United States

                       Securities and Exchange Commission
                             Washington, D.C. 20549


                                    FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the Quarterly Period Ended June 30, 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 July 25,  1997,  the issuer had  outstanding  15,794,951  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 June 30, 1997 and
     December 31, 1996.                                                       1

     Consolidated Statements of Operations for the three and
     six months ended June 30, 1997 and 1996.                                 2
     Consolidated Statements of Cash Flows for the six months
     ended June 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                               6


PART II:  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS                                                 18
ITEM 2.    CHANGES IN SECURITIES                                             18
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES                                   18
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               18
ITEM 5.    OTHER INFORMATION                                                 18
ITEM 6.    EXHIBITS OR REPORTS ON FORM 8-K                                   18

SIGNATURES                                                                   19

<PAGE>

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

                               PRIME RETAIL, INC.
                           CONSOLIDATED BALANCE SHEETS
                    (in thousands, except share information)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           JUNE 30, 1997           December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                          <C>
ASSETS
Investment in rental property:
     Land                                                                                     $ 51,291                     $ 44,731
     Buildings and improvements                                                                608,264                      570,761
     Property under development                                                                 39,220                       20,900
     Furniture and equipment                                                                     4,844                        4,367
                                                                                            -----------                   ----------
                                                                                               703,619                      640,759
     Accumulated depreciation                                                                  (69,001)                     (57,674)
                                                                                            -----------                   ----------
                                                                                               634,618                      583,085
Cash and cash equivalents                                                                          985                        3,924
Restricted cash                                                                                 47,346                       45,127
Accounts receivable, net                                                                         7,424                        6,096
Deferred charges, net                                                                           18,906                       20,841
Due from affiliates, net                                                                         1,313                        1,549
Investment in partnerships                                                                       5,729                        5,625
Other assets                                                                                     1,231                          556
                                                                                            -----------                  -----------
     Total assets                                                                             $717,552                     $666,803
                                                                                            ===========                  ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Bonds payable                                                                                 $ 32,900                     $ 32,900
Notes payable                                                                                  501,539                      466,623
Accrued interest                                                                                 3,584                        3,640
Real estate taxes payable                                                                        4,944                        2,138
Construction costs payable                                                                       1,402                        3,047
Accounts payable and other liabilities                                                          15,114                       19,246
                                                                                            -----------                  ----------
     Total liabilities                                                                         559,483                      527,594

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, 15,794,951 and 13,404,651
       shares issued and outstanding, respectively                                                 158                          134
Additional paid-in capital                                                                     197,074                      165,346
Distributions in excess of net income                                                          (39,216)                     (26,322)
                                                                                            -----------                  -----------
     Total shareholders' equity                                                                158,069                      139,209
                                                                                            -----------                  -----------

     Total liabilities and shareholders' equity                                               $717,552                     $666,803
                                                                                            ===========                  ===========
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.

<PAGE>

                               Prime Retail, Inc.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except per share information)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                 THREE MONTHS                    SIX MONTHS
                                                                                ENDED JUNE 30                  ENDED JUNE 30
                                                                          --------------------------     ---------------------------
                                                                                  1997         1996               1997         1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>                <C>          <C>

REVENUES
Base rents                                                                     $19,006      $12,786            $37,072      $25,530
Percentage rents                                                                   721          368              1,390          811
Tenant reimbursements                                                            8,969        5,895             17,918       12,034
Income (loss) from investment partnerships                                         (98)         168                (60)         609
Interest and other                                                               2,615          933              5,055        2,297
                                                                               -------      -------            -------      -------
     Total revenues                                                             31,213       20,150             61,375       41,281

EXPENSES
Property operating                                                               7,022        4,796             13,655        9,415
Real estate taxes                                                                2,399        1,012              4,789        2,485
Depreciation and amortization                                                    6,543        4,612             12,871        8,999
Corporate general and administrative                                             1,269          966              2,619        1,859
Interest                                                                         9,703        6,148             18,872       12,204
Other charges                                                                      694        6,566              1,493        7,212
                                                                               -------      -------            -------      -------
     Total expenses                                                             27,630       24,100             54,299       42,174
                                                                               -------      -------            -------      -------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
     EXTRAORDINARY ITEM                                                          3,583       (3,950)             7,076         (893)

(Income) loss allocated to minority interests                                   (2,672)       4,993             (5,263)       6,470
                                                                               -------      -------            -------      -------
INCOME BEFORE EXTRAORDINARY ITEM                                                   911        1,043              1,813        5,577
Extraordinary item - loss on early extinguishment of
     debt, net of minority interests of $3,263                                      -        (1,017)                -        (1,017)
                                                                               -------      -------            -------      -------
NET INCOME                                                                         911           26              1,813        4,560
Income allocated to preferred shareholders                                       3,093        3,000              6,186        8,236
                                                                               -------      -------            -------      -------
NET LOSS APPLICABLE TO COMMON SHARES                                          $ (2,182)    $ (2,974)          $ (4,373)    $ (3,676)
                                                                               =======      =======            =======      =======

PER COMMON SHARE:
     Loss before extraordinary item                                           $  (0.14)    $  (0.62)          $  (0.29)    $  (0.88)
     Extraordinary item                                                            -          (0.32)               -          (0.34)
                                                                                -------      -------            -------      -------
     Net loss                                                                 $  (0.14)    $  (0.94)          $  (0.29)    $  (1.22)
                                                                                =======      =======            =======      =======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                      15,795        3,171             15,073        3,023
                                                                                =======      =======            =======      ======

DISTRIBUTIONS DECLARED PER COMMON SHARE                                       $  0.295     $  0.295           $  0.590     $  0.735
                                                                                =======      =======            =======     ========
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.

<PAGE>

                               PRIME RETAIL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                   SIX MONTHS ENDED JUNE 30
                                                                                               ----------------------------------
                                                                                                        1997                1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>                   <C>
OPERATING ACTIVITIES
Net income                                                                                         $   1,813             $ 4,560
Adjustments to reconcile net income to
    net cash provided by operating activities:
      Income (loss) allocated to minority interests                                                    5,263              (6,470)
      Extraordinary loss for early retirement of debt                                                      -               1,017
      Write-off of financing costs                                                                         -               6,131
      Gains on sale of outlots                                                                          (598)                  -
      Depreciation and amortization                                                                   12,871               8,999
      Amortization of deferred financing costs and
        interest rate protection contracts                                                             1,925               2,250
      Cash distributions in excess of equity earnings
        from joint ventures                                                                              480                  79
      Provision for uncollectible accounts receivable                                                    475                 281
Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                                                      (1,803)              1,882
      (Increase) decrease in due from affiliates, net                                                    236                (104)
      Increase in other assets                                                                        (2,939)               (863)
      Increase (decrease) in accrued interest                                                            (56)                122
      Increase (decrease) in accounts payable and other liabilities                                   (1,410)              1,701
                                                                                                     --------             -------
        Net cash provided by operating activities                                                     16,257              19,585

INVESTING ACTIVITIES
Proceeds from sale of outlots                                                                            900                   -
Purchase of buildings and improvements                                                                (9,124)             (3,704)
Increase in property under development                                                               (19,157)            (20,235)
Deferred leasing commissions                                                                               -                 (21)
Acquisition of outlet centers                                                                        (37,658)                 -
                                                                                                     --------             -------
        Net cash used in investing activities                                                        (65,039)            (23,960)

FINANCING ACTIVITIES
Net proceeds from issuance of common and preferred stock                                              31,754                   -
Proceeds from notes payable                                                                           66,633              14,700
Principal repayments on notes payable                                                                (31,717)             (1,877)
Deferred financing costs                                                                                (857)             (2,873)
Distributions and dividends paid                                                                     (14,707)            (12,170)
Distributions to minority interests                                                                   (5,263)             (4,292)
                                                                                                     --------             -------
        Net cash provided by (used in) financing activities                                           45,843              (6,512)
                                                                                                     --------             -------
Decrease in cash and cash equivalents                                                                 (2,939)            (10,887)
Cash and cash equivalents at beginning of period                                                       3,924              14,927
                                                                                                     --------             -------
Cash and cash equivalents at end of period                                                         $     985             $ 4,040
                                                                                                     ========             =======
=================================================================================================================================
</TABLE>
See accompanying notes to financial statements.

<PAGE>
                               PRIME RETAIL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Amounts in thousands, except share and unit information)


NOTE 1 -- INTERIM FINANCIAL PRESENTATION

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial  information  and the  instructions  to Form  10-Q and  Article  10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes required by GAAP for complete financial statements.  In the opinion of
management,  all adjustments  consisting only of recurring  accruals  considered
necessary for a fair presentation have been included. Operating results for such
interim  periods are not  necessarily  indicative  of the  results  which may be
expected  for a  full  fiscal  year.  For  further  information,  refer  to  the
consolidated  financial statements and footnotes included in Prime Retail's (the
"Company") annual report on Form 10-K 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 six months ended June 30,
1997 and 1996.

<PAGE>

NOTE 3 -- 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 of $4,674 incurred during
the six months  ended June 30, 1997 that were  allocable  to minority  interests
were allocated to common  shareholders.  The cumulative  amount of distributions
and losses that were  allocable  to minority  interests  that were  allocated to
common shareholders at June 30, 1997 was $8,131. There were no distributions and
losses   allocable  to  minority   interests  which  were  allocated  to  common
shareholders during the six months ended June 30, 1996.


NOTE 4 -- ACQUISITIONS

On February 7, 1997,  the Company  purchased  an  additional  20.0%  partnership
interest in Oxnard Factory  Outlet from an unrelated  third party for $334. As a
result of this  purchase,  the Company  owns a 50.0%  equity  interest in Oxnard
Factory Outlet.  The remaining 50.0% equity interest is owned by an affiliate of
Fru-Con Projects, Inc.

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.


NOTE 5 -- PUBLIC 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
"1997  Stock  Offering").  As a result of the 1997 Stock  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.


NOTE 6 -- 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
disclosed in the Consolidated Statement of Operations.

<PAGE>

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

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


INTRODUCTION

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

CAUTIONARY STATEMENTS

The following  discussion in "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect  management's  current views with respect to future events and financial
performance.  Such  forward-looking  statements are subject to certain risks and
uncertainties;  including,  but not limited to, the effects of future  events on
the Company's financial performance;  the risk that the Company may be unable to
finance its planned development activities; risks related to the retail industry
in which the Company's  factory outlet centers compete,  including the potential
adverse  impact of external  factors,  such as inflation,  consumer  confidence,
unemployment  rates and consumer tastes and  preferences;  risks associated with
the Company's property  development  activities,  such as the potential for cost
overruns,  delays and the lack of  predictability  with respect to the financial
returns  associated  with these  development  activities;  the risk of potential
increase in market interest rates from current levels; 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  6,138,000  square feet of gross leasable area
("GLA") at June 30, 1997,  compared to seventeen factory outlet centers totaling
4,331,000 square feet of GLA at June 30, 1996.

The Company  purchased  three factory outlet centers during the first quarter of
1997,  adding  358,000  square feet of GLA in the  aggregate.  During 1996,  the
Company opened two new factory outlet centers and nine expansions,  and acquired
two  factory  outlet  centers,  adding  1,449,000  square  feet  of  GLA  in the
aggregate. Additionally, the Company purchased its joint venture partner's first
mortgage and 50% partnership interest in Grove City Factory Shops Partnership on
November 1, 1996 and now owns 100% 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  June  30,  1997  compared  to the  portfolio  of
properties  at June 30,  1996,  is  collectively  referred to as the  "Portfolio
Expansion".

<PAGE>

TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1997
<TABLE>
<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            92%
                                                                     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            88
                                                                     II             July 1992       68,000            89
                                                                                                   -------          -----
                                                                                                   179,000            88

Gulf Coast Factory Shops--Ellenton, Florida                           I          October 1991      187,000            99
                                                                     II           August 1993      123,000            99
                                                                    III          October 1996       30,000           100
                                                                                                   -------          -----
                                                                                                   340,000            99

Triangle Factory Shops--Raleigh-Durham, North Carolina                I          October 1991      181,000            99
                                                                     II             July 1996        6,000           100
                                                                                                   -------          -----
                                                                                                   187,000            99

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
                                                                                                   -------          -----
                                                                                                   370,000           100

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

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

Gainesville Factory Shops--Gainesville, Texas                         I           August 1993      210,000            92
                                                                     II         November 1994      106,000            89
                                                                                                   -------          -----
                                                                                                   316,000            91

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             June 1994      148,000            90

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            97
                                                                                                   -------          -----
                                                                                                  533,000             99
</TABLE>

<PAGE>

TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1997 (CONTINUED)
<TABLE>
<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             90%
                                                                     II         November 1995      90,000             71
                                                                                                  -------           -----
                                                                                                  282,000             84

Florida Keys Factory Shops--Florida City, Florida                     I        September 1994     208,000             98

Indiana Factory Shops--Daleville, Indiana                             I         November 1994     208,000             97
                                                                    IIA         November 1996      26,000             35
                                                                                                  -------           -----
                                                                                                  234,000             90


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             86
                                                                    IIA         November 1995      56,000             69
                                                                    IIB             July 1996      21,000             66
                                                                                                  -------           -----
                                                                                                  315,000             82

Arizona Factory Shops(8)--Phoenix, Arizona                            I        September 1995     217,000             96
                                                                     II        September 1996     109,000             82
                                                                                                  -------           -----
                                                                                                  326,000             91

Gulfport Factory Shops(9)--Gulfport, Mississippi                      I         November 1995     228,000             99
                                                                    IIA         November 1996      40,000             85
                                                                                                  -------           -----
                                                                                                  268,000             97

Buckeye Factory Shops(10)--Burbank, Ohio                              I         November 1996     205,000             94

Carolina Factory Shops--Gaffney, South Carolina                       I         November 1996     235,000             91
                                                                                                  -------           -----
TOTAL FACTORY OUTLET CENTER PORTFOLIO(11)                                                       6,138,000             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 June 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) The  Company  owns 75% of this  factory  outlet  center in a joint  venture
     partnership with an unrelated third party.
(11) The Company also owns three  community  centers  containing  424,000 square
     feet of GLA in the aggregate that were 96% leased as of June 30, 1997.
(12) Fully  executed  leases as of June 30,  1997 as a percent of square feet of
     GLA.
</FN>
</TABLE>
<PAGE>

COMPARISON  OF THE THREE  MONTHS  ENDED JUNE 30, 1997 TO THE THREE  MONTHS ENDED
JUNE 30, 1996

Summary

For the three  months ended June 30,  1997,  the Company  reported net income of
$911 on total revenues of $31,213. For the three months ended June 30, 1997, the
net loss applicable to common shareholders was $2,182 or $0.14 per common share.

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

Revenues

Total revenues were $31,213 for the three months ended June 30, 1997 compared to
$20,150 for the three  months ended June 30,  1996,  an increase of $11,063,  or
54.9%.  Base rents  increased  $6,220,  or 48.6%,  in the second quarter of 1997
compared to the second quarter of 1996. These increases are primarily due to the
Portfolio Expansion.  Straight-line rents (included in base rents) were $127 and
$99 for the three  months  ended June 30,  1997 and 1996,  respectively.  Tenant
reimbursements, which represent the contractual recovery from tenants of certain
operating  expenses,  increased  by $3,074,  or 52.1 %, during the three  months
ended June 30, 1997 over the same period in 1996. These increases were primarily
due to the Portfolio Expansion.

Income (loss) from investment partnerships decreased by $266, or 158.3%, for the
three months ended June 30, 1997 to $(98) from $168 for the same period in 1996.
This  decrease  reflects the Company's  purchase of its joint venture  partner's
first  mortgage  and 50%  partnership  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  share of a loss incurred by Buckeye Factory Shops of $152 for the
three months ended June 30, 1997. The decrease in income (loss) from  investment
partnerships during the second quarter of 1997 compared to the second quarter of
1996 was  offset,  in part,  by the  opening of  Arizona  Factory  Shops  (Phase
II--September 1996).

Interest and other income increased by $1,682,  or 180.3%,  to $2,615 during the
three  months ended June 30, 1997 as compared to $933 for the three months ended
June 30, 1996. The increase reflects increases in interest income of $752, gains
on outlot sales of $598, temporary tenant income of $172, lease buy-out and late
fee income of $168, municipal assistance income of $140, and ancillary income of
$24,   partially  offset  by  reduced  property   development  and  construction
management  fees of $172.  The increase in interest  income was primarily due to
interest  earnings  on the  Company's  $40,000  expansion  loan  escrow  account
included in restricted cash.

Expenses

Property  operating  expenses  increased by $2,226,  or 46.4%, to $7,022 for the
three months ended June 30, 1997 compared to $4,796 for the same period in 1996.
Real estate taxes increased by $1,387, or 137.1%, to $2,399 for the three months
ended June 30, 1997,  from $1,012 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

<PAGE>

by  $1,931,  or 41.9%,  to $6,543  for the three  months  ended  June 30,  1997,
compared to $4,612 for 1996.  This increase  results from the  depreciation  and
amortization of assets associated with 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
                                                                 JUNE 30
                                                    ---------------------------
                                                            1997           1996
-------------------------------------------------------------------------------
Building and improvements                                 $3,450         $2,226
Land improvements                                            727            474
Tenant improvements                                        1,649          1,248
Furniture and fixtures                                       200            160
Leasing commissions(1)                                       517            504
                                                         -------        -------
       Total                                              $6,543         $4,612
                                                         =======        =======
===============================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

TABLE 3 -- COMPONENTS OF INTEREST EXPENSE

The components of interest expense are summarized as follows:

-------------------------------------------------------------------------------
                                                           THREE MONTHS ENDED
                                                                  JUNE 30
                                                     --------------------------
                                                            1997           1996
-------------------------------------------------------------------------------
Interest incurred                                         $9,721         $5,753
Interest capitalized                                        (975)          (705)
Interest earned on interest rate protection contracts        (24)           (38)
Amortization of deferred financing costs                     622            819
Amortization of interest rate protection contracts           359            319
                                                         -------        -------
       Total                                              $9,703         $6,148
                                                         =======        =======
================================================================================

As shown in TABLE 3,  interest  expense for the three months ended June 30, 1997
increased by $3,555,  or 57.8%, to $9,703 compared to $6,148 for the same period
in 1996. This increase  reflects higher interest  incurred of $3,968, a decrease
in amortization  of deferred  financing costs of $197, an increase in the amount
of interest  capitalized  in connection  with  development  projects of $270, an
increase in the amortization of interest rate protection contracts of $40, and a
reduction in interest earned on interest rate protection contracts of $14.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $222,050 in the  Company's  average debt  outstanding  during the
three  months  ended June 30,  1997  compared  to the same  period in 1996.  The
weighted  average  interest  rates  were  7.32%  and 7.45% for the 1997 and 1996
periods, respectively.

Other charges  decreased by $5,872, or 89.4%, to $694. The decrease is primarily
attributable  to the  Nonrecurring  Charge of $6,131  incurred  during  the 1996
period,  partially  offset  by a higher  provision  for  uncollectable  accounts
receivable of $164 and other miscellaneous charges of $95.

<PAGE>

In connection with re-leasing  space to new merchants,  the Company incurred $89
and $121 in capital expenditures during the three months ended June 30, 1997 and
1996, respectively.

COMPARISON  OF THE SIX MONTHS  ENDED JUNE 30, 1997 TO THE SIX MONTHS  ENDED JUNE
30, 1996

Summary

For the six months  ended June 30,  1997,  the  Company  reported  net income of
$1,813 on total revenues of $61,375. For the six months ended June 30, 1997, the
net loss  applicable  to common  shareholders  was  $4,373,  or $0.29 per common
share.

For the six months  ended June 30,  1996,  the  Company  reported  net income of
$4,560 on total  revenues of $41,281.  These  results  include 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 June 5, 1996.  For the six months  ended June 30,
1996,  the net loss  applicable to common  shareholders  was $3,676 or $1.22 per
common share.

Revenues

Total  revenues were $61,375 for the six months ended June 30, 1997, as compared
to $41,281 for the six months  ended June 30, 1996,  an increase of $20,094,  or
48.7%. Base rents increased $11,542,  or 45.2%, during the six months ended June
30, 1997 compared to the same period in 1996.  These increases are primarily due
to the Portfolio  Expansion.  Straight-line  rents (included in base rents) were
$252 and $237 for the six  months  ended June 30,  1997 and 1996,  respectively.
Tenant reimbursements,  which represent the contractual recovery from tenants of
certain operating expenses, increased by $5,884, or 48.9%, during the six months
ended June 30, 1997 over the same period in 1996.  These increases are primarily
due to the Portfolio Expansion.

Income (loss) from investment partnerships decreased by $669, or 109.9%, for the
six months  ended June 30,  1997 to $(60) from $609 for the same period in 1996.
This  decrease  reflects the Company's  purchase of its joint venture  partner's
first  mortgage  and 50%  partnership  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 in income
(loss) from  investment  partnerships  was also due to a decrease of $185 in the
Company's share of earnings in its joint ventures.

Interest and other income increased by $2,758,  or 120.1%,  to $5,055 during the
six months  ended June 30, 1997 as  compared to $2,297 for the six months  ended
June 30, 1996. The increase  reflects higher interest income of $1,580,  gain on
outlot sales of $598,  temporary  tenant  income of $364,  municipal  assistance
income of $241,  customer  service  income of $70, and ancillary  income of $51.
These increases were offset by reduced  property  development  and  construction
management fees and property management fees of $77 and $69,  respectively.  The
increase  in  interest  income was  primarily  due to  interest  earnings on the
Company's $40,000 expansion loan escrow included in restricted cash.

For the six months ended June 30, 1997, same-space sales in centers owned by the
Company increased 2.2% compared to the same period in 1996. Excluding 1996 sales
reported  by a  tenant  that  departed  Triangle  Factory  Shops  in July  1996,
same-space  sales increased 6.3% for the six months ended June 30, 1997 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.

<PAGE>

The Company's same-space sales for the year ended December 31, 1996 were $232.45
per square  foot.  For the six  months  ended June 30,  1997,  same-store  sales
increased  by 4.4%  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.

Expenses

Property  operating  expenses  increased by $4,240, or 45.0%, to $13,655 for the
six months  ended June 30, 1997  compared to $9,415 for the same period in 1996.
Real estate taxes  increased by $2,304,  or 92.7%,  to $4,789 for the six months
ended June 30, 1997 from $2,485 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 $3,872, or 43.0%, to $12,871 for the six months ended June 30, 1997
compared to $8,999 for 1996.  This increase  results from the  depreciation  and
amortization of assets associated with the Portfolio Expansion.

TABLE 4 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE

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

-------------------------------------------------------------------------------
                                                            SIX MONTHS ENDED
                                                                  JUNE 30
                                                     --------------------------
                                                             1997          1996
-------------------------------------------------------------------------------
Building and improvements                                  $6,708        $4,455
Land improvements                                           1,354           953
Tenant improvements                                         3,476         2,354
Furniture and fixtures                                        402           315
Leasing commissions(1)                                        931           922
                                                         --------       -------
       Total                                              $12,871        $8,999
                                                         ========       =======
===============================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

TABLE 5 -- COMPONENTS OF INTEREST EXPENSE

The components of interest expense are summarized as follows:

-------------------------------------------------------------------------------
                                                            SIX MONTHS ENDED
                                                                 JUNE 30
                                                     --------------------------
                                                             1997          1996
-------------------------------------------------------------------------------
Interest incurred                                         $18,830       $11,394
Interest capitalized                                       (1,820)       (1,318)
Interest earned on interest rate protection contracts         (63)         (122)
Amortization of deferred financing costs                    1,230         1,612
Amortization of interest rate protection contracts            695           638
                                                         --------      --------
       Total                                              $18,872       $12,204
                                                         ========      ========
===============================================================================

As shown in TABLE 5,  interest  expense  for the six months  ended June 30, 1997
increased  by $6,668,  or 54.6%,  to $18,872  compared  to $12,204  for the same
period in 1996. This increase  reflects higher interest  incurred of $7,436,  an
increase in  amortization  of interest  rate  protection  contracts of $57 and a
reduction  in interest  earned on interest  rate  protection  contracts  of $59,
partially offset by a

<PAGE>

decrease in amortization of deferred  financing costs of $382 and an increase in
the amount of interest  capitalized in connection with  development  projects of
$502.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $217,752 in the Company's average debt outstanding during the six
months  ended June 30, 1997  compared to the same period in 1996.  The  weighted
average  interest  rates  were  7.18% and  7.44% for the 1997 and 1996  periods,
respectively.

Other  charges  decreased  by $5,719,  or 79.3%,  to $1,493.  This  decrease  is
primarily  attributable  to the  Nonrecurring  Charge of $6,131  during the 1996
period  partially  offset  by a  higher  provision  for  uncollectable  accounts
receivable of $194,  higher  marketing  costs of $211,  and other  miscellaneous
charges of $7.

In connection with re-leasing space to new merchants,  the Company incurred $140
and $121 in capital  expenditures  during the six months ended June 30, 1997 and
1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH -- GENERAL

For the six  months  ended  June  30,  1997,  net  cash  provided  by  operating
activities  was $15,837.  Net cash used in investing  activities was $64,619 for
the six months ended June 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 an additional 20% equity interest in a
factory outlet center, and costs for pre-development  activities associated with
future  development.  Net cash provided by financing  activities was $45,843 for
the six months ended June 30, 1997.  The  principal  sources of these funds were
the proceeds from new  borrowings and the Company's  public  offering of certain
equity  securities.  Such proceeds were offset by principal  repayments on notes
payable of $31,717, distributions to minority interests (including distributions
to the limited  partner unit holders) of $5,263,  and preferred and common stock
distributions of $14,707.

SOURCES AND USES OF CASH -- 1997 PUBLIC OFFERING OF COMMON
STOCK AND CONVERTIBLE PREFERRED STOCK

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 "1997 Stock 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 1997  Stock  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 1997 Stock 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
"Shelf  Registration") with the SEC to register $300,000 of the Company's equity
securities.  From time to time,  the Company will  consider  issuing  additional
equity   securities  under  the  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.

<PAGE>

SOURCES AND USES OF CASH -- PROPERTY ACQUISITIONS

On February 7, 1997,  the Company  purchased  an  additional  20.0%  partnership
interest in Oxnard Factory  Outlet from an unrelated  third party for $334. As a
result of this  purchase,  the Company  owns a 50.0%  equity  interest in Oxnard
Factory  Outlet.  The remaining  50.0% equity  interest is owned by an unrelated
third party.

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.

Oak Creek  Factory  Outlets is located  in  Sedona,  Arizona,  which is north of
Phoenix  and  south of the Grand  Canyon.  Oak Creek  Factory  Outlets  contains
approximately  82,000  square feet of GLA and was 99% occupied at June 30, 1997.
Bend Factory Outlets is located in Bend, Oregon, which is east of Eugene, Oregon
and southeast of Portland.  Bend Factory Outlets contains  approximately  97,000
square feet of GLA and was 100%  occupied at June 30, 1997.  Factory  Outlets at
Post Falls is located in Post Falls,  Idaho,  which is 30 miles east of Spokane,
Washington.  Factory Outlets at Post Falls contains approximately 179,000 square
feet of GLA and was 86% occupied at June 30, 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  250,000 square feet of GLA
during 1997 in connection  with planned  expansions of existing  factory  outlet
centers. At June 30, 1997, the remaining budgeted capital expenditures for these
expansions   aggregated   approximately   $19,617,   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 $6,700.

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,  the  sale  of  equity
securities in the public or private capital markets, and funds provided by joint
venture partners.

The Company plans to open new factory outlet centers and expansions in 1998 that
are expected to contain between approximately 700,000 and 900,000 square feet of
GLA,  in the  aggregate,  and have a total  expected  development  cost  ranging
between approximately $91,400 and $118,800, respectively. 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, and (iv) 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.
<PAGE>

DEBT REPAYMENTS AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS

The Company's aggregate  indebtedness was $534,439 and $499,523 at June 30, 1997
and December 31, 1996,  respectively.  At June 30, 1997, such indebtedness had a
weighted  average  maturity of 6.3 years and bore interest at a weighted average
interest rate of 7.3% per annum.  At June 30, 1997,  $58,184,  or 10.9%, of such
indebtedness  bore  interest  at fixed  rates and  $476,255,  or 89.1%,  of such
indebtedness,   including   $28,250  of  tax-exempt   bonds,  bore  interest  at
variable-rates.  Of the variable-rate  indebtedness,  approximately  $357,362 is
scheduled  to  convert  to a fixed  rate of  7.782%  in  November  1998  for the
remaining five years of the note.

At June 30, 1997, the Company held interest rate protection contracts on $28,250
of floating rate  tax-exempt  indebtedness  and $357,362 of other  floating rate
indebtedness (or approximately  81.0% of its total floating rate  indebtedness).
These contracts expire in 1999 and 1998, respectively.  In addition, the Company
held additional  interest rate  protection  contracts on $43,900 of the $357,362
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 June 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 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 54.0%.

The Company is obligated to repay  $18,675 of mortgage  indebtedness  during the
remainder of 1997 and $45,442 in 1998.  Annualized  cumulative  dividends on the
Company's Senior Preferred Stock and Convertible  Preferred Stock outstanding as
of June 30,  1997 are $6,037  and  $6,336,  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 June 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.  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.

<PAGE>

In March  1995,  the  National  Association  of Real  Estate  Investment  Trusts
established  guidelines clarifying the definition of FFO (as modified,  the "New
Definition").  The Company reports FFO under both the Old Definition and the New
Definition.  For the Company,  the primary impact of adopting the New Definition
was a reduction  in FFO since the  amortization  of  capitalized  debt costs and
depreciation  of  non-real  estate  assets are not added  back to income  before
allocations to minority interests and preferred shareholders.

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

TABLE 7 provides a  reconciliation  of income  before  allocations  to  minority
interests and preferred  shareholders  to FFO under the New  Definition  and Old
Definition for the three and six months ended June 30, 1997 and 1996.

New Definition FFO before  allocations  to preferred  shareholders  and minority
interests  was $10,586 for the three months ended June 30, 1997 compared to $951
for the three months ended June 30, 1996. New Definition FFO before  allocations
to preferred  shareholders and minority interests was $20,838 for the six months
ended June 30, 1997  compared to $8,566 for the six months  ended June 30, 1996.
The  increases  in the  1997  periods  when  compared  to the 1996  periods  are
primarily  due to the  Nonrecurring  Charge of $6,131  incurred  during the 1996
periods and the Portfolio  Expansion.  Excluding the effect of the  Nonrecurring
Charge,  New Definition FFO before  allocations  to preferred  shareholders  and
minority  interests  increased  $3,504,  or 49.5%, and $6,141, or 41.8%, for the
three and six months  ended June 30,  1997,  respectively,  compared to the same
periods in 1996.  These  increases are primarily  attributable  to the Portfolio
Expansion.

Upon  payment of the  scheduled  distributions  with respect to the common units
held by Prime  Retail,  Inc. and the limited  partners on August 15,  1997,  the
preferential  distribution  with respect to the common units held by the Company
will terminate since the Company will have paid equal distributions of $0.295 to
both the common  shareholders  and the  limited  partner  unit  holders for four
successive quarters.  For purposes of determining the amount of distributions to
the limited  partners and whether the Company's FFO was  sufficient to terminate
the preferential distribution, FFO was calculated under the Old Definition. As a
result of the termination of the  preferential  distribution,  commencing in the
third  quarter  of 1997,  the  Company  will no longer  report FFO under the Old
Definition and the New Definition.  Rather,  the Company will report its results
only under the New Definition.
<PAGE>

TABLE 7 -- FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                  THREE MONTHS ENDED JUNE 30                 SIX MONTHS ENDED JUNE 30
                                                 1997    1996      1997      1996      1997     1996        1997       1996
----------------------------------------------------------------------------------------------------------------------------
                                              (New Definition)    (Old Definition)   (New Definition)     (Old Definition)
<S>                                          <C>      <C>       <C>       <C>       <C>      <C>        <C>        <C>
Income (loss) before minority interests
   and extraordinary item                    $  3,583 $(3,950)  $  3,583  $(3,950)  $  7,076 $  (893)   $  7,076   $   (893)
FFO adjustments:
Depreciation and amortization                   6,473   4,420      6,543    4,612     12,747   8,619      12,871      8,999
Amortization of deferred financing costs
   and interest rate protection contracts           -       -        981    1,138          -       -       1,925      2,249
Unconsolidated joint venture adjustments
                                                  530     481        535      482      1,015     840       1,025        842
                                              ------- -------    -------  -------    -------  ------     -------    -------
FFO before allocations to minority
   interests and preferred shareholders       $10,586 $   951    $11,642  $ 2,282    $20,838  $8,566     $22,897    $11,197
                                              ======= =======    =======  =======    =======  ======     =======    =======
==============================================================================================================================
</TABLE>

<PAGE>

PART II:  OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS
                  None

ITEM 2.           CHANGES IN SECURITIES
                  None

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES
                  None

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  At the Company's Annual  Shareholders  Meeting held on May 29,
                  1997  (the  "Annual  Meeting"),   the  nominees  for  director
                  proposed by the Company were elected. The votes cast for these
                  nominees were as set forth below:

                                                 For              Withheld
                                           --------------     ---------------
                  Michael W. Reschke         14,264,828            31,329
                  Terence C. Golden          14,265,078            31,129

                  In addition, at the Annual Meeting, the proposal to ratify the
                  selection  of the firm of Ernst & Young  LLP as the  Company's
                  independent auditors for the year ending December 31, 1997 was
                  approved. The votes cast with respect to that proposal were as
                  set forth below:

                                     For           Against         Abstain
                                -------------   --------------  ------------
                                  14,238,329        14,473         43,355

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

                  (b)      Reports on Form 8-K:
                           None

<PAGE>

                                   SIGNATURES




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




                                                  PRIME RETAIL, INC.
                                                  Registrant



Date:  July 29, 1997                              /s/ Abraham Rosenthal
       -------------------------------------      ----------------------
                                                  Abraham Rosenthal
                                                  Chief Executive Officer





Date: July 29, 1997                               /s/ Robert P. Mulreaney
      --------------------------------------      ------------------------
                                                  Robert P. Mulreaney
                                                  Executive Vice President,
                                                    Chief Financial Officer
                                                    and Treasurer