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


                                   FORM 10-Q/A

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

                                       or

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

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

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


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

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

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

                                 NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name,former address, or former fiscal year,if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes   X           No
    -----            -----

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

As of August 9, 1996,  the issuer had  outstanding  13,404,651  shares of Common
Stock, $.01 par value per share.


<PAGE>


                               PRIME RETAIL, INC.
                                   FORM 10-Q/A


                                      INDEX



                                                                           PAGE
                                                                           ----

PART I:  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

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

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

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

<TABLE>

                                                          PRIME RETAIL, INC.

                                                      CONSOLIDATED BALANCE SHEETS

                                               (in thousands, except share information)

<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                   JUNE 30, 1996         December 31, 1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                       <C>
ASSETS:
Investment in rental property:
   Land                                                                                $  35,370                 $  35,370
   Buildings and improvements                                                            406,992                   403,542
   Property under development                                                             36,588                    12,165
   Furniture and equipment                                                                 3,662                     3,403
                                                                                        --------                  --------
                                                                                         482,612                   454,480
   Accumulated depreciation                                                              (48,272)                  (40,190)
                                                                                        --------                  --------
                                                                                         434,340                   414,290
Cash and cash equivalents                                                                  4,040                    14,927
Restricted cash                                                                            2,310                     2,230
Accounts receivable, net                                                                   6,588                     8,751
Deferred charges, net                                                                      8,620                    18,136
Due from affiliates, net                                                                   1,298                     1,194
Investment in partnerships                                                                 2,822                     2,258
Other assets                                                                                 774                       619
                                                                                        --------                  --------
     Total assets                                                                       $460,792                  $462,405
                                                                                        ========                  ========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Bonds payable                                                                           $ 32,900                  $ 32,900
Notes payable                                                                            285,877                   273,054
Accrued interest                                                                           3,156                     3,034
Real estate taxes payable                                                                  3,260                     3,142
Construction costs payable                                                                 9,829                     5,796
Accounts payable and other liabilities                                                    14,654                     8,539
                                                                                        --------                  --------
     Total liabilities                                                                   349,676                   326,465

Minority interests                                                                           430                    14,456
  
Shareholders' equity:
   Shares of preferred stock, 24,315,000 shares authorized:
     2,300,000 shares of 10.5% Series A Senior Cumulative
       Preferred Stock, $0.01 par value (liquidation preference
       of $57,500), issued and outstanding                                                    23                        23
     8.5% Series B Cumulative  Participating  Convertible Preferred
       Stock, $0.01 par value (liquidation preference of $70,150 
       and $175,375, respectively), 2,806,000 and 7,015,000 shares
       issued and outstanding, respectively                                                   28                        70
   Shares of common stock, 75,000,000 shares authorized:
     Common stock, $0.01 par value, 9,609,323 and 2,875,000 shares
       issued and outstanding, respectively                                                   96                        29
   Additional paid-in capital                                                            126,453                   128,275
   Distributions in excess of net income                                                 (15,914)                   (6,913)
                                                                                        --------                  --------
     Total shareholders' equity                                                          110,686                   121,484
                                                                                        --------                  --------

     Total liabilities and shareholders' equity                                         $460,792                  $462,405
                                                                                        ========                  ========
=============================================================================================================================
</TABLE>

See accompanying notes to financial statements.


<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
                                                                 ---------------------------      --------------------------
                                                                    1996          1995              1996           1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>              <C>            <C>   
REVENUES:
Base rents                                                          $12,786       $10,956           $25,530        $21,628
Percentage rents                                                        368           327               811            728
Tenant reimbursements                                                 5,895         5,548            12,034         10,421
Income from investment partnerships                                     168           657               609            787
Interest and other                                                      933         1,302             2,297          2,500
                                                                    -------       -------           -------        -------
     Total revenues                                                  20,150        18,790            41,281         36,064

EXPENSES:
Property operating                                                    4,796         4,044             9,415          7,814
Real estate taxes                                                     1,012         1,545             2,485          2,779
Depreciation and amortization                                         4,612         3,739             8,999          7,344
Corporate general and administrative                                    966           692             1,859          1,536
Interest                                                              6,148         5,022            12,204          9,478
Other charges                                                         6,566           685             7,212            908
                                                                    -------       -------           -------        -------
     Total expenses                                                  24,100        15,727            42,174         29,859
                                                                    -------       -------           -------        -------

INCOME (LOSS) BEFORE MINORITY INTERESTS AND
   EXTRAORDINARY ITEM                                                (3,950)        3,063              (893)         6,205

Loss allocated to minority interests                                  4,993         1,395             6,470          2,861
                                                                    -------       -------           -------        -------
INCOME BEFORE EXTRAORDINARY ITEM                                      1,043         4,458             5,577          9,066
Extraordinary item -- loss on early extinguishment of
   debt, net of minority interests in the amount of $3,263           (1,017)           --            (1,017)            --
                                                                    -------       -------           -------        -------
NET INCOME                                                               26         4,458             4,560          9,066
Income allocated to preferred shareholders                            3,000         5,236             8,236         10,472
                                                                    -------       -------           -------        -------

NET LOSS APPLICABLE TO COMMON SHARES                                $(2,974)      $  (778)          $(3,676)       $(1,406)
                                                                    =======       =======           =======        =======

PER COMMON SHARE:
   Loss before extraordinary item                                   $ (0.62)      $ (0.27)          $ (0.88)       $ (0.49)
   Extraordinary item                                                 (0.32)           --             (0.34)            --
                                                                    -------       -------           -------        -------
   Net loss                                                         $ (0.94)      $ (0.27)          $ (1.22)       $ (0.49)
                                                                    =======       =======           =======        =======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                            3,171         2,875             3,023          2,875
                                                                    =======       =======           =======        =======

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

See accompanying notes to financial statements.


<PAGE>


<TABLE>
                                                            PRIME RETAIL, INC.

                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                              (in thousands)

<CAPTION>
 ----------------------------------------------------------------------------------------------------------------------------
                                                                                              SIX MONTHS ENDED JUNE 30
                                                                                         ------------------------------------
                                                                                            1996                   1995
 ----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                    <C>
 OPERATING ACTIVITIES:
 Net income                                                                                $  4,560               $  9,066
 Adjustments to reconcile net income to
    net cash provided by operating activities:
      Loss allocated to minority interests                                                   (6,470)                (2,861)
      Extraordinary loss for early retirement of debt                                         1,017                     --
      Write-off of financing costs                                                            6,131                     --
      Depreciation and amortization                                                           8,999                  7,344
      Amortization of deferred financing costs and
         interest rate protection contracts                                                   2,249                  2,206
      Equity earnings in excess of cash distributions from
         joint ventures                                                                          79                   (602)
      Provision for uncollectible accounts receivable                                           281                     67
 Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                                              1,882                    (60)
      Increase in due from affiliates, net                                                     (104)                (1,328)
      Increase in other assets                                                                 (863)                  (698)
      Increase in accrued interest                                                              122                    829
      Increase in accounts payable and other liabilities                                      1,702                  2,926
                                                                                           --------               --------
        Net cash provided by operating activities                                            19,585                 16,889

 INVESTING ACTIVITIES:
 Purchase of land                                                                                --                 (3,076)
 Purchase of buildings and improvements                                                      (3,704)               (26,427)
 Increase in property under development                                                     (20,235)                (7,289)
 Deferred leasing commissions                                                                   (21)                  (265)
                                                                                           --------               --------
        Cash used in investing activities                                                   (23,960)               (37,057)

 FINANCING ACTIVITIES:
 Proceeds from notes payable                                                                 14,700                 89,225
 Principal repayments on notes payable                                                       (1,877)               (52,798)
 Deferred financing fees                                                                     (2,873)                (1,679)
 Distributions and dividends paid                                                           (12,170)               (12,168)
 Distributions to minority interests                                                         (4,292)                (2,364)
                                                                                           --------               --------
        Net cash (used in) provided by financing activities                                  (6,512)                20,216
                                                                                           --------               --------
 Increase (decrease) in cash and cash equivalents                                           (10,887)                    48
 Cash and cash equivalents at beginning of period                                            14,927                  2,959
                                                                                           --------               --------
 Cash and cash equivalents at end of period                                                $  4,040               $  3,007
                                                                                           ========               ========
 ============================================================================================================================
</TABLE>

See accompanying notes to financial statements.


<PAGE>


                               PRIME RETAIL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            (Amounts in thousands, except share and unit information)


NOTE 1 -- INTERIM FINANCIAL PRESENTATION

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

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

The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.   Significant   intercompany  accounts  and  transactions  have  been
eliminated in  consolidation.  Certain  financial  statement amounts and related
footnote  information  have  been  reclassified  to  conform  with  the  current
presentation.  These  reclassifications  have not  changed  previously  reported
results or shareholders' equity.

NOTE 2 -- EXCHANGE OFFER AND SECONDARY COMMON STOCK OFFERING

On June 27,  1996,  the  Company  completed  a  registered  exchange  offer (the
"Exchange  Offer") to exchange  shares of its Common  Stock for up to  4,209,000
shares,  or 60%,  of its  outstanding  8.5%  Series B  Cumulative  Participating
Convertible  Preferred Stock (the "Convertible  Preferred  Stock").  The Company
received tender offers for 4,648,650  shares,  or approximately  66.27%,  of the
Convertible  Preferred  Stock.  A proration  factor was applied to each share of
Convertible  Preferred Stock validly tendered by holders,  and on June 27, 1996,
the Company issued  6,734,323 shares of its Common Stock. In connection with the
Exchange Offer,  certain  affiliates of the Company who are limited  partners of
the Operating Partnership (the "Limited Partners")  contributed to the Operating
Partnership 625,000 common units for cancellation.



<PAGE>


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

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

On July 3, 1996, the Company completed a secondary  offering of its Common Stock
to the public by issuing  3,795,328  shares at  $11.375  per share (the  "Common
Stock  Offering").  Of the total  offering,  3,705,000  shares  were sold by the
Company  and  90,328  shares  were sold by a selling  stockholder.  The  Company
received net proceeds  from the Common Stock  Offering of $38,928 that were used
to repay outstanding indebtedness.

A summary of the holders of the Series A preferred  units,  Series B convertible
preferred  units and common units after giving effect to the Exchange  Offer and
Common Stock Offering follows:

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


NOTE 3 -- INVESTMENT IN PARTNERSHIPS

On May 6, 1996, the Company and the Company's  joint venture  partner  (together
with its affiliates, the "Grove City Partner") entered into a purchase agreement
(the "Grove City Purchase  Agreement") pursuant to which the Company has agreed,
subject to certain conditions, to purchase on or before February 28, 1997 all of
the  Grove  City  Partner's  ownership  interest  in Grove  City  Factory  Shops
Partnership,  the  property  partnership  which owns Grove City  Factory  Shops.
Following the completion of such transaction, the Company will own 100% of Grove
City Factory Shops  Partnership.  As consideration  for the Grove City Partner's
partnership interest,  the Company has agreed, at closing, to pay $8,000 in cash
to the Grove City Partner and to repay all of the then outstanding  indebtedness
secured by Grove City Factory  Shops,  which  indebtedness  is owed to the Grove
City Partner by the Grove City Factory Shops Partnership.

Under the Grove City Purchase  Agreement,  if the Company  breaches any material
representation, warranty, covenant or agreement or if the Company defaults under
the Grove City Purchase  Agreement,  the Company is obligated to pay  liquidated
damages  to the Grove City  Partner  in the  amount of $2,000.  In the event the
Grove City Purchase  Agreement is terminated for any reason other than by reason
of the Grove City Partner's default  thereunder or a condemnation of or casualty
to this property, the Grove City Partner will be entitled to the first $8,000 of
the  proceeds  of  any  subsequent  sale  of  the  property  (after  payment  of
outstanding  indebtedness  and return of capital  contributions  with respect to
Phase IV).  The  Company  will be  entitled  to receive  the next $8,000 of such
proceeds and the balance of such proceeds,  if any, will be distributed pro rata
between  the  Company  and the  Grove  City  Partner  based on their  respective
ownership  interests in the Grove City Factory Shops  Partnership.  No assurance
can be  given that  conditions to the Grove City Purchase Agreement  will be met

<PAGE>


NOTE 3 -- INVESTMENT IN PARTNERSHIPS (CONTINUED)

or that such purchase will be completed.  Specifically,  because the Company has
not yet secured  commitments to finance such  transaction,  management  does not
currently believe that the consummation of the Grove City Purchase  Agreement is
currently probable.


NOTE 4 -- BONDS AND NOTES PAYABLE

On January 30, 1996, the Company  obtained from a commercial  mortgage company a
commitment  for a mortgage loan in the amount of $7,000 for an  eight-year  term
(the "Refinancing Loan"). The Refinancing Loan bears interest at a fixed rate of
9.375%,  requires  monthly  principal and interest  payments  based on a 16-year
amortization  schedule,  matures  on March  1,  2004  and is  collateralized  by
property in Lombard, IL. The Company closed on the Refinancing Loan on August 1,
1996 and  received  net  proceeds of $6,807  that were used for working  capital
purposes.

On June 5, 1996, the Company  entered into a binding loan  commitment (the "1996
Nomura Loan Commitment") with Nomura Asset Capital Corporation  ("Nomura") which
provides   for,   among   other   things,   (i)   a   variable-rate   seven-year
cross-collateralized  first  mortgage  loan (the "First  Mortgage  Loan") in the
principal   amount   of   $226,500   and   (ii)   a   variable-rate   seven-year
cross-collateralized second mortgage loan (the "Mezzanine Mortgage Loan") in the
principal  amount of $33,500.  The First Mortgage Loan will bear a variable-rate
of  interest  equal to the London  Interbank  offered  rate for thirty  (30) day
deposits in U.S. dollars  ("30-day  LIBOR") plus 1.31%.  The Mezzanine  Mortgage
Loan bears a  variable-rate  of interest  equal to 30-day LIBOR plus 3.25%.  The
First Mortgage Loan and the Mezzanine  Mortgage Loan are expected to be advanced
and securitized by Nomura on or before  September 30, 1996 (the  "Securitization
Closing Date").  After the Securitization  Closing Date, the First Mortgage Loan
will require  monthly  payments of principal and interest based on a thirty-year
amortization  of principal and the Mezzanine  Mortgage Loan will require monthly
payments of principal and interest based on the full  amortization  of principal
within seven years. The First Mortgage Loan and the Mezzanine Mortgage Loan will
be   cross-collateralized   by  senior  and  junior   mortgages,   respectively,
encumbering thirteen of the Company's existing factory outlet centers.

On August 1, 1996, the Company closed on the  refinancing of the existing credit
facilities  with Nomura (the "Amended  Credit  Facilities").  The Amended Credit
Facilities  provided an aggregate of $253,000 of financing to the Company on the
same  economic  terms as  those of the  First  Mortgage  Loan and the  Mezzanine
Mortgage Loan that were applicable under the 1996 Nomura Loan Commitment for the
period prior to the  Securitization  Closing Date. The Amended Credit Facilities
were utilized (i) to refinance $151,323 which was outstanding under the existing
credit  facilities,  (ii) to refinance  $97,411  which was  outstanding  under a
securitized  mortgage  loan,  (iii) to pay loan  fees and  transaction  costs of
$3,600,  and  (iv)  for  working  capital  purposes.  Under  the  terms  of  the
refinancing,  the Amended  Credit  Facilities  consist of two notes,  one in the
amount of $218,000  and the other in the amount of $35,000.  Each note  requires
monthly  payments of  interest-only at a rate equal to 30-day LIBOR plus 1.513%.
The Amended  Credit  Facilities  are required to be repaid in full in connection
with the closing of the First Mortgage Loan and the Mezzanine  Mortgage Loan. If
the First  Mortgage  Loan and the  Mezzanine  Mortgage  Loan are not advanced by
September 30, 1996,  the interest  rate on the Amended  Credit  Facilities  will
increase to a rate equal to 30-day LIBOR plus 1.717%.

In connection  with the  commitment  to provide the First  Mortgage Loan and the
Mezzanine  Mortgage  Loan,  the Company and Nomura have agreed that,  subject to
certain  conditions,  the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the  securitization  of the First Mortgage Loan.
If the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the

<PAGE>


NOTE 4 -- BONDS AND NOTES PAYABLE (CONTINUED)

Senior  Certificates  (as  defined  below),  the  appropriate  party will make a
payment  to the  other  based on the  present  value of such  deviation  applied
against the principal balance of the Senior Certificates.  If the Securitization
Closing  Date does not occur by February 1, 1997,  Nomura may demand  payment of
the Amended  Credit  Facilities in full six months after delivery of such demand
notice.  It is  anticipated  that the First Mortgage Loan will be securitized at
investment grade levels through the issuance of Real Estate Mortgage  Investment
Company  ("REMIC")  certificates (the "Senior  Certificates")  and the Mezzanine
Mortgage Loan will be securitized  through the issuance of REMIC certificates or
another acceptable  securitization  vehicle (the "Junior  Certificates").  After
securitization,   the  Company  will  be  required  to  purchase  interest  rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. In addition, prior to the securitization, the
Company is required to purchase  interest rate protection  contracts with regard
to the Amended  Credit  Facilities  when and if 30-day LIBOR exceeds  6.50%.  At
August 8, 1996,  30-day LIBOR was 5.44%.  It is estimated that the proceeds from
the sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan  (described  below) will  approximate  $260,000.  In the
event that loan proceeds  available from the Senior  Certificates and the Junior
Certificates  are less than $260,000,  Nomura has agreed to provide,  subject to
certain conditions (including the consent of the applicable rating agencies),  a
loan based on the cash flow of the property  partnerships which own the thirteen
factory  outlet  centers  in the  principal  amount  of the  difference  between
$260,000  and such loan  proceeds.  In the event that the net cash flow from the
thirteen  outlet  centers is less than a  mutually  agreed  upon  amount and the
securitization results in proceeds of less than the amount required to repay the
Amended  Credit  Facilities  and to pay all  other  costs  and  expenses  due in
connection  with the  closing  of the  First  Mortgage  Loan  and the  Mezzanine
Mortgage  Loan,  the Company  will be required  to fund such  difference  at the
closing  of the  securitization.  The  Company  intends to  purchase  the Junior
Certificates  with  the  proceeds  of a  financing  provided  through  a  Nomura
repurchase  agreement  (the "Repo  Financing").  The Repo Financing will require
monthly payments of  interest-only  and will be for a term of two years and will
be recourse to the Operating Partnership.  The Repo Financing will be subject to
daily  mark-to-market and margin calls.  Interest will be payable for 75% of the
market value of the Junior Certificates (which at date of inception shall be par
value) at the rate of 30-day  LIBOR plus 1.95% and for the balance of the market
value of the Junior Certificates (which at date of inception shall be par value)
at the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including  the  estimated  annual  amortization  of  interest  rate  protection
contracts) on the $260,000 of  securitized  loans based on a seven-year  term of
such loans is initially expected to be approximately 7.66%.

Under the terms of the 1996 Nomura Loan  Commitment,  the Company and the lender
can agree to elect a five-year term with respect to the Senior  Certificates  at
an interest rate spread of 1.10% over 30-day LIBOR. If the five-year term option
is completed at the time of securitization, the weighted average annual interest
rate  (including the estimated  annual  amortization of interest rate protection
contracts)  on the $260,000 of  securitized  loans is  initially  expected to be
approximately 7.46%.

The Company will account for the payment/receipt  with respect to the sharing of
the risks and rewards  associated  with the  interest  rate spread on the Senior
Certificates as a deferred asset/liability. The deferred asset/liability will be
amortized as a component of interest expense as an adjustment to the cost of the
borrowings over the term of the Senior Certificates.

Upon terms  acceptable  to the Company and the rating  agencies  involved in the
securitization, an amount between $25,000 to $50,000 in addition to the $260,000
of  securitized  loans may be raised by the  securitization  and, if so, will be
held in escrow by Nomura. These funds may be drawn upon by the  Company, subject

<PAGE>


NOTE 4 -- BONDS AND NOTES PAYABLE (CONTINUED)

to the satisfaction of certain objective standards acceptable to the Company and
such rating  agencies,  after  completion  of  construction  of, and opening for
business in, expansions at the thirteen mortgaged outlet centers.

The Company's existing $160,000 loan (the "Revolving Loan") with Nomura will not
be terminated as a result of the  transactions  contemplated  by the 1996 Nomura
Loan  Commitment,  however,  the collateral that was pledged  thereunder will be
released and pledged to Nomura under the First  Mortgage  Loan and the Mezzanine
Mortgage  Loan.  The  Revolving  Loan will be  available,  subject to sufficient
collateral being pledged to Nomura, for acquisitions,  expansions and new outlet
centers.

In connection with the execution of the binding 1996 Nomura Loan Commitment, the
Company  incurred a  nonrecurring  charge and  extraordinary  loss of $6,131 and
$4,280,  respectively,  during  the  three  months  ended  June  30,  1996.  The
nonrecurring  loss  results  from (i) the  termination  of  previously  obtained
financing  commitments  from  Nomura  for  which  the  Company  paid  $3,250  in
nonrefundable financing fees, (ii) the unamortized cost of certain interest rate
protection contracts of $3,696 and (iii) other nonrefundable  deferred financing
costs of $1,425,  less the  estimated  fair market  value of the  interest  rate
protection contracts of $2,240 based on their fair market value at May 31, 1996.
The  extraordinary  loss results from (i) the write-off of unamortized  deferred
financing costs of $3,458 relating to the early  extinguishment of debt and (ii)
debt prepayment penalties of $822.

On July 8, 1996, the Company obtained from a financial  institution a commitment
for a  construction  mortgage  loan in an  amount  not to exceed  the  lesser of
$20,000 or sixty-five  percent (65%) of the  appraised  value of the  underlying
collateral (as defined) (the  "Construction  Mortgage  Loan").  The Construction
Mortgage  Loan  will  (i)  bear  a  variable  interest  rate  at  the  financial
institution's prime rate or, at the Company's option, a LIBOR index, (ii) mature
two years after closing on the  Construction  Mortgage  Loan and,  (iii) require
monthly  interest-only   payments.   The  Construction  Mortgage  Loan  will  be
collateralized by a factory outlet center under  construction in Gaffney,  South
Carolina.  The Construction Mortgage Loan will be subject to certain leasing and
cash contribution  restrictions  prior to the disbursement of loan proceeds.  No
loan proceeds have been disbursed as of August 8, 1996.

NOTE 5 -- LEGAL PROCEEDINGS

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

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

NOTE 6 -- CASH DISTRIBUTIONS

On August 7, 1996, the Company's board of directors approved a cash distribution
of $1,861,  or $0.219 per common unit, to the limited  partners of the Operating
Partnership. The cash distribution will be paid on August 15, 1996.


<PAGE>


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

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


INTRODUCTION

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

CAUTIONARY STATEMENTS

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

RESULTS OF OPERATIONS

GENERAL

The Company has grown by developing  and acquiring  factory  outlet  centers and
expanding its existing  factory  outlet  centers.  As summarized in TABLE 1, the
Company's  factory outlet  portfolio  consisted of seventeen  operating  factory
outlet centers totaling  4,331,000 square feet of gross leasable area ("GLA") at
June 30, 1996,  compared to fourteen factory outlet centers  totaling  3,382,000
square feet of GLA at June 30, 1995. The Company opened three new factory outlet
centers and four expansions of existing  factory outlet centers during the third
and fourth quarters of 1995, adding 949,000 square feet of GLA in the aggregate.
The significant  increase in the number of operating properties and total GLA at
June 30, 1996  compared to the  portfolio of  properties  at June 30,  1995,  is
collectively referred to as the "Portfolio Expansion".



<PAGE>



TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                            OWNERSHIP                GRAND            GLA      PERCENTAGE
FACTORY OUTLET CENTER                          PHASE      INTEREST(1)         OPENING DATE      (SQ. FT.)       LEASED(9)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>              <C>             <C>                 <C>
Warehouse Row Factory Shops(2)(3)--                I              99%        November 1989         95,000              89%
Chattanooga, Tennessee                            II              65%          August 1993         26,000              94
                                                                                                ---------             ---
                                                                                                  121,000              90

San Marcos Factory Shops--                         I             100%          August 1990        177,000              99
San Marcos, Texas                                 II                           August 1991         67,000              98
                                                 III                           August 1993        117,000             100
                                                IIIB                         November 1994         20,000              91
                                                IIIC                         November 1995         35,000             100
                                                                                                ---------             ---
                                                                                                  416,000              99

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

Triangle Factory Shops--Raleigh-Durham,            I             100%         October 1991        181,000             100
North Carolina

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

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

Ohio Factory Shops--                               I             100%            July 1993        186,000              99
Jeffersonville, Ohio                              II                         November 1993        100,000              98
                                                 IIB                         November 1994         13,000             100
                                                                                                ---------             ---
                                                                                                  299,000              99

Gainesville Factory Shops--                        I             100%          August 1993        210,000              96
Gainesville, Texas                                II                         November 1994        106,000              92
                                                                                                ---------             ---
                                                                                                  316,000              95

Nebraska Crossing Factory Shops--Gretna,           I             100%         October 1993        192,000              96
Nebraska

Oxnard Factory Outlet(4)--                         I              30%            June 1994        148,000              96
Oxnard, California

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

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

Florida Keys Factory Shops--                       I             100%       September 1994        208,000              94
Florida City, Florida

Indiana Factory Shops--                            I             100%        November 1994        208,000              89
Daleville, Indiana

</TABLE>

<PAGE>



TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1996 (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                            OWNERSHIP                GRAND            GLA      PERCENTAGE
FACTORY OUTLET CENTER                
          PHASE      INTEREST(1)         OPENING DATE      (SQ. FT.)       LEASED(9)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>              <C>             <C>                <C>
Magnolia Bluff Factory Shops(6)--Darien,           I             100%            July 1995        238,000             91%
Georgia                                          IIA                         November 1995         56,000             88
                                                                                                ---------            ---
                                                                                                  294,000             90

Arizona Factory Shops(7)--                         I              50%       September 1995        217,000             93
Phoenix, Arizona

Gulfport Factory Shops(8)--                        I             100%        November 1995        228,000             92
                                                                                                ---------            ---
Gulfport, Mississippi

TOTAL FACTORY OUTLET CENTERS(10)                                                                4,331,000             96%
                                                                                                =========            === 

=============================================================================================================================
<FN>
Notes:
(1)  This percentage represents the Company's ownership interest in the property partnership that directly owns or leases the
     property indicated.
(2)  The Company owns a 2%  partnership  interest as the sole general  partner in Phase I of this property but is entitled to
     99% of the  property's  operating cash flow and net proceeds from a sale or  refinancing.  With regard to Phase II, Ford
     Motor Credit Company holds a 35% limited partnership  interest and the Company holds a 65% general partnership  interest
     in the partnership that owns Phase II of this property.
(3)  Phase I of this mixed-use  development  includes  154,000 square feet of office space and Phase II includes 5,000 square
     feet of office space.  The total office space of 159,000 square feet of GLA is not included in this table and such space
     was 100% leased as of June 30, 1996.
(4)  The Company owns 30% of this factory outlet center in a joint venture partnership with unrelated third parties.
(5)  The Company owns 50% of this factory outlet center in a joint venture  partnership  with an unrelated  third party.  The
     Company has entered  into an  agreement  dated May 6, 1996 with its joint  venture  partner to purchase all of the joint
     venture partner's  ownership interest in the general partnership that owns this property on or before February 28, 1997.
     Following the  completion of such purchase,  the Company will own 100% of this property.  No assurance can be given that
     this transaction will be consummated as scheduled.
(6)  The property  partnership  operates this  property  pursuant to a long-term  lease under which the property  partnership
     receives the economic benefit of a 100% ownership interest.
(7)  The Company owns 50% of this factory outlet center in a joint venture partnership with an unrelated third party.
(8)  The real  property  on which  this  outlet  center is  located is subject to a  long-term  ground  lease.  The  property
     partnership receives the economic benefit of a 100% ownership interest.
(9)  Fully executed leases as of June 30, 1996 as a percent of square feet of GLA.
(10) The Company also owns three  community  centers  containing  424,000  square feet of GLA in the aggregate  that were 97%
     leased as of June 30, 1996.
</FN>
</TABLE>

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

Summary

   
For the three months ended June 30, 1996, the Company reported net income of $26
on total revenues of $20,150.  These results  include a nonrecurring  charge and
extraordinary loss of $6,131 and $1,017 (net of minority interests in the amount
of $3,263), respectively,  related to a binding loan commitment that the Company
obtained on June 5, 1996. For the three months ended June 30, 1996, the net loss
applicable to common shareholders was $2,974 or $0.94 per common share.
    

For the three  months ended June 30,  1995,  the Company  reported net income of
$4,458  on  total  revenues  of  $18,790.  For the  same  period,  the net  loss
applicable to common shareholders was $778, or $0.27 per common share.



<PAGE>


Revenues

Total  revenues  were  $20,150  for the three  months  ended June 30,  1996,  as
compared to $18,790 for the three  months  ended June 30,  1995,  an increase of
$1,360,  or 7.2%.  Base rents  increased  $1,830,  or 16.7%, in 1996 compared to
1995.   These   increases  are   primarily  due  to  the  Portfolio   Expansion.
Straight-line  rents  (included  in base  rents) were $99 and $205 for the three
months ended June 30, 1996 and 1995, respectively.

Tenant reimbursements,  which represent the contractual recovery from tenants of
certain operating expenses,  increased by $347, or 6.3%, during the three months
ended June 30, 1996 over the same period in 1995.  These increases are primarily
due to  the  Portfolio  Expansion.  Tenant  reimbursements  as a  percentage  of
recoverable  operating  expenses,  which include property operating expenses and
real estate taxes,  increased to 101.5% from 99.3% during the three months ended
June 30, 1996 and 1995, respectively. This positive trend reflects the Company's
continued  efforts  to  contain  operating  expenses  at  its  properties  while
requiring merchants to pay their pro rata share of these expenses.

Income from investment partnerships decreased by $489 for the three months ended
June 30, 1996 over the same period in 1995.  The decrease is primarily  due to a
gain of  approximately  $288 on the  sale of land  and  improvements  by a joint
venture partnership during the 1995 period.  Interest and other income decreased
by $369,  or 28.3%,  to $933  during the three  months  ended  June 30,  1996 as
compared to $1,302 for the three  months  ended June 30,  1995.  The decrease is
attributable to lower leasing  commissions,  construction  management fees, real
estate  brokerage  commissions and ancillary  income of $278, $41, $138 and $11,
respectively, offset by an increase in development fees of $99.

Expenses

Property operating expenses increased by $752, or 18.6%, to $4,796 for the three
months ended June 30, 1996 compared to $4,044 for the same period in 1995.  Real
estate taxes  decreased by $533, or 34.5%,  to $1,012 for the three months ended
June 30, 1996, from $1,545 in the same period for 1995. The increase in property
operating expenses is primarily due to the Portfolio Expansion.  The decrease in
real estate  taxes is  primarily  attributable  to lowered tax  assessments  for
certain properties.  As shown in TABLE 2, depreciation and amortization  expense
increased by $873, or 23.3%, to $4,612 for the three months ended June 30, 1996,
compared to $3,739 for 1995.  This increase  results from the  depreciation  and
amortization of assets associated with the Portfolio Expansion.



<PAGE>


TABLE 2 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE

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

--------------------------------------------------------------------------------
                                                             THREE  MONTHS
                                                             ENDED JUNE 30
                                                     ---------------------------
                                                            1996           1995
--------------------------------------------------------------------------------
Building and improvements                                 $2,226         $2,010
Land improvements                                            474            312
Tenant improvements                                        1,248            822
Furniture and fixtures                                       160            115
Leasing commissions(1)                                       504            480
                                                          ------         ------
       Total                                              $4,612         $3,739
                                                          ======         ======
================================================================================
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
                                                      --------------------------
                                                             1996          1995
--------------------------------------------------------------------------------
Interest incurred                                         $5,753         $4,723
Interest capitalized                                        (705)          (634)
Interest earned on interest rate protection contracts        (38)          (205)
Amortization of deferred financing costs                     819            819
Amortization of interest rate protection contracts           319            319
                                                          ------         ------
       Total                                              $6,148         $5,022
                                                          ======         ======
================================================================================

As shown in TABLE 3, interest  expense for the three months ended June 30, 1996,
increased by $1,126,  or 22.4%, to $6,148 compared to $5,022 for the same period
in 1995.  This  increase  is  primarily  the result of an increase of $68,325 in
total debt  outstanding  at June 30, 1996 compared to total debt  outstanding at
June 30, 1995. The effect of the increase in total debt  outstanding  was offset
by a  decrease  of 0.37% in the  weighted  average  interest  rate for the three
months  ended June 30, 1996  compared to the same period in 1995.  The  weighted
average  interest rate for bonds and notes payable at June 30, 1996 and 1995 was
7.29% and 7.70%,  respectively.  Also  effecting  the  increase is a decrease in
interest earned from interest rate protection  contracts of $167 and an increase
in the  amount  of  interest  capitalized  in  connection  with new  development
projects of $71.

During the second quarter of 1996, the Company  recorded a nonrecurring  loss of
$10,411 related to a binding loan  commitment that the Company  obtained on June
5, 1996 in  connection  with  refinancing  approximately  $253,000 of debt.  See
Liquidity and Capital  Resources -- Sources and Uses of Cash -- The Nomura Loans
for  additional  information  relating to the binding  loan  commitment  and the
components of this nonrecurring loss.  Approximately  $6,131 of the nonrecurring
loss is included in other charges in the Consolidated  Statements of Operations.
As a result,  other  charges  increased by $5,881 to $6,566 for the three months
ended June 30, 1996 compared to $685 for the same period in 1995.


<PAGE>


Excluding the nonrecurring charge, other charges decreased by $250, or 36.5%, to
$435.  This decrease  reflects a lower  provision for  potentially  unsuccessful
pre-development efforts of $165 and a decrease in marketing costs of $155 offset
by a higher  provision for  uncollectible  accounts  receivable of $47 and other
miscellaneous charges of $23.

In connection with re-leasing space to new merchants,  the Company incurred $121
in capital expenditures during the three months ended June 30, 1996. The Company
did not incur any such capital  expenditures  during the three months ended June
30, 1995.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 
TO THE SIX MONTHS ENDED JUNE 30, 1995

Summary

   
For the six months  ended June 30,  1996,  the  Company  reported  net income of
$4,560 on total revenues of $41,281. These results include a nonrecurring charge
and an extraordinary loss of $6,131 and $1,017 (net of minority interests in the
amount of $3,263),  respectively,  related to a binding loan commitment that the
Company  obtained on June 5, 1996.  For the six months ended June 30, 1996,  the
net loss applicable to common shareholders was $3,676 or $1.22 per common share.
    

For the six months  ended June 30,  1995,  the  Company  reported  net income of
$9,066  on  total  revenues  of  $36,064.  For the  same  period,  the net  loss
applicable to common shareholders was $1,406, or $0.49 per common share.

Revenues

Total  revenues were $41,281 for the six months ended June 30, 1996, as compared
to $36,064 for the six months  ended June 30,  1995,  an increase of $5,217,  or
14.5%.  Base rents increased  $3,902,  or 18.0%, in 1996 compared to 1995. These
increases  are primarily due to the  Portfolio  Expansion.  Straight-line  rents
(included  in base rents)  were $237 and $387 for the six months  ended June 30,
1996 and 1995, respectively.

Tenant reimbursements,  which represent the contractual recovery from tenants of
certain operating expenses, increased by $1,613, or 15.5%, during the six months
ended June 30, 1996 over the same period in 1995.  These increases are primarily
due to  the  Portfolio  Expansion.  Tenant  reimbursements  as a  percentage  of
recoverable  operating  expenses,  which include property operating expenses and
real estate  taxes,  increased  to 101.1% from 98.4% during the six months ended
June 30, 1996 and 1995, respectively. This positive trend reflects the Company's
continued  efforts  to  contain  operating  expenses  at  its  properties  while
requiring merchants to pay their pro rata share of these expenses.

Income from investment  partnerships  decreased by $178 for the six months ended
June 30, 1996 over the same period in 1995.  The decrease is primarily  due to a
gain on the sale of land and improvements of $288 by a joint venture partnership
during the 1995 period. Interest and other income decreased by $203, or 8.1%, to
$2,297  during the six months  ended June 30, 1996 as compared to $2,500 for the
six months ended June 30, 1995.  This decrease is  attributable to lower leasing
commissions of $629,  construction management fees of $75, real estate brokerage
commissions  of $152,  offset  by  higher  lease  termination  income,  property
management fees, development fees, coupon program income and ancillary income of
$363, $108, $94, $55 and $33, respectively.



<PAGE>


Expenses

Property operating expenses increased by $1,601, or 20.5%, to $9,415 for the six
months ended June 30, 1996 compared to $7,814 for the same period in 1995.  Real
estate  taxes  decreased by $294,  or 10.6%,  to $2,485 for the six months ended
June 30, 1996, from $2,779 in the same period for 1995. The increase in property
operating expenses is primarily due to the Portfolio Expansion.  The decrease in
real estate taxes is primarily attributable to lower tax assessments for certain
properties. As shown in TABLE 4, depreciation and amortization expense increased
by $1,655, or 22.5%, to $8,999 for the six months ended June 30, 1996,  compared
to $7,344 for 1995. This increase results from the depreciation and amortization
of assets associated with the Portfolio Expansion.

TABLE 4 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE

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

--------------------------------------------------------------------------------
                                                               SIX MONTHS
                                                              ENDED JUNE 30
                                                      --------------------------
                                                             1996          1995
--------------------------------------------------------------------------------

Building and improvements                                  $4,455        $3,928
Land improvements                                             953           647
Tenant improvements                                         2,354         1,655
Furniture and fixtures                                        315           223
Leasing commissions(1)                                        922           891
                                                           ------        ------
     Total                                                 $8,999        $7,344
                                                           ======        ======
================================================================================
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
                                                      --------------------------
                                                             1996          1995
--------------------------------------------------------------------------------

Interest incurred                                         $11,394        $8,935
Interest capitalized                                       (1,318)       (1,215)
Interest earned on interest rate protection contracts        (122)         (448)
Amortization of deferred financing costs                    1,612         1,568
Amortization of interest rate protection contracts            638           638
                                                          -------        ------
     Total                                                $12,204        $9,478
                                                          =======        ======
================================================================================



<PAGE>


As shown in TABLE 5,  interest  expense for the six months  ended June 30, 1996,
increased by $2,726, or 28.8%, to $12,204 compared to $9,478 for the same period
in 1995.  This  increase  is  primarily  the result of an increase of $68,325 in
total debt  outstanding  at June 30, 1996 compared to total debt  outstanding at
June 30, 1995. The effect of the increase in total debt  outstanding  was offset
by a decrease  of 0.23% in the  weighted  average  interest  rate the six months
ended June 30, 1996  compared to the same period in 1995.  The weighted  average
interest  rate for bonds and notes  payable at June 30,  1996 and 1995 was 7.29%
and 7.70%,  respectively.  Also effecting the increase is a decrease in interest
earned from  interest rate  protection  contracts of $326 and an increase in the
amount of interest  capitalized in connection with new  development  projects of
$148.

During the second quarter of 1996, the Company  recorded a nonrecurring  loss of
$10,411 related to a binding loan  commitment that the Company  obtained on June
5, 1996 in  connection  with  refinancing  approximately  $253,000 of debt.  See
Liquidity and Capital  Resources -- Sources and Uses of Cash -- The Nomura Loans
for  additional  information  relating to the binding  loan  commitment  and the
components of this nonrecurring loss.  Approximately  $6,131 of the nonrecurring
loss is included in other charges in the Consolidated  Statements of Operations.
As a result,  other  charges  increased  by $6,304 to $7,212  for the six months
ended June 30, 1996 compared to $908 for the same period in 1995.

Excluding the nonrecurring charge, other charges increased by $173, or 19.1%, to
$1,081.  This increase  reflects a higher provision for  uncollectible  accounts
receivable of $213,  increased  ground lease expense of $132, a lower  provision
for  potentially  unsuccessful  pre-development  efforts of $50,  and  decreased
marketing costs and miscellaneous other charges of $62 and $60, respectively.

In connection with re-leasing space to new merchants,  the Company incurred $140
and $162 in capital  expenditures  during the six months ended June 30, 1996 and
1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH -- GENERAL

For the six  months  ended  June  30,  1996,  net  cash  provided  by  operating
activities  was $19,585.  Cash used in investing  activities was $23,960 for the
six months  ended June 30,  1996.  The  primary use of these funds was for costs
associated  with the  development  and  construction  of two new factory  outlet
centers and  expansions of existing  factory  outlet  centers  scheduled to open
during the  remainder  of 1996,  costs  associated  with the  completion  of two
factory  outlet  centers and three  expansions  opened during 1995 and costs for
pre-development activities associated with future developments. Net cash used in
financing  activities  was $6,512 for the six months  ended June 30,  1996.  The
principal  uses of these  funds were the payment of certain  deferred  financing
costs of $2,873, principal repayments on notes payable of $1,877,  distributions
to minority  interests  (including  distributions  to the limited  partner  unit
holders)  of $4,292 and  preferred  and common  stock  distributions  of $12,170
offset by new borrowings of $14,700.



<PAGE>


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

Pursuant to the terms and conditions of a secondary  stock offering (the "Common
Stock Offering") for 3,795,328 shares of the Company's Common Stock as set forth
in a Prospectus  dated June 28, 1996, the Company and Kilico Realty  Corporation
sold 3,705,000 and 90,328 shares,  respectively,  of the Company's  Common Stock
for $11.375  per share on July 3, 1996.  The  Company's  net  proceeds  from the
Common  Stock   Offering  of  $38,928  were  primarily  used  to  repay  certain
outstanding indebtedness.

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

On May 7, 1996,  the Corporate  Line was renewed and  increased to $15,000.  The
purpose of the Corporate  Line is to provide  working  capital to facilitate the
funding of short-term  operating  cash needs of the Company.  The Corporate Line
bears interest at the London Interbank offered rate for thirty (30) day deposits
in U.S.  dollars  ("30-day  LIBOR") plus 2.50% and matures on July 11, 1997. The
principal  balance  outstanding  under the  Corporate  Line at June 30, 1996 was
$13,200 and the interest rate was 8.03%. On July 3, 1996, the Company repaid the
outstanding  borrowings  under the  Corporate  Line  using a portion  of the net
proceeds from the Common Stock Offering.

On July 8, 1996, the Company obtained from a financial  institution a commitment
for a  construction  mortgage  loan in an  amount  not to exceed  the  lesser of
$20,000 or sixty-five  percent (65%) of the  appraised  value of the  underlying
collateral (as defined) (the  "Construction  Mortgage  Loan").  The Construction
Mortgage  Loan  will  (i)  bear  a  variable  interest  rate  at  the  financial
institution's prime rate or, at the Company's option, a LIBOR index, (ii) mature
two years after  closing on the  Construction  Mortgage  Loan and (iii)  require
monthly  interest-only   payments.   The  Construction  Mortgage  Loan  will  be
collateralized by property under  construction in Gaffney,  South Carolina.  The
Construction  Mortgage  Loan  will  be  subject  to  certain  leasing  and  cash
contribution  restrictions  prior to the disbursement of loan proceeds.  No loan
proceeds have been disbursed as of August 8, 1996.



<PAGE>


SOURCES AND USES OF CASH -- THE NOMURA LOANS

On March  2,  1995,  the  Company  closed  on a  $160,000  revolving  loan  (the
"Revolving Loan") with Nomura Capital Asset Corporation ("Nomura"). Prior to its
amendment on August 1, 1996,  the  Revolving  Loan bore interest at 30-day LIBOR
plus 2.25%, required monthly interest-only  payments and matured on December 31,
1996.  The Company could extend the maturity of the Revolving  Loan for a period
of one year subject to its satisfaction of certain financial loan covenants. The
Revolving  Loan was guaranteed by the Operating  Partnership  and seven property
partnerships,  and was  cross-collateralized by first mortgages on seven factory
outlet  centers  and certain  related  assets.  The  Revolving  Loan  prohibited
additional   collateralized   indebtedness  on  these  properties  and  required
compliance with certain monetary and non-monetary covenants.  The Revolving Loan
agreement contained certain covenants regarding the payment of distributions and
dividends if at any date the debt service coverage ratio, as defined, fell below
a minimum  threshold.  As of June 30, 1996,  the Company was in compliance  with
monetary,  non-monetary  and debt  service  coverage  covenants.  The  principal
balance  outstanding  under the Revolving Loan at June 30, 1996 was $145,478 and
the interest rate was 7.69%.

The amount  available to be drawn by the Company under the Revolving Loan at any
time during the term of the facility was calculated based upon the net cash flow
from the collateral, as defined. The collateral pool of the Revolving Loan could
be  expanded,  subject  to  lender  approval,  by adding  properties,  including
properties under  development,  that satisfy certain criteria relating to, among
other things,  the level of executed leases and the amount of projected net cash
flow.  At June 30, 1996,  the  Revolving  Loan was fully drawn based on executed
leases and projected  net cash flow of the  collateral,  as defined.  On July 3,
1996,  the  Company  repaid  $4,155  of the  outstanding  borrowings  under  the
Revolving  Loan  using a  portion  of the net  proceeds  from the  Common  Stock
Offering.

On December  18,  1995,  the Company  obtained  from Nomura a  commitment  for a
ten-year  $233,000 first mortgage loan and a commitment for a five-year  $22,500
term loan (the "1995  Nomura Loan  Commitments").  On  December  18,  1995,  the
Company also  obtained from Nomura a $35,000  interim loan (the "Interim  Loan")
collateralized by second mortgages on two existing factory outlet centers. Prior
to its  amendment on August 1, 1996,  the Interim  Loan bore  interest at 30-day
LIBOR  plus  2.25%,  was to  mature  on July  31,  1996,  and  required  monthly
interest-only payments prior to maturity.

On June 5, 1996, the Company  entered into a binding loan  commitment (the "1996
Nomura Loan Commitment") with Nomura Asset Capital Corporation  ("Nomura") which
provides   for,   among   other   things,   (i)   a   variable-rate   seven-year
cross-collateralized  first  mortgage  loan (the "First  Mortgage  Loan") in the
principal   amount   of   $226,500   and   (ii)   a   variable-rate   seven-year
cross-collateralized second mortgage loan (the "Mezzanine Mortgage Loan") in the
principal  amount of $33,500.  The First Mortgage Loan will bear a variable-rate
of interest equal to 30-day LIBOR plus 1.31%. The Mezzanine  Mortgage Loan bears
a variable-rate of interest equal to 30-day LIBOR plus 3.25%. The First Mortgage
Loan and the Mezzanine Mortgage Loan are expected to be advanced and securitized
by Nomura on or before September 30, 1996 (the  "Securitization  Closing Date").
After the  Securitization  Closing  Date,  the First  Mortgage Loan will require
monthly  payments of principal and interest based on a thirty-year  amortization
of principal and the Mezzanine  Mortgage Loan will require  monthly  payments of
principal and interest based on the full  amortization of principal within seven
years.  The  First  Mortgage  Loan  and  the  Mezzanine  Mortgage  Loan  will be
cross-collateralized by senior and junior mortgages,  respectively,  encumbering
thirteen of the Company's existing factory outlet centers.



<PAGE>


On August 1, 1996, the Company closed on the  refinancing of the existing credit
facilities  with Nomura (the "Amended  Credit  Facilities").  The Amended Credit
Facilities  provided an aggregate of $253,000 of financing to the Company on the
same  economic  terms as  those of the  First  Mortgage  Loan and the  Mezzanine
Mortgage Loan that were applicable under the 1996 Nomura Loan Commitment for the
period prior to the  Securitization  Closing Date. The Amended Credit Facilities
were utilized (i) to refinance $151,323 which was outstanding under the existing
credit  facilities,  (ii) to refinance  $97,411  which was  outstanding  under a
securitized  mortgage  loan,  (iii) to pay loan  fees and  transaction  costs of
$3,600,  and  (iv)  for  working  capital  purposes.  Under  the  terms  of  the
refinancing,  the Amended  Credit  Facilities  consist of two notes,  one in the
amount of $218,000  and the other in the amount of $35,000.  Each note  requires
monthly  payments of  interest-only at a rate equal to 30-day LIBOR plus 1.513%.
The Amended  Credit  Facilities  are required to be repaid in full in connection
with the closing of the First Mortgage Loan and the Mezzanine  Mortgage Loan. If
the First  Mortgage  Loan and the  Mezzanine  Mortgage  Loan are not advanced by
September 30, 1996,  the interest  rate on the Amended  Credit  Facilities  will
increase to a rate equal to 30-day LIBOR plus 1.717%.

In connection  with the  commitment  to provide the First  Mortgage Loan and the
Mezzanine  Mortgage  Loan,  the Company and Nomura have agreed that,  subject to
certain  conditions,  the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the  securitization  of the First Mortgage Loan.
If the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior  Certificates  (as  defined  below),  the  appropriate  party will make a
payment  to the  other  based on the  present  value of such  deviation  applied
against the principal balance of the Senior Certificates.  If the Securitization
Closing  Date does not occur by February 1, 1997,  Nomura may demand  payment of
the Amended  Credit  Facilities in full six months after delivery of such demand
notice.  It is  anticipated  that the First Mortgage Loan will be securitized at
investment grade levels through the issuance of Real Estate Mortgage  Investment
Company  ("REMIC")  certificates (the "Senior  Certificates")  and the Mezzanine
Mortgage Loan will be securitized  through the issuance of REMIC certificates or
another acceptable  securitization  vehicle (the "Junior  Certificates").  After
securitization,   the  Company  will  be  required  to  purchase  interest  rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. In addition, prior to the securitization, the
Company is required to purchase  interest rate protection  contracts with regard
to the Amended  Credit  Facilities  when and if 30-day LIBOR exceeds  6.50%.  At
August 8, 1996,  30-day LIBOR was 5.44%.  It is estimated that the proceeds from
the sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan  (described  below) will  approximate  $260,000.  In the
event that loan proceeds  available from the Senior  Certificates and the Junior
Certificates  are less than $260,000,  Nomura has agreed to provide,  subject to
certain conditions (including the consent of the applicable rating agencies),  a
loan based on the cash flow of the Property  Partnerships which own the thirteen
factory  outlet  centers  in the  principal  amount  of the  difference  between
$260,000  and such loan  proceeds.  In the event that the net cash flow from the
thirteen  outlet  centers is less than a  mutually  agreed  upon  amount and the
securitization results in proceeds of less than the amount required to repay the
Amended  Credit  Facilities  and to pay all  other  costs  and  expenses  due in
connection  with the  closing  of the  First  Mortgage  Loan  and the  Mezzanine
Mortgage  Loan,  the Company  will be required  to fund such  difference  at the
closing  of the  securitization.  The  Company  intends to  purchase  the Junior
Certificates  with  the  proceeds  of a  financing  provided  through  a  Nomura
repurchase  agreement  (the "Repo  Financing").  The Repo Financing will require
monthly payments of  interest-only  and will be for a term of two years and will
be recourse to the Operating Partnership.  The Repo Financing will be subject to
daily  mark-to-market and margin calls.  Interest will be payable for 75% of the


<PAGE>


market value of the Junior Certificates (which at date of inception shall be par
value) at the rate of 30-day  LIBOR plus 1.95% and for the balance of the market
value of the Junior Certificates (which at date of inception shall be par value)
at the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including  the  estimated  annual  amortization  of  interest  rate  protection
contracts) on the $260,000 of  securitized  loans based on a seven-year  term of
such loans is initially expected to be approximately 7.66%.

Under the terms of the 1996 Nomura Loan  Commitment,  the Company and the lender
can agree to elect a five-year term with respect to the Senior  Certificates  at
an interest rate spread of 1.10% over 30-day LIBOR. If the five-year term option
is completed at the time of securitization, the weighted average annual interest
rate  (including the estimated  annual  amortization of interest rate protection
contracts)  on the $260,000 of  securitized  loans is  initially  expected to be
approximately 7.46%.

Upon terms  acceptable  to the Company and the rating  agencies  involved in the
securitization, an amount between $25,000 to $50,000 in addition to the $260,000
of  securitized  loans may be raised by the  securitization  and, if so, will be
held in escrow by Nomura. These funds may be drawn upon by the Company,  subject
to the satisfaction of certain objective standards acceptable to the Company and
such rating  agencies,  after  completion  of  construction  of, and opening for
business in, expansions at the thirteen mortgaged outlet centers.

The Company's  existing  Revolving  Loan with Nomura will not be terminated as a
result of the  transactions  contemplated  by the 1996 Nomura  Loan  Commitment,
however, the collateral that was pledged thereunder will be released and pledged
to Nomura under the First  Mortgage Loan and the Mezzanine  Mortgage  Loan.  The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.

In connection with the execution of the binding 1996 Nomura Loan Commitment, the
Company  incurred a  nonrecurring  charge and  extraordinary  loss of $6,131 and
$4,280,  respectively,  during  the  three  months  ended  June  30,  1996.  The
nonrecurring  loss  results  from (i) the  termination  of  previously  obtained
financing  commitments  from  Nomura  for  which  the  Company  paid  $3,250  in
nonrefundable financing fees, (ii) the unamortized cost of certain interest rate
protection contracts of $3,696 and (iii) other nonrefundable  deferred financing
costs of $1,425,  less the  estimated  fair market  value of the  interest  rate
protection contracts of $2,240 based on their fair market value at May 31, 1996.
The  extraordinary  loss results from (i) the write-off of unamortized  deferred
financing costs of $3,458 relating to the early  extinguishment of debt and (ii)
debt prepayment penalties of $822.

SOURCES AND USES OF CASH -- THE GROVE CITY PURCHASE AGREEMENT

On May 6, 1996, the Company and the Company's  joint venture  partner  (together
with its affiliates, the "Grove City Partner") entered into a purchase agreement
(the "Grove City Purchase  Agreement") pursuant to which the Company has agreed,
subject to certain conditions, to purchase on or before February 28, 1997 all of
the  Grove  City  Partner's  ownership  interest  in Grove  City  Factory  Shops
Partnership,  the Property  Partnership which owns the Grove City Factory Shops.
Following the completion of such transaction, the Company will own 100% of Grove
City Factory Shops  Partnership.  As consideration  for the Grove City Partner's
partnership interest,  the Company has agreed, at closing, to pay $8,000 in cash
to the Grove City Partner and to repay all of the then outstanding  indebtedness
secured by Grove City Factory  Shops,  which  indebtedness  is owed to the Grove
City Partner by the Grove City Factory Shops Partnership.



<PAGE>


The Grove City Purchase  Agreement  also provides for the Grove City Partner and
the Company to finance, develop and construct a fourth phase of the center which
will  contain  approximately  118,000  square feet of GLA.  Under the Grove City
Purchase  Agreement,  an  affiliate  of  the  Grove  City  Partner  will  make a
construction  loan to the Company in the aggregate  principal  amount of $11,000
for the construction of Phase IV. Construction of Phase IV commenced in May 1996
and is expected to be completed during the fourth quarter of 1996 at an expected
cost of completion of $13,500. The Company is obligated to fund any construction
costs in excess of $11,000.  No assurance can be given that this  expansion will
be completed on schedule,  with the indicated  GLA, or that the total  estimated
construction cost will not be exceeded.

Under the Grove City Purchase  Agreement,  if the Company  breaches any material
representation, warranty, covenant or agreement or if the Company defaults under
the Grove City Purchase  Agreement,  the Company is obligated to pay  liquidated
damages  to the Grove City  Partner  in the  amount of $2,000.  In the event the
Grove City Purchase  Agreement is terminated for any reason other than by reason
of the Grove City Partner's default  thereunder or a condemnation of or casualty
to this property, the Grove City Partner will be entitled to the first $8,000 of
the  proceeds  of  any  subsequent  sale  of  the  property  (after  payment  of
outstanding  indebtedness  and return of capital  contributions  with respect to
Phase IV).  The  Company  will be  entitled  to receive  the next $8,000 of such
proceeds and the balance of such proceeds,  if any, will be distributed pro rata
between  the  Company  and the  Grove  City  Partner  based on their  respective
ownership  interests in the Grove City Factory Shops  Partnership.  No assurance
can be given that conditions to the Grove City Purchase Agreement will be met or
that such purchase will be completed.  Specifically, because the Company has not
yet  secured  commitments  to  finance  such  transaction,  management  does not
currently  believe the  consummation  of the Grove City  Purchase  Agreement  is
probable.

PLANNED DEVELOPMENT

Management believes that there is sufficient demand for continued development of
new factory  outlet centers and  expansions of certain  existing  factory outlet
centers.  The Company expects to open  approximately  829,000 square feet of GLA
during 1996. Of this amount,  approximately  440,000  square feet relates to the
development of two new factory outlet centers and the balance relates to planned
expansions of existing  factory outlet centers.  At June 30, 1996, the estimated
aggregate remaining capital  expenditures for the new factory outlet centers and
expansions  expected  to  open  in  1996  approximated  $71,800.  The  estimated
aggregate  remaining  capital  expenditures  for new factory  outlet centers and
expansions opened during the year ended December 31, 1995  (aggregating  949,000
square feet of GLA) approximated $3,400.


<PAGE>


TABLE 6 - FACTORY OUTLET CENTERS AND EXPANSIONS UNDER CONSTRUCTION(1)

TABLE 6  summarizes  the  projected  opening  dates and total GLA of the factory
outlet centers and expansions of existing centers under  construction as of June
30,  1996.  The  total  estimated   construction   cost  for  such  projects  is
approximately $92,800.

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

 Grove City Factory Shops                     Grove City, PA                 IV                November              118,000
 Arizona Factory Shops                        Phoenix, AZ                   IIA               September               94,000
 Gulfport Factory Shops                       Gulfport, MS                  IIA                November               40,000
 Ohio Factory Shops                           Jeffersonville, OH            IIIA              September               35,000
 Gulf Coast Factory Shops                     Ellenton, FL                  III                October                30,000
 Indiana Factory Shops                        Daleville, IN                 IIA                October                26,000
 Magnolia Bluff Factory Shops                 Darien, GA                    IIB                November               21,000
 Arizona Factory Shops                        Phoenix, AZ                   IIB               September               19,000
 Triangle Factory Shops                       Raleigh-Durham, NC            IIA             July 19, 1996              6,000
                                                                                                                     -------
        Total Expansions under
          Construction                                                                                               389,000
                                                                                                                     -------
        Total New Centers and
          Expansions under Construction                                                                              829,000
                                                                                                                     =======
 =============================================================================================================================
<FN>
Note:
(1)  No  assurance  can be given that these  factory  outlet  centers  will be opened on  schedule  with the  indicated  GLA.
     Additionally, no assurance can be given that the estimated construction costs will not be exceeded.
</FN>
</TABLE>



<PAGE>


Management  believes  that  the  Company  has  sufficient  capital  and  capital
commitments to fund the remaining  development  costs  associated  with the 1995
openings and the  openings  planned for 1996.  These  funding  requirements  are
expected  to be met,  in large part,  with the  proceeds of the loan  facilities
under the 1996 Nomura Loan  Commitment,  the  Corporate  Line,  the Common Stock
Offering,   joint  venture  partners  and  the  formation  of  a  joint  venture
partnership with an unrelated third party associated with Buckeye Factory Shops.
There can be no assurance  that the Company will be successful  in  consummating
the securitization  transactions contemplated by the 1996 Nomura Loan Commitment
or consummating a joint venture  partnership to construct Buckeye Factory Shops.
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.

With regard to planned new factory outlet  centers and  expansions  scheduled to
open in 1997, which are expected to contain approximately 750,000 square feet of
GLA in the aggregate,  at a total development cost of approximately $82,500, the
Company  expects to fund  approximately  37% of these new  projects  through new
joint ventures with an unrelated  third party.  The Company  expects to fund the
development   cost  for  the  balance  of  its  new  1997  projects   from:  (a)
approximately  70% to 75% of cost  from  proceeds  available  on line of  credit
facilities, and (b) the balance of cost (25% to 30%) from a variety of potential
sources, including excess proceeds from securitized loan transactions,  retained
cash flow from operations,  and the potential sale of common or preferred equity
in the public or private  capital  markets.  As of June 30, 1996,  there were no
material commitments with regard to the 1997 planned development activity.

DEBT REPAYMENTS AND PREFERRED STOCK DIVIDENDS

The Company's aggregate  indebtedness was $318,777 and $305,954 at June 30, 1996
and December 31, 1995,  respectively.  At June 30, 1996, such indebtedness had a
weighted  average  maturity of 3.4 years and bore interest at a weighted average
interest rate of 7.29% per annum.  At June 30, 1996,  $24,971,  or 7.8%, of such
indebtedness  bore  interest  at fixed  rates and  $293,806,  or 92.2%,  of such
indebtedness,   including   $28,250  of  tax-exempt   bonds,  bore  interest  at
variable-rates.

At June 30, 1996, the Company held interest rate protection contracts on $28,250
of floating  rate  tax-exempt  indebtedness  and $96,878 of other  floating rate
indebtedness (or approximately  42.6% of its total floating rate  indebtedness).
These contracts expire in 1999 and 2000, respectively.  In addition, the Company
held  additional  interest rate  protection  contracts on $43,900 of the $96,878
floating rate indebtedness to further reduce the Company's exposure to increases
in interest rates.

The  Company's  ratio of debt to total market  capitalization  (defined as total
long term debt  divided by the sum of:  (a) the  aggregate  market  value of the
outstanding  shares of  Common  Stock;  (b) the  aggregate  market  value of the
outstanding shares of Convertible Preferred Stock; (c) the aggregate liquidation
preference of the Senior  Preferred Stock at $25.00 per share; and (d) the total
long-term debt of the Company) was 50.5% at June 30, 1996.

At  August  9,  1996,  the  Company  is  obligated  to  repay  $81  of  mortgage
indebtedness  during the  remainder of 1996 and $253,797  during the year ending
December 31, 1997. The Company may extend for one year the term of its Revolving
Loan which is currently  scheduled  to expire on December  31, 1996.  Annualized
cumulative  dividends on the Company's  Senior  Preferred  Stock and Convertible
Preferred Stock are $6,037 and $5,963, respectively. These dividends are payable
quarterly, in arrears.

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



<PAGE>


ECONOMIC CONDITIONS

Substantially  all of the  merchants'  leases contain  provisions  that somewhat
mitigate the impact of inflation.  Such provisions include clauses providing for
increases in base rent and clauses  enabling  the Company to receive  percentage
rentals  based on  merchants'  gross  sales.  Substantially  all leases  require
merchants to pay their proportionate share of all operating expenses,  including
common area maintenance,  real estate taxes and promotion,  thereby reducing the
Company's  exposure to increased  costs and operating  expenses  resulting  from
inflation.  At June 30, 1996, the Company  maintained  interest rate  protection
contracts to protect  against  increases in interest  rates on certain  floating
rate indebtedness (see "Debt Repayments and Preferred Stock Dividends").

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

FUNDS FROM OPERATIONS

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

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

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

In March  1995,  the  National  Association  of Real  Estate  Investment  Trusts
established  guidelines clarifying the definition of FFO (as modified,  the "New
Definition").  The  Company  now  reports  both the old  definition  and the New
Definition.  For the Company,  the primary impact of adopting the New Definition
is a  reduction  in FFO since the  amortization  of  capitalized  debt costs and
depreciation  of  non-real  estate  assets are not added  back to income  before
minority interests and extraordinary  item. TABLE 7 provides a reconciliation of
income before minority  interests and extraordinary  item to FFO, under both the
old definition and the New  Definition,  for the three and six months ended June
30, 1996 and 1995. FFO (New Definition)  decreased $5,670, or 85.6%, to $951 for
the three months ended June 30, 1996 from $6,621 for the three months ended June
30, 1995. This decrease is primarily  attributable to the nonrecurring charge of
$6,131 in connection with the binding 1996 Nomura Loan Commitment  offset by the
Portfolio Expansion.



<PAGE>


TABLE 7 -- FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                   THREE MONTHS ENDED JUNE 30               SIX MONTHS ENDED JUNE 30
                                              ----------------------------------      ------------------------------------
                                               1996      1995      1996     1995       1996     1995       1996     1995
---------------------------------------------------------------------------------------------------------------------------
                                              (Old Definition)    (New Definition)    (Old Definition)   (New Definition)
<S>                                              <C>       <C>      <C>      <C>       <C>       <C>      <C>       <C>
Income before minority interests and
   extraordinary item                         $(3,950)   $3,063   $(3,950)  $3,063    $ (893)  $ 6,205   $   (893) $ 6,205
                                                                                         
FFO adjustments:
   Depreciation and amortization                4,612     3,739     4,420    3,611      8,999    7,344      8,619    7,098
   Amortization of deferred financing costs
      and interest rate protection contracts    1,138     1,138        --       --      2,249    2,206         --       --
   Unconsolidated joint venture
      adjustments(1)                              482       (53)      481      (53)       842      165        840      165
                                               ------    ------    ------   ------     ------   ------     ------   ------
FFO before allocations to minority
   interests and preferred shareholders       $ 2,282    $7,887   $   951   $6,621    $11,197  $15,920    $ 8,566  $13,468
                                              =======    ======   =======   ======    =======  =======    =======  =======
===========================================================================================================================
<FN>
Note:
(1)   Includes net preferential  partner  distributions  received from a joint venture partnership of $81 and $162 for the
      three and six months ended June 30, 1995, respectively .
</FN>
</TABLE>


<PAGE>


PART II:  OTHER INFORMATION


Item 1.           Legal Proceedings

                  None

Item 2.           Changes in Securities

                  None

Item 3.           Defaults Upon Senior Securities

                  None

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

                  At the Company's Annual  Shareholders  Meeting held on May 29,
                  1996  (the  "Annual  Meeting"),   the  nominees  for  director
                  proposed by the Company were elected. The votes cast for these
                  nominees were as set forth below:

<TABLE>
<CAPTION>
                                                                                     For                          Withheld
                                                                                 -------------                  -------------
                         <S>                                                        <C>                             <C>  
                  Abraham Rosenthal                                               2,173,252                        5,900
                  Governor James R. Thompson                                      2,173,252                        5,900
                  Marvin S. Traub                                                 2,173,252                        5,900
</TABLE>
                  At the Annual Meeting, the proposal to approve an amendment to
                  the Company's  Charter to provide that a holder may acquire or
                  beneficially  own shares of Series B Preferred  Stock if, as a
                  result  of such  acquisition  or  beneficial  ownership,  such
                  holder  does not own shares of capital  stock  (including  all
                  classes)  of the Company in excess of 9.9% of the value of the
                  Company's outstanding capital stock.

<TABLE>
<CAPTION>
                                                                                                 Broker
                                                               For             Against          Non-Votes          Abstain
                                                           -------------      ----------      --------------     ------------
                         <S>                                   <C>               <C>               <C>               <C>   
                  Common Stock                              1,615,902          34,620            714,004            12,275
                  Series B Preferred Stock                  3,570,181           2,752             52,650             1,200
</TABLE>

                  In addition, at the Annual Meeting, 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, 1996 was
                  approved. The votes cast with respect to that proposal were as
                  set forth below:


<TABLE>
<CAPTION>
                                                               For                       Against                   Abstain
                                                           -------------                -----------               -----------
                                                               <S>                         <C>                       <C>
                                                            2,367,821                     7,100                     1,880
</TABLE>


<PAGE>


Item 5.           Other Information

                  None

Item 6.           Exhibits or Reports on Form 8-K

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

                          None

                  (b)     Reports on Form 8-K:

                           On April 1, 1996,  the Company filed a Current Report
                           on Form 8-K, dated April 1, 1996,  reporting that the
                           Company modified its proposed  exchange offer for its
                           8.5% Series B Cumulative Convertible Preferred Stock.

                           On April 29, 1996, the Company filed a Current Report
                           on Form 8-K, dated April 29, 1996, reporting that the
                           Company  commenced  the  exchange  offer for its 8.5%
                           Series B Cumulative Convertible Preferred Stock.

                           On June 6, 1996,  the Company filed a Current  Report
                           on Form 8-K,  dated June 6, 1996,  reporting that the
                           Company  obtained a commitment  for $260.0 million of
                           various debt  facilities  from Nomura  Asset  Capital
                           Corporation,  increased  its  proposed  common  stock
                           offering to $43.5 million and extended the expiration
                           date for the exchange offer to June 24, 1996.


<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:  January 30, 1997                                 /s/ Abraham Rosenthal
       ----------------                                 ------------------------
                                                        Abraham Rosenthal
                                                        Chief Executive Officer





Date:  January 30, 1997                                /s/ Robert P. Mulreaney
       ----------------                                 ------------------------
                                                       Robert P. Mulreaney
                                                       Executive Vice President,
                                                       Chief Financial Officer
                                                         and Treasurer