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, 1997

                                      OR

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

       FOR THE TRANSITION PERIOD FROM       TO
                                      -----    -----

                      COMMISSION FILE NUMBER: 001-11914

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

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

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

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

         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 16,  1998,  the  aggregate  market  value of the  voting  stock held by
non-affiliates was $340,084,062,  based on the closing price of the common stock
on the New York Stock Exchange.

Number of shares of Common Stock outstanding at March 16, 1998:  21,107,131

DOCUMENTS INCORPORATED BY REFERENCE:

   Portions of the Registrant's definitive Proxy Statement dated March 30, 1998,
   issued  in  connection  with  the  Annual  Meeting  of  Shareholders  of  the
   Registrant to be held on April 30, 1998, are  incorporated  by reference into
   Parts I and III.

<PAGE>

                     THORNBURG MORTGAGE ASSET CORPORATION

                         1997 FORM 10-K ANNUAL REPORT

                              TABLE OF CONTENTS


                                    PART I
                                                                          Page

   ITEM 1.  BUSINESS....................................................    3

   ITEM 2.  PROPERTIES..................................................   14

   ITEM 3.  LEGAL PROCEEDINGS...........................................   14

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   14

                                   PART II

   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
               AND RELATED SHAREHOLDER MATTERS..........................   15

   ITEM 6.  SELECTED FINANCIAL DATA.....................................   16

   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS............   17

   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   28

   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE......................   28

                                   PART III

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   29

   ITEM 11. EXECUTIVE COMPENSATION......................................   29

   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT...............................................   29

   ITEM 13. CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS.............   29

                                   PART IV

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
               REPORTS ON FORM 8-K......................................   29

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

   SIGNATURES

   EXHIBIT INDEX


<PAGE>
                                       PART I

ITEM 1.  BUSINESS

GENERAL

Thornburg  Mortgage Asset Corporation (the "Company") is a mortgage  acquisition
company  that  primarily  invests in  adjustable-rate  mortgage  ("ARM")  assets
comprised of ARM securities and ARM loans,  thereby indirectly providing capital
to the single  family  residential  housing  market.  ARM  securities  represent
interests in pools of ARM loans,  which often include guarantees or other credit
enhancements against losses from loan defaults.  While the Company is not a bank
or savings and loan,  its business  purpose,  strategy,  method of operation and
risk profile are best understood in comparison to such institutions. The Company
leverages its equity  capital using  borrowed  funds,  invests in ARM assets and
seeks to generate  income based on the  difference  between the yield on its ARM
assets portfolio and the cost of its borrowings.  The corporate structure of the
Company differs from most lending  institutions in that the Company is organized
for tax  purposes as a real  estate  investment  trust  ("REIT")  and  therefore
generally  passes  through  substantially  all of its  earnings to  shareholders
without paying federal or state income tax at the corporate  level. 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 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 assets from broker-dealers and financial  institutions
that regularly  make markets in these assets.  The Company can also purchase ARM
assets 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  assets  portfolio  may  consist  of  either  agency or
privately   issued   securities   (generally   publicly   registered)   mortgage
pass-through  securities,  multiclass  pass-through  securities,  collateralized
mortgage obligations ("CMOs"),  ARM loans or short-term  investments that either
mature within one year or have an interest rate that reprices within one year.

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

   (1) securities  that are unrated but are guaranteed by the U.S.  Government
       or issued or guaranteed by an agency of the U.S. Government;
   (2) securities  which  are  rated  within  one of  the  two  highest  rating
       categories by at least one of either Standard & Poor's 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.



<PAGE>


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
approximately  6%, of its total assets in Other Investment  assets.  The Company
believes that,  due to recent  changes in the mortgage  industry and the current
real estate  environment,  a strategy to selectively  increase its investment in
Other Investment assets can provide attractive benefits to the Company such that
the total return of these  investments  would be commensurate  with their higher
risk and not  significantly  affect  the ARM  portfolio's  overall  high  credit
quality.  By increasing its investment in Other Investment assets,  specifically
classes of multi-class pass-through  certificates,  the Company may benefit from
future credit rating  upgrades as senior classes of these  securities pay off or
have the  potential  to  increase  in value as a result of the  appreciation  of
underlying real estate values.

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

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

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

Financing Strategies

The Company  employs a  leveraging  strategy to increase its assets by borrowing
against  its ARM assets and then uses the  proceeds  to acquire  additional  ARM
assets.  By  leveraging  its  portfolio in this manner,  the Company  expects to
maintain  an  equity-to-assets  ratio  between  8% to 10%,  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 assets 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 assets.  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 assets are
declining.  If the ratio of the Company's  equity-to-total assets, measured on a
historical  cost basis,  falls below 8%,  then,  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,
raising equity capital, sale of assets or other steps as necessary.

The Company's ARM assets 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 assets.  Generally, upon repayment of
each  reverse  repurchase  agreement  the ARM assets 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
assets to a lender at an agreed upon price in return for the lender's  agreement
to resell the same assets 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 assets 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  assets 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 assets. 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
assets 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  assets  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 assets.  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 assets
would  decline,  which  would  thereby  offset some of the decline in the market
value of the Company's portfolio of ARM assets.

In addition,  ARM assets are 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  assets
because the contractual  future interest rate adjustments on the ARM assets will
cause their interest rates to increase over time and reestablish the ARM assets'
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  reduces  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 assets held by the Company were  generally  purchased at prices  greater
than par.  The Company is  amortizing  the  premiums  paid for these assets over
their expected  lives using the level yield method of accounting.  To the extent
that the prepayment rate on the Company's ARM assets 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.  To the extent there is an increase in prepayment  rates,  resulting in a
shortening of the expected lives of the Company's ARM assets,  the Company's net
income and,  therefore,  the amount  available for dividends  could be adversely
affected.  To mitigate the adverse  effect of an increase in  prepayments on the
Company's ARM assets, the Company has purchased ARM assets at prices at or below
par,  however the Company's  portfolio of ARM assets is currently  held at a net
premium.  The Company may also  purchase  limited  amounts of  "principal  only"
mortgage  derivative assets backed by either fixed-rate  mortgages or ARM assets
as a hedge against the adverse  effect of increased  prepayments.  To date,  the
Company has chosen not to purchase  any  "principal  only"  mortgage  derivative
assets.

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  assets 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 assets.
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".

Acquisition of ARM Loans

The Company has  established  relationships  with mortgage  originators  who are
originating  and, in certain  cases,  securitizing  ARM loans for the  Company's
investment  portfolio,  based on the Company's specific pricing and underwriting
criteria.  The Company has also acquired  existing pools of ARM loans for future
securitization.  Acquiring  ARM loans for future  securitization  is expected to
benefit the Company by providing:  (i) additional  sources of new whole-pool ARM
assets;  (ii) greater control over the types of ARM loans originated;  (iii) the
ability to acquire  ARM loans at lower  prices so that the amount of the premium
to be amortized will be reduced in the event of prepayment; and (iv) potentially
higher yielding investments in its portfolio.

The Company  either  performs due diligence  itself,  or hires  specialized  due
diligence  companies to review packages of ARM loans offered by loan originators
based upon agreed upon underwriting  criteria. The Company carefully reviews the
ARM loans offered for sale or the work of the contracted  underwriting companies
and makes the final  decision as to which ARM loans will be ultimately  accepted
or rejected in a pool of ARM loans being acquired.

The sellers of the ARM loan packages purchased by the Company usually retain the
servicing  rights to the ARM loans in the  packages  but in cases  where they do
not, the Company has contracted with outside loan servicing companies to perform
loan servicing  functions for an agreed upon fee as a more cost effective method
for  servicing  the  Company's  loans  rather  than  starting  a loan  servicing
business. The Company views loan servicing as a mature business that has reached
an efficient level of operation  through  technology and accumulation of sizable
servicing  portfolios and does not believe,  at this time, that it would be cost
effective for the Company to develop an internal loan servicing capability.

Securitization of ARM Loans

The Company creates,  through securitization,  ARM securities with substantially
all  ARM  loans  that  it  acquires.   The  Company   purchases  ARM  loans  for
securitization  when it  believes  that it can  earn a  higher  yield  on  these
mortgage  assets  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 assets 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 assets represent all the certificates  issued
with respect to an  underlying  pool of mortgages,  such mortgage  assets may be
treated as assets 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 assets that qualify for the  exemption.  See "Portfolio of
Mortgage Assets - 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 ASSETS

As of December 31, 1997, ARM assets comprised approximately 99% of the Company's
total assets. The Company has invested in the following types of mortgage assets
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  assets are  concentrated in High Quality
ARM pass-through  certificates which account for approximately 95% of ARM assets
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, 1997:

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 assets. During 1997,
FHLMC issued $9.0 billion of FHLMC ARM certificates and as of December 31, 1997,
there was $49.0 billion of all types of FHLMC ARM certificates  outstanding,  of
which FHLMC held $10.4 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 assets  through  REMICs under the Code.
During  1997,  FNMA  issued  $20.8  billion of FNMA ARM  certificates  and as of
December 31, 1997, there was $71.0 billion of all types of FNMA ARM certificates
outstanding, of which FNMA held $11.4 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 assets (other
than Agency ARM assets)  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, the Company has
become more  reliant on the purchase of Agency ARM  securities  as its source of
Qualifying  Interests  in real estate and acquires 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 ASSETS

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  at  their  stated
maturity.

Multiclass  pass-through  securities  backed by ARM assets or ARM loans owned by
the Company are typically  structured into classes designated as senior classes,
mezzanine classes and subordinated  classes. The Company also owns variable rate
classes of CMO's which are backed by both fixed- and adjustable-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 assets 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.

The  variable  rate  classes of CMOs owned by the Company  generally  float at a
spread to the one-month  LIBOR index and are backed by mortgages that are either
fixed-rate  or are  adjustable-rate  mortgages  indexed  to the  one-year  U. S.
Treasury yield or a Cost of Funds index.

ARM LOANS

The ARM loans the Company has acquired are all first mortgages on  single-family
residential  homes.  Some  have  additional  collateral  in the form of  pledged
financial assets that provides the Company with additional  credit protection in
exchange  for  a  simpler  application  and  approval  process.  The  loans  are
originated to "A" quality  underwriting  guidelines  or are seasoned  loans with
over five years or more of good  payment  history  and/or  low loan to  property
value ratios.

Going forward, when acquiring ARM loans originated specifically for the Company,
the Company is focusing its attention on key aspects of a borrower's profile and
the  characteristics  of a mortgage  loan product that the Company  believes are
most  important  in insuring  excellent  loan  performance  and  minimal  credit
exposure.  As such,  the Company's  loan programs focus on larger down payments,
excellent  borrower  credit history (as measured by a credit report and a credit
score) and a conservative  appraisal process. If an ARM loan acquired has a loan
to property  value that is above 80%,  then the  borrower is required to pay for
private  mortgage  insurance  providing  additional  protection  to the  Company
against credit risk.  The ARM loans  acquired have original  maturities of forty
years or less.  The ARM loans are either fully  amortizing  or are interest only
for up to ten years and fully  amortizing  thereafter.  As an ARM loan,  the ARM
loans  acquired all bear an interest rate that is tied to an interest rate index
with both periodic and lifetime  constraints  on how much the loan interest rate
can change on any  predetermined  interest  rate reset  date.  In  general,  the
interest  rate on each ARM loan  resets at a frequency  that is either  monthly,
semi-annually or annually. The indices the ARM loans are tied to are generally a
U.S. Treasury Bill index,  LIBOR,  Certificate of Deposit, a Cost of Funds index
or Prime.

                                    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, 1997, 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 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. 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 23, 1998 under the
caption "Certain Relationships and Related Transactions".

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.




                         FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The Company has elected to be treated as a REIT for federal income 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 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 assets, 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 assets not included in the foregoing 75% assets test, the
value of  securities  issued by any one issuer may not exceed 5% in 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 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 assets 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 assets, that the Company otherwise might acquire.

   3. THE 30% LIMIT.  For 1997 and prior  years,  the  Company  was  required to
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 assets 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
had to hold mortgage loans and mortgage assets for four or more years and assets
and hedges (other than assets 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. The
U. S. Congress repealed the 30% limit effective for 1998 and thereafter.

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 (the "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.


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, 1997,  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 1997.



<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, 1998,
the Company had 20,742,325  shares of common stock issued and outstanding  which
were held by 1,348 holders of record and approximately 19,600 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>

                                                        Stock Prices            Cash
                                            ---------------------------------   Dividends
                                                                                Declared
                                              High        Low        Close      Per Share
                                            ---------   ---------   ---------  ----------
<S>                                         <C>         <C>         <C>        <C>
1997

Fourth  Quarter ended December 31, 1997       22 1/4      15 7/8      16 1/2       $0.50
Third Quarter ended  September 30, 1997       24 9/16     20          21           $0.50
Second  Quarter ended June 30, 1997           22 1/8      17 3/4      21 1/2       $0.49
First  Quarter ended March 31, 1997           22 7/8      18 3/4      19           $0.48

1996

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
</TABLE>

The Company intends to pay quarterly dividends and to make such distributions to
its  shareholders in such amounts that all or  substantially  all of its taxable
income  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  and  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 discretion from the Company at a discount from the then prevailing
market price or in the open market.  Shareholders and non-shareholders  also can
make additional  purchases of stock monthly , subject to a minimum of $100 ($500
for  non-shareholders)  and a maximum of $5,000 for each optional cash purchase.
Continental Stock Transfer & Trust Company (the "Agent"), the Company's transfer
agent, is the Trustee and administrator of the DRP. Additional information about
the  details of the DRP and a  prospectus  are  available  from the Agent or the
Company.  Shareholders  who own stock that is  registered  in their own name and
want to participate must deliver a completed enrollment form to the Agent. Forms
are 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)  and
want to participate  must either request the broker or nominee to participate on
their behalf or request that the broker or nominee  re-register 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, 1997,  1996,  1995,
1994 and 1993. 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  (Amounts  in
thousands, except per share data).

<TABLE>
<CAPTION>

OPERATIONS STATEMENT HIGHLIGHTS
                                                    1997         1996          1995         1994         1993
                                                 ----------   -----------  -----------   ----------   ----------
<S>                                              <C>           <C>          <C>           <C>          <C>

Net interest income                              $   49,064    $   30,345   $   13,496    $  13,055    $   3,157
Net income                                       $   41,402    $   25,737   $   10,452    $  11,946    $   2,572
Basic earnings per common share                  $     1.95    $     1.73   $     0.88    $    1.02    $    0.36
Diluted earnings per common share                $     1.94    $     1.73   $     0.88    $    1.02    $    0.36
Average number of common shares outstanding          18,048        14,874       11,927       11,759        7,174
Distributable income per common share            $     1.98    $     1.76   $     0.92    $    1.02    $    0.36
Dividends declared per common share              $     1.97    $     1.65   $     0.93    $    1.00    $    0.29
Noninterest expense as percent of average assets       0.21%         0.21%        0.13%        0.11%        0.18%(1)


BALANCE SHEET HIGHLIGHTS
                                                                As of December 31
                                                 ---------------------------------------------------------------
                                                     1997         1996         1995         1994         1993
                                                 -----------  -----------  -----------  -----------  -----------
Adjustable-rate mortgage assets                  $ 4,638,694  $ 2,727,875  $ 1,995,287  $ 1,727,469  $ 1,320,169
Total assets                                     $ 4,691,115  $ 2,755,358  $ 2,017,985  $ 1,751,832  $ 1,364,429
Shareholders' equity  (2)                        $  380,658   $   238,005  $   182,312  $   180,035  $   170,326
Number of common shares outstanding                  20,280        16,219       12,191       11,773       11,748
Yield on adjustable-rate mortgage assets               6.38%         6.64%        6.73%        5.66%        4.03%
Effective spread on net  interest-earning assets       0.96%         1.34%        1.11%        0.17%        0.90%(1)
Return on average assets                               0.92%         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

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

FINANCIAL CONDITION

At December 31, 1997,  the Company held total assets of $4.691  billion,  $4.639
billion of which  consisted of ARM assets.  That  compares to $2.755  billion in
total  assets and  $2.728  billion of ARM assets at  December  31,  1996.  Since
commencing  operations,  the Company has purchased either ARM securities (backed
by agencies  of the U.S.  government  or  privately-issued,  generally  publicly
registered,  mortgage  assets,  most of which are rated AA or higher by at least
one of the Rating  Agencies) or ARM loans  generally  originated  to "A" quality
underwriting  standards.  At December 31, 1997,  94.3% of the assets held by the
Company were High Quality assets, far exceeding the Company's  investment policy
minimum  requirement  of  investing  at least  70% of its  total  assets in High
Quality ARM assets and cash and cash  equivalents.  Of the ARM assets  currently
owned by the  Company,  97.4%  are in the form of  adjustable-rate  pass-through
certificates.  The remainder are floating rate classes of CMOs,  investments  in
floating rate classes of trusts backed by mortgaged-backed assets or ARM loans.

The following table presents a schedule of ARM assets owned at December 31, 1997
and December 31, 1996 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.

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

<TABLE>
<CAPTION>
                               December 31, 1997         December 31, 1996
                            ------------------------- -------------------------
                             Carrying     Portfolio    Carrying     Portfolio
                               Value         Mix         Value         Mix
                            ------------  ----------- ------------  -----------
<S>                         <C>           <C>         <C>           <C>
HIGH QUALITY:
  FHLMC/FNMA                $ 3,117,937         67.2% $ 1,474,842         54.1%
  Privately Issued:
   AAA/Aaa Rating               476,615         10.3      260,031          9.5
   AA/Aa Rating                 782,206         16.8      862,727         31.6
                             -----------  -----------  -----------  -----------
     Total Privately Issued   1,258,821         27.1    1,122,758         41.1
                             -----------  -----------  -----------  -----------

                             -----------  -----------  -----------  -----------
     Total High Quality       4,376,758         94.3    2,597,600         95.2
                             -----------  -----------  -----------  -----------

OTHER INVESTMENT:
  Privately Issued:
   A Rating                     115,055          2.5      106,531          3.9
   BBB/Baa Rating                17,625          0.4       14,017          0.5
   BB/Ba Rating and Other        10,269          0.2        9,727          0.4
  Whole loans                   118,987          2.6            -          0.0
                             -----------  -----------  -----------  -----------
     Total Other Investment     261,936          5.7      130,275          4.8
                             -----------  -----------  -----------  -----------
      Total ARM Portfolio    $ 4,638,694        100.0% $ 2,727,875        100.0%
                             ===========  ===========  ===========  ===========
</TABLE>

As of  December  31,  1997,  the  Company  had reduced the cost basis of its ARM
securities  in the amount of  $1,739,000  due to potential  future credit losses
(other than  temporary  declines in fair  value).  At this time,  the Company is
providing for potential  future  credit  losses on two  securities  that have an
aggregate carrying value of $13.1 million, which represent less than 0.3% of the
Company's total portfolio of ARM assets. Both of these assets are performing and
have some minimal remaining credit support to mitigate the Company's exposure to
potential future credit losses.

Additionally,  during  1997,  the  Company  recorded  a  $42,000  provision  for
potential  credit losses on its loan  portfolio,  although no actual losses have
been realized in the loan portfolio to date. The Company's credit reserve policy
regarding ARM loans is to record a monthly  provision of 0.15% (annualized rate)
on the outstanding  principal  balance of loans (including loans  securitized by
the Company for which the Company has retained first loss exposure),  subject to
adjustment  on certain  loans or pools of loans based upon  factors such as, but
not limited to, age of the loans,  borrower payment history,  low  loan-to-value
ratios and quality of underwriting standards applied by the originator.

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

                                 ARM ASSETS BY INDEX
                            (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                               December 31, 1997         December 31, 1996
                            ------------------------- -------------------------
                             Carrying     Portfolio    Carrying     Portfolio
                               Value         Mix         Value         Mix
                            ------------  ----------- ------------  -----------
<S>                         <C>           <C>         <C>           <C>
INDEX:
  One-month LIBOR           $   115,198          2.5% $    10,646          0.4%
  Three-month LIBOR              31,215          0.7            -          0.0
  Six-month LIBOR             1,489,802         32.1    1,252,884         46.0
  Six-month Certificate of      278,386          6.0       69,348          2.5
     Deposit
  Six-month Constant             66,669          1.4        8,841          0.3
     Maturity Treasury
  One-year Constant           2,271,914         49.0    1,238,892         45.4
     Maturity Treasury
  Cost of Funds                 385,510          8.3      147,264          5.4
                             ===========  ===========  ===========  ===========
                            $ 4,638,694        100.0% $ 2,727,875        100.0%
                             ===========  ===========  ===========  ===========
</TABLE>

The portfolio  had a current  weighted  average  coupon of 7.56% at December 31,
1997.  If the portfolio had been "fully  indexed," the weighted  average  coupon
would have been approximately  7.64%, based upon the current  composition of the
portfolio and the applicable indices. As of December 31, 1996, the portfolio had
a weighted  average coupon of 7.57%. If the portfolio had been "fully  indexed,"
the weighted average coupon would have been approximately  7.61%, based upon the
composition of the portfolio and the applicable indices at that time.

At December 31, 1997,  the current yield of the ARM assets  portfolio was 6.38%,
compared  to 6.64% as of December  31,  1996,  with an average  term to the next
repricing  date of 110 days as of December 31, 1997,  compared to 105 days as of
December 31, 1996. The current yield includes the impact of the  amortization of
applicable premiums and discounts,  the cost of hedging, the amortization of the
deferred  gains  from  hedging  activity  and the  impact of  principal  payment
receivables.

The  reduction in the yield as of December  31,  1997,  compared to December 31,
1996, is primarily because of the higher rate of ARM portfolio prepayments which
occurred  during 1997. The higher level of  prepayments  increased the amount of
premium  amortization  expense and increased the impact of non-interest  earning
assets in the form of principal payment receivables. Higher premium amortization
and a  higher  balance  of  principal  payment  receivables  decreased  the  ARM
portfolio  yield  by 0.30%  as of the end of 1997  compared  to the end of 1996,
which was partially offset by a 0.05% decrease in the net cost of hedging.

During the year ended December 31, 1997, the Company purchased $2.930 billion of
ARM securities,  99.8% of which were High Quality assets,  and $123.2 million of
ARM loans generally originated to "A" quality underwriting standards or seasoned
loans  with over five years of good  payment  history  and/or low  loan-to-value
ratios.  Included in the $2.930 billion of ARM securities purchased during 1997,
$103.1 million were ARM loans that the Company  securitized  in connection  with
their purchase.  Of the ARM assets acquired during 1997,  approximately 50% were
indexed to U.S.  Treasury bill rates, 35% were indexed to LIBOR, 8% were indexed
to a Cost of Funds  Index and the  remaining  7% to other  indices.  Although  a
larger proportion of fixed-rate loans compared to ARM loans are being originated
in the current market,  the Company has continued to find sufficient  attractive
ARM asset  acquisition  opportunities to reinvest its cash flows and to continue
its asset growth while  maintaining  the high credit quality  profile of the ARM
portfolio.  During 1997,  the Company  placed  particular  emphasis on acquiring
seasoned  ARM  assets,  which  are ARM  assets  comprised  of  loans  that  were
originated over five years ago. These ARM assets have been prepaying at a slower
rate than newly  originated  ARM assets.  The Company  believes,  partially as a
result of this strategy, that it has been experiencing lower prepayment activity
in its ARM portfolio than it otherwise would have, which contributes to a higher
and more stable ARM portfolio yield.

The  Company  sold ARM assets in the  amount of $189.0  million at a net gain of
$1,189,000  during 1997.  These sales reflect the Company's desire to manage the
portfolio  with a view to  enhancing  the  total  return of the  portfolio.  The
Company  monitors the  performance of its individual ARM assets and  selectively
sells an asset when there is an opportunity to replace it with an ARM asset that
has an  expected  higher  long-term  yield  or  more  attractive  interest  rate
characteristics.  Most of the ARM assets sold in 1997 were prepaying faster than
expected  and had  yields  at the time of sale  approximately  0.50%  below  the
portfolio  average yield at the time. The Company is presented  with  investment
opportunities in the ARM assets market on a daily basis and management evaluates
such opportunities against the performance of its existing ARM assets. At times,
the Company is able to identify  opportunities that it believes will improve the
total  return of its ARM assets  portfolio  by  replacing  selected  assets.  In
managing the portfolio,  the Company may at times realize either gains or losses
in the process of replacing  selected  assets when it believes it has identified
better investment opportunities in order to improve long-term total return.

For the quarter ended December 31, 1997, the Company's mortgage assets paid down
at an  approximate  average  annualized  constant  prepayment  rate of 24%.  The
annualized constant  prepayment rate averaged  approximately 22% during the full
year of 1997,  having  averaged  approximately  22% during the first half of the
year and 23% during  the second  half of the year.  When  prepayment  experience
exceeds expectations due to sustained increased prepayment activity, the Company
has to amortize its premiums over a shorter time period,  resulting in a reduced
yield to maturity on the Company's ARM assets.  Conversely, if actual prepayment
experience is less than the assumed constant  prepayment rate, the premium would
be amortized over a longer time period, resulting in a higher yield to maturity.
The Company  monitors its  prepayment  experience on a monthly basis in order to
adjust the amortization of the net premium, as appropriate.

The fair value price of the  Company's  portfolio  of ARM assets  classified  as
available-for-sale  improved by 0.13% from a negative adjustment of 0.65% of the
portfolio  as of December  31,  1996,  to a negative  adjustment  of 0.52% as of
December  31, 1997.  Despite this  relative  price  improvement,  because of the
increased size of the portfolio,  the amount of the negative  adjustment to fair
value on the ARM assets  classified as  available-for-sale  increased from $14.7
million as of December 31, 1996, to $21.7  million as of December 31, 1997.  The
improvement  in the fair value price relative to the amortized cost basis of the
assets is generally a result of: (i) the upward  repricing of the interest rates
on the Company's ARM assets relative to their  respective  indexes;  and (ii) an
increased  demand for ARM assets as reflected in the price at which  similar ARM
assets traded in the open market during the year.  During the fourth  quarter of
1997,  the fair value  price of the  Company's  ARM assets  did  decline  from a
negative  price  adjustment  of 0.18% as of September  30,  1997,  to a negative
adjustment  of 0.52% as of December 31, 1997.  This price  decline was primarily
because of increased  future  prepayment  expectations  which have the effect of
shortening  the average life of the  Company's ARM assets and  decreasing  their
market value.

The Company has purchased Cap Agreements in order to limit its exposure to risks
associated  with  the  lifetime  interest  rate  caps of its ARM  assets  should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect  of the  lifetime  or  maximum  interest  rate  cap  limitation.  The Cap
Agreements  purchased  by the Company  will allow the yield on the ARM assets to
continue to rise in a high interest rate  environment just as the Company's cost
of  borrowings  would  continue to rise,  since the  borrowings  do not have any
interest rate cap limitation.  At December 31, 1997, the Cap Agreements owned by
the Company had a remaining  notional  balance of $4.156 billion with an average
final maturity of 3.1 years,  compared to a remaining notional balance of $2.266
billion  with an average  final  maturity  of 3.0 years at  December  31,  1996.
Pursuant to the terms of the Cap  Agreements,  the  Company  will  receive  cash
payments if the one-month,  three-month or six-month LIBOR index increases above
certain  specified  levels,  which  range  from  7.50%  to  13.00%  and  average
approximately  10.19%.  The fair  value of these Cap  Agreements  also  tends to
increase when general  market  interest  rates increase and decrease when market
interest rates decrease,  helping to partially  offset changes in the fair value
of the  Company's  ARM assets.  At December 31, 1997,  the fair value of the Cap
Agreements  was $1.9 million,  $11.2 million less than the amortized cost of the
Cap Agreements.

The  following  table  presents  information  about the  Company's Cap Agreement
portfolio as of December 31, 1997:

                     CAP AGREEMENTS STRATIFIED BY STRIKE PRICE
                            (Dollar amounts in thousands)
<TABLE>
<CAPTION>

              Hedged     Weighted          Cap                         Weighted
             ARM          Average       Agreement                       Average
          Securities      Life Cap       Notional      Strike          Remaining
         Balance (1)                     Balance         Price           Term
         -------------   -----------   -------------   -----------   --------------
<S>      <C>                  <C>      <C>                  <C>            <C>
         $   446,484          9.31%    $   487,551          7.50%          2.4 Years
             385,396         10.06         344,195          8.00           3.7
             157,392         10.50         207,143          8.50           2.2
             222,507         10.12         323,607          9.00           2.0
             148,278         10.84         156,717          9.50           2.8
             324,637         11.03         329,131         10.00           4.4
             514,472         11.41         464,992         10.50           2.8
             467,179         12.01         392,071         11.00           3.8
             381,791         12.53         575,431         11.50           4.4
             591,189         12.95         590,605         12.00           3.0
             232,371         13.54         186,617         12.50           2.4
             253,911         14.39          97,466         13.00           2.1
              28,080         None             N/A          N/A             N/A
           -----------   ===========     ===========   ===========   ==============
         $ 4,153,687         11.60%    $ 4,155,526         10.19%          3.1 Years
           ===========   ===========     ===========   ===========   ==============
<FN>
         (1)   90% of the ARM securities' balance, which approximates the financed portion.
</FN>
</TABLE>

As of  December  31,  1997,  the  Company was a  counterparty  to six  different
interest  rate swap  agreements  that  substantially  offset  each other with an
aggregate net notional  balance of $30 million.  Due to the offsetting and short
remaining term of these agreements,  they had no effect on the average period to
the next repricing of the Company's  borrowings.  The average period to the next
repricing of the Company's  borrowings was 33 days as of December 31, 1997. Five
of the agreements are cancelable beginning in the first quarter of 1998 and have
a final  maturity  during the first  quarter of 1999.  The  remaining  agreement
matures during the first quarter of 1998.

RESULTS OF OPERATIONS - 1997 COMPARED TO 1996

For the year ended December 31, 1997, the Company's net income was  $41,402,000,
or $1.95 per share (Basic EPS), based on a weighted average of 18,047,955 shares
outstanding. That compares to $25,737,000, or $1.73 per share (Basic EPS), based
on a  weighted  average  of  14,873,700  shares  outstanding  for the year ended
December  31,  1996.  This 61%  increase  in  earnings  -- a 13%  increase  on a
per-share basis -- was achieved  despite a 21% increase in the average number of
shares  outstanding  during the two periods.  Net  interest  income for the year
totaled  $49,064,000,  compared to  $30,345,000  for the same period in 1996, an
increase of 62%. Net interest  income is comprised of the interest income earned
on mortgage investments less interest expense from borrowings.  During 1997, the
Company  recorded a gain on the sale of ARM securities of $1,189,000 as compared
to a gain of  $1,362,000  during 1996.  Additionally,  during 1997,  the Company
reduced  its  earnings  and the  carrying  value of its ARM assets by  reserving
$886,000 for potential credit losses,  compared to $990,000 during 1996.  During
1997, the Company  incurred  operating  expenses of $7,965,000,  consisting of a
base  management fee of $3,664,000,  a  performance-based  fee of $3,363,000 and
other  operating  expenses  of  $938,000.  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.  Total operating expenses decreased as a percentage of net interest
income to 16.2% for 1997,  compared to 16.4% for 1996,  thereby  contributing to
the Company's improved net earnings.

The Company's  return on average  common equity for the year ended  December 31,
1997 was 12.72%,  compared to 11.68% for the same period in 1996.  The Company's
return on average  common equity was 11.63% for the quarter  ended  December 31,
1997, compared to 12.37% for the same period in 1996.



<PAGE>


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

                 COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

<TABLE>
<CAPTION>

              Net Interest    Provision      Gain(Loss)       G & A       Performance    Preferred        Net
  For The       Income/      For Losses/      on ARM       Expense (2)/       Fee/       Dividend/      Income/
Quarter Ended   Equity         Equity       Sales/Equity      Equity         Equity        Equity     Equity (ROE)
------------------------------------------------------------------------------------------------------------------
<S>             <C>             <C>          <C>               <C>            <C>           <C>         <C>
Mar 31, 1995     2.58%            -           -1.47%           1.02%           -             -           0.09%
Jun 30, 1995     5.51%            -              -             1.04%           -             -           4.47%
Sep 30, 1995     9.85%            -            0.09%           1.07%          0.34%          -           8.54%
Dec 31, 1995    11.94%            -            0.11%           1.05%          0.97%          -          10.03%
Mar 31, 1996    13.37%            -            0.03%           1.04%          1.27%          -          11.08%
Jun 30, 1996    13.14%            -               -            1.00%          0.92%          -          11.22%
Sep 30, 1996    13.42%           0.34%         0.88%           1.03%          1.07%          -          11.86%
Dec 31, 1996    14.99%           1.32%         1.38%           1.46%          1.23%          -          12.37%
Mar 31, 1997    18.85%           0.32%         0.01%           1.65%          1.43%        2.07%        13.40%
Jun 30, 1997    19.48%           0.34%         0.03%           1.81%          1.25%        2.67%        13.45%
Sep 30, 1997    17.66%           0.30%         0.45%           1.64%          1.24%        2.23%        12.70%
Dec 31, 1997    15.62%           0.33%         1.06%           1.59%          1.01%        2.12%        11.63%
<FN>
------------
(1)     Average common equity excludes unrealized gain (loss) on available-for-sale ARM assets.
(2)     Excludes performance fees.
</FN>
</TABLE>

The decline in the Company's  return on common equity from the fourth quarter of
1996 to the fourth  quarter of 1997 is  primarily  due to the decline in the net
interest   spread   between   the   Company's    interest-earning   assets   and
interest-bearing  liabilities from 0.92% as of December 31, 1996, to 0.47% as of
December 31, 1997.  The primary  reasons for this decline were the change in the
relationship  between the one-year U. S. Treasury yield and LIBOR, the impact of
increased ARM  prepayment  speeds and an increase in the Company's cost of funds
during the fourth  quarter of 1997.  From March 31, 1997,  to December 31, 1997,
the one-year U.S.  Treasury  yield declined by  approximately  0.51% while LIBOR
rates  remained  substantially  the same.  During the entire  year,  LIBOR rates
increased by 0.23%. Approximately 50% of the Company's ARM assets are indexed to
the one-year U. S. Treasury bill yield and, therefore,  the yield on such assets
declined  with  the  index.  Conversely,  the  interest  rate  on the  Company's
borrowings is generally  LIBOR-based and, thus,  increased by 0.19% during 1997.
To put this in historical perspective, the one-year U.S. Treasury bill yield had
a spread of -0.26% to the  average of the one-and  three-month  LIBOR rate as of
December 31,  1997,  compared to having a spread of -0.02% at December 31, 1996,
0.04% on  average  during  1996 and  -0.07%  on  average  during  1995.  For the
five-year  period from 1993 to 1997, the average  spread was 0.15%.  The Company
does not know when or if the  relationship  between the one-year U. S.  Treasury
bill yield and LIBOR will return to these  historical  norms,  but the Company's
spreads would be expected to improve if that occurs. The Company's ARM portfolio
yield also was lower  during the fourth  quarter of 1997  compared to the fourth
quarter of 1996  because of an  increase in the  prepayment  rate of ARM assets.
During the fourth quarter of 1997, the average prepayment rate was 24%, compared
to 21% during the comparable  period in 1996. The impact of this was to increase
the  average  amount of  non-interest-earning  assets  in the form of  principal
payments  receivable as well as to increase the amortization  expense related to
writing  off  the  Company's  premiums  and  discounts.  The  Company  generally
amortizes its premiums and discounts on a monthly basis based on the most recent
three-month average of the prepayment rate of its ARM assets,  thereby adjusting
its amortization to current market  conditions,  which is reflected in the yield
of the ARM portfolio.

For the year ended  December  31,  1997,  the  Company's  taxable  income  after
preferred dividends was $35,741,000,  or $1.98 per weighted average common share
outstanding.  Taxable income in 1997 excludes loss provisions of $886,000 and an
expense of $32,000  for  Dividend  Equivalent  Rights and  Phantom  Stock  Right
grants, but includes actual credit losses of $96,000 and a compensation  expense
of $232,000 related to the exercise of Non-Incentive Stock Options. For the year
ended December 31, 1996, the Company's taxable income was $26,159,000,  or $1.76
per  weighted  average  common  share  outstanding.  Taxable  income in 1996 was
reduced by the net  capital  loss  carryforward  of  $568,000 on the sale of ARM
assets during 1995 and excludes loss provisions of $990,000 recorded in 1996. As
a REIT,  the Company is required to declare  dividends  amounting to 85% of each
year's  taxable  income by the end of each  calendar  year and to have  declared
dividends  amounting  to 95% of its taxable  income for each year by the time it
files its applicable tax return. Therefore, the Company generally passes through
substantially all of its earnings to shareholders  without paying federal income
tax at the corporate  level.  Since the Company,  as a REIT,  pays its dividends
based on  taxable  earnings,  the  dividends  may at times be more or less  than
reported  earnings.  As of December 31, 1997, the Company had a retained deficit
of $951,000 because its dividends,  which consisted  entirely of taxable income,
were higher than its reported earnings,  principally  because of loss provisions
recorded that are not deductible for tax purposes until actually realized.

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

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

<TABLE>
<CAPTION>

                                               Common       Common      Cumulative
                 Taxable      Taxable Net     Dividend      Dividend   Undistributed
   For The         Net        Income Per    Declared Per    Pay-out       Taxable
Quarter Ended   Income (1)     Share (2)     Share (2)      Ratio (3)   Net Income
------------- ------------- -------------- ------------- ------------- ------------
<S>           <C>           <C>            <C>              <C>           <C>
Mar 31, 1995  $     701     $      0.06    $     0.15        252%          (874)
Jun 30, 1995      1,993            0.17          0.15         89%          (634)
Sep 30, 1995      3,791            0.32          0.25         79%           139
Dec 31, 1995      4,535            0.37          0.38        102%            41
Mar 31, 1996      5,118            0.41          0.40         97%           188
Jun 30, 1996      6,169            0.42          0.40        103%           (18)
Sep 30, 1996      6,708            0.42          0.40         96%           250
Dec 31, 1996      8,164            0.50          0.45         89%         1,115
Mar 31, 1997      8,224            0.50          0.48         95%         1,505
Jun 30, 1997      8,573            0.51          0.49         99%         1,603
Sep 30, 1997      9,737            0.51          0.50        100%         1,560
Dec 31, 1997      9,207            0.46          0.50        110%           629
<FN>
-------------
(1) Taxable net income after preferred dividends.
(2) Weighted average common shares outstanding.
(3) Common  dividend  declared  divided by applicable  quarter's  taxable income
      available to common shareholders.
</FN>
</TABLE>

Despite the fact that the Company's  cost of funds  increased from 5.67% in 1996
to 5.76% in 1997,  its net  interest  income  increased  during  this  same time
period,  primarily due to the increased  size of the  Company's  portfolio.  Net
interest  income  increased by  $18,719,000,  which is a combination of rate and
volume  variances.  There was a combined  favorable  rate  variance of $623,000,
which consisted of a favorable variance of $2,691,000  resulting from the higher
yield on the Company's ARM assets  portfolio and other  interest-earning  assets
and an  unfavorable  variance of  $2,068,000  resulting  from an increase in the
Company's cost of funds. The increased  average size of the Company's  portfolio
during 1997 compared to 1996  contributed  to higher net interest  income in the
amount of  $18,096,000.  The average  balance of the Company's  interest-earning
assets was $3.777  billion during 1997 compared to $2.351 billion during 1996 --
an increase of 61%.



<PAGE>


The following  table  highlights the  components of net interest  spread and the
annualized yield on net interest-earning assets:

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

<TABLE>
<CAPTION>
                                    ARM Assets
                          ------------------------------
                Average   Wgt. Avg.                       Yield on                              Yield on
               Interest-    Fully    Weighted             Interest-                   Net     Net Interest-
  As of the     Earning    Indexed    Average    Yield     Earning    Cost of       Interest    Earning
Quarter Ended   Assets      Coupon    Coupon     Adj.(2)    Assets     Funds         Spread      Assets
-----------------------------------------------------------------------------------------------------------
<S>           <C>            <C>       <C>       <C>         <C>        <C>           <C>         <C>
Mar 31, 1995  $ 1,748.7      8.46%     6.33%     0.26%       6.07%      6.33%        -0.26%       0.49%
Jun 30, 1995    1,809.7      7.94%     6.77%     0.40%       6.37%      6.21%         0.16%       0.55%
Sep 30, 1995    1,864.3      7.93%     7.24%     0.58%       6.66%      6.04%         0.62%       1.04%
Dec 31, 1995    1,975.6      7.51%     7.42%     0.69%       6.73%      6.05%         0.68%       1.11%
Mar 31, 1996    2,025.8      7.56%     7.48%     0.99%       6.49%      5.60%         0.89%       1.32%
Jun 30, 1996    2,248.2      7.83%     7.28%     0.85%       6.43%      5.59%         0.84%       1.32%
Sep 30, 1996    2,506.0      7.80%     7.31%     0.80%       6.51%      5.71%         0.80%       1.32%
Dec 31, 1996    2,624.4      7.61%     7.57%     0.93%       6.64%      5.72%         0.92%       1.34%
Mar 31, 1997    2,950.6      7.93%     7.53%     0.89%       6.65%      5.67%         0.98%       1.54%
Jun 30, 1997    3,464.1      7.75%     7.57%     0.90%       6.67%      5.77%         0.90%       1.39%
Sep 30, 1997    4,143.7      7.63%     7.65%     1.07%       6.58%      5.79%         0.79%       1.22%
Dec 31, 1997    4,548.9      7.64%     7.56%     1.18%       6.38%      5.91%         0.47%       0.96%
<FN>
------------
   (1)Yield on Net  Interest-Earning  Assets is computed by dividing  annualized
      net  interest  income by the  average  daily  balance of  interest-earning
      assets.
   (2)Yield adjustments include the impact of amortizing premiums and discounts,
      the cost of hedging  activities,  the  amortization of deferred gains from
      hedging  activities and the impact of principal payment  receivables.  The
      following table presents these components of the yield adjustments for the
      dates presented in the table above:
</FN>
</TABLE>

                 COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<TABLE>
<CAPTION>
                                                   Amort. of
                          Impact of                Deferred
                Premium/  Principal                Gain from        Total
  As of the     Discount   Payments   Hedging       Hedging         Yield
Quarter Ended    Amort.   Receivable  Activity      Activity      Adjustment
-------------  ---------  ----------  ----------  -------------  -----------
<S>               <C>        <C>        <C>           <C>           <C>
Mar 31, 1995      0.22%      0.02%      0.21%        -0.19%         0.26%
Jun 30, 1995      0.26%      0.03%      0.28%        -0.17%         0.40%
Sep 30, 1995      0.37%      0.06%      0.31%        -0.16%         0.58%
Dec 31, 1995      0.43%      0.10%      0.32%        -0.16%         0.69%
Mar 31, 1996      0.77%      0.11%      0.31%        -0.20%         0.99%
Jun 30, 1996      0.67%      0.07%      0.27%        -0.16%         0.85%
Sep 30, 1996      0.57%      0.08%      0.25%        -0.10%         0.80%
Dec 31, 1996      0.69%      0.09%      0.23%        -0.08%         0.93%
Mar 31, 1997      0.63%      0.13%      0.19%        -0.07%         0.89%
Jun 30, 1997      0.66%      0.13%      0.16%        -0.05%         0.90%
Sep 30, 1997      0.85%      0.12%      0.15%        -0.05%         1.07%
Dec 31, 1997      0.94%      0.14%      0.14%        -0.04%         1.18%
</TABLE>


The  Company's  ARM assets  portfolio  generated a yield of 6.56%  during  1997,
compared to 6.45%  during  1996.  The  Company's  cost of funds  during 1997 was
5.76%, compared to 5.67% during 1996, primarily as a result of higher short-term
interest rates available to the Company for financing purposes. Despite the fact
that the Company's cost of funds  increased,  the Company's net spread increased
to 0.80% for 1997 from a spread of 0.78% for 1996 -- an increase  of 0.02%.  The
Company's  yield on net  interest-earning  assets,  which includes the impact of
shareholders'  equity, rose to 1.30% for 1997 from 1.29% for 1996. 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 years ended
December 31, 1997, and December 31, 1996:

                           AVERAGE BALANCE AND RATE TABLE
                           (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                             For the Year Ended      For the Year Ended
                              December 31, 1997       December 31, 1996
                            ---------------------   --------------------
                             Average    Effective   Average    Effective
                             Balance       Rate     Balance       Rate
                            ---------------------   --------------------
<S>                         <C>            <C>      <C>           <C>
Interest-Earning Assets:
  ARM assets                $ 3,755,064     6.56%   $ 2,336,900    6.45%
  Cash and cash equivalents      21,774     5.57         14,200    5.29
                             -------------------     -------------------
                              3,776,838     6.56      2,351,100    6.45
                             -------------------     -------------------
Interest-Bearing Liabilities:
  Borrowings                  3,446,913     5.76      2,138,236    5.67
                             -------------------     -------------------
Net Interest-Earning Assets $   329,925    0.80%    $   212,864    0.78%
and Spread                   ===================     ===================

Yield on Net                               1.30%                   1.29%
Interest-Earning Assets (1)            =========               =========
<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  1997,  the  Company's  yield  on its  ARM  assets  portfolio,
including the impact of the amortization of premiums and discounts,  the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment receivables,  was 6.38%, compared to 6.64% as of the end of
1996 -- a decrease of 0.26%.  The  Company's  cost of funds as of  December  31,
1997,  was 5.91%,  compared to 5.72% as of  December  31, 1996 -- an increase of
0.19%.  This increase was primarily the result of financing a portion of the ARM
portfolio  over 1997  year-end  at a time when LIBOR  interest  rates  increased
suddenly late in November due to year-end  pressures.  Fortunately  the Company,
expecting  this to  occur,  already  had  financed  most of its  portfolio  over
year-end  before  the  LIBOR  increase  and,  thus,  was able to avoid  the full
potential  impact.  Subsequent to year-end,  LIBOR interest rates have generally
returned to their previous level,  which will be reflected in first quarter 1998
interest rate spreads. As a result of these changes,  the Company's net interest
spread as of the end of 1997 was 0.47%,  compared to 0.92% as of the end of 1996
-- a decrease of 0.45%.

During 1997, the Company  realized a net gain from the sale of ARM securities in
the  amount  of  $1,189,000,  compared  to a gain  of  $1,362,000  during  1996.
Additionally,  the Company  recorded a provision for credit losses in the amount
of $886,000  during the year ended December 31, 1997,  although the Company only
incurred  actual  credit  losses  of  $96,000  during  the year,  compared  to a
provision for credit losses in the amount of $990,000 during 1996 with no actual
credit losses.  The Company  provided for  additional  credit losses because its
review of underlying ARM collateral indicates potential for some loss on two ARM
securities,  which are being  carried  at their  current  market  value of $13.1
million,  or 0.3% of the Company's ARM portfolio.  The Company also has a policy
to regularly  record a provision for possible  credit losses on its portfolio of
ARM loans.

For both  years  ended  December  31,  1997 and  1996,  the  Company's  ratio of
operating expenses to average assets was 0.21%. 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 Company pays the
Manager an annual base management fee, generally based on average  shareholders'
equity, not assets, as defined in the Management  Agreement,  payable monthly in
arrears  as  follows:  1.1% of the first $300  million of Average  Shareholders'
Equity, plus 0.8% of Average Shareholders' Equity above $300 million. Since this
management  fee is  based  on  shareholders'  equity  and not  assets,  this fee
increases  as the  Company  successfully  accesses  capital  markets  and raises
additional  equity  capital  and is,  therefore,  managing  a larger  amount  of
invested capital on behalf of its shareholders. In order for the Manager to earn
a  performance  fee,  the rate of return  on the  shareholders'  investment,  as
defined in the  Management  Agreement,  must  exceed the average  ten-year  U.S.
Treasury  rate during the quarter  plus 1%.  During 1997,  the Manager  earned a
performance fee of $3,363,000.  During 1997,  after paying this performance fee,
the Company's return on common equity was 12.72%.  As presented in the following
table,  the  performance  fee is a variable  expense  that  fluctuates  with the
Company's  return on  shareholders'  equity relative to the average 10-year U.S.
Treasury rate. As the Company's return on  shareholders'  equity declined during
the fourth quarter of 1997, the performance fee also declined,  to an annualized
0.05% of average assets during the fourth  quarter.  See Note 7 to the Financial
Statements for a discussion of the management fee formulas.

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

                        ANNUALIZED OPERATING EXPENSE RATIOS

<TABLE>
<CAPTION>
                      Management Fee
                         & Other            Performance             Total
   For The               Expenses/              Fee/            G & A Expense/
 Quarter Ended        Average Assets       Average Assets       Average Assets
----------------     ----------------     ----------------     ----------------
<S>                        <C>                  <C>                  <C>
Mar 31, 1995               0.10%                0.00%                0.10%
Jun 30, 1995               0.10%                0.00%                0.10%
Sep 30, 1995               0.10%                0.03%                0.13%
Dec 31, 1995               0.10%                0.09%                0.19%
Mar 31, 1996               0.09%                0.12%                0.21%
Jun 30, 1996               0.10%                0.09%                0.19%
Sep 30, 1996               0.10%                0.10%                0.20%
Dec 31, 1996               0.13%                0.11%                0.24%
Mar 31, 1997               0.14%                0.11%                0.25%
Jun 30, 1997               0.13%                0.09%                0.22%
Sep 30, 1997               0.12%                0.09%                0.21%
Dec 31, 1997               0.12%                0.05%                0.17%
</TABLE>

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 (Basic EPS), based on a weighted average of 14,873,700 shares
outstanding, compared to $10,452,000, or $0.88 per share (Basic EPS), based on a
weighted  average of 11,926,996  shares  outstanding for the year ended December
31,  1995.  Net  interest  income  for 1996  totaled  $30,345,000,  compared  to
$13,496,000  for the same  period in 1995.  Net  interest  income  includes  the
interest  income  earned on mortgage  investments  less  interest  expense  from
borrowings.  The Company  recorded a net gain from the sale of ARM assets in the
amount of  $1,362,000  during  1996,  compared to a net loss of $568,000  during
1995.  Additionally,  during  1996,  the Company  reduced its  earnings  and the
carrying  value of its ARM assets by  reserving  $990,000 for  potential  credit
losses.  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.

For the  year  ended  December  31,  1996,  the  Company's  taxable  income  was
$26,159,000, or $1.76 per weighted average share outstanding.

The  improvement  in the Company's  net interest  income during 1996 compared to
1995 was  $16,849,000.  As  presented  in the table  below,  the Company had, on
average,  $212.9  million  more  interest-earning  assets than  interest-bearing
liabilities  during 1996. The  improvement in the Company's net interest  income
was  primarily  the  result of the  higher  yield on the  $212.9  million of net
interest-earning  assets in 1996  compared to 1995 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 assets  portfolio (the rate of interest
actually  received before the impact of yield  adjustments  such as hedging cost
and  amortization  of premiums and discounts) was 7.57% as of December 31, 1996,
compared to 7.42% as of December 31, 1995 -- a rise of 0.15%.  This  improvement
in the  weighted  average  portfolio  coupon was more than offset by  additional
premium  amortization  resulting from increased prepayment activity during 1996.
The Company's  mortgage  assets paid down at an approximate  average  annualized
constant  prepayment  rate of 26% during 1996,  whereas the constant  prepayment
rate averaged  approximately 18% during the full year of 1995. As a result,  the
yield on the  Company's  ARM assets  portfolio was 6.64% at December 31, 1996, a
decline of 0.09% from 6.73% at December  31, 1995.  Also,  during the year ended
December 31, 1996, the Company's cost of funds declined by 0.33%. As of December
31, 1996, the interest rate on the Company's  borrowings was 5.72%,  compared to
6.05% as of December 31, 1995. As a result of these  changes,  the Company's net
interest  spread as of December  31,  1996 was 0.92%,  compared to a 0.68% as of
December 31, 1995.

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 years ended December 31, 1996, and December 31, 1995:

                           AVERAGE BALANCE AND RATE TABLE
                           (Dollar amounts in thousands)

<TABLE>
<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 assets                $ 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     6.45      1,849,506    6.31
                             -------------------     -------------------
Interest-Bearing Liabilities:
  Borrowings                  2,138,236     5.67      1,676,981    6.15
                             -------------------     -------------------
Net Interest-Earning Assets $   212,864    0.78%    $   172,525    0.16%
and Spread                   ===================     ===================

Yield on Net                               1.29%                   0.73%
Interest-Earning Assets (1)            =========               =========
<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, 1997 and
1996 consisted of reverse  repurchase  agreements,  which totaled $4.270 billion
and $2.459 billion at the respective year ends. The Company's other  significant
sources of funds for the years ended  December  31, 1997 and 1996  consisted  of
payments of principal  and  interest  from the ARM assets in the amounts of $1.1
billion and $713.7 million,  respectively, and the proceeds from the sale of ARM
assets in the amounts of $190.2 million and $277.6 million, respectively. In the
future,  the  Company  expects  its  primary  sources of funds  will  consist of
borrowed  funds under reverse  repurchase  agreement  transactions  with one- to
twelve-month  maturities,  of monthly  payments of principal and interest on its
ARM assets  portfolio and possibly asset sales as needed.  The Company's  liquid
assets generally consist of unpledged ARM assets, cash and cash equivalents.

Total borrowings  incurred at December 31, 1997, had a weighted average interest
rate of 5.92% and a weighted  average  remaining term to maturity of 2.2 months.
As of  December  31,  1997,  $1.687  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 24 different financial institutions
and on December 31, 1997, had borrowed funds under reverse repurchase agreements
with 16 of these  firms.  Because  the Company  borrows  money based on the fair
value of its ARM assets and because  increases in short-term  interest rates can
negatively impact the valuation of ARM assets,  the Company's  borrowing ability
could be limited and lenders may initiate  margin calls in the event  short-term
interest  rates  increase or the value of the Company's ARM assets  declines for
other reasons. Additionally,  certain of the Company's ARM assets are rated less
than AA by the Rating  Agencies  and have less  liquidity  than  assets that are
rated AA or higher.  Other  mortgage  assets which are rated AA or higher by the
Rating  Agencies  derive their credit rating based on a mortgage pool  insurer's
rating. As a result of either changes in interest rates, credit performance of a
mortgage pool or a downgrade of a mortgage pool issuer,  the Company may find it
difficult to borrow against such assets and, therefore,  may be required to sell
certain mortgage assets in order to maintain liquidity. If required, these sales
could be at prices  lower than the  carrying  value of the  assets,  which would
result in losses. For the year ended December 31, 1997, the Company had adequate
cash flow, liquid assets and unpledged  collateral with which to meet its margin
requirements during such periods. Further, the Company believes it will continue
to have  sufficient  liquidity  to meet its future  cash  requirements  from its
primary  sources of funds for the  foreseeable  future  without  needing to sell
assets.

In December 1996, the Company's  Registration Statement on Form S-3, registering
the sale of up to $200 million of additional  assets,  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.

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 $65.8 million.

In May 1997,  the Company  issued  861,850  shares of common stock at a price of
$19.50 per share. Net proceeds from this issuance totaled $16.2 million.

In July 1997, the Company issued  2,100,000 shares of common stock at a price of
$22.625 per share. Net proceeds from this issuance  totaled $45.0 million.  Upon
completion of this issuance of common stock, the Company had $109 million of its
securities   registered  for  future  sale  under  the  Company's   Registration
Statement.

The  Company has a Dividend  Reinvestment  and Stock  Purchase  Plan (the "DRP")
designed to provide a convenient and economical way for existing shareholders to
automatically  reinvest their dividends in additional shares of common stock and
for new and  existing  shareholders  to  purchase  shares at a  discount  to the
current market price of the common stock,  as defined in the DRP. As a result of
1997  participation  in the DRP, the Company issued 912,590 new shares of common
stock and received $18.0 million of new equity capital.

EFFECTS OF INTEREST RATE CHANGES

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

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

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

Lastly,  because the Company only invests in ARM assets and  approximately 8% to
9% of  such  mortgage  assets  are  purchased  with  shareholders'  equity,  the
Company's  earnings  over time  will tend to  increase  following  periods  when
short-term  interest  rates  have  risen and  decrease  following  periods  when
short-term interest rates have declined. This is because the financed portion of
the Company's  portfolio of ARM assets will, over time, reprice to a spread over
the Company's cost of funds, while the portion of the Company's portfolio of ARM
assets that are purchased with shareholders' equity will generally have a higher
yield  in a  higher  interest  rate  environment  and a lower  yield  in a lower
interest rate environment.

OTHER MATTERS

The Company  calculates  its Qualified  REIT Assets,  as defined in the Internal
Revenue Code of 1986, as amended (the "Code"),  to be 99.7% of its total assets,
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, 1997,  subject to the 30%
income  limitation  under the REIT rules amount to 0.85% 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,
1997, the Company  believes that it will continue to qualify as a REIT under the
provisions of the Code.

The  Company at all times  intends to conduct  its  business so as not to become
regulated as an investment  company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, 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  assets  represent  all the  certificates  issued  with  respect  to an
underlying  pool of  mortgages,  such  mortgage  assets may be treated as assets
separate from the  underlying  mortgage  loans and,  thus, may not be considered
Qualifying  Interests  for purposes of the 55%  requirement.  As of December 31,
1997, the Company calculates that it is in compliance with this requirement.

The Company has reviewed its computer  systems and has determined  that they are
in compliance with the  requirements of the year 2000. The Company also believes
that  because  of its  internal  systems  and  controls  and the  nature  of its
financial  contracts,  it is not  likely  to  incur  any  material  disruptions,
expenses or losses in connection with any external  relationship  related to the
year 2000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements of the Company, the related notes and schedules
        to the financial  statements,  together with the  Independent  Auditor's
        Report  thereon  are set  forth on pages F-3  through  F-21 on this Form
        10-K.

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

        None.




<PAGE>


                                      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 30,  1998  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 30,  1998  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 30,  1998  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 30,  1998  pursuant to
        General Instruction G(3).

                                      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,
                 1997 and 1996;  Statements  of  Operations  for the years ended
                 December 31, 1997, 1996 and 1995;  Statements of  Shareholders'
                 Equity for the years ended  December 31,  1997,  1996 and 1995;
                 Statements of Cash Flows for the years ended December 31, 1997,
                 1996 and 1995 and Notes to Financial Statements.

            2.   Schedules to Financial Statements:

                 All financial statement schedules are included in Part II, Item
                 8 of this Annual Report on Form-K.

            3.   Exhibits:

                 See "Exhibit Index".

        (b) Reports on Form 8-K:

                 None



<PAGE>


                        THORNBURG MORTGAGE ASSET CORPORATION


                                FINANCIAL STATEMENTS

                                        AND

                            INDEPENDENT AUDITOR'S REPORT



                             For Inclusion in Form 10-K

                                     Filed with

                         Securities and Exchange Commission

                                 December 31, 1997



<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

FINANCIAL STATEMENT SCHEDULE:

Schedule IV - mortgage loans on real estate                          F-20


<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, 1997 and 1996 and the  related  statements  of
operations,  shareholders'  equity and cash flows for each of the three years in
the  period  ended  December  31,  1997.  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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended  December 31,
1997 in conformity with generally accepted accounting principles.

   Our  audits  were made for the  purpose  of  forming  an opinion on the basic
financial statements taken as a whole. The supplemental Schedule IV is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not a part of the basic  financial  statements.  This  schedule  has been
subjected  to the  auditing  procedures  applied  in  our  audits  of the  basic
financial  statements  and, in our  opinion,  is fairly  stated in all  material
respects in relation to the basic financial statements taken as a whole.




                                                 /s/  McGLADREY & PULLEN, LLP

                                                      McGLADREY & PULLEN, LLP

New York, New York
January 15, 1998


<PAGE>

===============================================================================
                        THORNBURG MORTGAGE ASSET CORPORATION
===============================================================================

                                   BALANCE SHEETS
                               (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                           December 31
                                                               -------------------------------------
                                                                     1997                1996
                                                               ------------------  -----------------
<S>                                                            <C>                 <C>
ASSETS

   Adjustable-rate mortgage ("ARM") assets (Notes 2 and 3)
      ARM securities                                           $      4,519,707    $     2,727,875
      ARM loans held for securitization                                 118,987                  -
                                                                 ----------------   ----------------
                                                                      4,638,694          2,727,875
   Cash and cash equivalents                                             13,780              3,693
   Accrued interest receivable                                           38,353             23,563
   Prepaid expenses and other                                               289                227
                                                                 ----------------   ----------------
                                                               $      4,691,116    $     2,755,358
                                                                 ================   ================


LIABILITIES

   Reverse repurchase agreements (Note 3)                      $      4,270,170    $     2,459,132
   Other borrowings (Note 3)                                             10,018             14,187
   Payable for assets purchased                                               -             32,683
   Accrued interest payable                                              39,749             18,747
   Dividends payable (Note 5)                                            11,810              7,299
   Accrued expenses and other                                             1,215              1,112
                                                                 ----------------   ----------------
                                                                      4,332,962          2,533,160
                                                                 ----------------   ----------------


COMMITMENTS (Note 2)


SHAREHOLDERS' EQUITY (Note 5)

   Preferred stock: par value $.01 per share;
      2,760 shares authorized; 9.68% Cumulative
      Convertible Series A, 2,760 and none issued
      and outstanding, respectively; aggregate
      preference in liquidation $69,000                                  65,805                  -
   Common stock: par value $.01 per share;
      47,240 shares authorized, 20,280 and 16,219
      shares issued and outstanding, respectively                           203                162
   Additional paid-in-capital                                           315,240            233,177
   Available-for-sale assets:
      Unrealized gain (loss) (Note 2)                                   (22,504)           (15,807)
      Realized deferred hedging gain                                      3,059              4,541
   Notes receivable from stock sales                                     (2,698)                 -
   Retained earnings (deficit)                                             (951)               125
                                                                 ----------------   ----------------
                                                                        358,154            222,198
                                                                 ----------------   ----------------
                                                               $      4,691,116    $     2,755,358
                                                                 ================   ================
</TABLE>
See Notes to Financial Statements.


<PAGE>

===============================================================================
                        THORNBURG MORTGAGE ASSET CORPORATION
===============================================================================

                              STATEMENTS OF OPERATIONS
                    (Amounts in thousands, except per share data)


<TABLE>
<CAPTION>
                                                        Year ended December 31
                                              -------------------------------------------
                                                  1997           1996           1995
                                              -------------  -------------  -------------
<S>                                           <C>            <C>            <C>
Interest income from ARM assets and cash      $    247,721   $    151,511   $    116,617
Interest expense on borrowed funds                (198,657)      (121,166)      (103,121)
                                                -----------    -----------    -----------
   Net interest income                              49,064         30,345         13,496
                                                -----------    -----------    -----------

Gain (loss) on sale of ARM assets                    1,189          1,362           (568)
Provision for credit losses                           (886)          (990)             -
Management fee (Note 7)                             (3,664)        (1,872)        (1,390)
Performance fee (Note 7)                            (3,363)        (2,462)          (596)
Other operating expenses                              (938)          (646)          (490)
                                                -----------    -----------    -----------
   NET INCOME                                 $     41,402   $     25,737   $     10,452
                                                ===========    ===========    ===========



Net income                                    $     41,402   $     25,737   $     10,452
Dividend on preferred stock                         (6,251)             -              -
                                                -----------    -----------    -----------
Net income available to common shareholders   $     35,151   $     25,737   $     10,452
                                                ===========    ===========    ===========

Basic earnings per share                      $       1.95   $       1.73   $       0.88
                                                ===========    ===========    ===========

Diluted earnings per share                    $       1.94   $       1.73   $       0.88
                                                ===========    ===========    ===========

Average number of common shares outstanding         18,048         14,874         11,927
                                                ===========    ===========    ===========
</TABLE>






See Notes to Financial Statements.


<PAGE>


================================================================================
                      THORNBURG MORTGAGE ASSET CORPORATION
================================================================================

                       STATEMENTS OF SHAREHOLDERS' EQUITY
                    Three  Years  Ended   December  31,  1997
               (Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 Available-for-Sale Assets
                                                                 -------------------------
                                                                                 Realized     Notes
                                                     Additional                  Deferred   Receivable
                               Preferred   Common     Paid-in     Unrealized     Gain From  From Stock   Retained
                                 Stock     Stock      Capital     Gain (Loss)     Hedging     Sales      Earnings     Total
                               ---------  --------  -----------  ------------  -----------  ----------  ----------  ---------
<S>                            <C>       <C>        <C>          <C>           <C>          <C>         <C>         <C>
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
Assets:
  Fair value
   adjustment, net
   of amortization                    -          -            -       38,217             -           -           -     38,217

  Deferred gain on
   sale of hedges,
   net of amortization                -          -            -            -        (2,250)          -           -     (2,250)


Net income                            -          -            -            -             -           -      10,452     10,452

Dividends declared on
 common stock - $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
Assets:
  Fair value
   adjustment, net
   of amortization                    -          -            -        6,028             -           -           -      6,028

  Deferred gain on
   sale of hedges,
   net of  amortization               -          -            -            -        (2,468)          -           -     (2,468)

Net income                            -          -            -            -             -           -      25,737     25,737

Dividends declared on
  common stock -
  $1.65 per share                     -          -            -            -             -           -     (25,085)   (25,085)
                               --------   --------   ----------   ----------    ----------   ---------   ---------   --------
Balance, December 31, 1996            -        162      233,177      (15,807)        4,541           -         125    222,198

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

Issuance of common
  stock   (Note 5)                    -         41       82,063            -             -      (2,698)          -     79,406

Available-for-Sale
Assets:
  Fair value
   adjustment, net
   of amortization                    -          -            -       (6,697)            -           -           -     (6,697)

  Deferred gain on
    sale of hedges, net of
    amortization                      -          -            -            -        (1,482)          -           -     (1,482)

Net income                            -          -            -            -             -           -      41,402     41,402

Dividends declared on
 preferred stock -
 $2.265 per share                     -          -            -            -             -           -      (6,251)    (6,251)

Dividends declared on
  common stock -
  $1.97 per share                     -          -            -            -             -           -     (36,227)   (36,227)
                               --------   --------   ----------   ----------    ----------   ---------   ---------   --------
Balance, December 31, 1997    $  65,805  $    203   $   315,240  $   (22,504)  $     3,059  $ (  2,698) $     (951) $ 358,154
                               ========   ========   ==========   ==========    ==========   =========   =========   ========
</TABLE>

See Notes to Financial Statements.

<PAGE>


===============================================================================
                        THORNBURG MORTGAGE ASSET CORPORATION
===============================================================================

                              STATEMENTS OF CASH FLOWS
                           (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                              Year ended December 31
                                    -------------------------------------------
                                        1997           1996           1995
                                    -------------  -------------  -------------
<S>                                 <C>            <C>            <C>
Operating Activities:
  Net income                        $     41,402   $     25,737   $     10,452
  Adjustments to reconcile net
    income to net cash provided by
    operating activities:
   Amortization                           24,665         14,346          4,699
   Net realized (gain) loss from
     investing activities                   (303)          (372)           568
   Decrease (increase) in accrued
     interest receivable                 (14,789)        (4,785)        (5,329)
   Decrease (increase) in prepaid
     expenses and other                      (62)            33           (193)
   Increase (decrease) in accrued
     interest payable                     21,002          8,840          3,349
   Increase (decrease) in accrued
     expenses and other                      101            433            463
                                      -----------    -----------    -----------
     Net cash provided by operating
       activities                         72,016         44,232         14,009
                                      -----------    -----------    -----------

Investing Activities:
  Available-for-sale securities:
   Purchases                          (2,929,746)    (1,583,678)      (548,672)
   Proceeds on sales                     190,196        277,594         75,374
   Proceeds on call                       67,202              -              -
   Principal payments                    756,379        441,722        201,583
  Held-to-maturity securities:
   Principal payments                     63,120        111,684         78,268
  ARM Loans:
   Purchases                            (123,211)             -              -
   Principal payments                      4,092              -              -
  Purchase of interest rate cap
    agreements                            (4,074)          (631)          (403)
                                      -----------    -----------    -----------
     Net cash (used in) investing
       activities                     (1,976,042)      (753,309)      (193,850)
                                      -----------    -----------    -----------

Financing Activities:
  Net borrowings from reverse
    repurchase agreements              1,811,038        678,278        178,920
  Repayments of other borrowings          (4,169)        (4,259)        (3,208)
  Proceeds from preferred stock
    issued                                65,805              -              -
  Proceeds from common stock issued       79,406         57,509          5,246
  Dividends paid                         (37,967)       (22,418)        (8,305)
                                      -----------    -----------    -----------
   Net cash provided by financing
     activities                        1,914,113        709,110        172,653
                                      -----------    -----------    -----------

Net increase (decrease) in cash and
   cash equivalents                       10,087             33         (7,188)
Cash and cash equivalents at
   beginning of period                     3,693          3,660         10,848
                                      -----------    -----------    -----------
Cash and cash equivalents at end of
   period                           $     13,780   $      3,693   $      3,660
                                      ===========    ===========    ===========
</TABLE>

Supplemental disclosure of cash flow information and non-cash
  investing and financing 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 assets 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 ASSETS

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

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

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

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

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

         CREDIT RISK

            The Company limits its exposure to credit losses on its portfolio of
            ARM  securities  by only  purchasing  ARM  securities  that  have an
            investment  grade  rating at the time of purchase and have some form
            of credit  enhancement or are guaranteed by an agency of the federal
            government.  An investment  grade security  generally has a security
            rating of BBB or Baa or  better  by at least  one of two  nationally
            recognized  rating  agencies,  Moody's  Investor  Services,  Inc. or
            Standard & Poor's, Inc. (the "Rating Agencies").  Additionally,  the
            Company  has also  purchased  ARM loans and limits its  exposure  to
            credit losses by  restricting  its whole loan purchases to ARM loans
            generally originated to "A" quality underwriting  standards or loans
            that have at least  five  years of pay  history  and/or  low loan to
            property  value ratios.  The Company  further limits its exposure to
            credit  losses  by  limiting  its  investment  in  investment  grade
            securities that are rated A, or equivalent,  BBB, or equivalent,  or
            ARM loans originated to "A" quality  underwriting  standards ("Other
            Investments") to no more than 30% of the portfolio.

            The Company monitors the  delinquencies and losses on the underlying
            mortgage loans backing its ARM assets. If the credit  performance of
            the underlying mortgage loans is not as expected,  the Company makes
            a provision for possible credit losses at a level deemed appropriate
            by  management  to provide for known losses as well as  unidentified
            potential future losses in its ARM assets  portfolio.  The provision
            is based on management's  assessment of numerous  factors  affecting
            its portfolio of ARM assets  including,  but not limited to, current
            and projected economic conditions, delinquency status, credit losses
            to date on underlying mortgages and remaining credit protection. The
            provision  for ARM  securities is made by reducing the cost basis of
            the individual security for the decline in fair value which is other
            than  temporary,  and the amount of such write-down is recorded as a
            realized loss, thereby reducing  earnings.  The Company also makes a
            monthly provision for possible credit losses on its portfolio of ARM
            loans which is an increase to the reserve for possible  loan losses.
            The provision  for possible  credit losses on loans is based on loss
            statistics  of the real estate  industry for similar  loans,  taking
            into   consideration   factors   including,   but  not  limited  to,
            underwriting  characteristics,  seasoning,  geographic  location and
            current and projected economic conditions.  When a loan or a portion
            of a loan is deemed to be  uncollectible,  the portion  deemed to be
            uncollectible   is  charged   against  the  reserve  and  subsequent
            recoveries, if any, are credited to the reserve.

            Provisions  for credit losses do not reduce  taxable income and thus
            do not affect the dividends paid by the Company to  shareholders  in
            the period the provisions are taken.  Actual losses  realized by the
            Company do reduce  taxable  income in the period the actual  loss is
            realized and would affect the  dividends  paid to  shareholders  for
            that tax year.

         DERIVATIVE FINANCIAL INSTRUMENTS

            INTEREST RATE CAP AGREEMENTS

            The  Company  purchases  interest  rate  cap  agreements  (the  "Cap
            Agreements")  to  limit  the  Company's  risks  associated  with the
            lifetime  or maximum  interest  rate caps of its ARM  assets  should
            interest  rates  rise above  specified  levels.  The Cap  Agreements
            reduce the effect of the  lifetime  cap feature so that the yield on
            the  ARM  assets  will  continue  to  rise  in  high  interest  rate
            environments  as the Company's  cost of borrowings  also continue to
            rise.

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

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

            INTEREST RATE SWAP AGREEMENTS

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

         INCOME TAXES

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

         NET EARNINGS PER SHARE

            The  Financial   Accounting  Standards  Board  ("FASB")  has  issued
            Statement No. 128, Earnings per Share,  which supersedes APB Opinion
            No. 15.  Statement No. 128 requires the presentation of earnings per
            share  ("EPS") by all  entities  that have common stock or potential
            common stock, such as options,  warrants and convertible  securities
            outstanding that trade in a public market.  Those entities that have
            only common  stock  outstanding  are  required to present  basic EPS
            amounts.  Basic EPS  amounts are  computed  by  dividing  net income
            (adjusted for dividends declared on preferred stock) by the weighted
            average number of common shares outstanding.  All other entities are
            required  to present  basic and  diluted  EPS  amounts.  Diluted EPS
            amounts assume the conversion, exercise or issuance of all potential
            common  stock  instruments  unless the effect is to reduce a loss or
            increase the earnings per common share.

            The Company  initially  applied Statement No. 128 for the year ended
            December 31, 1997,  and as required by the  Statement,  has restated
            all per share  information  for the prior  years to  conform  to the
            Statement.

            Following is information  about the  computation of the earnings per
            share data for the years  ended  December  31,  1997,  1996 and 1995
            (Amounts in thousands except per share data):

                                                              Earnings
                                   Income        Shares      Per Share
                                ------------  -------------  -------------
              1997
Net Income                      $     41,402

Less preferred stock dividends        (6,251)
                                 ------------

Basic EPS, income available to
  common shareholders                 35,151        18,048  $        1.95
                                                              ===========

Effect of dilutive securities:

  Stock options                                        110

                                 -----------  ------------
Diluted EPS                     $     35,151        18,158  $        1.94
                                 ===========  ============    ===========



<PAGE>



                                                              Earnings
                                   Income        Shares      Per Share
                                ------------  ------------  -------------
              1996
Net Income                      $     25,737

Less preferred stock dividends             -
                                 -----------

Basic EPS, income available to
  common stockholders                 25,737        14,874  $        1.73
                                                              ===========

Effect of dilutive securities:

  Stock options                                         37

                                 -----------  ------------
Diluted EPS                     $     25,737        14,911  $        1.73
                                 ===========  ============    ===========

              1995
Net Income                      $     10,452

Less preferred stock dividends             -
                                 -----------

Basic EPS, income available to
  common stockholders                 10,452        11,927  $        0.88
                                                              ===========

Effect of dilutive securities:

  Stock options                                          -

                                 -----------  ------------
Diluted EPS                     $     10,452        11,927  $        0.88
                                 ===========  ============    ===========

            The Company has granted  options to  directors  and  officers of the
            Company and  employees of the Manager to purchase  240,320,  169,099
            and  23,791  shares of common  stock at  average  prices of  $20.89,
            $15.44 and $15.36 per share  during  the years  ended  December  31,
            1997, 1996 and 1995, respectively. The conversion of preferred stock
            was not  included in the  computation  of diluted  EPS because  such
            conversion would increase the diluted EPS.

         USE OF ESTIMATES

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

         RECENT ACCOUNTING PRONOUNCEMENTS

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

            The  Company  intends  to  comply  with  the  requirements  of  this
            statement in the first quarter of 1998.  The Company has  determined
            that this  statement  will not  result in  material  changes  to the
            Company's financial position and results of operations.



<PAGE>


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

         Investments in ARM assets consist of both ARM securities  backed by ARM
         loans and ARM loans,  primarily  secured by  single-family  residential
         housing.

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

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

              Carrying value              $ 4,123,904   $   395,803   $ 4,519,707  $   118,987
                                           ==========    ==========    ==========   ==========
</TABLE>

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

              Carrying value              $ 2,267,279   $   460,596   $ 2,727,875  $         -
                                           ==========    ==========    ==========   ==========
</TABLE>

         During 1997, the Company  realized  $2,179,000 in gains and $990,000 in
         losses on the sale of $189.0  million of ARM  securities.  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,  and during 1995, the Company
         realized  $91,000 in gains and  $659,000 in losses on the sale of $75.9
         million  of ARM  securities.  All  of  the  ARM  securities  sold  were
         classified as available-for-sale.

         As of December 31, 1997,  the Company had reduced the cost basis of its
         ARM  securities  due to  potential  future  credit  losses  (other than
         temporary  declines  in fair  value) in the  amount of  $1,739,000.  At
         December 31, 1997, the Company is providing for potential future credit
         losses on two assets  that have an  aggregate  carrying  value of $13.1
         million,  which  represent  less  than  0.3%  of  the  Company's  total
         portfolio of ARM assets.  Both of these assets are  performing and have
         some remaining  credit support that mitigate the Company's  exposure to
         potential future credit losses. Additionally, during 1997, the Company,
         in accordance with its credit  policies,  recorded a $42,000  provision
         for potential  credit losses on its loan portfolio,  although no actual
         losses have been realized in the loan  portfolio to date. The following
         table summarizes the activity for the allowance for losses on ARM loans
         for the year ended 1997 (dollar amounts in thousands):

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

         As of December 31, 1997, the Company had  commitments to purchase $66.5
         million of ARM assets.

         The average  effective  yield on the ARM assets  owned,  including  the
         amortization  of the net  premium  paid for the ARM  assets and the Cap
         Agreements,  was 6.38% as of December 31, 1997 and 6.64% as of December
         31, 1996.

         As of  December  31,  1997 and  December  31,  1996,  the  Company  had
         purchased Cap  Agreements  with a remaining  notional  amount of $4.156
         billion and $2.266  billion,  respectively.  The notional amount of the
         Cap  Agreements  purchased  decline  at a  rate  that  is  expected  to
         approximate  the  amortization  of the  ARM  assets.  Under  these  Cap
         Agreements,   the  Company  will  receive  cash  payments   should  the
         one-month,   three-month  or  six-month  London  InterBank  Offer  Rate
         ("LIBOR") increase above the contract rates of the Cap Agreements which
         range  from  7.50% to 13.00%  and  average  approximately  10.19%.  The
         Company's ARM assets  portfolio had an average  lifetime  interest rate
         cap of 11.60% with an average  maturity of 3.1 years as of December 31,
         1997.  The  initial  aggregate  notional  amount of the Cap  Agreements
         declines  to  approximately  $3.260  billion  over  the  period  of the
         agreements,  which expire between 1999 and 2004. The Company  purchased
         these Cap  Agreements  by  incurring a one-time  fee,  or premium.  The
         premium is amortized, or expensed, over the lives of the Cap Agreements
         and  decreases  interest  income on the Company's ARM assets during the
         period of amortization.  The Company has credit risk to the extent that
         the   counterparties  to  the  cap  agreements  do  not  perform  their
         obligations under the Cap Agreements. If one of the counterparties does
         not perform,  the Company  would not receive the cash to which it would
         otherwise be entitled  under the  conditions of the Cap  Agreement.  In
         order to mitigate  this risk and to achieve  competitive  pricing,  the
         Company   has  entered   into  Cap   Agreements   with  six   different
         counterparties, five of which are rated AAA, and one is rated AA.

NOTE 3.  REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS

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

         As of December 31, 1997, the Company had outstanding  $4.270 billion of
         reverse repurchase agreements with a weighted average borrowing rate of
         5.91% and a weighted average  remaining  maturity of 2.1 months.  As of
         December 31, 1997,  $1.687  billion of the  Company's  borrowings  were
         variable-rate   term  reverse   repurchase   agreements  with  original
         maturities  that range from one month to two years.  The interest rates
         of these term reverse  repurchase  agreements are indexed to either the
         one-, two-, three- or six-month LIBOR rate and reprice accordingly. The
         reverse repurchase  agreements at December 31, 1997 were collateralized
         by ARM  assets  with a  carrying  value of  $4.482  billion,  including
         accrued interest.

         At  December  31,  1997,  the  reverse  repurchase  agreements  had the
         following remaining maturities (dollar amounts in thousands):

            Within 30 days      $ 1,676,268
            31 to 89 days         1,526,069
            90 days to one year   1,067,833
                                 ===========
                                $ 4,270,170
                                 ===========

         As of  December  31,  1997,  the  Company  was a  counterparty  to  six
         different interest rate swap agreements that substantially  offset each
         other with an aggregate  notional  balance of $650 million.  Due to the
         offsetting  nature of these  agreements and their short remaining term,
         they had no  effect on the  average  period  of next  repricing  of the
         Company's  borrowings.  Five of the agreements are cancelable beginning
         in the first quarter of 1998 and have a final maturity during the first
         quarter  of 1999.  The  remaining  agreement  matures  during the first
         quarter of 1998.

         The  Company  has  a  line  of  credit  agreement  which  provides  for
         short-term  borrowings  of up to  $25  million  collateralized  by  the
         Company's principal and interest receivables.  As of December 31, 1997,
         there was no balance outstanding under this agreement.

         As of December  31,  1997,  the  Company had  financed a portion of its
         portfolio of interest rate cap  agreements  with $10.0 million of other
         borrowings  which require  quarterly or semi-annual  payments until the
         year  2000.  These  borrowings  have a weighted  average  fixed rate of
         interest of 7.91% and have a weighted average remaining maturity of 2.0
         years.  The other  borrowings  financing cap agreements at December 31,
         1997 were  collateralized  by ARM assets with a carrying value of $14.4
         million,  including  accrued  interest,  and  $500,000 of cash and cash
         equivalents.  The aggregate maturities of these other borrowings are as
         follows (dollar amounts in thousands):

            1998                $     4,509
            1999                      4,877
            2000                        632
                                 -----------
                                $    10,018
                                 ===========

         The total cash paid for interest was $177.9 million, $112.2 million and
         $100.4 million for 1997, 1996 and 1995 respectively.

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, 1997 and
         December 31, 1996. FASB Statement No. 107, Disclosures About Fair Value
         of  Financial  Instruments,  defines  the  fair  value  of a  financial
         instrument as the amount at which the instrument  could be exchanged in
         a current transaction  between willing parties,  other than in a forced
         or liquidation sale (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                   December 31, 1997           December 31, 1996
                                ------------------------   --------------------------
                                 Carrying       Fair          Carrying      Fair
                                  Amount       Value           Amount       Value
                                -------------------------   -------------------------
<S>                             <C>         <C>             <C>          <C>
            Assets:
              ARM assets        $ 4,634,612 $ 4,639,513     $  2,689,727 $ 2,692,521
              Cap agreements          4,082       1,931            5,465       2,535

            Liabilities:
              Other borrowings       10,018      10,321           14,187      14,744
              Swap agreements           (50)        184               (7)        440
</TABLE>

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

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

NOTE 5.  COMMON AND PREFERRED STOCK

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

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

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

         During 1997,  the Company  issued  912,590 shares of common stock under
         its  Dividend  Reinvestment  and Stock  Purchase  Plan and received net
         proceeds of $18.0  million.  During 1996,  the Company  issued  347,434
         shares of common  stock under this 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  1997,  stock  options for 186,071  shares of common  stock were
         exercised  at an average  price of $15.71.  The  Company  received  net
         proceeds of $0.2  million,  and $2.7 million of notes  receivable  were
         executed in  connection  with the exercise of certain  options.  During
         1996, stock options for 23,595 shares of common stock were exercised at
         an average price of $15.41 that generated net proceeds of $0.4 million.

         During the Company's 1997 fiscal year, the Company  declared  dividends
         to  shareholders  totaling  $1.97 per common share,  of which $1.47 was
         paid during 1997 and $0.50 was paid on January 12, 1998, and $2.265 per
         preferred  share,  of which  $1.66 was paid  during 1997 and $0.605 was
         paid on January 12, 1998.  During the Company's  1996 fiscal year,  the
         Company  declared  dividends to shareholders  totaling $1.65 per common
         share,  of which  $1.20  was paid  during  1996 and  $0.45  was paid on
         January 12, 1997.  During the Company's  1995 fiscal year,  the Company
         declared dividends to shareholders totaling $0.93 per common share. For
         federal  income tax  purposes,  $0.01 of the 1997  dividend was capital
         gains  subject  to a  maximum  tax rate of 28%,  and  $0.05 of the 1997
         dividend  was capital  gains  subject to a maximum tax rate of 20%, and
         $0.03 of the 1996 dividend was long-term  capital gains.  The remainder
         of the dividends paid for fiscal years 1997, 1996 and 1995 was ordinary
         income to the Company's shareholders.

NOTE 6.  STOCK OPTION PLAN

         The Company has a Stock Option and  Incentive  Plan (the "Plan")  which
         authorizes  the  granting of options to purchase an  aggregate of up to
         1,800,000 shares, but not more than 5% of the outstanding shares of the
         Company's common stock. The Plan authorizes the Board of Directors,  or
         a committee of the Board of Directors, to grant Incentive Stock Options
         ("ISOs") as defined under  section 422 of the Internal  Revenue Code of
         1986,  as  amended,  options  not  so  qualified  ("NQSOs"),   Dividend
         Equivalent Rights ("DERs"),  Stock  Appreciation  Rights ("SARs"),  and
         Phantom Stock Rights ("PSRs").

         The exercise  price for any options  granted  under the Plan may not be
         less than 100% of the fair  market  value of the  shares of the  common
         stock at the time the option is granted. Options become exercisable six
         months  after the date granted and will expire ten years after the date
         granted,  except  options  granted in  connection  with an  offering of
         convertible   preferred  stock,  in  which  case  such  options  become
         exercisable if and when the  convertible  preferred  stock is converted
         into common stock.

         The Company issued DERs at the same time as ISOs and NQSOs based upon a
         formula defined in the Plan.  During 1997 the number of DERs issued was
         based on 25% of the ISOs and NQSOs granted  during 1997.  The number of
         PSRs issued are based on the level of the  Company's  dividends  and on
         the price of the Company's stock on the related  dividend  payment date
         and is  equivalent  to the  cash  that  otherwise  would be paid on the
         outstanding DERs and previously issued PSRs.

         During the year ended  December  31, 1997,  there were 240,320  options
         granted to buy common  shares at an  average  exercise  price of $20.89
         along with  60,081  DERs.  As of  December  31,  1997,  the Company had
         680,995 options outstanding at exercise prices of $9.375 to $22.625 per
         share, 476,875 of which were exercisable. The weighted average exercise
         price of the options  outstanding  was $17.35 per share. As of the year
         ended  December  31,  1997,  there were 60,081 DERs  granted,  of which
         31,101 were vested,  and 965 PSRs  granted.  In  addition,  the Company
         recorded  an expense  associated  with the DERs and the PSRs of $32,000
         for the year ending December 31, 1997.

         Notes  receivable  from stock sales  result  from the  Company  selling
         shares of  common  stock  through  the  exercise  of stock  options  in
         exchange for notes receivable.  The notes are full recourse  promissory
         notes  bearing  interest at 6.00% and are  collateralized  by the stock
         issued upon exercise of the stock options.  Interest, which is credited
         to paid-in-capital, is payable quarterly and principal is due in 2006.

         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 1997  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  in the table
         below.  The fair value of each option grant is estimated on the date of
         grant using the Black-Scholes  option-pricing  model (dollar amounts in
         thousands, except per share data).

<TABLE>
<CAPTION>
                                                1997          1996          1995
                                            -------------  ------------  ------------
<S>                                          <C>            <C>           <C>
                 Net income - as reported    $    41,402    $   25,737    $   10,452
                 Net income - pro forma           41,093        25,551        10,435

                 Basic EPS - as reported            1.95          1.73          0.88
                 Basic EPS - pro forma              1.93          1.72          0.87

                 Diluted EPS - as reported          1.94          1.73          0.88
                 Diluted EPS - pro forma            1.92          1.71          0.87

                 Assumptions:
                     Dividend yield               10.00%        10.00%        10.00%
                     Expected volatility          21.50%        23.30%        36.20%
                     Risk-free interest rate       6.40%         6.52%         7.06%
                      Expected lives              7 years       7 years       7 years

</TABLE>





<PAGE>


Information regarding options is as follows:

<TABLE>
<CAPTION>
                                           1997                 1996                 1995
                                   -------------------  --------------------  -------------------
                                              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      626,746  $ 15.510   482,078   $  15.529    488,284  $  15.538
Granted                             240,320    20.888   169,099      15.439     23,791     15.358
Exercised                          (186,071)   15.711   (23,595)     15.407         -         -
Expired                                  -        -        (836)     14.375    (29,997)    15.556
                                   ---------  --------  --------   ---------  --------   --------
Outstanding, end of year            680,995  $ 17.353   626,746   $  15.511    482,078  $  15.528
                                   =========  ========  ========   =========  ========   ========

Weighted average fair value of
options granted during the year    $   1.29            $   1.10               $   0.73

Options exercisable at year end     476,875             613,413                482,078
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                     Options Outstanding        Options Exercisable
                                  -------------------------  -------------------------
                                    Weighted
                                     Average     Weighted                   Weighted
                                    Remaining    Average                    Average
Range of Exercise      Options     Contractual   Exercise     Exercisable   Exercise
      Prices         Outstanding    Life (Yrs)     Price      At 12/31/97     Price
-------------------  -----------  -------------  ----------  -------------  ----------
<S>                  <C>          <C>            <C>         <C>            <C>
      $9.375                 147         7.2     $   9.375            147   $    9.375
$14.375 - $16.125        427,195         6.4        15.315        427,195       15.315
$19.000 - $22.625        253,653         9.3        20.789         49,533       19.365
-------------------  -----------  -------------  ----------  ------------    ---------
 $9.375 - $22.625        680,995         7.5        17.353        476,875       15.734
===================  ===========  =============   ========   ============     ========
</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, 1997,  1996 and 1995, the Company paid
         the Manager  $3,664,000,  $1,872,000 and $1,390,000,  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,  1997,  1996 and 1995,  the Company  paid the  Manager  $3,363,000,
         $2,462,000   and   $596,000,   respectively,   in   performance   based
         compensation in accordance with the terms of the Agreement.

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, 1997,  1996 and 1995  (dollar  amounts in
         thousands):

<TABLE>
<CAPTION>
                                   1997                 1996                  1995
                             -------------------  --------------------  ------------------
                                        Average              Average              Average
                              Amount      Rate     Amount      Rate     Amount      Rate
                             ---------  --------  ---------  --------  ---------  --------
<S>                          <C>         <C>      <C>         <C>      <C>        <C>
Interest Earning Assets:
  ARM assets                 $ 246,507     6.56%  $ 150,759     6.45%  $ 115,830    6.31%
  Cash and cash equivalents      1,214     5.57         752     5.29         787    5.98
                              --------   -------   --------   -------   --------  -------
                               247,721     6.56     151,511     6.44     116,617    6.31
                              --------   -------   --------   -------   --------  -------
Interest Bearing Liabilities:
  Borrowings                   198,657     5.76     121,166     5.67     103,121    6.15
                              --------   -------   --------   -------   --------  -------

Net Interest Earning Assets
  and Spread                 $  49,064     0.80%  $  30,345    0.77%   $  13,496    0.16%
                              ========   =======   ========   ======    ========  =======

Yield on Net Interest
  Earning Assets (1)                       1.30%               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>
         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 (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                1997 versus 1996             1996 versus 1995
                            --------------------------   --------------------------
                             Rate    Volume    Total      Rate    Volume    Total
                            -------- -------- -------- -------- -------- --------
<S>                         <C>      <C>      <C>       <C>      <C>       <C>
Interest Income:
  ARM assets                $ 2,651  $93,097  $95,748    $ 2,625  $32,304  $34,929
  Cash and cash equivalents      40      422      462        (80)      45      (35)
                             -------  -------  -------    -------  -------  -------
                              2,691   93,519   96,210      2,545   32,349   34,894
                             -------  -------  -------    -------  -------  -------
Interest Expense:
  Borrowings                  2,068   75,423   77,491     (8,092)  26,137   18,045
                             -------  -------  -------    -------  -------  -------
Net interest income         $   623  $18,096  $18,719    $10,637  $ 6,212  $16,849
                             =======  =======  =======    =======  =======  =======
</TABLE>


<PAGE>


NOTE 9.  SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                        Year Ended December 31, 1997
                                              -------------------------------------------------
                                                Fourth       Third        Second       First
                                               Quarter      Quarter       Quarter     Quarter
                                              ----------   -----------  -----------  ----------
<S>                                           <C>          <C>          <C>          <C>
Interest  income from ARM assets and  cash    $   73,011   $   68,088   $   57,623   $   48,999
Interest expense on borrowed funds               (60,680)     (54,862)     (45,448)     (37,667)
                                               ----------   ----------   ----------   ----------
  Net interest income                             12,331       13,226       12,175       11,332
                                               ----------   ----------   ----------   ----------

Gain (loss) on ARM assets                            566          112          (189)       (186)
General and administrative expenses               (2,047)      (2,156)       (1,911)     (1,851)
Dividend on preferred stock                       (1,670)      (1,670)       (1,670)     (1,241)
                                               ----------   ----------   -----------  ----------
  Net income available to common shareholders $    9,180   $    9,512    $    8,405   $   8,054
                                               ==========   ==========    ==========   =========

Basic EPS                                     $      0.46  $     0.50    $     0.50  $     0.49
                                               ==========    =========    ==========  ==========

Diluted EPS                                   $      0.46  $     0.49    $     0.50  $     0.49
                                               ==========    =========    ==========  ==========

Average number of common shares outstanding       19,860        19,152       16,817      16,311
                                               ==========    ==========   ==========  ==========
</TABLE>

<TABLE>
<CAPTION>
                                                        Year Ended December 31, 1996
                                              -------------------------------------------------
                                                Fourth       Third        Second       First
                                               Quarter      Quarter       Quarter     Quarter
                                              ----------   -----------  -----------  ----------
<S>                                           <C>          <C>          <C>          <C>
Interest  income from ARM assets 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 ARM assets                             39          320           -            13
General and administrative expenses               (1,607)      (1,244)       (1,056)     (1,072)
Dividend on preferred stock                           -            -            -           -
                                               ----------   ----------   -----------  ----------
  Net income available to common shareholders $    7,409   $    7,028    $    6,169   $   5,131
                                               ==========   ==========    ==========   =========

Basic EPS                                     $      0.46  $     0.44    $     0.42  $     0.41
                                               ==========    =========    ==========  ==========

Diluted EPS                                   $      0.46  $     0.44    $     0.42  $     0.41
                                               ==========    =========    ==========  ==========

Average number of common shares outstanding       16,207        16,080       14,844      12,335
                                               ==========    ==========   ==========  ==========
</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 assets and  cash    $   32,561   $   30,178   $   27,998   $   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 ARM assets                             49           42           -          (659)
General and administrative expenses                 (925)        (630)         (464)       (457)
Dividend on preferred stock                           -            -            -           -
                                               ----------   ----------   -----------  ----------
  Net income available to common shareholders $    4,584   $    3,833    $    1,993   $      42
                                               ==========   ==========    ==========   =========

Basic EPS                                     $      0.38  $     0.33    $     0.17  $     0.00
                                               ==========    =========    ==========  ==========

Diluted EPS                                   $      0.38  $     0.33    $     0.17  $     0.00
                                               ==========    =========    ==========  ==========

Average number of common shares outstanding       12,103        11,947       11,874      11,781
                                               ==========    ==========   ==========  ==========
</TABLE>


<PAGE>


                    SCHEDULE IV - Mortgage Loans on Real Estate

Column A, Description:  The Company's whole loan portfolio at December 31, 1997,
which consists of only first mortgages on single-family  residential housing, is
stratified as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>

        Column A (continued)      Column B    Column C       Column G        Column H
      --------------------------  --------
         Description (4)

                                                                             Principal
                                                                             Amount of
                                                                               Loans
                                                                             Subject to
            Range of        Number                  Final      Carrying      Delinquent
        Carrying Amounts     of                    Maturity    Amount of     Principal
          of Mortgages      Loans   Interest Rate    Date     Mortgages (3)   Interest
        ----------------    ------  -------------  ---------  -------------  ----------
<S>     <C>                   <C>   <C>             <C>       <C>            <C>
        $       0 - 250       308   5.375 - 9.000   Various   $   42,973     $     167
              251 - 500       114   6.000 - 8.612   Various       37,587
              501 - 750        20   6.000 - 8.000   Various       12,592
            751 - 1,000        13   6.375 - 7.875   Various       11,436
             over 1,000         8   6.375 - 7.875   Various       11,407
                Premium                                            3,034
          Allowance for
              losses (2)                                             (42)
                             ======                            ==========     ==========
                               463                            $  118,987     $      167
                             ======                            ==========     ==========
<FN>
Notes:
      (1)    Reconciliation of carrying amounts of mortgage loans:

            Balance at December 31, 1996              $     -
              Additions during 1997:
               Loan purchases                           123,211

              Deductions during 1997:
               Collections of principal                   4,092
               Provision for losses                          42
               Amortization of premium                       90
                                                       --------
                                                          4,224
                                                       --------
            Balance at December 31, 1997              $ 118,987
                                                       ========

      (2) The provision for losses is based on management's assessment of various factors.
      (3) Cost for Federal income taxes is the same.
      (4) The geographic distribution of the Company's whole loan portfolio at
          December 31, 1997 is as follows:
</FN>
</TABLE>

<TABLE>
<CAPTION>
                         Number
          State or          of         Carrying
         Territory        Loans         Amount
      -----------------  ---------  ---------------
<S>                          <C>    <C>
      California             111    $     38,276
      Connecticut              8           1,823
      Florida                183          30,401
      Georgia                 12           4,744
      Maine                    5           1,034
      Michigan                 5           1,344
      New Jersey              16           5,828
      New York                48          11,932
      Puerto Rico              9           2,557
      Texas                    8           3,241
      Other states,
        less than             58          14,815
        4 loans each
      Premium                              3,034
      Allowance for losses                   (42)
                         =========  ===============
           TOTAL             463    $    118,987
                         =========  ===============
</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 30, 1998               /s/ H. Garrett Thornburg, Jr.
                                    -----------------------------
                                        H. Garrett Thornburg, Jr.
                                        Chairman of the Board of Directors and
                                        Chief Executive Officer
                                       (Principal Executive Officer)


Dated: March 30, 1998               /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 30, 1998
-----------------------------
H. Garrett Thornburg, Jr.     Director and Chief
                              Executive Officer

/s/ Larry A. Goldstone        President, Director and       March 30, 1998
------------------------
Larry A. Goldstone            Chief Operating Officer

/s/ David A. Ater             Director                      March 30, 1998
------------------------
David A. Ater

/s/ Joseph H. Badal           Director                      March 30, 1998
------------------------
Joseph H. Badal

/s/ Owen M. Lopez             Director                      March 30, 1998
------------------------
Owen M. Lopez

/s/ James H. Lorie            Director                      March 30, 1998
------------------------
James H. Lorie

/s/ Stuart C. Sherman         Director                      March 30, 1998
------------------------
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 (h)

      10.3.1   Amendment dated December 16, 1997 to the amended
               and restated 1992 Stock Option and Incentive Plan *...   52

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

      22.      Notice and Proxy Statement for the Annual Meeting
               of Shareholders to be held on April 30, 1998 (j)

      27       Financial Data Schedule *


*  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 with  Registrant's  Form 10-K dated  December  31, 1996 and
   incorporated herein by reference pursuant to Rule 12b-32.
(i)Previously  filed as Exhibit 4 to  Registrant's  registration  statement on
   Form S-3D dated  September  24,  1997 and  incorporated  herein by  reference
   pursuant to Rule 12b-32.
(j)Previously filed on March 30, 1998 and incorporated by reference  pursuant to
   Rule 12-b32.