(2)  Includes gain on sale of land of $661,000 in 2002.

ITEM 7 –  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Statement Restatement

In a review of its accounting treatment of various interest rate swaps, the Company has determined that it is necessary to restate its previously issued financial statements for periods ending on or prior to September 30, 2004.  In its review of its accounting policies, the Company determined that the accounting for its interest rate swaps did not comply with generally accepted accounting principles in the U.S. (GAAP).  Although management believes the economics of the interest rate swaps achieved the original objectives of converting certain variable rate debt to effectively fixed rate obligations, certain technical documentation requirements for hedge accounting under Financial Accounting Standards Board (FAS) Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” and related interpretations were not met.

Historically, the Company treated these interest rate swaps as embedded derivatives (part of debt agreements) and did not separately record these derivatives as assets/liabilities in the consolidated balance sheets.  As a result, the Company disclosed the variable rate borrowings as fixed rate obligations as if they were altered by the interest rate swap agreements.  Since these derivatives do not qualify for hedge accounting, the changes in the fair value of the derivatives must be recorded in the Company’s income statement as an income/expense in the period that such changes occurred.  These non-cash fair value adjustments have the effect of decreasing net income for periods prior to January 1, 2002 by approximately $384,000, decreasing net income by approximately $531,000 for the year ended December 31, 2002, increasing net income by approximately $390,000 for the year e nded December 31, 2003 and increasing net income for the nine months ended September 30, 2004 by approximately $249,000.  There is no effect on historical or future net cash flows provided by operating activities.

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Overview

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto elsewhere herein.

The Company is a real estate investment trust (REIT).  The Company’s primary business is the ownership and operation of manufactured home communities – leasing manufactured home spaces on a month-to-month basis to private manufactured home owners.  The Company also leases homes to residents and, through, its taxable REIT subsidiary, UMH Sales and Finance, Inc. (S&F), sells and finances homes to residents and prospective residents of our communities.  The Company owns twenty-seven communities containing approximately 6,200 sites.  These communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee.  The Company also invests in debt and equity securities of other REITs.

During 2004, the Company acquired Bishop's Mobile Home Court and Whispering Pines Community, in Somerset Township, Pennsylvania.  Bishop's Mobile Home Court is an existing family community consisting of 124 sites, located next to Whispering Pines Community, a 55-and-older community consisting of 15 existing home sites and an additional 60 acres for expansion.  The Company has renamed Bishop's Mobile Home Court as Somerset Estates.

The Company also holds a portfolio of securities of other REITs with a balance of $23,821,078 at December 31, 2004.  The Company invests in REIT securities on margin from time to time when the Company can achieve an adequate yield spread and when suitable acquisitions of real property cannot be found.  At December 31, 2004, the Company’s portfolio consisted of 57% preferred stocks, 28% common stocks and 15% debentures.  The REIT securities portfolio provides the Company with liquidity and additional income until suitable acquisitions of real property are found.

The Company’s revenue primarily consists of rental and related income from the operation of its manufactured home communities.  Revenues also include sales of manufactured homes, interest and dividend income and gain on securities available for sale transactions, net.  Rental and related income increased 3.3% for the year ended December 31, 2004 as compared to the year ended December 31, 2003 primarily due to rent increases and the acquisition of a new community during the first quarter of 2004.  On March 1, 2004, the Company acquired a manufactured home community in Somerset Township, Pennsylvania.  Net income for the year ended December 31, 2004 decreased by $315,782 due primarily to a decrease in the gain on securities available for sales transactions of $233,237 for the year ended December 31, 2004 as compared to the year ended December 31, 2003.  There was al so a decrease in interest and dividend income due to the sales of securities available for sale during 2003 and 2004.  Community operations have remained relatively stable.  Management is continuing to seek communities for acquisition, but the current acquisition environment is very competitive.

See PART I, Item 1- Business for a more complete discussion of the economic and industry-wide factors relevant to the Company, the Company's lines of business and principal products and services, and the opportunities, challenges and risks on which the Company is focused.

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Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U. S. generally accepted accounting principles.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company’s financial statements. For a detailed description of these and other accounting policies, see Note 2 in the notes to the Company’s consolidated financial statements included in this Form 10-K.  Management has discussed each of these critical accounting policies with the Audit Committee of the Board of Directors.

     Real Estate Investments

The Company applies Financial Accounting Standards Board Statement No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (Statement 144) to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated co st to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded.

     Securities Available for Sale

Investments in non-real estate assets consist primarily of marketable securities.  Management reviews our marketable securities for impairment on a periodic basis when events or circumstances occur.  If a decline in fair value is determined to be other than temporary,  an impairment charge is recognized against earnings and the cost basis of the individual security shall be written down to fair value as the  new cost basis.  Management’s evaluation includes consideration of events that may be attributable to the unrealized loss, including, among other things, the credit-worthiness of the issuer, length of time that a security had a continuous

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unrealized loss, the financial position of the issuing company, and the period of expected recovery in value.

Other

Estimates are used when accounting for the allowance for doubtful accounts, potentially excess and obsolete inventory and contingent liabilities, among others.  These estimates are susceptible to change and actual results could differ from these estimates.  The effects of changes in these estimates are recognized in the period they are determined.

Results of Operations

2004 vs. 2003

Rental and related income increased from $20,954,274 for the year ended December 31, 2003 to $21,646,325 for the year ended December 31, 2004 primarily due to the acquisition of a new community in 2004 and rental increases to residents.  During 2004, the Company was able to obtain an average rent increase of approximately 3% to 4%.

Occupancy as well as the ability to increase rental rates directly affect revenues.  The Company’s occupancy rate has remained relatively stable at 86% in 2004 as compared to the prior year.  The Company has faced many challenges in filling vacant homesites.  Relatively low interest rates have continued to make site-built housing more accessible.  Attractive apartment rental deals continue to hinder occupancy advances.  Some of the Company’s vacancies are the result of expansions in progress.  The Company is also evaluating further expansion at selected communities in order to increase the number of available sites.  

Sales of manufactured homes increased from $6,758,168 for the year ended December 31, 2003 to $7,286,610 for the year ended December 31, 2004.  Cost of sales of manufactured homes increased from $5,360,554 for the year ended December 31, 2003 to $5,693,028 for the year ended December 31, 2004.  This increase was due to the increase in sales.  Selling expenses remained relatively stable for the year ended December 31, 2004 as compared to the year ended December 31, 2003.  Income from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling expenses) increased from $141,841 for the year ended December 31, 2003 to $443,720 for the year ended December 31, 2004.  The Company has been experiencing an increase in sales volume as well as a slight increase in gross margin.  The Company believes that sales of new hom es produces new rental revenue and is an investment in the upgrading of the communities.

Interest and dividend income decreased from $3,260,261 in 2003 to $2,842,523 in 2004.   This was primarily as a result of a lower average balance of securities available for sale during 2004 as a result of sales during 2003 and 2004.

Gains on securities transactions, net decreased from $2,698,724 in 2003 to $2,465,487 in 2004.  This decrease was primarily due to a loss on settlement of futures contracts of $243,360 during 2004.

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Community operating expenses increased from $10,305,372 for the year ended December 31, 2003 to $10,984,908 for the year ended December 31, 2004 primarily as a result of acquisitions of the new communities in 2003 and 2004 and increased real estate taxes.

General and administrative expenses decreased from $2,589,275 in 2003 to $2,513,692 in 2004 primarily as a result of a decrease in professional fees relating to the reorganization in Maryland in 2003.

Interest expense decreased from $2,800,017 in 2003 to $2,529,752 in 2004 primarily as a result of a decrease in loans payable.  Interest capitalized on construction in progress amounted to $210,000, and $145,800 for 2004 and 2003, respectively.

Depreciation expense increased from $2,909,069 in 2003 to $3,174,673 in 2004 primarily as a result of the acquisitions of the new communities in 2003 and 2004.

Amortization of financing costs increased from $108,800 in 2003 to $130,856 in 2004 primarily as a result of the new mortgages payable and lines of credit in 2003 and 2004.

2003 vs. 2002

Rental and related income increased from $20,140,691 for the year ended December 31, 2002 to $20,954,274 for the year ended December 31, 2003 primarily due to the acquisition of a new community in 2003 and rental increases to residents.  During 2003, the Company was able to obtain an average rent increase of approximately 4%.

Occupancy as well as the ability to increase rental rates directly affect revenues.  The Company has experienced a slight decrease in occupancy of approximately 1% from 87% in 2002.  The Company has faced many challenges in filling vacant homesites.  Relatively low interest rates have made site-built housing more accessible.  Attractive apartment rental deals have also contributed to the increased vacancies.  Some of the Company’s vacancies are the result of expansions in progress.  The Company is also evaluating further expansion at selected communities in order to increase the number of available sites.  

Sales of manufactured homes increased from $5,538,202 for the year ended December 31, 2002 to $6,758,168 for the year ended December 31, 2003.  Cost of sales of manufactured homes increased from $4,657,988 for the year ended December 31, 2002 to $5,360,554 for the year ended December 31, 2003.  Selling expenses increased from $1,040,005 for the year ended December 31, 2002 to $1,255,773 for the year ended December 31, 2003.   These fluctuations are directly attributable to the fluctuations in sales.  Income from the sales operations (defined as sales of manufactured homes less cost of sales of manufactured homes less selling expenses) increased from a loss of $159,791 for the year ended December 31, 2002 to a profit of $141,841 for the year ended December 31, 2003.     The Company has been experiencing an increase in sales volume as well as an incre ase in gross margin.  The Company believes that sales of new homes produces new rental revenue and is an investment in the upgrading of the communities.

Interest and dividend income increased from $2,867,142 in 2002 to $3,260,261 in 2003.   This was primarily as a result of a higher average balance of securities available for sale during 2003.

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Gains on securities transactions, net increased from $794,950 in 2002 to $2,698,724 in 2003.  This increase was primarily the result of the Company’s decision to take advantage of the rise in price of the securities portfolio.  The Company has also experienced an increase in redemptions on the preferred stock holdings by the issuers.  These securities were redeemed at par.  

Community operating expenses increased from $9,457,214 for the year ended December 31, 2002 to $10,305,372 for the year ended December 31, 2003 primarily as a result of the acquisition of a new community in 2003 and increased real estate taxes, professional fees and personnel costs, including health insurance.  

General and administrative expenses increased from $2,184,045 in 2002 to $2,589,275 in 2003 primarily as a result of an increase in professional fees relating to growth of corporate offices, staff and reorganization in Maryland.

Interest expense decreased from $3,845,244 in 2002 to $2,800,017 in 2003.  This was primarily as a result of a decrease in loans payable and the changes in fair value of the derivatives.  The Company has also extended the Waterfalls Village mortgage and the D&R Village mortgage and reduced those rates from over 7% to 4.625%.  The balance of these mortgages amounted to $2,632,734 and $3,044,969 at December 31, 2003, respectively.  Interest capitalized on construction in progress amounted to $145,800 and $162,600 for 2003 and 2002, respectively.

Depreciation expense and amortization of financing costs remained relatively stable.

Gain on sales of investment property and equipment decreased from $664,546 in 2002 to $55,888 in 2003 primarily due to the sale of vacant land at a gain of $661,000 in 2002.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has not executed any off-balance sheet arrangements.

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The following is a summary of the Company’s contractual obligations as of December 31, 2004:

Mortgages payable represents the principal amounts outstanding by scheduled maturity.  The interest rates on these mortgages varies from fixed rates ranging from 4.625% to 7.36% and variable rates of prime plus ½% to LIBOR plus 1.55% to 1.75%.  The above table does not include the Company’s obligation under short-term borrowings including its lines of credit and margin loan as described in Note 5 of the Notes to Consolidated Financial Statements.

Operating lease obligations represent a lease, with a related party, for the Company’s corporate offices.  The original lease is for a five-year term with monthly lease payments of $12,000.  The Company is also responsible for its proportionate share of real estate taxes and common area maintenance.  

Retirement benefits represent post-retirement benefits that are not funded and therefore will be paid from the general assets of the Company.

Liquidity and Capital Resources

The Company operates as a real estate investment trust deriving its income primarily from real estate rental operations.  At December 31, 2004, the Company’s shareholders’ equity increased to $48,804,743 as compared to $38,575,404 at December 31, 2003, principally due to proceeds from the dividend reinvestment and stock purchase plan (DRIP) partially offset by dividends and decreases in unrealized gains on securities available for sale.

The Company’s ability to generate cash adequate to meet its needs is dependent primarily on income from its real estate investments and securities portfolio, the sale of real estate investments and securities, refinancing of mortgage debt, leveraging of real estate investments, and availability of bank borrowings, proceeds from the DRIP, and access to the capital markets.  Purchases of new properties, purchases of manufactured home inventory, investment in debt and equity securities of other REITS, payments of expenses related to real estate operations, capital improvements programs, debt service, management and professional fees, and dividend requirements place demands on the Company’s liquidity.

The Company intends to operate its existing properties from the cash flows generated by the properties.  However, the Company’s expenses are affected by various factors, including

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inflation.  Increases in operating expenses raise the breakeven point for a property and, to the extent that they cannot be passed on through higher rents, reduce the amount of available cash flow which can adversely affect the market value of the property.

Management does not see an indication that material factors are present that may negatively impact cash flows.  The Company is not aware of adverse trends, demands, commitments, events or uncertainties that are reasonably likely to have an impact on the Company’s liquidity.  The Company owns securities available for sale of $23,821,078 at December 31, 2004.  At December 31, 2004, the Company owns twenty-seven communities of which 12 have no mortgages.  The Company also has unused lines of credit totaling $17,000,000.  These marketable securities, non-mortgaged properties and lines of credit provide the Company with additional liquidity.   The Company has been raising capital through its DRIP.  The Company believes that funds generated from operations and the DRIP, the funds available on the line of credit, together with the ability to finance and re finance its properties and sell marketable securities will provide sufficient funds to adequately meet its obligations over the next several years.

Net cash provided by operating activities decreased from $6,747,943 in 2002 to $4,420,150 in 2003 and increased to $5,115,754 in 2004.  Cash flow was primarily used for capital improvements, payment of dividends, purchases of securities available for sale, purchase of inventory of manufactured homes, loans to customers for the sales of manufactured homes, purchases of manufactured home communities and expansion of existing communities.  The Company meets maturing mortgage obligations by using a combination of cash flow and refinancing.  The dividend payments were primarily made from cash flow from operations.

In addition to normal operating expenses, the Company requires cash for additional investments in manufactured home communities, capital improvements, purchase of manufactured homes for rent, scheduled mortgage amortization and dividend distributions.

The Company also invests in debt and equity securities of other REITs for liquidity and additional income.  The Company from time to time may purchase these securities on margin when there is an adequate yield spread.  At December 31, 2004, there was no amount outstanding on the margin loan.  During 2004, the Company’s securities portfolio decreased by approximately $7,300,000 primarily due to sales of approximately $11,100,000, partially offset by purchases of approximately $6,000,000 and a decrease in the unrealized gain of approximately $2,200,000.  During 2004, the Company recognized a portion of the substantial unrealized gains in the security portfolio.  The securities portfolio at December 31, 2004 has experienced an increase in value from cost of approximately 15%, however, there are no assurances such unrealized gains will be sustained or increases will c ontinue.  

The Company estimates that in 2005 it will purchase approximately 25 manufactured homes to be used as rentals for a total cost of $500,000.  Management believes that these manufactured homes will each generate approximately $300 per month in rental income in addition to lot rent.  Once rental homes reach 10 years old, the Company generally sells them.

Capital improvements include amounts needed to meet environmental and regulatory requirements in connection with the manufactured home communities that provide water or

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sewer service.  Excluding expansions, the Company is budgeting approximately $1,000,000 in capital improvements for 2005.  

The Company’s only significant commitments and contractual obligations relate to retirement benefits and the lease on its corporate offices as described in Note 8 to the Consolidated Financial Statements.

The Company has a Dividend Reinvestment and Stock Purchase Plan (Plan), which provides for the reinvestment of dividends and for monthly optional cash payments of not less than $500 per payment nor more than $1,000 unless a request for waiver has been accepted by the Company.  During 2004, amounts received, including dividends reinvested of $1,890,667, amounted to $12,043,926.  During 2004, the Company paid $8,149,313, including dividends reinvested. The success of the Plan resulted in a substantial improvement in the Company’s liquidity and capital resources in 2004.

The Company has undeveloped land which it could develop over the next several years. The Company is also exploring the utilization of vacant land for town houses.  The Company continues to analyze the highest and best use of its vacant land, and uses it accordingly.

During the year ended December 31, 2004, employees exercised their stock options and purchased 21,000 shares for a total of $185,725.  During the year ended December 31, 2003, eleven employees exercised their stock options and purchased 115,000 shares for a total of $1,185,900.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payments, which establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses primarily on accounting for transactions with employees, and carries forward without change prior guidance for share-based payments for transactions with non-employees.

SFAS No. 123(R) eliminates the intrinsic value measurement objective in APB Opinion No. 25 and generally requires an issuer to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such cost must be recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period (which is usually the vesting period). The standard also requires an issuer estimate the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur.  This Statement is effective for reporting periods beginning aft er June 15, 2005.  An issuer is required to use either the “modified prospective method” or the “modified retrospective method.” Under the modified prospective method, an issuer must recognize compensation cost

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for all awards granted after the adoption of the standard and for the unvested portion of previously granted awards that are outstanding on that date. Under the modified retrospective method, an issuer must restate previously issued financial statements to recognize the amounts previously calculated and reported on a pro forma basis, as if the prior standard had been adopted. Under both methods, an issuer is permitted to use either a straight line or an accelerated method to amortize the cost as an expense for awards with graded vesting.  The Company will utilize the prospective method on a straight line basis.   This Statement will not have a material impact on the Company’s consolidated financial statements.

Safe Harbor Statement

This Form 10-K contains various “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby.  The words “may”, “will”, “expect”, “believe”, “anticipate”, “should”, “estimate”, and similar expressions
identify forward-looking statements.  These forward-looking statements reflect the Company’s current views with respect to future events and finance performance, but are based upon current assumptions regarding the Company’s operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company’s operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements.  

Such factors include, but are not limited to, the following:  (i)  changes in the general economic climate; (ii)  increased competition in the geographic areas in which the Company owns and operates manufactured housing communities; (iii)  changes in government laws and regulations affecting manufactured housing communities; and (iv)  the ability of the Company to continue to identify, negotiate and acquire manufactured housing communities and/or vacant land which may be developed into manufactured housing communities on terms favorable to the Company.  The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

ITEM 7A –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's principal market risk exposure is interest rate risk.  The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing capital costs and interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures, which include the periodic use of derivatives.  The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows.  The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt.  The Company does not enter into derivative instruments for speculative purposes.

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The following table sets forth information as of December 31, 2004, concerning the Company’s long-term debt obligations, including principal cash flow by scheduled maturity, weighted average interest rates and estimated fair value.

The Company’s variable rate long-term debt consists of six mortgage loans with interest rates ranging from prime plus ½% to LIBOR plus 1.55% to 1.75%.  To minimize the variability that changes in interest rates could have on its future cash flows, the Company has entered into five separate interest rate swap agreements.  The interest rate swap agreements have the effect of fixing interest rates relative to specific mortgage loans totaling approximately $26 million.  The effective fixed interest rates on these loans range from 5.17% to 6.39%.

The Company's remaining variable rate debt totals $3 million as of December 31, 2004 which bears interest at prime plus ½%.  If prime increased or decreased by 1%, the Company believes its interest expense would have increased or decreased by approximately $30,000, based on the balance of long-term debt outstanding at December 31, 2004.

The Company also has approximately $800 thousand in variable rate debt due on demand.  This debt primarily consists of inventory financing loans.  The interest rates on these loans range from 6% to 9% at December 31, 2004.  The carrying value of the Company’s variable rate debt approximates fair value at December 31, 2004.

The Company invests in both debt and equity securities of other REITs and is primarily exposed to equity price risk from adverse changes in market rates and conditions.  All securities are classified as available for sale and are carried at fair value.  To reduce exposure of the debt securities portfolio to market rate fluctuations, the Company invests in futures contracts of ten-year treasury notes.  These contracts are marked to market with changes in market recognized in income.

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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data listed in Part IV, Item 15(a)(1) are incorporated herein by reference and filed as part of this report.

The following is the Unaudited Selected Quarterly Financial Data:

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

THREE MONTHS ENDED

(1)  See Note 1 to Consolidated Financial Statements for a description of the restatement.