United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549


                                    FORM 10-Q

     [X] Quarterly  Report  Pursuant  to Section 13 or 15(d) of the  Securities
     Exchange Act of 1934 for the Quarterly Period Ended September 30, 1996

                                       or

     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934, for the Transition Period From         to
                                                          -------     ------

                       Commission file number      0-23616
                                                   -------

                               PRIME RETAIL, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

      Maryland                                          52-1836258
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


     100 East Pratt Street
     Nineteenth Floor
     Baltimore, Maryland                                   21202
----------------------------------------    ------------------------------------
(Address of principal executive offices)                  (Zip Code)


                                 (410) 234-0782
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name,former address,or 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  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes   X           No
     ---             ---

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

As of November 12, 1996, the issuer had outstanding  13,404,651 shares of Common
Stock, $.01 par value per share.


<PAGE>


                               PRIME RETAIL, INC.
                                    FORM 10-Q


                                      INDEX





PART I:  FINANCIAL INFORMATION                                              PAGE
                                                                            ----


ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

     Consolidated Balance Sheets of Prime Retail, Inc.
     as of September 30, 1996 and December 31, 1995.                          1

     Consolidated Statements of Operations of Prime
     Retail, Inc. for the three and nine months ended
     September 30, 1996 and 1995.                                             2

     Consolidated Statements of Cash Flows of Prime Retail,
     Inc. for the nine months ended September 30, 1996 and 1995.              3

     Notes to the Consolidated Financial Statements of
     Prime Retail, Inc.                                                       4


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS                                 10


PART II:  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS                                                 27
ITEM 2.    CHANGES IN SECURITIES                                             27
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES                                   27
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               27
ITEM 5.    OTHER INFORMATION                                                 27
ITEM 6.    EXHIBITS OR REPORTS ON FORM 8-K                                   27

SIGNATURES                                                                   28


<PAGE>


PART I:  FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

                                                  PRIME RETAIL, INC.
                                              CONSOLIDATED BALANCE SHEETS
                                        (in thousands, except share information)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                   SEPTEMBER 30, 1996            December 31, 1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>                    <C>
ASSETS:
Investment in rental property:
     Land                                                                                    $ 35,544                    $ 35,370
     Buildings and improvements                                                               414,487                     403,542
     Property under development                                                                38,507                      12,165
     Furniture and equipment                                                                    3,779                       3,403
                                                                                             --------                     -------

                                                                                              492,317                     454,480
     Accumulated depreciation                                                                 (52,525)                    (40,190)
                                                                                             --------                     -------
                                                                                              439,792                     414,290
Cash and cash equivalents                                                                       9,602                      14,927
Restricted cash                                                                                 2,623                       2,230
Accounts receivable, net                                                                        6,500                       8,751
Deferred charges, net                                                                          11,407                      18,136
Due from affiliates, net                                                                        1,960                       1,194
Investment in partnerships                                                                     13,150                       2,258
Other assets                                                                                    1,039                         619
                                                                                             --------                    --------
     Total assets                                                                            $486,073                    $462,405
                                                                                             ========                    ========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Bonds payable                                                                               $  32,900                   $  32,900
Notes payable                                                                                 281,768                     273,054
Accrued interest                                                                                3,001                       3,034
Real estate taxes payable                                                                       4,074                       3,142
Construction costs payable                                                                      5,885                       5,796
Accounts payable and other liabilities                                                         13,318                       8,539
                                                                                             --------                    --------
     Total liabilities                                                                        340,946                     326,465

Minority interests                                                                                  -                      14,456

Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
     2,300,000 shares of 10.5% Series A Senior Cumulative
       Preferred Stock, $0.01 par value (liquidation preference
       of $57,500), issued and outstanding                                                         23                          23
     8.5% Series B Cumulative Participating  Convertible Preferred
       Stock, $0.01 par value (liquidation preference of $70,150 and
       $175,375, respectively), 2,806,000 and
       7,015,000 shares issued and outstanding, respectively                                       28                          70
Shares of common stock, 75,000,000 shares authorized:
     Common stock, $0.01 par value, 13,404,651 and 2,875,000
       shares issued and outstanding, respectively                                                134                          29
Additional paid-in capital                                                                    165,446                     128,275
Distributions in excess of net income                                                         (20,504)                     (6,913)
                                                                                             --------                    --------
     Total shareholders' equity                                                               145,127                     121,484
                                                                                             --------                    --------

     Total liabilities and shareholders' equity                                              $486,073                    $462,405
                                                                                             ========                    ========
==================================================================================================================================
</TABLE>

See accompanying notes to financial statements.

<PAGE>



                                                  PRIME RETAIL, INC.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (in thousands, except per share information)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                            THREE MONTHS                    NINE MONTHS
                                                                         ENDED SEPTEMBER 30             ENDED SEPTEMBER 30
                                                                     --------------------------     --------------------------
                                                                            1996          1995              1996         1995
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>               <C>          <C>    
REVENUES:
Base rents                                                               $12,887       $12,081           $38,417      $33,709
Percentage rents                                                             466           393             1,277        1,121
Tenant reimbursements                                                      6,039         5,711            18,073       16,132
Income from investment partnerships                                          250           405               859        1,192
Interest and other                                                         2,189         1,415             4,486        3,915
                                                                         -------       -------           -------      -------
     Total revenues                                                       21,831        20,005            63,112       56,069

EXPENSES:
Property operating                                                         5,121         4,613            14,536       12,427
Real estate taxes                                                          1,369         1,287             3,854        4,066
Depreciation and amortization                                              4,579         3,917            13,578       11,261
Corporate general and administrative                                         973           904             2,832        2,440
Interest                                                                   5,139         5,501            17,343       14,979
Other charges                                                                475           551             7,687        1,459
                                                                         -------       -------           -------      -------
     Total expenses                                                       17,656        16,773            59,830       46,632
                                                                         -------       -------           -------      -------

INCOME BEFORE MINORITY INTERESTS AND
     EXTRAORDINARY ITEM                                                    4,175         3,232             3,282        9,437

(Income) loss allocated to minority interests                             (1,810)        1,290             1,398        4,151
                                                                         -------       -------           -------      -------
INCOME BEFORE EXTRAORDINARY ITEM                                           2,365         4,522             4,680       13,588
Extraordinary item -- loss on early extinguishment of
     debt, net of minority interests in the amount of $3,263                   -             -            (1,017)           -
                                                                         -------       -------           -------      -------
NET INCOME                                                                 2,365         4,522             3,663       13,588
Income allocated to preferred shareholders                                 3,000         5,236            11,236       15,708
                                                                         -------       -------           -------      -------

NET LOSS APPLICABLE TO COMMON SHARES                                     $  (635)      $  (714)          $(7,573)     $(2,120)
                                                                         =======       =======           =======      =======

PER COMMON SHARE:
     Loss before extraordinary item                                      $ (0.05)      $ (0.25)          $ (1.01)     $ (0.74)
     Extraordinary item                                                        -             -             (0.16)           -
                                                                         -------       -------           -------      -------
     Net loss                                                            $ (0.05)      $ (0.25)          $ (1.17)     $ (0.74)
                                                                         =======       =======           =======      =======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                13,322         2,875             6,481        2,875
                                                                         =======       =======           =======      =======

==============================================================================================================================
</TABLE>

See accompanying notes to financial statements.

<PAGE>


                                                     PRIME RETAIL, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (in thousands)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  NINE MONTHS ENDED SEPTEMBER 30
                                                                                             ---------------------------------------
                                                                                                     1996                      1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>                        <C>     
OPERATING ACTIVITIES:
Net income                                                                                      $   3,663                  $ 13,588
Adjustments to reconcile net income to
   net cash provided by operating activities:
      Loss allocated to minority interests                                                         (1,398)                   (4,151)
      Extraordinary loss for early retirement of debt                                               1,017                         -
      Write off of financing costs                                                                  6,131                         -
      Depreciation and amortization                                                                13,578                    11,261
      Amortization of deferred financing costs and
        interest rate protection contracts                                                          3,028                     3,311
      Equity earnings in excess of cash distributions
        from joint ventures                                                                             -                      (492)
      Cash distributions in excess of equity earnings
        from joint ventures                                                                           213                         -
      Provision for uncollectible accounts receivable                                                 437                       173
Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                                                    1,814                    (1,821)
      Increase in due from affiliates, net                                                           (766)                     (482)
      (Increase) decrease in other assets                                                          (1,238)                    3,970
      Increase (decrease) in accrued interest                                                         (33)                      596
      Increase in accounts payable and other liabilities                                            4,857                       138
                                                                                                ---------                 ---------
        Net cash provided by operating activities                                                  31,303                    26,091

INVESTING ACTIVITIES:
Purchase of land                                                                                     (174)                   (3,071)
Purchase of buildings and improvements                                                            (11,319)                  (27,412)
Increase in property under development                                                            (36,645)                  (31,355)
Deferred leasing commissions                                                                          (22)                      (34)
                                                                                                ---------                  --------
        Cash used in investing activities                                                         (48,160)                  (61,872)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock                                                             38,843                         -
Conversion of convertible preferred stock                                                          (1,342)                        -
Proceeds from notes payable                                                                       140,852                   142,582
Principal repayments on notes payable                                                            (132,138)                  (82,933)
Deferred financing fees                                                                            (7,821)                   (2,326)
Distributions and dividends paid                                                                  (20,516)                  (18,253)
Distributions to minority interests                                                                (6,346)                   (3,603)
                                                                                                ---------                 ---------
        Net cash provided by financing activities                                                  11,532                    35,467
                                                                                                ---------                 ---------
Decrease in cash and cash equivalents                                                              (5,325)                     (314)
Cash and cash equivalents at beginning of period                                                   14,927                     2,959
                                                                                                ---------                 ---------
Cash and cash equivalents at end of period                                                      $   9,602                 $   2,645
                                                                                                =========                 =========
====================================================================================================================================
</TABLE>

See accompanying notes to financial statements.

<PAGE>


                               PRIME RETAIL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            (Amounts in thousands, except share and unit information)


NOTE 1 -- INTERIM FINANCIAL PRESENTATION

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial  information  and the  instructions  to Form  10-Q and  Article  10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes required by GAAP for complete financial statements.  In the opinion of
management,  all adjustments  consisting only of recurring  accruals  considered
necessary for a fair presentation have been included. Operating results for such
interim  periods are not  necessarily  indicative  of the  results  which may be
expected  for a  full  fiscal  year.  For  further  information,  refer  to  the
consolidated  financial statements and footnotes included in Prime Retail's (the
"Company") annual report on Form 10-K/A-1 for the year ended December 31, 1995.

Unless the context requires otherwise, all references to the Company herein mean
Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc.,
including Prime Retail,  L.P. (the "Operating  Partnership").  The  consolidated
financial  statements  include  the  accounts  of  the  Company,  the  Operating
Partnership and the  partnerships in which the Company has majority  interest or
control.  Profits and losses are allocated in  accordance  with the terms of the
agreement of limited  partnership of the Operating  Partnership.  Investments in
partnerships  in  which  the  Company  does  not have  operational  control  are
accounted for under the equity method of accounting. Income (loss) applicable to
minority interests and common shares as presented in the consolidated statements
of operations is allocated  based on income  (loss)  before  minority  interests
after income allocated to preferred shareholders.

The  preparation  of  financial  statements  in  conformity  with GAAP  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.   Significant   intercompany  accounts  and  transactions  have  been
eliminated in  consolidation.  Certain  financial  statement amounts and related
footnote  information  have  been  reclassified  to  conform  with  the  current
presentation.  These  reclassifications  have not  changed  previously  reported
results or shareholders' equity.

NOTE 2 -- EXCHANGE OFFER AND SECONDARY COMMON STOCK OFFERING

On June 27,  1996,  the  Company  completed  a  registered  exchange  offer (the
"Exchange  Offer") to exchange  shares of its Common  Stock for up to  4,209,000
shares,  or 60%,  of its  outstanding  8.5%  Series B  Cumulative  Participating
Convertible  Preferred Stock (the "Convertible  Preferred  Stock").  The Company
received tender offers for 4,648,650  shares,  or approximately  66.27%,  of the
Convertible  Preferred  Stock.  A proration  factor was applied to each share of
Convertible  Preferred Stock validly tendered by holders,  and on June 27, 1996,
the Company issued  6,734,323 shares of its Common Stock. In connection with the
Exchange Offer, certain affiliates of the Company who are

<PAGE>


NOTE 2 -- EXCHANGE OFFER AND SECONDARY COMMON STOCK OFFERING (CONTINUED)

limited  partners  of  the  Operating   Partnership  (the  "Limited   Partners")
contributed to the Operating Partnership 625,000 common units for cancellation.

On June 26,  1996,  the  Company's  board of  directors  approved a special cash
distribution (the "Special Cash Distribution") on its Common Stock of $1,393, or
$0.145 per common share, to holders of record on June 27, 1996. The Special Cash
Distribution  was paid on July 15, 1996. The Limited  Partners were not entitled
to receive and did not receive any portion of the Special Cash Distribution.

On July 3, 1996, the Company completed a secondary  offering of its Common Stock
to the public by issuing  3,705,000  shares at  $11.375  per share (the  "Common
Stock  Offering").  The Company  received  net  proceeds  from the Common  Stock
Offering  of  $38,843  that were  used to repay  outstanding  indebtedness.  The
selling  stockholder  sold  90,328  shares in  conjunction  with such  secondary
offering.

A summary of the holders of the Series A preferred  units,  Series B convertible
preferred units and common units at September 30, 1996 follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                             Number of Units
                                                                              ------------------------------------------------
Holder                                                                             Series A       Series B           Common
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>             <C>       
Prime Retail, Inc............................................................     2,300,000      2,806,000       13,404,651
The Prime Group, Inc. ("PGI") and management(1)..............................             -              -        8,505,472
                                                                                  ---------      ---------        ---------
                                                                                  2,300,000      2,806,000       21,910,123
                                                                                  =========      =========       ==========
=============================================================================================================================
<FN>
Note:
(1) Includes 742,180 units  beneficially  owned by management and 4,091,255 units  beneficially  owned by certain executive
    officers based on their ownership interests in affiliates of PGI.
</FN>
</TABLE>

NOTE 3 -- INVESTMENT IN PARTNERSHIPS

On May 6, 1996,  the Company and its joint venture  partner,  Fru-Con  Projects,
Inc.  ("Fru-Con")  entered into a purchase  agreement  (the "Grove City Purchase
Agreement") pursuant to which the Company agreed, subject to certain conditions,
to purchase on or before February 28, 1997, all of Fru-Con's  ownership interest
in Grove City Factory Shops  Partnership,  the property  partnership  which owns
Grove City Factory Shops.  On November 1, 1996, the Company  finalized the Grove
City  Purchase  Agreement  and  purchased  Fru-Con's  first  mortgage  and 50.0%
ownership  interest  in  Grove  City  Factory  Shops  Partnership  for  $55,968.
Effective  November 1, 1996, the Company owns 100.0% of Grove City Factory Shops
Partnership.  The Company  financed the purchase  transaction  primarily  with a
portion of the proceeds from certain Nomura Asset Capital Corporation ("Nomura")
loan  transactions  that  closed on  November  1,  1996.  See Note 4 of Notes to
Unaudited Consolidated Financial Statements for additional information regarding
the Nomura loan transactions.

On September  30,  1996,  the Company  obtained a $32,905  first  mortgage  loan
commitment and formed a joint venture  partnership  with Salomon Brothers Realty
Corp.  ("SBRC")  relating to the  development  and operation of Buckeye  Factory
Shops located in Burbank, Ohio.



<PAGE>


NOTE 3 -- INVESTMENT IN PARTNERSHIPS (CONTINUED)

The terms of the first mortgage loan commitment with SBRC provide for borrowings
on two phases of Buckeye Factory Shops at amounts equal to approximately  ninety
percent of the total estimated cost of the development and  construction of each
phase.  The first mortgage loan requires  monthly payments of interest at a rate
equal to 30-day LIBOR plus 2.0%.  Monthly principal  payments are required based
on available cash flows,  as defined.  The loan will be due three years from the
initial  disbursement  date of the Phase I loan.  The maximum  loan  amounts for
Phases I and II of Buckeye  Factory  Shops are limited to $22,905  and  $10,000,
respectively.

Under  the joint  venture  agreement,  the  Company  and SBRC will hold  capital
interests of 75.0% and 25.0%, respectively. The Company and SBRC are required to
make combined equity contributions  totaling at least 10.0% of the total cost of
the development and construction of each phase of the project. Earnings and cash
flows of the partnership are allocated based on the partnership  agreement.  The
project will be developed,  leased, and managed exclusively by the Company which
will be entitled to certain management, construction management, development and
leasing  fees for its  services.  Additionally,  the Company may, at its option,
elect  to  purchase  all  of  SBRC's  ownership  interest  in the  project  at a
contractually  determined  amount at any time prior to the maturity  date of the
first mortgage loan.

NOTE 4 -- BONDS AND NOTES PAYABLE

Effective December 31, 1995, the Company's $16,000 fixed rate mortgage loan that
was scheduled to mature on that date was modified to extend the maturity date to
July 31,  1996 at a fixed rate of interest of 8.00%.  On January 30,  1996,  the
Company obtained from a commercial  mortgage company a commitment for a mortgage
loan in an amount not to exceed $7,000 for an eight-year term (the  "Refinancing
Loan"). On July 3, 1996, the Company repaid the $16,000 fixed rate mortgage loan
by using a portion of the net  proceeds  from the  Common  Stock  Offering.  The
Company  closed on the  Refinancing  Loan on August  1,  1996 and  received  net
proceeds of $6,807 that were used for working capital purposes.  The Refinancing
Loan  bears a fixed  interest  rate at  9.375%,  matures  on March  1,  2004 and
requires monthly principal and interest payments based on a 16-year amortization
schedule. The outstanding principal balance of the Refinancing Loan at September
30, 1996 was $6,986.

On May 7, 1996, the Company's  unsecured line of credit (the  "Corporate  Line")
was renewed and increased from $10,000 to $15,000.  The purpose of the Corporate
Line is to provide  working  capital to  facilitate  the  funding of  short-term
operating  cash needs of the Company.  The Corporate  Line bears interest at the
London  Interbank  offered  rate for thirty (30) day  deposits  in U.S.  dollars
("30-day LIBOR") plus 2.50% and matures on July 11, 1997. The principal  balance
outstanding  under the Corporate  Line at September 30, 1996 was $12,000 and the
interest rate was 7.67%.  As a result of repayments  subsequent to September 30,
1996, the available balance as of November 1, 1996 was $13,700.



<PAGE>


NOTE 4 -- BONDS AND NOTES PAYABLE (CONTINUED)

On July 8, 1996, the Company obtained from a financial  institution a commitment
for a  construction  mortgage  loan in an  amount  not to exceed  the  lesser of
$20,000 or sixty-five  percent (65%) of the  appraised  value of the  underlying
collateral (the "Construction  Mortgage Loan").  The Construction  Mortgage Loan
(i) bears a variable interest rate at the financial institution's prime rate or,
at the Company's option, a LIBOR index plus 2.25%, (ii) matures on September 10,
1998  and  (iii)  requires  monthly  interest-only  payments.  The  Construction
Mortgage Loan is collateralized by a first mortgage on Carolina Factory Shops, a
new outlet  center which opened on November 8, 1996,  located in Gaffney,  South
Carolina.  At September 30, 1996, the  outstanding  balance of the  Construction
Mortgage Loan was $5,475.

On August 1, 1996,  the  Company  closed on the  refinancing  of certain  credit
facilities  with Nomura (the  "Nomura  Credit  Facilities").  The Nomura  Credit
Facilities  provided an aggregate  of $253,000 of financing to the Company.  The
Nomura  Credit  Facilities  were  used  (i)  to  refinance  $151,323  which  was
outstanding  under a revolving credit facility,  (ii) to refinance $97,411 which
was outstanding  under a securitized  mortgage loan,  (iii) to pay loan fees and
transaction costs of $3,600,  and (iv) for working capital  purposes.  Under the
terms of the refinancing,  the Nomura Credit Facilities  consisted of two notes,
one in the amount of $218,000 and the other in the amount of $35,000.  Each note
required  monthly payments of interest-only at a rate equal to 30-day LIBOR plus
1.513%.  At September  30, 1996,  the  outstanding  balance of the Nomura Credit
Facilities was $253,000. The Nomura Credit Facilities were repaid on November 1,
1996 in connection  with the closing of certain loan  transactions  as described
below.

In connection with the execution of the binding commitment for the Nomura Credit
Facilities, the Company incurred a nonrecurring charge and extraordinary loss of
$6,131  and  $4,280,  respectively,  during  the  second  quarter  of 1996.  The
nonrecurring  loss resulted  from (i) the  termination  of  previously  obtained
financing  commitments  from  Nomura  for  which  the  Company  paid  $3,250  in
nonrefundable financing fees, (ii) the unamortized cost of certain interest rate
protection contracts of $3,696, and (iii) other nonrefundable deferred financing
costs of $1,425,  less the  estimated  fair market  value of the  interest  rate
protection contracts of $2,240 based on their fair market value at May 31, 1996.
The extraordinary  loss resulted from (i) the write-off of unamortized  deferred
financing costs of $3,458 relating to the early extinguishment of debt, and (ii)
debt prepayment penalties of $822.

On November  1, 1996,  the Company  closed on $428,290 of loan  facilities  with
Nomura. The transaction provided (i) a $319,000 non-recourse first mortgage loan
(the "First Mortgage Loan") for sixteen of the Company's factory outlet centers,
(ii) a $40,000  non-recourse  expansion  loan (the  "Expansion  Loan"),  (iii) a
junior  secured loan (the "Repo  Financing")  of $53,290,  and (iv) a short-term
unsecured loan of $16,000 (the "Unsecured Loan").



<PAGE>


NOTE 4 -- BONDS AND NOTES PAYABLE (CONTINUED)

The First Mortgage Loan and the Expansion Loan (i) are  cross-collateralized  by
first  mortgages on sixteen of the Company's  factory outlet centers  (including
Rocky  Mountain  Factory  Stores  and Kansas  City  Factory  Outlets  which were
purchased by the Company on November 1, 1996 -- see Note 7 of Notes to Unaudited
Consolidated  Financial  Statements  for  additional  information),  (ii) bear a
variable interest rate of 30-day LIBOR plus 1.51% during the first two years and
a fixed  interest  rate of 7.782% for the balance of the  seven-year  term,  and
(iii)  require  monthly  principal  and  interest  payments  pursuant to a level
payment  360  month  amortization  schedule.  The  First  Mortgage  Loan and the
Expansion  Loan can be prepaid  only  after year two by the use of certain  debt
defeasance and yield  maintenance  provisions and are effectively due at the end
of year seven.

The Repo  Financing  is a recourse  loan to the  Company and (i) is secured by a
pledge of excess cash flow after debt service on the First Mortgage Loan and the
Expansion Loan, (ii) bears a variable  interest rate of 30-day LIBOR plus 1.95%,
(iii) matures in three years, and (iv) requires monthly  interest-only  payments
during the first year of its term and monthly  interest  payments and  quarterly
principal payments thereafter pursuant to six-year amortization schedule.

The proceeds from the First  Mortgage Loan, the Repo Financing and the Unsecured
Loan were used (i) to repay  $253,000 debt  outstanding  under the Nomura Credit
Facilities,  (ii) to  purchase  Rocky  Mountain  Factory  Stores and Kansas City
Factory  Outlets  for  $71,700  (consisting  of  $59,700  in cash and a  $12,000
installment   note),  (iii)  to  purchase  the  first  mortgage  and  the  50.0%
partnership  interest of its joint  venture  partner in Grove City Factory Shops
Partnership for $57,100, and (iv) for loan fees, escrow deposits,  interest rate
protection  contracts  and  transaction  costs  of  approximately  $12,700.  The
remaining proceeds of $5,800 will be used for working capital purposes.  Subject
to certain funding conditions,  proceeds from the Expansion Loan will be used to
fund completed and occupied  expansions on certain of the sixteen factory outlet
centers pledged as collateral for the First Mortgage Loan.

The  Unsecured  Loan (i) bears a  variable  interest  rate of 30-day  LIBOR plus
3.50%, (ii) requires monthly  interest-only  payments,  (iii) requires mandatory
principal  payments  of $6,000 on the earlier of  September  11,  1997,  or upon
repayment from fundings  under the Expansion  Loan, and (iv) matures on November
11, 1997.

On November 1, 1996, the Company amended certain of its interest rate protection
contracts  with an aggregate  notional  amount of $96,441 at September 30, 1996.
The significant terms that were amended included (i) an increase in the notional
amount to $262,000,  and (ii) a change in the termination date from July 1, 2000
to November 11, 1998. In addition, on November 1, 1996, the Company purchased an
interest  rate  protection  contract  with a  notional  amount of  $97,000  that
provides  for a  cap  to  the  variable  interest  rate  index  at  7.00%  and a
termination  date of November 11, 1998.  As a result,  the Company held interest
rate  protection  contracts with an aggregate  notional amount of $359,000 as of
November 1, 1996 to reduce its  exposure to  increases  in  short-term  interest
rates with respect to the First Mortgage Loan and the Expansion  Loan,  prior to
the fixed interest rate period which commences after twenty-four months.



<PAGE>


NOTE 5 -- LEGAL PROCEEDINGS

In the  ordinary  course of  business,  the Company is subject to certain  legal
actions.  While any litigation  contains an element of  uncertainty,  management
believes  that  losses,  if any,  resulting  from such  matters  will not have a
material adverse effect on the consolidated financial statements of the Company.

The  Company  was a  defendant  in a lawsuit  filed on June 14, 1995 in the U.S.
District Court for the Northern District of West Virginia whereby the plaintiffs
alleged that the Company breached a confidentiality agreement entered into by an
affiliate of PGI and the  plaintiffs  in connection  with the proposed  purchase
during 1993 of a factory outlet center in  Martinsburg,  West Virginia.  On July
26, 1996, the U.S.  District  Court for the Northern  District of West Virginia,
after the plaintiffs completed the presentation of their case, issued a judgment
in favor of the Company as a matter of law on all claims.  The  plaintiffs  have
filed a notice of appeal of the judgment with the United States Court of Appeals
for the Fourth Circuit.

NOTE 6 -- CASH DISTRIBUTIONS

On  November  11,  1996,  the  Company's  board  of  directors  approved  a cash
distribution  of $2,509,  or $0.295 per common unit, to the limited  partners of
the Operating  Partnership.  The cash  distribution will be paid on November 15,
1996.

NOTE 7 -- ACQUISITIONS

On November 1, 1996, the Company  acquired the Rocky Mountain Factory Stores and
the Kansas City Factory Outlets for an aggregate purchase price of approximately
$71,700.  The Company  financed the purchase with a portion of the proceeds from
the Nomura loan transactions that closed on November 1, 1996 and the issuance to
the seller of a $12,000  unsecured  installment note. The installment note bears
interest at a fixed rate of 8.25% and requires  quarterly  interest  payments in
arrears.  Commencing  November 30, 1997 through November 30, 1998, the note will
be repaid with four quarterly  principal  payments each in the amount of $3,000.
See  Note  4  of  Notes  to  Unaudited  Consolidated  Financial  Statements  for
additional information regarding the Nomura loan transactions.



<PAGE>


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

           (Amounts in thousands, except share, unit information and GLA)


INTRODUCTION

The following  discussion and analysis of the consolidated  financial  condition
and results of operations of Prime Retail,  Inc. (the "Company")  should be read
in conjunction  with the  Consolidated  Financial  Statements and Notes thereto.
Historical  results  and  percentage  relationships  set  forth  herein  are not
necessarily indicative of future operations.

CAUTIONARY STATEMENTS

The following  discussion in "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect  management's  current views with respect to future events and financial
performance.  Such  forward-looking  statements are subject to certain risks and
uncertainties;  including,  but not limited to, the effects of future  events on
the Company's financial performance;  the risk that the Company may be unable to
finance its planned development activities; risks related to the retail industry
in which the Company's  factory outlet centers compete,  including the potential
adverse  impact of external  factors,  such as inflation,  consumer  confidence,
unemployment  rates and consumer tastes and  preferences;  risks associated with
the Company's property  development  activities,  such as the potential for cost
overruns,  delays and the lack of  predictability  with respect to the financial
returns  associated  with these  development  activities;  the risk of potential
increase in market interest rates from current levels; and risks associated with
real estate ownership,  such as the potential adverse impact of changes in local
economic climate on the revenues and the value of the Company's properties.

RESULTS OF OPERATIONS

GENERAL

The Company has grown by developing  and acquiring  factory  outlet  centers and
expanding its existing  factory  outlet  centers.  As summarized in TABLE 1, the
Company's  factory outlet  portfolio  consisted of seventeen  operating  factory
outlet centers totaling  4,487,000 square feet of gross leasable area ("GLA") at
September  30,  1996,  compared  to  sixteen  factory  outlet  centers  totaling
3,837,000  square feet of GLA at September 30, 1995.  The Company opened one new
factory  outlet center and four  expansions of existing  factory  outlet centers
during the fourth  quarter of 1995,  adding  494,000  square  feet of GLA in the
aggregate.  Additionally, the Company opened four expansions of existing factory
outlet centers  during the third quarter of 1996,  adding 156,000 square feet of
GLA in the  aggregate.  The  significant  increase  in the  number of  operating
properties  and total GLA at  September  30, 1996  compared to the  portfolio of
properties at September 30, 1995, is collectively  referred to as the "Portfolio
Expansion".



<PAGE>


TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                            OWNERSHIP                GRAND            GLA      PERCENTAGE
FACTORY OUTLET CENTER                          PHASE      INTEREST(1)         OPENING DATE      (SQ. FT.)       LEASED(9)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>                 <C>          <C>                 <C>
Warehouse Row Factory Shops(2)(3)--                I              99%        November 1989         95,000              95%
Chattanooga, Tennessee                            II              65%          August 1993         26,000              94
                                                                                                ---------             ---
                                                                                                  121,000              95

San Marcos Factory Shops--                         I             100%          August 1990        177,000             100
San Marcos, Texas                                 II                           August 1991         67,000              96
                                                 III                           August 1993        117,000             100
                                                IIIB                         November 1994         20,000              91
                                                IIIC                         November 1995         35,000             100
                                                                                                ---------             ---
                                                                                                  416,000              99

Gulf Coast Factory Shops--                         I             100%         October 1991        187,000             100
Ellenton, Florida                                 II                           August 1993        123,000             100
                                                                                                ---------             ---
                                                                                                  310,000             100

Triangle Factory Shops--                           I             100%         October 1991        181,000             100
Raleigh-Durham, North Carolina                   IIA                             July 1996          6,000             100
                                                                                                ---------             ---
                                                                                                  187,000             100

Coral Isle Factory Shops--                         I             100%        December 1991         94,000              98
Naples/Marco Island, Florida                      II                         December 1992         32,000              98
                                                                                                ---------             ---
                                                                                                  126,000              98

Castle Rock Factory Shops--                        I             100%        November 1992        181,000             100
Castle Rock, Colorado                             II                           August 1993         94,000              99
                                                 III                         November 1993         95,000             100
                                                                                                ---------             ---
                                                                                                  370,000             100

Ohio Factory Shops--                               I             100%            July 1993        186,000             100
Jeffersonville, Ohio                              II                         November 1993        100,000              99
                                                 IIB                         November 1994         13,000             100
                                                IIIA                           August 1996         35,000              36
                                                                                                ---------             ---
                                                                                                  334,000              93

Gainesville Factory Shops--                        I             100%          August 1993        210,000              94
Gainesville, Texas                                II                         November 1994        106,000              94
                                                                                                ---------             ---
                                                                                                  316,000              94

Nebraska Crossing Factory Shops--                  I             100%         October 1993        192,000              98
Gretna, Nebraska

Oxnard Factory Outlet(4)--                         I              30%            June 1994        148,000              98
Oxnard, California

Grove City Factory Shops(5)--                      I              50%          August 1994        235,000             100
Grove City, Pennsylvania                          II                         November 1994         95,000             100
                                                 III                         November 1995         85,000             100
                                                                                                ---------             ---
                                                                                                  415,000             100

Huntley Factory Shops--                            I             100%          August 1994        192,000              98
Huntley, Illinois                                 II                         November 1995         90,000              57
                                                                                                ---------             ---
                                                                                                  282,000              85
</TABLE>



<PAGE>



TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF SEPTEMBER 30, 1996 (CONTINUED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                            OWNERSHIP                GRAND            GLA      PERCENTAGE
FACTORY OUTLET CENTER                          PHASE      INTEREST(1)         OPENING DATE      (SQ. FT.)       LEASED(9)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>                 <C>          <C>                 <C>
Florida Keys Factory Shops--                       I             100%       September 1994        208,000              97%
Florida City, Florida

Indiana Factory Shops--                            I             100%        November 1994        208,000              91
Daleville, Indiana

Magnolia Bluff Factory Shops(6)--                  I             100%            July 1995        238,000              90
Darien, Georgia                                  IIA                         November 1995         56,000              69
                                                 IIB                             July 1996         21,000              66
                                                                                                ---------             ---
                                                                                                  315,000              85

Arizona Factory Shops(7)--                         I              50%       September 1995        217,000              97
Phoenix, Arizona                                 IIA                        September 1996         94,000              60
                                                                                                ---------             ---
                                                                                                  311,000              86

Gulfport Factory Shops(8)--                        I             100%        November 1995        228,000              94
Gulfport, Mississippi                                                                           ---------             ---

TOTAL FACTORY OUTLET CENTERS(10)                                                                4,487,000              95%
                                                                                                =========             === 
=============================================================================================================================
<FN>
Notes:
(1)  This percentage  represents the Company's ownership interest in the property  partnership  that directly owns or leases
     the property indicated.
(2)  The Company owns a 2% partnership  interest  as the sole general  partner  in Phase  I of this  property but is entitled
     to 99% of the property's operating cash flow and net proceeds from a sale or refinancing.  With regard to Phase II, Ford
     Motor Credit Company holds a 35% limited partnership  interest and the Company holds a 65% general partnership  interest
     in the partnership that owns Phase II of this property.
(3)  Phase I of this  mixed-use  development  includes  154,000  square feet of office space and Phase II includes  5,000
     square feet of office  space.  The total office  space of 159,000  square feet of GLA is not included in this table and
     such space was 100% leased as of September 30, 1996.
(4)  The Company owns 30% of this factory outlet center in a joint venture partnership with unrelated third parties.  
(5)  The Company  purchased its joint venture  partner's 50% ownership  interest in the general  partnership  that owns this
     property on November 1, 1996. As of November 1, 1996, the Company owns 100% of this factory  outlet center.  See Note 3
     of Notes to the  Unaudited  Consolidated  Financial  Statements  for  additional  information  regarding  the  purchase
     transaction.
(6)  The property  partnership  operates this property pursuant to a long-term lease under which the property partnership
     receives the economic benefit of a 100% ownership interest.
(7)  The Company owns 50% of this factory outlet center in a joint venture partnership with an unrelated third party.
(8)  The real  property  on which this outlet  center is located is subject to a long-term  ground  lease.  The  property
     partnership receives the economic benefit of a 100% ownership interest.
(9)  Fully executed leases as of September 30, 1996 as a percent of square feet of GLA.
(10) The Company also owns three community centers containing  424,000 square  feet of GLA in the aggregate that were 97%
     leased as of September 30, 1996.
</FN>
</TABLE>



<PAGE>


COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THE THREE MONTHS 
ENDED SEPTEMBER 30, 1995

Summary

For the three months ended  September 30, 1996, the Company  reported net income
of $2,365 on total revenues of $21,831. For the three months ended September 30,
1996,  the net loss  applicable  to  common  shareholders  was $635 or $0.05 per
common  share.  For the three  months  ended  September  30,  1995,  the Company
reported net income of $4,522 on total revenues of $20,005. For the same period,
the net loss  applicable  to common  shareholders  was $714, or $0.25 per common
share.

Revenues

Total  revenues  were $21,831 for the three months ended  September 30, 1996, as
compared to $20,005 for the three months ended  September  30, 1995, an increase
of $1,826,  or 9.1%.  Base rents  increased  $806,  or 6.7%, in 1996 compared to
1995.   These   increases  are   primarily  due  to  the  Portfolio   Expansion.
Straight-line  rents  (included  in base rents) were $101 and $295 for the three
months ended September 30, 1996 and 1995,  respectively.  Tenant reimbursements,
which  represent  the  contractual  recovery  from tenants of certain  operating
expenses,  increased by $328, or 5.7%,  during the three months ended  September
30, 1996 over the same period in 1995.  These increases are primarily due to the
Portfolio Expansion.

Income from investment partnerships decreased by $155 for the three months ended
September  30,  1996 over the same  period in 1995.  Interest  and other  income
increased by $774, or 54.7%,  to $2,189 during the three months ended  September
30, 1996 as compared to $1,415 for the three  months ended  September  30, 1995.
This  increase is  attributable  to higher  lease  termination  income,  leasing
commissions,  property  management fees and push cart income of $358, $304, $100
and  $99,  respectively,   partially  offset  by  lower  real  estate  brokerage
commissions,  interest  income  and  ancillary  income  of  $26,  $22  and  $39,
respectively.

Expenses

Property operating expenses increased by $508, or 11.0%, to $5,121 for the three
months ended  September 30, 1996 compared to $4,613 for the same period in 1995.
Real estate  taxes  increased  by $82, or 6.4%,  to $1,369 for the three  months
ended September 30, 1996, from $1,287 in the same period for 1995. The increases
in property  operating  expenses and real estate taxes are  primarily due to the
Portfolio Expansion.  As shown in TABLE 2, depreciation and amortization expense
increased by $662, or 16.9%,  to $4,579 for the three months ended September 30,
1996,  compared to $3,917 for 1995. This increase  results from the depreciation
and amortization of assets associated with the Portfolio Expansion.



<PAGE>


TABLE 2 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE

The  components  of  depreciation  and  amortization  expense are  summarized as
follows:

--------------------------------------------------------------------------------
                                                           THREE MONTHS ENDED
                                                              SEPTEMBER 30
                                                     ---------------------------
                                                            1996           1995
--------------------------------------------------------------------------------
Building and improvements                                 $2,289         $2,066
Land improvements                                            502            357
Tenant improvements                                        1,294            900
Furniture and fixtures                                       171            158
Leasing commissions(1)                                       323            436
                                                          ------         ------
       Total                                              $4,579         $3,917
                                                          ======         ======
================================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

TABLE 3 -- COMPONENTS OF INTEREST EXPENSE

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                            THREE MONTHS ENDED
                                                               SEPTEMBER 30
                                                     ---------------------------
                                                            1996           1995
--------------------------------------------------------------------------------
Interest incurred                                         $5,257         $5,075
Interest capitalized                                        (857)          (546)
Interest earned on interest rate protection contracts        (40)          (133)
Amortization of deferred financing costs                     316            786
Amortization of interest rate protection contracts           463            319
                                                          ------         ------
       Total                                              $5,139         $5,501
                                                          ======         ======
================================================================================

As shown in TABLE 3, interest  expense for the three months ended  September 30,
1996  decreased  by $362,  or 6.6%,  to $5,139  compared  to $5,501 for the same
period in 1995.  This  decrease  reflects  an increase in the amount of interest
capitalized in connection with new  development  projects of $311 and a decrease
in  amortization  of deferred  financing  costs of $470 offset by  increases  in
interest  incurred and  amortization of interest rate  protection  agreements of
$182 and  $144,  respectively,  as well as a  decrease  in  interest  earned  on
interest rate protection contracts of $93.

The  decrease  in  amortization   of  deferred   financing  costs  is  primarily
attributable to reduced amortization related to certain deferred financing costs
totaling  $6,773  which were  written off in the second  quarter of 1996.  These
costs were part of the $10,411  nonrecurring loss recorded in the second quarter
of 1996 related to a binding loan commitment  that the Company  obtained on June
5, 1996 in connection with refinancing  $253,000 of debt. See Note 2 of Notes to
Unaudited Financial Statements for additional  information  regarding the Nomura
Asset Capital Corporation ("Nomura") loan transactions.



<PAGE>


Other  charges  decreased  by $76, or 13.8%,  to $475.  This  decrease  reflects
reduced   marketing  costs  of  $227  and  a  lower  provision  for  potentially
unsuccessful  pre-development  efforts  of $120  partially  offset by  increased
professional fees, ground lease expense and other miscellaneous charges of $105,
$48 and  $68,  respectively.  Additionally,  other  charges  includes  a  higher
provision for uncollectible accounts receivable of $50.

In  connection  with re-leasing space to new merchants, the Company incurred $54
and $403 in capital  expenditures  during the  three months ended  September 30,
1996 and 1995, respectively.


COMPARISON OF THE NINE MONTHS ENDED  SEPTEMBER 30, 1996 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995

Summary

For the nine months ended September 30, 1996, the Company reported net income of
$3,663 on total revenues of $63,112. These results include a nonrecurring charge
and an extraordinary loss of $6,131 and $1,017 (net of minority interests in the
amount of $3,263),  respectively,  related to a binding loan commitment that the
Company  obtained on June 5, 1996. For the nine months ended September 30, 1996,
the net loss  applicable to common  shareholders  was $7,573 or $1.17 per common
share.  For the nine months ended  September 30, 1995, the Company  reported net
income of $13,588 on total  revenues of $56,069.  For the same  period,  the net
loss applicable to common shareholders was $2,120, or $0.74 per common share.

Revenues

Total  revenues  were $63,112 for the nine months ended  September  30, 1996, as
compared to $56,069 for the nine months ended September 30, 1995, an increase of
$7,043,  or 12.6%.  Base rents increased  $4,708,  or 14.0%, in 1996 compared to
1995.   These   increases  are   primarily  due  to  the  Portfolio   Expansion.
Straight-line  rents  (included  in base  rents) were $338 and $682 for the nine
months ended September 30, 1996 and 1995, respectively.

Tenant reimbursements,  which represent the contractual recovery from tenants of
certain  operating  expenses,  increased  by $1,941,  or 12.0%,  during the nine
months ended  September 30, 1996 over the same period in 1995.  These  increases
are  primarily  due to  the  Portfolio  Expansion.  Tenant  reimbursements  as a
percentage of recoverable  operating expenses,  which include property operating
expenses  and real estate  taxes,  increased to 98.3% from 97.8% during the nine
months ended  September 30, 1996 and 1995,  respectively.  This  positive  trend
reflects the Company's  continued efforts to contain  operating  expenses at its
properties  while  requiring  merchants  to pay  their  pro rata  share of these
expenses.

Income from investment  partnerships decreased by $333 for the nine months ended
September  30, 1996 over the same period in 1995.  The decrease is primarily due
to a gain on the  sale  of  land  and  improvements  of $288 by a joint  venture
partnership during the 1995 period. Interest and other income increased by $571,
or 14.6%,  to $4,486 during the nine months ended September 30, 1996 as compared
to $3,915  for the nine  months  ended  September  30,  1995.  The  increase  is
attributable to higher lease termination  income,  property  management fees and
push cart income of $722, $208 and $183, respectively, partially offset by lower
leasing commissions,  real estate brokerage  commissions and ancillary income of
$325, $178 and $39, respectively.



<PAGE>


Expenses

Property  operating  expenses  increased by $2,109, or 17.0%, to $14,536 for the
nine months ended  September 30, 1996 compared to $12,427 for the same period in
1995.  Real estate  taxes  decreased  by $212,  or 5.2%,  to $3,854 for the nine
months ended  September 30, 1996,  from $4,066 in the same period for 1995.  The
increase  in  property  operating  expenses is  primarily  due to the  Portfolio
Expansion.  The  decrease  in real estate  taxes is  primarily  attributable  to
management's   successful  efforts  in  lowering  tax  assessments  for  certain
properties. As shown in TABLE 4, depreciation and amortization expense increased
by $2,317,  or 20.6%,  to $13,578 for the nine months ended  September 30, 1996,
compared to $11,261 for 1995. This increase  results from the  depreciation  and
amortization of assets associated with the Portfolio Expansion.

TABLE 4 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE

The  components  of  depreciation  and  amortization  expense are  summarized as
follows:

 -------------------------------------------------------------------------------
                                                            NINE MONTHS ENDED
                                                               SEPTEMBER 30
                                                      --------------------------
                                                             1996          1995
--------------------------------------------------------------------------------
Building and improvements                                 $ 6,744       $ 5,994
Land improvements                                           1,455         1,004
Tenant improvements                                         3,648         2,555
Furniture and fixtures                                        486           381
Leasing commissions(1)                                      1,245         1,327
                                                           ------        ------
       Total                                              $13,578       $11,261
                                                          =======       =======
================================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

TABLE 5 -- COMPONENTS OF INTEREST EXPENSE

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                           NINE MONTHS ENDED
                                                              SEPTEMBER 30
                                                      --------------------------
                                                             1996          1995
--------------------------------------------------------------------------------
Interest incurred                                         $16,651       $14,010
Interest capitalized                                       (2,175)       (1,761)
Interest earned on interest 
  rate protection contracts                                  (162)         (581)
Amortization of deferred financing costs                    1,928         2,354
Amortization of interest rate protection contracts          1,101           957
                                                          -------       -------
       Total                                              $17,343       $14,979
                                                          =======       =======
================================================================================



<PAGE>


As shown in TABLE 5,  interest  expense for the nine months ended  September 30,
1996 increased by $2,364,  or 15.8%, to $17,343 compared to $14,979 for the same
period in 1995. This increase  reflects higher interest  incurred of $2,641,  an
increase in  amortization  of interest rate  protection  contracts of $144 and a
reduction  in interest  earned on interest  rate  protection  contracts  of $419
partially  offset by a decrease in amortization  of deferred  financing costs of
$426 and an increase in the amount of interest  capitalized  in connection  with
new development projects of $414.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $69,606 in the Company's average debt outstanding during the nine
months  ended   September  30,  1996  compared  to  the  same  period  in  1995.
Additionally,  the increase in interest incurred reflects a decrease of 0.58% in
the weighted  average interest rate for the nine months ended September 30, 1996
compared to the same period in 1995.  The weighted  average  interest rates were
7.12% and 7.70% for the 1996 and 1995 periods, respectively.

The  decrease  in  amortization   of  deferred   financing  costs  is  primarily
attributable to reduced amortization related to certain deferred financing costs
totaling  $6,773  which were  written off in the second  quarter of 1996.  These
costs were part of the $10,411  nonrecurring loss recorded in the second quarter
of 1996 related to a binding loan commitment  that the Company  obtained on June
5, 1996 in connection with refinancing  $253,000 of debt. See Note 2 of Notes to
Unaudited  Financial  Statements  for  additional   information   regarding  the
refinancing transaction.

During the second quarter of 1996, the Company  recorded a nonrecurring  loss of
$10,411 related to a binding loan  commitment that the Company  obtained on June
5, 1996 in  connection  with  refinancing  approximately  $253,000 of debt.  See
Liquidity and Capital  Resources -- Sources and Uses of Cash -- The Nomura Loans
for  additional  information  relating to the binding  loan  commitment  and the
components of this nonrecurring loss.  Approximately  $6,131 of the nonrecurring
loss is included in other charges in the Consolidated  Statements of Operations.
As a result,  other  charges  increased  by $6,228 to $7,687 for the nine months
ended September 30, 1996 compared to $1,459 for the same period in 1995.

Excluding the nonrecurring  charge,  other charges increased by $97, or 6.6%, to
$1,556.  This increase  reflects a higher provision for  uncollectible  accounts
receivable  of  $264,   increased  ground  lease  expense  of  $180,   increased
miscellaneous  other charges of $119,  decreased  marketing  costs of $296 and a
lower provision for potentially unsuccessful pre-development efforts of $170.

In connection with re-leasing space to new merchants,  the Company incurred $194
and $565 in capital expenditures during the nine months ended September 30, 1996
and 1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH -- GENERAL

For the nine months ended  September  30, 1996,  net cash  provided by operating
activities was $31,303 and cash used in investing  activities  was $48,160.  The
primary use of cash used in investing  activities was for costs  associated with
the  development  and  construction  of two new factory  outlet centers and four
expansions  of existing  factory  outlet  centers  scheduled  to open during the
fourth quarter of 1996,  costs associated with the three expansions which opened
during the third quarter of 1996,  costs  associated  with the completion of two
factory outlet centers and three  expansions  which opened during 1995 and costs
for pre-development  activities  associated with future  developments.  Net cash
provided by financing activities was $11,532 for the nine months ended September
30, 1996.

<PAGE>


The  principal  sources of these  funds  were the  proceeds  from the  Company's
secondary  stock  offering  (the  "Common  Stock  Offering")  of $38,843 and new
borrowings  of $140,852  offset by the payment of  deferred  financing  costs of
$7,821,  principal  repayments  on notes payable of $132,138,  distributions  to
minority interests (including distributions to the limited partner unit holders)
of $6,346,  preferred and common stock distributions of $20,516,  and payment of
certain costs related to the Exchange Offer (as defined herein) of $1,342.

Pursuant to the terms and conditions of an exchange offer (the "Exchange Offer")
which expired by its terms on June 24, 1996,  4,209,000  shares of the Company's
8.5% Series B Cumulative Participating Convertible Preferred Stock ("Convertible
Preferred  Stock") were  exchanged on June 27, 1996 for 6,734,323  shares of the
Company's  Common Stock, a basis of 1.6 shares of Common Stock for each share of
Convertible Preferred Stock validly tendered and accepted. As a condition to the
Exchange Offer,  the Company  declared a special  one-time cash  distribution on
June  27,  1996 of  $0.145  on each of the  9,609,323  shares  of  Common  Stock
outstanding after consummation of the Exchange Offer. This special one-time cash
distribution totaling $1,393 was paid on July 15, 1996.

Pursuant to the terms and  conditions of the Common Stock Offering for 3,795,328
shares of the Company's Common Stock as set forth in a Prospectus dated June 28,
1996,  the Company  and Kilico  Realty  Corporation  sold  3,705,000  and 90,328
shares,  respectively,  of the  Company's  Common Stock for $11.375 per share on
July 3, 1996.  The  Company's  net proceeds  from the Common  Stock  Offering of
$38,843 were primarily used to repay certain outstanding indebtedness.

Effective December 31, 1995, the Company's $16,000 fixed rate mortgage loan that
was scheduled to mature on that date was modified to extend the maturity date to
July 31,  1996 at a fixed rate of interest of 8.00%.  On January 30,  1996,  the
Company obtained from a commercial  mortgage company a commitment for a mortgage
loan in an amount not to exceed $7,000 for an eight-year term (the  "Refinancing
Loan"). On July 3, 1996, the Company repaid the $16,000 fixed rate mortgage loan
by using a portion of the net  proceeds  from the  Common  Stock  Offering.  The
Company  closed on the  Refinancing  Loan on August  1,  1996 and  received  net
proceeds of $6,807 that was used for working capital  purposes.  The Refinancing
Loan  bears a fixed  interest  rate at  9.375%,  matures  on March  1,  2004 and
requires monthly principal and interest payments based on a 16-year amortization
schedule.

On May 7, 1996, the Company's  unsecured line of credit (the  "Corporate  Line")
was renewed and increased from $10,000 to $15,000.  The purpose of the Corporate
Line is to provide  working  capital to  facilitate  the  funding of  short-term
operating  cash needs of the Company.  The Corporate  Line bears interest at the
London  Interbank  offered  rate for thirty (30) day  deposits  in U.S.  dollars
("30-day LIBOR") plus 2.50% and matures on July 11, 1997. The principal  balance
outstanding  under the Corporate  Line at September 30, 1996 was $12,000 and the
interest rate was 7.67%.  As a result of repayments  subsequent to September 30,
1996, the available balance as of November 1, 1996 was $13,700.

On July 8, 1996, the Company obtained from a financial  institution a commitment
for a  construction  mortgage  loan in an  amount  not to exceed  the  lesser of
$20,000 or sixty-five  percent (65%) of the  appraised  value of the  underlying
collateral (as defined) (the  "Construction  Mortgage  Loan").  The Construction
Mortgage Loan (i) bears a variable interest rate at the financial  institution's
prime rate or, at the Company's  option,  a LIBOR index,  (ii) matures two years
after  closing on the  Construction  Mortgage  Loan and (iii)  requires  monthly
interest-only  payments.  The Construction  Mortgage Loan is collateralized by a
first mortgage on Carolina Factory Shops located in Gaffney, South Carolina.

<PAGE>


Carolina  Factory Shops  contains  approximately  235,000 square feet of GLA and
opened to the public on November 8, 1996. At September 30, 1996, the outstanding
balance of the Construction Mortgage Loan was $5,475.

SOURCES AND USES OF CASH -- THE NOMURA LOANS

On August 1, 1996,  the  Company  closed on the  refinancing  of certain  credit
facilities  (the "Nomura  Credit  Facilities")  with Nomura.  The Nomura  Credit
Facilities  provided an aggregate  of $253,000 of financing to the Company.  The
Nomura  Credit  Facilities  were  used  (i)  to  refinance  $151,323  which  was
outstanding  under a revolving credit facility,  (ii) to refinance $97,411 which
was outstanding  under a securitized  mortgage loan,  (iii) to pay loan fees and
transaction costs of $3,600,  and (iv) for working capital  purposes.  Under the
terms of the refinancing,  the Nomura Credit Facilities  consisted of two notes,
one in the amount of $218,000 and the other in the amount of $35,000.  Each note
required  monthly payments of interest-only at a rate equal to 30-day LIBOR plus
1.513%.  At September  30, 1996,  the  outstanding  balance of the Nomura Credit
Facilities was $253,000. The Nomura Credit Facilities were repaid on November 1,
1996 in connection  with the closing of certain loan  transactions  as described
below.

In connection with the execution of the binding commitment for the Nomura Credit
Facilities, the Company incurred a nonrecurring charge and extraordinary loss of
$6,131  and  $4,280,  respectively,  during  the  second  quarter  of 1996.  The
nonrecurring  loss resulted  from (i) the  termination  of  previously  obtained
financing  commitments  from  Nomura  for  which  the  Company  paid  $3,250  in
nonrefundable financing fees, (ii) the unamortized cost of certain interest rate
protection contracts of $3,696, and (iii) other nonrefundable deferred financing
costs of $1,425,  less the  estimated  fair market  value of the  interest  rate
protection contracts of $2,240 based on their fair market value at May 31, 1996.
The extraordinary  loss resulted from (i) the write-off of unamortized  deferred
financing costs of $3,458 relating to the early  extinguishment of debt and (ii)
debt prepayment penalties of $822.

On November  1, 1996,  the Company  closed on $428,290 of loan  facilities  with
Nomura. The transaction provided (i) a $319,000 non-recourse first mortgage loan
(the "First Mortgage Loan") for sixteen of the Company's factory outlet centers,
(ii) a $40,000  non-recourse  expansion  loan (the  "Expansion  Loan"),  (iii) a
junior  secured loan (the "Repo  Financing")  of $53,290,  and (iv) a short-term
unsecured loan of $16,000 (the "Unsecured Loan").

The First Mortgage Loan and the Expansion Loan (i) are  cross-collateralized  by
first  mortgages on sixteen of the Company's  factory outlet centers  (including
Rocky  Mountain  Factory  Stores  and Kansas  City  Factory  Outlets  which were
purchased  by the Company on November 1, 1996 -- see Sources and Uses of Cash --
Acquisition of Rocky Mountain Factory Stores and Kansas City Factory Outlets for
additional information), (ii) bear a variable interest rate of 30-day LIBOR plus
1.51%  during  the first two years and a fixed  interest  rate of 7.782% for the
balance of the seven-year term, and (iii) require monthly principal and interest
payments  pursuant to a level  payment 360 - month  amortization  schedule.  The
First Mortgage Loan and the Expansion Loan can be prepaid only after year two by
the use of certain debt  defeasance  and yield  maintenance  provisions  and are
effectively due at the end of year seven.



<PAGE>


The Repo  Financing  is a recourse  loan to the  Company and (i) is secured by a
pledge of excess cash flow after debt service on the First Mortgage Loan and the
Expansion Loan, (ii) bears a variable  interest rate of 30-day LIBOR plus 1.95%,
(iii) matures in three years, and (iv) requires monthly  interest-only  payments
during the first year of its term and, thereafter, monthly interest payments and
quarterly principal payments pursuant to a six-year amortization schedule.

The proceeds from the First  Mortgage Loan, the Repo Financing and the Unsecured
Loan were used (i) to repay  $253,000 debt  outstanding  under the Nomura Credit
Facilities,  (ii) to  purchase  Rocky  Mountain  Factory  Stores and Kansas City
Factory  Outlets  for  $71,700  (consisting  of  $59,700  in cash and a  $12,000
installment   note),  (iii)  to  purchase  the  first  mortgage  and  the  50.0%
partnership  interest of its joint  venture  partner in Grove City Factory Shops
Partnership for $57,100, and (iv) for loan fees, escrow deposits,  interest rate
protection  contracts  and  transaction  costs  of  approximately  $12,700.  The
remaining proceeds of $5,800 will be used for working capital purposes.  Subject
to certain funding conditions,  proceeds from the Expansion Loan will be used to
fund completed and occupied  expansions on certain of the sixteen factory outlet
centers pledged as collateral for the First Mortgage Loan.

The  Unsecured  Loan (i) bears a  variable  interest  rate of 30-day  LIBOR plus
3.50%, (ii) requires monthly  interest-only  payments,  (iii) requires mandatory
principal  payments  of $6,000 on the earlier of  September  11,  1997,  or upon
repayment from fundings  under the Expansion  Loan, and (iv) matures on November
11, 1997.

On November 1, 1996, the Company amended certain of its interest rate protection
contracts  with an aggregate  notional  amount of $96,441 at September 30, 1996.
The significant terms that were amended included (i) an increase in the notional
amount to $262,000  and (ii) a change in the  termination  date to November  11,
1998. In addition,  on November 1, 1996, the Company  purchased an interest rate
protection contract with a notional amount of $97,000 that provides for a cap to
the variable interest rate index at 7.00% and a termination date of November 11,
1998. As a result,  the Company held interest rate protection  contracts with an
aggregate  notional  amount of  $359,000  as of  November  1, 1996 to reduce its
exposure to increases  in  short-term  interest  rates with respect to the First
Mortgage Loan and the Expansion  Loan,  prior to the fixed  interest rate period
which commences after twenty-four months.

The Company's  existing $160,000 loan (the "Revolving Loan") with Nomura was not
terminated  as a result  of the  refinancing  loan  transactions.  However,  the
collateral that was pledged  thereunder was released and pledged to Nomura under
the First Mortgage Loan and Expansion Loan which are  cross-collateralized.  The
Revolving Loan is available,  subject to sufficient  collateral being pledged to
Nomura, for acquisitions, expansions and new outlet centers.

The Revolving Loan bears interest at 30-day LIBOR plus 1.75%,  requires  monthly
interest-only payments, and matures on December 31, 1996. The Company can extend
the  maturity  of the  Revolving  Loan for a period of one year  subject  to its
satisfaction  of certain  financial  covenants.  The  Revolving  Loan  agreement
contains certain convenants regarding the payment of distributions and dividends
if at any date the debt service coverage ratio, as defined, fell below a minimum
threshold.  As of  September  30,  1996,  the  Company  was in  compliance  with
monetary,  non-monetary  and debt  service  covenants.  There  was no  principal
balance outstanding under the Revolving Loan at September 30, 1996.



<PAGE>


The amount  available to be drawn by the Company under the Revolving Loan at any
time during the term of the facility is calculated  based upon the net cash flow
from the collateral,  as defined.  The collateral pool of the Revolving Loan can
be  expanded,  subject  to  lender  approval,  by adding  properties,  including
properties under  development,  that satisfy certain criteria relating to, among
other things,  the level of executed leases and the amount of projected net cash
flow.

SOURCES AND USES OF CASH -- GROVE CITY FACTORY SHOPS PURCHASE TRANSACTION

On May 6, 1996,  the Company and its joint venture  partner,  Fru-Con  Projects,
Inc.  ("Fru-Con")  entered into a purchase  agreement  (the "Grove City Purchase
Agreement") pursuant to which the Company agreed, subject to certain conditions,
to purchase on or before February 28, 1997, all of Fru-Con's  ownership interest
in Grove City Factory Shops  Partnership,  the property  partnership  which owns
Grove City Factory Shops.  On November 1, 1996, the Company  completed the Grove
City  Purchase  Agreement  and  purchased  Fru-Con's  first  mortgage  and 50.0%
ownership  interest  in  Grove  City  Factory  Shops  Partnership  for  $55,968.
Effective  November 1, 1996, the Company owns 100.0% of Grove City Factory Shops
Partnership.  The Company financed the purchase  transaction  primarily with the
proceeds from certain Nomura loan transactions that closed on November 1, 1996.

SOURCES AND USES OF CASH -- BUCKEYE FACTORY SHOPS FIRST MORTGAGE LOAN COMMITMENT
AND JOINT VENTURE PARTNERSHIP

On September 30, 1996, Company obtained a $32,905 first mortgage loan commitment
and formed a joint  venture  partnership  with  Salomon  Brothers  Realty  Corp.
("SBRC")  relating to the  development  and  operation of Buckeye  Factory Shops
located in Burbank, Ohio.

The  terms  of the  first  mortgage  loan  commitment  with  SBRC  provides  for
borrowings  on  two  phases  of  Buckeye  Factory  Shops  at  amounts  equal  to
approximately  ninety percent of the total estimated cost of the development and
construction of each phase. The first mortgage loan requires monthly payments of
interest at a rate equal to 30-day LIBOR plus 2.0%.  Monthly principal  payments
are required  based on available  cash flows,  as defined.  The loan will be due
three years from the initial  disbursement date of the Phase I loan. The maximum
loan amounts for Phases I and II of Buckeye Factory Shops are limited to $22,905
and $10,000, respectively.

Under the real estate joint  venture  agreement,  the Company and SBRC will hold
capital  interests  of 75.0% and 25.0%,  respectively.  The Company and SBRC are
required to make combined  equity  contributions  totaling at least 10.0% of the
total cost of the development and construction of each phase of the project. The
project will be developed,  leased, and managed exclusively by the Company which
will be entitled to certain management, construction management, development and
leasing  fees for its  services.  Additionally,  the Company may, at its option,
elect  to  purchase  all  of  SBRC's  ownership  interest  in the  project  at a
contractually  determined  amount at any time prior to the maturity  date of the
first mortgage loan.



<PAGE>


SOURCES AND USES OF CASH -- ACQUISITION OF ROCKY MOUNTAIN FACTORY STORES AND 
KANSAS CITY FACTORY OUTLETS

On November 1, 1996, the Company  acquired the Rocky Mountain Factory Stores and
the Kansas City Factory Outlets for an aggregate purchase price of approximately
$71,700.  The Company  financed the purchase with a portion of the proceeds from
the Nomura loan transactions that closed on November 1, 1996 and the issuance to
the seller of a $12,000  unsecured  installment note. The installment note bears
interest at a fixed rate of 8.25% and requires  quarterly  interest  payments in
arrears.  Commencing  November 30, 1997 through November 30, 1998, the note will
be repaid with four quarterly principal payments each in the amount of $3,000.

Rocky  Mountain  Factory  Stores is  located  in  Loveland,  Colorado,  which is
approximately 35 miles north of Denver, Colorado and 40 miles south of Cheyenne,
Wyoming.  Rocky Mountain  Factory Stores contains  approximately  328,000 square
feet of GLA and was 100.0%  occupied  at  September  30,  1996.  Rocky  Mountain
Factory  Stores was  constructed  in four phases with the first phase opening in
May 1994. Kansas City Factory Outlets is located in Odessa,  Missouri,  which is
approximately  20 miles east of Kansas City on Interstate  70. Phase I of Kansas
City Factory Outlets contains  approximately  191,000 square feet of GLA and was
99.0% occupied at September 30, 1996. Kansas City Factory Outlets opened in July
1995. Phase II, which contains  approximately 105,000 square feet of GLA, opened
to the public on November 8, 1996.

DEVELOPMENT

Management believes that there is sufficient demand for continued development of
new factory  outlet centers and  expansions on certain  existing  factory outlet
centers. The Company expects to open 915,000 square feet of GLA during 1996. The
Company  opened four  expansions on existing  factory  outlet  centers  totaling
156,000 square feet of GLA during the third quarter of 1996. The Company expects
to open an additional  759,000  square feet of GLA during the fourth  quarter of
1996,  including an expansion consisting of 105,000 square feet of GLA at Kansas
City  Factory  Outlets,  a factory  outlet  center  purchased  by the Company on
November 1, 1996.  See Sources and Uses of Cash -- Acquisition of Rocky Mountain
Factory Stores and Kansas City Factory Outlets for additional information.

At September 30, 1996, the estimated  aggregate  remaining capital  expenditures
for the 915,000 square feet of new factory outlet centers and expansions  opened
and  expected to open in 1996  approximated  $48,115.  The  estimated  aggregate
remaining  capital  expenditures  for new factory  outlet centers and expansions
opened during the year ended December 31, 1995 (aggregating  949,000 square feet
of GLA) approximated $797.

TABLE 6 - THIRD QUARTER OPENINGS

TABLE 6  summarizes  the opening  dates and total GLA  relating to  expansion of
existing centers that opened in the third quarter of 1996.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
PROJECT                                             LOCATION              PHASE             OPENING DATE              GLA
-----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                       <C>                   <C>                  <C>   
Arizona Factory Shops                        Phoenix, AZ                   IIA           September 26, 1996          94,000
Ohio Factory Shops                           Jeffersonville, OH            IIIA           August 29, 1996            35,000
Magnolia Bluff Factory Shops                 Darien, GA                    IIB             July 28, 1996             21,000
Triangle Factory Shops                       Raleigh-Durham, NC            IIA             July 19, 1996              6,000
                                                                                                                    -------
       Total Third Quarter Openings                                                                                 156,000
                                                                                                                    =======
=============================================================================================================================
</TABLE>


<PAGE>


TABLE 7 - FACTORY OUTLET CENTERS AND EXPANSIONS UNDER CONSTRUCTION(1)

TABLE 7 summarizes the projected  opening dates and total GLA of the new factory
outlet centers and expansions to existing  outlet centers under  construction as
of  September  30, 1996 and opened or expected to open in the fourth  quarter of
1996.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                           ACTUAL/PROJECTED
PROJECT                                        LOCATION                  PHASE            1996 OPENING DATE          GLA
-----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                       <C>                   <C>                  <C>   
Carolina Factory Shops                       Gaffney, SC                    I                November 8             235,000
Buckeye Factory Shops                        Burbank, OH                    I                November 22            205,000
                                                                                                                    -------
       Total New Centers under
         Construction                                                                                               440,000

Grove City Factory Shops                     Grove City, PA                 IV               November 15            118,000
Kansas City Factory Outlets                  Odessa, MO                     II               November 8             105,000
Gulfport Factory Shops                       Gulfport, MS                  IIA               November 1              40,000
Gulf Coast Factory Shops                     Ellenton, FL                  III               October 18              30,000
Indiana Factory Shops                        Daleville, IN                 IIA               November 14             26,000
                                                                                                                    -------
       Total Expansions under
         Construction                                                                                               319,000
                                                                                                                    -------
       Total New Centers and
         Expansions under Construction                                                                              759,000
                                                                                                                    =======
=============================================================================================================================
</TABLE>
Note:
(1) No  assurance  can be given  that  these new  factory  outlet  centers  and
    expansions will be opened on schedule with the indicated GLA.  Additionally,
    no assurance can be given that the estimated  construction costs will not be
    exceeded.

Management  believes  that  the  Company  has  sufficient  capital  and  capital
commitments to fund the remaining development costs associated with the 1995 and
1996 openings. These funding requirements are expected to be met, in large part,
with the proceeds  from the Nomura loan  facilities,  the  Corporate  Line,  the
Construction  Mortgage Loan, and joint venture partners.  If adequate  financing
for such development and expansion is not available, the Company may not be able
to develop new centers or expand existing centers at currently planned levels.

The Company plans to open new factory outlet centers and expansions in 1997 that
are  expected  to  contain  approximately  750,000  square  feet  of  GLA in the
aggregate,  and have a total expected development cost of approximately $82,500.
However,  on November 7, 1996, a court overturned the zoning decision that would
have allowed development of a planned new outlet center in Hagerstown,  Maryland
of  approximately  235,000  square feet of GLA. The Company  plans to appeal the
court's  decision.  A successful  appeal is  necessary  for  development  of the
planned  new outlet  center on the  identified  site  during  1997.  The Company
expects to fund the  development  cost of its new  factory  outlet  centers  and
expansions  from (i)  certain  line of credit  facilities,  (ii)  joint  venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the  potential  sale of common or preferred  equity in the public or private
capital markets.  As of September 30, 1996,  there were no material  commitments
with regard to the construction of the new factory outlet centers and expansions
scheduled to open in 1997.  There can be no  assurance  that the Company will be
successful in obtaining the required  amount of equity capital or debt financing
for the  1997  planned  openings  or that  the  terms  of such  capital  raising
activities will be as favorable as the Company has experienced in prior periods.



<PAGE>


DEBT REPAYMENTS AND PREFERRED STOCK DIVIDENDS

The Company's aggregate  indebtedness was $314,668 and $305,954 at September 30,
1996  and  December  31,  1995,  respectively.   At  September  30,  1996,  such
indebtedness had a weighted average maturity of 3.4 years and bore interest at a
weighted  average  interest  rate of 6.70% per annum.  At  September  30,  1996,
$15,943,  or  5.1%,  of such  indebtedness  bore  interest  at fixed  rates  and
$298,725, or 94.9%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates.

At September 30, 1996,  the Company held interest rate  protection  contracts on
$28,250 of floating rate tax-exempt  indebtedness  and $96,441 of other floating
rate   indebtedness  (or   approximately   41.7%  of  its  total  floating  rate
indebtedness).  These  contracts  were  scheduled  to  expire  in 1999 and 2000,
respectively.  In addition, the Company held additional interest rate protection
contracts on $43,900 of the $96,441 floating rate indebtedness to further reduce
the Company's  exposure to increases in interest rates. On November 1, 1996, the
Company  amended  certain of its  interest  rate  protection  contracts  with an
aggregate  notional  amount of $96,441 at September  30, 1996.  The  significant
terms that were  amended  included  (i) an  increase in the  notional  amount to
$262,000 and (ii) a change in the  termination  date to November  11,  1998.  In
addition, on November 1, 1996, the Company purchased an interest rate protection
contract  with a  notional  amount of  $97,000  that  provides  for a cap to the
variable  interest  rate index at 7.00% and a  termination  date of November 11,
1998. As a result,  the Company held interest rate protection  contracts with an
aggregate  notional  amount of  $359,000  as of  November  1, 1996 to reduce its
exposure to increases in interest  rates with respect to the First Mortgage Loan
and the Expansion Loan,  prior to the fixed interest rate period which commences
after twenty-four months.

The  Company's  ratio of debt to total market  capitalization  (defined as total
long term debt  divided by the sum of:  (a) the  aggregate  market  value of the
outstanding  shares of  Common  Stock;  (b) the  aggregate  market  value of the
outstanding shares of Convertible Preferred Stock; (c) the aggregate liquidation
preference of the Senior  Preferred Stock at $25.00 per share; and (d) the total
long-term debt of the Company) was 45.5% at September 30, 1996.

As of  November  1,  1996,  the  Company  is  obligated  to repay  $272 of total
indebtedness  during the  remainder  of 1996 and $22,045  during the year ending
December 31, 1997. The Company may extend for one year the term of its Revolving
Loan which is currently scheduled to expire on December 31, 1996. As of November
1, 1996, the Company's total indebtedness had a weighted average maturity of 6.9
years and bore interest at a weighted  average interest rate of 6.88% per annum.
Annualized  cumulative  dividends on the Company's  Senior  Preferred  Stock and
Convertible Preferred Stock are $6,037 and $5,963, respectively. These dividends
are payable quarterly, in arrears.

The  Company  anticipates  that cash flow from  operations,  together  with cash
available  from  borrowings  and other sources will be sufficient to satisfy its
debt service  obligations,  expected  dividend  requirements  and operating cash
needs for the foreseeable future.



<PAGE>


ECONOMIC CONDITIONS

Substantially  all of the  merchants'  leases contain  provisions  that somewhat
mitigate the impact of inflation.  Such provisions include clauses providing for
increases in base rent and clauses  enabling  the Company to receive  percentage
rentals  based on  merchants'  gross  sales.  Substantially  all leases  require
merchants to pay their proportionate share of all operating expenses,  including
common area maintenance,  real estate taxes and promotion,  thereby reducing the
Company's  exposure to increased  costs and operating  expenses  resulting  from
inflation.  At November 1, 1996, the Company maintained interest rate protection
contracts to protect  against  increases in interest  rates on certain  floating
rate indebtedness (see "Debt Repayments and Preferred Stock Dividends").

The  Company  intends to reduce  operating  and leasing  risks by  managing  its
existing  portfolio of  properties  with the goal of  improving  its tenant mix,
rental rates and lease terms and attracting high fashion,  upscale manufacturers
and national brand-name manufacturers as merchants.

FUNDS FROM OPERATIONS

Management  believes that to facilitate a clear  understanding  of the Company's
operating  results,  Funds  from  Operations  ("FFO")  should be  considered  in
conjunction  with net income (loss)  presented in accordance  with GAAP.  FFO is
defined as net income  (loss)  (determined  in accordance  with GAAP)  excluding
gains  (or  losses)  from  debt  restructuring  and  sales  of  property,   plus
depreciation and amortization after adjustments for unconsolidated  partnerships
and joint ventures.

The Company generally  considers FFO an appropriate measure of performance of an
equity real estate investment trust. Historical FFO may or may not be indicative
of future FFO. FFO does not represent cash  generated from operating  activities
in accordance with GAAP (which,  unlike FFO, generally reflects all cash effects
of  transactions  and other  events  that  enter into the  determination  of net
income), is not necessarily indicative of cash flow available to fund cash needs
and should not be considered an alternative to net income or other GAAP measures
as an indication of the Company's  performance or an alternative to cash flow as
a measure of liquidity or the ability to service debt or pay dividends.

The Company  cautions that the calculation of FFO may vary from entity to entity
and as such the  presentation  of FFO by the  Company may not be  comparable  to
other similarly titled measures of other reporting companies.

In March  1995,  the  National  Association  of Real  Estate  Investment  Trusts
established  guidelines clarifying the definition of FFO (as modified,  the "New
Definition").  The  Company  now  reports  both the old  definition  and the New
Definition.  For the Company,  the primary impact of adopting the New Definition
is a  reduction  in FFO since the  amortization  of  capitalized  debt costs and
depreciation  of  non-real  estate  assets are not added  back to income  before
minority interests and extraordinary  item. TABLE 8 provides a reconciliation of
income before minority  interests and extraordinary  item to FFO, under both the
old  definition  and the New  Definition,  for the three and nine  months  ended
September 30, 1996 and 1995. FFO (New Definition) increased $2,347, or 33.4%, to
$9,379 for the

<PAGE>


three  months  ended  September  30, 1996 from $7,032 for the three months ended
September  30, 1995.  This increase is primarily  attributable  to the Portfolio
Expansion.  FFO (New Definition)  decreased $2,556, or 12.5%, to $17,945 for the
nine months  ended  September  30, 1996 from  $20,501 for the nine months  ended
September 30, 1995. This decrease is primarily  attributable to the nonrecurring
charge of  $6,131  recorded  in the  second  quarter  of 1996 as a result of the
binding loan commitment obtained by the Company on June 5, 1996 partially offset
by the Portfolio Expansion.

TABLE 8 -- FUNDS FROM OPERATIONS

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                 THREE MONTHS ENDED SEPTEMBER 30         NINE MONTHS ENDED SEPTEMBER 30
                                              -------------------------------------------------------------------------------
                                                1996     1995       1996     1995       1996     1995      1996      1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>
                                               (Old Definition)   (New Definition)    (Old Definition)    (New Definition)
                                               ---------------    ----------------    ----------------    ----------------
Income before minority interests and
   extraordinary item                        $ 4,175   $3,232    $4,175    $3,232     $3,282  $ 9,437   $ 3,282   $ 9,437
                                                                                    
FFO adjustments:
   Depreciation and amortization               4,579    3,917     3,603     2,639     13,578   11,261     9,971     7,532
   Amortization of deferred financing costs
      and interest rate protection contracts     779    1,105       779     1,105      3,028    3,311     3,028     3,311
   Unconsolidated joint venture                  822       56       822        56      1,664      221     1,664       221
      adjustments(1)                          ------   ------    ------    ------    ------- --------    -------  --------
FFO before allocations to minority
   interests and preferred shareholders      $10,355   $8,310    $9,379    $7,032    $21,552  $24,230    $17,945  $20,501
                                             =======   ======    ======    ======    =======  =======    =======  =======
=============================================================================================================================
<FN>
Note:
(1) Includes net preferential partner  distributions  received from joint  venture  partnerships of $400, $400 and $162 for
    the three months ended September 30, 1996, the nine months ended September 30, 1996 and the nine months ended September
    30, 1995, respectively.
</FN>
</TABLE>

<PAGE>


PART II:  OTHER INFORMATION


Item 1.           Legal Proceedings

                  None

Item 2.           Changes in Securities

                  None

Item 3.           Defaults Upon Senior Securities

                  None

Item 4.           Submission of Matters to a Vote of Security Holders

                  None

Item 5.           Other Information

                  None

Item 6.           Exhibits or Reports on Form 8-K

                  (a)     The following exhibits are included in this Form 10-Q:

                          None

                  (b)     Reports on Form 8-K:

                          None


<PAGE>


                                                        SIGNATURES






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




                                                        PRIME RETAIL, INC.
                                                        Registrant



Date:  November 12, 1996                                /s/ Abraham Rosenthal
       -------------------------                        ------------------------
                                                        Abraham Rosenthal
                                                        Chief Executive Officer





Date:  November 12, 1996                               /s/ Robert P. Mulreaney
       --------------------------                      -------------------------
                                                       Robert P. Mulreaney
                                                       Executive Vice President,
                                                       Chief Financial Officer
                                                       and Treasurer