1
FORM 10-Q

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

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

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

COMMISSION FILE NUMBER: 1-11718

MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)

MARYLAND 36-3857664
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)

(312) 474-1122
(Registrant's telephone number, including area code)

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 ( )

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

26,042,803 shares of Common Stock as of July 31, 1998.
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MANUFACTURED HOME COMMUNITIES, INC.

TABLE OF CONTENTS

PART I - FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

INDEX TO FINANCIAL STATEMENTS

Page
----

Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997...................................... 3

Consolidated Statements of Operations for the six months and quarters ended June 30, 1998 and 1997......... 4

Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997...................... 5

Notes to Consolidated Financial Statements................................................................. 6

ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 11

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.................................................................................. 18

ITEM 6. Exhibits and Reports on Form 8-K................................................................... 18

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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

June 30, December 31,
1998 1997
----------- -----------

ASSETS
Investment in rental property:
Land ................................................................. $ 267,780 $ 206,375
Land improvements .................................................... 859,043 612,670
Buildings and other depreciable property ............................. 93,196 90,870
Advances on rental property acquisitions ............................. 980 26,403
----------- -----------
1,220,999 936,318
Accumulated depreciation ............................................. (101,813) (89,208)
----------- -----------
Net investment in rental property .................................. 1,119,186 847,110
Cash and cash equivalents ............................................... 5,853 909
Short-term investments (at cost, which approximates market) ............. 7,933 --
Notes receivable ........................................................ 15,567 1,147
Investment in and advances to affiliates ................................ 7,950 7,126
Investment in joint ventures ............................................ 6,612 --
Rents receivable ........................................................ 1,425 787
Deferred financing costs, net ........................................... 4,502 3,265
Prepaid expenses and other assets ....................................... 7,157 4,021
----------- -----------
Total assets ......................................................... $ 1,176,185 $ 864,365
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ............................................... $ 502,917 $ 403,656
Unsecured term loan .................................................. 100,000 60,000
Unsecured line of credit ............................................. 136,000 25,000
Other notes payable .................................................. 6,488 6,516
Accounts payable and accrued expenses ................................ 24,220 17,197
Accrued interest payable ............................................. 4,955 1,536
Rents received in advance and security deposits ...................... 4,748 2,299
Distributions payable ................................................ 11,715 55
Due to affiliates .................................................... 136 78
----------- -----------
Total liabilities .................................................. 791,179 516,337

Commitments and contingencies

Minority interests ...................................................... 62,915 67,453

Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized; none issued -- --
Common stock, $.01 par value
50,000,000 shares authorized; 26,039,088 and 24,771,180
shares issued and outstanding for 1998 and 1997, respectively ...... 260 248
Paid-in capital ...................................................... 363,666 319,030
Employee notes ....................................................... (4,727) (4,967)
Distributions in excess of accumulated earnings ...................... (37,108) (33,736)
----------- -----------
Total stockholders' equity ......................................... 322,091 280,575
----------- -----------

Total liabilities and stockholders' equity ........................... $ 1,176,185 $ 864,365
=========== ===========

The accompanying notes are an integral part of the financial statements.

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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS AND QUARTERS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

For the Six Months Ended For the Quarters Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------

REVENUES
Base rental income ............................... $ 78,161 $ 50,978 $ 40,953 $ 25,932
Utility and other income ......................... 12,662 5,483 5,951 2,745
Equity in income of affiliates ................... 324 207 155 99
Interest income .................................. 1,619 1,246 835 609
-------- -------- -------- --------
Total revenues ............................... 92,766 57,914 47,894 29,385
-------- -------- -------- --------

EXPENSES
Property operating and maintenance ............... 25,249 15,274 13,137 7,675
Real estate taxes ................................ 7,104 3,914 3,546 1,987
Property management .............................. 3,465 2,412 1,683 1,191
General and administrative ....................... 2,937 2,212 1,341 1,062
Interest and related amortization ................ 22,520 10,017 12,399 5,196
Depreciation on corporate assets ................. 460 289 166 146
Depreciation on real estate assets and other costs 12,382 8,034 6,556 4,077
-------- -------- -------- --------
Total expenses ............................... 74,117 42,152 38,828 21,334
-------- -------- -------- --------

Income before allocation to minority interests ... 18,649 15,762 9,066 8,051

(Income) allocated to minority interests ......... (3,544) (1,585) (1,723) (798)
-------- -------- -------- --------
Net income ....................................... $ 15,105 $ 14,177 $ 7,343 $ 7,253
======== ======== ======== ========

Net income per common share - basic .............. $ .60 $ .57 $ .29 $ .29
======== ======== ======== ========
Net income per common share - diluted ............ $ .59 $ .57 $ .28 $ .29
======== ======== ======== ========

Distributions declared per common share
outstanding .................................. $ .6725 $ .66 $ .3625 $ .33
======== ======== ======== ========

Weighted average common shares
outstanding - basic .......................... 25,235 24,777 25,659 24,715
======== ======== ======== ========
Weighted average common shares
outstanding - diluted (Note 1) ............... 31,549 27,750 32,095 27,660
======== ======== ======== ========

The accompanying notes are an integral part of the financial statements.

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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)

June 30, 1998 June 30, 1997
---------------- -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 15,105 $ 14,177
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests ..................... 3,544 1,585
Depreciation and amortization expense ...................... 12,906 8,792
Equity in income of affiliates ............................. (324) (207)
Amortization of deferred compensation and other ............ 568 436
Writeoff of project costs .................................. -- 57
(Increase) decrease in rents receivable .................... (638) 6
(Increase) in prepaid expenses and other assets ............ (3,136) (1,165)
Increase in accounts payable and accrued expenses .......... 10,500 2,776
Increase in rents received in advance and security deposits 2,449 1,527
--------- ---------
Net cash provided by operating activities ...................... 40,974 27,984
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments, net ........................ (7,933) (1,852)
Net proceeds from sale of project related assets ............... -- 11,148
(Contributions to) distributions from affiliates ............... (500) 1,178
(Funding) collection on notes receivable ....................... (14,420) 100
Investment in joint ventures ................................... (6,612) --
Acquisition of rental properties ............................... (166,097) (34,649)
Improvements:
Improvements - corporate ................................... (144) (147)
Improvements - rental properties ........................... (3,423) (966)
Site development costs ..................................... (2,242) (904)
--------- ---------
Net cash used in investing activities .......................... (201,371) (26,092)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options .................... 2,311 1,333
Distributions to common stockholders and minority interests .... (11,371) (17,587)
Issuance (repurchase) of common stock .......................... 25,273 (7,260)
Collection of principal payments on employee notes ............. 369 58
Proceeds from line of credit and term loan ..................... 173,500 98,900
Repayments on mortgage notes payable and line of credit ........ (23,292) (75,747)
Debt issuance costs ............................................ (1,449) (300)
--------- ---------
Net cash provided by (used in) financing activities ............ 165,341 (603)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................ 4,944 1,289
Cash and cash equivalents, beginning of period ...................... 909 324
--------- ---------
Cash and cash equivalents, end of period ............................ $ 5,853 $ 1,613
========= =========

SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest ............................ $ 18,889 $ 9,332
========= =========

The accompanying notes are an integral part of the financial statements.

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MANUFACTURED HOME COMMUNITIES, INC.

PRESENTATION:

These unaudited Consolidated Financial Statements of Manufactured Home
Communities, Inc., a Maryland corporation, and its subsidiaries (collectively,
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K (the "1997 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
1997 Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
Certain reclassifications have been made to the prior periods' financial
statements in order to conform with current period presentation.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

(a) 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.

(b) Earnings Per Common Share

Earnings per common share are based on the weighted average number of
common shares outstanding during each year. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements. The conversion of units of
limited partnership interest ("OP Units") in MHC Operating Limited Partnership
(the "Operating Partnership") has been excluded from the basic earnings per
share calculation because of certain restrictions on conversion. The conversion
of an OP Unit to common stock will have no effect on earnings per common share
since the allocation of earnings to an OP Unit is equivalent to earnings
allocated to a share of common stock. The following table sets forth the
computation of basic and diluted earnings per share for the six months and
quarters ended June 30, 1998 and 1997:

For the Six Months Ended For the Quarters Ended
June 30, June 30,
------------------------ ----------------------
1998 1997 1998 1997
------- ------- ------- -------

Numerator:
Net income .............................. $15,105 $14,177 $ 7,343 $ 7,253
Income allocated to minority interests... 3,544 1,585 1,723 798
------- ------- ------- -------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed
conversions ........................... $18,649 $15,762 $ 9,066 $ 8,051
======= ======= ======= =======

Denominator:
Weighted average shares outstanding ..... 25,235 24,777 25,659 24,715
Weighted average OP Units outstanding
assuming conversion ................... 5,927 2,715 6,020 2,715
Employee stock options .................. 387 258 416 230
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions ........ 31,549 27,750 32,095 27,660
======= ======= ======= =======

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MANUFACTURED HOME COMMUNITIES, INC.

NOTE 2 - COMMON STOCK AND RELATED TRANSACTIONS

On April 10, 1998 and July 10, 1998, the Company paid a $.3625 per share
distribution for the quarters ended March 31, 1998 and June 30, 1998,
respectively, to stockholders of record on March 27, 1998 and June 26, 1998,
respectively.

In the first quarter of 1998, the Company, as general partner of the
Operating Partnership, approved the admission of new limited partners to the
Operating Partnership in connection with certain acquisitions of rental property
and investments in joint ventures (see Note 4). The new limited partners
received OP Units which are exchangeable on a one-for-one basis for shares of
the Company's common stock.

On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price on April 23, 1998, resulting in gross
offering proceeds of approximately $26.7 million. Net of the underwriter's
discount and offering expenses, the Company received approximately $25 million.
The Underwriter deposited the shares of common stock with the trustee of the
Equity Investor Fund Cohen & Steers Realty Majors Portfolio, a unit investment
trust (the "Trust"), in exchange for units in the Trust.

NOTE 3 - RENTAL PROPERTY

In connection with the supplemental agreement entered into in December 1997
(the "Supplemental Agreement"), on February 12, 1998, the Company exercised its
right of first refusal to purchase five of the Ellenburg Communities. A third
party, backed by one of the Company's competitors, has appealed certain orders
of the Superior Court for the State of California, County of Los Angeles (the
"California Court") related to the Company's acquisition of the Ellenburg
Communities. The third party originally requested the California Court to stay
all of its proceedings and the Company's acquisition of the Ellenburg
Communities pending such appeal. The California Court denied this motion. The
third party then filed a writ of supersedeas with the California appellate court
seeking a stay of the California Court's orders and related transactions pending
appeal. The appellate court also refused to issue a stay and denied the writ of
supersedeas. The Company's request for dismissal was denied. The Company does
not expect the appeals to be successful, or if successful, to have a material
impact on the Company's acquisition of the Ellenburg Communities. On July 6,
1998, the Company received approximately $10.4 million, including approximately
$297,000 of interest income, which was being held subject to the completion of
due diligence procedures on the Ellenburg Communities. The persons appointed to
windup the affairs of ECC agreed to the release of such funds subject to
retaining the right to further review the Company's requested due diligence
adjustments.

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MANUFACTURED HOME COMMUNITIES, INC.

NOTE 3 - RENTAL PROPERTY (CONTINUED)

On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.

On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort consists
of approximately 512 developed sites and a 33 acre expansion parcel.

On May 14, 1998, the Company acquired Casa Del Sol III, located adjacent to
one of the Company's communities in Peoria, Arizona, for a purchase price of
approximately $9.8 million. The acquisition was funded with a borrowing under
the Company's line of credit. Casa Del Sol III consists of 238 developed sites.

On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities"). The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition was funded with a borrowing from a bank of
approximately $68 million. The Company's $19 million contribution to the joint
venture was funded with a borrowing under the Company's line of credit.

The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of manufactured home communities. At any time these
negotiations are at varying stages which may include contracts outstanding to
acquire certain manufactured home communities which are subject to satisfactory
completion of the Company's due diligence review.

NOTE 4 - INVESTMENT IN JOINT VENTURE

On March 18, 1998, the Company formed Trails Associates, LLC, an
approximately 50% joint venture investment with Meadows Management Company to
own two manufactured home communities known as "Plantation on the Lake" and
"Trails West", for approximately $6.4 million. Plantation on the Lake is located
in Riverside, California and consists of 385 developed sites and 122 expansion
sites. Trails West is located in Tucson, Arizona and consists of 488 developed
sites and 294 expansion sites. The Company's investment was funded with a $3.9
million borrowing under the Company's line of credit and with the issuance of
approximately $2.5 million in OP Units.

NOTE 5 - NOTES RECEIVABLE

At June 30, 1998 and December 31, 1997, the Company had approximately $15.6
million and $1.1 million in notes receivable, respectively. The Company has $1.1
million in purchase money notes with monthly principal and interest payments at
7.0%, maturing on July 31, 2001. On January 6, 1998, the Company funded a $12.3
million loan (the "Meadows Loan") to Meadows Preservation, Inc. The Meadows Loan
is collateralized by "The Meadows" manufactured home community located in Palm
Beach Gardens, Florida, bears interest at a nominal rate of 9%, subject to
adjustment based on cash flow of the property. The Meadows Loan matured on July
31, 1998, however, the Company and the borrower have agreed to extend said
maturity date. On May 12, 1998, the Company entered into an agreement to loan
$5.9 million to Trails Associates, LLC (the "Trails West Loan") for development
of the property known as Trails West. On May 12, 1998, the Company funded
$1,750,000 under the loan. This $1,750,000 portion of the Trails West Loan is
collateralized by the property known as Trails West, bears interest at the prime
rate of 8.5% and matures on June 1, 2003. The Meadows Loan and the Trails West
Loan were funded with borrowings under the Company's line of credit.

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MANUFACTURED HOME COMMUNITIES, INC.

NOTE 6 - LONG-TERM BORROWINGS

As of June 30, 1998 and December 31, 1997, the Company had outstanding
mortgage indebtedness of approximately $502.9 million and $403.7 million,
respectively, encumbering 74 and 43 of the Company's properties, respectively.
As of June 30, 1998 and December 31, 1997, the carrying value of such properties
was approximately $641 million and $493 million, respectively.

The outstanding indebtedness consists in part of a $265.0 million mortgage
note (the "Mortgage Debt") collateralized by 29 properties beneficially owned by
MHC Financing Limited Partnership. The Mortgage Debt has a maturity date of
January 2, 2028 and pays interest at 7.015%. There is no principal amortization
until February 1, 2008, after which principal and interest are paid from
available cash flow and the interest rate is reset at a rate equal to the then
10-year U.S. Treasury obligations plus 2.0%. In connection with the acquisition
of the College Heights Communities, the joint venture formed by the Company and
Wolverine Investors L.L.C. borrowed approximately $68 million at an interest
rate of 7.19%, maturing July 1, 2008. The Company also has outstanding debt on
13 properties in the aggregate amount of approximately $76 million, which was
recorded at fair market value with the related discount or premium being
amortized over the life of the loan using the effective interest rate. In
addition, the Company recorded a $2.4 million loan in connection with a direct
financing lease entered into in May 1997. Scheduled maturities for the
outstanding indebtedness, excluding the Mortgage Debt, are at various dates
through November 30, 2020, and fixed interest rates range from 7.25% to 9.05%.

The Company has an unsecured line of credit with a bank (the "Credit
Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus
1.125%. On April 28, 1998, the Company amended the Credit Agreement, increasing
the line of credit from $100 million to $150 million. The Company pays a fee on
the average unused amount of such credit equal to 0.125% of such amount. As of
June 30, 1998, $136 million was outstanding under the line of credit. The
Company paid fees related to the amendment which were immaterial.

The Company has a term loan (the "Loan") with a group of banks with
interest only payable monthly at a rate of LIBOR plus 1.0%. On April 28, 1998,
the Company amended the Loan to increase the borrowing from $60 million to $100
million. The Loan matures on April 3, 2000 and may be extended to April 3, 2002.
The Company used the $40.0 million in proceeds to repay a portion of the $50
million previously borrowed on April 7, 1998 under the facility. The Company
paid fees related to this amendment which were immaterial.

The Company has approximately $6.5 million of installment notes payable,
secured by a letter of credit with interest rates of 7.5%, maturing September 1,
2002. Approximately $5.3 million of the notes pay principal annually and
interest quarterly and the remaining $1.3 million of the notes pay interest
quarterly.

In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs which were deemed immaterial. The value of the 1998 Swap is
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on June 30, 1998, the applicable LIBOR swap rate would have been
5.9%. Each 0.01% increase or decrease in the applicable swap rate for the 1998
Swap increases or decreases the value of the 1998 versus its current value by
approximately $42,000.

NOTE 7 - STOCK OPTIONS

Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan
as discussed in Note 12 to the 1997 Form 10-K, certain officers, directors,
employees and consultants have been offered the opportunity to acquire shares of
common stock of the Company through stock options ("Options"). During the six
months ended June 30, 1998, Options for 96,621 shares of common stock were
exercised.

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MANUFACTURED HOME COMMUNITIES, INC.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The residents of DeAnza Santa Cruz, a Property located in Santa Cruz,
California (the "City") previously brought several actions opposing certain fees
and charges in connection with water service at the Property, specifically
opposing a monthly "readiness to serve" charge. One group of residents, who have
elected to be covered under the City's rent control ordinance ("Ordinance"), had
their case heard before the City's rent control board. On June 29, 1995, the
City's hearing officer found that the Company may charge only its actual costs.
The Company believes its actual costs exceed the amount of the monthly readiness
to serve charge and has appealed this decision and filed an application with the
California Public Utilities Commission requesting the Commission to set cost
based rates for water at this Property. In connection with the hearing officer's
decision, the residents were awarded costs of approximately $50,000 and the
Company has rebated the readiness to serve charge collected since its
acquisition of the Property in August, 1994. During 1998, the court of appeals
upheld the residents' statutory interpretation regarding imposition of the
"readiness to serve" charge, but upheld the Company's calculation of the amounts
rebated. The appeals court also reversed the prior award of costs in favor of
the residents and rewarded for further determination by the trial court
regarding costs and attorneys' fees. The impact of this decision on the
financial condition or results of operations of the Company is not expected to
be material.

The Santa Cruz Homeowners Association ("HOA"), representing approximately
fifteen residents not covered by the Ordinance, separately filed suit in the
Superior Court of the State of California (Case Number 128001) opposing the same
fees and charges in connection with water service and seeking damages, including
punitive damages, arising out of the imposition of the readiness to serve
charge. The trial court during 1998 allowed a motion by the HOA to allow it to
represent all residents of the property and set the trial in the matter for July
1998. The Company intends to vigorously defend itself in the matter.

On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Properties. On October 6, 1995, the USEPA issued its Findings of Violation and
Order for Compliance with respect to the NPDES Permit governing the operation of
the onsite waste water treatment plant at another of the Properties. Applicable
law provides for fines and penalties for these violations. USEPA continues to
threaten the imposition of fines, penalties and further legal proceedings
regarding these matters. Notwithstanding, the Company believes it complied with
one order by connecting to the local municipal waste water system in 1997 and
has completed upgrades to the waste water treatment plant at the other Property
during 1998 to further comply with the remaining order.

The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
taken together, are not expected to have a material adverse impact on the
Company.

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MANUFACTURED HOME COMMUNITIES, INC.

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

OVERVIEW

The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
six months and quarters ended June 30, 1998 compared to the corresponding period
in 1997. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein and the 1997 Form 10-K.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30,
1997

The Company's gross investment in rental property has increased from $630
million as of June 30, 1997 to $1.2 billion as of June 30, 1998 due to the
following acquisitions (collectively, the "Acquisition Properties"): (i) a
portfolio of eighteen manufactured home communities and two commercial
properties (collectively, the "MPW Properties") on August 29, 1997; (ii)
Arrowhead Village on September 16, 1997; (iii) the Ellenburg Communities on
December 18, 1997 and during the first six months of 1998; (iv) Quail Meadows on
January 8, 1998; (v) Sherwood Forest RV Park on April 30, 1998, and (vi) the
College Heights Communities on June 4, 1998. The total number of sites owned or
controlled has increased from 28,168 as of June 30, 1997 to 53,220 as of June
30, 1998.

The following table summarizes certain weighted average occupancy
statistics for the quarters ended June 30, 1998 and 1997. "Core Portfolio"
represents an analysis of properties owned as of the beginning of both periods
of comparison.

Core Portfolio Total Portfolio
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------

Total sites 27,453 27,456 42,912 28,111
Occupied sites 26,043 25,957 40,572 26,562
Occupancy % 94.9% 94.5% 94.5% 94.5%
Monthly base rent per site $ 335 $ 322 $ 336 $ 325

Base rental income ($41.0 million) increased $15.0 million or 58%. For the
Core Portfolio, base rental income increased approximately $1.1 million or 4.2%,
reflecting a 4.1% increase in base rental rates and a 0.1% increase related to
occupancy. The remaining $13.9 million increase in base rental income was
attributed to the Acquisition Properties.

Monthly base rent per site for the total portfolio increased 3.4%,
reflecting a 4.0% increase in monthly base rent per site for the Core Portfolio,
partially offset by lower monthly base rents for the Acquisition Properties.
Average monthly base rent per site for the Acquisition Properties was $340 for
the quarter ended June 30, 1998.

Weighted average occupancy remained stable with a 0.4% increase at the Core
Portfolio offset by decreased occupancy at the Acquisition Properties.

Utility and other income ($6.0 million) increased $3.2 million or 115%,
with $3.1 million attributed to the Acquisition Properties, including $1.4
million of RV income. The remaining $100,000 increase reflected increased
utility income and real estate tax pass-ons at the Core Portfolio.

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MANUFACTURED HOME COMMUNITIES, INC.

Interest income ($835,000) increased $226,000 or 37%, primarily due to the
one-time recognition of interest earned on notes receivable related to the
Ellenburg Communities, interest earned on the Meadows Loan and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the quarters ended June 30, 1998 and 1997 of approximately $10.5
million and $3.2 million, respectively, which earned interest income at an
effective rate of 5.4% and 5.3% per annum, respectively. As of June 30, 1998,
the Company had cash and cash equivalents and short-term investments of $13.8
million.

Property operating and maintenance expenses ($13.1 million) increased $5.5
million or 71%. Approximately $5.4 million of the increase was attributed to the
Acquisition Properties. The remaining increase was due to increased payroll
expense and insurance and other expenses, partially offset by decreased repairs
and maintenance expense, utility expense, and property general and
administrative expenses at the Core Portfolio. Property operating and
maintenance expenses represented 27.4% of total revenues in 1998 and 26.5% in
1997.

Real estate taxes ($1.9 million) increased $1.6 million or 79% attributed
to the Acquisition Properties. Real estate taxes represented 7.4% of total
revenues in 1998 and 6.8% in 1997.

Property management expenses ($1.7 million) increased $492,000 or 41%. The
increase was primarily due to the addition of a regional office in San Jose,
California and an increase in management company payroll. Property management
expenses represented 3.5% of total revenues in 1998 and 4.1% in 1997.

General and administrative expense ("G&A") ($1.3 million) increased
$279,000 or 26%. The increase was primarily due to increased payroll resulting
from salary increases and increased public company related expenses. G&A
represented 2.8% of total revenues in 1998 and 3.6% in 1997.

Interest and related amortization ($12.4 million) increased $7.2 million or
139%. The increase was due to higher weighted average outstanding debt balances
during the period, as well as a slightly increased effective interest rate. The
weighted average outstanding debt balances for the quarters ended June 30, 1998
and 1997 were $670.1 million and $274.7 million, respectively. The effective
interest rates were 7.3% and 6.9%, respectively. Interest and related
amortization represented 25.9% of total revenues in 1998 and 17.7% in 1997.

Depreciation on corporate assets ($166,000) increased $20,000 or 14% due to
fixed asset additions in 1997 associated with information systems. Depreciation
on corporate assets represented 0.3% of total revenues in 1998 and 0.5% in 1997.

Depreciation on real estate assets and other costs ($6.6 million) increased
$2.5 million or 61% as a result of the Acquisition Properties. Depreciation on
real estate assets and other costs represented 13.7% of total revenues in 1998
and 13.9% in 1997.

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MANUFACTURED HOME COMMUNITIES, INC.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997

The following table summarizes certain weighted average occupancy
statistics for the six months ended June 30, 1998 and 1997. "Core Portfolio"
represents an analysis of properties owned as of the beginning of both periods
of comparison.

Core Portfolio Total Portfolio
------------------------------ ---------------------------
1998 1997 1998 1997
------------ ---------- ----------- ------------

Total sites 27,452 27,410 41,189 27,776
Occupied sites 26,067 25,944 39,044 26,286
Occupancy % 95.0% 94.7% 94.8% 94.6%
Monthly base rent per site $334 $321 $334 $323

Base rental income ($78.2 million) increased $27.2 million or 53%. For the
Core Portfolio, base rental income increased approximately $2.2 million or 4.4%,
reflecting a 4.1% increase in base rental rates and a 0.3% increase related to
occupancy. The remaining $25.0 million increase was attributed to the
Acquisition Properties, and California Hawaiian acquired on March 14, 1997, Golf
Vista Estates, acquired on March 27, 1997 and Golden Terrace South, acquired on
May 30, 1997.

Monthly base rent per site for the total portfolio increased 2.5%,
reflecting a 3.4% increase in monthly base rent per site for the Core Portfolio,
partially offset by lower monthly base rents for the Acquisition Properties.
Average monthly base rent per site for the Acquisition Properties was $333 for
the six months ended June 30, 1998.

Weighted average occupancy increased 0.3% due to increased occupancy at the
expansion communities and the addition of the Acquisition Properties to the
portfolio with higher occupancy percentages.

Utility and other income ($12.7 million) increased $7.2 million or 131%,
with $7.0 million attributed to the Acquisition Properties, including $3.4
million of RV income. The remaining $200,000 increase reflected increased
utility income and real estate tax pass-ons at the Core Portfolio.

Interest income ($1.6 million) increased $373,000 or 30%, primarily due to
the one-time recognition of interest earned on notes receivable related to the
Ellenburg Communities, interest earned on the Meadows Loan and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the six months ended June 30, 1998 and 1997 of approximately $9.2
million and $4.2 million, respectively, which earned interest income at an
effective rate of 5.5% and 5.3% per annum, respectively.

Property operating and maintenance expenses ($25.2 million) increased $10.0
million or 65%. The increase was attributed to the Acquisition Properties.
Property operating and maintenance expense at the Core Portfolio remained stable
with increased payroll expense, general and administrative expense and insurance
and other expenses, offset by decreased repairs and maintenance expense and
utility expense. Property operating and maintenance expenses represented 27.2%
of total revenues in 1998 and 26.4% in 1997.

Real estate taxes ($7.1 million) increased $3.2 million or 82% with $3.1
million attributed to the Acquisition Properties. The remaining $100,000
increase reflected increased rates at the Core Portfolio. Real estate taxes
represented 7.7% of total revenues in 1998 and 6.8% in 1997.

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MANUFACTURED HOME COMMUNITIES, INC.

Property management expenses ($3.5 million) increased $1.1 million or 44%.
The increase was primarily due to the addition of a regional office in San Jose,
California and an increase in management company payroll. Property management
expenses represented 3.7% of total revenues in 1998 and 4.2% in 1997.

G&A ($2.9 million) increased $725,000 or 33%. The increase was primarily
due to increased payroll resulting from salary increases, increased professional
fees and public company related expenses. G&A represented 3.2% of total revenues
in 1998 and 3.8% in 1997.

Interest and related amortization ($22.5 million) increased $12.5 million
or 125%. The increase was due to higher weighted average outstanding debt
balances during the period, as well as a slightly increased effective interest
rate. The weighted average outstanding debt balances for the six months ended
June 30, 1998 and 1997 were $604.9 million and $263.0 million, respectively. The
effective interest rates were 7.3% and 7.1%, respectively. Interest and related
amortization represented 24.3% of total revenues in 1998 and 13.9% in 1997.

Depreciation on corporate assets ($460,000) increased $171,000 or 59% due
to fixed asset additions in 1997 associated with information systems.
Depreciation on corporate assets represented 0.5% of total revenues in both 1998
and 1997.

Depreciation on real estate assets and other costs ($12.4 million)
increased $4.3 million or 54% as a result of the Acquisition Properties.
Depreciation on real estate assets and other costs represented 13.3% of total
revenues in 1998 and 13.9% in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $4.9 million when compared to
December 31, 1997. The major components of this increase were increased cash
provided by operating activities and borrowings from the line of credit,
partially offset by the purchase of short-term investments, funding of notes
receivable, the acquisitions of Quail Meadows, Sherwood Forest RV Park, Casa del
Sol III and the College Heights Communities (collectively, the "1998
Acquisitions"), additional acquisition advances related to the Ellenburg
Communities and the investment in Plantation on the Lake and Trails West.

Net cash provided by operating activities increased $13.0 million from
$28.0 million for the six months ended June 30, 1997 to $41.0 million for the
six months ended June 30, 1998. This increase reflected a $7.2 million increase
in funds from operations ("FFO"), as discussed below, and increased accounts
payable accruals related to real estate taxes of $4.2 million, interest on notes
payable of $3.4 million and other accruals related to the 1998 Acquisitions,
partially offset by increased rents receivables.

FFO was defined by the National Association of Real Estate Investment
Trusts ("NAREIT") in March 1995 as net income (computed in accordance with
generally accepted accounting principles ["GAAP"]), before allocation to
minority interests, excluding gains (or losses) from sales of property, plus
real estate depreciation and after adjustments for significant non-recurring
items, if any. The Company computes FFO in accordance with the NAREIT definition
which may differ from the methodology for calculating FFO utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs. Funds
available for distribution ("FAD") is defined as FFO less non-revenue producing
capital expenditures and amortization payments on mortgage loan principal. The
Company believes that FFO and FAD are useful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, they provide
investors an understanding of the ability of the Company to incur and service
debt and to make capital expenditures. FFO and FAD in and of themselves do not
represent cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net income as an indication
of the Company's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and are not necessarily indicative
of cash available to fund cash needs.

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MANUFACTURED HOME COMMUNITIES, INC.

The following table presents a calculation of FFO and FAD for the quarters
and six months ended June 30, 1998 and 1997:

For the Quarters Ended For the Six Months Ended
June 30, June 30
1998 1997 1998 1997
-------- -------- -------- --------

Computation of funds from operations:
Income before allocation to minority
interests ................................. $ 9,066 $ 8,051 $ 18,649 $ 15,762
Depreciation on real estate assets and
other costs ............................... 6,556 4,077 12,382 8,034
-------- -------- -------- --------
Funds from operations ........................ $ 15,622 $ 12,128 $ 31,031 $ 23,796
======== ======== ======== ========

Computation of funds available for distribution:
Funds from operations ........................ $ 15,622 $ 12,128 $ 31,031 $ 23,796
Non-revenue producing improvements-
rental properties ......................... (2,506) (461) (3,423) (966)
-------- -------- -------- --------
Funds available for distribution ............. $ 13,116 $ 11,667 $ 27,608 $ 22,830
======== ======== ======== ========

Net cash used in investing activities increased $175 million from $26.1
million for the six months ended June 30, 1997 to $201.4 million for the six
months ended June 30, 1998 primarily due to the purchase of short-term
investments, the funding of the Meadows Loan, increased payments for
acquisitions and the investment in Plantation on the Lake and Trails West in
1998, increased payments for recurring improvements to rental properties due to
the acquisitions, increased payments for site development due to additional
expansion activity in 1998 and the one-time collection of proceeds from the sale
of project related assets in 1997.

On September 4, 1997, the Company entered into a portfolio purchase
agreement to acquire 38 manufactured home communities (the "Ellenburg
Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as
the general partner for a puchase price in excess of $300 million. In December
1997, the Company closed on the acquisition of seventeen of the Ellenburg
Communities for an aggregate purchase price of approximately $149 million.
During the six months ended June 30, 1998, the Company closed on the acquisition
of ten additional Ellenburg Communities for an aggregate purchase price of
approximately $92 million and gained control of an additional nine Ellenburg
Communities with acquisition advances of approximately $85 million to the
partnerships which own such Ellenburg Communities. In addition, the Company
funded a loan on one Ellenburg Community for approximately $16.4 million, the
terms of which result in effective ownership of the community. For financial
accounting purposes, this loan will be accounted for as an investment in real
estate. The Company funded the acquisition advances with borrowings under the
Company's line of credit. In connection with the supplemental agreement entered
into in December 1997 (the "Supplemental Agreement"), on February 12, 1998, the
Company exercised its right of first refusal to purchase five of the Ellenburg
Communities. A third party, backed by one of the Company's competitors, has
appealed certain orders of the Superior Court for the State of California,
County of Los Angeles (the "California Court") related to the Company's
acquisition of the Ellenburg Communities. The third party originally requested
the California Court to stay all of its proceedings and the Company's
acquisition of the Ellenburg Communities pending such appeal. The California
Court denied this motion. The third party then filed a writ of supersedeas with
the California appellate court seeking a stay of the California Court's orders
and related transactions pending appeal. The appellate court also refused to
issue a stay and denied the writ of supersedeas. The Company's request for
dismissal was denied. The Company does not expect the appeals to be successful,
or if successful, to have a material impact on the Company's acquisition of the
Ellenburg Communities.

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MANUFACTURED HOME COMMUNITIES, INC.

On July 6, 1998, the Company received approximately $10.4 million,
including approximately $297,000 of interest income, which was being held
subject to the completion of due diligence procedures on the Ellenburg
Communities. The persons appointed to windup the affairs of ECC agreed to the
release of such funds subject to retaining the right to further review the
Company's requested due diligence adjustments.

On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by "The
Meadows" manufactured home community located in Palm Beach Gardens, Florida,
bears interest at a nominal rate of 9%, subject to adjustment based on cash flow
of the property. The Meadows Loan matured on July 31, 1998, however, the Company
and the borrower have agreed to extend said maturity date.

On May 14, 1998, the Company acquired Casa del Sol III, located adjacent to
one of the Company's communities in Peoria, Arizona, for a purchase price of
approximately $9.8 million. The acquisition was funded with a borrowing under
the Company's line of credit. Casa Del Sol III consists of 238 developed sites.

Capital expenditures for improvements were approximately $5.8 million for
the six months ended June 30, 1998 compared to $2.0 million for the six months
ended June 30, 1997. Of the $5.8 million, approximately $3.4 million represented
improvements to existing sites. The Company anticipates spending approximately
$3.1 million on improvements to existing sites during the remainder of 1998. The
Company believes these improvements are necessary in order to increase and/or
maintain occupancy levels and maximize rental rates charged to new and renewing
residents. The remaining $2.4 million represented costs to develop expansion
sites at certain of the Company's properties and other corporate headquarter
costs.

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MANUFACTURED HOME COMMUNITIES, INC.

Net cash provided by financing activities increased $165.9 million from
$603,000 used in financing activities for the six months ended June 30, 1997 to
$165.3 million provided by financing activities for the six months ended June
30, 1998 primarily due to additional borrowings under the line of credit, a
borrowing with a bank for the acquisition of the College Heights Communities,
the issuance of common stock in the second quarter of 1998, and a decrease in
distributions paid in the first six months of 1998.

Distributions to common stockholders and minority interests decreased
approximately $8.4 million due to the timing of the payment of the
distributions. On April 10, 1998, the Company paid a $.3625 per share
distribution for the quarter ended March 31, 1998 to stockholders of record on
March 27, 1998. Return of capital on a GAAP basis was $.05 per share for the
first quarter of 1998.

The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.

The year 2000 issue ("Year 2000") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
collect rents, or engage in similar normal business activities. Based on a
recent assessment, the Company determined that a majority of its applications
will function properly with respect to dates in the year 2000 and thereafter.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues. The Company's total Year 2000 project cost and estimates to complete do
not include the estimated costs and time associated with the impact of third
party Year 2000 issues. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems. The Company anticipates
completing its Year 2000 project no later than December 31, 1998, which is prior
to any impact on its operating systems. The total cost of the Year 2000 project
is estimated to be immaterial assuming third parties remediate their own year
2000 issues. This assumption is based on management's best estimates, which were
derived utilizing numerous assumptions of future events, and there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.

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MANUFACTURED HOME COMMUNITIES, INC.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The discussion in Note 8 of Notes to Consolidated Financial
Statements is incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

10 Second Amended and Restated 1992 Stock Option and
Stock Award Plan

27 Financial Data Schedule

(b) Reports on Form 8-K:

Form 8-K dated June 4, 1998, filed June 18, 1998,
relating to Item 2 "Acquisition of Assets" and
Item 7 "Financial Statements and Exhibits" on the
acquisition of the College Height Communities.

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SIGNATURES

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

MANUFACTURED HOME COMMUNITIES, INC.

BY: /s/ Thomas P. Heneghan
---------------------------------------
Thomas P. Heneghan
Executive Vice President, Treasurer and
Chief Financial Officer

BY: /s/ Judy A. Pultorak
---------------------------------------
Judy A. Pultorak
Principal Accounting Officer

DATE: August 6, 1998