<PAGE>

================================================================================
                          UNITED STATES SECURITIES AND
                               EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                               ------------------

                                    FORM 10-Q
                               ------------------
(Mark One)

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

                For the quarterly period ended September 30, 1998

                                       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 1-12269
                              --------------------

                         HOMESTEAD VILLAGE INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                            -------------------------

                MARYLAND                          74-2770966
      (STATE OR OTHER JURISDICTION            (I.R.S. EMPLOYER
    OF INCORPORATION OR ORGANIZATION)         IDENTIFICATION NO.)



                        2100 RIVEREDGE PARKWAY, 9TH FLOOR
                             ATLANTA, GEORGIA 30328
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                 (770) 303-2200
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                          IF CHANGED SINCE LAST REPORT)
                                               ---------------------

     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
                                        ----          ----

The number of shares outstanding of the Registrant's common stock
as of November 12, 1998 was: 38,262,996
 ===============================================================================



<PAGE>





                         HOMESTEAD VILLAGE INCORPORATED
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                             NUMBER
                                                                                                              PAGE
                                                                                                           -----------
<S>                                                                                                        <C>
PART I.          Condensed Financial Information

       Item 1.   Financial Statements

                 Condensed Balance Sheets (unaudited) - September 30, 1998 and December 31, 1997...........     3

                 Condensed Statements of Operations (unaudited) - Three- and nine-month Periods Ended
                 September 30, 1998 and 1997...............................................................     4

                 Condensed Statements of Cash Flows (unaudited) - Nine-month Periods Ended September 30,
                 1998 and 1997.............................................................................     5

                 Notes to Condensed Financial Statements (unaudited).......................................     6

                 Report of Independent Public Accountants..................................................     12

       Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.....     13

PART II.         Other Information

       Item 6.   Exhibits and Reports on Form 8-K.........................................................      20

</TABLE>

                                       2
<PAGE>




                         HOMESTEAD VILLAGE INCORPORATED

                            CONDENSED BALANCE SHEETS

                                   (UNAUDITED)

                                 (In thousands)
<TABLE>
<CAPTION>

                                     ASSETS                                                   September 30,   DECEMBER  31,
                                                                                                   1998            1997
                                                                                              --------------  -------------
<S>                                                                                           <C>             <C>
Current assets:
     Cash and cash equivalents (including restricted cash of $167 in 1998 and $657 in 1997).    $     12,760 $       2,974

     Accounts receivable, net of allowance of $105 in 1998 and $81 in 1997..................           5,264         1,970
     Other current assets...................................................................           5,153           732
                                                                                                -------------- -------------
          Total current assets..............................................................          23,177         5,676
                                                                                                -------------- -------------
Property and equipment......................................................................       1,122,522       733,321
Less accumulated depreciation...............................................................         (37,665)
                                                                                                                  (17,824)
                                                                                                -------------- -------------
Net investment in property and equipment....................................................       1,084,857       715,497
                                                                                                -------------- -------------
Deposits and pursuit costs, including $5,114 of funds with title companies for property
   acquisitions in 1998 and $7,697 in 1997..................................................          11,231        12,901
Deferred loan costs, net of accumulated amortization of $32,983 in 1998 and $43,297 in
     1997                                                                                              1,993           632
Trademark and intangibles, net of accumulated amortization of $3,569 in 1998 and $1,768
   in 1997                                                                                            44,899        44,447
Other assets ...............................................................................           5,420         4,796
                                                                                                -------------- -------------

   Total assets.............................................................................     $ 1,171,577   $   783,949
                                                                                                ============== =============

                             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Lines of credit........................................................................    $    292,580     $  96,808
     Mortgage note payable..................................................................          122,028           --
     Development costs payable, including retainage of $18,107 in 1998 and $21,966 in
        1997                                                                                          28,848        34,079
     Due to affiliate.......................................................................             339           133
     Accrued interest payable to affiliates.................................................           6,972         2,540
     Accrued real estate taxes..............................................................           6,146         2,900
     Accounts payable and other accrued expenses............................................          16,505         8,882
                                                                                                -------------- -------------
          Total current liabilities.........................................................         473,418       145,342
Convertible mortgage notes payable to affiliates............................................         221,334       301,606
Other long-term liabilities.................................................................           8,067         8,070
                                                                                                -------------- -------------
          Total liabilities.................................................................         702,819       455,018
Commitments and contingencies
Shareholders' equity:
     Common stock,  $.01 par value,  249,823  shares  authorized,  38,263 shares
        issued and  outstanding in 1998 and 27,805 shares issued and outstanding
        in
        1997                                                                                             383           278
     Preferred stock, 177 shares authorized, none issued....................................              --            --
     Additional paid-in capital.............................................................         474,554       318,667
     Retained earnings (accumulated deficit)................................................          (5,330)       13,098
     Less shares in escrow..................................................................              --        (2,253)
     Less deferred compensation.............................................................            (849)         (859)
                                                                                                -------------- -------------

          Total shareholders' equity........................................................         468,758       328,931
                                                                                                -------------- --------------
          Total liabilities and shareholders' equity........................................     $ 1,171,577   $    783,949
                                                                                                ============== =============

</TABLE>



              The accompanying notes are an integral part of these
                    condensed financial statements.

                                       3
<PAGE>



                         HOMESTEAD VILLAGE INCORPORATED

                       CONDENSED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                          THREE-MONTH PERIODS ENDED            NINE-MONTH PERIODS ENDED
                                                                SEPTEMBER 30,                        SEPTEMBER 30,
                                                   -----------------------------------   -----------------------------------
                                                          1998              1997               1998             1997
                                                        --------          --------           --------          -------
<S>                                                <C>                  <C>               <C>              <C>    
Revenues:
     Room revenue..................................$          38,345    $      15,922     $       97,781   $    40,421
     Other revenue.................................            1,858              285             4,277            829
                                                   -----------------    -------------     --------------   -----------
          Total revenues...........................           40,203           16,207            102,058        41,250
                                                   -----------------    -------------     --------------   -----------

Operating expenses:
     Property operating expenses...................           17,158            6,991             43,456        17,369
     Corporate operating expenses..................            6,347            3,840             16,368        10,988
     Depreciation and amortization.................            8,368            3,640             22,227         7,831
                                                   -----------------    -------------     --------------   -----------
          Total operating expenses.................           31,873           14,471             82,051        36,188
                                                   -----------------    -------------     --------------   -----------

Operating income...................................            8,330            1,736             20,007         5,062

Interest income....................................              203              129                707           421
Interest expense, net of capitalized interest......           (6,679)              --            (13,798)           --
                                                   -----------------    -------------     --------------   -----------

Earnings before income taxes and extraordinary
  item.............................................            1,854            1,865              6,916         5,483
Provision for income taxes.........................               --               --                 --            --
                                                   -----------------    -------------     --------------   -----------
Earnings before extraordinary item.................            1,854            1,865              6,916         5,483
Extraordinary item - loss on early extinguishment
  of debt..........................................          (25,344)              --            (25,344)         --
                                                   -----------------    -------------     --------------   -----------
Net earnings (loss)................................$         (23,490)   $       1,865     $      (18,428)  $     5,483
                                                   =================    ==============    ===============  ============

Basic weighted average shares outstanding..........           38,263           24,936             37,430        22,381
                                                   =================    ==============    ===============  ============
Diluted weighted average shares outstanding........           38,263           46,218             37,430        40,498
                                                   =================    ==============    ===============  ============

Earnings (loss) per share:
Basic earnings before extraordinary item...........$            0.05    $        0.07     $          0.19  $      0.24
Extraordinary item-loss on early extinguishment of
  debt ............................................            (0.66)              --               (0.68)          --
                                                   =================    ==============    ===============  ============
Basic earnings (loss)..............................$           (0.61)   $         0.07    $         (0.49)  $      0.24
                                                   =================    ==============    ===============  ============

Diluted earnings before extraordinary item.........$             0.05   $         0.04    $          0.19   $      0.14
Extraordinary item-loss on early extinguishment
  of debt .........................................            (0.66)              --               (0.68)           --
                                                   -----------------    --------------    ---------------  ------------
Diluted earnings (loss)............................$           (0.61)   $         0.04      $       (0.49) $       0.14
                                                   =================    ==============    ===============  ============


</TABLE>







              The accompanying notes are an integral part of these
                    condensed financial statements.
                                       4

<PAGE>



                         HOMESTEAD VILLAGE INCORPORATED

                       CONDENSED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                          NINE-MONTH PERIODS ENDED
                                                                                               SEPTEMBER 30,
                                                                                       -------------------------------
                                                                                           1998             1997
                                                                                       ------------      -----------
<S>                                                                                    <C>               <C>
Operating activities:
    Net earnings (loss)...........................................................     $     (18,428)      $   5,483
    Adjustments  to  reconcile  net  earnings to net cash  provided by operating
activities:
        Extraordinary item - loss on early extinguishment of debt.................            25,344              --
        Depreciation and amortization.............................................            22,227           7,831
        Deferred compensation.....................................................               510             351
        Amortization of deferred loan costs.......................................             2,665             --
        Amortization of prepaid rent..............................................              --               225
    Change in assets and liabilities:
        Increase in accounts receivable...........................................           (3,294)          (1,809)
        Increase in other current assets..........................................           (4,421)            (448)
        Increase in accrued real estate taxes.....................................            3,246              843
        Increase in accrued interest on convertible mortgage notes................            4,432              --
        Increase in accounts payable and other accrued expenses...................            7,623            6,249
        Increase (decrease) in due to affiliate...................................              206              (15)
                                                                                       --------------   --------------
            Net cash provided by operating activities.............................           40,110           18,710
                                                                                       --------------   --------------

Investing activities:
        Investment in properties, excluding development costs payable.............         (393,185)        (255,081)
        Decrease (increase) in deposits and pursuit costs.........................            1,670           (3,682)
        Increase in other assets..................................................           (1,207)          (3,619)
                                                                                       --------------   --------------
            Net cash used in investing activities.................................         (392,722)        (262,382)
                                                                                       --------------   --------------

Financing activities:
        Proceeds from lines of credit.............................................          325,772           27,408
        Payments on lines of credit...............................................         (130,000)             --
        Deferred loan costs for line of credit....................................           (3,281)          (1,049)
        Proceeds from convertible mortgage notes payable..........................           17,013          158,250
        Payment of convertible mortgage notes payable.............................          (98,028)              --
        Proceeds from mortgage note payable.......................................          122,028               --
        Proceeds from sale of shares, net of expenses.............................          154,241              --
        Payment to extinguish debt................................................          (25,344)             --
        Payments on other long-term liabilities...................................               (3)             --
        Repurchase of stock.......................................................              --              (126)
        Exercise of warrants for common stock.....................................              --            56,827
                                                                                       --------------   --------------
            Net cash provided by financing activities.............................          362,398          241,310
                                                                                       --------------   --------------
Net increase in cash and cash equivalents.........................................            9,786           (2,362)
Cash and cash equivalents, beginning of period....................................            2,974            7,415
                                                                                       --------------   --------------
Cash and cash equivalents, end of period..........................................     $      12,760    $      5,053
                                                                                       ==============   ==============

Non-cash investing and financing transactions:

        Increase in property and equipment, and development cost payable..........     $      5,231     $     20,291
                                                                                       ==============   ==============

        Increase in property and equipment, and accrued interest payable to            $         --     $      6,055
                                                                                       ==============   ==============

        Increase in property and equipment from capitalization of loan costs......     $       1,249    $      1,877
                                                                                       ==============   ==============

        Increase in trademark and intangibles arising from release of shares in        $      2,253     $     14,488
                                                                                       ==============   ==============

        Loan costs resulting from issuance of convertible mortgage debt...........     $       1,251    $     10,830
                                                                                       ==============   ==============

        Decrease in deferred tax asset and deferred tax liability.................     $         --     ($       1,657)
                                                                                       ==============   ==============

</TABLE>



                   The  accompanying   notes  are  an  integral  part  of  these
                    condensed financial statements.
                                       5

<PAGE>




                         HOMESTEAD VILLAGE INCORPORATED
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)

NOTE 1--GENERAL

     The financial statements of Homestead Village Incorporated ("Homestead") as
of September 30, 1998 and for the three and nine-month  periods ended  September
30,  1998  and  1997,  are  unaudited  and  certain   information  and  footnote
disclosures normally included in financial  statements have been omitted.  While
management of Homestead  believes that the  disclosures  presented are adequate,
these  interim  financial  statements  should  be read in  conjunction  with the
financial  statements and notes  included in  Homestead's  1997 Annual Report on
Form 10-K.

     In  the  opinion  of  management,   the  accompanying  unaudited  financial
statements  contain  all  adjustments,   consisting  only  of  normal  recurring
adjustments,   necessary  for  a  fair  presentation  of  Homestead's  financial
statements for the interim periods presented.  The results of operations for the
three  and  nine-month  periods  ended  September  30,  1998  and  1997  are not
necessarily indicative of the results to be expected for the full year.

     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.

      In  April  1998  the  Accounting   Standards  Executive  Committee  issued
Statement  of Position  98-5 ("SOP  98-5")  "Reporting  on the Costs of Start-Up
Activities"   establishing  accounting  standards  requiring  the  expensing  of
organizational,  pre-opening,  and start-up  costs.  SOP 98-5 is  effective  for
fiscal  years  beginning  after  December  15,  1998.  Restatement  of financial
statements for earlier  periods is prohibited.  Upon adoption,  any  unamortized
organizational,  pre-opening  and start-up costs will be written off and charged
to first  quarter  1999  operations  as a  cumulative  effect of  adoption of an
accounting standard. Homestead is in the process of evaluating SOP 98-5 and will
adopt the  standard  in the  beginning  of its 1999 fiscal  year.  The impact of
adoption of SOP 98-5 on Homestead's results of operations and financial position
has not been quantified.


NOTE 2--PROPERTY AND EQUIPMENT

     Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                           SEPTEMBER 30,        DECEMBER 31,
                                                                                1998                 1997
                                                                          ----------------    ----------------
                                                                            (UNAUDITED)

            <S>                                                           <C>                 <C>
            Completed properties:
                 Land                                                     $       174,856     $        100,118
                 Buildings and improvements...........                            572,011              329,045
                 Furniture, fixtures and equipment....                             93,178               49,773
                                                                          ----------------    -----------------
                                                                                  840,045              478,936
            Properties under construction.............                            159,158              213,283
            Properties in planning and owned..........                            118,517               32,984
            Land held for future development..........                                --                 1,463
            Land held for sale........................                              4,802                6,655
                                                                          ----------------    -----------------
                      Total...........................                    $     1,122,522     $        733,321
                                                                          ================    =================

</TABLE>

                                       6

<PAGE>



                         HOMESTEAD VILLAGE INCORPORATED
               NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)


NOTE 3--DEBT

   Lines of Credit

         On April 24, 1998  Homestead  renewed its  existing  revolving  line of
credit  facility with  Commerzbank AG ("CAG"),  as agent for the lenders,  for a
one-year  term,  with an increase in total  borrowing  capacity to $150 million,
subject to collateral  requirements.  Borrowings bear interest at the Eurodollar
rate plus 1.5% to 2.5% per annum,  depending  upon the  percentage  leverage  of
borrowings  outstanding to the amount of qualifying  collateral.  Alternatively,
borrowings bear interest at a base rate defined as the higher of prime rate plus
a margin of 0.5% to 1.5% or the  federal  funds  rate plus a margin of 1% to 2%,
with the margin dependent on the percentage  leverage of borrowings  outstanding
to the  amount  of  qualifying  collateral.  Average  unfunded  balances  bear a
commitment fee of 0.375% per annum.

         On April 24, 1998  Homestead  also  entered into a separate $50 million
one-year  revolving  line of credit  facility  with CAG of which $30 million was
available  for  borrowing  on an unsecured  basis  through  September  30, 1998.
Subsequent to September  30, 1998,  borrowings on the $50 million line of credit
are  subject  to  collateral  requirements.  Borrowings  bear  interest  at  the
Eurodollar rate plus 2.75% per annum or,  alternatively,  at a base rate defined
as the  higher of prime rate plus 1.75% or the  federal  funds rate plus  2.25%.
Average unfunded balances bear a commitment fee of 0.5% per annum.

     On June 15, 1998 Homestead  entered into an additional $200 million line of
credit  facility with CAG which bears  interest at the  Eurodollar  rate plus 1%
(1.25%  after six months) or at a base rate of prime (prime plus 0.25% after six
months). The average unfunded balance bears a commitment fee of 0.25% per annum.
The line  expires  February  23, 1999.  Homestead  has  obtained a  subscription
agreement  from  Security  Capital for $200  million of  Homestead  subordinated
debentures to secure this obligation. If the subscription is called by Homestead
or Homestead  receives  proceeds from any offering of  securities,  the proceeds
must be used to first  repay  the  lines of  credit  to CAG and  second  to fund
projects under  development  which secure the other CAG credit  facilities.  The
debentures would bear interest at a rate of 0.25% over the rate Homestead incurs
under the $50 million  credit  facility with CAG.  Homestead may  repurchase the
debentures with the proceeds of an equity offering within 90 days of issuance of
the debentures,  otherwise the debentures  convert to Homestead  common stock at
the  lower of the  20-day  average  trading  price  of  Homestead  common  stock
immediately before execution of the subscription agreement or immediately before
the 90th day after issuance.  The subscription  agreement expires the earlier of
June  30,  1999 or two  weeks  after  termination  of the  $200  million  credit
agreement.  The  subscription  obligation  will be reduced or  terminated to the
extent  Homestead  issues equity  securities to any third party,  or to Security
Capital  pursuant to a separate  offering and the proceeds are used to repay the
$200  million  credit  facility  and any  remaining  proceeds  are  used to fund
projects  under  development  which secure the other CAG credit  facilities.  In
conjunction with Security  Capital's  entering into the subscription  agreement,
Homestead paid an arrangement fee to Security Capital of $600,000.

         The CAG lines  require  maintenance  of  certain  financial  covenants,
specifically,  aggregate  indebtedness of no more than 55% of gross asset value,
as defined, or indebtedness secured by a lien of no more than 50% of gross asset
value, as defined,  in each case excluding  indebtedness  outstanding  under the
credit agreement  entered into on June 15, 1998.  Homestead must also maintain a
minimum debt service coverage ratio of earnings before  interest,  income taxes,
depreciation,  amortization  and gains or losses on sales of assets to cash debt
service,  as defined,  of no less than 1.25 to 1 for the second quarter of 1998,
and,  including the $200 million  facility,  no less than 1.4 to 1 for third and
fourth  quarters 1998 and 1.5 to 1 for first quarter of 1999,  and excluding the
$200 million  facility,  no less than 1.5 to 1 for third quarter 1998,  1.6 to 1
for fourth  quarter  1998,  and no less than 1.75 to 1 thereafter on a quarterly
basis,  and  not  allow  stockholders  equity  to be  less  than  $325  million.
Additionally, Homestead will not enter into any commitment for purchases of land
or construction of projects if such obligations  exceed the available  borrowing
capacity  under all of the lines and  internally  generated  excess  funds.  The
covenants also restrict payment of dividends without lender approval.



                                       7
<PAGE>


                        HOMESTEAD VILLAGE INCORPORATED
               NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

     The lines of credit  covenant  ratios  were  amended  in  conjunction  with
Homestead  entering into the new mortgage note  (described  below).  As amended,
Homestead  may incur  indebtedness  secured  by a lien up to 55% of gross  asset
value through the earlier of the date the new mortgage note is repaid or October
1, 1998 or, if the $200 line of credit  has been  repaid,  until the  earlier of
June 30, 1999 or the date the new mortgage  note is repaid.  Further,  until the
earlier of June 30, 1999 or the date the new mortgage  note is repaid,  the debt
service  coverage  ratio,  including  debt  outstanding  under the $200  million
facility,  is required to be no less than 1.3 to 1 for third and fourth quarters
1998 and 1.4 to 1 for first  quarter of 1999,  and  excluding  the $200  million
facility, is required to be no less than 1.3 to 1 for third quarter 1998, 1.4 to
1 for fourth  quarter  1998,  and no less than 1.6 to 1 for the first quarter of
1999.  Homestead was in compliance  with all such  covenants as of September 30,
1998.  See Note 8 regarding  the  expected  effect on  compliance  with the debt
service  coverage ratio in fourth  quarter 1998 due to  anticipated  expenses of
reorganization of Homestead's development effort.

     Convertible Mortgage Notes Payable

     At  September  30,  1998  Homestead  owed  convertible  mortgage  notes  to
Archstone  Communities  Trust  ("Archstone"),  formerly Security Capital Pacific
Trust ("PTR"),  an affiliate,  of $221,333,620.  The notes are collateralized by
Homestead properties (54 Homestead properties at $360 million of historical cost
mortgaged to Archstone at September 30, 1998). The notes accrue interest at 9.0%
on the principal amount,  and require interest only payments every six months on
May 28 and November 28. The notes are due October 31, 2006,  and are callable on
or after May 28, 2001. The notes are  convertible,  at the option of the holder,
into shares of Homestead  common stock at a conversion  ratio equal to one share
of common  stock for every  $11.50 of  principal  amount  outstanding.  Deferred
financing  costs and the premium and discount on the  respective  fundings  have
been fully  amortized.  No further  funding  commitment  is available  under the
mortgage notes.

     Mortgage Note

     On July 6, 1998,  Homestead entered into a mortgage loan purchase agreement
with  Security  Capital  Atlantic  Incorporated  ("ATLANTIC")  and Merrill Lynch
Mortgage  Capital Inc  ("MLMC")  whereby $98  million of  Homestead  convertible
mortgage notes held by ATLANTIC were modified to, among other things,  eliminate
their  convertibility  feature in exchange  for a payment of $21.4  million from
Homestead to ATLANTIC.  The amount paid to ATLANTIC was based on trailing market
prices of Homestead  common stock at the time the  agreement  was entered  into,
which exceeded the conversion  price of the  convertible  mortgage notes at that
date.  Homestead funded the payment with the proceeds  received from the sale of
$24 million of 7.5% convertible  subordinated  debentures.  Also pursuant to the
mortgage loan purchase agreement ATLANTIC sold the amended notes to MLMC for $98
million.  On August 7, 1998,  Homestead  converted  the $98  million of mortgage
notes and the $24 million of 7.5%  convertible  subordinated  debentures  into a
$122 million mortgage of a newly formed special purpose subsidiary of Homestead.
The note is collateralized by 26 Homestead  properties (totaling $227 million of
historical  cost at September 30, 1998) which were formerly  collateral  for the
ATLANTIC  mortgage notes.  The $122 million  mortgage note matures June 30, 1999
and  provides for interest  only  monthly  payments of LIBOR plus 1.70%  through
September 30, 1998,  LIBOR plus 2.0% through  November 30, 1998,  and LIBOR plus
2.25% thereafter.  MLMC has mutually  exclusive  extension rights to either give
notice by December 15, 1998 to extend the maturity of the mortgage  note to June
30,  2001 (the "2 Year  Extension  Notice")  or give  notice by June 10, 1999 to
extend the maturity of the mortgage note to at least June 30, 2006 or as late as
September 30, 2009 (the "7 - 10 Year Extension Notice").  If extended,  the note
will bear interest at LIBOR plus 2.5% (3.5% if the collateral  properties do not
generate net  operating  income,  as defined,  of $18 million for the year ended
June 30,  1999).  No  assurance  can be given that MLMC will elect to extend the
mortgage note.  Homestead may prepay the mortgage note in whole or in part prior
to June 30,  1999 or, if the 2 Year  Extension  Notice is given,  Homestead  may
prepay in whole or in part by June 30, 2001.


                                       8
<PAGE>






                         HOMESTEAD VILLAGE INCORPORATED
               NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)



     The transaction resulted in an early extinguishment of debt measured as the
difference  between the $98 million  carrying  amount of the  original  mortgage
notes  to  ATLANTIC  and the  amount  paid to  extinguish  the  debt,  including
transaction  costs.  Such loss on  extinguishment  of debt and transaction costs
amounted to $25.3  million and was  recorded as an  extraordinary  item in third
quarter 1998.

     The  elimination  of the conversion  option  attached to the mortgage notes
reduced   Homestead's   contingently   issuable   shares  of  common   stock  by
approximately 8.5 million shares.

   Interest

     Homestead  incurred total interest cost of $34,146,000  and $59,559,000 for
the nine-month periods ended September 30, 1998 and 1997, respectively, of which
$20,348,000 and $59,559,000  were  capitalized,  respectively.  Interest paid in
cash in the nine-month periods ended September 30, 1998 and 1997 was $24,100,000
and $6,359,200, respectively.


NOTE 4--SHAREHOLDERS' EQUITY

   Shelf Offering

     On November 10, 1998,  Homestead filed a shelf registration  statement with
the  Securities  and  Exchange  Commission,  which  has  not yet  been  declared
effective,  for up to $356,402,600 of any combination of preferred  stock,  debt
securities and securities  warrants and up to a total of $500,000,000  including
common stock. Once effective, the securities issuable under the registration may
be offered from time to time, in amounts, at prices and on terms to be set forth
at the time of the offerings.

   Rights Offering

     On January 15, 1998,  Homestead  completed a Rights Offering for 10,426,840
common  shares at $15 per share  resulting  in gross  proceeds of  $156,402,600.
After costs of the  offering,  which  included a fee of 1% of gross  proceeds to
Security  Capital  Markets  Group  Incorporated,  a  wholly-owned  subsidiary of
Security Capital,  net proceeds to Homestead were approximately  $154.2 million.
Proceeds were used to repay outstanding  balances on Homestead's lines of credit
and for land acquisition and development costs.

     Security Capital,  Homestead's  majority  shareholder,  purchased 8,429,225
shares in the Rights  Offering  (80.8% of the offered  shares) at the same price
paid by the public.  Upon  completion of the Rights  Offering  Security  Capital
owned 69.3% of Homestead's outstanding common shares.

   Per Share Data

     On December 31, 1997 Homestead adopted Financial Accounting Standards Board
Statement  No.  128,   Earnings  per  Share  ("SFAS  128"),   which  requires  a
presentation  of basic  earnings per share,  calculated by dividing net earnings
available to common  shareholders by weighted average common shares  outstanding
and a  presentation  of diluted  earnings  per  share,  calculated  by  dividing
adjusted  earnings  available  to common  shareholders,  assuming  dilution,  by
adjusted weighted average common shares outstanding. Adjusted earnings available
for common  shareholders  adds back all net interest  expense  from  convertible
mortgage  notes.  Adjusted  weighted  average  shares  outstanding  includes the
dilutive  effect of options and warrants using the treasury stock method and the
dilutive effect of the  convertible  mortgage notes. In the three and nine-month
periods ended September 30, 1998 the effect of the loss on early  extinguishment
of debt results in basic loss per share being the most dilutive  result.  In the
three and  nine-month  periods  ended  September  30,  1997 the  restatement  of
earnings per share required by SFAS 128 resulted in no change and an increase of
$0.02, respectively, in basic earnings per share from the prior presentation and
no change in diluted earnings per share from the prior presentation.

     The  following is a  reconciliation  of the  denominator  used to calculate
basic  earnings per common share to the  denominator  used to calculate  diluted
earnings  per common  share  under SFAS No. 128 for the  periods  indicated  (in
thousands, except per common share amounts):
                                       9

<PAGE>


                        HOMESTEAD VILLAGE INCORPORATED
               NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)



<TABLE>
<CAPTION>

                                                                    Three Months Ended          Nine Months Ended
                                                                       September 30               September 30
                                                                     1998        1997           1998        1997
                                                                  ----------- -----------    ----------- -----------
<S>                                                               <C>         <C>            <C>         <C>
Earnings (loss) attributable to common shares..................   ($  23,490) $     1,865    ($   18,428)$     5,483
                                                                  =========== ===========    =========== ===========

Basic weighted average shares outstanding......................       38,263      24,936         37,430      22,381
    Incremental options and warrants...........................          --        1,530            --        2,635
    Conversion of convertible mortgage notes...................          --       19,752            --       15,482
                                                                  ----------- -----------    ----------- -----------
Adjusted weighted average shares outstanding                          38,263      46,218         37,430      40,498
                                                                  =========== ===========    =========== ===========

Earnings (loss) per share attributable to common shares:
    Basic......................................................   ($     0.61)$     0.07     ($    0.49) $     0.24
                                                                  =========== ===========    =========== ===========
    Diluted....................................................   ($    0.61) $     0.04     ($    0.49) $     0.14
                                                                  =========== ===========    =========== ===========
</TABLE>


NOTE 5--INCOME TAXES

     Deferred tax assets relate primarily to: (1) the difference in the carrying
amount of deferred  financing  costs  recognized  at formation and in connection
with  subsequent  fundings of  convertible  mortgage notes payable for financial
reporting  purposes  and  the  amount  recognized  for  tax  purposes;  (2)  the
difference in the carrying  amount of the  convertible  mortgage notes and other
liabilities for financial  reporting  purposes and the amount recognized for tax
purposes;  and (3) tax net  operating  loss.  Deferred  tax  liabilities  relate
primarily  to  the  difference  in  the  carrying  amount  and  the  methods  of
depreciation of certain  depreciable assets for financial reporting purposes and
the  amount  recognized  for  tax  purposes.  A  valuation  allowance  has  been
recognized  to  offset  the net  deferred  tax  assets,  due to  uncertainty  of
realization of those deferred tax assets in future years.

     At September  30, 1998,  Homestead  had, for federal  income tax  reporting
purposes,   estimated  net  operating  loss   carryforwards   of   approximately
$73,000,000,  which expire $4,200,000 in the year 2011,  $24,800,000 in the year
2017 and $44,000,000 in the year 2018.


NOTE 6--ADMINISTRATIVE SERVICES AGREEMENT

         Homestead  and  Security  Capital  have  an   administrative   services
agreement (the "Administrative Services Agreement"),  pursuant to which Security
Capital provides Homestead with administrative  services with respect to certain
aspects of Homestead's business. These services include, but are not limited to,
insurance administration,  accounts payable administration, internal audit, cash
management,  human  resources,  management  information  systems,  tax and legal
administration, research, shareholder communications and investor relations. The
fees payable to Security  Capital are based on  identifiable  costs  incurred by
Security  Capital  on  behalf  of  Homestead  plus  20% to cover  overhead.  Any
arrangements  under the  Administrative  Services Agreement for the provision of
services  are  required  to be  commercially  reasonable  and on terms  not less
favorable  than those which could be obtained from  unaffiliated  third parties.
Total  administrative  services fees for the nine-month  periods ended September
30,  1998  and  1997  were   $3,084,000  and   $1,620,000,   respectively.   The
Administrative Services Agreement, which expires December 31, 1998, is renewable
for a one-year  term,  subject to  approval  by a  majority  of the  independent
members of the Homestead Board.

     Homestead  believes  its  relationship  with  Security  Capital  under this
agreement  provides  it with  certain  advantages,  including  access to greater
quality  and  depth  of  management  personnel  and  resources,  highly  focused
research,  information  systems,  insurance,  cash  management and legal support
provided at substantial economies of scale.

                                       10


<PAGE>

                        HOMESTEAD VILLAGE INCORPORATED
               NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)



NOTE 7--COMMITMENTS AND CONTINGENCIES

   Unfunded Development Commitments

     At September 30, 1998, Homestead had approximately $113 million of unfunded
commitments  for  developments   under   construction.   Homestead   anticipates
completing  development  of  properties  under  construction  utilizing  present
financing sources, cash on hand, and cash flow from operations.

   Finder's Agreement

     Homestead has a series of agreements with an unaffiliated person ("Finder")
who developed the Homestead  Village concept and has performed certain services.
The agreements which expire February 5, 2043,  provide for payments to Finder as
follows:  (i) $535,000  annually with respect to the four  properties  for which
Finder  assisted in the location,  development and initial  operations;  (ii) an
annual amount of $7,500 per property  (subject to certain  conditions as defined
in the  agreements) for assistance in site location with respect to the first 35
properties  constructed  (other  than the  four  properties  referred  to in (i)
above);  (iii) 20% of the net proceeds as defined per the  agreements,  upon the
sale of the four properties  noted in (i) above to an unaffiliated  third party;
and (iv) 10% of the net proceeds as defined per the agreements, upon the sale of
the additional 35 properties to an unaffiliated  third party. No such sales have
occurred to date.  Total  payments  under these  agreements  for the  nine-month
periods  ended   September  30,  1998  and  1997  were  $553,300  and  $545,200,
respectively.


NOTE 8--SUBSEQUENT EVENT

     In fourth  quarter 1998, in light of the difficult  environment  in capital
markets and the resulting  limited  availability of new financing for additional
commitments for  developments,  Homestead  reorganized its internal  development
department  and  terminated  approximately  40 full-time  persons.  In addition,
Homestead is reviewing  its land sites owned and its  contracts for purchases of
development  sites and is aligning its decisions to develop and/or acquire sites
for development with its ability to obtain specific financings or its ability to
use cash flow from operations.  In conjunction with the severance of development
personnel and changed  expectations to pursue development of certain sites owned
or under contract for acquisition,  Homestead  anticipates  recording an accrual
for expenses of severance and abandoned pursuits totaling approximately $6 to $7
million.  As a result of the reorganization  expense,  Homestead  anticipates it
will not meet its bank lines of credit debt service  coverage ratio covenant for
fourth quarter 1998. Homestead has initiated  discussions with the banks to seek
a waiver of this covenant for fourth quarter 1998.

                                       11


<PAGE>







                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Homestead Village Incorporated:


     We have made a review of the accompanying  condensed  consolidated  balance
sheet  of  Homestead   Village   Incorporated  (a  Maryland   corporation)   and
subsidiaries  as of September  30, 1998 and the related  condensed  consolidated
statements of operations  for the three and nine-month  periods ended  September
30, 1998 and the related condensed  consolidated statement of cash flows for the
nine-month  period ended September 30, 1998. These financial  statements are the
responsibility of the Company's management.

     We conducted our review in accordance  with  standards  established  by the
American  Institute  of  Certified  Public  Accountants.  A  review  of  interim
financial  information consists principally of obtaining an understanding of the
system for the preparation of interim financial information, applying analytical
procedures to financial  data and making  inquiries of persons  responsible  for
financial and  accounting  matters.  It is  substantially  less in scope than an
audit conducted in accordance with generally  accepted auditing  standards,  the
objective  of which is the  expression  of an opinion  regarding  the  financial
statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review,  we are not aware of any material  modifications  that
should be made to the financial  statements  referred to above for them to be in
conformity with generally accepted accounting principles.

     We have previously  audited, in accordance with generally accepted auditing
standards,  the consolidated balance sheet of Homestead Village Incorporated and
subsidiaries  as of December 31, 1997, and in our report dated January 30, 1998,
we expressed an unqualified  opinion on that balance sheet. In our opinion,  the
information set forth in the accompanying  condensed  consolidated balance sheet
as of December 31, 1997 is fairly stated, in all material respects,  in relation
to the consolidated balance sheet from which it has been derived.


                                                           ARTHUR ANDERSEN LLP

Atlanta, Georgia
October 23, 1998


                                       12
<PAGE>





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

         The following discussion should be read in conjunction with Homestead's
1997 Annual  Report on Form 10-K (the "1997 Form 10-K") as well as the financial
statements  and the notes  thereto  in Item 1 of this  report.  In  addition  to
historical  information,  this discussion  contains  forward-looking  statements
under the  federal  securities  laws.  These  statements  are  based on  current
expectations,  estimates and projections about the industry and markets in which
Homestead  operates,  management's  beliefs and assumptions  made by management.
Forward-looking  statements are not guarantees of future performance and involve
certain risks and uncertainties which are difficult to predict. Actual operating
results may be affected by changes in national  and local  economic  conditions,
competitive  market  conditions,  changes in financial markets or interest rates
that could adversely affect  Homestead's cost of capital and its ability to meet
its financing needs and obligations,  weather,  obtaining governmental approvals
and meeting  development  schedules,  and therefore,  may differ materially from
what is expressed or forecasted in this discussion.

         Homestead  Village(R)  is a registered  trademark of Homestead  Village
Incorporated  and all references to the term  "Homestead  Village"  herein shall
include  a  reference  to  such  registered  trademark.  For  analysis  purposes
Homestead categorizes its operating properties (which include all properties not
under  construction or in  pre-development  planning) as either  "stabilized" or
"pre-stabilized." For purposes of this report, the term "stabilized" means those
properties which have been open for 24 weeks or achieved 80% occupancy as of the
beginning  of  a  period,  and   "pre-stabilized"   means  all  other  operating
properties.


OVERVIEW

     Homestead's  overall  results of  operations  and  financial  position  are
significantly  influenced by its  development  activity.  During the  nine-month
period ended September 30, 1998, Homestead started construction on 15 properties
consisting of 1,910 rooms and completed 40 properties consisting of 5,318 rooms.
As of September  30, 1998,  Homestead has 111  Homestead  Village  properties in
operation  representing  in the  aggregate  14,991 rooms in 35 cities and had 25
Homestead Village properties under  construction  totaling 3,233 rooms within 10
of these  cities  as well as 2  additional  cities.  Homestead  owns  additional
development sites and has additional sites under contractual control (land which
is under control through contingent  contract or letter of intent).  In light of
the present difficult environment in capital markets Homestead, as of the fourth
quarter 1998, has reorganized its development  effort and anticipates  recording
an accrual for expenses of  severance of  development  personnel  and  abandoned
pursuits totaling  approximately $6 to $7 million.  Homestead also anticipates a
slower growth rate in 1999 versus its historical number of property  development
starts and property openings.

     Homestead's  operating  results  are  substantially  influenced  by (i) the
demand  for and  supply of  extended-stay  lodging in  Homestead's  markets  and
submarkets,  (ii) occupancy and average weekly rate, (iii) the  effectiveness of
property  level  operations  and (iv) the pace and cost at which  Homestead  can
develop additional  extended-stay lodging properties.  Capital and credit market
conditions  which  affect  Homestead's  ability to access the capital and credit
markets and the cost of capital will influence future operating results.

     As of  September  30, 1998,  Homestead  had  approximately  $636 million of
indebtedness  outstanding  and expects to utilize an additional  approximate $86
million of its lines of credit to fund  developments  in process.  Approximately
$200  million of this  indebtedness  matures in the first  quarter of 1999,  and
approximately  $300 million matures in the second quarter of 1999.  Homestead is
in discussion  with its lenders and other parties  regarding the  refinancing of
its indebtedness  maturing next year and will seek to refinance or extend all of
this  indebtedness.  Homestead is also exploring other means to obtain financing
to replace existing indebtedness and to fund additional development.

                                       13
<PAGE>




RESULTS OF OPERATIONS

   Interim Period Comparison

     Net  earnings  before  extraordinary  item  increased  $1.4 million for the
nine-month  period  ended  September  30, 1998 as compared to the same period in
1997.  This  increase is  primarily  attributable  to  increases in net property
operating  income  offset  by  increases  in  net  interest  expense,  corporate
operating  expenses,  and depreciation and amortization.  Net earnings decreased
$25.3 million for the three-month period ended September 30, 1998 as compared to
the same period in 1997 and decreased  $23.9 million for the  nine-month  period
ended September 30, 1998 as compared to the same period in 1997. These decreases
are  primarily  due to the  loss on  extinguishment  of debt  of  $25.3  million
recorded as an  extraordinary  item in the third  quarter.  See  "Liquidity  and
Capital  Resources" for further  discussion of the transaction.  A discussion of
the major components of net earnings follows.

   Property Operations

     The following table sets forth certain  information  for Homestead's  total
operating property portfolio for the periods indicated:

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                        SEPTEMBER 30,               SEPTEMBER 30,
                                                                  --------------------------- --------------------------
                                                                      1998          1997          1998         1997
                                                                      ----          ----          ----         ----
            <S>                                                       <C>           <C>           <C>          <C>
            Weekly RevPAR(1)................                          $222          $194          $215         $195
            Average Weekly Rate(2)..............................      $301          $253          $296         $252
            Occupancy...........................................      73.9%        76.6%         72.5%        77.2%
            Number of Operating Properties at Period End........       111           50           111           50
            Property Operating Income Margin....................      56.8%        56.9%         57.0%        57.7%
----------
<FN>

(1)  Weekly RevPAR is determined by dividing room revenue by the number of guest
     room days available for the period and multiplying by seven.

(2)  Average weekly rate is determined by dividing room revenue by the number of
     guest room days occupied for the period and multiplying by seven.
</FN>
</TABLE>

     Homestead's 61 property  openings from the end of the third quarter of 1997
through  the end of the third  quarter of 1998 were the  primary  reason for the
reported  room  revenue  increase of $57.4  million  for the nine  months  ended
September 30, 1998 as compared to the same period in 1997.  The increase in room
revenue was also due in part to an increase in the weekly  RevPAR of $20 (10.3%)
in the nine months ended September 30, 1998 compared to 1997.

     Total  property  operating  expenses  increased from $17.4 million to $43.5
million over the same period,  an increase of $26.1  million for the nine months
ended  September  30, 1998.  The increase is due primarily to an increase in the
number of operating properties as noted above.  Homestead's property openings in
the latter  part of 1997 and  through  the third  quarter  1998 were the primary
reason for the slight decrease in property  operating  income margin to 57.0% as
such new openings  were in their lease up phase  during parts of the  nine-month
period ended September 30, 1998.

   Homestead Stabilized, Comparable Properties

     Homestead had 35 properties which were stabilized and operating in both the
nine-month  periods  ended  September  30,  1998  and  1997.  All but 12 of such
comparable  properties  are located in Texas.  RevPAR for the nine months  ended
September 30, 1998 for these properties increased to $215 from $203 for the same
period in 1997. The RevPAR  increase was due primarily to an increase in average
weekly rates for such properties to $274 from $250, respectively, an increase of
9.6%.  The  increase  in RevPAR  due to rate  increases  was offset in part by a
decrease in occupancy  to 78.5% from 81.1% for the nine months  ended  September
30, 1998 as compared to the same period in 1997.  The  decrease in  occupancy is
believed to be the result of rate increases and competition in certain  markets,
especially  in the  Southwest.  Property  operating  margins  decreased  for the
nine-month  period to 57.4% in 1998 versus 57.6% in 1997 due to increased  local
sales costs, increased costs for new security services, and, most significantly,
one-time  additional  costs in first  quarter  of 1998 for the use of  Homestead
personnel  in  returning  rooms to  service  which had been out of  service  for
refurbishment.

                                       14
<PAGE>

   Stabilized Properties Operations

     The 79 stabilized properties showed improved operating performance over the
35 stabilized  properties for the nine-month  period ended September 30, 1998 as
compared to the same period in 1997 with a 9.4% increase in RevPAR to $222 (from
$203 for the nine-month period ended September 30, 1997). These improvements are
primarily  attributable to a 17.3% increase in the average weekly rate offset in
part by a decrease in occupancy  to 75.6% from 81.1%.  The decrease in occupancy
is  believed  to be the  result of rate  increases  and  competition  in certain
markets, especially in the Southwest.

   Corporate Operating Expenses

     Corporate  operating  expense  increased  $5.4  million for the  nine-month
period  ended  September  30, 1998 as  compared to the same period in 1997.  The
increase is attributed  to the  continued  growth of the company since the first
half of 1997 when  Homestead  was still in the process of developing a corporate
infrastructure  in support of a rapidly  growing  entity and includes  costs for
additional personnel in operations, marketing and finance.

   Depreciation and Amortization

     Depreciation and  amortization  increased $14.4 million for the nine months
ended September 30, 1998 as compared to the same period in 1997. Depreciation of
the cost of properties  and  improvements  is provided  using the  straight-line
method  over the  estimated  useful  lives of the assets.  Depreciation  expense
(exclusive  of  amortization)  increased  approximately  $13.4  million  for the
nine-month  period  ended  September  30, 1998 as compared to the same period in
1997 due to the  increased  number of properties  operating  for the  nine-month
period ended September 30, 1998 as compared to the same period in 1997.

     Amortization  of the  trademarks  and other  intangibles is calculated on a
straight-line  basis  over a period of 20 years.  Increased  amortization  of $1
million for the  nine-month  period ended  September 30, 1998 as compared to the
same period in 1997 is due to  amortization  of increases in the total Homestead
Village trademark and other intangibles asset.

   Interest Income

     Interest  income of $707,000 for the nine months ended  September  30, 1998
was a result of interest earned from investment of excess cash on hand.

   Interest Cost

     Homestead's gross interest cost includes amortization of non-cash financing
costs  arising from the issuance of warrants used to obtain the  commitment  for
the  convertible  mortgage  notes  financing  and the  differential  between the
conversion  price of the mortgage notes and the merger date value of Homestead's
common stock.  Exclusive of such  amortized  amounts  Homestead's  interest cost
(comprised of interest on the mortgages,  amortization of premiums and discounts
on the mortgages,  interest on its lines of credit borrowings,  and amortization
of deferred  financing costs paid to obtain the lines of credit) increased $12.1
million for the  nine-month  period ended  September 30, 1998 as compared to the
same period in 1997.  The  increase is due to the  increase  in  investments  in
operating and under  construction  properties and the corresponding  increase in
notes payable and the lines of credit  borrowings  (used to finance the increase
in investments)  for the nine-month  period ended September 30, 1998 as compared
to the same period in 1997.

     Homestead's  total interest cost,  including the  amortization  of non-cash
mortgage  financing  costs  described  above,  decreased  $25.4  million for the
nine-month  period ended September 30, 1998 compared to the same period in 1997.
The decrease was due to the greater amortization of the non-cash financing costs
associated with the mortgages in 1997 versus 1998.  Total interest  incurred was
offset by capitalization of interest  resulting in net interest expense of $13.8
million and none for the nine-month  periods ended  September 30, 1998 and 1997,
respectively. This net interest expense increase in 1998 over 1997 is the result
of increases in total debt and related  interest  expense relative to the amount
of  construction  in  progress in the periods  which  result in a  proportionate
decrease in the amounts of interest eligible for capitalization.
                                       15
<PAGE>



ENVIRONMENTAL MATTERS

         Homestead  is not  aware  of,  nor does it  expect,  any  environmental
condition on its properties to have a material adverse effect upon its business,
results of operations or financial position.


LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 1998 Homestead had 25 properties under construction and
had additional sites owned and under contractual  control.  Unfunded development
commitments  for the  properties  under  construction  as of September  30, 1998
approximate $113 million. Homestead has borrowings of $292.6 million outstanding
under its lines of  credit as of  September  30,  1998  leaving  $107.4  million
capacity  under  the  lines,  subject  to  collateral  requirements.   Homestead
estimates its  availability  under the lines  approximates  $86 million based on
available collateral. Homestead anticipates completing development of properties
under  construction  utilizing these financing  sources,  cash on hand, and cash
flow from operations.

     In fourth  quarter 1998, in light of the difficult  environment  in capital
markets and the resulting  limited  availability of new financing for additional
commitments for  developments,  Homestead  reorganized its internal  development
department  and  terminated  approximately  40 full-time  persons.  In addition,
Homestead is reviewing  its land sites owned and its  contracts for purchases of
development  sites and is aligning its decisions to develop and/or acquire sites
for development with its ability to obtain specific financings or its ability to
use cash flow from operations.  In conjunction with the severance of development
personnel and changed  expectations to pursue development of certain sites owned
or under contract for acquisition,  Homestead  anticipates  recording an accrual
for expenses of severance and abandoned pursuits totaling  approximately $6 to 7
million.

     On November 10, 1998,  Homestead filed a shelf registration  statement with
the  Securities  and  Exchange  Commission,  which  has  not yet  been  declared
effective,  for up to $356,402,600 of any combination of preferred  stock,  debt
securities and securities  warrants and up to a total of $500,000,000  including
common stock. Once effective, the securities issuable under the registration may
be offered from time to time, in amounts, at prices and on terms to be set forth
at the time of the offerings.

     On April 24, 1998 Homestead  renewed its existing  revolving line of credit
facility with Commerzbank AG ("CAG"),  as agent for the lenders,  for a one-year
term, with an increase in total borrowing  capacity to $150 million,  subject to
collateral  requirements.  Borrowings  bear interest at the Eurodollar rate plus
1.5% to 2.5% per annum,  depending  upon the  percentage  leverage of borrowings
outstanding to the amount of qualifying  collateral.  Alternatively,  borrowings
bear  interest at a base rate  defined as the higher of prime rate plus a margin
of 0.5% to 1.5% or the  federal  funds rate plus a margin of 1% to 2%,  with the
margin  dependent on the  percentage  leverage of borrowings  outstanding to the
amount of qualifying collateral. Average unfunded balances bear a commitment fee
of 0.375% per annum.

     On April 24,  1998  Homestead  also  entered  into a separate  $50  million
one-year  revolving  line of credit  facility  with CAG of which $30 million was
available  for  borrowing  on an unsecured  basis  through  September  30, 1998.
Borrowings  bear  interest  at the  Eurodollar  rate  plus  2.75%  per annum or,
alternatively,  at a base rate defined as the higher of prime rate plus 1.75% or
the federal funds rate plus 2.25%.  Average unfunded  balances bear a commitment
fee of 0.5% per annum.

     On June 15, 1998 Homestead  entered into an additional $200 million line of
credit facility with CAG which bears interest at the Eurodollar rate plus 1%
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(1.25%  after six months) or at a base rate of prime (prime plus 0.25% after six
months). The average unfunded balance bears a commitment fee of 0.25% per annum.
The line  expires  February  23, 1999.  Homestead  has  obtained a  subscription
agreement  from  Security  Capital for $200  million of  Homestead  subordinated
debentures to secure this obligation. If the subscription is called by Homestead
or Homestead  receives  proceeds from any offering of  securities,  the proceeds
must be used to first  repay  the  lines of  credit  to CAG and  second  to fund
projects under  development  which secure the other CAG credit  facilities.  The
debentures would bear interest at a rate of 0.25% over the rate Homestead incurs
under the $50 million  credit  facility with CAG.  Homestead may  repurchase the
debentures with the proceeds of an equity offering within 90 days of issuance of
the debentures,  otherwise the debentures  convert to Homestead  common stock at
the  lower of the  20-day  average  trading  price  of  Homestead  common  stock
immediately before execution of the subscription agreement or immediately before
the 90th day after issuance.  The subscription  agreement expires the earlier of
June  30,  1999 or two  weeks  after  termination  of the  $200  million  credit
agreement.  The  subscription  obligation  will be reduced or  terminated to the
extent  Homestead  issues equity  securities to any third party,  or to Security
Capital pursuant to a separate  offering and the proceeds are used to repay this
credit  facility  and any  remaining  proceeds are used to fund  projects  under
development  which secure the other CAG credit  facilities.  In conjunction with
Security Capital's entering into the subscription  agreement,  Homestead paid an
arrangement fee to Security Capital of $600,000.

     The  CAG  lines  require   maintenance  of  certain  financial   covenants,
specifically,  aggregate  indebtedness of no more than 55% of gross asset value,
as defined, or indebtedness secured by a lien of no more than 50% of gross asset
value, as defined,  in each case excluding  indebtedness  outstanding  under the
credit agreement  entered into on June 15, 1998.  Homestead must also maintain a
minimum debt service coverage ratio of earnings before  interest,  income taxes,
depreciation,  amortization  and gains or losses on sales of assets to cash debt
service,  as defined,  of no less than 1.25 to 1 for the second quarter of 1998,
and,  including the $200 million  facility,  no less than 1.4 to 1 for third and
fourth  quarters 1998 and 1.5 to 1 for first quarter of 1999,  and excluding the
$200 million  facility,  no less than 1.5 to 1 for third quarter 1998,  1.6 to 1
for fourth  quarter  1998,  and no less than 1.75 to 1 thereafter on a quarterly
basis,  and  not  allow  stockholders  equity  to be  less  than  $325  million.
Additionally, Homestead will not enter into any commitment for purchases of land
or construction of projects if such obligations  exceed the available  borrowing
capacity  under all of the lines and  internally  generated  excess  funds.  The
covenants also restrict payment of dividends without lender approval.

     The lines of credit  covenant  ratios  were  amended  in  conjunction  with
Homestead  entering into the new mortgage note  (described  below).  As amended,
Homestead  may incur  indebtedness  secured  by a lien up to 55% of gross  asset
value through the earlier of the date the new mortgage note is repaid or October
1, 1998 or, if the $200 line of credit  has been  repaid,  until the  earlier of
September 30, 1999 or the date the new mortgage note is repaid.  Further,  until
the earlier of September  30, 1999 or the date the new mortgage  note is repaid,
the debt service  coverage  ratio,  including  debt  outstanding  under the $200
million  facility,  is  amended to be no less than 1.3 to 1 for third and fourth
quarters  1998 and 1.4 to 1 for first  quarter of 1999,  and  excluding the $200
million facility, is amended to be no less than 1.3 to 1 for third quarter 1998,
1.4 to 1 for  fourth  quarter  1998,  and no less  than  1.6 to 1 for the  first
quarter of 1999.  Homestead  was in  compliance  with all such  covenants  as of
September 30, 1998. As a result of the reorganization  expense to be recorded in
fourth quarter 1998 discussed above,  Homestead anticipates it will not meet its
bank lines of credit debt service  coverage  ratio  covenant for fourth  quarter
1998.  Homestead  has initiated  discussions  with the banks to seek a waiver of
this covenant for fourth quarter 1998.

         On July 6,  1998,  Homestead  entered  into a  mortgage  loan  purchase
agreement   with  ATLANTIC  and  MLMC  whereby  the  $98  million  of  Homestead
convertible  mortgage  notes held by  ATLANTIC  were  modified  to,  among other
things,  eliminate  their  convertibility  feature in exchange  for a payment of
$21.4 million from Homestead to ATLANTIC.  The amount paid to ATLANTIC was based
on trailing  market  prices of Homestead  Common Stock at the time the agreement
was  entered  into,  which  exceeded  the  conversion  price of the  convertible
mortgage  notes at that date.  Homestead  funded the payment  with the  proceeds
received  from  the  sale  of  $24  million  of  7.5%  convertible  subordinated
debentures.  Also pursuant to the mortgage loan purchase agreement ATLANTIC sold
such  amended  notes to MLMC for $98  million.  On  August  7,  1998,  Homestead
converted the $98 million of mortgage notes and the $24 million of 7.5%  conver-

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tible  subordinated  debentures  into a $122 million  mortgage of a newly formed
special  purpose  subsidiary  of  Homestead.  The note is  collateralized  by 26
Homestead  properties (totaling $227 million of historical cost at September 30,
1998) which were formerly  collateral for the ATLANTIC  mortgage notes. The $122
million mortgage note matures  September 30, 1999 and provides for interest only
monthly payments of LIBOR plus 1.70% through September 30, 1998, LIBOR plus 2.0%
through  November 30, 1998, and LIBOR plus 2.25%  thereafter.  MLMC has mutually
exclusive  extension rights to either give notice by December 15, 1998 to extend
the maturity of the mortgage note to September  30, 2001 (the "2 Year  Extension
Notice") or give notice by June 10, 1999 to extend the  maturity of the mortgage
note to at least  September  30, 2006 or as late as September 30, 2009 (the "7 -
10 Year Extension  Notice").  If extended,  the note will bear interest at LIBOR
plus 2.5% (3.5% if the  collateral  properties  do not  generate  net  operating
income,  as defined,  of $18 million for the year ended  September 30, 1999). No
assurance  can be given  that  MLMC  will  elect to extend  the  mortgage  note.
Homestead  may prepay the  mortgage  note in whole or in part prior to September
30, 1999 or, if the 2 Year  Extension  Notice is given,  Homestead may prepay in
whole or in part by September 30, 2001.

     The transaction resulted in an early extinguishment of debt measured as the
difference  between the $98 million  carrying  amount of the  original  mortgage
notes  to  ATLANTIC  and the  amount  paid to  extinguish  the  debt,  including
transaction costs. Such loss on extinguishment of debt was $25.3 million and was
recorded as an extraordinary item in third quarter 1998.

     The  elimination  of the conversion  option  attached to the mortgage notes
reduced   Homestead's   contingently   issuable   shares  of  common   stock  by
approximately 8.5 million shares.

     Homestead  is  exploring   the  possible  sale  of  properties  in  certain
non-strategic  markets.  The  proceeds  of such a sale would be used to pay down
existing debt. No assurance can be given that such a sale will occur.

     Capital  resources in addition to those  described  above will be needed to
fund  future  land  acquisitions  and  developments  and to repay  or  refinance
existing debt upon maturity. Homestead may seek additional credit facilities and
may seek to issue additional debt or equity securities.  Presently, Homestead is
exploring  possible  extension  of its bank  lines of  credit  and is  exploring
alternatives to refinancing the mortgage note to MLMC.  Homestead,  as discussed
above, has also filed a shelf registration  statement and is researching various
financing  alternatives  utilizing  securities  which could be issued  under the
shelf, once the shelf registration is declared effective.  However,  there is no
assurance  that  Homestead  will be able to obtain  such  financing  as and when
required or on acceptable terms.

   Operating Activities

     Net cash flow provided by operating  activities  increased by $21.4 million
for the nine months ended  September 30, 1998 as compared to 1997.  The increase
is due  primarily  to the  growth  in the  number  of  operating  properties  as
described under "Results of Operations."

   Investing Activities

     During  the nine  months  ended  September  30,  1998 and  1997,  Homestead
invested $393.2 million and $255.1 million,  respectively,  in Homestead Village
properties.  The amounts  invested in the nine months ended  September  30, 1998
were financed  primarily from proceeds from borrowings  under the line of credit
and proceeds from a $156.4  million  Rights  Offering  which occurred in January
1998.  The amounts  invested in the nine months  ended  September  30, 1997 were
financed primarily from the proceeds of convertible  mortgage loans from PTR and
ATLANTIC and proceeds from exercise of warrants.  No further funding  commitment
is available under the mortgage notes.

YEAR 2000

     The Year 2000  issue has  arisen as many  existing  computer  programs  and
chip-based  embedded technology systems use only the last two digits to refer to
a year,  and  therefore do not  properly  recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous  results.  Homestead has adopted a Year 2000 compliance
program in an attempt to minimize or prevent the number and  seriousness  of any
disruptions  that may  occur as a result  of the Year  2000  issue.  Homestead's
compliance  program includes an assessment of its hardware and software computer
systems    ("information    technology"    systems)   and    embedded    systems
("non-information  technology"  systems such as lighting,  security,  fire, card
keys,  phones,  irrigation,   elevators,  and  heating,   ventilation,  and  air
conditioning systems), as well as an assessment of the Year 2000 issues relating
to third  parties  with which  Homestead  has a material  relationship  or whose
systems are material to the operations of Homestead's properties.

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<PAGE>


     Homestead's  computer  hardware,  operating  systems,  general  accounting,
property management systems and principal desktop software applications are Year
2000  compliant  as  certified  by the various  vendors.  Homestead is currently
testing  these  information  technology  systems,  and expects to  complete  the
testing phase by December 31, 1998.  Based on initial  testing,  management does
not anticipate any Year 2000 issues that will  materially  impact  operations or
operating results.

     Homestead's property management system software is non-compliant.  However,
the  property  management  system  software  vendor has stated that the property
management system does not use the date routines  associated with the underlying
database  software.  Validation  will be completed by December 31, 1998.  If the
property  management  system does not pass the validation tests, an upgrade will
be necessary.  The cost to complete the upgrade,  if it is necessary to upgrade,
should not exceed  $500,000 and it is expected the upgrade would be completed by
end of second quarter 1999.


     Homestead's   critical   non-information   technology   systems  are  being
inventoried  and are being  assessed for Year 2000  compliance by contacting the
vendors of the systems. The review, testing and verification of these systems is
expected to be complete by the first  quarter of 1999 and costs are not expected
to be material.

     Homestead  has surveyed its  financial  institutions  and major  vendors to
determine the extent to which Homestead is vulnerable to third parties'  failure
to resolve  their Year 2000 issues.  Homestead  will be able to more  adequately
assess its third party risk when responses are received from the majority of the
entities contacted.

     Management  believes its planning  efforts are adequate to address the Year
2000  issue and that its  risks  are  primarily  those  that it cannot  directly
control,   including   the   readiness  of  its  major   vendors  and  financial
institutions.  Failure  on the  part of  these  entities  to  become  Year  2000
compliant  could  result in  disruption  in the  Homestead's  cash  receipt  and
disbursement functions. There can be no guarantee,  however, that the systems of
unrelated entities upon which the Homestead's  operations rely will be corrected
on a timely basis and will not have a material adverse effect on the company.

     Homestead  does not  have a  formal  contingency  plan or a  timetable  for
implementing  one.  Contingency  plans will be  established,  if they are deemed
necessary,  after  Homestead  has  adequately  assessed the impact on operations
should third parties fail to properly respond to their Year 2000 issues.

     Homestead's  historical  costs for  addressing  the Year 2000 issue are not
material and  management  does not anticipate  that its future costs  associated
with the Year 2000  issue  will be  material.  Third-party  costs  and  software
upgrades  or  replacements  for Year  2000  issues  are not  expected  to exceed
$500,000.  Homestead does not  separately  track the internal costs incurred for
Year 2000  compliance  issues.  Such costs are  principally  the related payroll
costs of  its  information  technology  group.   Although  the  cost of recently
replacing  Homestead's  key information technology systems was substantial,  the
replacements   were   made  to  improve   operational  efficiency  and  were not
accelerated due to the Year 2000 issue.  Homestead has not delayed any  material
projects as a result of the Year 2000 issue. Funds expended to address Year 2000
issues have been made from operating cash flow.

     There can be no assurances that Year 2000 remediation by Homestead or third
parties will be properly and timely completed, and failure to do so could have a
material adverse effect on Homestead,  its business and its financial condition.
Homestead  cannot  predict  the actual  effects to it of the Year 2000  problem,
which depends on numerous  uncertainties such as: (i) whether  significant third
parties  properly  and timely  address  the Year 2000  issue;  and (ii)  whether
broad-based  or systemic  economic  failures may occur.  Failures  could include
disruptions in passenger  transportation  or transportation  systems  generally,
loss of utility and/or  telecommunications  services,  the loss or disruption of
hotel  reservations  made on  centralized  reservation  systems  and  errors  or
failures in financial  transactions or payment processing systems such as credit
cards. Due to the general uncertainty  inherent in the Year 2000 problem and the
company's dependence on third parties,  Homestead is unable to determine at this
time whether the  consequences of Year 2000 failures will have a material impact
on the  company.  Homestead's  Year  2000  compliance  program  is  expected  to
significantly  reduce  the level of  uncertainty  about the Year 2000  issue and
management believes that the possibility of significant  interruptions of normal
operations should be reduced.

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<PAGE>






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


     (a)          Exhibits:



Exhibit 10.1   $122,028,471 Consolidated, Amended, Renewed and Restated Mortgage
               Note, made by Borrower in favor of Midland

Exhibit 10.2   Consolidated,  Amended and Restated Mortgage, Deed of Trust, Deed
               to Secure Debt, Security Agreement,  Financing Statement, Fixture
               Filing and  Assignment  of Leases,  Rents and Security  Deposits,
               from  Borrower  to (A)(i)  Alexander  Title  Agency,  Inc.,  with
               respect to the  properties  located  in  Maryland  and  Virginia,
               (ii)Chicago  Title  Insurance   Company,   with  respect  to  the
               properties  located in North Carolina;  and (iii) Joseph B. Pitt,
               Jr., with respect to the properties located in Tennessee, for the
               benefit  of  Midland;  and  (B)  Midland,  with  respect  to  the
               properties located in Florida and Georgia

15            Letter regarding unaudited interim financial information

27            Financial Data Schedule

     (b) No reports were filed during this period on Form 8-K.


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<PAGE>




                                                    SIGNATURES

     PURSUANT  TO THE  REQUIREMENTS  OF  SECTION  13 OR 15(D) 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.


                                       HOMESTEAD VILLAGE INCORPORATED



                                       /S/   ROBERT C. ALDWORTH
                                       Robert C. Aldworth, Senior Vice President
                                       And Chief Financial Officer
                                       (Principal Financial Officer)



                                       /S/   BRYAN J. FLANAGAN
                                        Bryan J. Flanagan, Senior Vice President
                                       And Controller
                                       (Principal Accounting Officer)

Date:  November 13, 1998


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