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 June 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 August 12, 1998, the issuer had outstanding 42,142,880 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 June 30, 1998 and
     December 31, 1997                                                         1

     Consolidated Statements of Operations for the three and
     six months ended June 30, 1998 and 1997                                   2

     Consolidated Statements of Cash Flows for the six
     months ended June 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                                   9


PART II:  OTHER INFORMATION

Item 1.  Legal Proceedings                                                    25
Item 2.  Changes in Securities                                                25
Item 3.  Defaults Upon Senior Securities                                      25
Item 4.  Submission of Matters to a Vote of Security Holders                  25
Item 5.  Other Information                                                    26
Item 6.  Exhibits or Reports on Form 8-K                                      26

Signatures                                                                    27


<PAGE>
<TABLE>

PART I:  FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)

                               Prime Retail, Inc.
                           Consolidated Balance Sheets
                    (in thousands, except share information)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                        June 30, 1998                    December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                              <C>    
Assets
Investment in rental property:
     Land                                               $    199,357                     $     66,277
     Buildings and improvements                            1,660,909                          779,191
     Property under development                               65,505                           53,139
     Furniture and equipment                                   7,318                            6,175
                                                       -------------                    -------------
                                                           1,933,089                          904,782
Accumulated depreciation                                     (93,797)                         (82,033)
                                                       -------------                    -------------
                                                           1,839,292                          822,749
Cash and cash equivalents                                     18,737                            6,373
Restricted cash                                               38,690                           41,736
Accounts receivable, net                                      14,480                            9,745
Deferred charges, net                                         13,991                           16,206
Due from affiliates, net                                         460                            1,052
Investment in partnerships                                     4,674                            3,278
Other assets                                                   3,538                            3,044
                                                        ------------                    -------------
     Total assets                                        $ 1,933,862                     $    904,183
                                                        ============                    =============
Liabilities and shareholders'equity
Bonds payable                                            $    32,900                    $      32,900
Notes payable                                              1,119,233                          482,365
Accrued interest                                               5,559                            3,767
Real estate taxes payable                                     11,304                            4,639
Construction costs payable                                     5,631                            5,849
Accounts payable and other liabilities                        67,910                           20,210
                                                         -----------                   --------------
     Total liabilities                                     1,242,537                          549,730

Minority interests
                                                              54,412                            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,
     41,992,880 and 27,294,951 shares
     issued and outstanding, respectively                        420                              273
Additional paid-in capital                                   734,442                          398,188
Distributions in excess of net income                        (98,086)                         (54,022)
                                                        ------------                   --------------
     Total shareholders' equity                              636,913                          344,528
                                                        ------------                   --------------
     Total liabilities and shareholders' equity          $ 1,933,862                    $     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                           Six months
                                                                       ended June 30                         ended June 30
                                                                   -----------------------               ----------------------
                                                                      1998          1997                1998         1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>                     <C>          <C>

Revenues
Base rents                                                        $ 28,047      $ 19,006                $ 51,130     $ 37,072
Percentage rents                                                     1,174           721                   2,039        1,390
Tenant reimbursements                                               13,234         8,969                  23,977       17,918
Interest and other                                                   2,309         2,517                   5,126        4,995
                                                                   -------       -------                 -------      -------
    Total revenues                                                  44,764        31,213                  82,272       61,375

Expenses
Property operating                                                  10,272         7,022                  18,625       13,655
Real estate taxes                                                    3,364         2,399                   6,220        4,789
Depreciation and amortization                                        9,935         6,543                  17,758       12,871
Corporate general and administrative                                 1,756         1,269                   3,448        2,619
Interest                                                            10,939         9,703                  19,313       18,872
Other charges                                                        1,339           694                   2,298        1,493
                                                                   -------       -------                 -------      -------
    Total expenses                                                  37,605        27,630                  67,662       54,299
                                                                   -------       -------                 -------      -------

Income before loss on sale of
  real estate and allocation to
  minority interest                                                  7,159         3,583                  14,610         7,076

Loss on sale of real estate                                        (15,461)            -                 (15,461)            -
                                                                   -------       -------                 -------       -------
Income (loss) before allocation to minority interest                (8,302)        3,583                    (851)        7,076
(Income) loss allocated to minority interests                        3,219        (2,672)                 (2,242)       (5,263)
                                                                   -------       -------                 -------       -------
Net income (loss)                                                   (5,083)          911                  (3,093)        1,813
Income allocated to preferred shareholders                           6,741         3,093                  10,907         6,186
                                                                   -------       -------                 -------       -------
Net loss applicable to common shares                             $ (11,824)      $(2,182)              $ (14,000)    $  (4,373)
                                                                   =======       =======                 =======       =======
Net loss per common shares - basic and diluted                   $   (0.40)      $ (0.14)              $   (0.49)    $   (0.29)
                                                                   =======       =======                 =======       =======
Weighted average common shares outstanding                          29,859        15,795                  28,584        15,073
                                                                   =======       =======                 =======       =======
Distributions declared per common share                          $   0.795       $ 0.295               $   1.090     $   0.590
                                                                   =======       =======                 =======       =======
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
                               Prime Retail, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                          Six months ended
                                                                              June 30         
                                                                          ----------------         
                                                                       1998                      1997
-------------------------------------------------------------------------------------------------------
<S>                                                               <C>                      <C>

Operating Activities
Net income (loss)                                                  $  (3,093)              $     1,813
Adjustments to reconcile net income (loss) to
 net cash provided by operating activities:
   Income allocated to minority interests                              2,242                     5,263
   Loss on sale of real estate                                        15,461                         -
   Depreciation                                                       17,120                    11,940                              
   Amortization of deferred financing costs and
    interest rate protection contracts                                 1,329                     1,925
   Amortization of leasing commissions                                   638                       931
   Provision for uncollectible accounts receivable                       530                       475
Changes in operating assets and liabilities:
    Increase in accounts receivable                                   (6,032)                   (1,803)                             
    Decrease in due from affiliates, net                                 698                       236
    (Increase) decrease in other assets                                3,090                    (3,537)                             
    Decrease in accrued interest                                         570                       (56)                             
    Decrease in accounts payable and other liabilities               (14,382)                   (1,410)
                                                                   ---------                  --------
      Net cash provided by operating activities                       18,171                    15,777

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                               (23,820)                   (7,744)                             
Increase in property under development                               (45,448)                  (19,157)                             
Acquisition of outlet centers                                              -                   (37,658)
                                                                   ---------                  --------
  Net cash used in investing activities                              (78,377)                  (64,559)

Financing Activities
Net proceeds from issuance of common and preferred stock                   -                    31,754
Proceeds from notes payable                                          368,128                    66,633                              
Principal repayments on notes payable                               (241,512)                  (31,717)                             
Deferred financing fees                                               (2,730)                     (857)                           
Distributions and dividends paid                                     (40,970)                  (14,707)                             
Distributions to minority interests                                  (10,346)                   (5,263)                             
                                                                   ---------                  --------                              
  Net cash provided by financing activities                           72,570                    45,843
                                                                   ---------                  --------                              
Increase (decrease) in cash and cash equivalents                      12,364                    (2,939)                             
Cash and cash equivalents at beginning of period                       6,373                     3,924                              
                                                                   ---------                  --------                              
Cash and cash equivalents at end of period                         $  18,737                  $    985
                                                                   =========                  ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>

<PAGE>
                               Prime Retail, Inc.
               Consolidated Statements of Cash Flows (continued)
                                 (in thousands)
--------------------------------------------------------------------------------
                                                                      Six months
                                                                   ended June 30
                                                                        1998
                                                                   -------------

Supplemental Disclosure of Noncash Investing and Financing Activities:

Conversion of Common units to common stock                           $    3,431
                                                                    ===========

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 stock issued                                                 (214,282
   Series B convertible preferred stock issued                         (118,735)
   Common units issued                                                  (56,023)
                                                                    -----------
   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.
<PAGE>

                               Prime Retail, Inc.

                   Notes to Consolidated Financial Statements
            (Amounts in thousands, except share and unit information)


Note 1 - Interim Financial  Presentation

 The accompanying unaudited consolidated financial statements have been prepared
 in  accordance  with  generally  accepted  accounting  principles  ("GAAP") for
 interim financial  information and the instructions to Form 10-Q and Article 10
 of Regulation S-X. Accordingly,  they do not include all of the information and
 footnotes required by GAAP for complete financial statements. In the opinion of
 management,  all adjustments  consisting only of recurring accruals  considered
 necessary for a fair  presentation  have been included.  Operating  results for
 such interim periods are not necessarily indicative of the results which may be
 expected  for a  full  fiscal  year.  For  further  information,  refer  to the
 consolidated financial statements and footnotes included in Prime Retail's (the
 "Company")  annual  report on Form 10-K 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)
 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 $4,342 and
$4,674   incurred   during  the  six  months  ended  June  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
June 30, 1998 was $16,538.

 As of June 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 unit of the Operating  Partnership's  Common  Units.  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 purchase price allocation before the end of
 1998.  The final  allocation  is not  expected  to differ  materially  from the
 allocation made at June 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.

--------------------------------------------------------------- ----------------
                                                       Six months ended June 30
                                                         1998              1997
--------------------------------------------------------------------------------

Total revenues                                       $ 135,620        $  129,657
                                                     =========        ==========
Net income from continuing operations                $  17,182        $   15,287
                                                     =========        ==========
Net income applicable to common shares               $   3,701        $    3,951
                                                     =========        ==========
Earnings per common share:
  Basic                                              $    0.09        $     0.13
                                                     =========        ==========
  Diluted                                            $    0.09        $     0.13
                                                     =========        ==========

Weighted average shares outstanding:
  Basic                                                 41,772            29,551
                                                     =========        ==========
  Diluted                                               41,943            29,623
                                                     =========        ==========
================================================================================

 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 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.
<PAGE>

As of June 30,  1998,  the Company is a guarantor or  otherwise  obligated  with
respect to $41,857 of HGP's indebtedness, including $12,200 of obligations under
HGP's  $108,205  three-year  secured  credit  facility.  The Company and HGP are
continuing  to seek the consent of certain  parties to the  assumption by HGP or
its affiliates of $13,864 of indebtedness in connection with the spin-off.

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 all forward
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 June 30,  1998,  the  Partnership  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
Partnership   is  legally   obligated  for  $30,906  of  mortgage   indebtedness
outstanding  at June 30,  1998 which is secured by a first  mortgage on the Lake
Elsinore outlet center. In addition, Castle & Cooke has provided the Partnership
a guaranty,  without  limitation,  of the obligations under the $30,906 mortgage
note.

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.

<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.  Such  forward-looking  statements  are subject to
 certain risks and uncertainties;  including, but not limited to, the effects of
 future events on the Company's financial performance; the risk that the Company
 may be unable to finance its planned  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 49 operating
 factory outlet centers totaling  13,706,000  square feet of gross leasable area
 ("GLA") at June 30,  1998,  compared to 24  operating  factory  outlet  centers
 totaling 6,138,000 square feet of GLA at June 30, 1997.
<PAGE>

 During the six months ended June 30, 1998,  the Company  opened one new factory
 outlet center and four expansions to existing  factory outlet centers  totaling
 289,000  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 July 1, 1997
 through  December 31, 1997,  the Company  purchased four factory outlet centers
 totaling  863,000 square feet of GLA and opened  expansions to existing factory
 outlet centers totaling 224,000 square feet of GLA.  Additionally,  the Company
 acquired its joint venture partner's 25% ownership  interest in Buckeye Factory
 Shops Limited  Partnership  ("Buckeye") on September 2, 1997, and now owns 100%
 of this factory outlet center with 205,000 square feet of GLA.

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


TABLE 1 - Portfolio of Properties as of June 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            98%
                                                                              II           August 1995        234,000            87
                                                                                                              -------           ---
                                                                                                              534,000            93

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           100
                                                                             III          October 1994         60,000            96
                                                                                                              -------           ---
                                                                                                              229,000            99

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            98
                                                                              II              May 1988        130,000           100
                                                                             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            96
                                                                              II         November 1990         75,000            98
                                                                             III         November 1993         88,000            91
                                                                                                              -------           ---
                                                                                                              258,000            95

Prime Outlets at Edinburgh (4) - Edinburgh, Indiana....................        I                  1988        156,000            99
                                                                              II         November 1994        142,000           100
                                                                                                              -------           ---
                                                                                                              298,000            99

Prime Outlets at Burlington (4) - Burlington, Washington ..............        I              May 1989         89,000            96
                                                                              II          October 1989         36,000            94
                                                                             III            April 1993         49,000           100
                                                                                                              -------           ---
                                                                                                              174,000            97
</TABLE>

<PAGE>
<TABLE>

TABLE 1 - Portfolio of Properties as of June 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            92
                                                                              II          January 1992        101,000           100
                                                                             III              May 1995        163,000            98
                                                                                                              -------           ---
                                                                                                              359,000            97

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

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

Prime Outlets at Gilroy (4) - Gilroy, California.......................        I          January 1990         94,000            95
                                                                              II           August 1991        109,000           100
                                                                             III          October 1992        137,000            97
                                                                              IV             July 1994        170,000            97
                                                                               V         November 1995         69,000           100
                                                                                                              -------           ---
                                                                                                              579,000            97

Prime Outlets at Perryville (4) - Perryville, Maryland.................        I             June 1990        148,000            95

Prime Outlets at Sedona (6) - Sedona, Arizona .........................        I           August 1990         82,000           100

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           100
                                                                            IIIB         November 1994         20,000            91
                                                                            IIIC         November 1995         35,000           100
                                                                            IIID              May 1998         18,000           100
                                                                                                              -------           ---
                                                                                                              437,000            99

Prime Outlets at Anderson (2) - Anderson, California...................        I           August 1990        165,000            97

Prime Outlets at Post Falls (6) - Post Falls, Idaho ...................        I             July 1991        111,000            93
                                                                              II             July 1992         68,000            84
                                                                                                              -------           ---
                                                                                                              179,000            89

Prime Outlets at Ellenton - Ellenton, Florida..........................        I         October 1991         187,000            99
                                                                              II          August 1993         123,000            99
                                                                             III         October 1996          30,000           100
                                                                                                              -------           ---
                                                                                                              340,000            99

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            91
                                                                              II        December 1992          32,000           100
                                                                             III           March 1998          20,000            98
                                                                                                              -------           ---
                                                                                                              146,000            94
</TABLE>

<PAGE>
<TABLE>

TABLE 1 - Portfolio of Properties as of June 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            88%
                                                                              II            June 1994         163,000            96
                                                                             III         October 1994          26,000            99
                                                                                                              -------           ---
                                                                                                              282,000            93

Prime Outlets at Woodbury (4) - Woodbury, Minnesota....................        I            July 1992         129,000            87
                                                                              II        November 1993         100,000            93
                                                                             III          August 1994          21,000           100
                                                                                                              -------           ---
                                                                                                              250,000            90

Prime Outlets at Calhoun (4) - Calhoun, Tennessee......................        I         October 1992         123,000           100
                                                                              II         October 1995         131,000            98
                                                                                                              -------           ---
                                                                                                              254,000            99

Prime Outlets at Castle Rock - Castle Rock, Colorado...................        I        November 1992         181,000           100
                                                                              II          August 1993          94,000            98
                                                                             III        November 1993          95,000            94
                                                                              IV          August 1997         110,000           100
                                                                                                              -------           ---
                                                                                                              480,000            98

Prime Outlets at Bend (6) - Bend, Oregon...............................        I        December 1992          97,000            94

Prime Outlets at Jeffersonville II (4) - Jeffersonville, Ohio..........        I           March 1993         126,000            84
                                                                              II          August 1993         123,000            70
                                                                             III         October 1994          65,000            77
                                                                                                              -------           ---
                                                                                                              314,000            77

Prime Outlets at Jeffersonville I - Jeffersonville, Ohio................       I            July 1993         186,000            97
                                                                              II        November 1993         100,000           100
                                                                             IIB        November 1994          13,000            75
                                                                            IIIA          August 1996          35,000           100
                                                                            IIIB           March 1997          73,000            88
                                                                                                              -------           ---
                                                                                                              407,000            96

Prime Outlets at Gainesville - Gainesville, Texas......................        I           August 1993        210,000            85
                                                                              II         November 1994        106,000            95
                                                                                                              -------           ---
                                                                                                              316,000            88

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            91

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        118,000            99
                                                                                                              -------           ---
                                                                                                              533,000           100

Prime Outlets at Huntley - Huntley, Illinois...........................        I           August 1994        192,000            96
                                                                              II         November 1995         90,000            88
                                                                                                              -------           ---
                                                                                                              282,000            94


Prime Outlets at Florida City - Florida City, Florida..................        I        September 1994        208,000            93

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 June 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            97%

Prime Outlets at Vero Beach (4) - Vero Beach, Florida..................        I         November 1994        210,000            93
                                                                              II           August 1995        116,000            96
                                                                                                              -------           ---
                                                                                                              326,000            94

Prime Outlets at Waterloo (4) - Waterloo, New York.....................        I            March 1995        208,000            99
                                                                              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            56
                                                                                                              -------           ---
                                                                                                              296,000            84

Prime Outlets at Darien (8) - Darien, Georgia..........................        I             July 1995        238,000            88
                                                                             IIA         November 1995         49,000            99
                                                                             IIB             July 1996         20,000           100
                                                                                                              -------           ---
                                                                                                              307,000            91

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

Prime Outlets at Gulfport (10) - Gulfport, Mississippi.................        I         November 1995        228,000           100
                                                                             IIA         November 1996         40,000            91
                                                                             IIB         November 1997         38,000            83
                                                                                                              -------           ---
                                                                                                              306,000            97

Prime Outlets at Lodi (11) - Burbank, Ohio.............................        I         November 1996        205,000            95
                                                                             IIA              May 1998         33,000            93
                                                                                                              -------           ---
                                                                                                              238,000            95

Prime Outlets at Gaffney - Gaffney, South Carolina.....................        I         November 1996        235,000            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            89
                                                                                                              -------           ---
Total Factory Outlet Centers (12)                                                                          13,706,000            95%
                                                                                                           ==========           ====
====================================================================================================================================
</TABLE>

Notes:
 (1) Percentage  reflects fully executed leases as of June 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.
(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 69% leased as of June 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%
      ownership 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  Partnership
      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 June 30, 1998.
<PAGE>

Results of Operations

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

Summary

 The  Company  reported  net income  (loss) of  $(5,083)  and $911 for the three
 months ended June 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. For the three months ended June 30, 1998, the net loss
 applicable to common  shareholders was $11,824,  or $0.40 per common share on a
 basic and diluted basis. For the three months ended June 30, 1997, the net loss
 applicable to common  shareholders  was $2,182,  or $0.14 per common share on a
 basic and diluted basis.

Revenues

 Total  revenues  were $44,764 for the three months ended June 30, 1998 compared
 to $31,213 for the three months ended June 30, 1997, an increase of $13,551, or
 43.4%.  Base  rents  increased  $9,041,  or 47.6%,  in 1998  compared  to 1997.
 Straight-line  rents  (included in base rents) were $286 and $127 for the three
 months  ended  June 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 $453, or 62.8%, during the three months
ended June 30,  1998  compared  to the same period in 1997.  This  increase  was
attributable to the Portfolio  Expansion and the Horizon  Merger.  For the three
months ended June 30,  1998,  same-space  sales in centers  owned by the Company
increased  1.0%  compared  to the same  period  in 1997.  "Same-space  sales" is
defined as the weighted  average sales per square foot reported by merchants for
space open since January 1, 1997. The Company's pro forma  same-space  sales for
the year ended  December 31, 1997 were  $255.00 per square  foot.  For the three
months ended June 30, 1998, same-store sales increased 2.0% compared to the same
period in 1997.  "Same-store sales" is defined as the weighted average sales per
square foot  reported by  merchants  for stores  opened  since  January 1, 1997.
Tenant reimbursements,  which represent the contractual recovery from tenants of
certain  operating  expenses,  increased by $4,265,  or 47.6%,  during the three
months ended June 30, 1998 over the same period in 1997.  These  increases  were
primarily due to the Portfolio Expansion and the Horizon Merger.

 Interest and other  income  decreased by $208,  or 8.3%,  to $2,309  during the
 three  months  ended June 30, 1998 as  compared to $2,517 for the three  months
 ended June 30, 1997. The decrease  reflects  reductions in (i) interest income
 of $474 and (ii)  gains on outlot  sales of $456.  Partially  offsetting  these
 reductions were higher (i) lease  termination  income of $315, (ii) income from
 unconsolidated  investment  partnerships  of $175,  (iii) push cart,  temporary
 tenant and late fee income of $158, and (iv) other ancillary income of $74. 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 $3,250, or 46.3%, to $10,272 for the
three months ended June 30, 1998 compared to $7,022 for the same period in 1997.
Real estate taxes  increased by $965,  or 40.2%,  to $3,364 for the three months
ended June 30, 1998,  from $2,399 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 2,  depreciation
and amortization expense increased by $3,392, or
<PAGE>

51.8%,  to $9,935 for the three months  ended June 30, 1998,  compared to $6,543
for 1997. This increase results from the depreciation and amortization of assets
associated with the Portfolio Expansion and the Horizon Merger. 

TABLE 2 - Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                              Three months ended
                                                                    June 30
                                                     ---------------------------

                                                             1998           1997
--------------------------------------------------------------------------------

Building and improvements                                  $5,669         $3,450
Land improvements                                             889            727
Tenant improvements                                         2,743          1,649
Furniture and fixtures                                        308            200
Leasing commissions(1)                                        326            517
                                                           ------         ------
Total                                                      $9,935         $6,543
                                                          ========        ======
================================================================================

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
                                                                   June 30
                                                     ---------------------------

                                                             1998           1997
--------------------------------------------------------------------------------

Interest incurred                                         $11,508        $9,721
Interest capitalized                                       (1,389)         (975)
Interest earned on interest rate protection contracts           -           (24)
Amortization of deferred financing costs                      481           622
Amortization of interest rate protection contracts            339           359
                                                            ------       ------
Total                                                     $10,939        $9,703
                                                         ========        ======
================================================================================


 As shown in TABLE 3, interest  expense for the three months ended June 30, 1998
 increased  by  $1,236,  or 12.7%,  to $10,939  compared  to $9,703 for the same
 period in 1997.  This increase  reflects (i) higher interest incurred of $1,787
 and (ii) a reduction in interest earned on interest rate  protection  contracts
 of $24. Partially  offsetting these items were (i) an increase in the amount of
 interest capitalized in connection with development projects of $414 and (ii) a
 decrease  in  amortization  of  deferred  financing  costs  and  interest  rate
 protection contracts of $161.

 The increase in interest  incurred is primarily  attributable to an increase of
 approximately  $104,463 in the Company's  average debt  outstanding  during the
 three months ended June 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 June 30, 1998  compared to the same period in 1997.  The weighted
 average  interest  rates  were  7.25% and 7.32% for the 1998 and 1997  periods,
 respectively.
<PAGE>

 Other charges  increased by $645, or 92.9%, to $1,339.  This increase  reflects
 selling and marketing expenses of $448 associated with the Company's  operation
 of an outlet store known as the Designer  Connection,  ground lease  expense of
 $29, marketing costs of $69 and other ancillary charges of $99.

 In connection with re-leasing space to new merchants, the Company incurred $245
 and $89 in capital expenditures during the three months ended June 30, 1998 and
 1997, respectively.

Loss on Sale of Real Estate

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

Comparison of six months ended June 30, 1998 to six months ended June 30, 1997

Summary

 The  Company  reported  net income  (loss) of  $(3,093)  and $1,813 for the six
 months ended June 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  Company's  sale of the Prime  Transferred  Properties  to HGP. For the six
 months ended June 30, 1998, the net loss applicable to common  shareholders was
 $14,000,  or $0.49 per common share on a basic and diluted  basis.  For the six
 months ended June 30, 1997, the net loss applicable to common  shareholders was
 $4,373, or $0.29 per common share on a basic and diluted basis.

Revenues

 Total  revenues were $82,272 for the six months ended June 30, 1998 compared to
 $61,375 for the six months  ended June 30,  1997,  an  increase of $20,897,  or
 34.0%.  Base rents  increased  $14,058,  or 37.9%,  in 1998  compared  to 1997.
 Straight-line  rents  (included  in base  rents) were $261 and $252 for the six
 months  ended  June 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 $649, or 46.7%,  during the six months
 ended June 30,  1998  compared to the same period in 1997.  This  increase  was
 attributable  to the Portfolio  Expansion and the Horizon  Merger.  For the six
 months ended June 30, 1998,  same-space  sales in centers  owned by the Company
 increased by 0.5% compared to the same period in 1997. For the six months ended
 June 30, 1998,  same-store sales were flat compared to the same period in 1997.
 Tenant reimbursements, which represent the contractual recovery from tenants of
 certain  operating  expenses,  increased  by $6,059,  or 33.8%,  during the six
 months ended June 30, 1998 over the same period in 1997.  These  increases were
 primarily due to the Portfolio Expansion and the Horizon Merger.

 Interest and other income  increased by $131, or 2.6%, to $5,126 during the six
 months  ended June 30, 1998 as compared to $4,995 for the six months ended June
 30, 1997. The increase  reflects higher (i) push cart,  temporary  tenant,  and
 late fee  income of $640,  (ii)  lease  termination  income of $407,  and (iii)
 income  from  unconsolidated   investment   partnerships  of  $158.   Partially
 offsetting  these  increases were reductions in (i) interest income of $877 and
 (ii) all other  ancillary  income of $197. 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 $4,970, or 36.4%, to $18,625 for the
six months ended June 30, 1998  compared to $13,655 for the same period in 1997.
Real estate taxes  increased by $1,431,  or 29.9%,  to $6,220 for the six months
ended June 30, 1998,  from $4,789 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 2,  depreciation
and amortization  expense  increased by $4,887, or 38.0%, to $17,758 for the six
months ended June 30, 1998,  compared to $12,871 for 1997. This increase results
from the depreciation  and amortization of assets  associated with the Portfolio
Expansion and the Horizon Merger.

TABLE 4 -  Components of Depreciation and Amortization Expense

 The  components of  depreciation  and  amortization  expense are  summarized as
 follows:
--------------------------------------------------------------------------------
                                                              Six months ended
                                                                  June 30
                                                     ---------------------------

                                                             1998           1997
--------------------------------------------------------------- ----------------

Building and improvements                                  $9,993       $  6,708
Land improvements                                           1,719          1,354
Tenant improvements                                         4,818          3,476
Furniture and fixtures                                        590            402
Leasing commissions(1)                                        638            931
                                                           ------        -------
Total                                                     $17,758        $12,871
                                                          =======        =======
================================================================================

Note:
(1)   In accordance  with  generally  accepted  accounting  principles  ("GAAP")
      leasing  commissions  are  classified as intangible assets.  Therefore,
      the amortization of leasing commissions is reported as a component of
      depreciation and amortization expense.

TABLE 5 - Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                                Six months ended
                                                                     June 30
                                                     ---------------------------

                                                             1998           1997
--------------------------------------------------------------------------------

Interest incurred                                         $20,784       $18,830
Interest capitalized                                       (2,777)       (1,820)
Interest earned on interest rate protection contracts         (23)          (63)
Amortization of deferred financing costs                      648         1,230
Amortization of interest rate protection contracts            681           695
                                                           ------        -------
Total                                                     $19,313       $18,872
                                                          =======        =======
================================================================================


 As shown in TABLE 5,  interest  expense for the six months  ended June 30, 1998
 increased by $441, or 2.3%, to $19,313  compared to $18,872 for the same period
 in 1997. This increase reflects (i) higher interest incurred of $1,954 and (ii)
 a reduction in interest  earned on interest rate  protection  contracts of 
<PAGE>

$40.  Partially  offsetting  these  items were (i) an  increase in the amount of
interest  capitalized in connection with development projects of $957 and (ii) a
decrease  in  amortization  of  deferred   financing  costs  and  interest  rate
protection contracts of $596.


 The increase in interest incurred is primarily  attributable to (i) an increase
 of approximately  $54,483 in the Company's average debt outstanding  during the
 six months  ended June 30, 1998  compared to the same period in 1997 and (ii) a
 slight increase in the weighted  average interest rate for the six months ended
 June 30,  1998  compared  to the same  period  in 1997.  The  weighted  average
 interest   rates  were  7.22%  and  7.18%  for  the  1998  and  1997   periods,
 respectively.

 Other charges  increased by $805, or 53.9%, to $2,298.  This increase  reflects
 higher ground lease expense of $149,  marketing costs of $210, bad debt expense
 of $55, and selling and marketing  expenses of $391  primarily  relating to the
 operation of Designer Connection.

 In connection with re-leasing space to new merchants, the Company incurred $441
 and $140 in capital  expenditures during the six months ended June 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  the  Prime  Transferred  Properties  to  HGP  for  an  aggregate
 consideration of $26,015 resulting in a loss of $15,461.

Liquidity and Capital Resources

Sources and Uses of Cash

 For the six  months  ended  June 30,  1998,  net  cash  provided  by  operating
 activities was $18,171, cash used in investing activities was $78,377, and net
 cash provided by financing activities was $72,570.

 The primary uses of cash for investing  activities  during the six months ended
 June  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, and (iii) costs for pre-development  activities  associated
 with future developments.

 The  primary  source of cash from  financing  activities  during the six months
 ended June 30, 1998 was proceeds from new borrowings of $368,128. Such proceeds
 were partially offset by (i) principal repayments on notes payable of $241,512,
 (ii) Preferred and Common Stock  distributions of $40,970,  (iii) distributions
 to  minority  interests  (including  distributions  to limited  partners of the
 Operating Partnership) of $10,346, and (iv) deferred financing costs of $2,730.

Shelf Registration

 On January 10, 1997, the Company filed a Form S-3  Registration  Statement (the
 "Shelf  Registration")  with the Securities and Exchange Commission to register
 $100,000  of the  Company's  equity  securities.  As a result of the 1997 Stock
 Offering,  as of June 30, 1998, the Company had $66,122 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.
<PAGE>

Property Acquisitions

 During 1998, 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.  The  Company  cannot  predict  if any  transaction  will  be
 consummated, nor the terms or form of consideration required.

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 unit of the Operating  Partnership's  Common  Units.  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 June 30, 1998.
<PAGE>

 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.

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 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 June 30, 1998,  the Company is a guarantor or  otherwise  obligated  with
 respect to  $41,857 of HGP's  indebtedness,  including  $12,200 of  obligations
 under HGP's $108,205  three-year secured credit facility.  Prime Retail and HGP
 are continuing to seek the consent of certain  parties to the assumption by HGP
 or its affiliates of $13,864 of indebtedness in connection with the spin-off.

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 all forward
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 June 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 $30,906 of mortgage  indebtedness  outstanding at June
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 under the $30,906 mortgage note.
<PAGE>

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 now expects to open 928,000 square feet of GLA during 1998
including  the 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
89%  occupied  at June 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  95% occupied on its grand opening.  At
June 30, 1998,  the remaining  budgeted  capital  expenditures  for 1998 planned
developments   aggregated   approximately  $57,900,  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
$2,265.

 Management  believes  that the  Company  has  sufficient  capital  and  capital
 commitments to fund the remaining capital expenditures associated with its 1997
 and 1998 development  activities. These funding requirements are expected to be
 met, in large part,  with the proceeds from various loan  facilities  including
 the financing of certain  unencumbered  properties.  If adequate  financing for
 such development and expansion is not available, the Company may not be able to
 develop new centers or expand existing centers at currently planned levels.

The Company  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, and (iv) the potential sale of common
or preferred  equity in the public or private  capital  markets.  As of June 30,
1998, the Company had committed  $11,241 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 $1,152,133 and $515,265 at June 30,
 1998 and December 31,  1997, respectively.  At June 30, 1998, such indebtedness
 had a weighted  average  maturity of 6.3 years and bore  interest at a weighted
 average interest rate of 7.02% per annum. At June 30, 1998, $592,704, or 51.4%,
 of such  indebtedness  bore interest at fixed rates and $559,429,  or 48.6%, of
 such  indebtedness,  including  $28,250 of tax-exempt  bonds,  bore interest at
 variable-rates. Of the variable rate indebtedness outstanding at June 30, 1998,
 $354,498 is scheduled to convert to a fixed rate of 7.782% in November 1998 for
 the remaining five year term of such indebtedness.

 At June 30, 1998,  the Company held interest rate  protection  contracts on all
 $28,250 of its floating rate tax-exempt  indebtedness  which expire in 1999 and
 approximately  $354,498 of other  floating  rate  indebtedness  which expire in
 November 1998 (or approximately 68.4% of its total floating rate indebtedness).
 In addition,  the Company held additional interest rate protection contracts on
 $43,900 (of which  $22,000  expired in July 1998 and  $21,900  expires in April
 1999)  of the  $354,498  floating  rate  indebtedness  to  further  reduce  the
 Company's exposure to increases in interest rates.
<PAGE>

 The  Company's  ratio of debt to total market  capitalization  at June 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 55.7%.

 The Company is obligated to repay $11,025 of mortgage  indebtedness  during the
 remainder of 1998 and $76,887 in 1999.  Annualized  cumulative dividends on the
 Company's  Senior  Preferred  Stock,  Series B Convertible  Preferred Stock and
 Series C Preferred  Securities  outstanding June 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  operations,  together  with cash
 available from borrowings and other sources,  will be sufficient to satisfy its
 debt service obligations,  expected  distribution and dividend requirements and
 operating cash needs for the next year.

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 June 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 and the Company's  operations will
 not be adversely impacted by year 2000 software failures.

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 
<PAGE>

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 six months ended June 30, 1998 and 1997. FFO
 increased $6,667, or 63.0%, to $17,253 for the three months ended June 30, 1998
 from $10,586 for the three months ended June 30, 1997.  FFO increased  $11,870,
 or 57.0%,  to $32,708 for the six months  ended June 30, 1998 from  $20,838 for
 the six months ended June 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                Six months ended
                                                                          June 30                           June 30
                                                                --------------------------------    --------------------------
                                                                1998              1997                 1998             1997
--------------------------------------------------------------- --------------------------------------------------------------
<S>                                                            <C>              <C>               <C>             <C>

Income (loss) before allocation to minority interests           $(8,302)        $  3,583          $   (851)       $   7,076
FFO adjustments:
Loss on sale of real estate                                      15,461                -            15,461                -
Real estate depreciation and amortization                         9,792            6,473            17,493           12,747
Unconsolidated joint venture adjustments                            302              530               605            1,015
                                                                -------         --------          --------        ---------

FFO before allocation to minority interests                     $17,253          $10,586           $32,708          $20,838
                                                                =======         ========           =======        =========
====================================================================================================================================
</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.

Item 2.           Changes in Securities

                  None

Item 3.           Defaults Upon Senior Securities

                  None

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

 At the Company's  Annual  Shareholders  Meeting held on June 12, 1998,  certain
 matters  were  submitted to the vote of the  Company's  security  holders.  The
 following summarizes these matters and the results of the voting.

           (a)  The proposed  merger of the Company and Horizon and
                other  transactions  contemplated  by the Merger
                Agreement were approved.  The votes cast for these
                items were as set forth below:


                       For                   Against             Abstain
                 ---------------  ----------------------  ----------------------
                    18,693,361             127,598              65,823



            (b)  The nominees for director  proposed by the Company were
                 elected.  The votes cast for these  nominees were as set
                 forth below:

                                               For                  Withheld
                                            -----------          --------------

                 William H. Carpenter, Jr.     23,032,209            39,219
                 Kenneth A. Randall            23,032,209            39,219
                 Sharon J. Sharp               23,032,009            39,419
<PAGE>

             (c)  The proposal to ratify the adoption of the Prime Retail,
                  Inc.  Nonemployee  Director Stock Plan was approved.  The
                  votes cast with respect to such proposal were as set forth
                  below:

                                                    Broker
                  For          Against             Non-Votes           Abstain
                  ---          -------             ---------           -------
                 17,320,842    1,460,064           4,184,646            105,876



              (d)  The proposal for ratify the adoption of the Prime Retail,
                   Inc. 1998 Long-term  Stock Incentive Plan was approved.  The
                   votes cast with respect to such proposal were as set forth
                   below:

                                                    Broker
                  For          Against             Non-Votes           Abstain
                  ---          -------             ---------           -------
                 14,488,686     4,293,281           4,184,646           104,815


               (e)  The proposal to ratify the selection of the firm of Ernst
                    Young LLP as the  Company's  independent auditors  for the
                    year ending  December 31,  1998 was  approved.  The vote
                    cast with respect to that proposal were as set forth below:


                               For                 Against             Abstain
                               ---                 -------            ---------
                         22,978,819                 33,086              59,523

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 

                  (b)     Reports on Form 8-K:
                          On June 25,  1998,  the  Company  filed a  Current
                          Report  on Form 8-K,  dated  June 23,  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.  No financial  statements 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.



                                                           PRIME RETAIL, INC.
                                                           Registrant



Date: August 13, 1998                                  /s/ Abraham Rosenthal
      ---------------                                  ---------------------
                                                       Abraham Rosenthal
                                                       Chief Executive Officer





Date: August 13, 1998                                  /s/ Robert P. Mulreaney
      ---------------                                  -----------------------
                                                       Robert P. Mulreaney
                                                       Executive Vice President,
                                                       Chief Financial Officer
                                                       and Treasurer