programs

FNMA is a federally  chartered and  privately  owned  corporation  organized and
existing  under the Federal  National  Mortgage  Association  Charter Act.  FNMA
provides  funds to the mortgage  market  primarily by  purchasing  home mortgage
loans from  mortgage  loan  originators,  thereby  replenishing  their funds for
additional  lending.  FNMA  established  its  first  ARM  programs  in 1982  and
currently has several ARM programs under which ARM  certificates  may be issued,
including programs for the issuance of securities through REMICs under the Code.
During  1996,  FNMA  issued  $15.3  billion of FNMA ARM  certificates  and as of
December 31, 1996, there was $66.0 billion of all types of FNMA ARM certificates
outstanding, of which FNMA held $12.8 billion in its own portfolio.

Each  FNMA ARM  Certificate  issued  to date has  been  issued  in the form of a
pass-through  certificate representing a fractional undivided interest in a pool
of ARM loans  formed  by FNMA.  The ARM  loans  included  in each pool are fully
amortizing  conventional  mortgage  loans  secured  by a first  lien  on  either
one-to-four  family  residential  properties  or  multi-family  properties.  The
original  terms to maturities of the mortgage  loans  generally do not exceed 40
years. FNMA has issued several different series of ARM Certificates. Each series
bears an initial interest rate and margin tied to an index based on all loans in
the related pool, less a fixed percentage  representing  servicing  compensation
and FNMA's guarantee fee.

FNMA guarantees to the registered  holder of a FNMA ARM Certificate that it will
distribute amounts  representing  scheduled  principal and interest (at the rate
provided  by the  FNMA  ARM  Certificate)  on the  mortgage  loans  in the  pool
underlying  the FNMA ARM  Certificate,  whether  or not  received,  and the full
principal  amount of any such  mortgage  loan  foreclosed  or otherwise  finally
liquidated,  whether  or not the  principal  amount is  actually  received.  The
obligations  of FNMA under its  guarantees  are solely those of FNMA and are not
backed by the full faith and credit of the U.S. Government.  If FNMA were unable
to satisfy such  obligations,  distributions to holders of FNMA ARM Certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans  and,   accordingly,   monthly   distributions  to  holders  of  FNMA  ARM
Certificates  would be  affected by  delinquent  payments  and  defaults on such
mortgage loans.

Privately Issued ARM Pass-Through Certificates

Privately  issued ARM Pass-Through  Certificates  are structured  similar to the
Agency  Certificates  discussed  above but are  issued by  originators  of,  and
investors in, mortgage loans,  including savings and loan associations,  savings
banks,  commercial banks,  mortgage banks,  investment banks and special purpose
subsidiaries   of  such   institutions.   Privately   issued  ARM   pass-through
certificates  are  usually  backed  by a  pool  of  non-conforming  conventional
adjustable-rate  mortgage  loans and are generally  structured  with one or more
types  of  credit  enhancement,   including  pool  insurance,   guarantees,   or
subordination.  Accordingly,  the privately issued ARM pass-through certificates
typically  are not  guaranteed by an entity having the credit status of FHLMC or
FNMA.

Privately issued ARM pass-through  certificates credit enhanced by mortgage pool
insurance  provided the Company  with an  alternative  source of ARM  securities
(other than Agency ARM securities)  that meet the Qualifying  Interests test for
purposes maintaining the Company's exemption under the Investment Company Act of
1940.  Since the  inception  of the Company in 1993,  most of the  providers  of
mortgage pool insurance have stopped providing such insurance. Therefore, in the
future the Company will be more reliant on the purchase of Agency ARM securities
as its source of  Qualifying  Interests  in real  estate and has to amended  its
operating  policies  to allow the  purchase  of ARM loans in order to be able to
increase its flexibility when meeting its Investment Company Act requirements.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND MULTICLASS PASS-THROUGH
SECURITIES

CMOs are debt obligations,  ordinarily issued in series and most commonly backed
by a pool of fixed rate mortgage  loans or  pass-through  certificates,  each of
which consists of several serially  maturing  classes.  Multiclass  pass-through
securities  are equity  interests  in a trust  composed  of  similar  underlying
mortgage  assets.  Generally,  principal and interest  payments  received on the
underlying  mortgage-related  assets  securing  a series  of CMOs or  multiclass
pass-through securities are applied to principal and interest due on one or more
classes  of the  CMOs  of  such  series  or to pay  scheduled  distributions  of
principal  and  interest  on  multiclass  pass-throughs.  Scheduled  payments of
principal  and  interest  on the  mortgage-related  assets and other  collateral
securing  a  series  of CMOs or  multiclass  pass-throughs  are  intended  to be
sufficient  to make timely  payments of principal and interest on such issues or
securities  and to  retire  each  class  of such  obligations  by  their  stated
maturity.

Multiclass  pass-through  securities backed by ARM securities or ARM loans owned
by the  Company are  typically  structured  into  classes  designated  as senior
classes,  mezzanine classes and subordinated  classes.  The Company does not own
any variable rate classes of CMO's which are backed by fixed rate mortgages.

The senior classes in a multiclass  pass-through  security  generally have first
priority  over all cash flows and  consequently  have the least amount of credit
risk since  principal  losses are generally  covered by mortgage pool  insurance
policies  or  are  charged  against  the   subordinated   classes  in  order  of
subordination.  As a result of these  features,  the senior classes  receive the
highest  credit  rating from  Rating  Agencies of the series of classes for each
multiclass pass-through security.

The mezzanine  classes of a multiclass  pass-through  security  generally have a
slightly  greater  risk of  principal  loss than the senior  classes  since they
provide some credit  enhancement  to the senior  classes.  In most, but not all,
instances, mezzanine classes participate on a pro-rata basis with senior classes
in their  right to  receive  cash flow and have  expected  lives  similar to the
senior classes.  In other instances,  mezzanine classes are subordinate in their
right to receive  cash flow and have  average  lives  that are  longer  than the
senior classes. However, in all cases, a mezzanine class generally has a similar
or slightly lower credit rating than the senior class from the Rating  Agencies.
Generally,  the  mezzanine  classes that the Company has acquired are rated High
Quality.

Subordinated  classes  are  junior  in the  right to  receive  payment  from the
underlying mortgages to other classes of a multiclass pass-through security. The
subordination  provides credit  enhancement to the senior and mezzanine classes.
Subordinated  classes may be at risk for some  payment  failures on the mortgage
loans securing or underlying such  securities and generally  represent a greater
level of credit risk as they are responsible for bearing the risk of credit loss
on all of the outstanding loans underlying a CMO or multi-class pass-through. As
a result of being subject to more credit risk,  subordinated  classes  generally
have lower credit ratings relative to the senior and mezzanine  classes from the
Rating Agencies.

The  Subordinated  classes which the Company has acquired are all rated at least
Investment  Grade at the time of purchase by one of the Rating  Agencies  and in
certain cases are High Quality.  Also, the Subordinated  classes acquired by the
Company  are limited in amount and bear yields  which the Company  believes  are
commensurate with the increased risks involved.

The  market  for  Subordinated  classes  is not  extensive  and at times  may be
illiquid.  In addition,  the Company's ability to sell  Subordinated  classes is
limited by the REIT  Provisions  of the Code.  The Company has not purchased any
Subordinated  classes  that are not  Qualified  REIT  Assets.  The  Subordinated
classes acquired by the Company,  which are not High Quality,  together with the
Company's  other  investments  in  Other  Investment  assets,  may  not,  in the
aggregate,  comprise more than 30% of the Company's total assets,  in accordance
with the Company's investment policy.

                         FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The Company has elected to be treated as a REIT for tax purposes.  In brief,  if
certain detailed  conditions imposed by the REIT provisions of the Code are met,
entities that invest  primarily in real estate  investments  and mortgage loans,
and that  otherwise  would be taxed as  corporations  are, with certain  limited
exceptions,  not taxed at the corporate  level on their  taxable  income that is
currently  distributed to their shareholders.  This treatment eliminates most of
the "double  taxation" (at the corporate level and then again at the shareholder
level when the income is  distributed)  that  typically  results from the use of
corporate investment vehicles.

In the event that the Company  does not qualify as a REIT in any year,  it would
be subject to federal income tax as a domestic corporation and the amount of the
Company's after-tax cash available for distribution to its shareholders would be
reduced.   The  Company   believes  it  has  satisfied  the   requirements   for
qualification  as a REIT since  commencement of its operations in June 1993. The
Company  intends at all times to continue to comply  with the  requirements  for
qualification as a REIT under the Code, as described below.

REQUIREMENTS FOR QUALIFICATION AS A REIT

To qualify for tax  treatment  as a REIT under the Code,  the Company  must meet
certain tests which are described briefly below.

Ownership of Common Stock

For all taxable  years after the first taxable year for which a REIT election is
made,  the  Company's  shares of capital  stock must be held by a minimum of 100
persons for at least 335 days of a 12 month year (or a  proportionate  part of a
short tax year).  In  addition,  at all times  during  the  second  half of each
taxable  year, no more than 50% in value of the capital stock of the Company may
be owned  directly or  indirectly by five or fewer  individuals.  The Company is
required to maintain records regarding the actual and constructive  ownership of
its shares, and other information,  and to demand statements from persons owning
above a  specified  level of the REIT's  shares (as long as the Company has over
200 or more  shareholders,  only  persons  holding  1% or more of the  Company's
outstanding  shares of capital stock)  regarding their ownership of shares.  The
Company  must  keep a list of  those  shareholders  who  fail to reply to such a
demand.

The  Company is required  to use and does use the  calendar  year as its taxable
year for income purposes.

Nature of Assets

On the last  day of each  calendar  quarter  at  least  75% of the  value of the
Company's assets must consist of Qualified REIT Assets,  government  securities,
cash and cash items.  The Company expects that  substantially  all of its assets
will  continue to be  Qualified  REIT Assets.  On the last day of each  calendar
quarter,  of the  investments  in  securities  not included in the foregoing 75%
assets test, the value of any one issuer's securities may not exceed 5% by value
of the  Company's  total assets and the Company may not own more than 10% of any
one  issuer's   outstanding  voting  securities.   Pursuant  to  its  compliance
guidelines,  the Company  intends to monitor closely the purchase and holding of
its assets in order to comply with the above assets tests.

Sources of Income

The Company must meet the following three separate income-based tests each year:

   1. THE 75% TEST.At  least 75% of the  Company's  gross income for the taxable
year must be derived from Qualified REIT Assets  including  interest (other than
interest  based in whole or in part on the income or  profits of any  person) on
obligations secured by mortgages on real property or interests in real property.
The  investments  that the Company has made and will  continue to make will give
rise primarily to mortgage interest qualifying under the 75% income test.

   2. THE 95%  TEST.In  addition to  deriving  75% of its gross  income from the
sources listed above,  at least an additional 20% of the Company's  gross income
for the taxable  year must be derived  from those  sources,  or from  dividends,
interest or gains from the sale or disposition of stock or other securities that
are not dealer property.  The Company intends to limit  substantially all of the
assets that it acquires to Qualified  REIT Assets.  The policy of the Company to
maintain REIT status may limit the type of assets,  including  hedging contracts
and other securities, that the Company otherwise might acquire.

   3. THE 30%  LIMIT.The  Company  must also  derive  less than 30% of its gross
income from the sale or other  disposition of (i) Qualified REIT Assets held for
less than four years, other than foreclosure property or property  involuntarily
or compulsorily  converted through destruction,  condemnation or similar events,
(ii) stock or  securities  held for less than one year  (including  hedges)  and
(iii) property in a prohibited transaction.  As a result of the Company's having
to limit such gains,  the Company may have to hold  mortgage  loans and mortgage
assets for four or more years and securities  and hedges (other than  securities
and hedges that are  Qualified  REIT  Assets) for one year or more at times when
the Company might  otherwise have determined that the disposition of such assets
for short-term  gains might be advantageous in order to ensure that it maintains
compliance with the 30% source of income limit.

Distributions

The Company must distribute to its shareholders on a pro rata basis each year an
amount  equal to at least (i) 95% of its  taxable  income  before  deduction  of
dividends  paid and excluding  net capital gain,  plus (ii) 95% of the excess of
the net income from foreclosure  property over the tax imposed on such income by
the Code,  less (iii) any "excess noncash  income".  The Company intends to make
distributions  to its  shareholders  in  sufficient  amounts  to meet  this  95%
distribution requirement.

The Service has ruled that if a REIT's dividend reinvestment plan ("DRP") allows
shareholders  of the REIT to  elect to have  cash  distributions  reinvested  in
shares of the REIT at a  purchase  price  equal to at least  95% of fair  market
value on the distribution date, then such cash  distributions  qualify under the
95%  distribution  test.  The Company  believes  that its DRP complies with this
ruling.

TAXATION OF THE COMPANY'S SHAREHOLDERS

For any  taxable  year in which the  Company is  treated  as a REIT for  federal
income purposes,  amounts  distributed by the Company to its shareholders out of
current  or  accumulated   earnings  and  profits  will  be  includable  by  the
shareholders  as ordinary income for federal income tax purposes unless properly
designated by the Company as capital gain dividends.

Distributions  of the Company  will not be eligible for the  dividends  received
deduction for corporations. Shareholders may not deduct any net operating losses
or capital losses of the Company.

Any loss on the sale or  exchange  of shares of the common  stock of the Company
held by a  shareholder  for six months or less will be  treated  as a  long-term
capital loss to the extent of any capital gain  dividend  received on the common
stock held by such shareholders.

If the Company makes  distributions to its shareholders in excess of its current
and accumulated  earnings and profits,  those  distributions  will be considered
first a tax-free  return of capital,  reducing the tax basis of a  shareholder's
shares  until the tax  basis is zero.  Such  distributions  in excess of the tax
basis will be taxable as gain realized  from the sale of the  Company's  shares.
The Company will withhold 30% of dividend distributions to shareholders that the
Company knows to be foreign persons unless the shareholder  provides the Company
with a properly  completed  IRS form for claiming the reduced  withholding  rate
under an applicable income tax treaty.

Under the Code, if a portion of the  Company's  assets were treated as a taxable
mortgage pool or if the Company were to hold REMIC residual interests, a portion
of the Company's dividends would be treated as unrelated business taxable income
("UBTI") for pension plans and other tax exempt  entities.  The Company believes
that it does not  engage in  activities  that  would  cause any  portion  of the
Company's  income to be taxable as UBTI for pension plans and similar tax exempt
shareholders.  The Company  believes that its shares of stock will be treated as
publicly  offered  securities  under  the plan  asset  rules  of the  Employment
Retirement Income Security Act ("ERISA") for Qualified Plans.

The provisions of the Code are highly technical and complex. This summary is not
intended to be a detailed  discussion of all applicable  provisions of the Code,
the rules and regulations  promulgated  thereunder,  or the  administrative  and
judicial interpretations thereof. The Company has not obtained a ruling from the
Internal  Revenue  Service  with respect to tax  considerations  relevant to its
organization  or  operation,  or to an  acquisition  of its common  stock.  This
summary is not intended to be a substitute  for prudent tax  planning,  and each
shareholder  of the Company is urged to consult its own tax advisor with respect
to these and other federal, state and local tax consequences of the acquisition,
ownership  and  disposition  of shares of stock of the Company and any potential
changes in applicable law.

                                    COMPETITION

In  acquiring  ARM  assets,  the Company  competes  with other  mortgage  REITs,
investment  banking  firms,  savings  and  loan  associations,  banks,  mortgage
bankers, insurance companies, mutual funds, other lenders, FNMA, FHLMC and other
entities  purchasing ARM assets,  many of which have greater financial resources
than the Company.  The existence of these competitive  entities,  as well as the
possibility  of  additional  entities  forming in the future,  may  increase the
competition  for the  acquisition  of ARM assets  resulting in higher prices and
lower yields on such mortgage assets.

                                     EMPLOYEES

As of December 31, 1996, the Company had no employees.  The Manager  carries out
the day to day  operations  of the Company,  subject to the  supervision  of the
Board of  Directors  and  under the terms of a  Management  Agreement  discussed
below.




THE MANAGEMENT AGREEMENT

On June 17, 1994, the Company  renewed its  Management  Agreement with Thornburg
Mortgage Advisory  Corporation,  the Manager,  for a term of five years, with an
annual  review  required  each year.  On December 15, 1995,  the  Agreement  was
amended to provide that in the event a person or entity obtains more than 20% of
the Company's  common stock, if the Company is combined with another entity,  or
if the Company  terminates  the Agreement  other than for cause,  the Company is
obligated to acquire  substantially  all of the assets of the Manager through an
exchange  of shares with a value based on a formula  tied to the  Manager's  net
profits.  The Company has the right to terminate the  Management  Agreement upon
the occurrence of certain  specific  events,  including a material breach by the
Manager of any provision contained in the Management Agreement.

The Manager at all times is subject to the supervision of the Company's Board of
Directors and has only such  functions and authority as the Company may delegate
to it. The Manager is responsible  for the day-to-day  operations of the Company
and performs such services and activities  relating to the assets and operations
of the Company as may be appropriate.

The Manager  receives a per annum base management fee on a declining scale based
on the Average Net Invested Assets (generally  defined as the difference between
assets  and   liabilities   financing  such  assets)  of  the  Company  and  its
subsidiaries  for such year,  payable  monthly in  arrears.  The Manager is also
entitled to receive,  as  incentive  compensation  for each fiscal  quarter,  an
amount  equal  to  20% of the  Net  Income  of  the  Company,  before  incentive
compensation, in excess of the amount that would produce an annualized Return on
Equity equal to 1% over the Ten Year U.S. Treasury Rate. For further information
regarding  the  base  management  fee,  incentive  compensation  and  applicable
definitions,  see the Company's  Proxy  Statement dated March 24, 1997 under the
caption "Certain Relationships and Related Transactions".

On September 18, 1996,  the Board of Directors of the Company  completed a study
of the management fees and expenses of comparable companies. The study indicated
that the total  management fees and other operating  expenses of the Company are
below the level of other comparable companies,  whether the other companies were
self-managed or externally managed.  The study also indicated that the Company's
base management fee was  significantly  less than any other  externally  managed
company and that the performance fee was higher.  As a result of the study,  the
unaffiliated  directors modified the Manager's  compensation formula by lowering
the performance based  compensation from 25% to 20% of the Company's  annualized
net income, before performance based compensation, above an annualized Return on
Equity as described above and by simplifying the formula for the base management
fee.  These changes took effect  October 1, 1996.  The combined fees paid to the
Manager for the period from October 1, 1996 to December  31, 1996 was  virtually
the same under the new management fee formulas as they would have been under the
prior formula.

Subject to the  limitations  set forth  below,  the Company  pays all  operating
expenses except those specifically  required to be paid by the Manager under the
Management Agreement.  The operating expenses required to be paid by the Manager
include the compensation of the Company's officers and the cost of office space,
equipment and other personnel required for the Company's day-to-day  operations.
The  expenses  that  will be paid  by the  Company  will  include  issuance  and
transaction  costs  incident to the  acquisition,  disposition  and financing of
investments, regular legal and auditing fees and expenses, the fees and expenses
of the  Company's  directors,  the costs of  printing  and  mailing  proxies and
reports to  shareholders,  the fees and expenses of the Company's  custodian and
transfer agent, if any, and  reimbursement  of any obligation of the Manager for
any New Mexico Gross Receipts Tax liability. The expenses required to be paid by
the Company  which are  attributable  to the  operations of the Company shall be
limited  to an amount per year equal to the  greater  of 2% of the  Average  Net
Invested Assets of the Company or 25% of the Company's Net Income for that year.
The  determination  of Net  Income  for  purposes  of  calculating  the  expense
limitation  will  be  the  same  as  for  calculating  the  Manager's  incentive
compensation except that it will include any incentive  compensation payable for
such  period.  Expenses in excess of such  amount  will be paid by the  Manager,
unless  the  unaffiliated  directors  determine  that,  based  upon  unusual  or
non-recurring  factors,  a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in succeeding
years  to the  extent  that  expenses  in  succeeding  quarters  are  below  the
limitation  of  expenses.  The Company,  rather than the  Manager,  will also be
required to pay expenses  associated with litigation and other  extraordinary or
non-recurring expenses.  Expense reimbursement will be made monthly,  subject to
adjustment at the end of each year.

The   transaction   costs  incident  to  the   acquisition  and  disposition  of
investments,  the incentive  compensation  and the New Mexico Gross Receipts Tax
liability  will not be  subject  to the 2%  limitation  on  operating  expenses.
Expenses  excluded from the expense  limitation are those incurred in connection
with the servicing of mortgage loans, the raising of capital, the acquisition of
assets,  interest  expenses,  taxes and  license  fees,  non-cash  costs and the
incentive management fee.

ITEM 2. PROPERTIES

        The Company's  principal  executive offices are located in Santa Fe, New
        Mexico and are provided by the Manager in accordance with the Management
        Agreement.

ITEM 3. LEGAL PROCEEDINGS

        At December 31, 1996,  there were no pending legal  proceedings to which
        the Company was a party or of which any of its property was subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of the Company's shareholders during
        the fourth quarter of 1996.



<PAGE>


                                      PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The  Company's  common stock began trading on June 25, 1993 and is traded on the
New York Stock  Exchange  under the trading  symbol TMA. As of January 31, 1997,
the Company had 16,321,578  shares of common stock issued and outstanding  which
was held by 1,123 holders of record and approximately 12,500 beneficial owners.

 The following table sets forth,  for the periods  indicated,  the high, low and
closing sales prices per share of common stock as reported on the New York Stock
Exchange  composite  tape and the cash  dividends  declared  per share of common
stock.
<TABLE>
<CAPTION>
                                                                                  Cash
                                                        Stock Prices            Dividends
                                               -----------------------------    Declared
      1996                                       High      Low       Close      Per Share
      ----                                     --------  --------   --------    ---------
      <S>                                       <C>       <C>        <C>          <C>    
      Fourth Quarter ended December 31, 1996    21 1/2    16 1/8     21 3/8       $0.45
      Third Quarter ended September 30, 1996    17 5/8    14 7/8     16 1/4       $0.40
      Second Quarter ended June 30, 1996        17        14 1/8     16 1/4       $0.40
      First Quarter ended March 31, 1996        16 5/8    14 1/8     14 3/8       $0.40

      1995
      ----
      Fourth Quarter ended December 31, 1995    15 7/8    14 1/8     15 3/4       $0.38
      Third Quarter ended September 30, 1995    15 1/2    13         14 1/2       $0.25
      Second Quarter ended June 30, 1995        14 7/8     8 1/4     13 5/8       $0.15
      First Quarter ended March 31, 1995        10         7 3/8      9           $0.15

      1994
      ----
      Fourth Quarter ended December 31, 1994    12 1/4     6 3/4      7 3/8       $0.15
      Third Quarter ended September 30, 1994    14 5/8    11 1/8     12 1/2       $0.25
      Second Quarter ended June 30, 1994        16 1/8    13 3/8     14           $0.30
      First Quarter ended March 31, 1994        17 1/4    15 3/8     15 3/8       $0.30
</TABLE>

The Company intends to pay quarterly dividends and to make such distributions to
its  shareholders in amounts such that all or  substantially  all of its taxable
income in each year (subject to certain  adjustments)  is  distributed  so as to
qualify  for  the  tax  benefits   accorded  to  a  REIT  under  the  Code.  All
distributions  will be made by the  Company  at the  discretion  of the Board of
Directors and will depend on the earnings of the Company, financial condition of
the Company,  maintenance  of REIT status and such other factors as the Board of
Directors may deem relevant from time to time.

The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP") that
allows both common and preferred shareholders to have their dividends reinvested
in  additional  shares of common stock and to purchase  additional  shares.  The
common stock to be acquired for  distribution  under the DRP may be purchased at
the  Company's  direction  from  the  Company  at a 3%  discount  from  the then
prevailing market price or in the open market. The additional purchases of stock
are  subject  to a minimum of $50 and a maximum  of  $15,000  for each  dividend
payment  date.  State Street Bank & Trust Company (the  "Agent"),  the Company's
transfer agent, is the Trustee and  administrator  of the DRP.  Shareholders who
own stock that is  registered  in their own name  desiring to  participate  must
deliver a completed  enrollment  form to the Agent which is  available  from the
Agent or the Company.  Shareholders  who own stock that is  registered in a name
other than their own (e.g., broker or bank nominee) desiring to participate must
either  request the broker or nominee to  participate on their behalf or request
that the broker or nominee  reregister the stock in the  shareholder's  name and
deliver a completed enrollment form to the Agent.

 <PAGE>


ITEM 6. SELECTED FINANCIAL DATA

The  following  selected  financial  data are  derived  from  audited  financial
statements of the Company for the years ended December 31, 1996,  1995 and 1994.
The selected financial data should be read in conjunction with the more detailed
information  contained  in  the  Financial  Statements  and  Notes  thereto  and
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operations"  included elsewhere in this Form 10-K (dollars in thousands,  except
per share data).

<TABLE>
OPERATIONS STATEMENT HIGHLIGHTS
<CAPTION>
                                                      1996          1995          1994          1993
                                                    ---------     ---------     ---------     ---------
   <S>                                              <C>           <C>           <C>           <C>
   Net interest income                              $  30,345     $  13,496     $  13,055     $  3,157

   Net income                                       $  25,737     $  10,452     $  11,946     $  2,572

   Net income per share                             $     1.73    $    0.88     $    1.02     $   0.36

   Average number of shares outstanding             14,873,700   11,926,996    11,758,810    7,173,745

   Distributable income per share                   $     1.76    $    0.92     $    1.02     $   0.36

   Dividends declared per share                     $     1.65     $   0.93     $    1.00     $   0.29

   Noninterest expense as percent of average assets       0.21%        0.13%         0.11%        0.18% (1)
</TABLE>

<TABLE>
BALANCE SHEET HIGHLIGHTS
<CAPTION>
                                                                As of December 31
                                                -----------------------------------------------------
                                                   1996          1995          1994          1993
                                                -----------   -----------   -----------   -----------
   <S>                                          <C>           <C>           <C>           <C>

   Adjustable-rate mortgage securities          $ 2,727,875   $ 1,995,287   $ 1,727,469   $ 1,320,169

   Total assets                                 $ 2,755,358   $ 2,017,985   $ 1,751,832   $ 1,364,429

   Shareholders' equity  (2)                    $   238,005   $   182,312   $   180,035   $   170,326

   Number of shares outstanding                  16,219,241    12,190,712    11,772,951    11,748,331

   Yield on adjustable-rate mortgage assets            6.64%         6.73%         5.66%         4.03%

   Effective spread on net interest earning assets     1.34%         1.11%         0.17%         0.90% (1)

   Return on average assets                            1.09%         0.56%         0.66%         0.82% (1)
<FN>
   (1)  Annualized; the Company commenced operations on June 25, 1993.
   (2)  Shareholders' equity before mark-to-market adjustment
</FN>
</TABLE>



<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


FINANCIAL CONDITION

At December 31, 1996,  the Company held total assets of $2.755  billion,  $2.728
billion of which consisted of ARM securities,  as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. Since commencing operations,
the Company has purchased only ARM  securities  which have been either backed by
agencies  of  the  U.S.  government  or  privately-issued   (generally  publicly
registered)  mortgage  securities,  most of which  are  rated AA or higher by at
least one of the Rating Agencies. At December 31, 1996, 95.0% of the assets held
by the  Company  were  High  Quality  assets  as  compared  with  the  Company's
investment  policy of investing at least 70% of its total assets in High Quality
ARM  securities  and  cash  and  cash  equivalents.  All of the  ARM  securities
currently owned by the Company are in the form of  adjustable-rate  pass-through
certificates.  The Company does not  currently  own any floating rate classes of
CMO's.

The following table presents a schedule of ARM securities  owned at December 31,
1996 and  December  31, 1995  classified  by High  Quality and Other  Investment
assets and further classified by type of issuer and by ratings categories.
<TABLE>
<CAPTION>

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

                                       December 31, 1996     December 31, 1995
                                      -------------------   -------------------
                                      Carrying  Portfolio   Carrying  Portfolio
                                        Value      Mix        Value      Mix
                                      ----------  ------   ----------  ------
<S>                                   <C>         <C>      <C>         <C>
      HIGH QUALITY:
         FHLMC/FNMA                   $1,474,842   54.1%   $  894,433   44.8%
         Privately Issued:
            AAA/Aaa Rating               260,031    9.5       165,196    8.3
            AA/Aa Rating                 862,727   31.6       784,633   39.3
                                       ---------  ------    ---------  ------
               Total Privately Issued  1,122,758   41.1       949,829   47.6
                                       ---------  ------    ---------  ------

                                       ---------  ------    ---------  ------
               Total High Quality      2,597,600   95.2     1,844,262   92.4
                                       ---------  ------    ---------  ------

      OTHER INVESTMENT:
         Privately Issued:
            A Rating                     106,531    3.9       134,970    6.8
            BBB/Baa Rating                14,017    0.5        16,055    0.8
            BB/Ba Rating                   9,727    0.4          -        -
                                       ---------  ------    ---------  ------
               Total Other Investment    130,275    4.8       151,025    7.6
                                       ---------  ------    ---------  ------

               Total ARM Securities   $2,727,875  100.0%    $1,995,287  100.0%
                                      ==========  ======    ==========  ======
</TABLE>

Over the course of 1996,  High Quality ARM securities  increased as a percent of
the total ARM  securities  portfolio.  This was in part due to  upgrades  to the
credit rating of certain  securities.  During the year ended  December 31, 1996,
two of the  Company's  ARM  securities,  in the  amount of $42.0  million,  were
upgraded  from an A equivalent  rating to a Aa  equivalent  rating.  At the same
time, one security with a carrying value of $9.7 million was downgraded  from an
A rating to a Ba rating. Management has carefully reviewed certain securities it
has identified as having an increased level of credit risk and the potential for
downgrade  and has  discussed  these  particular  investments  with the Board of
Directors. The security that was downgraded was one of the securities identified
by  management as having an increased  level of credit risk.  At this time,  the
Company  believes that the  potential  credit  exposure of the Other  Investment
segment of the Company's ARM securities portfolio is minimal and is commensurate
with the higher yield the Company receives on this segment of the portfolio. The
Company  monitors  the  credit  losses  on the  underlying  loans  of all of its
privately  issued ARM  securities  and  evaluates  the adequacy of the remaining
credit  support on an ongoing  basis.  Although the Company has not realized any
credit  losses on any ARM  security,  as of December 31,  1996,  the Company has
reserved  $990,000  for  possible  losses  on its  existing  portfolio  and will
continue to evaluate potential credit exposure in the future.

The following table classifies the Company's portfolio of ARM securities by type
of interest rate index.
<TABLE>
                               ARM SECURITIES BY INDEX
                               (amounts in thousands)
<CAPTION>
                                          December 31, 1996     December 31, 1995
                                        ---------------------  --------------------
                                          Carrying  Portfolio   Carrying  Portfolio
                                           Value      Mix        Value        Mix
                                        ----------  ---------  ----------  --------
<S>                                     <C>         <C>        <C>         <C>
 INDEX:
   One-month LIBOR                      $   10,646     0.4%    $   10,229     0.5%
   Six-month LIBOR                       1,252,884    45.9      1,494,102    74.9
   Six-month Certificate of Deposit         69,348     2.6         32,349     1.6
   Six-month Constant Maturity Treasury      8,841     0.3            -        -
   One-year Constant Maturity Treasury   1,238,892    45.4        385,066    19.3
   11th District Cost of Funds             147,264     5.4         73,541     3.7
                                         ---------   ------     ---------   ------
                                        $2,727,875   100.0%    $1,995,287   100.0%
                                         =========   ======     =========   ======
</TABLE>

The portfolio  had a current  weighted  average  coupon of 7.57% at December 31,
1996 and if the portfolio had been "fully indexed",  the weighted average coupon
would have been approximately  7.61%, based upon the current  composition of the
portfolio and the applicable  indices. As of December 31, 1995 the portfolio had
a  weighted  average  coupon  of 7.42%  and if the  portfolio  had  been  "fully
indexed", the weighted average coupon would have been approximately 7.51%, based
upon the composition of the portfolio and the applicable indices at that time.

At December 31, 1996,  the current  yield of the ARM  securities  portfolio  was
6.64% as compared to 6.73% as of December  31, 1995 with an average  term to the
next  repricing  date of 105 days as of December 31, 1996 as compared to 90 days
as of  December  31,  1995.  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 1996,  the Company  purchased  $1.584 billion of ARM  securities,  $1.540
billion  of which  were  High  Quality  ARM  securities.  The  Company  sold ARM
securities in the amount of $276.4  million at a net gain of  $1,362,000  during
1996. Of special  note,  during the fourth  quarter of 1996,  the Company had an
opportunity  to purchase a  significant  amount of  fully-indexed,  seasoned ARM
securities  that could be purchased at a higher current yield than the yield the
Company was  receiving  on a group of it's  recently  originated  low coupon ARM
securities which were prepaying faster than the Company had expected at the time
of acquisition.  The Company took advantage of this  opportunity and sold $245.0
million of its ARM  securities  and realized a net gain of $829,000 and replaced
them with the higher yielding fully-indexed, seasoned securities.

The sale of ARM securities  during 1996 reflects the Company's  desire to manage
the  portfolio  with a view to enhance the total  return of the  portfolio.  The
Company   monitors  the   performance  of  its  individual  ARM  securities  and
selectively  sells an asset when there is an  opportunity  to replace it with an
ARM security  that has an expected  higher  long-term  yield or more  attractive
interest rate  sensitivity  characteristics.  In the case of the 1996 sales, the
Company was able to sell ARM  securities  that had either low  lifetime  maximum
interest  rate caps or low  current  coupons  that were  prepaying  faster  than
expected and replaced them with ARM securities with higher maximum interest rate
caps and/or higher current  coupons and, in many  instances,  better  prepayment
performance.  The Company is presented with investment  opportunities in the ARM
securities market on a daily basis and management  evaluates such  opportunities
against the performance of its existing ARM securities. At times, the Company is
able to identify opportunities that it believes will improve the total return of
its ARM securities portfolio by replacing selected  securities.  In managing the
portfolio,  the  Company  may at times  realize  either  gains or  losses in the
process of replacing selected assets when the Company believes it has identified
better investment opportunities in order to improve the long-term total return.

During 1996,  the  composition  of the  Company's  ARM  securities  by index has
changed,  reflecting an increased  percentage of  investments  in ARM securities
indexed  to the  one-year  constant  maturity  treasury  index  and a  decreased
percentage of investments in six-month LIBOR indexed ARM securities. This change
is largely a reflection  of the types of ARM  securities  that were  produced or
available for sale during 1996, with new LIBOR ARM production down markedly from
prior years.  This change also  reflects the  Company's  strategy of acquiring a
larger percentage of fully indexed ARM securities with lifetime maximum interest
rates above 11%. Most of the LIBOR based ARM securities production does not meet
the Company's current maximum lifetime interest rate requirement. As a result of
the Company's  effort,  the average maximum  lifetime  interest rate cap for the
Company's portfolio has increased to 11.42% at December 31, 1996, as compared to
10.73% at December 31, 1995.

For the quarter ended December 31, 1996, the Company's mortgage  securities paid
down at an approximate average annualized constant prepayment rate of 21%, close
to long-term  expectations.  The annualized  constant  prepayment  rate averaged
approximately  26% during the full year of 1996,  having averaged  approximately
32% during  the first  half of the year and 22%  during  the second  half of the
year. In the event that actual prepayment experience exceeds expectations due to
sustained increased prepayment activity,  the Company would have to amortize its
premiums over a shorter time period, resulting in a reduced yield to maturity on
the Company's ARM securities.  Conversely,  if actual  prepayment  experience is
less than the assumed  constant  prepayment rate, the premium would be amortized
over a longer time period,  resulting in a higher yield to maturity. The Company
monitors its  prepayment  experience  on a monthly  basis in order to adjust the
amortization of the net premium as appropriate.

The fair  value of the  Company's  portfolio  of ARM  securities  classified  as
available-for-sale  improved by $5.6 million during 1996,  generally as a result
of:  (i) the  upward  repricing  of the  interest  rates  on the  Company's  ARM
securities  relative to their respective  indexes;  and (ii) an increased demand
for ARM  securities  as reflected in the price at which  similar ARM  securities
traded in the open  market  during  the  year.  As of  December  31,  1996,  the
Company's  portfolio  of  ARM  securities   available-for-sale,   including  the
applicable cap agreements,  had a net unrealized loss of $14.7 million, or 0.65%
of the securities  available-for-sale,  as compared to a net unrealized  loss of
$20.3 million or 1.41% of the securities available-for-sale, as of December 31,
1995.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with the lifetime  interest rate caps of its ARM  securities  should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect  of the  lifetime  or  maximum  interest  rate  cap  limitation.  The Cap
Agreements  purchased by the Company will allow the yield on the ARM  securities
to continue to rise in a high  interest rate  environment  just as the Company's
cost of borrowings  would continue to rise, since the borrowings do not have any
interest rate cap limitation.  At December 31, 1996, the Cap Agreements owned by
the Company had a remaining  notional  balance of $2.266 billion with an average
final  maturity of 3.0 years,  as compared  to a remaining  notional  balance of
$1.461 billion with an average final maturity of 4.3 years at December 31, 1995.
Pursuant to the terms of the Cap  Agreements,  the  Company  will  receive  cash
payments if the  three-month or six-month  LIBOR index  increases  above certain
specified  levels  which  range from 7.50% to 12.50% and  average  approximately
9.93%.  The fair  value of these Cap  Agreements  also  tends to  increase  when
general market  interest rates increase and decrease when market  interest rates
decrease, helping to partially offset changes in the fair value of the Company's
ARM  securities.  At December 31, 1996 the fair value of the Cap  Agreements was
$2.5 million, $12.1 million less than the amortized cost of the Cap Agreements.

As of December  31, 1996,  the Company had entered  into two interest  rate swap
agreements  having an aggregate  notional balance of $300 million and a weighted
average  remaining term of 4 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
December 31, 1996, the average cost of the Company's borrowings was 5.72%, 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 50 days to 62 days.

RESULTS OF OPERATIONS - 1996 COMPARED TO 1995

For the year ended December 31, 1996,  the Company's net income was  $25,737,000
or $1.73 per share based on a weighted average of 14,873,700 shares  outstanding
as compared  to  $10,452,000  or $0.88 per share based on a weighted  average of
11,926,996  shares  outstanding  for the year ended December 31, 1995. This 146%
increase in earnings,  a 97% increase on a per share basis, was achieved despite
a 25%  increase  in the  average  number of shares  outstanding  during  the two
periods.  Net interest  income for the year totaled  $30,345,000  as compared to
$13,496,000  for the same  period in 1995,  an increase  of 125%.  Net  interest
income is comprised of the interest income earned on mortgage  investments  less
interest expense from borrowings.  The Company recorded a net gain from the sale
of ARM  securities  in the amount of  $372,000  during 1996 as compared to a net
loss of  $568,000  during  1995.  During  1996 the  Company  incurred  operating
expenses of $4,980,000  consisting of a base  management  fee of  $1,872,000,  a
performance  based fee of $2,462,000 and other  operating  expenses of $646,000.
During 1995 the Company incurred operating expenses of $2,476,000  consisting of
a base  management  fee of $1,390,000,  a performance  based fee of $596,000 and
other  operating  expenses of $490,000.  Total operating  expenses  decreased to
16.4% of net  interest  income  for 1996 as  compared  to 18.3% for  1995,  also
contributing to the Company's improved net earnings.

The table below  highlights the historical trend and the components of return on
average equity (annualized):
<TABLE>

                     COMPONENTS OF RETURN ON AVERAGE EQUITY (1)
<CAPTION>
                    Net
                  Interest     Provision    Gain (Loss)      G & A      Performance       Net
      For The      Income/    For Losses/  on ARM Sales/  Expense(2)/      Fee/        Income/
   Quarter Ended   Equity       Equity        Equity         Equity       Equity     Equity (ROE)
   -------------  --------    -----------  -------------  -----------   -----------  ------------
   <S>            <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%
<FN>
   (1) Average equity excludes unrealized gain (loss) on available-for-sale  ARM
       securities.
   (2) Excludes performance fees.
</FN>
</TABLE>

For the  year  ended  December  31,  1996,  the  Company's  taxable  income  was
$26,159,000 or $1.76 per weighted average share  outstanding.  Taxable income in
1996  includes the carry forward of the $568,000 net capital loss on the sale of
ARM securities  from 1995 and excludes loss  provisions of $990,000  recorded in
1996.  For the year ended  December 31, 1995,  the Company's  taxable income was
$11,020,000 or $0.92 per weighted average share  outstanding.  Taxable income in
1995 excluded the $568,000 net capital loss on the sale of ARM securities.  As a
REIT,  the  Company is required to declare  dividends  amounting  to 85% of each
years  taxable  income  by the end of each  calendar  year and to have  declared
dividends  amounting  to 95% of its taxable  income for each year by the time it
files its  applicable  tax  return  and,  therefore,  generally  passes  through
substantially all of its earnings to shareholders  without paying federal income
tax at the corporate level.

The following table highlights the quarterly dividend history of the Company:
<TABLE>
                                  DIVIDEND SUMMARY
                     ($ in thousands, except per share amounts)
<CAPTION>
                                                                      Cumulative
                    Taxable       Taxable     Dividend    Dividend   Undistributed
      For The         Net        Net Income   Declared     Pay-out      Taxable
   Quarter Ended     Income      Per Share    Per Share    Ratio(1)    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
<FN>
   (1)      Dividend declared divided into applicable quarter's taxable income.
</FN>
</TABLE>

The primary  reasons for the rise in the Company's net interest  income for 1996
as compared to 1995 was the  combined  effect of an increase in the yield on the
Company's  portfolio of ARM  securities  and a decrease in the Company's cost of
funds as well as the  increased  size of the Company's  portfolio.  Net interest
income increased by $16,849,000.  Of this increase,  $8,092,000 is the result of
the lower  interest  rate on the Company's  cost of funds and  $2,545,000 is the
result of the higher yield on the Company's ARM  securities  portfolio and other
interest  earning assets for a combined  favorable rate variance of $10,637,000.
The increased average size of the Company's portfolio during 1996 as compared to
1995 also contributed to higher net interest income in the amount of $6,212,000.
The average balance of the Company's  interest earning assets was $2.351 billion
during 1996 as compared to $1.850 billion during 1995, an increase of 27%.

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

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

The Company's ARM securities portfolio generated a yield of 6.45% during 1996 as
compared to 6.31% during 1995. The Company's cost of funds during 1996 was 5.67%
as compared to 6.15%  during  1995,  primarily  as a result of lower  short-term
interest  rates  available to the Company for financing  purposes.  The combined
effect of the higher yield on the  Company's  ARM  securities  portfolio and the
lower cost of funds  increased the Company's net spread to 0.78% for 1996 from a
spread of 0.16% for 1995,  an  increase  of 0.62%.  The  Company's  yield on net
interest earning assets, which includes the impact of shareholders' equity, rose
to 1.29% for 1996 from 0.73% for 1995.



<PAGE>


The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities with the corresponding effective rate of interest annualized for the
year ended December 31, 1996 and December 31, 1995:

<TABLE>
                      AVERAGE BALANCE AND RATE TABLE
                          (amounts in thousands)
<CAPTION>
                                               For the Year Ended       For the Year Ended
                                                December 31, 1996        December 31, 1995
                                             ----------------------    ---------------------
                                               Average    Effective      Average    Effective
                                               Balance       Rate        Balance      Rate
                                             -----------  ---------    ----------   ---------
<S>                                          <C>          <C>          <C>          <C>
      Interest Earning Assets:
         ARM securities                       $2,336,900     6.45%     $1,836,154    6.31%
         Cash and cash equivalents                14,200     5.29          13,352    5.89
                                               ---------    -----       ---------   -----
                                               2,351,100     6.44       1,849,506    6.31
                                               ---------    -----       ---------   -----
      Interest Bearing Liabilities:
         Borrowings                            2,138,236     5.67       1,676,981    6.15
                                               ---------    -----       ---------   -----
      Net Interest Earning Assets and Spread  $  212,864     0.78%     $  172,525    0.16%
                                               =========    =====       =========   =====
      Yield on Net Interest Earning Assets (1)               1.29%                   0.73%
                                                            =====                   =====
<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>


As of the end of 1996,  the  Company's  yield on its ARM  securities  portfolio,
including the impact of the amortization of premiums and discounts,  the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment  receivables,  was 6.64% as compared to 6.73% as of the end
of 1995,  a decrease of 0.09%.  The  Company's  cost of funds as of December 31,
1996 was 5.72% as  compared  to 6.05% as of  December  31,  1995,  a decrease of
0.33%. As a result of these changes, the Company's net interest spread as of the
end of 1996 was 0.92% as compared to 0.68% as of the end of 1995, an increase of
0.24%.

During 1996 the Company  realized a net gain from the sale of ARM  securities in
the amount of $372,000. The Company's net gain includes $1,362,000 from the sale
of ARM  securities  and a provision for losses of $990,000.  The Company has not
realized any actual losses on any ARM security to date, but the Company's review
of the  underlying ARM collateral has indicated the potential of loss on two ARM
securities and, as a result, the Company has provided for such potential losses.
During  1995  the  Company  realized  a loss  of  $568,000  on the  sale  of ARM
securities.

For the year ended December 31, 1996, the Company's ratio of operating  expenses
to  average  assets  was 0.21% as  compared  to 0.13% for  1995.  The  Company's
operating  expense  ratio is well below the  average  of other more  traditional
mortgage portfolio lending institutions such as banks and savings and loans. The
increase  in the  Company's  operating  expenses  is  primarily  the  result  of
achieving sufficient earnings for the Company's  shareholders such that a higher
performance  based fee was earned by the  Manager.  In order for the  Manager to
earn a performance fee, the rate of return on the shareholders'  investment,  as
defined in the  Management  Agreement,  must  exceed  the  average  ten-year  US
Treasury  rate during the quarter  plus 1%.  During 1996,  the Manager  earned a
performance fee of $2,462,000.  During 1996,  after paying this performance fee,
the  Company's  return  on  equity  was  11.68%.  See  Note 7 to  the  Financial
Statements for a discussion of the management fee formulas.



<PAGE>


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

<TABLE>
                        ANNUALIZED OPERATING EXPENSE RATIOS
<CAPTION>

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

RESULTS OF OPERATIONS - 1995 COMPARED TO 1994

For the year ended December 31, 1995,  the Company's net income was  $10,452,000
or $0.88 per share based on a weighted average of 11,926,996 shares  outstanding
as compared  to  $11,946,000  or $1.02 per share based on a weighted  average of
11,758,810 shares outstanding for the year ended December 31, 1994. Net interest
income for the year totaled  $13,496,000 as compared to $13,055,000 for the same
period in 1994. Net interest  income is comprised of the interest  income earned
on mortgage  investments  less  interest  expense from  borrowings.  The Company
recorded a net loss from the sale of ARM  securities  in the amount of  $568,000
during 1995 as compared to a net gain of $863,000  during 1994.  During 1995 the
Company  incurred  operating  expenses  of  $2,476,000   consisting  of  a  base
management  fee of  $1,390,000,  a  performance  based fee of $596,000 and other
operating  expenses of  $490,000.  During 1994 the  Company  incurred  operating
expenses of $1,972,000  consisting of a base  management  fee of  $1,342,000,  a
performance based fee of $121,000 and other operating expenses of $509,000.

For the  year  ended  December  31,  1995,  the  Company's  taxable  income  was
$11,020,000  or $0.92 per weighted  average share  outstanding.  Taxable  income
excludes the $568,000 net capital loss on the sale of ARM securities. As a REIT,
the  Company is  required to declare  dividends  amounting  to 85% of each years
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  improvement in the Company's net interest income during 1995 as compared to
1994 was $441,000. As presented in the table below, the Company had, on average,
$172.5 million more interest  earning assets than interest  bearing  liabilities
during 1995. The  improvement in the Company's net interest income was primarily
the result of the higher  yield on the $172.5  million of net  interest  earning
assets  in 1995 as  compared  to 1994  and in  part  due to the  higher  average
balances of total interest earning assets and interest bearing  liabilities at a
positive spread.

The weighted  average coupon of the ARM securities  portfolio (the rate actually
received  before  the  impact  of yield  adjustments  such as  hedging  cost and
amortization  of premiums  and  discounts)  was 7.42% as of December 31, 1995 as
compared to 5.79% as of December 31, 1994, a rise of 1.63%.  This improvement in
the weighted average portfolio coupon was partially offset by additional premium
amortization  resulting from increased prepayment activity during the year. As a
result,  the  yield on the  Company's  ARM  securities  portfolio  was  6.73% at
December 31,  1995,  a rise of 1.07% from 5.66% as of December  31, 1994.  Also,
during the year ended December 31, 1995, the Company's cost of money declined by
0.20%. As of December 31, 1995 the interest rate on the Company's borrowings was
6.05% as  compared  to 6.25% as of December  31,  1994.  As a result of both the
improved  yield on ARM  securities  and a lower cost of money the  Company's net
interest  spread as of December  31, 1995 was a positive  0.68% as compared to a
negative 0.59% as of December 31, 1994.



<PAGE>


The  following  table  reflects the average  balances  for each  category of the
Company's  interest  earning  assets as well as the Company's  interest  bearing
liabilities,  with the corresponding  effective rate of interest  annualized for
the year ended December 31, 1995 and December 31, 1994:

<TABLE>
                      AVERAGE BALANCE AND RATE TABLE
                          (amounts in thousands)
<CAPTION>
                                              For the Year Ended    For the Year Ended
                                               December 31, 1995     December 31, 1994
                                             --------------------  --------------------
                                              Average   Effective    Average   Effective
                                              Balance     Rate       Balance      Rate
                                             ----------  ------    -----------  --------
<S>                                          <C>         <C>       <C>          <C>
   Interest Earning Assets:
      ARM securities                         $1,836,154    6.31%    $1,778,578    4.74%
      Cash and cash equivalents                  13,352    5.89         13,069    4.28
                                              ---------   -----      ---------   -----
                                              1,849,506    6.31      1,791,647    4.73
                                              ---------   -----      ---------   -----
   Interest Bearing Liabilities:
      Borrowings                              1,676,981    6.15      1,619,978    4.43
                                              ---------   -----      ---------   -----
   Net Interest Earning Assets and Spread    $  172,525    0.16%    $  171,669    0.30%
                                              =========   =====      =========   =====
   Yield on Net Interest Earning Assets (1)                0.73%                  0.73%
                                                          =====                  =====
<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>

LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary source of funds for the years ended December 31, 1996 and
1995 consisted of reverse  repurchase  agreements,  which totaled $2.459 billion
and $1.781 billion at the respective year ends. The Company's other  significant
sources of funds for the years ended  December  31, 1996 and 1995  consisted  of
payments of principal  and interest  from the ARM  securities  in the amounts of
$713.7 million and $395.7 million,  respectively, and the proceeds from the sale
of  ARM  securities  in  the  amounts  of  $277.6  million  and  $75.4  million,
respectively.  In the future,  the Company  expects its primary sources of funds
will consist of borrowed funds under reverse repurchase  agreement  transactions
with one to twelve  month  maturities,  of monthly  payments  of  principal  and
interest  on its ARM  securities  portfolio  and  possibly  from asset  sales as
needed.   The  Company's  liquid  assets  generally  consist  of  unpledged  ARM
securities, cash and cash equivalents.

Total  borrowings  incurred at December 31, 1996 had a weighted average interest
rate of 5.72% and a weighted  average  remaining term to maturity of 4.2 months.
As of  December  31,  1996,  $1.104  billion of the  Company's  borrowings  were
variable-rate  term  reverse  repurchase  agreements.  Term  reverse  repurchase
agreements are committed  financings  with original  maturities  that range from
three months to two years.  The interest rates on these term reverse  repurchase
agreements  are  indexed to either the one,  three or  six-month  LIBOR rate and
reprice accordingly.

The Company has borrowing  arrangements  with  twenty-four  different  financial
institutions  and  at  December  31,  1996  had  borrowed  funds  under  reverse
repurchase  agreements with thirteen of these firms. Because the Company borrows
money based on the fair value of its ARM  securities  and because  increases  in
short-term interest rates can negatively impact the valuation of ARM securities,
the Company's borrowing ability could be limited and lenders may initiate margin
calls in the event short-term interest rates increase. Additionally,  certain of
the Company's ARM securities  are rated less than AA by the Rating  Agencies and
have less liquidity than securities that are rated AA or higher.  Other mortgage
securities  which are rated AA or higher by the  Rating  Agencies  derive  their
credit rating based on a mortgage pool insurer's  rating.  As a result of either
changes in interest rates,  credit performance of a mortgage pool or a downgrade
of a mortgage pool issuer,  the Company may find it difficult to borrow  against
such assets and, therefore,  may be required to sell certain mortgage securities
in order to  maintain  liquidity.  If  required,  these sales could be at prices
lower than the carrying value of the assets,  which would result in losses.  For
the year ended  December 31, 1996,  the Company had adequate  cash flow,  liquid
assets and  unpledged  collateral  with  which to meet its  margin  requirements
during such  periods.  Further,  the Company  believes it will  continue to have
sufficient  liquidity  to meet its future  cash  requirements  from its  primary
sources of funds for the foreseeable future without needing to sell assets.

In  October  1995,  the  Company  entered  into a Sales  Agency  Agreement  with
PaineWebber  Incorporated.  In  accordance  with  the  Sales  Agency  Agreement,
PaineWebber  agreed to sell, at the direction and discretion of the Company,  up
to 1,174,969  additional shares of the Company's common stock.  During 1996, the
Company sold 207,500  shares under this Sales Agency  Agreement and received net
proceeds of $3.1  million.  During 1995,  the Company sold 148,300  shares under
this Sales Agency Agreement and received net proceeds of $2.1 million.

In April 1996, the Company  completed a public  offering of 3,450,000  shares of
its common stock. The Company received net proceeds of $48.7 million.

In December 1996, the Company's  Registration Statement on Form S-3, registering
the sale of up to $200 million of additional securities,  was declared effective
by the Securities and Exchange Commission.  This registration statement includes
the possible issuances of common stock, preferred stock, warrants or shareholder
rights.  When  combined  with the  Registration  Statement  which  was  declared
effective  September  12, 1995,  the Company had $242 million of its  securities
registered for future sale as of December 31, 1996.

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 $65.9 million.

The Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically  reinvest their dividends in additional shares of common stock and
to purchase  additional  shares at a 3% discount to the current  market price of
the common stock, as defined in the Plan. As a result of 1996  participation  in
the Plan,  the Company  issued  347,434 new shares of common  stock and received
$5.4 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 securities, rising short-term interest rates may
temporarily  negatively  affect the Company's  earnings and  conversely  falling
short-term interest rates may temporarily increase the Company's earnings.  This
impact  can  occur  for  several  reasons  and  may be  mitigated  by  portfolio
prepayment  activity as discussed below.  First,  the Company's  borrowings will
react to changes in interest  rates  sooner than the  Company's  ARM  securities
because the weighted average next re-pricing date of the borrowings is usually a
shorter time period.  Second,  interest rates on ARM loans are generally limited
to an increase of either 1% or 2% per adjustment period (commonly referred to as
the periodic cap) and the Company's  borrowings do not have similar limitations.
Third, the Company's ARM securities lag changes in the indices due to the notice
period  provided  to ARM  borrowers  when the  interest  rate on their loans are
scheduled to change.  The periodic cap only affects the Company's  earnings when
interest rates move by more than 1% per six-month period or 2% per year.

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

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

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

OTHER MATTERS

The Company  calculates  its Qualified  REIT Assets,  as defined in the Internal
Revenue Code of 1986, as amended (the "Code"),  to be 99.9% of its total assets,
as compared to the Code  requirement  that at least 75% of its total assets must
be Qualified REIT Assets.  The Company also calculates that 99.5% of its revenue
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 year ended  December 31, 1996 subject to the 30%
income  limitation  under the REIT rules amount to 0.90% 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 December 31,
1996, 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
December 31, 1996,  the Company  calculates  that it is in compliance  with this
requirement.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements of the Company and the related notes,  together
        with the Independent Auditors' Report thereon are set forth on pages F-3
        through F-15 on this Form 10-K.

ITEM 9. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

        None.

                                      PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information  required by Item 10 is incorporated herein by reference
        to the  definitive  Proxy  Statement  dated March 24,  1997  pursuant to
        General Instruction G(3).

ITEM 11.EXECUTIVE COMPENSATION

        The information  required by Item 11 is incorporated herein by reference
        to the  definitive  Proxy  Statement  dated March 24,  1997  pursuant to
        General Instruction G(3).

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information  required by Item 12 is incorporated herein by reference
        to the  definitive  Proxy  Statement  dated March 24,  1997  pursuant to
        General Instruction G(3).

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information  required by Item 13 is incorporated herein by reference
        to the  definitive  Proxy  Statement  dated March 24,  1997  pursuant to
        General Instruction G(3).




<PAGE>


                                      PART IV

 ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (a) Documents filed as part of this report:

            1.   The following Financial  Statements of the Company are included
                 in Part II, Item 8 of this Annual Report on Form-K:

                 Independent Auditors' Report;
                 Balance Sheets as of December 31, 1996 and 1995;
                 Statements of Operations for the years ended December 31, 1996,
                    1995 and 1994;
                 Statements of Shareholders' Equity for the years ended December
                    31, 1996, 1995 and  1994;
                 Statements of Cash Flows for the years ended December 31, 1996,
                    1995 and 1994 and
                 Notes to Financial Statements.

            2.   Schedules to Financial Statements:

                 All financial  statement  schedules  have been omitted  because
                 they are either  inapplicable  or the  information  required is
                 provided  in  the  Company's  Financial  Statements  and  Notes
                 thereto,  included in Part II, Item 8 of this Annual  Report on
                 Form 10-K.

            3.   Exhibits:

                 See "Exhibit Index".

        (b) Reports on Form 8-K:

                 None



<PAGE>


                        THORNBURG MORTGAGE ASSET CORPORATION


                                FINANCIAL STATEMENTS

                                        AND

                            INDEPENDENT AUDITORS' REPORT



                             For Inclusion in Form 10-K

                                     Filed with

                         Securities and Exchange Commission

                                 December 31, 1996



<PAGE>


                        THORNBURG MORTGAGE ASSET CORPORATION

                           INDEX TO FINANCIAL STATEMENTS


                                                                    PAGE
FINANCIAL STATEMENTS:                                               ----

Independent Auditor's Report                                         F-3

Balance sheets                                                       F-4

Statements of operations                                             F-5

Statement of shareholders' equity                                    F-6

Statements of cash flows                                             F-7

Notes to financial statements                                        F-8


<PAGE>



                            INDEPENDENT AUDITOR'S REPORT










To the Board of Directors
Thornburg Mortgage Asset Corporation
Santa Fe, New Mexico

   We have audited the accompanying  balance sheets of Thornburg  Mortgage Asset
Corporation  as of  December  31, 1996 and 1995 and the  related  statements  of
operations,  shareholders'  equity and cash flows for each of the three years in
the  period  ended  December  31,  1996.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

   We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in
all  material  respects,  the  financial  position of Thornburg  Mortgage  Asset
Corporation  as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended  December 31,
1996 in conformity with generally accepted accounting principles.



                                                    /s/ McGLADREY & PULLEN, LLP


                                                    McGLADREY & PULLEN, LLP

New York, New York
January 14, 1997, except for the last paragraph
of Note 5, as to which the date is January 24, 1997



<PAGE>
<TABLE>
                        THORNBURG MORTGAGE ASSET CORPORATION

                                   BALANCE SHEETS
                         (In thousands, except share data)

<CAPTION>
                                                        December 31
                                             ---------------------------------
                                                   1996              1995
                                             ---------------   ---------------
<S>                                          <C>               <C>
ASSETS

   ARM securities (Notes 2 and 3)              $   2,727,875   $     1,995,287
   Cash and cash equivalents                           3,693             3,660
   Accrued interest receivable                        23,563            18,778
   Prepaid expenses and other                            227               260
                                               -------------     -------------
                                             $     2,755,358   $     2,017,985
                                               =============     =============


LIABILITIES

   Reverse repurchase agreements (Note 3)    $     2,459,132   $     1,780,854
   Other borrowings (Note 3)                          14,187            18,446
   Payable for securities purchased                   32,683            42,990
   Accrued interest payable                           18,747             9,907
   Dividends payable (Note 5)                          7,299             4,632
   Accrued expenses and other                          1,112               679
                                               -------------     -------------
                                                   2,533,160         1,857,508
                                               -------------     -------------
SHAREHOLDERS' EQUITY (Note 5)

   Common stock: par value $.01 per share;
     50,000,000 shares authorized, 16,219,241
     and 12,190,712 shares issued
     and outstanding                                     162               122
   Additional paid-in-capital                        233,177           175,708
   Available-for-sale securities:
     Unrealized gain (loss) (Note 2)                 (15,807)          (21,835)
     Realized deferred hedging gain                    4,541             7,009
   Retained  earnings (deficit)                          125              (527)
                                               -------------     --------------
                                                     222,198           160,477
                                               -------------     --------------

                                             $     2,755,358   $     2,017,985
                                               =============     =============


</TABLE>
See Notes to Financial Statements.


<PAGE>


<TABLE>
                        THORNBURG MORTGAGE ASSET CORPORATION

                              STATEMENTS OF OPERATIONS
                          (In thousands, except share data)


<CAPTION>
                                                        Year ended December 31
                                              -------------------------------------------
                                                  1996           1995           1994
                                              ------------   ------------   -------------
<S>                                           <C>            <C>            <C>
Interest income from ARM securities and cash  $   151,511    $   116,617    $    84,798
Interest expense on borrowed funds                121,166        103,121         71,743
                                               ----------     ----------     ----------  
   Net interest income                             30,345         13,496         13,055
                                               ----------     ----------     ----------  

Gain (loss) on sale of ARM securities                 372           (568)           863

General and administrative expenses:
  Management fee (Note 7)                           1,872          1,390          1,342
  Performance fee (Note 7)                          2,462            596            121
  Other                                               646            490            509
                                               ----------     ----------     ----------  
                                                    4,980          2,476          1,972
                                               ----------     ----------     ----------  

Net income                                    $    25,737    $    10,452    $    11,946
                                               ==========     ==========     ==========  

Net income per share                          $      1.73    $      0.88    $      1.02
                                               ==========     ==========     ==========  

Average number of shares outstanding           14,873,700     11,926,996     11,758,810
                                               ==========     ==========     ==========


</TABLE>
See Notes to Financial Statements.



<PAGE>


<TABLE>
                      THORNBURG MORTGAGE ASSET CORPORATION

                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       Three Years Ended December 31, 1996
                           (In thousands, except share data)

<CAPTION>
                                                      Available-for-Sale Securities
                                                      -----------------------------
                                 Common   Additional                    Realized        Retained
                                  Stock     Paid-in    Unrealized     Deferred Gain    Earnings
                                Par Value   Capital    Gain (Loss)     From Hedging    (Deficit)     Total
                                ---------  ----------  ------------  --------------  ------------  ----------
<S>                             <C>         <C>         <C>          <C>             <C>           <C>
Balance,
  December 31, 1993             $     117  $  170,206   $     -      $       -       $          3  $  170,326

Issuance of common
  stock (Note 5)                        1         260         -              -                -           261

Available-for-sale securities:
  Fair value adjustment, net
   of amortization                      -          -        (60,052)         -                -       (60,052)

  Deferred gain on sale of
   hedges, net of amortization          -          -           -             9,259            -         9,259

Net income                              -          -           -              -            11,946      11,946
Dividends declared -
  $1.00 per share                       -          -           -              -           (11,757)    (11,757)
                                 --------   ---------     ---------     ----------     ----------   ---------                     
Balance, December 31, 1994            118     170,466       (60,052)         9,259            192     119,983

Issuance of common
  stock (Note 5)                        4       5,242          -              -               -         5,246

Available-for-sale securities:
  Fair value adjustment, net
   of amortization                      -          -         38,217           -               -        38,217

  Amortization of deferred
   hedging gain                         -          -           -            (2,250)           -        (2,250)

Net income                              -          -           -              -            10,452      10,452
Dividends declared -
  $0.93 per share                       -          -           -              -           (11,171)    (11,171)
                                 --------   ---------     ---------     ----------     ----------   ---------
Balance, December 31, 1995            122    175,708       (21,835)          7,009           (527)    160,477

Issuance of common
  stock (Note 5)                       40     57,469           -              -               -        57,509

Available-for-sale securities:
  Fair value adjustment, net
   of amortization                      -         -          6,028            -               -         6,028

  Amortization of deferred
   hedging gain                         -         -            -            (2,468)           -        (2,468)

Net income                              -         -            -              -            25,737      25,737
Dividends declared -
  $1.65 per share                       -         -            -              -           (25,085)    (25,085)
                                 --------   ---------     ---------     ----------     ----------   ---------
Balance, December 31, 1996      $     162  $  233,177    $  (15,807)   $     4,541    $       125  $  222,198
                                 ========   =========     =========     ==========     ==========   =========

</TABLE>
See Notes to Financial Statements.



<PAGE>

<TABLE>
                        THORNBURG MORTGAGE ASSET CORPORATION

                              STATEMENTS OF CASH FLOWS
                                   (In thousands)

<CAPTION>
                                                            Year ended December 31
                                                      ----------------------------------
                                                         1996        1995        1994
                                                      ----------  ----------  ----------
<S>                                                   <C>         <C>         <C>
Operating Activities:
  Net income                                          $   25,737  $   10,452  $   11,946
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Amortization                                          14,346       4,699       3,186
    Net (gain) loss from investing activities               (372)        568        (863)
    Decrease (increase) in accrued interest receivable    (4,785)     (5,329)     (7,270)
    Decrease (increase) in prepaid expenses and other         33        (193)         11
    Increase (decrease) in accrued interest payable        8,840       3,349         442
    Increase (decrease) in accrued expenses and other        433         463          13
                                                       ---------   ---------   ---------
 Net cash provided by operating activities                44,232      14,009       7,465
                                                       ---------   ---------   ---------
Investing Activities:
  Available-for-sale assets:
   Purchase of ARM assets                             (1,583,678)   (548,672)   (767,892)
   Proceeds on sales of ARM assets                       277,594      75,374     145,796
   Principal payments on ARM assets                      441,722     201,583     139,431
  Held-to-maturity assets:
   Principal payments on ARM assets                      111,684      78,268      55,027
  Purchase of interest rate cap agreements                  (631)       (403)     (3,436)
                                                       ---------   ---------   ---------     
 Net cash (used in) investing activities                (753,309)   (193,850)   (431,074)
                                                       ---------   ---------   ---------

Financing Activities:
  Net borrowings from reverse repurchase agreements      678,278     178,920     407,828
  Repayments of other borrowings                          (4,259)     (3,208)        -
  Proceeds from common stock issued                       57,509       5,246         261
  Dividends paid                                         (22,418)     (8,305)    (11,636)
                                                       ---------   ---------   ---------
   Net cash provided by financing activities             709,110     172,653     396,453
                                                       ---------   ---------   ---------

Net increase (decrease) in cash and cash equivalents          33      (7,188)    (27,156)

Cash and cash equivalents at beginning of period           3,660      10,848      38,004
                                                       ---------   ---------   ---------
Cash and cash equivalents at end of period            $    3,693  $    3,660  $   10,848
                                                       =========   =========   =========

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



See Notes to Financial Statements



<PAGE>


                         THORNBURG MORTGAGE ASSET CORPORATION

                            NOTES TO FINANCIAL STATEMENTS

NOTE 1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

         Thornburg  Mortgage Asset  Corporation (the "Company") was incorporated
         in Maryland on July 28, 1992.  The Company  commenced its operations of
         purchasing and managing for  investment a portfolio of  adjustable-rate
         mortgage  securities on June 25, 1993, upon receipt of the net proceeds
         from the initial public offering of the Company's common stock.

         A summary of the Company's significant accounting policies follows:

         CASH AND CASH EQUIVALENTS

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

         ADJUSTABLE-RATE MORTGAGE SECURITIES

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

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

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

         CREDIT RISK

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

         INTEREST RATE CAP AGREEMENTS

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

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

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

         INTEREST RATE SWAP AGREEMENTS

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

         INCOME TAXES

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

         NET INCOME PER SHARE

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

         USE OF ESTIMATES

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



<PAGE>


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

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

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

                                             Available-for-Sale
                                       -----------------------------
                                             1996           1995
                                       -------------- --------------
               Amortized cost basis    $    2,282,991 $    1,440,345
               Allowance for losses              (990)           -
                                         -------------   ---------
                 Amortized cost, net        2,282,001      1,440,345
                                         ------------   ------------
               Gross unrealized gains           7,686          4,468
               Gross unrealized losses        (22,408)       (24,800)
                                         -------------  ------------
                 Fair value            $    2,267,279 $    1,420,013
                                         =============  ============

         During 1996,  the Company  realized  $1,427,000 in gains and $65,000 in
         losses on the sale of $276.4  million of ARM  securities.  During 1995,
         the  Company  realized  $91,000 in gains and  $659,000 in losses on the
         sale of $75.9 million of ARM securities  and,  during 1994, the Company
         realized $983,000 in gains and $120,000 in losses on the sale of $145.8
         million  of ARM  securities.  All  of  the  ARM  securities  sold  were
         classified as available-for-sale.

         As of December 31, 1996,  the Company had reduced the cost basis of its
         ARM securities  due to potential  future credit losses in the amount of
         $990,000.  Although no credit  losses have been  realized on any of the
         Company's ARM  securities,  the  Company's  analysis of losses on loans
         underlying  certain ARM securities owned by the Company relative to the
         remaining  credit  support  protecting  the Company from credit  losses
         indicates that there is the possibility of future losses.

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

                                              Held-to-Maturity
                                       -----------------------------
                                             1996           1995
                                       -------------- --------------
               Amortized cost basis    $      460,596 $      575,274
               Gross unrealized gains           4,169          3,746
               Gross unrealized losses         (4,306)        (5,437)
                                         ------------- -------------
                 Fair value            $      460,459 $      573,583
                                         ============   ============

         As of December 31, 1996, the Company had no commitments to purchase ARM
         securities.

         The average effective yield on the ARM securities owned,  including the
         amortization of the net premium paid for the ARM securities and the Cap
         Agreements,  was 6.64% as of December 31, 1996 and 6.73% as of December
         31, 1995.

         As of  December  31,  1996 and  December  31,  1995,  the  Company  had
         purchased Cap  Agreements  with a remaining  notional  amount of $2.266
         billion and $1.462  billion,  respectively.  The notional amount of the
         Cap  Agreements  purchased  decline  at a  rate  that  is  expected  to
         approximate the  amortization  of the ARM  securities.  Under these Cap
         Agreements,  the Company will receive cash  payments  should either the
         three-month or six-month London InterBank Offer Rate ("LIBOR") increase
         above the contract rates of the Cap  Agreements  which range from 7.50%
         to 12.50% and average approximately 9.93%. The Company's ARM securities
         portfolio  had an average  lifetime  interest  rate cap of 11.42% as of
         December 31, 1996.  The initial  aggregate  notional  amount of the Cap
         Agreements declines to approximately  $1.547 billion over the period of
         the  agreements,  which  expire  between  1999 and  2001.  The  Company
         purchased these Cap Agreements by incurring a one-time fee, or premium.
         The  premium  is  amortized,  or  expensed,  over the  lives of the Cap
         Agreements  and  decreases   interest   income  on  the  Company's  ARM
         securities  during the period of  amortization.  The Company has credit
         risk to the extent that the counterparties to the cap agreements do not
         perform  their  obligations  under  the Cap  Agreements.  If one of the
         counterparties does not perform, the Company would not receive the cash
         to which it would otherwise be entitled under the conditions of the Cap
         Agreement.  In order to mitigate  this risk and to achieve  competitive
         pricing,  the  Company  has  entered  into  Cap  Agreements  with  five
         different  counterparties,  three of which are rated AAA,  two of which
         are rated AA.

NOTE 3.  REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

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

         As of December 31, 1996, the Company had outstanding  $2.459 billion of
         reverse repurchase agreements with a weighted average borrowing rate of
         5.68% and a weighted average  remaining  maturity of 4.0 months.  As of
         December 31, 1996,  $1.104  billion of the  Company's  borrowings  were
         variable-rate   term  reverse   repurchase   agreements  with  original
         maturities that range from six months to two years.  The interest rates
         of these term reverse  repurchase  agreements are indexed to either the
         one, three or six-month LIBOR rate and reprice accordingly. The reverse
         repurchase  agreements at December 31, 1996 were  collateralized by ARM
         securities with a carrying value of $2.581 billion,  including  accrued
         interest.

         At  December  31,  1996,  the  reverse  repurchase  agreements  had the
         following remaining maturities (dollars in thousands):

                             Within 30 days     $    619,066
                             30 to 90 days           816,081
                             90 days to one year     760,525
                             Over one year           263,460
                                                 -----------
                                                $  2,459,132
                                                 ===========

         As of December 31, 1996, the Company had entered into two interest rate
         swap agreements  having an aggregate  notional  balance of $300 million
         and a weighted average remaining term of 4.0 months. In accordance with
         these agreements,  the Company will pay a fixed rate of interest during
         the term of these  agreements and receive a payment that varies monthly
         with the  one-month  LIBOR  rate.  As a result of  entering  into these
         agreements,  the Company has reduced the interest rate  variability  of
         its cost to finance its  adjustable-rate  mortgage assets by increasing
         the average period until the next  repricing of its borrowings  from 50
         days to 62 days.

         The  Company  has  a  line  of  credit  agreement  which  provides  for
         short-term  borrowings  of up to  $25  million  collateralized  by  the
         Company's principal and interest receivables.  As of December 31, 1996,
         there was no balance outstanding under this agreement.

         As of December 31, 1996, the Company had financed most of its portfolio
         of interest rate cap agreements with $14.2 million of other  borrowings
         which require  quarterly or  semi-annual  payments until the year 2000.
         These  borrowings  have a weighted  average  fixed rate of  interest of
         7.91% and have a weighted average remaining  maturity of 3.0 years. The
         other  borrowings  financing  cap  agreements at December 31, 1996 were
         collateralized  by  ARM  securities  with a  carrying  value  of  $17.6
         million,  including accrued interest. The aggregate maturities of these
         other borrowings are as follows (dollars in thousands):

                             1997         $      4,169
                             1998                4,509
                             1999                4,877
                             2000                  632
                                            ----------
                                         $      14,187
                                            ==========

         The total cash paid for interest was $112.2 million, $100.4 million and
         $71.3 million for 1996, 1995 and 1994 respectively.



<PAGE>


NOTE 4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  table  presents the carrying  amounts and estimated fair
         values of the Company's financial  instruments at December 31, 1996 and
         December 31, 1995. FASB Statement No. 107, Disclosures About Fair Value
         of  Financial  Instruments,  defines  the  fair  value  of a  financial
         instrument as the amount at which the instrument  could be exchanged in
         a current transaction  between willing parties,  other than in a forced
         or liquidation sale (dollars in thousands):

                                     December 31, 1996       December 31, 1995
                                   ----------------------  ---------------------
                                     Carrying    Fair      Carrying     Fair
                                      Amount     Value      Amount      Value
            Assets:                ----------  ----------  ---------- ----------
              ARM securities       $2,689,727  $2,692,521  $1,988,127 $1,990,217
              Cap agreements            5,465       2,535       7,160      3,379

            Liabilities:
              Other borrowings         14,187     14,744      18,446      19,131
              Swap agreements              (7)       440         (33)        580

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

         The fair values of the Company's ARM  securities and cap agreements are
         based on market prices  provided by 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 October 1995, the Company entered into a Sales Agency Agreement with
         PaineWebber   Incorporated.   In  accordance   with  the  Sales  Agency
         Agreement,  PaineWebber agreed to sell, at the direction and discretion
         of the Company,  up to  1,174,969  additional  shares of the  Company's
         common stock.  During 1996,  the Company sold 207,500 shares under this
         Sales  Agency  Agreement  and received net proceeds of $3.1 million and
         during 1995,  the Company  sold 148,300  shares under this Sales Agency
         Agreement and received net proceeds of $2.1 million.

         During 1996,  the Company  issued  347,434 shares of common stock under
         its  dividend  reinvestment  and stock  purchase  plan and received net
         proceeds of $5.4 million and during 1995,  the Company  issued  269,461
         shares of common  stock under this plan and  received  net  proceeds of
         $3.1 million.  During 1994,  the Company issued 24,620 shares of common
         stock under this plan and received net proceeds of $261,000.

         In April 1996,  the Company  completed a public  offering of  3,450,000
         shares of its common stock.  The Company received net proceeds of $48.7
         million.

         During  1996,  stock  options  for 23,595  shares of common  stock were
         exercised at an average  exercise price of $15.41 for which the Company
         received proceeds of $364,000.

         During the Company's 1996 fiscal year, the Company  declared  dividends
         to  shareholders  totaling  $1.65 per  share,  of which  $1.20 was paid
         during  1996 and  $0.45  was  paid on  January  10,  1997.  During  the
         Company's  1995  fiscal  year,  the  Company   declared   dividends  to
         shareholders totaling $0.93 per share. During the Company's 1994 fiscal
         year, the Company declared dividends to shareholders totaling $1.00 per
         share. For Federal income tax purposes,  $0.03 of the 1996 dividend was
         long-term  capital gains and all other  dividends paid for fiscal years
         1996, 1995 and 1994 are ordinary income to the Company's shareholders.

         In December  1996,  the Company's  Registration  Statement on Form S-3,
         registering  the sale of up to $200 million of  additional  securities,
         was declared effective by the Securities and Exchange Commission.  This
         registration statement includes the possible issuances of common stock,
         preferred stock, warrants or shareholder rights. When combined with the
         Registration Statement which was declared effective September 12, 1995,
         the Company had $242 million of its  securities  registered  for future
         sale as of December 31, 1996.

         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 $65.9 million.

NOTE 6.  STOCK OPTION PLAN

         The Company has a Stock  Option Plan which  authorizes  the granting of
         options to purchase an  aggregate of up to  1,000,000  shares,  but not
         more than 5% of the outstanding  shares of the Company's  common stock.
         The exercise price for any options  granted under the Stock Option Plan
         may not be less than 100% of the fair market value of the shares of the
         common  stock  at the  time  the  option  is  granted.  Options  become
         exercisable six months after the date granted and will expire ten years
         after the date granted.

         The Company  adopted the  disclosure-only  provisions  of  Statement of
         Financial  Accounting  Standards No. 123,  "Accounting  for Stock-Based
         Compensation."  Accordingly,  no compensation  cost has been recognized
         for the  Company's  stock option plan.  Had  compensation  cost for the
         Company's stock option plan been determined  based on the fair value at
         the grant date for awards in 1996  consistent  with the  provisions  of
         SFAS No. 123, the  Company's  net earnings and earnings per share would
         have been reduced to the pro forma amounts indicated below:
          
                                                    1996
                                                ------------
         Net earnings - as reported             $ 25,737,000
         Net earnings - pro forma               $ 25,551,000
         Earnings per share - as reported            $  1.73
         Earnings per share - pro forma              $  1.72

         The fair value of each option  grant is  estimated on the date of grant
         using  the  Black-Scholes   option-pricing  model  with  the  following
         weighted average assumptions used for grants in 1996: dividend yield of
         10%; expected  volatility of 23.3%;  risk-free  interest rate of 6.52%;
         and expected lives of 7 years.

         Information regarding options is as follows:

<TABLE>
<CAPTION>
                                                 1996              1995              1994
                                         ----------------  ----------------  ------------------
                                                 Weighted          Weighted          Weighted
                                                  Average           Average           Average
                                                 Exercise          Exercise          Exercise
                                         Shares    Price   Shares    Price    Shares   Price
         <S>                             <C>      <C>      <C>      <C>      <C>      <C>
                                         -------  -------  -------  -------  -------  --------
         Outstanding, beginning of year  482,078  $15.529  488,284  $15.538  414,300  $15.455
         Granted                         169,099   15.439   23,791   15.358   73,984   16.000
         Exercised                       (23,595)  15.407      -        -        -        -
         Expired                            (836)  14.375  (29,997)  15.556      -        -
                                         -------   ------  --------  ------  -------   ------
         Outstanding, end of year        626,746  $15.510  482,078  $15.529  488,284  $15.538
                                         =======  =======  =======  =======  =======   ======
</TABLE>
         Weighted average fair value of
         options granted during the year $186,577
                                          =======


<PAGE>


         The  following  table  summarizes   information   about  stock  options
         outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                           Options Outstanding       Options Exercisable
                                         -----------------------  ------------------------
                                            Weighted 
                                             Average    Weighted                 Weighted
                                            Remaining    Average                  Average
                                Options    Contractual  Exercise    Exercisable  Exercise
    Range of Exercise Prices  Outstanding   Life (Yrs)   Price      At 12/31/96    Price
    ------------------------  -----------  -----------  --------   ------------  ---------
    <S>                       <C>          <C>          <C>        <C>           <C>
               $9.375                196          8.2   $  9.375           196   $   9.375
          $14.375 - $16.125      613,217          7.3     15.436       613,217      15.436
               $19.000            13,333         10.0     19.000           -           -
    ------------------------  -----------  -----------  --------   -----------    --------
          $9.375 - $16.125       626,746          7.4   $ 15.510       613,413   $  15.434
    ========================  ===========  ===========  ========   ===========    ========
</TABLE>

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 years ended December 31, 1996,  1995 and 1994, the Company paid
         the Manager  $1,872,000,  $1,390,000 and $1,342,000,  respectively,  in
         base management fees in accordance with the terms of the Agreement.

         The Manager is also entitled to earn performance based  compensation in
         an amount equal to 20% of the Company's  annualized net income,  before
         performance  based  compensation,  above an annualized Return on Equity
         equal to the ten year U.S.  Treasury  Rate plus 1%. For purposes of the
         performance fee  calculation,  equity is generally  defined as proceeds
         from issuance of common stock before  underwriter's  discount and other
         costs of issuance, plus retained earnings. For the years ended December
         31,  1996,  1995 and 1994,  the Company  paid the  Manager  $2,462,000,
         $596,000 and $121,000,  respectively, in performance based compensation
         in accordance with the terms of the Agreement.

         On September 18, 1996, the Board of Directors of the Company  completed
         a study of the  management  fees and expenses of comparable  companies.
         The study indicated that the total  management fees and other operating
         expenses  of the  Company  are  below  the  level of  other  comparable
         companies,  whether the other companies were self-managed or externally
         managed.  The study also indicated  that the Company's base  management
         fee was  significantly  less than any other externally  managed company
         and that the performance fee was higher.  As a result of the study, the
         unaffiliated  directors decreased the formula for the performance based
         compensation  from 25% to 20% of the Company's  annualized  net income,
         before  performance based  compensation,  above an annualized Return on
         Equity as described above.  Additionally,  the  unaffiliated  directors
         simplified the formula described above for the base management fee.

         These  changes took effect  October 1, 1996.  The combined fees paid to
         the Manager for the period  from  October 1, 1996 to December  31, 1996
         was  virtually the same under the new  management  fee formulas as they
         would have been under the prior formula.



<PAGE>


NOTE 8.  NET INTEREST INCOME ANALYSIS

         The  following  table  summarizes  the  amount of  interest  income and
         interest  expense  and the  average  effective  interest  rate  for the
         periods ended December 31, 1996, 1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>

                                                        1996            1995             1994
                                                   ---------------- ---------------- ----------------
                                                            Average          Average          Average
                                                    Amount   Rate    Amount   Rate    Amount   Rate
                                                   -------- ------- -------- ------- -------- -------
<S>                                                <C>       <C>    <C>       <C>    <C>      <C>
        Interest Earning Assets:
           ARM securities                          $150,759   6.45% $115,830   6.31% $84,238   4.74%
           Cash and cash equivalents                    752   5.29       787   5.98      560   4.28
                                                    -------- ------  -------  ------  ------- ------
                                                    151,511   6.44   116,617   6.31   84,798   4.73
                                                    -------- ------  -------  ------  ------- ------
        Interest Bearing Liabilities:
           Borrowings                               121,166   5.67   103,121   6.15   71,743   4.43
                                                    -------  ------  -------  ------  ------- ------
        Net Interest Earning Assets and Spread     $ 30,345   0.78% $ 13,497   0.16% $13,055   0.30%
                                                    =======  ======  =======  ======  ======  ======

        Yield on Net Interest Earning Assets (1)              1.29%            0.73%           0.73%
                                                             ======           ======          ======
<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  following  table  presents  the total amount of change in interest
         income/expense  from the table above and  presents the amount of change
         due to changes  in  interest  rates  versus the amount of change due to
         changes in volume (dollars in thousands):

<TABLE>
<CAPTION>
                                              1996 versus 1995              1995 versus 1994
                                        ----------------------------  ---------------------------
                                          Rate     Volume    Total      Rate     Volume     Total
                                        --------  --------  --------  --------  --------  --------
<S>                                     <C>       <C>       <C>       <C>       <C>       <C>
         Interest Income:
           ARM securities               $  2,625  $ 32,304  $ 34,930  $ 27,959  $  3,632  $ 31,591
           Cash and cash equivalents         (80)       45       (35)      211        17       227
                                         -------   -------   -------   -------   -------   -------
                                           2,545    32,349    34,894    28,170     3,649    31,818
                                         -------   -------   -------   -------   -------   -------
         Interest Expense:
           Borrowings                     (8,092)   26,138    18,045    27,872     3,505    31,377
                                         -------   -------   -------   -------   -------   -------
         Net interest income            $ 10,637  $  6,212  $ 16,849  $    298  $    144  $    441
                                         =======   =======   =======   =======   =======   =======
</TABLE>


<PAGE>


NOTE 9.  SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

      The following is a  presentation  of the  quarterly  results of operations
      (dollars in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 1996

                                                     Fourth      Third     Second      First
                                                     Quarter    Quarter    Quarter    Quarter
                                                    ---------  ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>        <C>       
      Interest income from ARM securities and cash  $  42,955  $  40,173  $  35,680  $  32,702
      Interest expense on borrowed funds               33,978     32,221     28,455     26,512
                                                     --------   --------   --------   --------
         Net interest income                            8,977      7,952      7,225      6,190
                                                     --------   --------   --------   --------

      Gain (loss) on sale of ARM securities                39        320        -           13

      General and administrative expenses               1,607      1,244      1,056      1,072
                                                     --------   --------   --------   --------
         Net income                                 $   7,409  $   7,028  $   6,169  $   5,131
                                                     ========   ========   ========   ========

      Net income per share                          $    0.46  $    0.44  $    0.42  $    0.41
                                                     ========   ========   ========   ========

      Average number of shares outstanding         16,207,446 16,080,363 14,844,227 12,334,847
                                                   ========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 1995

                                                     Fourth      Third     Second      First
                                                     Quarter    Quarter    Quarter    Quarter
                                                    ---------  ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>        <C>       
      Interest income from ARM securities and cash  $  32,561  $  30,178  $  27,988  $  25,880
      Interest expense on borrowed funds               27,101     25,757     25,541     24,722
                                                     --------   --------   --------   --------
         Net interest income                            5,460      4,421      2,457      1,158
                                                     --------   --------   --------   --------

      Gain (loss) on sale of ARM securities                49         42        -         (659)

      General and administrative expenses                 925        630        464        457
                                                     --------   --------   --------   --------
         Net income                                 $   4,584  $   3,833  $   1,993  $      42
                                                     ========   ========   ========   ========

      Net income per share                          $    0.38  $    0.33  $    0.17  $    0.00
                                                     ========   ========   ========   ========

      Average number of shares outstanding         12,102,969 11,946,970 11,873,557 11,780,726
                                                   ========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 1994

                                                     Fourth      Third     Second      First
                                                     Quarter    Quarter    Quarter    Quarter
                                                    ---------  ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>        <C>       
      Interest income from ARM securities and cash  $  25,457  $  23,137  $  19,673  $  16,531
      Interest expense on borrowed funds               23,474     19,834     15,918     12,517
                                                     --------   --------   --------   --------
         Net interest income                            1,983      3,303      3,755      4,014
                                                     --------   --------   --------   --------

      Gain (loss) on sale of ARM securities               (59)       388        398        136

      General and administrative expenses                 472        480        462        558
                                                     --------   --------   --------   --------
         Net income                                 $   1,452  $   3,211  $   3,691  $   3,592
                                                     ========   ========   ========   ========

      Net income per share                          $    0.12  $    0.27  $    0.32  $    0.31
                                                     ========   ========   ========   ========

      Average number of shares outstanding         11,771,717 11,760,854 11,754,059 11,748,331
                                                   ========== ========== ========== ==========
</TABLE>


<PAGE>


================================================================================
                                     SIGNATURES
================================================================================


Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities  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
                                    (Registrant)


Dated: March 26, 1997               /s/ H. Garrett Thornburg, Jr.
                                    -----------------------------
                                    H. Garrett Thornburg, Jr.
                                    Chairman of the Board of Directors and
                                    Chief Executive Officer
                                    (Principal Executive Officer)


Dated: March 26, 1997               /s/ Richard P. Story
                                    --------------------
                                    Richard P. Story
                                    Chief Financial Officer and Treasurer
                                    (Principal Accounting Officer)


Pursuant to the  requirements  of the Securities and Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

        Signature                  Capacity                     Date
-----------------------------  -----------------------    ----------------

/s/ H. Garrett Thornburg, Jr.  Chairman of the Board,      March 26, 1997
-----------------------------  Director and Chief
H. Garrett Thornburg, Jr.      Executive Officer
                               
 
/s/ Larry A. Goldstone         President, Director and     March 26, 1997
-----------------------------  Chief Operating Officer
Larry A. Goldstone            

/s/ David A. Ater              Director                    March 26, 1997
-----------------------------
David A. Ater

/s/ Joseph H. Badal            Director                    March 26, 1997
-----------------------------
Joseph H. Badal

/s/ Owen M. Lopez              Director                    March 26, 1997
-----------------------------
Owen M. Lopez

/s/ James H. Lorie             Director                    March 26, 1997
-----------------------------
James H. Lorie

/s/ Stuart C. Sherman          Director                    March 26, 1997
-----------------------------
Stuart C. Sherman






<PAGE>


================================================================================
                                   Exhibit Index
================================================================================

                                                                    Sequentially
                                                                      Numbered
Exhibit Number                  Exhibit Description                     Page
--------------  --------------------------------------------------  ------------
     1.1        Sales Agency Agreement (a)

     3.1        Articles of Incorporation of the Registrant (b)

     3.1.1      Articles of Amendment to Articles of Incorporation
                dated June 29, 1995 (c)

     3.1.2      Articles Supplementary dated January 21, 1997 (d)

     3.2        Amended and Restated Bylaws of the Registrant (e)

     4.1        Specimen Common Stock Certificates (b)

     4.2        Specimen Preferred Stock Certificates (d)

    10.1        Management Agreement between the Registrant and
                Thornburg Mortgage Advisory Corporation dated
                June 17, 1994 (e)

    10.1.1      Amendment to Management Agreement dated 
                June 16, 1995 (a)

    10.1.2      Amendment to Management Agreement dated
                December 15, 1995 (f)

    10.1.3      Amendment to Management Agreement dated
                September 18, 1996 (g)

    10.2        Form of Servicing Agreement (b)

    10.3        Form of 1992 Stock Option and Incentive Plan
                as amended and restated March 14, 1997 * ..........     45

    10.4        Form of Dividend Reinvestment and Stock
                Purchase Plan (h)

    10.4.1      Amendment dated January 8, 1997 to the Company's
                Dividend Reinvestment and Stock Purchase Plan (i)

    22.         Notice and Proxy Statement for the Annual Meeting
                of Shareholders to be held on April 24, 1997 (j)
-----------------------
*  Being filed herewith.
(a)Previously  filed  with  Registrant's  Form 8-K dated  October  10,  1995 and
   incorporated herein by reference pursuant to Rule 12b-32.
(b)Previously  filed as part of Form S-11 which went  effective on June 18, 1993
   and incorporated herein by reference pursuant to Rule 12b-32.
(c)Previously  filed  with  Registrant's  Form  10-Q  dated  June  30,  1995 and
   incorporated herein by reference pursuant to Rule 12b-32.
(d)Previously  filed as part of Form 8-A dated January 17, 1997 and incorporated
   herein by reference pursuant to Rule 12b-32.
(e)Previously  filed as part of Form S-8  dated  July 1,  1994 and  incorporated
   herein by reference pursuant to Rule 12b-32.
(f)Previously  filed with  Registrant's  Form 10-K dated  December  31, 1995 and
   incorporated herein by reference pursuant to Rule 12b-32.
(g)Previously  filed with  Registrant's  Form 10-Q dated  September 30, 1996 and
   incorporated herein by reference pursuant to Rule 12b-32.
(h)Previously filed as Exhibit 4 to Registrant's  registration statement on Form
   S-3 dated August 31, 1994 and  incorporated  herein by reference  pursuant to
   Rule 12b-32.
(i)Previously filed as Exhibit 4 to Registrant's  registration statement on Form
   S-3 dated  March 14,  1997 and  incorporated  by  reference  pursuant to Rule
   12-b32.
(j)Previously filed on March 24, 1997 and incorporated by reference  pursuant to
   Rule 12-b32.