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


                                    FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the Quarterly Period Ended September 30, 1997
                                       or

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

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

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



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

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

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

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

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

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

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

As of November 7, 1997, the issuer had outstanding  27,294,951  shares of Common
Stock, $.01 par value per share.

<PAGE>


                               Prime Retail, Inc.
                                    Form 10-Q


                                      INDEX
                                      -----



                                                                           PAGE
                                                                           ----

PART I:  FINANCIAL INFORMATION
------------------------------

Item 1.  Financial Statements (Unaudited)

     Consolidated Balance Sheets as of September 30, 1997 and
     December 31, 1996                                                       1

     Consolidated Statements of Operations for the three and
     nine months ended September 30, 1997 and 1996                           2

     Consolidated Statements of Cash Flows for the nine months
     ended September 30, 1997 and 1996                                       3

     Notes to the Consolidated Financial Statements                          4

Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                              9


PART II:  OTHER INFORMATION
---------------------------

Item 1.    Legal Proceedings                                                21
Item 2.    Changes in Securities                                            21
Item 3.    Defaults Upon Senior Securities                                  22
Item 4.    Submission of Matters to a Vote of Security Holders              22
Item 5.    Other Information                                                22
Item 6.    Exhibits or Reports on Form 8-K                                  22

Signatures                                                                  23

<PAGE>

PART I:  FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
<TABLE>
                               Prime Retail, Inc.
                           Consolidated Balance Sheets
                    (in thousands, except share information)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    September 30, 1997             December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                          <C>
Assets
Investment in rental property:
     Land                                                                                   $   55,163                   $   44,731
     Buildings and improvements                                                                649,733                      570,761
     Property under development                                                                 36,545                       20,900
     Furniture and equipment                                                                     5,215                        4,367
                                                                                         --------------              --------------
                                                                                               746,656                      640,759
     Accumulated depreciation                                                                  (75,147)                     (57,674)
                                                                                         --------------              --------------
                                                                                               671,509                      583,085
Cash and cash equivalents                                                                       23,777                        3,924
Restricted cash                                                                                 41,019                       45,127
Accounts receivable, net                                                                         8,547                        6,096
Deferred charges, net                                                                           17,281                       20,841
Due from affiliates, net                                                                           654                        1,549
Investment in partnerships                                                                       3,139                        5,625
Other assets                                                                                     2,651                          556
                                                                                         --------------              --------------
     Total assets                                                                            $ 768,577                    $ 666,803
                                                                                         ==============              ==============

Liabilities and shareholders' equity
Bonds payable                                                                               $   32,900                   $   32,900
Notes payable                                                                                  395,620                      466,623
Accrued interest                                                                                 3,460                        3,640
Real estate taxes payable                                                                        6,121                        2,138
Construction costs payable                                                                       2,786                        3,047
Accounts payable and other liabilities                                                          15,864                       19,246
                                                                                         --------------              --------------
     Total liabilities                                                                         456,751                      527,594

Minority interests                                                                               9,800                            -

Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
     10.5% Series A Senior Cumulative Preferred Stock, $0.01
       par value (liquidation preference of $57,500), 2,300,000
       shares issued and outstanding                                                                23                          23
     8.5% Series B Cumulative  Participating  Convertible Preferred Stock, $0.01
       par value (liquidation preference of $74,545 and $70,150,  respectively),
       2,981,800 and 2,806,000 shares
       issued and outstanding, respectively                                                         30                          28
Shares of common stock, 75,000,000 shares authorized:
     Common stock, $0.01 par value, 27,294,951 and 13,404,651
       shares issued and outstanding, respectively                                                 273                         134
Additional paid-in capital                                                                     349,179                     165,346
Distributions in excess of net income                                                          (47,479)                    (26,322)
                                                                                         --------------              --------------
     Total shareholders' equity                                                                302,026                     139,209
                                                                                         --------------              --------------

     Total liabilities and shareholders' equity                                              $ 768,577                   $ 666,803
                                                                                         ==============              ==============
====================================================================================================================================

See accompanying notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
                               Prime Retail, Inc.
                      Consolidated Statements of Operations
                  (in thousands, except per share information)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                Three months                    Nine months
                                                                             ended September 30              ended September 30
                                                                          --------------------------     ---------------------------
                                                                                  1997         1996               1997         1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>                <C>          <C>
Revenues
Base rents                                                                    $ 19,243     $ 12,887           $ 56,315     $ 38,417
Percentage rents                                                                 1,008          466              2,398        1,277
Tenant reimbursements                                                            8,731        6,039             26,649       18,073
Income (loss) from investment partnerships                                         (52)         250               (112)         859
Interest and other                                                               2,619        2,189              7,674        4,486
                                                                              --------     --------           --------     --------
     Total revenues                                                             31,549       21,831             92,924       63,112

Expenses
Property operating                                                               6,840        5,121             20,495       14,536
Real estate taxes                                                                2,449        1,369              7,238        3,854
Depreciation and amortization                                                    6,644        4,579             19,515       13,578
Corporate general and administrative                                             1,464          973              4,083        2,832
Interest                                                                         9,079        5,139             27,951       17,343
Other charges                                                                      982          475              2,475        7,687
                                                                              --------     --------           --------     --------
     Total expenses                                                             27,458       17,656             81,757       59,830
                                                                              --------     --------           --------     --------
Income before minority interests and
     extraordinary item                                                          4,091        4,175             11,167        3,282

(Income) loss allocated to minority interests                                   (2,540)      (1,810)            (7,803)       4,660
                                                                              --------     --------           --------     --------

Income before extraordinary item                                                 1,551        2,365              3,364        7,942
Extraordinary item - loss on early extinguishment of
     debt, net of minority interests of $0 in 1997 and
     $3,263 in 1996                                                             (2,061)           -             (2,061)      (1,017)
                                                                              --------     --------           --------     --------
Net income (loss)                                                                 (510)       2,365              1,303        6,925
Income allocated to preferred shareholders                                       3,094        3,000              9,280       11,236
                                                                              --------     --------           --------     --------
Net loss applicable to common shares                                          $ (3,604)    $   (635)         $  (7,977)   $  (4,311)
                                                                              ========     ========          =========    =========

Per common share:
     Loss before extraordinary item                                           $  (0.08)    $  (0.05)         $   (0.36)   $   (0.51)
     Extraordinary item                                                          (0.11)           -              (0.12)       (0.16)
                                                                              --------     --------          ---------    ---------
     Net loss                                                                 $  (0.19)    $  (0.05)         $   (0.48)   $   (0.67)
                                                                              ========     ========          =========    =========

Weighted average common shares outstanding                                      19,159       13,322             16,458        6,481
                                                                              ========     ========          =========    =========

Distributions declared per common share                                       $  0.295     $  0.295          $   0.885    $   1.030
                                                                              ========     ========          =========    =========

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

See accompanying notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
                               Prime Retail, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                              Nine months ended September 30
                                                                                           --------------------------------------
                                                                                                    1997                    1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                     <C>
Operating Activities
Net income                                                                                   $     1,303             $     6,925
Adjustments to reconcile net income to
   net cash provided by operating activities:
      Income (loss) allocated to minority interests                                                7,803                  (4,660)
      Extraordinary loss for early extinguishment of debt                                          2,061                   1,017
      Write-off of financing costs related to early extinguishment of debt                             -                   6,131
      Gains on sale of outlots                                                                      (598)                      -
      Depreciation and amortization                                                               19,515                  13,578
      Amortization of deferred financing costs and
        interest rate protection contracts                                                         2,861                   3,029
      Cash distributions in excess of equity earnings
        from joint ventures                                                                          613                     213
      Provision for uncollectible accounts receivable                                                748                     437
Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                                                  (3,199)                  1,814
      (Increase) decrease in due from affiliates, net                                                895                    (766)
      (Increase) decrease in other assets                                                          2,219                  (1,238)
      Decrease in accrued interest                                                                  (180)                    (33)
      Increase in accounts payable and other liabilities                                             517                   4,856
                                                                                             -----------             -----------
        Net cash provided by operating activities                                                 34,558                  31,303

Investing Activities
Proceeds from sale of outlots                                                                         900                      -
Purchase of land                                                                                        -                   (174)
Increase in buildings and improvements                                                           (13,607)                (11,319)
Increase in property under development                                                           (32,659)                (36,645)
Deferred leasing commissions                                                                        (551)                    (22)
Acquisition of outlet centers                                                                    (60,819)                      -
                                                                                             -----------             -----------
        Net cash used in investing activities                                                   (106,736)                (48,160)

Financing Activities
Net proceeds from offerings                                                                      193,774                  38,843
Conversion of convertible preferred stock                                                              -                  (1,342)
Proceeds from notes payable                                                                       91,767                 140,852
Principal repayments on notes payable                                                           (162,770)               (132,138)
Deferred financing costs                                                                            (477)                 (7,821)
Distributions and dividends paid                                                                 (22,460)                (20,516)
Distributions to minority interests                                                               (7,803)                 (6,346)
                                                                                             -----------             -----------
        Net cash provided by financing activities                                                 92,031                  11,532
                                                                                             -----------             -----------
Increase (decrease) in cash and cash equivalents                                                  19,853                  (5,325)
Cash and cash equivalents at beginning of period                                                   3,924                  14,927
                                                                                             -----------             -----------
Cash and cash equivalents at end of period                                                    $   23,777             $     9,602
                                                                                             ===========             ===========
=================================================================================================================================

See accompanying notes to financial statements.
</TABLE>

<PAGE>

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


Note 1 -- Interim Financial Presentation

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial  information  and the  instructions  to Form  10-Q and  Article  10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes required by GAAP for complete financial statements.  In the opinion of
management,  all adjustments  consisting only of recurring  accruals  considered
necessary for a fair presentation have been included. Operating results for such
interim  periods are not  necessarily  indicative  of the  results  which may be
expected  for a  full  fiscal  year.  For  further  information,  refer  to  the
consolidated financial statements and footnotes included in Prime Retail, Inc.'s
annual report on Form 10-K for the year ended December 31, 1996.

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

The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.   Significant   intercompany  accounts  and  transactions  have  been
eliminated in consolidation.  Certain prior year financial statement amounts and
related footnote  information have been reclassified to conform with the current
year presentation.


Note 2 -- Recently Issued Accounting Standards

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting Standards ("SFAS") No. 128, "Earnings per Share", which is
required to be adopted on December 31, 1997.  At that time,  the Company will be
required to change the method  currently used to compute  earnings per share and
to restate all prior periods.  Under the new requirements for calculating  basic
earnings per share,  the dilutive effect of stock options will be excluded.  The
adoption of SFAS No. 128 is expected to have no impact on the Company's  primary
and fully  diluted  earnings  per share  for the  three  and nine  months  ended
September 30, 1997 and 1996.

<PAGE>

Note 3 -- Capital Stock Offerings

In February and March 1997, the Company completed a public offering of 2,390,300
shares of its Common Stock at $12.50 per share and 175,800  shares of its Series
B Cumulative Participating  Convertible Preferred Stock at $22.75 per share (the
"February Offering"). As a result of the February Offering, the Company received
net  proceeds  of  $31,930  that  were  used  (i) to repay  certain  outstanding
indebtedness  aggregating  $26,500,  (ii) to fund  development and  construction
activities, and (iii) for general corporate purposes.

In September 1997, the Company  completed a public offering of 11,500,000 shares
(including  1,500,000  shares  related  to the  exercise  of  the  underwriters'
overallotment  option) of its Common  Stock at $14.00 per share (the  "September
Offering"). In addition, on September 8, 1997, the Company issued 727,273 Series
C preferred limited partnership units ("Series C Preferred Units") at $13.75 per
unit pursuant to the initial draw of the Private  Placement (as defined  below).
See Note 4 -  "Private  Placement"  of the Notes to the  Consolidated  Financial
Statements for additional information. As a result of the September Offering and
the initial draw on the Private Placement (collectively,  the "September Capital
Transactions"),  the Company received net proceeds of $162,750 after commissions
and  underwriting  discounts.  A portion of the net proceeds  from the September
Capital  Transactions  were  used (i) to  repay  certain  outstanding  corporate
indebtedness  aggregating  $113,410  and (ii) to  acquire  the  25.0%  ownership
interest of Salomon  Brothers  Realty Corp.  ("SBRC") in Buckeye  Factory  Shops
Limited  Partnership  ("Buckeye")  for  $23,148  (including  $22,642 of mortgage
indebtedness  relating to such  property).  The  remaining net proceeds from the
September  Capital  Transactions of $26,192 will be used (i) to fund development
and construction activities,  (ii) to fund property acquisitions,  and (iii) for
general corporate purposes.

Note 4 -- Private Placement

On August 8,  1997,  the  Company  entered  into a  purchase  agreement  with an
institutional  investor providing for the issuance of a new series of cumulative
convertible  non-voting  preferred  securities (the  "Preferred  Securities") at
$13.75 per unit, or an aggregate of $60,000 (the "Private  Placement")  in cash.
The Preferred  Securities must be issued no later than December 6, 1997 and will
pay dividends equivalent to the amount being paid on the Company's Common Stock,
with an annual  minimum  equal to $1.18  per unit.  In  addition,  the  Company,
subject to certain  conditions,  has agreed to waive the  ownership  limitations
otherwise  applicable  to the Common Stock to permit the investor to own, at any
one time, the shares of Common Stock  issuable upon  conversion of the Preferred
Securities.  The Company has the right to call the Preferred Securities, at par,
after ten years.  Subject to certain  conditions,  the Preferred  Securities may
take the form of shares of preferred  stock in the Company or preferred units of
partnership interest in the Operating  Partnership that will be exchangeable for
shares of preferred stock or Common Stock on a one-to-one  basis.  The Preferred
Securities  may be converted  into shares of Common Stock on a one-to-one  basis
commencing August 8, 1998 (or earlier subject to certain conditions).

Note 5 - Investment in Partnerships

On  September 2, 1997,  the Company  acquired  the 25.0%  ownership  interest in
Buckeye from its joint venture partner,  SBRC for $23,148  (including $22,642 of
mortgage  indebtedness  relating  to  such  property),  thereby  increasing  its
ownership  percentage in such  property to 100.0% (the  "Buckeye  Acquisition").
Prior to September 2, 1997,  the Company  accounted for its 75.0%  investment in
Buckeye using the equity method of accounting. Commencing September 2, 1997, the
operating  results  of  Buckeye  are  consolidated.  The  Company  financed  the
acquisition with a portion of the

<PAGE>

proceeds from the Offering.  See Note 3 - "Capital Stock Offerings" of the Notes
to the Consolidated Financial Statements for additional information.

As a result of the  prepayment  of the mortgage  indebtedness  noted above,  the
joint venture partnership  incurred an extraordinary loss of $851 related to the
write-off  of  certain  unamortized  financing  costs  totaling  $624 and a debt
prepayment penalty of $227. The Company's 75.0% share of the extraordinary loss,
or $638, is included in the extraordinary loss in the Consolidated Statements of
Operations.


Note 6 -- Minority Interests

Cash  distributions and losses allocated to minority  interests have reduced the
minority  interests  balance to zero.  After  reducing  the  minority  interests
balance to zero,  additional  distributions  and losses  allocable  to  minority
interests of $7,272 and $1,253  incurred  during the nine months ended September
30, 1997 and 1996,  respectively,  were  allocated to common  shareholders.  The
cumulative  amount of distributions  and losses allocable to minority  interests
that were allocated to common shareholders at September 30, 1997 was $10,730.

On September 8, 1997, the Company  issued  727,273  Series C Preferred  Units at
$13.75 per unit pursuant to the initial  $10,000 draw on the Private  Placement.
The net proceeds of $9,800 from the issuance of the Series C Preferred Units are
included in minority interests in the Consolidated Balance Sheets.


Note 7 -- Bonds and Notes Payable

In September 1997, the Company completed the September Capital  Transactions and
used a  portion  of the net  proceeds  to repay  certain  outstanding  corporate
indebtedness  aggregating  $113,410 as described in the table below.  See Note 3
"Capital Stock Offerings" of the Notes to the Consolidated  Financial Statements
for additional information  concerning the September Capital Transactions.  As a
result  of  the  prepayment  of  such  indebtedness,  the  Company  incurred  an
extraordinary  loss of $1,423  related to the  write-off of certain  unamortized
financing costs. The Company also incurred an extraordinary loss of $638 related
to the write-off of certain  unamortized  financing costs in connection with its
purchase of a 25.0% ownership  interest in Buckeye.  See Note 5 - "Investment in
Partnerships"  of  the  Notes  to  the  Consolidated  Financial  Statements  for
additional information.

<PAGE>

The  following  table  summarizes  the debt  repaid with net  proceeds  from the
September Capital Transactions:

--------------------------------------------------------------------------------
                                                                      Principal
Description                                                           Repayment
--------------------------------------------------------------------------------
Fixed Rate Debt:
----------------
Unsecured term loans, 8.25%,
 monthly interest-only payments,
 due August 1, 1998                                                    $ 10,500

Unsecured promissory note, 8.50%,
 monthly interest-only payments
 through August 31, 1997, due
 September 30, 1997                                                      4,000
                                                                      ---------
         Total Fixed Rate Debt                                          14,500

Variable Rate Debt:
-------------------
Term loan, LIBOR plus 1.95%,
 monthly interest-only payments
 through February 10, 1998;
 monthly principal and interest
 payments thereafter, due November
 11, 1999                                                               53,290

Term loan, LIBOR plus 1.95%,
 monthly interest-only payments,
 due February 13, 2000                                                   3,000

Mortgage, LIBOR plus 2.25%,
 monthly interest-only payments,
 due September 10, 1998
                                                                        19,620
Unsecured term loans, LIBOR plus 3.50%,
 monthly interest-only payments,
 due November 11, 1997                                                  10,000

Unsecured line of credit,  $15,000,
 LIBOR plus 2.50%,  interest-only
 payments, due July 11, 1998                                            13,000
                                                                      ---------
         Total Variable Rate Debt                                       98,910
                                                                      ---------

Total Fixed and Variable Rate Debt                                    $113,410
                                                                      =========
================================================================================

As of September 30, 1997, unused commitments were $71,290.

Note 8 -- Distributions

On June 26,  1996,  the  Company's  Board of  Directors  approved a special cash
distribution on its Common Stock of $0.145 per common share,  payable to holders
of record on June 27, 1996. Such  distribution is included in the  distributions
declared  per  common  share  disclosed  in  the   Consolidated   Statements  of
Operations.

<PAGE>

Note 9 -- Acquisitions

On November 1, 1996,  the Company  acquired  Rocky  Mountain  Factory Stores and
Kansas City  Factory  Outlets for an  aggregate  purchase  price of $71,700 (the
"1996 Acquired Properties"). The Company accounted for the acquisition using the
purchase  method of  accounting.  Commencing  November  1, 1996,  the  operating
results  of  the  1996  Acquired   Properties  are  included  in  the  Company's
consolidated  results of  operations.  Additionally,  on November  1, 1996,  the
Company purchased its joint venture partner's first mortgage and 50.0% ownership
interest in Grove City Factory Shops  Partnership  ("Grove City"),  the property
partnership  which owns Grove City Factory  Shops,  for $57,094 (the "Grove City
Acquisition")  thereby  increasing  its  ownership  interest in such property to
100.0%.  Prior  to  November  1,  1996,  the  Company  accounted  for its  50.0%
investment  in Grove  City  under the equity  method of  accounting.  Commencing
November 1, 1996, the operating results of Grove City are consolidated.


On February  13,  1997,  the Company  acquired Oak Creek  Factory  Stores,  Bend
Factory  Outlets and Factory  Outlets at Post Falls (the "February 1997 Acquired
Properties")  from an unrelated  third party for an aggregate  purchase price of
$37,250.  The Company  financed the purchase with loan proceeds from a financial
institution  and a $4,000  promissory note issued to the seller which was repaid
with net proceeds from the  September  Offering.  The  operating  results of the
Company for 1997 include the results of these  acquisitions  effective  with the
closing on February 13, 1997.

The  following  unaudited  pro  forma  information  presents  a  summary  of the
consolidated  results of operations  of the Company  including the 1996 Acquired
Properties,  the Grove City Acquisition,  the February 1997 Acquired  Properties
and the Buckeye Acquisition as if such acquisitions had occurred on January 1,
1996.

--------------------------------------------------------------------------------
                                                         Nine months ended
                                                            September 30
                                                     ---------------------------
                                                         1997           1996
--------------------------------------------------------------------------------

Total revenues                                        $ 96,445       $ 82,771
                                                     ============  =============
Income before extraordinary item                      $  4,349       $  9,328
                                                     ============  =============
Net income                                            $  2,075       $  8,311
                                                     ============  =============
Net loss applicable to common shares                  $ (4,931)      $ (2,925)
                                                     ============  =============
Per common share:

       Loss before extraordinary item                 $  (0.16)      $  (0.29)
       Extraordinary item                                (0.14)         (0.16)
                                                     ------------  -------------
       Net loss                                      $   (0.30)     $   (0.45)
                                                     ============  =============
================================================================================


These  unaudited pro forma results have been prepared for  comparative  purposes
only and include certain  adjustments,  such as additional  depreciation expense
based on the purchase price of such assets acquired and interest expense on debt
incurred on financing the acquisitions. These unaudited pro forma results do not
purport to be indicative of the results of operations  which actually would have
resulted  had the  combination  been in effect on  January  1, 1996 or of future
results of operations of the Company.

On October 29, 1997, the Company acquired Tidewater Outlet Mall,  Manufacturer's
Outlet Mall,  Kittery Outlet  Village,  and Latham Factory Outlet Center from an
unrelated  third party for an aggregate  purchase price of $26,000.  The Company
financed  the  purchase  with  proceeds  from  the  September  Offering  and the
Company's unsecured line of credit.

<PAGE>

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

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

Introduction

The following  discussion and analysis of the consolidated  financial  condition
and results of operations of Prime Retail,  Inc. (the "Company")  should be read
in conjunction with the Consolidated  Financial  Statements and the Notes to the
Consolidated   Financial   Statements.   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
increases in market  interest rates from current levels;  risks  associated with
the Company's  property  acquisition  activities,  such as the uncertainty as to
whether these transactions may be completed and the lack of predictability  with
respect  to the  financial  returns;  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 certain of its existing factory outlet centers. As summarized in TABLE
1, the Company's  factory  outlet  portfolio  consisted of twenty four operating
factory outlet  centers  totaling  6,313,000  square feet of gross leasable area
("GLA") at September  30, 1997,  compared to seventeen  factory  outlet  centers
totaling 4,487,000 square feet of GLA at September 30, 1996.

During 1997, the Company purchased three factory outlet centers totaling 358,000
square  feet of GLA in the first  quarter  and  opened two  expansions  totaling
183,000  square  feet of GLA in the third  quarter.  Additionally,  the  Company
acquired its joint venture partner's 25.0% ownership interest in Buckeye Factory
Shops  Limited  Partnership  on  September  2, 1997 and now owns  100.0% of this
factory  outlet center with 205,000 square feet of GLA. In the fourth quarter of
1996, the Company opened two new factory outlet centers and five expansions, and
acquired two factory outlet centers,  adding 1,293,000 square feet of GLA in the
aggregate.  Furthermore, the Company purchased its joint venture partner's first
mortgage and 50.0% partnership  interest in Grove City Factory Shops Partnership
on  November  1, 1996 and now owns  100.0% of this  factory  outlet  center with
533,000 square feet of GLA. The significant  increase in the number of operating
properties  and total GLA at  September  30, 1997  compared to the  portfolio of
properties at September 30, 1996, is collectively  referred to as the "Portfolio
Expansion".

<PAGE>

<TABLE>
TABLE 1 -- Portfolio of Properties as of September 30, 1997
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                       Grand          GLA      Percentage
Factory Outlet Center                                             Phase         Opening Date    (Sq. Ft.)      Leased(12)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>        <C>                <C>            <C>
Warehouse Row Factory Shops(1)(2)--Chattanooga, Tennessee            I        November 1989       95,000               91%
                                                                    II          August 1993       26,000               94
                                                                                                 -------              ---
                                                                                                 121,000               92

Oak Creek Factory Outlets(3)--Sedona, Arizona                        I          August 1990       82,000               99

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

The Factory Outlets at Post Falls(3)--Post Falls, Idaho              I            July 1991      111,000               86
                                                                    II            July 1992       68,000               84
                                                                                                 -------              ---
                                                                                                 179,000               85

Gulf Coast Factory Shops--Ellenton, Florida                          I         October 1991      187,000              100
                                                                    II          August 1993      123,000              100
                                                                   III         October 1996       30,000              100
                                                                                                 -------              ---
                                                                                                 340,000              100

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

Coral Isle Factory Shops--Naples/Marco Island, Florida               I        December 1991       94,000               98
                                                                    II        December 1992       32,000              100
                                                                                                 -------              ---
                                                                                                 126,000               99

Castle Rock Factory Shops--Castle Rock, Colorado                     I        November 1992      181,000              100
                                                                    II          August 1993       94,000               99
                                                                   III        November 1993       95,000              100
                                                                    IV          August 1997      110,000               88
                                                                                                 -------              ---
                                                                                                 480,000               97

Bend Factory Outlets(3)--Bend Oregon                                 I        December 1992       97,000              100

Ohio Factory Shops--Jeffersonville, Ohio                             I            July 1993      186,000              100
                                                                    II        November 1993      100,000              100
                                                                   IIB        November 1994       13,000              100
                                                                  IIIA          August 1996       35,000              100
                                                                  IIIB          August 1997       73,000               36
                                                                                                 -------              ---
                                                                                                 407,000               89

Gainesville Factory Shops--Gainesville, Texas                        I          August 1993      210,000               95
                                                                    II        November 1994      106,000               89
                                                                                                 -------              ---
                                                                                                 316,000               93

Nebraska Crossing Factory Shops--Gretna, Nebraska                    I         October 1993      192,000               92

Rocky Mountain Factory Stores(4)--Loveland, Colorado                 I             May 1994      139,000              100
                                                                    II        November 1994       50,000              100
                                                                   III             May 1995      114,000              100
                                                                    IV             May 1996       25,000              100
                                                                                                 -------              ---
                                                                                                 328,000              100

Oxnard Factory Outlet(5)--Oxnard, California                         I       September 1994      148,000               96

Grove City Factory Shops(6)--Grove City, Pennsylvania                I          August 1994      235,000              100
                                                                    II        November 1994       95,000              100
                                                                   III        November 1995       85,000               99
                                                                    IV        November 1996      118,000               99
                                                                                                 -------              ---
                                                                                                 533,000              100
</TABLE>

<PAGE>

<TABLE>
TABLE 1 -- Portfolio of Properties as of September 30, 1997 (continued)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                       Grand          GLA      Percentage
Factory Outlet Center                                             Phase         Opening Date    (Sq. Ft.)      Leased(12)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>        <C>                <C>            <C>
Huntley Factory Shops--Huntley, Illinois                             I           August 1994     192,000               91%
                                                                    II         November 1995      90,000               67
                                                                                                 -------              ---
                                                                                                 282,000               84

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

Indiana Factory Shops--Daleville, Indiana                            I         November 1994     208,000               90
                                                                   IIA         November 1996      26,000               35
                                                                                                 -------              ---
                                                                                                 234,000               84

Kansas City Factory Outlets(4)--Odessa, Missouri                     I             July 1995     191,000               98
                                                                    II         November 1996     105,000               67
                                                                                                 -------              ---
                                                                                                 296,000               87

Magnolia Bluff Factory Shops(7)--Darien, Georgia                     I             July 1995     238,000               90
                                                                   IIA         November 1995      49,000               99
                                                                   IIB             July 1996      20,000              100
                                                                                                 -------              ---
                                                                                                 307,000               92

Arizona Factory Shops(8)--Phoenix, Arizona                           I        September 1995     217,000               98
                                                                    II        September 1996     109,000               81
                                                                                                 -------              ---
                                                                                                 326,000               93

Gulfport Factory Shops(9)--Gulfport, Mississippi                    I          November 1995     228,000              100
                                                                  IIA          November 1996      40,000               82
                                                                                                 -------              ---
                                                                                                 268,000               97

Buckeye Factory Shops(10)--Burbank, Ohio                            I          November 1996     205,000               95

Carolina Factory Shops--Gaffney, South Carolina                     I          November 1996     235,000               93
                                                                                                 -------              ---

Total Factory Outlet Center Portfolio(11)                                                      6,313,000               94%
                                                                                               =========              ===
=============================================================================================================================
<FN>
Notes:
(1)  The Company owns a 2% partnership  interest as the sole general  partner in
     Phase I of this property but is entitled to 99% of the property's operating
     cash flow and net proceeds from a sale or  refinancing.  An unrelated third
     party holds a 35% limited partnership  interest and the Company holds a 65%
     general partnership  interest in the partnership that owns Phase II of this
     property.
(2)  Phase I of this  mixed-use  development  includes  154,000  square  feet of
     office space and Phase II includes  5,000 square feet of office space.  The
     total  office  space of 159,000  square feet of GLA is not included in this
     table and such space was 100% leased as of September 30, 1997.
(3)  The Company  acquired this factory  outlet center on February 13, 1997 from
     an unrelated third party.
(4)  The Company acquired this factory outlet center on November 1, 1996 from an
     unrelated third party.
(5)  On February 7, 1997, the Company  purchased an additional  20%  partnership
     interest  from a  joint  venture  partner  which  increased  the  Company's
     ownership interest to 50%.
(6)  On November 1, 1996, the Company  purchased its joint venture partner's 50%
     partnership  interest in Grove City Factory Shops  Partnership and now owns
     100% of this factory outlet center.
(7)  The Company  operates  this  property  pursuant to a long-term  lease under
     which it receives the economic benefit of a 100% ownership interest.
(8)  The  Company  owns 50% of this  factory  outlet  center in a joint  venture
     partnership with an unrelated third party.
(9)  The real  property on which this  outlet  center is located is subject to a
     long-term ground lease. The Company receives the economic benefit of a 100%
     ownership interest.
(10) On September 2, 1997, the Company purchased its joint venture partner's 25%
     partnership  interest in Buckeye Factory Shops Limited  Partnership and now
     owns 100% of this factory outlet center.
(11) The Company also owns three  community  centers  containing  424,000 square
     feet of GLA in the aggregate that were 92% leased as of September 30, 1997.
(12) Fully executed  leases as of September 30, 1997 as a percent of square feet
     of GLA.
</FN>
</TABLE>

<PAGE>

Comparison  of the three  months  ended  September  30, 1997 to the three months
ended September 30, 1996

Summary

For the three months ended  September 30, 1997, the Company  reported a net loss
of $510 on total revenues of $31,549.  For the three months ended  September 30,
1997,  the net loss  applicable to common  shareholders  was $3,604 or $0.19 per
common  share.  For the three  months  ended  September  30,  1996,  the Company
reported net income of $2,365 on total revenues of $21,831. For the three months
ended  September 30, 1996, the net loss  applicable to common  shareholders  was
$635 or $0.05 per common share.

Revenues

Total  revenues  were  $31,549 for the three  months  ended  September  30, 1997
compared to $21,831 for the three months ended  September  30, 1996, an increase
of $9,718, or 44.5%. Base rents increased $6,356, or 49.3%, in the third quarter
of 1997 compared to the third quarter of 1996.  Straight-line rents (included in
base rents) were $140 and $101 for the three months ended September 30, 1997 and
1996,  respectively.  These  increases  were  primarily  due  to  the  Portfolio
Expansion.  Percentage  rents,  which  represent  rents based on a percentage of
sales volume above a specified threshold,  increased $542, or 116.3%, during the
three months ended  September 30, 1997 compared to the same period in 1996. This
increase was  attributable to higher reported  merchant sales in the 1997 period
and  the  Portfolio  Expansion.  Tenant  reimbursements,   which  represent  the
contractual  recovery from tenants of certain operating  expenses,  increased by
$2,692, or 44.6%, during the three months ended September 30, 1997 over the same
period in 1996. This increase was primarily due to the Portfolio Expansion.

Income (loss) from investment partnerships decreased by $302, or 120.8%, for the
three months ended  September 30, 1997 to $(52) from $250 for the same period in
1996.  This  decrease  reflects  the  Company's  purchase  of its joint  venture
partner's  first  mortgage  and 50.0%  ownership  interest in Grove City Factory
Shops  Partnership  on November 1, 1996.  As a result of this  acquisition,  the
Company owns 100.0% of this factory  outlet  center and,  therefore,  commencing
November 1, 1996, its operations are included in the consolidated results of the
Company.  Prior to November 1, 1996,  the Company  accounted for its interest in
Grove City Factory  Shops under the equity  method of  accounting.  The decrease
also  reflects  the  Company's  purchase of its joint  venture  partner's  first
mortgage  and  25.0%  ownership   interest  in  Buckeye  Factory  Shops  Limited
Partnership  ("Buckeye") on September 2, 1997. As a result of this  acquisition,
the Company owns 100.0% of this factory outlet center and, therefore, commencing
September 2, 1997, its operations  are included in the  consolidated  results of
the Company.  Prior to September 2, 1997, the Company accounted for its interest
in Buckeye under the equity method of accounting.  The decrease in income (loss)
from investment  partnerships was also due to a decrease of $39 in the Company's
share of earnings in its joint ventures.

Interest and other  income  increased by $430,  or 19.6%,  to $2,619  during the
three months ended September 30, 1997 as compared to $2,189 for the three months
ended  September  30,  1996.  The  increase  reflects   increases  in  municipal
assistance income of $706,  interest income of $676,  temporary tenant income of
$108,   partially  offset  by  reduced  property  development  and  construction
management  fees and leasing  commissions  of $892,  and lease buyout  income of
$168. The increase in interest income was primarily due to interest  earnings on
the Company's expansion loan escrow account included in restricted cash.

<PAGE>

Expenses

Property  operating  expenses  increased by $1,719,  or 33.6%, to $6,840 for the
three months ended  September 30, 1997 compared to $5,121 for the same period in
1996. Real estate taxes  increased by $1,080,  or 78.9%, to $2,449 for the three
months  ended  September  30, 1997 from $1,369 in the same period for 1996.  The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio  Expansion.  As shown in TABLE 2, depreciation and amortization
expense  increased  by $2,065,  or 45.1%,  to $6,644 for the three  months ended
September 30, 1997,  compared to $4,579 for 1996. This increase results from the
depreciation and amortization of assets comprising the Portfolio Expansion.

TABLE 2 -- Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                          Three months ended
                                                             September 30
                                                     ---------------------------
                                                          1997           1996
--------------------------------------------------------------------------------

Buildings and improvements                               $3,423         $2,289
Land improvements                                           715            502
Tenant improvements                                       1,872          1,294
Furniture and fixtures                                      214            171
Leasing commissions(1)                                      420            323
                                                         ------         ------
       Total                                             $6,644         $4,579
                                                         ======         ======
================================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

TABLE 3 -- Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                         Three months ended
                                                             September 30
                                                     ---------------------------
                                                          1997           1996
--------------------------------------------------------------------------------

Interest incurred                                        $9,288         $5,257
Interest capitalized                                     (1,123)          (857)
Interest earned on interest rate protection contracts       (23)           (40)
Amortization of deferred financing costs                    589            316
Amortization of interest rate protection contracts          348            463
                                                         ------         ------
       Total                                             $9,079         $5,139
                                                         ======         ======
================================================================================

As shown in TABLE 3, interest  expense for the three months ended  September 30,
1997 increased by $3,940,  or 76.7%,  to $9,079  compared to $5,139 for the same
period in 1996. This increase  reflects higher interest  incurred of $4,031,  an
increase in amortization of deferred financing costs of $273, an increase in the
amount of interest  capitalized in connection with development projects of $266,
an decrease in the  amortization of interest rate protection  contracts of $115,
and a reduction in interest earned on interest rate protection contracts of $17.

<PAGE>

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $206,749 in the  Company's  average debt  outstanding  during the
three months ended  September 30, 1997 compared to the same period in 1996.  The
weighted  average  interest  rates  were  7.28%  and 6.98% for the 1997 and 1996
periods, respectively.

Other charges  increased by $507, or 106.7%,  to $982. The increase is primarily
attributable  to  higher  marketing  costs  of  $199,  a  higher  provision  for
uncollectible  accounts  receivable of $117, a higher  provision for potentially
abandoned  projects of $100,  increased  coupon  program  expenses  of $51,  and
increased other charges of $40.

In connection with re-leasing space to new merchants,  the Company incurred $100
and $54 in capital expenditures during the three months ended September 30, 1997
and 1996, respectively.

Comparison of the nine months ended  September 30, 1997 to the nine months ended
September 30, 1996

Summary

For the nine months ended September 30, 1997, the Company reported net income of
$1,303 on total  revenues of $92,924.  For the nine months ended  September  30,
1997,  the net loss  applicable to common  shareholders  was $7,977 or $0.48 per
common share.

For the nine months ended September 30, 1996, the Company reported net income of
$6,925 on total  revenues of $63,112.  These  results  include a second  quarter
nonrecurring  charge (the  "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
September 5, 1996.  For the nine months ended  September 30, 1996,  the net loss
applicable to common shareholders was $4,311 or $0.67 per common share.

Revenues

Total  revenues  were  $92,924 for the nine months ended  September  30, 1997 as
compared to $63,112 for the nine months ended September 30, 1996, an increase of
$29,812,  or 47.2%.  Base rents  increased  $17,898,  or 46.6%,  during the nine
months  ended   September  30,  1997  compared  to  the  same  period  in  1996.
Straight-line  rents  (included  in base  rents) were $392 and $338 for the nine
months ended  September 30, 1997 and 1996,  respectively.  These  increases were
primarily due to the Portfolio Expansion.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified threshold,  increased $1,121, or 87.8%, during the nine months
ended  September 30, 1997 compared to the same period in 1996. This increase was
attributable  to  higher  reported  merchant  sales in the 1997  period  and the
Portfolio  Expansion.  For the nine months ended September 30, 1997,  same-space
sales in centers owned by the Company increased 4.7% compared to the same period
in 1996.  "Same-space sales" is defined as the weighted average sales per square
foot reported by merchants  for space open since January 1, 1996.  The Company's
same-space  sales for the year ended  December  31, 1996 were $232.45 per square
foot. For the nine months ended September 30, 1997,  same-store  sales increased
by 3.1%  compared to the same period in 1996.  "Same-store  sales" is defined as
the weighted  average  sales per square foot  reported by  merchants  for stores
opened since January 1, 1996.

Tenant reimbursements,  which represent the contractual recovery from tenants of
certain  operating  expenses,  increased  by $8,576,  or 47.5%,  during the nine
months ended  September 30, 1997 over the same period in 1996. This increase was
primarily due to the Portfolio Expansion.

<PAGE>

Income (loss) from investment partnerships decreased by $971, or 113.0%, for the
nine months ended  September 30, 1997 to $(112) from $859 for the same period in
1996.  This  decrease  reflects  the  Company's  purchase  of its joint  venture
partner's  first  mortgage  and 50.0%  ownership  interest in Grove City Factory
Shops  Partnership  on November  1, 1996.  As a result of its  acquisition,  the
Company owns 100.0% of this factory  outlet  center and,  therefore,  commencing
November 1, 1996, its operations are included in the consolidated results of the
Company.  Prior to November 1, 1996,  the Company  accounted for its interest in
Grove City Factory  Shops under the equity  method of  accounting.  The decrease
also  reflects  the  Company's  purchase of its joint  venture  partner's  first
mortgage and 25.0%  ownership  interest in Buckeye on  September  2, 1997.  As a
result of this  acquisition,  the  Company  owns 100.0% of this  factory  outlet
center and, therefore, commencing September 2, 1997, its operations are included
in the  consolidated  results of the Company.  Prior to  September 2, 1997,  the
Company  accounted  for its  interest  in  Buckeye  under the  equity  method of
accounting.  The decrease in income (loss) from investment partnerships was also
due to a  decrease  of $223 in the  Company's  share of  earnings  in its  joint
ventures.

Interest and other income  increased by $3,188,  or 71.1%,  to $7,674 during the
nine months ended  September  30, 1997 as compared to $4,486 for the nine months
ended  September  30, 1996.  The increase  reflects  higher  interest  income of
$2,256, gain on outlot sales of $598, temporary tenant income of $285, municipal
assistance income of $947,  customer service income of $88, and ancillary income
of $105.  These increases were offset by reduced  property  development fees and
construction management fees, including lease commissions, of $967, and property
management  fees of $124.  The increase in interest  income was primarily due to
interest earnings on the Company's  expansion loan escrow included in restricted
cash.

Expenses

Property  operating  expenses  increased by $5,959, or 41.0%, to $20,495 for the
nine months ended  September 30, 1997 compared to $14,536 for the same period in
1996.  Real estate taxes  increased by $3,384,  or 87.8%, to $7,238 for the nine
months  ended  September  30, 1997 from $3,854 in the same period for 1996.  The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio  Expansion.  As shown in TABLE 4, depreciation and amortization
expense  increased  by $5,937,  or 43.7%,  to $19,515 for the nine months  ended
September 30, 1997 compared to $13,578 for 1996. This increase  results from the
depreciation and amortization of assets comprising the Portfolio Expansion.

TABLE 4 -- Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                           Nine months ended
                                                             September 30
                                                     ---------------------------
                                                          1997           1996
--------------------------------------------------------------------------------

Buildings and improvements                              $10,131        $6,744
Land improvements                                         2,069         1,455
Tenant improvements                                       5,348         3,648
Furniture and fixtures                                      616           486
Leasing commissions(1)                                    1,351         1,245
                                                        -------        ------
       Total                                            $19,515       $13,578
                                                        =======       =======
================================================================================
Note:
(1)  In accordance with GAAP,  leasing  commissions are classified as intangible
     assets. Therefore, the amortization of leasing commissions is reported as a
     component of depreciation and amortization expense.

<PAGE>

TABLE 5 -- Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                           Nine months ended
                                                             September 30
                                                     ---------------------------
                                                          1997           1996
--------------------------------------------------------------------------------

Interest incurred                                       $28,118       $16,651
Interest capitalized                                     (2,942)       (2,175)
Interest earned on interest rate protection contracts       (86)         (162)
Amortization of deferred financing costs                  1,818         1,928
Amortization of interest rate protection contracts        1,043         1,101
                                                        -------       -------
       Total                                            $27,951       $17,343
                                                        =======       =======
================================================================================

As shown in TABLE 5,  interest  expense for the nine months ended  September 30,
1997 increased by $10,608, or 61.2%, to $27,951 compared to $17,343 for the same
period in 1996. This increase reflects higher interest incurred of $11,467 and a
reduction  in interest  earned on interest  rate  protection  contracts  of $76,
partially  offset by a decrease in amortization  of deferred  financing costs of
$110, a decrease in amortization  of interest rate protection  contracts of $58,
and an  increase  in the  amount of  interest  capitalized  in  connection  with
development projects of $767.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately $207,046 in the Company's average debt outstanding during the nine
months  ended  September  30,  1997  compared  to the same  period in 1996.  The
weighted  average  interest  rates  were  7.24%  and 7.12% for the 1997 and 1996
periods, respectively.

Other  charges  decreased  by $5,212,  or 67.8%,  to $2,475.  This  decrease  is
primarily  attributable  to the  Nonrecurring  Charge of $6,131  during the 1996
period  partially  offset  by,  increased  marketing  costs  of  $410,  a higher
provision for uncollectable  accounts receivable of $312, a higher provision for
potentially  abandoned  projects  of $100,  and  increased  other  miscellaneous
charges of $97.

In connection with re-leasing space to new merchants,  the Company incurred $241
and $194 in capital expenditures during the nine months ended September 30, 1997
and 1996, respectively.

Liquidity and Capital Resources

Sources and Uses of Cash -- General

For the nine months ended  September  30, 1997,  net cash  provided by operating
activities was $34,558.  Net cash used in investing  activities was $106,736 for
the nine months ended September 30, 1997. The primary use of these funds was for
costs  associated  with the  completion of factory outlet centers and expansions
opened  during 1996,  costs  associated  with the  acquisition  of three factory
outlet  centers,  costs related to the purchase of the  Company's  joint venture
partner's 25.0%  ownership  interest in Buckeye,  and costs for  pre-development
activities  associated with future  development.  Net cash provided by financing
activities was $92,031 for the nine months ended September 30, 1997. The sources
of these funds were primarily the proceeds from new borrowings and the Company's
public  and  private  offerings  of certain  equity  securities  of $91,767  and
$193,774,  respectively.  Such proceeds  were offset by principal  repayments on
notes  payable of  $162,770,  distributions  to  minority  interests  (including
distributions to the limited partner unit holders) of $7,803,  and preferred and
common stock distributions of $22,460.

<PAGE>

Sources and Uses of Cash -- 1997 Equity Transactions

On January 10, 1997,  the Company filed a Form S-3  Registration  Statement (the
"January 1997 Shelf  Registration")  with the Securities and Exchange Commission
(the "SEC") to register $100,000 of the Company's equity securities. On February
20, 1997, the Company  completed a public offering (the "February  Offering") by
issuing  2,080,000  shares of its Common  Stock at $12.50 per share and  175,800
shares of its Convertible  Preferred Stock at $22.75 per share. In addition,  on
March  10,  1997,  the  underwriter  of  the  February  Offering  exercised  its
overallotment option to purchase 310,300 shares of the Company's Common Stock at
$12.50 per share. As a result of the February Offering, the Company received net
proceeds of $31,930 that were used to (i) repay certain outstanding indebtedness
aggregating $26,500, (ii) to fund development and construction  activities,  and
(iii) for general corporate purposes.

On June 17, 1997, the Company filed a Form S-3 Registration Statement (the "June
1997 Shelf  Registration")  with the SEC to register  $300,000 of the  Company's
equity  securities,  including  $66,122 of the Company's equity  securities that
remained available under the January 1997 Shelf Registration.

In September 1997, the Company  completed a public offering of 11,500,000 shares
(including  1,500,000 shares related to exercise of underwriters'  overallotment
option) of its Common Stock at $14.00 per share (the "September  Offering").  In
addition,  on September 8, 1997,  the Company  issued 727,273 Series C Preferred
Units at $13.75 per unit pursuant to the initial draw of the Private  Placement.
See Note 4 -  "Private  Placement"  of the Notes to the  Consolidated  Financial
Statements for additional information. As a result of the September Offering and
the initial draw on the Private Placement (collectively,  the "September Capital
Transactions"),  the Company received net proceeds of $162,750 after commissions
and  underwriting  discounts.  A portion of the net proceeds  from the September
Capital  Transactions  were  used (i) to  repay  certain  outstanding  corporate
indebtedness  aggregating  $113,410  and (ii) to  acquire  the  25.0%  ownership
interest  of Salomon  Brothers  Realty  Corp.  ("SBRC")  in Buckeye  for $23,148
(including  $22,642 of mortgage  indebtedness  relating to such  property).  The
remaining net proceeds from the September  Capital  Transactions of $26,192 will
be used  (i) to  fund  development  and  construction  activities,  (ii) to fund
property acquisitions, and (iii) for general corporate purposes.

As a result of the September Offering, as of September 30, 1997, the Company had
$139,000 of availability  under the June 1997 Shelf  Registration.  From time to
time, the Company will consider issuing  additional  equity securities under the
June 1997 Shelf  Registration  for the  development or acquisition of additional
properties,  the expansion and improvement of existing properties,  repayment of
indebtedness, and for general corporate purposes.

Sources and Uses of Cash -- Property Acquisitions and Investment in Partnerships

On February  13,  1997,  the Company  acquired Oak Creek  Factory  Stores,  Bend
Factory  Outlets and Factory Outlets at Post Falls from an unrelated third party
for an aggregate  purchase price of $37,250.  The Company  financed the purchase
with loan proceeds from a financial  institution  and a $4,000  promissory  note
issued to the seller.  The operating results of the Company for 1997 include the
results of these acquisitions effective with the closing on February 13, 1997.

On  September 2, 1997,  the Company  acquired  the 25.0%  ownership  interest in
Buckeye from its joint venture partner,  SBRC, for $23,148 (including $22,642 of
mortgage  indebtedness  relating  to  such  property),  thereby  increasing  its
ownership percentage in such property to 100.0%. Prior to September 2, 1997, the
Company accounted for its 75.0% investment in Buckeye using the equity method of
accounting.  Commencing  September 2, 1997, the operating results of Buckeye are
consolidated.  The Company  financed  the  acquisition  with  proceeds  from the
September Offering. See

<PAGE>

Note 3 - "Capital Stock  Offerings" of the Notes to the  Consolidated  Financial
Statements for additional information.

On October 29, 1997, the Company acquired Tidewater Outlet Mall,  Manufacturer's
Outlet Mall,  Kittery  Outlet  Village (the  "Kittery  Properties"),  and Latham
Factory Outlet Center (the "Latham  Property") from an unrelated third party for
an aggregate  purchase price of $26,000.  The Company financed the purchase with
proceeds from the September Offering and the Company's unsecured line of credit.

The  Kittery  Properties  are  located in  Kittery,  Maine and serve the Boston,
Massachusetts  and  Portland,  Maine  markets.  The Kittery  Properties  contain
approximately 121,000 square feet of GLA, and were 100.0% occupied as of October
31, 1997. The Latham Property is located in Latham,  New York,  north of Albany,
New York and south of Saratoga  Springs,  New York. The Latham Property contains
approximately  44,000  square feet of GLA and was 100.0%  occupied as of October
31, 1997.

During 1997 and 1998,  the Company  will  continue  to explore  acquisitions  of
factory outlet  centers in the United States.  The Company cannot predict if any
transaction  will be  consummated,  nor  the  terms  or  form  of  consideration
required.

Planned Development

Management believes that there is sufficient demand for continued development of
new factory outlet centers and the expansion of certain  existing factory outlet
centers.  The Company expects to open  approximately  224,000 square feet of GLA
during 1997 in connection  with planned  expansions of existing  factory  outlet
centers. At September 30, 1997, the remaining budgeted capital  expenditures for
these expansions  aggregated  approximately  $6,614,  while anticipated  capital
expenditures  related  to the  completion  of new  factory  outlet  centers  and
expansions opened during the year ended December 31, 1996  (aggregating  930,000
square feet of GLA) approximated $3,815.

Management  believes  that  the  Company  has  sufficient  capital  and  capital
commitments to fund the remaining capital expenditures  associated with its 1996
and 1997 development  activities.  These funding requirements are expected to be
met, in large part, with borrowings under various loan facilities including cash
escrow accounts  established for future  developments  and the proceeds from the
September Capital  Transactions.  As of September 30, 1997,  unused  commitments
were $71,290.

The Company plans to open new factory outlet centers and expansions in 1998 that
are  expected  to  contain  approximately  700,000  square  feet of GLA,  in the
aggregate,  and have a total expected development cost of approximately $93,227.
The  Company  expects to fund the  development  cost of its new  factory  outlet
centers and expansions from (i) certain line of credit facilities, (ii) retained
cash flow from  operations,  (iii)  construction  loans,  (iv) proceeds from the
September  Capital  Transactions,  and (v) the sale of equity  securities in the
public or private  capital  markets.  There can be no assurance that the Company
will be successful in obtaining  the required  amount of equity  capital or debt
financing  for the  1998  planned  openings  or that the  terms of such  capital
raising  activities will be as favorable as the Company has experienced in prior
periods.  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.

Debt Repayments and Preferred Stock Distributions and Dividends

The Company's aggregate  indebtedness was $428,520 and $499,523 at September 30,
1997  and  December  31,  1996,  respectively.   At  September  30,  1997,  such
indebtedness had a weighted average maturity of 7.2 years and bore interest at a
weighted  average  interest rate of 7.0% per annum.  At December 31, 1996,  such
indebtedness had a weighted average maturity of 6.7 years and bore interest at

<PAGE>

a weighted  average  interest  rate of 7.10% per annum.  At September  30, 1997,
$43,547,  or  10.2%,  of such  indebtedness  bore  interest  at fixed  rates and
$384,973, or 89.8%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates.  Of the variable-rate  indebtedness outstanding
at September 30, 1997, approximately $356,723 is scheduled to convert to a fixed
rate of 7.782% in November 1998 for the remaining five years of the note.

At September 30, 1997,  the Company held interest rate  protection  contracts on
$28,250 of floating rate tax-exempt  indebtedness and $356,723 of other floating
rate  indebtedness  (or   approximately   100.0%  of  its  total  floating  rate
indebtedness)  and these  contracts  expire in 1999 and 1998,  respectively.  In
addition,  the Company held  additional  interest rate  protection  contracts on
$43,900  of the  $356,723  floating  rate  indebtedness  to  further  reduce the
Company's exposure to increases in interest rates.

The Company's ratio of debt to total market capitalization at September 30, 1997
(defined as total debt divided by the sum of: (i) the aggregate  market value of
the  outstanding  shares of Common  Stock,  assuming the full exchange of Common
Units and Series C Preferred Units into Common Stock;  (ii) the aggregate market
value of the  outstanding  shares  of  Convertible  Preferred  Stock;  (iii) the
aggregate  liquidation  preference of the Series A Senior  Cumulative  Preferred
Stock ("Senior Preferred Stock") at $25.00 per share; and (iv) the total debt of
the Company) was 38.0%.

The  Company is  obligated  to repay $899 of  mortgage  indebtedness  during the
remainder  of 1997 and $5,206 in 1998.  Annualized  cumulative  dividends on the
Company's  Senior  Preferred  Stock,  Convertible  Preferred  Stock and Series C
Preferred  Units  outstanding as of September 30, 1997 are $6,038,  $6,336,  and
$858, 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,  including the potential sale of
equity  securities in the public or private capital markets,  will be sufficient
to satisfy its debt  service  obligations,  expected  distribution  and dividend
requirements, and operating cash needs for the next year.

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 insurance,  thereby reducing the
Company's  exposure to increased  costs and operating  expenses  resulting  from
inflation.   At  September  30,  1997,  the  Company  maintained  interest  rate
protection contracts to protect against significant  increases in interest rates
on certain floating rate  indebtedness (see "Debt Repayments and Preferred Stock
Distributions and Dividends").

The  Company  intends to reduce  operating  and leasing  risks by  managing  its
existing  portfolio of  properties  with the goal of  improving  its tenant mix,
rental  rates and lease  terms  and  attracting  upscale  fashion  and  national
brand-name manufacturers and retailers 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. In March
1995, the National  Association  of Real Estate  Investment  Trusts  established
guidelines clarifying the definition of FFO. FFO is defined as net income (loss)
(determined  in  accordance  with GAAP)  excluding  gains (or losses)  from debt
restructuring and sales of property,  plus  depreciation and amortization  after
adjustments for unconsolidated partnerships and joint ventures.

The Company  generally  considers FFO an appropriate  measure of liquidity of an
equity REIT because industry analysts have accepted it as a performance  measure
of equity REITs. The Company's FFO is

<PAGE>

not  comparable to FFO reported by other REITs that do not define the term using
the current NAREIT  definition or that  interpret the current NAREIT  definition
differently  than does the Company.  Therefore,  the Company  cautions  that the
calculation of FFO may vary from entity to entity and, as such, the presentation
of FFO by the Company may not be comparable to other  similarly  titled measures
of other reporting companies. The Company believes that in order to facilitate a
clear  understanding  of its  operating  results,  FFO  should  be  examined  in
conjunction  with net income  determined in accordance  with GAAP.  FFO does not
represent cash generated from operating  activities in accordance  with GAAP and
should not be considered as an alternative to net income as an indication of the
Company's  performance  or to cash flows as a measure of liquidity or ability to
make distributions.

TABLE 7 provides a  reconciliation  of income  before  allocations  to  minority
interests and preferred  shareholders to FFO for the three and nine months ended
September 30, 1997 and 1996.

FFO  before  allocations  to  preferred   shareholders  and  minority  interests
increased  $1,725, or 18.4%, to $11,104 for the three months ended September 30,
1997  compared to $9,379 for the three months  ended  September  30,  1996.  FFO
before allocations to preferred  shareholders and minority interests was $31,942
and $17,945 for the nine months ended September 30, 1997 and 1996, respectively.
The 1996  results  include  the  Nonrecurring  Charge of $6,131.  Excluding  the
Nonrecurring  Charge,  FFO before  allocations  to  preferred  shareholders  and
minority  interests  increased  $7,866, or 32.7%, to $31,942 for the nine months
ended September 30, 1997 compared to $24,076 for the nine months ended September
30, 1996.  The  increases  in the 1997 periods  compared to the 1996 periods are
primarily attributable to the Portfolio Expansion.

<TABLE>
TABLE 7 -- Funds from Operations
<CAPTION>
                                                                     Three months ended                  Nine months ended
                                                                        September 30                        September 30
-----------------------------------------------------------------------------------------------------------------------------------
                                                                       1997             1996             1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>             <C>                <C>
Income before minority interests and extraordinary item            $  4,091          $  4,175        $  11,167          $   3,282
FFO adjustments:
Real estate depreciation and amortization                             6,558             4,410           19,305             13,093
Unconsolidated joint venture adjustments                                455               794            1,470              1,570
                                                                   --------          --------        ---------          ---------
FFO before allocations to minority
   interests and preferred shareholders                            $ 11,104          $  9,379        $  31,942          $  17,945
                                                                   ========          ========        =========          =========
===================================================================================================================================
</TABLE>

<PAGE>

PART II:  OTHER INFORMATION


Item 1.           Legal Proceedings

                  None

Item 2.           Changes in Securities


                           On  August  18,  1997,  the  Company  entered  into a
                           purchase  agreement  with an  institutional  investor
                           providing  for  the  issuance  of  a  new  series  of
                           cumulative     convertible    non-voting    preferred
                           securities at $13.75 per unit, or an aggregate  $60.0
                           million in cash. Net proceeds of $58.8 million, after
                           commissions,  will  be used  to  fund  the  Company's
                           continued  acquisition and development  programs.  An
                           initial  $10.0  million  of  proceeds  was  drawn  on
                           September  8,  1997 and the  Company  issued  727,273
                           Series C Preferred Units. The balance of the proceeds
                           may be drawn through December 6, 1997 with the timing
                           and  amount of draws  determined,  subject to certain
                           limitations, at the discretion of the Company.

                           The   preferred   securities   will   pay   dividends
                           equivalent  to the amount being paid on the Company's
                           shares of common stock,  with an annual minimum equal
                           to $1.18 per unit.  The preferred  securities  may be
                           converted into shares of common stock on a one-to-one
                           basis  commencing  August 8, 1998 (or  earlier  under
                           certain conditions).

                           In  addition,   the   Company,   subject  to  certain
                           conditions,   has  agreed  to  waive  the   ownership
                           limitations  otherwise applicable to the common stock
                           to permit the  investor to own, at any one time,  the
                           shares of common stock  issuable  upon  conversion of
                           the preferred  securities.  The Company has the right
                           to call the  preferred  securities  after ten  years.
                           Subject  to   certain   conditions,   the   preferred
                           securities  may take the form of shares of  preferred
                           stock  in  the   Company   or   preferred   units  of
                           partnership  interest in Prime Retail, L.P. that will
                           be  exchangeable  for  shares of  preferred  stock or
                           common stock on a one-to-one basis.

                           Pursuant to the  purchase  agreement,  as long as the
                           investor  owns  more  than  9.9 % of the  outstanding
                           shares of common stock of the  Company,  the investor
                           will be subject to certain  standstill  restrictions,
                           including restrictions relating to the acquisition of
                           additional shares and various other matters. Pursuant
                           to a registration  rights agreement,  the Company has
                           granted the investor certain  registration  rights to
                           facilitate   resale  of  its  shares  under   certain
                           conditions.

                           The  above-described   transaction  was  effected  in
                           reliance upon an exemption  under Section 4(2) of the
                           Securities Act of 1933, as amended.

<PAGE>


Item 3.           Defaults Upon Senior Securities

                  None

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

                  None


Item 5.           Other Information

                  None

Item 6.           Exhibits or Reports on Form 8-K

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

                           Exhibit 12         Ratio of Earnings to Fixed Charges
                                              and Preferred Stock Dividends and
                                              Distributions

                           Exhibit 27         Financial Data Schedule
                                              (EDGAR filing)

                  (b)     Reports on Form 8-K:

                           On August 8, 1997, the Company filed a Current Report
                           on Form 8-K, dated August 8, 1997,  reporting (i) the
                           acquisition  of  Oak  Creek  Factory  Outlets,   Bend
                           Factory  Outlets  and The  Factory  Outlets  at Posts
                           Falls (the "Benderson  Acquired  Properties")  for an
                           aggregate    purchase   price   of   $37.3   million.
                           (previously  reported  on Form  8-K  filed  with  the
                           Securities  and Exchange  Commission  on February 13,
                           1997) and (ii) its  intention  to purchase  the 25.0%
                           ownership  interest of its joint  venture  partner in
                           Buckeye  Factory  Shops  Limited   Partnership   (the
                           "Buckeye  Acquisitions") for $23.1 million (including
                           the   repayment   of  $22.6   million   of   mortgage
                           indebtedness  relating to such  property).  Pro forma
                           consolidated  financial statements of the Company and
                           audited statements of revenue and certain expenses of
                           the  acquired  properties  were  filed with this Form
                           8-K.

                           On  August  11,  1997,  the  Company  filed a Current
                           Report on Form 8-K, dated August 11, 1997, announcing
                           its  $60.0  million  private  placement  of  Series C
                           Preferred Securities.

                           On  August  27,  1997,  the  Company  filed a Current
                           Report on Form 8-K,  dated  August  27,  1997,  which
                           included certain documents  relating to the Company's
                           Registration   Statement   on  Form  S-3   (File  No.
                           333-29437). No financial statements were included.

<PAGE>
                                   SIGNATURES






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




                                                  PRIME RETAIL, INC.
                                                     Registrant


Date:  November 12, 1997                     /s/ Abraham Rosenthal
       ------------------                    ----------------------
                                             Abraham Rosenthal
                                             Chief Executive Officer





Date: November 12, 1997                       /s/ Robert P. Mulreaney
      ------------------                      -----------------------
                                              Robert P. Mulreaney
                                              Executive Vice President,
                                              Chief Financial Officer
                                              and Treasurer