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, 1998

                                       or

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

                         Commission file number 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 10, 1998, the issuer had outstanding 42,736,742 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 as of September 30, 1998 and
     December 31, 1997.                                                       1

     Consolidated Statements of Operations for the three and
     nine months ended September 30, 1998 and 1997.                           2

     Consolidated Statements of Cash Flows for the nine
     months ended September 30, 1998 and 1997.                                3

     Notes to the Consolidated Financial Statements                           5

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                10


PART II:  OTHER INFORMATION
 
Item 1.  Legal Proceedings                                                    26
Item 2.  Changes in Securities                                                26
Item 3.  Defaults Upon Senior Securities                                      26
Item 4.  Submission of Matters to a Vote of Security Holders                  26
Item 5.  Other Information                                                    26
Item 6.  Exhibits or Reports on Form 8-K                                      27
 
Signatures                                                                    28
<PAGE>
PART I:  FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
<TABLE>

                               Prime Retail, Inc.
                           Consolidated Balance Sheets
                    (in thousands, except share information)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    September 30, 1998             December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                            <C>    
Assets
Investment in rental property:                                                                                   
     Land                                                                                   $  204,878                     $ 66,277
     Buildings and improvements                                                              1,702,986                      779,191
     Property under development                                                                 52,024                       53,139
     Furniture and equipment                                                                    11,851                        6,175
                                                                                            ----------                    ----------
                                                                                             1,971,739                      904,782
     Accumulated depreciation                                                                 (110,135)                     (82,033)
                                                                                            ----------                    ----------
                                                                                             1,861,604                      822,749
Cash and cash equivalents                                                                       13,758                        6,373
Restricted cash                                                                                 43,432                       41,736
Accounts receivable, net                                                                         9,846                        9,745
Deferred charges, net                                                                           13,422                       16,206
Due from affiliates, net                                                                           290                        1,052
Investment in partnerships                                                                       7,739                        3,278
Other assets                                                                                     3,030                        3,044
                                                                                            -----------                   ----------
     Total assets                                                                           $ 1,953,121                   $ 904,183
                                                                                            ===========                   ==========
Liabilities and shareholders' equity
Bonds payable                                                                               $    32,900                   $  32,900
Notes payable                                                                                 1,146,877                     482,365
Accrued interest                                                                                  7,542                       3,767
Real estate taxes payable                                                                        14,728                       4,639
Construction costs payable                                                                        2,948                       5,849
Accounts payable and other liabilities                                                           69,200                      20,210
Dividends and distributions payable                                                              22,899                           -
                                                                                             ----------                   ----------
     Total liabilities                                                                        1,297,094                     549,730

Minority interests                                                                               38,265                       9,925

Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:                               
     10.5% Series A Senior Cumulative Preferred Stock, $0.01
        par value (liquidation preference of $57,500), 2,300,000
        shares issued and outstanding                                                                23                          23
     8.5% Series B Cumulative Participating Convertible Preferred
        Stock, $0.01 par value (liquidation preference of $195,703
        and $74,545, respectively), 7,828,125 and 2,981,000 shares
        issued and outstanding, respectively                                                         78                          30
     Series C Cumulative Participating Convertible redeemable
        Preferred Stock, $.01 par value (liquidation preference
        $50,000), 3,636,363 shares issued and outstanding                                            36                          36
Shares of common stock, 150,000,000 shares authorized:
        Common stock, $0.01 par value, 42,598,445 and 27,294,951
         shares issued and outstanding, respectively                                                426                         273
Additional paid-in capital                                                                      743,406                     398,188
Distributions in excess of net income                                                          (126,207)                    (54,022)
                                                                                            -----------                   ----------
     Total shareholders' equity                                                                 617,762                     344,528
                                                                                            -----------                   ----------
     Total liabilities and shareholders' equity                                             $ 1,953,121                   $ 904,183
                                                                                            ===========                   =========
====================================================================================================================================

See accompanying notes to financial statements.
</TABLE>

<PAGE>
<TABLE>

                               Prime Retail, Inc.
                      Consolidated Statements of Operations
                  (in thousands, except per share information)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                            Three months                       Nine months
                                                                         ended September 30                ended September 30
                                                                      ---------------------------        ---------------------------
                                                                           1998         1997              1998        1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>          <C>             <C>           <C>    

Revenues
Base rents                                                                 $ 47,516     $ 19,243        $  98,646     $ 56,315
Percentage rents                                                              1,960        1,008            3,999        2,398
Tenant reimbursements                                                        21,338        8,731           45,315       26,649
Interest and other                                                            2,373        2,567            7,499        7,562
                                                                           --------     --------         --------     --------
     Total revenues                                                          73,187       31,549          155,459       92,924

Expenses
Property operating                                                           16,836        6,840           35,461       20,495
Real estate taxes                                                             5,380        2,449           11,600        7,238
Depreciation and amortization                                                16,509        6,644           34,267       19,515
Corporate general and administrative                                          2,105        1,464            5,553        4,083
Interest                                                                     20,086        9,079           39,399       27,951
Other charges                                                                 1,699          982            3,997        2,475
                                                                           --------     --------         --------     --------
     Total expenses                                                          62,615       27,458          130,277       81,757
                                                                           --------     --------         --------     --------
Income before loss on sale of real estate,
     minority interests, and extraordinary item                              10,572        4,091           25,182       11,167

Loss on sale of real estate                                                       -            -          (15,461)           -
                                                                           --------     --------         --------     --------
Income before minority interests and
     extraordinary item                                                      10,572        4,091            9,721       11,167
Income allocated to minority interests                                         (214)      (2,540)          (2,456)      (7,803)
                                                                           --------     --------         --------     --------
Income before extraordinary item                                             10,358        1,551            7,265        3,364
Extraordinary item, loss on early
   extinguishment of debt                                                         -       (2,061)               -       (2,061)
                                                                           --------     --------         --------     --------
Net income (loss)                                                            10,358         (510)           7,265        1,303
Income allocated to preferred shareholders                                    6,741        3,094           17,648        9,280
                                                                           --------     --------         --------     --------
                                                                      
Net income (loss) applicable to common shares                               $ 3,617      $(3,604)        $(10,383)     $(7,977)
                                                                           ========     ========         ========     ========
Earnings per common share - basic
   and diluted:
     Income (loss) before extraordinary item                                $  0.09      $ (0.08)        $  (0.31)     $ (0.36)
     Extraordinary item                                                           -        (0.11)               -        (0.12)
                                                                           --------     --------         --------     --------
     Net income (loss)                                                      $  0.09      $ (0.19)        $  (0.31)     $ (0.48)
                                                                           ========     ========         ========     ========
Weighted average common shares outstanding                                   42,314       19,159           33,211       16,458
                                                                           ========     ========         ========     ========

Distributions declared per common share                                     $ 0.295      $ 0.295         $  1.385      $ 0.885
                                                                           ========     ========         ========     ========

====================================================================================================================================
See accompanying notes to financial statements.

</TABLE>
<PAGE>
<TABLE>

                               Prime Retail, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Nine months ended September 30
                                                                                           -----------------------------------------
                                                                                                     1998                    1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>                     <C>    
Operating Activities
Net income                                                                                        $ 7,265                 $ 1,303
Adjustments to reconcile net income to
    net cash provided by operating activities:
      Income allocated to minority interests                                                        2,456                   7,803
      Extraordinary item, loss on early extinguishment of debt                                          -                   2,061
      Loss on sale of real estate                                                                  15,461                       -
      Depreciation                                                                                 33,413                  18,164
      Amortization of deferred financing costs and
         interest rate protection contracts                                                         2,199                   2,861
      Amortization of leasing commissions                                                             854                   1,351
      Provision for uncollectible accounts receivable                                                 788                     748
Changes in operating assets and liabilities:
      Increase in accounts receivable                                                              (1,656)                 (3,199)
      Decrease in due from affiliates, net                                                            868                     895
      (Increase) decrease in other assets                                                          (2,015)                  2,234
      Increase (decrease) in accrued interest                                                       2,553                    (180)
      Increase (decrease) in accounts payable and other liabilities                                (9,668)                    517
                                                                                                  -------                 -------
         Net cash provided by operating activities                                                 52,518                  34,558

Investing Activities                                                                                                               
Proceeds from sale of Prime Transferred Properties                                                 26,015                       -
Acquisition of Horizon, net of cash acquired and spin-off of HGP                                  (35,124)                      -
Purchase of buildings and improvements                                                            (42,916)                (13,258)
Increase in property under development                                                            (70,821)                (32,659)
Acquisition of outlet centers                                                                           -                 (60,819)
                                                                                                  -------                 -------
         Net cash used in investing activities                                                   (122,846)               (106,736)

Financing Activities
Net proceeds from issuance of common and preferred stock                                                -                 193,774
Proceeds from notes payable                                                                       421,970                  91,767
Principal repayments on notes payable                                                            (266,722)               (162,770)
Deferred financing fees                                                                            (3,247)                   (477)
Distributions and dividends paid                                                                  (60,143)                (22,460)
Distributions to minority interests                                                               (14,145)                 (7,803)
                                                                                                  -------                 -------
         Net cash provided by financing activities                                                 77,713                  92,031
                                                                                                  -------                 -------
Increase in cash and cash equivalents                                                               7,385                  19,853
Cash and cash equivalents at beginning of period                                                    6,373                   3,924
                                                                                                  -------                 -------
Cash and cash equivalents at end of period                                                       $ 13,758                $ 23,777
                                                                                                  =======                 =======
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>

<PAGE>
<TABLE>
                               Prime Retail, Inc.
                Consolidated Statements of Cash Flows (continued)
                                 (in thousands)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                 <C>    
Supplemental Disclosure of Noncash Investing and Financing Activities:

The following assets and liabilities were acquired and sold in connection with the consummation of the
Merger Transactions on June 15, 1998:

Acquisition of Horizon, net of spin-off of HGP:
    Fair value of assets acquired                                                                                   $ 1,007,329
    Cash paid, net of cash and cash equivalents acquired                                                                (35,124)
    Common shares issued                                                                                               (214,282)
    Common units of partnership interest issued                                                                         (56,023)
    Series B convertible preferred shares issued                                                                       (118,735)
                                                                                                                    -----------
    Fair value of liabilities assumed                                                                               $   583,165
                                                                                                                    ===========
Disposition of Prime Transferred Properties:
    Book value of assets disposed                                                                                   $    42,201
    Cash received                                                                                                       (26,015)
    Loss on sale                                                                                                        (15,461)
                                                                                                                    -----------
    Liabilities disposed                                                                                            $       725
                                                                                                                    ===========

====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<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 Inc.'s
(the "Company") annual report on Form 10-K for the year ended December 31, 1997.

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 operational  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 prior year financial statement amounts and
related footnote  information have been reclassified to conform with the current
year presentation.

Note 2 -- Earnings Per Share

On December  31, 1997,  the Company  adopted  Statement of Financial  Accounting
Standards  ("SFAS") No. 128,  "Earnings per Share" which specifies the method of
computation,  presentation,  and disclosure for earnings per share ("EPS"). SFAS
No. 128 requires  the  presentation  of basic EPS and diluted EPS.  Basic EPS is
calculated  by  dividing  net income  available  to common  shareholders  by the
weighted  average number of shares  outstanding  during the period.  Diluted EPS
includes  the  potentially  dilutive  effect,  if  any,  which  would  occur  if
outstanding  (i) options to purchase  Common Stock were  exercised,  (ii) Common
Units were  converted  into  shares of Common  Stock,  (iii)  shares of Series C
Preferred  Stock and Units were converted into shares of Common Stock,  and (iv)
shares of Series B Convertible  Preferred  Stock were  converted  into shares of
Common  Stock.  For all periods  presented,  the effect of these  exercises  and
conversions was anti-dilutive and, therefore, diluted EPS is equivalent to basic
EPS.

<PAGE>

Note 3 -- Minority Interests

In prior periods,  cash distributions and losses allocated to minority interests
reduced the  minority  interests  balance to zero.  After  reducing the minority
interests  balance to zero,  additional  distributions  and losses of $3,369 and
$7,272  incurred  during the nine  months  ended  September  30,  1998 and 1997,
respectively, that were allocable to minority interests were allocated to common
shareholders.  The  cumulative  amount of  distributions  and  losses  that were
allocable to minority  interests that were allocated to common  shareholders  at
September 30, 1998 was $15,565.

As of September 30, 1998 and 1997, loans to certain limited  partners,  who also
are  executive   officers  of  the  Company,   aggregating  $2,375  and  $4,750,
respectively,  were  reported  as a  reduction  in  minority  interests  in  the
Consolidated Balance Sheets.

Note 4 -- Business Combination

On June 15, 1998, the merger and other transactions  (collectively,  the "Merger
Transactions")  as set forth in the  agreement  and plan of merger (the  "Merger
Agreement")  between  the  Company  and Horizon  Group,  Inc.  ("Horizon")  were
consummated  for  an  aggregate   consideration  of  approximately   $1,083,100,
including liabilities assumed and related transaction costs.

Pursuant to the terms of the Merger  Agreement,  the Company acquired (i) all of
the  outstanding  shares of common stock of Horizon at an exchange ratio of 0.20
of a share of the Company's Series B Convertible  Preferred Stock and 0.597 of a
share of the  Company's  Common Stock for each share of common stock of Horizon,
and (ii) all of the outstanding limited partnership units of Horizon/Glen Outlet
Centers  Limited  Partnership  ("Horizon  Partnership")  at an exchange ratio of
0.9193 of a Common Unit of partnership interest in the Operating Partnership.  A
total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329
shares of Common Stock were issued by the Company to the shareholders of Horizon
and  3,782,121  Common  Units were issued by the  Operating  Partnership  to the
limited partners of Horizon Partnership.

Immediately prior to the merger,  Horizon  Partnership  contributed 13 of its 35
centers to Horizon Group  Properties,  L.P., of which Horizon Group  Properties,
Inc.  ("HGP"),  a subsidiary of Horizon,  is the sole general  partner.  HGP was
spun-off from the Company on June 15, 1998.  The remaining 22 outlet  centers of
Horizon were integrated into the Company's existing portfolio. On June 19, 1998,
all of the common equity of HGP was distributed to the convertible preferred and
common shareholders and unitholders of the Company and its Operating Partnership
and the  shareholders  and limited  partners of Horizon and Horizon  Partnership
based on their ownership in the Company  immediately  following  consummation of
the merger. One share of common stock of HGP was distributed for every 20 shares
of Common Stock and Series C Convertible  Preferred Stock of the Company and for
every 20 Common Units of the Operating Partnership. Additionally,  approximately
1.196 shares of the common stock of HGP were  distributed for every 20 shares of
Series B Convertible Preferred Stock of the Company.

In connection  with the Merger  Transactions,  the Company sold Indiana  Factory
Shops and Nebraska Crossing Factory Shops (collectively,  the "Prime Transferred
Properties") to HGP for an aggregate  consideration  of $26,015,  resulting in a
loss of $15,461. Proceeds from the sale of the Prime Transferred Properties were
used to repay indebtedness associated with the Horizon properties.

Concurrent with the closing of the merger, a special cash  distribution was made
aggregating  $21,871  consisting  of $0.50 per  share/unit  to holders of Common
Stock,  Series C Preferred  Securities  and Common  Units and $0.60 per share to
holders of Series B Convertible  Preferred  Stock.  Shareholders  of Horizon and
limited   partners  of  Horizon   Partnership   did  not  participate  in  these
distributions.
<PAGE>

The merger has been  accounted for using the purchase  method of accounting  and
the purchase  price of $1,083,100  was allocated to the assets  acquired and the
liabilities assumed based on estimates of their respective fair values.  Certain
assumptions  were made which  management of the Company believes are reasonable.
The Company expects to finalize the preliminary purchase price allocation before
the end of 1998. The final allocation is not expected to differ  materially from
the allocation made at September 30, 1998.

The  operating  results of those  properties  acquired have been included in the
Company's   consolidated  results  of  operations  commencing  on  the  date  of
acquisition. The operating results of the Prime Transferred Properties have been
included in the Company's consolidated results of operations through the date of
disposition.

The following unaudited pro forma summary financial  information gives effect to
the Merger Transactions as if they had occurred on January 1, 1997.
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Nine months ended September 30
                                                                                          ------------------------------
                                                                                              1998              1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>              <C>    

Total revenues                                                                               $208,807         $195,505
                                                                                             ========         ========
Net income from continuing operations                                                        $ 27,969         $ 21,786  
                                                                                             ========         ========
Net income applicable to common shares                                                       $  7,747         $  3,236
                                                                                             ========         ========
Earnings per common share - basic and diluted                                                $   0.18         $   0.10
                                                                                             ========         ========
Weighted average common shares outstanding                                                     41,954           30,924
                                                                                             ========         ========              
====================================================================================================================================
</TABLE>

These  unaudited pro forma results are presented for  comparative  purposes only
and are not  necessarily  indicative of what the Company's  actual  consolidated
results  of  operations  would  have  been  for  the  periods  presented  if the
Transactions  had been  completed  at January 1,  1997,  nor do they  purport to
represent the Company's future consolidated results of operations.

Note 5 -- Notes Payable

On September 25, 1998, the Company closed on an unsecured $40,000 revolving loan
(the  "Revolving  Loan") with a financial  institution.  The Revolving  Loan (i)
bears  interest  equal  to  30-day  LIBOR  plus  1.75%,  (ii)  requires  monthly
interest-only  payments,  and (iii)  matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.

The Revolving  Loan requires  compliance  with certain  financial loan covenants
including  those  relating  to the  Company's  (i)  total  outstanding  variable
indebtedness,  (ii) total outstanding  indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.
<PAGE>

On June 15, 1998, the Company closed on $292,000 of loan  facilities with Nomura
Asset Capital  Corporation.  The transaction provided (i) a $180,000 nonrecourse
permanent loan (the  "Permanent  Loan") and (ii) a $112,000 full recourse bridge
loan of which $95,000 was funded (the "Bridge Loan").  The Permanent Loan is (i)
collateralized  by first mortgages on four factory outlet centers,  (ii) bears a
fixed rate of interest of 6.99%,  (iii) requires monthly  principal and interest
payments  pursuant to an approximate  26-year  amortization  schedule,  and (iv)
matures  on June  15,  2008.  The  Bridge  Loan is (i)  collateralized  by first
mortgages on six factory outlet centers,  (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) requires monthly interest-only payments,
and (iv) matures on June 15, 2001.

As of November 11, 1998, the Company is a guarantor or otherwise obligated with
respect to  $39,570 of the  indebtedness  of HGP and its  affiliates,  including
$10,000 of obligations under HGP's $108,205  three-year secured credit facility.

On  April  1,  1998,  Horizon  consummated  an  agreement  with  Castle  & Cooke
Properties,  Inc. which released Horizon from its forward  obligations under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations  under such lease.
The  agreement  also  provided  that  Horizon  transfer  to such  joint  venture
substantially  all of Horizon's  economic  interest in its outlet center in Lake
Elsinore,  California  together  with  legal  title to vacant  property  located
adjacent to the center.  As of  September  30, 1998,  the Company  holds a small
minority  interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Company is legally obligated for $30,864 of mortgage indebtedness outstanding at
September  30, 1998 which is secured by a first  mortgage  on the Lake  Elsinore
outlet center. In addition,  Castle & Cooke has provided the Company a guaranty,
without limitation, of the obligations relating to such mortgage indebtedness.

On  March  18,  1998,  the  Company  obtained  from a  financial  institution  a
commitment for a construction  mortgage loan (the "Construction  Mortgage Loan")
relating to Phase I of Prime Outlets at Hagerstown  ("Hagerstown")  in an amount
not to exceed $21,600 which was subsequently  increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for  construction  financing on Phase
II. The Construction  Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR plus  1.50%,  (ii)  matures on June 1, 2004,  and (iii)  requires  monthly
interest-only  payments.  The Construction  Mortgage Loan is collateralized by a
first mortgage on Hagerstown.  At September 30, 1998, $15,969 was outstanding on
the Construction Mortgage Loan.
<PAGE>


Note 6 -- 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 the losses, if any,  resulting from such matters,  including the matter
described  below,  will not have a material  adverse effect on the  consolidated
financial statements of the Company.

The  Company  is  defendant  in a  lawsuit  filed on July  27,  1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company,  if any, from, this lawsuit cannot  currently be predicted.  Management
believes that the Company has acted  properly and intends to defend this lawsuit
vigorously.

In the  Company's  previously  filed Form 10-Q for the  quarter  ended March 31,
1998,  it reported  that on December 10, 1997 in the Circuit  Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit against Horizon,  the Company,  and certain  directors and former
directors of Horizon. The substantive allegations claim that Horizon's directors
breached  their  fiduciary  duties to Horizon's  shareholders  in approving  the
merger of  Horizon  and the  Company  and that the  consideration  to be paid to
Horizon's shareholders in connection with the merger was unfair and inadequate.

On  September  8, 1998,  a hearing was held before  Judge James M. Graves of the
Court. At the hearing, the defendants,  including the Company, continued to deny
any wrongdoing and liability. The Court approved the settlement set forth in the
Stipulation of Settlement (the "Stipulation") previously executed by the parties
to the  lawsuit  on July 21,  1998 and found  that the  settlement  was,  in all
respects,  fair,  reasonable,  and adequate,  and dismissed  with  prejudice the
litigation against the defendants.  The settlement required that the Company pay
legal expenses of $325.

<PAGE>

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

          (Amounts in thousands, except share, unit and square foot information)

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. The
Company's  operations are conducted  through Prime Retail,  L.P. (the "Operating
Partnership").  The  Company  controls  the  Operating  Partnership  as its sole
general partner and is dependent upon the  distributions  or other payments from
the Operating Partnership to meet its financial obligations.  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.  Actual results may differ  materially from those reflected in such
forward-looking   statements   because  of  various  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  acquisition  and  development  activities;  risks related to the retail
industry in which the Company's 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  acquisitions,  such as the lack of predictability  with
respect to financial  returns;  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.

Merger with Horizon Group, Inc.

On June 15, 1998, the merger and other transactions  (collectively,  the "Merger
Transactions")  between the Company and Horizon  Group,  Inc.  ("Horizon")  were
consummated  for  an  aggregate   consideration  of  approximately   $1,083,100,
including liabilities assumed and related transaction costs. The merger has been
accounted for using the purchase  method of accounting and the purchase price of
$1,083,100  was  allocated to the assets  acquired and the  liabilities  assumed
based on estimates of their respective fair values.  Accordingly,  the operating
results of the 22  properties  acquired  from Horizon have been  included in the
Company's  consolidated  results of operations  commencing on June 15, 1998. See
"Liquidity   and  Capital   Resources  -  Business   Combination"   for  further
information.

Portfolio Growth

The Company has grown by developing  and acquiring  factory  outlet  centers and
expanding  certain of its existing  factory  outlet  centers.  As  summarized in
TABLE 1,  the  Company's  factory  outlet  portfolio  consisted  of 50 operating
factory outlet centers  totaling  14,029,000  square feet of gross leasable area
("GLA") at September 30, 1998,  compared to 24 operating  factory outlet centers
totaling 6,316,000 square feet of GLA at September 30, 1997.
<PAGE>


During the nine months  ended  September  30, 1998,  the Company  opened two new
factory  outlet  centers and six  expansions to existing  factory outlet centers
totaling  612,000  square feet of GLA in the aggregate.  In connection  with the
Merger Transactions, the Company acquired and integrated 22 of Horizon's factory
outlet centers into its existing  portfolio  adding 6,626,000 square feet of GLA
in the aggregate.  Additionally, in connection with the Merger Transactions, the
Company  sold two  factory  outlet  centers to Horizon  Group  Properties,  Inc.
("HGP")  totaling  426,000 square feet of GLA. During the period October 1, 1997
through  December 31, 1997,  the Company  purchased  four factory outlet centers
totaling  863,000  square  feet of GLA and opened an  expansion  to an  existing
factory outlet center totaling 38,000 square feet of GLA.

The significant increase in the number of the Company's operating properties and
total  GLA  since  September  30,  1997  are  collectively  referred  to as  the
"Portfolio Expansion and the Horizon Merger".
<PAGE>
<TABLE>


TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand          GLA         Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>                 <C>                 <C>  

Prime Outlets at Niagara Falls USA (2) - Niagara Falls, New York.......     I             July 1992        300,000             100%
                                                                           II           August 1995        234,000              89
                                                                                                           -------             ---- 
                                                                                                           534,000              95

Prime Outlets at Kittery (3) - Kittery Maine...........................     I            April 1984         25,000             100
                                                                           II              May 1984         78,000              99
                                                                          III           August 1989         18,000              99
                                                                           IV              May 1998         10,000             100
                                                                                                           -------             ---- 
                                                                                                           131,000              99

Prime Outlets at Fremont (4) - Fremont, Indiana........................     I          October 1985        118,000             100
                                                                           II         November 1993         51,000              92
                                                                          III          October 1994         60,000             100
                                                                                                           -------             ----
                                                                                                           229,000              98

Prime Outlets at Birch Run (4) - Birch Run, Michigan................... I-XIV               Various        583,000              99
                                                                           XV             June 1996          6,000             100
                                                                         XVII             June 1996          2,000             100
                                                                         XVII                  1997         15,000              99
                                                                        XVIII                  1997        118,000             100
                                                                                                           -------             ----
                                                                                                           724,000              99

Prime Outlets at Latham (3) - Latham, New York.........................     I           August 1987         43,000             100

Prime Outlets at Michigan City (4) - Michigan City, Michigan...........     I         November 1987        199,000             100
                                                                           II              May 1988        130,000              97
                                                                          III             July 1991         36,000              85
                                                                           IV             July 1994         42,000             100
                                                                            V         December 1994         26,000              98
                                                                           VI              May 1995         58,000              99
                                                                                                           -------             ----
                                                                                                           491,000              98

Prime Outlets at Williamsburg (4) - Williamsburg, Virginia.............     I            April 1988         67,000              99
                                                                           II         November 1988         60,000             100
                                                                          III          October 1990         49,000             100
                                                                           IV                  1995         98,000             100
                                                                                                           -------             ----
                                                                                                           274,000             100

Prime Outlets at Kenosha (4) - Kenosha, Wisconsin......................     I        September 1988         89,000             100
                                                                           II             July 1989         65,000              97
                                                                          III              May 1990        115,000              99
                                                                                                           -------             ----
                                                                                                           269,000              99


Prime Outlets at Silverthorne (4) - Silverthorne, Colorado.............     I         November 1988         95,000              92
                                                                           II         November 1990         75,000              98
                                                                          III         November 1993         88,000              93
                                                                                                           -------             ----
                                                                                                           258,000              94

Prime Outlets at Edinburgh (4) - Edinburgh, Indiana....................    I                  1988         156,000             100
                                                                          II         November 1994         142,000             100
                                                                                                           -------             ----
                                                                                                           298,000             100  

Prime Outlets at Burlington (4) - Burlington, Washington ..............     I              May 1989         89,000             100
                                                                           II          October 1989         36,000             100
                                                                          III            April 1993         49,000             100
                                                                                                           -------             ----
                                                                                                           174,000             100
</TABLE>
<PAGE>
<TABLE>


TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>                  <C>                <C>  

Prime Outlets at Queenstown (4) - Queenstown, Maryland.................     I             June 1989         67,000             100%
                                                                           II             June 1990         55,000              99
                                                                          III          January 1991         16,000              97
                                                                           IV             June 1992         14,000              97
                                                                            V           August 1993         69,000             100
                                                                                                           -------             ----
                                                                                                           221,000              99

Prime Outlets at Hillsboro (4) - Hillsboro, Texas......................     I          October 1989         95,000              90
                                                                           II          January 1992        101,000             100
                                                                          III              May 1995        163,000             100
                                                                                                           -------             ----
                                                                                                           359,000              97

Prime Outlets at Oshkosh (4) - Oshkosh, Wisconsin......................     I         November 1989        215,000              95
                                                                           II             July 1991         45,000              99
                                                                                                           -------             ----
                                                                                                           260,000              96

Prime Outlets at Warehouse Row (5)- Chattanooga, Tennessee.............     I         November 1989         95,000              98
                                                                           II           August 1993         26,000              94
                                                                                                           -------             ----
                                                                                                           121,000              95

Prime Outlets at Gilroy (4) - Gilroy, California.......................     I          January 1990         94,000             100
                                                                           II           August 1991        109,000             100
                                                                          III          October 1992        137,000              95
                                                                           IV             July 1994        170,000              99
                                                                            V         November 1995         69,000             100
                                                                                                           -------             ----
                                                                                                           579,000              99

Prime Outlets at Perryville (4) - Perryville, Maryland.................     I             June 1990        148,000              98

Prime Outlets at Sedona (6) - Sedona, Arizona .........................     I           August 1990         82,000              99

Prime Outlets at San Marcos - San Marcos, Texas........................     I           August 1990        177,000              98
                                                                           II           August 1991         70,000             100
                                                                          III           August 1993        117,000              97
                                                                         IIIB         November 1994         20,000              91
                                                                         IIIC         November 1995         35,000             100
                                                                         IIID              May 1998         18,000             100
                                                                                                           -------             ----
                                                                                                           437,000              98

Prime Outlets at Anderson (2) - Anderson, California...................     I           August 1990        165,000              98

Prime Outlets at Post Falls (6) - Post Falls, Idaho ...................     I             July 1991        111,000              85
                                                                           II             July 1992         68,000              86
                                                                                                           -------             ----
                                                                                                           179,000              85

Prime Outlets at Ellenton - Ellenton, Florida..........................     I          October 1991        187,000             100
                                                                           II           August 1993        123,000             100
                                                                          III          October 1996         30,000             100
                                                                                                           -------             ----
                                                                                                           340,000             100

Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........     I          October 1991        181,000             100
                                                                           II             July 1996          6,000             100
                                                                                                           -------             ----
                                                                                                           187,000             100

Prime Outlets at Naples - Naples/Marco Island, Florida.................     I         December 1991         94,000              95
                                                                           II         December 1992         32,000             100
                                                                          III            March 1998         20,000              98
                                                                                                           -------             ----
                                                                                                           146,000              96
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>                   <C>                 <C>  
Prime Outlets at Conroe (4) - Conroe, Texas............................     I         January 1992          93,000              92%
                                                                           II            June 1994         163,000              96
                                                                          III         October 1994          26,000              87
                                                                                                           -------             ----
                                                                                                           282,000              93

Prime Outlets at Woodbury (4) - Woodbury, Minnesota....................     I            July 1992         129,000              93
                                                                           II        November 1993         100,000              93
                                                                          III          August 1994          21,000             100
                                                                                                           -------             ----
                                                                                                           250,000              94

Prime Outlets at Calhoun (4) - Calhoun, Tennessee......................     I         October 1992         123,000             100
                                                                           II         October 1995         131,000             100
                                                                                                           -------             ----
                                                                                                           254,000             100

Prime Outlets at Castle Rock - Castle Rock, Colorado...................     I        November 1992         181,000             100
                                                                           II          August 1993          94,000              97
                                                                          III        November 1993          95,000              96
                                                                           IV          August 1997         110,000              97
                                                                                                           -------             ----
                                                                                                           480,000              99

Prime Outlets at Bend (6) - Bend, Oregon...............................     I        December 1992          97,000              97
                                                                           II       September 1998          35,000              93
                                                                                                           -------             ----
                                                                                                           132,000              96

Prime Outlets at Jeffersonville II (4) - Jeffersonville, Ohio..........     I           March 1993         126,000              76
                                                                           II          August 1993         123,000              70
                                                                          III         October 1994          65,000             100
                                                                                                           -------             ----
                                                                                                           314,000              79

Prime Outlets at Jeffersonville I - Jeffersonville, Ohio................    I            July 1993         186,000              96
                                                                           II        November 1993         100,000             100
                                                                          IIB        November 1994          13,000              64
                                                                         IIIA          August 1996          35,000             100
                                                                         IIIB           March 1997          73,000              94
                                                                                                           -------             ----
                                                                                                           407,000              96

Prime Outlets at Gainesville - Gainesville, Texas......................     I          August 1993         210,000              88
                                                                           II        November 1994         106,000             100
                                                                                                           -------             ----
                                                                                                           316,000              92

Prime Outlets at Loveland - Loveland, Colorado.........................     I             May 1994         139,000             100
                                                                           II        November 1994          50,000             100
                                                                          III             May 1995         114,000             100
                                                                           IV             May 1996          25,000             100
                                                                                                           -------             ----
                                                                                                           328,000             100

Prime Outlets at Oxnard (7) - Oxnard, California.......................     I            June 1994         148,000              95

Prime Outlets at Grove City - Grove City, Pennsylvania.................     I          August 1994         235,000             100
                                                                           II        November 1994          95,000             100
                                                                          III        November 1995          85,000              99
                                                                           IV        November 1996          18,000              99
                                                                                                           -------             ----
                                                                                                           533,000             100

Prime Outlets at Huntley - Huntley, Illinois...........................     I          August 1994         192,000              95
                                                                           II        November 1995          90,000              99
                                                                                                           -------             ----
                                                                                                           282,000              96
Prime Outlets at Florida City - Florida City, Florida..................     I       September 1994         208,000              95

Prime Outlets at Pismo Beach (4) - Pismo Beach, California.............     I        November 1994         148,000              98
</TABLE>
<PAGE>

<TABLE>

TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>                  <C>                 <C> 

Prime Outlets at Tracy  (4) - Tracy, California........................     I         November 1994        153,000             100%

Prime Outlets at Vero Beach (4) - Vero Beach, Florida..................     I         November 1994        210,000              99
                                                                           II           August 1995        116,000              92
                                                                                                           -------            -----
                                                                                                           326,000              96

Prime Outlets at Waterloo (4) - Waterloo, New York.....................     I            March 1995        208,000             100
                                                                           II        September 1996        115,000             100
                                                                          III            April 1997         68,000              90
                                                                                                           -------            -----
                                                                                                           391,000              98

Prime Outlets at Odessa - Odessa, Missouri.............................     I             July 1995        191,000             100
                                                                           II         November 1996        105,000              61
                                                                                                           -------            -----
                                                                                                           296,000              86

Prime Outlets at Darien (8) - Darien, Georgia..........................     I             July 1995        238,000              85
                                                                          IIA         November 1995         49,000              99
                                                                          IIB             July 1996         20,000             100
                                                                                                           -------            -----
                                                                                                           307,000              88

Prime Outlets at New River (9) - Phoenix, Arizona......................     I        September 1995        217,000              96
                                                                           II        September 1996        109,000              93
                                                                                                           -------            -----
                                                                                                           326,000              95

Prime Outlets at Gulfport (10) - Gulfport, Mississippi.................     I         November 1995        228,000              99
                                                                          IIA         November 1996         40,000              93
                                                                          IIB         November 1997         38,000             100
                                                                                                           -------            -----
                                                                                                           306,000              98

Prime Outlets at Lodi (11) - Burbank, Ohio.............................     I         November 1996        205,000              97
                                                                          IIA              May 1998         33,000              78
                                                                                                           -------            -----
                                                                                                           238,000              94

Prime Outlets at Gaffney - Gaffney, South Carolina.....................     I         November 1996        235,000              99
                                                                           II             July 1998         70,000              81
                                                                                                           -------            -----
                                                                                                           305,000              95

Prime Outlets at Lee (4) - Lee, Massachusetts..........................     I             June 1997        224,000              99

Prime Outlets at Lebanon -  Lebanon, Tennessee.........................     I            April 1998        208,000              92

Prime Outlets at Hagerstown - Hagerstown, Maryland.....................     I           August 1998        218,000              96
                                                                                                           -------            -----
Total Factory Outlet Centers (12)                                                                       14,029,000              96%
                                                                                                        ==========            =====
====================================================================================================================================
</TABLE>
Notes:
(1) Percentage  reflects  fully  executed  leases as of September 30, 1998 as a
    percent of square feet of GLA.  
(2) The Company  acquired  this  factory  outlet center on  December  2, 1997
    from an  unrelated  third  party.  
(3) The  Company acquired this factory outlet center on October 29, 1997 from an
    unrelated  third party. 
(4) The Company acquired this factory outlet center on June 15, 1998 as a result
    of its  merger  with  Horizon. 
<PAGE>
(5) 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.  An
    unrelated third party 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.  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
    is not included in this table and such  space was 74%  leased as of  
    September  30,  1998.  
(6) The Company  acquired  this  factory  outlet  center on  February  13,  1997
    from an unrelated  third  party.  
(7) On February  7, 1997,  the  Company purchased  an additional 20% interest
    from a joint venture  partner, increasing the Company's ownership  interest
    in this  property  to 50%.
(8) The  Company  operates  this property  pursuant to a long-term  ground lease
    under which the Company receives the economic benefit of a 100% ownershi
    interest.  
(9) The Company owns 50% of this factory  outlet  center in a joint  venture
    partnership  with an unrelated third party.  
(10)The real  property on which this outlet  center is located is subject to a
    long-term  ground lease.  The Company receives the economic benefit of a 
    100% ownership  interest.  
(11)On September 2, 1997, the Company purchased its joint venture  partner's 
    25%  partnership  interest in Buckeye Factory Shops Limited  Partnershi
    and now owns 100% of this factory outlet center.  
(12)The Company also owns three community  centers not included in this table
    containing 424,000 square feet of GLA in the aggregate that were 88% leased
    as of September 30, 1998.

Results of Operations

Comparison  of the three  months  ended  September  30, 1998 to the three months
ended September 30, 1997

Summary

The  Company  reported  net income  (loss) of  $10,358  and $(510) for the three
months ended September 30, 1998 and 1997, respectively. The 1997 results include
a third  quarter  extraordinary  loss  on the  early  extinguishment  of debt of
$2,061. For the three months ended September 30, 1998, the net income applicable
to common  shareholders  was  $3,617,  or $0.09 per common  share on a basic and
diluted  basis.  For the three months  ended  September  30, 1997,  the net loss
applicable  to common  shareholders  was $3,604,  or $0.19 per common share on a
basic and diluted basis.

Revenues

Total  revenues  were  $73,187 for the three  months  ended  September  30, 1998
compared to $31,549 for the three months ended  September  30, 1997, an increase
of $41,638, or 132.0%. Base rents increased $28,273, or 146.9%, in 1998 compared
to 1997. Straight-line rents (included in base rents) were $713 and $140 for the
three months ended  September 30, 1998 and 1997,  respectively.  These increases
are primarily due to the Portfolio Expansion and the Horizon Merger.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified  threshold,  increased $952, or 94.4%, during the three months
ended  September 30, 1998 compared to the same period in 1997. This increase was
attributable  to  the  Portfolio  Expansion  and  the  Horizon  Merger.   Tenant
reimbursements, which represent the contractual recovery from tenants of certain
operating  expenses,  increased by $12,607,  or 144.4%,  during the three months
ended  September  30,  1998 over the same  period  in 1997.  This  increase  was
primarily due to the Portfolio Expansion and the Horizon Merger.

Interest and other income decreased by $194, or 7.6%, to $2,373 during the three
months ended September 30, 1998 as compared to $2,567 for the three months ended
September 30, 1997. The decrease reflects a reduction in interest income of $254
partially  offset by higher  other  ancillary  income of $60.  The  reduction in
interest  income  was  primarily  the  result  of the  use of a  portion  of the
Company's  expansion  loan  escrow  account to fund  certain of its  development
activities  during 1997 and 1998.  The expansion loan escrow account is included
in restricted cash in the Consolidated Balance Sheets.
<PAGE>

Expenses

Property  operating  expenses increased by $9,996, or 146.1%, to $16,836 for the
three months ended  September 30, 1998 compared to $6,840 for the same period in
1997. Real estate taxes increased by $2,931,  or 119.7%, to $5,380 for the three
months ended  September 30, 1998,  from $2,449 in the same period for 1997.  The
increases in property  operating  expenses and real estate taxes were  primarily
due to the  Portfolio  Expansion  and the Horizon  Merger.  As shown in TABLE 2,
depreciation and amortization expense increased by $9,865, or 148.5%, to $16,509
from the depreciation  and amortization of assets  associated with the Portfolio
Expansion and the Horizon Merger. 
<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
                                               ---------------------------
                                                1998               1997
--------------------------------------------------------------------------------
 
Buildings and improvements                     $ 9,440           $3,423
Land improvements                                  899              715
Tenant improvements                              5,611            1,872
Furniture and fixtures                             343              214
Leasing commissions(1)                             216              420
                                               -------            -----
Total                                          $16,509           $6,644
                                               =======           ======

================================================================================

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
                                                           --------------------
                                                                  
                                                             1998          1997
--------------------------------------------------------------------------------
 
Interest incurred                                         $20,950        $9,265
Interest capitalized                                       (1,734)       (1,123)
Amortization of deferred financing costs                      545           589
Amortization of interest rate protection contracts            325           348
                                                          -------         -----
Total                                                     $20,086        $9,079
                                                          =======        ======
================================================================================


As shown in TABLE 3, interest  expense for the three months ended  September 30,
1998 increased by $11,007, or 121.2%, to $20,086 compared to $9,079 for the same
period in 1997.  This  increase  reflects  higher  interest  incurred of $11,685
partially  offset by (i) an increase in the amount of  interest  capitalized  in
connection with development projects of $611 and (ii) a decrease in amortization
of deferred financing costs and interest rate protection contracts of $67.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $656,098 in the  Company's  average debt  outstanding  during the
three  months  ended  September  30,  1998  compared  to the same period in 1997
partially  offset by a slight decrease in the weighted average interest rate for
the three months ended  September  30, 1998 compared to the same period in 1997.
The weighted  average  interest rates were 7.15% and 7.28% for the 1998 and 1997
periods, respectively.

Other charges  increased by $717, or 73.0%,  to $1,699.  This increase  reflects
selling and  marketing  expenses of $649  associated  with the  operation  of an
outlet store known as Designer  Connection and other  ancillary  charges of $68.
<PAGE>

In connection  with  re-leasing  space to new  merchants,  the Company  incurred
$1,055 and $100 in capital  expenditures during the three months ended September
30, 1998 and 1997, respectively.

Comparison  of nine  months  ended  September  30,  1998 to  nine  months  ended
September 30, 1997

Summary

The Company  reported  net income of $7,265 and $1,303 for the nine months ended
September  30, 1998 and 1997,  respectively.  The 1998 results  include a second
quarter loss on the sale of real estate of $15,461 in connection with the Merger
Transactions. The 1997 results include a third quarter extraordinary loss on the
early  extinguishment of debt of $2,061. For the nine months ended September 30,
1998, the net loss applicable to common  shareholders was $10,383,  or $0.31 per
common share on a basic and diluted basis.  For the nine months ended  September
30, 1997, the net loss applicable to common  shareholders  was $7,977,  or $0.48
per common share on a basic and diluted basis.

Revenues

Total  revenues  were  $155,459  for the nine months  ended  September  30, 1998
compared to $92,924 for the nine months ended September 30, 1997, an increase of
$62,535,  or 67.3%.  Base rents increased  $42,331,  or 75.2%,  in 1998 compared
to 1997. Straight-line rents (included in base rents) were $974 and $392 for the
nine months ended September 30, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion and the Horizon Merger.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified threshold,  increased $1,601, or 66.8%, during the nine months
ended  September 30, 1998 compared to the same period in 1997. This increase was
attributable  to the Portfolio  Expansion and the Horizon  Merger.  For the nine
months  ended  September  30,  1998,  same-space  sales in centers  owned by the
Company  decreased  by 0.8%  compared to the same  period in 1997.  For the nine
months ended September 30, 1998, same-store sales decreased 2.0% compared to the
same period in 1997.  Tenant  reimbursements,  which  represent the  contractual
recovery from tenants of certain operating  expenses,  increased by $18,666,  or
70.0%,  during the nine months ended  September 30, 1998 over the same period in
1997. This increase was primarily due to the Portfolio Expansion and the Horizon
Merger.

Interest and other income  decreased by $63, or 0.8%,  to $7,499 during the nine
months ended  September 30, 1998 as compared to $7,562 for the nine months ended
September 30, 1997. The decrease  reflects  reductions in (i) interest income of
$1,131 and (ii) all other ancillary income of $132.  Partially  offsetting these
reductions were higher (i) push cart,  temporary tenant,  and late fee income of
$816,  and (ii) lease  termination  income of $384.  The  reduction  in interest
income  was  primarily  the  result  of the use of a  portion  of the  Company's
expansion  loan escrow  account to fund  certain of its  development  activities
during  1997 and  1998.  The  expansion  loan  escrow  account  is  included  in
restricted cash in the Consolidated Balance Sheets.

Expenses

Property operating  expenses increased by $14,966,  or 73.0%, to $35,461 for the
nine months  ended  September  30, 1998  compared to $20,495 for the same period
in 1997.  Real estate taxes  increased by $4,362,  or 60.3%,  to $11,600 for the
nine months ended September 30, 1998,  from $7,238 in the same period  for 1997.
The increases in property operating expenses and real estate taxes are primarily
due to the  Portfolio  Expansion  and the Horizon  Merger.  As shown in TABLE 4,
depreciation and amortization expense increased by $14,752, or 75.6%, to $34,267
for the nine months ended September 30, 1998, compared to $19,515 for 1997. This
increase results from the  depreciation  and  amortization of assets  associated
with the Portfolio Expansion and the Horizon Merger.
<PAGE>

TABLE 4 - Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                             Nine months ended
                                                               September 30
                                                     ---------------------------
                                                         1998               1997
--------------------------------------------------------------------------------
 
Buildings and improvements                            $19,433            $10,131
Land improvements                                       2,618              2,069
Tenant improvements                                    10,429              5,348
Furniture and fixtures                                    933                616
Leasing commissions(1)                                    854              1,351
                                                      -------            -------
Total                                                 $34,267            $19,515
                                                      =======            =======
================================================================================

Note:
(1)  In accordance  with generally  accepted  accounting  principles ("GAAP"),
     leasing  commissions  are classified as intangible assets.  Therefore, the
     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
                                                             -------------------
                                                           1998             1997
--------------------------------------------------------------------------------
 
Interest incurred                                         $41,711       $28,032
Interest capitalized                                       (4,511)       (2,942)
Amortization of deferred financing costs                    1,193         1,818
Amortization of interest rate protection contracts          1,006         1,043
                                                          -------       ------- 
Total                                                     $39,399       $27,951
                                                          =======       =======
================================================================================

As shown in TABLE 5,  interest  expense for the nine months ended  September 30,
1998 increased by $11,448, or 41.0%, to $39,399 compared to $27,951 for the same
period in 1997.  This  increase  reflects  higher  interest  incurred of $13,679
partially  offset by (i) an increase in the amount of  interest  capitalized  in
connection  with  development   projects  of  $1,569  and  (ii)  a  decrease  in
amortization of deferred financing costs and interest rate protection  contracts
of $662.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately $257,025 in the Company's average debt outstanding during the nine
months ended  September 30, 1998  compared to the same period in 1997  partially
offset by a slight decrease in the weighted  average  interest rate for the nine
months  ended  September  30,  1998  compared  to the same  period in 1997.  The
weighted  average  interest  rates  were  7.19%  and 7.24% for the 1998 and 1997
periods, respectively.

Other charges increased by $1,522,  or 61.5%, to $3,997.  This increase reflects
selling and marketing expenses of $1,494 associated with the operation of outlet
store known as Designer Connection and other ancillary charges of $28. 
<PAGE>

In connection  with  re-leasing  space to new  merchants,  the Company  incurred
$1,496 and $241 in capital  expenditures  during the nine months ended September
30, 1998 and 1997, respectively.

Loss on Sale of Real Estate

In connection  with the closing of its merger with Horizon on June 15, 1998, the
Company  sold  Indiana  Factory  Shops  and  Nebraska   Crossing  Factory  Shops
(collectively,  the  "Prime  Transferred  Properties")  to HGP for an  aggregate
consideration of $26,015 resulting in a second quarter loss of $15,461.

Liquidity and Capital Resources

Sources and Uses of Cash

For the nine months ended  September  30, 1998,  net cash  provided by operating
activities was $52,518, net cash used in investing activities was $122,846,  and
net cash provided by financing activities was $77,713.

The primary uses of cash for investing  activities  during the nine months ended
September 30, 1998  included:  (i) costs  associated  with the  development  and
construction  of new factory outlet  centers and expansions to existing  factory
outlet centers aggregating 928,000 square feet of GLA which are expected to open
during 1998, (ii) costs associated with the completion of expansions to existing
factory  outlet  centers  aggregating  224,000  square feet of GLA which  opened
during 1997, (iii) costs for pre-development  activities  associated with future
developments,  and (iv) and costs  associated  with the  Company's  merger  with
Horizon.  Such uses were partially offset by proceeds from the Company's sale of
the Prime Transferred Properties.

The  primary  source of cash from  financing  activities  during the nine months
ended  September  30, 1998 was proceeds from new  borrowings  of $421,970.  Such
proceeds were partially  offset by (i) principal  repayments on notes payable of
$266,722,  (ii)  Preferred  and Common  Stock  distributions  of $60,143,  (iii)
distributions to minority interests (including distributions to limited partners
of the Operating  Partnership) of $14,145,  and (iv) deferred financing costs of
$3,247.

Shelf Registration

On June 17,  1997,  the Company  filed a Form S-3  Registration  Statement  (the
"Shelf  Registration")  with the Securities and Exchange  Commission to register
$300,000 of the Company's equity securities,  including $66,122 of the Company's
equity securities that remained available under a previous Form S-3 Registration
Statement.  As of September 30, 1998,  the Company had $139,000 of  availability
under the Shelf  Registration.  From time to time,  the  Company  will  consider
issuing additional  securities under such Shelf Registration for the development
or  acquisition  of additional  properties,  the expansion  and  improvement  of
existing properties, and for general corporate purposes.

Property Acquisitions

During 1998 and 1999,  the Company will explore  acquisitions  of factory outlet
centers in the United States and Europe as well as consider  possible  strategic
acquisitions of other assets in the retail sector. The Company has evaluated and
is  evaluating  such  opportunities  and  prospects  and will  continue to do so
throughout 1998 and 1999. The Company cannot predict if any transaction  will be
consummated, nor the terms or form of consideration required.

<PAGE>
Business Combination

The Merger  Transactions  as set forth in the  agreement and plan of merger (the
"Merger  Agreement")  between the Company and Horizon  were  consummated  for an
aggregate  consideration  of  approximately  $1,083,100,  including  liabilities
assumed and related transaction costs.

Pursuant to the terms of the Merger  Agreement,  the Company acquired (i) all of
the  outstanding  shares of common stock of Horizon at an exchange ratio of 0.20
of a share of the Company's Series B Convertible  Preferred Stock and 0.597 of a
share of the  Company's  Common Stock for each share of common stock of Horizon,
and (ii) all of the outstanding limited partnership units of Horizon/Glen Outlet
Centers  Limited  Partnership  ("Horizon  Partnership")  at an exchange ratio of
0.9193 of a Common Unit of partnership interest in the Operating Partnership.  A
total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329
shares of Common Stock were issued by the Company to the shareholders of Horizon
and  3,782,121  Common  Units were issued by the  Operating  Partnership  to the
limited partners of Horizon Partnership.

Immediately prior to the merger,  Horizon  Partnership  contributed 13 of its 35
centers to Horizon  Group  Properties,  L.P.,  of which  HGP,  a  subsidiary  of
Horizon, is the sole general partner.  HGP was spun-off from the Company on June
15, 1998.  The remaining 22 outlet centers of Horizon were  integrated  into the
Company's existing portfolio.  On June 19, 1998, all of the common equity of HGP
was  distributed  to the  convertible  preferred  and  common  shareholders  and
unitholders of the Company and its Operating  Partnership  and the  shareholders
and limited partners of Horizon and Horizon Partnership based on their ownership
in the Company  immediately  following  consummation of the merger. One share of
common  stock of HGP was  distributed  for every 20  shares of Common  Stock and
Series C  Convertible  Preferred  Stock of the  Company  and for every 20 Common
Units of the Operating Partnership. Additionally,  approximately 1.196 shares of
the  common  stock of HGP were  distributed  for  every 20  shares  of  Series B
Convertible Preferred Stock of the Company.

In  connection  with  the  Merger  Transactions,  the  Company  sold  the  Prime
Transferred  Properties  to  HGP  for an  aggregate  consideration  of  $26,015,
resulting in a loss of $15,461.  Proceeds from the sale of the Prime Transferred
Properties  were  used  to  repay  indebtedness   associated  with  the  Horizon
properties.

Concurrent with the closing of the merger, a special cash  distribution was made
aggregating  $21,871  consisting  of $0.50 per  share/unit  to holders of Common
Stock,  Series C Preferred  Securities  and Common  Units and $0.60 per share to
holders of Series B Convertible  Preferred  Stock.  Shareholders  of Horizon and
limited   partners  of  Horizon   Partnership   did  not  participate  in  these
distributions.

The merger has been  accounted for using the purchase  method of accounting  and
the purchase  price of $1,083,100  was allocated to the assets  acquired and the
liabilities assumed based on estimates of their respective fair values.  Certain
assumptions  were made which  management of the Company believes are reasonable.
The Company expects to finalize the purchase price allocation  before the end of
1998.  The  final  allocation  is not  expected  to differ  materially  from the
allocation made at September 30, 1998.

The  operating  results of those  properties  acquired have been included in the
Company's   consolidated  results  of  operations  commencing  on  the  date  of
acquisition. The operating results of the Prime Transferred Properties have been
included in the Company's consolidated results of operations through the date of
disposition.

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 the losses, if any,  resulting from such matters,  including the matter
described  below,  will not have a material  adverse effect on the  consolidated
financial statements of the Company.
<PAGE>

The  Company  is  defendant  in a  lawsuit  filed on July  27,  1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company,  if any, from, this lawsuit cannot  currently be predicted.  Management
believes that the Company has acted  properly and intends to defend this lawsuit
vigorously.

Debt Transactions

On September 25, 1998, the Company closed on an unsecured $40,000 revolving loan
(the  "Revolving  Loan") with a financial  institution.  The Revolving  Loan (i)
bears  interest  equal  to  30-day  LIBOR  plus  1.75%,  (ii)  requires  monthly
interest-only  payments,  and (iii)  matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.

The Revolving  Loan requires  compliance  with certain  financial loan covenants
including  those  relating  to the  Company's  (i)  total  outstanding  variable
indebtedness,  (ii) total outstanding  indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.

On June 15, 1998, the Company closed on $292,000 of loan  facilities with Nomura
Asset Capital  Corporation.  The transaction provided (i) a $180,000 nonrecourse
permanent loan (the  "Permanent  Loan") and (ii) a $112,000 full recourse bridge
loan of which $95,000 was funded (the "Bridge Loan").  The Permanent Loan is (i)
collateralized  by first mortgages on four factory outlet centers,  (ii) bears a
fixed rate of interest of 6.99%,  (iii) requires monthly  principal and interest
payments  pursuant to an approximate  26-year  amortization  schedule,  and (iv)
matures  on June  15,  2008.  The  Bridge  Loan is (i)  collateralized  by first
mortgages on six factory outlet centers,  (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) requires monthly interest-only payments,
and (iv) matures on June 15, 2001.

As of November 11, 1998, the Company is a guarantor or otherwise obligated with
respect to  $39,570 of the  indebtedness  of HGP and its  affiliates,  including
$10,000 of obligations under HGP's $108,205  three-year secured credit facility.

On  April  1,  1998,  Horizon  consummated  an  agreement  with  Castle  & Cooke
Properties,  Inc. which released Horizon from its forward  obligations under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations  under such lease.
The  agreement  also  provided  that  Horizon  transfer  to such  joint  venture
substantially  all of Horizon's  economic  interest in its outlet center in Lake
Elsinore,  California  together  with  legal  title to vacant  property  located
adjacent to the center.  As of  September  30, 1998,  the Company  holds a small
minority  interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Company is legally obligated for $30,864 of mortgage indebtedness outstanding at
September  30, 1998 which is secured by a first  mortgage  on the Lake  Elsinore
outlet center. In addition,  Castle & Cooke has provided the Company a guaranty,
without   limitation,   of  the  obligations   relating  to  such mortgage
indebtedness. 
<PAGE>

On  March  18,  1998,  the  Company  obtained  from a  financial  institution  a
commitment for a construction  mortgage loan (the "Construction  Mortgage Loan")
relating to Phase I of Prime  Outlets at Hagerstown  ("Hagerstown")in  an amount
not to exceed $21,600 which was subsequently  increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for  construction  financing on Phase
II. The Construction  Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR plus  1.50%,  (ii)  matures on June 1, 2004,  and (iii)  requires  monthly
interest-only  payments.  The Construction  Mortgage Loan is collateralized by a
first mortgage on Hagerstown.  At September 30, 1998, $15,969 was outstanding on
the Construction Mortgage Loan.

Planned Development

Management believes that there is sufficient demand for continued development of
new factory  outlet centers and  expansions of certain  existing  factory outlet
centers.  The  Company  expects to open  928,000 square  feet of GLA during 1998
including  Prime  Outlets at Lebanon  which  opened on April 17,  1998 and Prime
Outlets at Hagerstown  which opened on August 7, 1998.  Prime Outlets at Lebanon
is located in Lebanon, Tennessee,  approximately 25 miles east of Nashville, and
contains 208,000 square feet of GLA. Prime Outlets at Lebanon was  approximately
92% leased at September  30, 1998.  Prime  Outlets at  Hagerstown  is located in
Hagerstown,  Maryland, west of Baltimore and northwest of Washington, D.C. Prime
Outlets at  Hagerstown  was  approximately  96% leased at September 30, 1998. At
September 30, 1998, the remaining budgeted capital expenditures for 1998 planned
developments   aggregated   approximately  $32,736,  while  anticipated  capital
expenditures  related to the completion of expansions of existing factory outlet
centers opened during 1997 (aggregating 224,000 square feet of GLA) approximated
$1,230.

Management  believes  that  the  Company  has  sufficient  capital  and  capital
commitments to fund the remaining capital expenditures  associated with its 1998
development  activities.  These funding  requirements are expected to be met, in
large part, with the proceeds from various loan facilities.

The Company  currently  plans to open one new factory  outlet center and several
expansions  in 1999 that are expected to contain  approximately  700,000  square
feet of GLA, in the  aggregate,  and have a total expected  development  cost of
approximately $95,000. The Company expects to fund the development cost of these
projects  from (i) certain line of credit  facilities,  (ii)  retained cash flow
from operations,  (iii)  construction  loans, (iv) the potential sale of a joint
venture  interest in certain factory outlet centers,  and (v) the potential sale
of common or preferred  equity in the public or private capital  markets.  As of
September  30,  1998,  the  Company  had  committed  $13,757  with regard to the
construction  of the new factory outlet center and expansions  scheduled to open
in 1999.  There can be no  assurance  that the  Company  will be  successful  in
obtaining the required  amount of equity  capital or debt financing for the 1999
planned openings or that the terms of such capital raising activities will be as
favorable as the Company has experienced in prior periods.

Debt Repayments and Preferred Stock Distributions and Dividends

The Company's  aggregate  indebtedness  was $1,179,777 and $515,265 at September
30, 1998 and December  31,  1997,  respectively.  At  September  30, 1998,  such
indebtedness had a weighted average maturity of 6.0 years and bore interest at a
weighted  average  interest  rate of 7.01% per annum.  At  September  30,  1998,
$588,457,  or 49.9%,  of such  indebtedness  bore  interest  at fixed  rates and
$591,320, or 50.1%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates.  Of the variable rate indebtedness  outstanding
at September 30, 1998,  $353,803 converted to a fixed rate of 7.782% on November
11, 1998 for the remaining five-year term of such indebtedness.

At September 30, 1998,  the Company held interest rate  protection  contracts on
all $28,250 of its floating rate  tax-exempt  indebtedness  which expire in 1999

<PAGE>

and approximately  $353,803 of other floating rate indebtedness which expired on
November  11,  1998  (or   approximately   64.6%  of  its  total  floating  rate
indebtedness). In addition, the Company held additional interest rate protection
contracts  on $21,900  (expires in April  1999) of the  $353,803  floating  rate
indebtedness  to further reduce the Company's  exposure to increases in interest
rates.

The Company's ratio of debt to total market capitalization at September 30, 1998
(defined as total debt divided by the sum of: (a) the  aggregate market value of
the  outstanding  shares of Common  Stock,  assuming the full exchange of Common
Units and Series C Preferred  Securities  into Common Stock;  (b) the  aggregate
market value of the outstanding shares of Series B Convertible  Preferred Stock;
(c) the  aggregate  liquidation  preference  of the Series A  Senior  Cumulative
Preferred  Stock  ("Senior  Preferred  Stock") at $25.00 per share;  and (d) the
total debt of the Company) was 60.7%.

The Company is  obligated to repay  $4,962 of mortgage  indebtedness  during the
remainder of 1998 and $77,498 in 1999.  Annualized  cumulative  dividends on the
Company's  Senior  Preferred  Stock,  Series B Convertible  Preferred  Stock and
Series C  Preferred  Securities  outstanding  September  30,  1998  are  $6,038,
$16,635,  and $5,149,  respectively.  These dividends are payable quarterly,  in
arrears.

The  Company  anticipates  that  cash  flow  from  (i)  certain  line of  credit
facilities,  (ii) operations,  (iii) new borrowings, (iv) refinancing of certain
existing  debt,  (v) the potential  sale of a joint venture  interest in certain
factory  outlet  centers,  and (vi) the  potential  sale of common or  preferred
equity in the public or private  capital  markets will be  sufficient to satisfy
its debt service obligations,  expected  distribution and dividend  requirements
and operating  cash needs for the next year.  There can be no assurance that the
Company will be successful  in obtaining the required  amount of funds for these
items or that the  terms  of  capital  raising  activities,  if any,  will be as
favorable as the Company has experienced in prior periods.

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  September  30,  1998,  the  Company  maintained  interest  rate
protection contracts to protect against significant  increases in interest rates
on certain floating rate  indebtedness (see "Debt Repayments and Preferred Stock
Distributions and 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.

Year 2000

Recognizing  the  need to  ensure  that  the  Company's  operations  will not be
adversely impacted by Year 2000 software  failures,  management has assessed the
potential  impact  of  the  Year  2000  on  the  processing  of   date-sensitive
information by the Company's  computerized  information  systems.  Based on this
assessment,   management  believes  that  the  Company's  primary   computerized
information systems are Year 2000 compliant  Recognizing the need to ensure that
the Company's  operations  will not be adversely  impacted by Year 2000 software
failures,  management has assessed the potential  impact of the Year 2000 on the
processing  of   date-sensitive   information  by  the  Company's   computerized
information  systems.  Based on this  assessment,  management  believes that the
Company's  primary  computerized  information  systems are Year 2000  compliant.
Additionally,  the Company is in the process of querying its significant vendors
and tenants about their Year 2000 compliance status. To date, the Company is not
aware of any  vendors  or  tenants  with a Year 2000  issue  that  would  have a
material impact on the Company's  results of operations,  liquidity,  or capital
resources.  However,  the Company  has no means of ensuring  that its vendors or
tenants will be Year 2000 ready.  The  inability of these  vendors or tenants to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company.  The effect of  non-compliance  by  significant  vendors and
tenants is not  determinable. However,  the Company will continue to monitor the
Year 2000 status of its significant vendors and tenants.
<PAGE>
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. In March
1995,  the National  Association  of Real Estate  Investment  Trusts  ("NAREIT")
established  guidelines  clarifying the definition of FFO. 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 liquidity of an
equity REIT because industry analysts have accepted it as a performance  measure
of equity REITs.  The  Company's FFO is not  comparable to FFO reported by other
REITs that do not define the term using the current  NAREIT  definition  or that
interpret  the current  NAREIT  definition  differently  than does the  Company.
Therefore, 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.  The
Company  believes  that in  order to  facilitate  a clear  understanding  of its
operating  results,  FFO  should be  examined  in  conjunction  with net  income
determined in accordance  with GAAP.  FFO does not represent cash generated from
operating  activities in accordance with GAAP and should not be considered as an
alternative  to net income as an indication of the Company's  performance  or to
cash flows as a measure of liquidity or ability to make distributions.

TABLE 6  provides a  reconciliation  of income  before  allocation  to  minority
interests  to FFO for the three and nine  months  ended  September  30, 1998 and
1997. FFO increased  $16,098,  or 145.0%,  to $27,202 for the three months ended
September  30, 1998 from $11,104 for the three months ended  September 30, 1997.
FFO increased $27,968,  or 87.6%, to $59,910 for the nine months ended September
30, 1998 from  $31,942 for the nine  months  ended  September  30,  1997.  These
increases are primarily  attributable to the Portfolio Expansion and the Horizon
Merger.
<TABLE>

TABLE 6 - Funds from Operations
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                     Three months ended                 Nine months ended
                                                                       September 30                        September 30
                                                                 ---------------------------         --------------------------
                                                                 1998           1997                   1998             1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>                   <C>               <C>    

Income before allocation to minority
  interests                                                      $10,572        $  4,091              $9,721            $11,167
FFO adjustments:
Loss on sale of real estate                                            -               -              15,461                  -
Real estate depreciation and amortization                         16,327           6,553              33,820             19,289
Unconsolidated joint venture adjustments                             303             460                 908              1,486
                                                                 --------       --------             -------            -------
FFO before allocation to minority interests                      $27,202         $11,104             $59,910            $31,942
                                                                 ========       ========             =======            ========
====================================================================================================================================

</TABLE>
<PAGE>

PART II:  OTHER INFORMATION

Item 1.           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 the losses, if any,  resulting from such matters,  including the matter
described  below,  will not have a material  adverse effect on the  consolidated
financial statements of the Company.

The  Company  is  defendant  in a  lawsuit  filed on July  27,  1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company,  if any, from, this lawsuit cannot  currently be predicted.  Management
believes that the Company has acted  properly and intends to defend this lawsuit
vigorously.

In the  Company's  previously  filed Form 10-Q for the  quarter  ended March 31,
1998,  it reported  that on December 10, 1997 in the Circuit  Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit against Horizon,  the Company,  and certain  directors and former
directors of Horizon. The substantive allegations claim that Horizon's directors
breached  their  fiduciary  duties to Horizon's  shareholders  in approving  the
merger of  Horizon  and the  Company  and that the  consideration  to be paid to
Horizon's shareholders in connection with the merger was unfair and inadequate.

On  September  8, 1998,  a hearing was held before  Judge James M. Graves of the
Court. At the hearing, the defendants,  including the Company, continued to deny
any wrongdoing and liability. The Court approved the settlement set forth in the
Stipulation of Settlement (the "Stipulation") previously executed by the parties
to the  lawsuit  on July 21,  1998 and found  that the  settlement  was,  in all
respects,  fair,  reasonable,  and adequate,  and dismissed  with  prejudice the
litigation against the defendants.  The settlement required that the Company pay
legal expenses of $325.

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:

                          Exhibit 12.1 - Ratio of Earnings to Fixed Charges
                          and Preferred Stock Distributions and Dividends

                          Exhibit 27.1 - Financial Data Schedule (EDGAR filing
                          only)

                 (b)      Reports on Form 8-K:
                          On August 27, 1998,  the Company filed a Current
                          Report on Form 8-K/A,  dated June 15, 1998,  reporting
                          (i)the merger and other transactions (collectively,
                          the "Transactions") as set forth in the agreement and
                          plan of merger between the Company and Horizon Group,
                          Inc. was consummated on June 15, 1998 and (ii) the
                          Company completed a $292.0  million debt  financing
                          with Nomura Asset Capital  Corporation  in connection
                          with the Transactions.   Unaudited  pro  forma
                          consolidated  financial  statements  of  the  Company
                          and  unaudited statements of revenue and certain
                          expenses of (i) the Prime  Transferred  Properties and
                          (ii) Horizon Group Properties, Inc. were included.

<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.



                                                 BY:    PRIME RETAIL, INC.
                                                        Registrant



Date: November 12, 1998                                /s/ Abraham Rosenthal 
      -----------------                                ------------------------
                                                       Abraham Rosenthal
                                                       Chief Executive Officer





Date: November 12, 1998                                /s/ Robert P. Mulreaney
      -----------------                                ------------------------
                                                       Robert P. Mulreaney
                                                       Executive Vice President,
                                                       Chief Financial Officer
                                                       and Treasurer