---

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, 2003

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 No. 1-12328

CHELSEA PROPERTY GROUP, INC.(Exact name of registrant as specified in its charter)

|Maryland(State or other jurisdiction
of incorporation or organization) | 22-3251332(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------- | ----------------------------------------------

103 Eisenhower Parkway, Roseland, New Jersey 07068(Address of principal executive offices - zip code)

(973) 228-6111(Registrant's telephone number, including area code)

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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days YesX  No.

Indicate by check mark whether the registrant is an accelerated filer.
Yes   X      No

The number of shares outstanding of the registrant's common
stock, $0.01 par value was 43,179,850 at August 1, 2003.

---

Chelsea Property Group, Inc.

Index

Part I. Financial Information

|Item 1. | Financial Statements (Unaudited) | Page
|------- | -------------------------------- | ----

| | Condensed Consolidated Balance Sheets
     as of June 30, 2003, and December 31, 2002 | 2
| | ------------------------------------------------------------------------------------- | -

| | Condensed Consolidated Statements of Income
     for the three and six months ended June 30, 2003, and 2002 | 3
| | ----------------------------------------------------------------------------------------------------------- | -

| | Condensed Consolidated Statements of Cash Flows
     for the six months ended June 30, 2003, and 2002 | 4
| | ----------------------------------------------------------------------------------------------------- | -

| | Notes to Condensed Consolidated Financial Statements | 5
| | ---------------------------------------------------- | -

|Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations | 19
|------- | ------------------------------------------------------------------------------------------ | --

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 27
|------- | ---------------------------------------------------------- | --

|Item 4. | Controls and Procedures | 27
|------- | ----------------------- | --

Part II. Other Information

|Item 4. | Submission of Matters to a Vote of Security Holders | 28
|------- | --------------------------------------------------- | --

|Item 6. | Exhibits and Reports on Form 8-K | 28
|------- | -------------------------------- | --

|Signatures | 29
|---------- | --

Chelsea Property Group, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)

`June 30,            December 31,
                                                                                      2003                  2002
                                                                                ---------------       --------------
Assets:                                                                          (Unaudited)
Rental properties:
     Land..................................................................      $   285,424          $    266,461
     Depreciable property..................................................        1,675,145             1,570,713
                                                                                ---------------       --------------
Total rental property......................................................        1,960,569             1,837,174
Accumulated depreciation...................................................         (313,794)             (284,239)
                                                                                ---------------       --------------
Rental properties, net.....................................................        1,646,775             1,552,935
Cash and cash equivalents..................................................           21,306                22,551
Restricted cash-escrows....................................................            4,525                 3,455
Tenant accounts receivable (net of allowance for doubtful
      accounts of $2,317 in 2003 and $2,593 in 2002).......................            2,559                 7,762
Deferred rent receivable...................................................           21,778                18,778
Investments in unconsolidated affiliates...................................           72,774                47,997
Notes receivable-related parties...........................................            2,728                 2,746
Deferred costs, net........................................................           14,475                16,706
Other assets...............................................................           29,695                30,100
                                                                                --------------        --------------
Total assets...............................................................       $1,816,615           $ 1,703,030
                                                                                ===============       ==============

Liabilities and stockholders' equity:
Liabilities:
     Unsecured bank debt...................................................          $83,035             $ 103,035
     Unsecured notes.......................................................          621,584               621,330
     Mortgage debt.........................................................          363,348               306,455
     Construction payables.................................................            6,964                 8,046
     Accounts payable and accrued expenses.................................           44,226                43,570
     Obligation under capital lease........................................            1,191                 1,507
     Accrued dividend and distribution payable.............................           28,284                 4,927
     Other liabilities.....................................................           21,342                18,886
                                                                                ---------------       --------------
Total liabilities..........................................................        1,169,974             1,107,756

Commitments and contingencies

Minority interest..........................................................          137,974               139,443

Stockholders' equity:
     8.375% series A cumulative redeemable preferred stock, $0.01
         par value, authorized 5,000 shares, issued and outstanding
         797 in 2003 and 2002 (aggregate liquidation preference of
         $39,847 in 2003 and 2002).........................................                8                     8
     Common stock, $0.01 par value, authorized 100,000 shares,
       43,078 in 2003 and 41,485 in 2002...................................              431                   415
     Paid-in-capital.......................................................          629,052               574,352
     Officer loan..........................................................             (488)                 (488)
     Distributions in excess of net income ................................         (114,920)             (112,648)
     Accumulated other comprehensive loss..................................           (5,416)               (5,808)
                                                                                ---------------       --------------
Total stockholders' equity.................................................          508,667               455,831
                                                                                ---------------       --------------
Total liabilities and stockholders' equity.................................       $1,816,615            $1,703,030
                                                                                ===============       ==============`

The accompanying notes are an integral part of the financial statements.

Chelsea Property Group, Inc.
Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30, 2003, and 2002
(Unaudited)(In thousands, except per share data)

`Three Months               Six Months
                                                                       Ended June 30,             Ended June 30,
                                                                  2003           2002           2003         2002
                                                            ----------  -------------  ------------- -------------
Revenues:
   Base rent.........................................           $60,001        $43,181       $119,751       $81,571
   Percentage rent...................................             4,993          4,465          9,178         7,519
   Expense reimbursements............................            20,596         14,485         39,328        27,019
   Other income......................................             1,816          2,711          3,291         5,214
                                                            ---------------  ------------  -----------   -------------
Total revenues.......................................            87,406         64,842        171,548       121,323
                                                            ---------------  ------------  -----------   -------------

Expenses:
   Operating and maintenance.........................            24,516         18,135         47,440        34,283
   Depreciation and amortization.....................            17,258         14,222         34,872        27,139
   General and administrative........................             2,468          1,921          4,669         3,438
   Other.............................................             1,632          1,085          3,068         2,191
                                                            ---------------  ------------  -----------   -------------
Total expenses.......................................            45,874         35,363         90,049        67,051
                                                            ---------------  ------------  -----------   -------------
Income before unconsolidated investments,
interest expense, minority interest and
discontinued operations..............................            41,532         29,479         81,499        54,272
Income from unconsolidated investments...............             2,495          2,982          3,946         6,752
Loss from Chelsea Interactive........................              (905)        (3,776)        (1,742)       (6,476)
Interest expense.....................................           (16,553)       (10,843)       (33,187)      (20,593)
                                                            ---------------  ------------  -----------   -------------
Income from continuing operations before
minority interest....................................            26,569         17,842         50,516        33,955
Minority interest  attributed to continuing
operations...........................................            (5,114)        (3,671)        (9,908)       (7,107)
                                                            ---------------  ------------ ------------- -------------
Income from continuing operations....................            21,455         14,171         40,608        26,848
Income from discontinued operations, net of
minority interest....................................                76             86            170           200
Gain on sale of discontinued operations, net of
minority interest....................................             4,008              -          4,008             -
                                                            ---------------  ------------ ------------- -------------
Net income...........................................            25,539         14,257         44,786        27,048
Preferred dividend...................................              (834)          (849)        (1,668)       (1,753)
                                                            ---------------  ------------ ------------- -------------
Net income available to common shareholders..........           $24,705        $13,408        $43,118       $25,295
                                                            ===============  ============ ============= =============

Basic:
Income from continuing operations....................             $0.49          $0.35          $0.93         $0.66
Income from discontinued operations..................                 -              -              -          0.01
Gain on sale of discontinued operations..............              0.10              -           0.10             -
                                                            ---------------  ------------ ------------- -------------
Net income per common share..........................             $0.59          $0.35          $1.03         $0.67
                                                            ===============  ============ ============= =============
Weighted average common shares outstanding...........            42,041         37,877         41,801        37,725
                                                            ===============  ============ ============= =============

Diluted:
Income from continuing operations....................             $0.47          $0.34          $0.89         $0.64
Income from discontinued operations..................                 -              -              -          0.01
Gain on sale of discontinued operations..............              0.09              -           0.10             -
                                                            ---------------  ------------ ------------- -------------
Net income per common share..........................             $0.56          $0.34          $0.99         $0.65
                                                            ===============  ============ ============= =============
Weighted average common shares outstanding...........            43,997         39,375         43,655        39,076
                                                            ===============  ============ ============= =============`

The accompanying notes are an integral part of the financial statements.

Chelsea Property Group, Inc.
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2003 and 2002
(Unaudited)(In thousands)

`2003                2002
                                                                          ---------------     -------------
Cash flows from operating activities
Net income.......................................................             $44,786             $27,048
Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization.................................              34,901              27,184
   Equity-in-earnings of unconsolidated investments in
       excess of distributions received..........................              (1,240)               (974)
   Loss from Chelsea Interactive.................................                   -               6,476
   Loss on interest rate swap....................................                 514                   -
   Gain on sale of discontinued operations.......................              (4,008)                  -
   Minority interest in net income...............................               9,938               7,140
   Proceeds from non-compete receivable..........................                   -               4,300
   Amortization of non-compete revenue...........................                   -              (2,568)
   Additions to deferred leasing costs...........................                (439)               (228)
   Other operating activities....................................                (116)               (446)
   Changes in assets and liabilities:
      Straight-line rent receivable..............................              (3,597)             (1,448)
      Due from affiliates........................................                (340)             (1,617)
       Other assets..............................................               8,135               6,511
       Deferred incentive compensation...........................                   -             (14,401)
       Accounts payable and accrued expenses.....................                 134              (4,482)
                                                                             ---------------     -------------
Net cash provided by operating activities........................              88,668              52,495
                                                                             ---------------     -------------

Cash flows from investing activities
Additions to rental properties...................................             (65,381)            (76,955)
Net proceeds from sale of center.................................               7,198               4,224
Additions to investments in unconsolidated affiliates............             (22,451)            (18,501)
Distributions from investments in
       unconsolidated affiliates in excess of earnings...........                   -                 337
Additions to deferred development costs..........................                (321)             (2,844)
Payments from related parties....................................                  18               1,104
Loans to related parties.........................................                   -                (550)
                                                                             ---------------     -------------
Net cash used in investing activities............................             (80,937)            (93,185)
                                                                             ---------------     -------------

Cash flows from financing activities
Debt proceeds....................................................                   -              177,324
Repayment of debt................................................             (27,107)             (89,806)
Net proceeds from sale of common stock...........................              53,461                5,001
Distributions....................................................             (34,632)             (25,177)
Redemption of preferred stock....................................                   -               (9,010)
Additions to deferred financing costs............................                (698)                (389)
                                                                             ---------------     -------------
Net cash (used in) provided by financing activities..............              (8,976)              57,943
                                                                             ---------------     -------------

Net (decrease) increase in cash and cash equivalents.............              (1,245)              17,253
Cash and cash equivalents, beginning of period...................              22,551               24,604
                                                                             ---------------     -------------
Cash and cash equivalents, end of period.........................             $21,306              $41,857
                                                                             ===============     =============
Supplemental information :
Non-cash investing activities:
Additions to rental properties on consolidation of property
  previously held as a 50% investment in unconsolidated affiliates                  -              $68,938
                                                                             ===============     =============
Non-cash financing activities:
Assumption of construction loan payable on consolidation
   of property previously held as a 50% investment in
   unconsolidated  affiliates                                                       -              $59,360
                                                                             ===============     =============
Assumption of mortgage debt                                                   $60,747                    -
                                                                             ===============     =============`

The accompanying notes are an integral part of the financial statements.

Chelsea Property Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.   Organization and Basis of Presentation

Chelsea Property Group, Inc. (the "Company") is a
self-administered and self-managed real estate investment trust ("REIT"). The
Company is the managing general partner of CPG Partners, L.P., (the "Operating
Partnership" or "OP"), an operating partnership that specializes in owning,
developing, leasing, marketing and managing upscale and fashion-oriented
manufacturers' outlet centers. As of June 30, 2003, the Company wholly or
partially owned 59 centers in 31 states and Japan containing approximately 14.9
million square feet of gross leasable area ("GLA"). The Company's portfolio is
comprised of 28 premium outlet centers containing 9.3 million square feet of GLA
(the "Premium Properties") and 31 other retail centers containing approximately
5.6 million square feet of GLA ("Other Properties") (collectively the
"Properties"). The Company's Premium Properties generated approximately 77% and
88% of the Company's retail real estate net operating income for the six months
ended June 30, 2003, and 2002, respectively. The Premium Properties generally
are located near metropolitan areas including New York City, Los Angeles,
Boston, Washington, D.C., San Francisco, Sacramento, Cleveland, Atlanta, Dallas,
Portland (Oregon), Tokyo and Osaka, Japan. Some Premium Properties are also
located within 20 miles of major tourist destinations including Palm Springs,
the Napa Valley, Orlando, and Honolulu.

Virtually all of the Company's assets are held by, and all of
its operations conducted through, the Operating Partnership. Due to the
Company's ability, as the sole general partner, to exercise financial and
operational control over the Operating Partnership, the Operating Partnership is
consolidated in the accompanying financial statements. All significant
intercompany transactions and accounts have been eliminated in consolidation.

Common ownership of the OP as of June 30, 2003, was
approximately as follows:

| | Company 
Unitholders Total | 85.3% 14.7%100.0% | 43,078,000 7,438,000 50,516,000 | units
 units
| | -------------------------- | ----------------- | ------------------------------- | ------------

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the six month period ended June 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. The balance sheet at December 31, 2002 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.

Certain information in the prior year financial statements
have been reclassified to conform to current year presentation.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.   Organization and Basis of
Presentation (continued)

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143")
which is effective January 1, 2003. SFAS 143 requires the recording of the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. See note 4 to financial statements for discussion related to the
estimated future costs to be incurred in connection with the future operations
of Chelsea Interactive.

In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires
certain guarantees to be recorded at fair value, instead of recording a
liability only when a loss is probable and reasonably estimatable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company adopted the
disclosure provisions of FIN 45 effective December 31, 2002. FIN 45's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.

In January of 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of FIN 46 will be immediately effective for all variable
interests in variable interest entities created after January 31, 2003, and the
Company will need to apply its provisions to any existing variable interests in
variable interest entities by no later than September 30, 2003. The Company does
not believe that FIN 46 will have a significant impact on the Company's
financial statements.

2.   Stock Option Plan

The Company elected Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and related Interpretations in
accounting for its employee stock options. Under APB No. 25, no compensation
expense is recognized because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.

Pro forma information regarding net income and earnings per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 2003
and 2002 respectively: risk-free interest rate of 4% for 2003 and 5% for 2002;
volatility factor of the expected market price of the Company's common stock
based on historical results of 0.166 for 2003 and 0.236 for 2002, and dividend
yield of 6% in 2003 and 2002, and an expected option life of four years. On
March 13, 2003, the Company granted options to acquire 45,000 shares at an
exercise price of $36.20 that will expire in 2013.

The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate,
management believes the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows (in thousands except for earnings
per share information):

Notes to Condensed Consolidated Financial Statements
(Unaudited)

2.   Stock Option Plan (continued)

`Three Months Ended                    Six Months Ended
                                                                 June 30,                             June 30,
                                                         2003              2002               2003               2002
                                                     -------------    ---------------    ---------------     --------------
     Net income to common shareholders; as
     reported................................          $24,705            $13,408            $43,118           $25,295

     Add: Stock based employee expense
     included in reported net income.........                -                  -                  -                 -

     Deduct: Total stock-based employee
       compensation expense determined
       under fair value based method for
       all awards, net of minority interest..             (366)              (521)              (733)           (1,041)
                                                     -------------    ---------------    ---------------     --------------

     Pro forma net income....................          $24,339            $12,887            $42,385           $24,254
                                                     =============    ===============    ===============     ==============

     Earnings per share: ....................
          Basic - as reported................            $0.59              $0.35              $1.03             $0.67
          Basic -   proforma.................             0.58               0.34               1.01              0.64

          Diluted - as reported..............            $0.56              $0.34              $0.99             $0.65
          Diluted -  proforma................             0.55               0.33               0.97              0.62`

3.   Acquisitions and Dispositions

Acquisitions

On June 12, 2003, the Company purchased The Crossings Factory
Stores, a 390,000 square-foot outlet center located in Tannersville,
Pennsylvania for $111.3 million, including closing costs, and assumed a $60.7
million 5.85% mortgage loan due 2013. An additional $5.0 million will be due to
the sellers upon the completion of a 21,000 square-foot expansion scheduled to
open in late summer 2004, subject to permits. The Company is in the process of
finalizing the purchase price allocation and is considering the fair value of
the mortgage assumed, the in-place leases, land and building.

Dispositions

On June 2, 2003, the Company sold a 23,000 square-foot Premium
Outlet Center located in St. Helena, California for $7.4 million resulting in a
gain of approximately $4.7 million. The center partially secured a mortgage note
due April 2010 and $5.0 million of the sales proceeds were used to pay down the
mortgage loan. The aggregate revenues and net income of the sold property were
$0.2 million and $0.1 million for the three months ended June 30, 2003, and $0.4
million and $0.2 million for the six months ended June 30, 2003.

4.   Investments in Affiliates

The Company holds several non-controlling interests in domestic
and international joint ventures accounted for under the equity method. Equity
in earnings or losses of these affiliates and related management advisory,
license, leasing and guarantee fees earned are included in income from
unconsolidated investments in the accompanying financial statements.

As of June 30, 2003, the Company's interests in joint ventures
included a 40% interest in Chelsea Japan Co., Ltd. ("Chelsea Japan"), a 50%
interest in two Premium Outlet Centers with Simon Property Group, Inc. ("Simon"),
a 50% interest in a strategic alliance with Sordo Madaleno y Asociados and Mr.
Carlos Peralta of Mexico City ("Chelsea Mexico"), minority interests in various
outlet centers and development projects in Europe operated by Value Retail PLC
("Value Retail") and 100% of the non-voting preferred stock and 50% of the
non-voting common stock of Chelsea Interactive, representing 40% of the total
common stock.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

4.   Investments in Affiliates (continued)

In March 2003, Chelsea Japan opened the 180,000 square-foot
first phase of Sano Premium Outlets, located 40 miles north of Tokyo. Chelsea
Japan has two other centers: Gotemba Premium Outlets, located to the west of
Tokyo, a 220,000 square-foot center, was expanded by an additional 170,000
square feet in July 2003; Rinku Premium Outlets, located near Osaka, is a
250,000 square-foot center including a 70,000 square-foot second phase that
opened in March 2002.

In June 2002, the Company and Simon entered into a 50/50 joint
venture to develop and operate Las Vegas Premium Outlets, a 435,000 square-foot
single-phase outlet center located in Las Vegas, Nevada, which opened on August
1, 2003. The Company is responsible for financing its 50% share of development
costs, or approximately $48.0 million. As of June 30, 2003, the Company had
contributed $36.6 million and capitalized interest and other costs of $2.3
million.

In August 2002, the Company and Simon entered into a 50/50 joint
venture to develop and operate Chicago Premium Outlets, a 438,000 square-foot
single-phase outlet center located in Aurora, Illinois, scheduled to open in
mid-2004. The Company is responsible for financing its 50% share of the
development costs, or approximately $46.0 million. As of June 30, 2003, the
Company had contributed $12.8 million and capitalized interest and other costs
of $1.2 million.

At June 30, 2003, the Company had incurred approximately $1.9
million related to pre-development costs and formation of the Chelsea Mexico
joint venture.

At June 30, 2003, the Company had minority interests ranging
from 3% to 8% in several outlet centers and outlet development projects in
Europe.

At December 31, 2002, the Company recognized an impairment loss
equal to the net book value of its investment in Chelsea Interactive. The
Company believes that it will not be able to recover the net book value of its
investment in Chelsea Interactive through future cash flows before reaching the
Company's $60.0 million funding limit. Through June 30, 2003, the Company had
funded $54.1 million and anticipates that the $5.9 million funding balance may
be used to further develop the platform and/or to fund operating cash shortfalls
and potential costs related to the disposal or discontinuance of the business. A
$0.9 million and $1.7 million funding loss was reported for the three and six
months ended June 30, 2003, respectively. Future funding by the Company will be
reported as a loss in the period funding is required. The Company has signed a
joint venture agreement with a third party to restructure Chelsea Interactive,
subject to the satisfaction of certain conditions. There can be no assurance
that this joint venture will be successful or that Chelsea Interactive will be
able to continue as a going concern.

The following is a summary of investments in and amounts due
from affiliates at June 30, 2003 (in thousands):

`Chelsea       Simon-            Chelsea
                                              Japan       Ventures            Mexico           Other         Total
                                          -----------    ------------    --------------    ----------    --------------

Balance December 31, 2002                    $12,471       $31,919           $    -          $3,607        $47,997
Additional
  investment........................             487        20,956            1,912              25         23,380
Income from
  unconsolidated
  investments.......................           3,946             -                -               -          3,946
Distribution
  and fees..........................          (2,706)            -                -               -         (2,706)
Advances (net)......................              98            59                -               -            157
                                          -----------    ------------    --------------    ----------    --------------
Balance  June 30, 2003..............         $14,296       $52,934           $1,912          $3,632        $72,774
                                          ===========    ============    ==============    ==========    ==============`

Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. Investments in Affiliates (continued)

The Company's share of income (loss) before depreciation,
depreciation expense and income (loss) from unconsolidated investments for the
three and six months ended June 30, 2003, and 2002, are as follows (in
thousands):

`For the Three Months Ended June 30,
                     -----------------------------------------------------------------------------------------
                                       2003                                          2002
                     -----------------------------------------------------------------------------------------
                                                     Income                                    Income (loss)
                      Income(loss)                 (loss) from       Income (loss)                 from
                      before                         Unconsol.         before                    Unconsol.
                      Depreciation      Depr.       Investments      Depreciation      Depr.    Investments
                      -------------   ---------    ------------     -------------   ---------   ------------
Chelsea Japan......       $3,189        $694          $2,495             $1,595       $  433      $1,162
F/C (1)............            -           -               -              2,546          726       1,820
                      -------------   ---------    ------------     -------------   ---------   -----------
  Total............       $3,189        $694          $2,495             $4,141       $1,159      $2,982
                      =============   =========    ============     =============   =========   ===========
Chelsea
Interactive........       ($ 905)       $  -          ($ 905)           ($1,716)      $2,060     ($3,776)
                      =============   =========    ============     =============   ========    ===========


                                                      For the Six Months Ended June 30,
                      ---------------------------------------------------------------------------------------
                                      2003                                            2002
                      ---------------------------------------------------------------------------------------
                                                     Income (loss)                              Income (loss)
                      Income (loss)                    from         Income (loss)                 from
                      before                         Unconsol.         before                    Unconsol.
                      Depreciation     Depr.        Investments      Depreciation      Depr.    Investments
                      ------------    -------      ------------     -------------   ---------   ------------
Chelsea Japan......       $5,239      $1,293          $3,946             $2,887         $832      $2,055
F/C (1)............            -           -               -              4,809        1,447       3,362
Simon- Orlando(2)..            -           -               -              1,833          523       1,310
Other..............            -           -               -                 25            -          25
                      ------------    ---------    ------------     -------------   ---------   -----------
   Total...........       $5,239      $1,293          $3,946             $9,554       $2,802      $6,752
                      ============    =========    ============     =============   =========   ===========
Chelsea
Interactive........      ($1,742)     $    -         ($1,742)           ($2,908)      $3,568     ($6,476)
                      ============    =========    ============     =============   =========   ===========`

|(1) | During the three and six months ended June 30, 2002, the Company had a 49%
interest in a joint venture, F/C Acquisition, that owns four Premium Outlet
centers. In August 2002, the Company became the sole owner of F/C Acquisition by
acquiring the remaining 51% undivided ownership interest from the joint venture
partner, and consolidated the operations and balance sheet from the buyout date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During the three months ended March 31, 2002, the
Company had a 50% interest in Orlando Premium Outlets through a 50/50 joint
venture with Simon. In April 2002, the Company became the sole owner of Orlando
Premium Outlets by acquiring the remaining 50% undivided ownership interest from
Simon, and consolidated the operations and balance sheet from the buyout date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. Investments in Affiliates (continued)

Condensed financial information as of June 30, 2003, and December 31, 2002, and
for the three and six months ended June 30, 2003, and 2002 for investments in
unconsolidated affiliates is as follows:

`Chelsea
                                                                      Retail         Interactive
                                                                  -------------     --------------
Property, plant and equipment (net)
     June 30, 2003............................................      $210,246           $     -
     December 31, 2002(3).....................................       140,057                 -

Total assets
     June 30, 2003............................................       265,634                 -
     December 31, 2002(3).....................................       190,157                 -

Long term debt
     June 30, 2003............................................        95,082                 -
     December 31, 2002........................................        75,139                 -

Total liabilities
     June 30, 2003............................................       154,947             1,656
     December 31, 2002........................................       119,886             1,548

Net income (loss)
  Three months ended:
        June 30, 2003.........................................         2,448                 -
        June 30, 2002 (1) ....................................         4,055            (3,776)

 Six months ended:
        June 30, 2003 ........................................        3,100                 -
        June 30, 2002 (1) (2).................................        9,047            (7,337)

Company's share of net income (loss)
  Three months ended:
        June 30, 2003 ........................................          979              (905)
        June 30, 2002 (1) ....................................        1,865            (3,776)

  Six months ended:
        June 30, 2003.........................................         1,240            (1,742)
        June 30, 2002 (1) (2).................................         4,284            (6,476)

Fee income
  Three months ended:
        June 30, 2003.........................................         1,516                 -
        June 30, 2002 (1) ....................................         1,117                 -

  Six months ended:
        June 30, 2003.........................................         2,706                 -
        June 30, 2002 (1) (2).................................         2,468                 -`

|(1) | During the three and six months ended June 30, 2002, the Company had a 49%
interest in a joint venture, F/C Acquisition, that owns four Premium Outlet
centers. In August 2002, the Company became the sole owner of F/C Acquisition by
acquiring the remaining 51% undivided ownership interest from the joint venture
partner, and consolidated the operations and balance sheet from the buyout date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During the three months ended March 31, 2002, the Company had a 50% interest in
Orlando Premium Outlets through a 50/50 joint venture with Simon. In April 2002,
the Company became the sole owner of Orlando Premium Outlets by acquiring the
remaining 50% undivided ownership interest from Simon, and consolidated the
operations and balance sheet from the buyout date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | At December 31, 2002, Chelsea Interactive recorded an impairment loss equal to
the carrying amount of its net assets.
|--- | ---------------------------------------------------------------------------------------------------------------------

Notes to Condensed Consolidated Financial Statements
(Unaudited)

5. Non-Compete Agreement

The Company recognized income from its non-compete agreement
with The Mills Corporation of $1.3 and $2.6 million during the three and six
months ended June 30, 2002, which is included in other income in the
accompanying financial statements.

6. Debt

Unsecured Bank Debt

The Company has a $200.0 million senior unsecured bank line of
credit (the "Senior Credit Facility") with an expiration date of March 31, 2005,
which the Company has the right to extend until March 31, 2006. The Senior
Credit Facility bears interest on the outstanding balance, payable monthly, at a
rate equal to the London Interbank Offered Rate ("LIBOR") plus 1.05% (2.21% at
June 30, 2003) or the prime rate, at the Company's option. The LIBOR rate spread
ranges from 0.85% to 1.50% depending on the Company's Senior Debt rating. The
Company received a debt rating upgrade in July 2003, resulting in a reduction of
the LIBOR rate spread to 0.95% from 1.05%. At June 30, 2003, $78.0 million was
outstanding under the Senior Credit Facility.

The Company also has a $5.0 million term loan that carries the
same interest rate and maturity as the Senior Credit Facility.

Unsecured Notes

A summary of the terms of the unsecured notes outstanding at
June 30, 2003, and December 31, 2002, is as follows (in thousands):

`June 30,          December 31,      Effective
                                                      2003                2002            Yield (1)
                                                 ---------------    ---------------  --------------------

8.375%   Unsecured Notes due August 2005.......     $  49,937          $  49,922           8.44%
7.25%    Unsecured Notes due October 2007......       124,857            124,841           7.39
8.625%   Unsecured Notes due August 2009.......        49,938             49,933           8.76
8.25%    Unsecured Notes due February 2011.....       148,890            148,817           8.40
6.875%   Unsecured Notes due June 2012.........        99,869             99,825           6.90
6.00%    Unsecured Notes due January 2013......       148,093            147,992           6.18
                                                 --------------      --------------
   Total                                             $621,584           $621,330
                                                 ==============      ==============`

(1)      Including discount on the
notes

Notes to Condensed Consolidated Financial Statements
(Unaudited)

6. Debt (continued)

Mortgage Debt

A summary of the terms of the mortgage debt outstanding at June
30, 2003, and December 31, 2002, and the related interest rate and Net Book
Value ("NBV") of the associated collateral as of June 30, 2003, are as follows
(in thousands):

`Effective
                              June 30,         December 31,       Interest
                                2003              2002              Rate              NBV
                            -------------    ----------------    ------------   -------------
 Due July 2008 (1)              $166,236        $167,723            7.26%          $255,043
 Due April 2010 (2)               61,975          67,250            7.26%            68,352
 Due December 2012 (3)            70,974          71,482            7.67%            74,948
 Due March 2013 (4)               64,163               -            5.10%           114,426
                            -------------    ----------------                   ------------
                                $363,348        $306,455                           $512,769
                            =============    ================                   ============`

|(1) | The mortgage loan due July 2008 was consolidated as part of the August 2002
buyout of a joint venture partner's 51% interest in the F/C Acquisition joint
venture. The mortgage calls for a $1.2 million fixed monthly debt service
payment based on a 26-year amortization schedule. During the six months ended
June 30, 2003, the Company recognized $67,000 in debt discount amortization that
is included in interest expense in the accompanying financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Chelsea Financing entered into a $70.0 million mortgage loan due April 2010
originally secured by its four properties. On June 2, 2003 the Company sold one
of the encumbered properties for $7.4 million with a NBV of $2.5 million.
Proceeds of $5.0 million were used to pay down the mortgage loan. The loan bears
interest equal to LIBOR plus 1.50% (2.82% at June 30, 2003) or prime rate plus
1.0% and calls for quarterly principal amortization of $0.25 million through
April 2005 and thereafter $0.45 million per quarter until maturity. In December
2000, the Company entered into an interest rate swap agreement to hedge against
unfavorable fluctuations in LIBOR rates by fixing the interest rate at 7.26%
until January 2006. During the six months ended June 30, 2003, and 2002, the
Company recognized interest expense of $1.5 million on the hedge that is
included in interest expense in the accompanying financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The mortgage loan due December 2012 was assumed as part of a September 2001
acquisition. The loan calls for a $0.5 million fixed monthly debt service
payment based on a 26-year amortization schedule. During the six months ended
June 30, 2003, and 2002, the Company recognized $0.2 million in debt premium
amortization that is included in interest expense in the accompanying financial
statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The mortgage loan due March 2013 was assumed as part of a June 2003 acquisition.
The stated interest rate of 5.85% was greater than that available to the Company
for comparable debt. Accordingly, the Company recorded a $3.4 million debt
premium that will be amortized over the period of the loan which reduces the
effective interest rate to 5.10%. The loan calls for a $0.4 million fixed
monthly debt service payment on a 25-year amortization schedule.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest and loan costs of approximately $1.3 million and $0.6
million were capitalized as development costs during the three months ended June
30, 2003, and 2002, respectively; and approximately $2.2 million and $1.3
million during the six months ended June 30, 2003, and 2002, respectively.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

7. Financial Instruments: Derivatives and Hedging

The Company employs interest rate and foreign currency forwards
or purchased options to hedge qualifying anticipated transactions. Gains and
losses are deferred and recognized in net income in the same period that the
underlying hedged transaction affects net income, expires or is otherwise
terminated or assigned.

At June 30, 2003 the Company's interest rate swap was reported
at its fair value and classified as an other liability of $6.9 million. At June
30, 2003, there were $6.4 million in deferred losses, recorded in accumulated
other comprehensive loss, a shareholder's equity account, and minority interest.
During the three months ended June 30, 2003, the Company reclassified $0.5
million of other comprehensive loss to other expense as a result of its $5.0
million pay down of swapped mortgage debt in June 2003.

`Hedge Type         Notional Value    Rate       Maturity      Fair Value
    ----------         --------------    ----       --------      ----------
   Swap, Cash Flow     $67.0 million    5.7625%      1/1/06     ($6.9 million)`

The notional value and fair value of the above hedge provides an
indication of the extent of the Company's involvement in financial derivative
instruments at June 30, 2003, but does not represent exposure to credit,
interest rate, foreign exchange or market risk.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. Stockholders' Equity

Following is a statement of stockholders' equity at June 30,
2003, (in thousands):

`Accum.
                                    Preferred   Common                         Distrib. in   Other
                                      Stock      Stock    Paid-                  Excess      Comp.         Total
                                    At Par      At Par     in        Officer    of Net       (Loss)      Stockholders'
                                     Value       Value    Capital     Loan     Income        Income         Equity
                                   ----------   -------- ---------  ---------  -----------  ---------   --------------

Balance December 31, 2002..........   $8         $415     $574,352    ($488)   ($112,648)    ($5,808)     $455,831

Net income.........................    -            -            -        -       44,786          -         44,786
Other comprehensive loss
     Foreign currency translation..    -            -            -        -            -         (41)          (41)
     Interest rate swap............    -            -            -        -            -         433           433
                                                                                                          ------------
Total comprehensive income.........                                                                         45,178
                                                                                                          ------------

Preferred dividend.................    -            -            -        -       (1,668)          -        (1,668)
Cash distributions declared
     ($1.07 per common share)......    -            -            -        -      (45,390)          -       (45,390)
Exercise of stock options..........    -            3        3,923        -            -           -         3,926
Shares issued (net of cost)........    -           12       49,370        -            -           -        49,382
Shares issued in exchange for units
     of the OP.....................    -            1        1,254        -            -           -         1,255
Shares issued through Employee
     Stock Purchase Plan
      (net of costs)...............    -            -          153        -            -          -            153
                                    ---------  ---------  ----------  ---------  --------   ---------   ---------------
Balance June 30, 2003..............   $8         $431     $629,052    ($488)   ($114,920)    ($5,416)      $508,667
                                    ========= ==========  ==========  ======== ============  ========   ===============`

On June 18, 2003, the Company sold 1.2 million shares of common
stock at a price of $42.10 per share, yielding net proceeds after expenses of
$49.4 million, which were used to repay borrowings under the Company's Senior
Credit Facility associated with the Company's Tannersville acquisition.

9. Dividends

On June 5, 2003, the Board of Directors of the Company declared
a $0.535 per share dividend to shareholders of record on June 30, 2003. The
dividend, totaling $23.0 million, was paid on July 14, 2003. The OP
simultaneously paid a $0.535 per unit cash distribution, totaling $4.0 million,
to its minority unitholders.

10. Income Taxes

At June 30, 2003, the Company was in compliance with all REIT
requirements under Section 856(c) of the Internal Revenue Code of 1986, as
amended, and as such, was not subject to federal income taxes.

11. Net Income Per Common Share

Basic earnings per common share is computed using the weighted
average number of shares outstanding. Diluted earnings per common share is
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to purchase common
stock of 2.0 million and 1.5 million shares for the three months ended June 30,
2003 and 2002, respectively; and 1.9 million and 1.4 million for the six months
ended June 30, 2003, and 2002, respectively.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

11. Net Income Per Common Share (continued)

The following table sets forth the computation of basic and
diluted earnings per share for the periods indicated:

`Three Months Ended              Six Months
                                                                         June 30,                 Ended June 30,
(In thousands, except per share amounts)                            2003          2002          2003        2002
                                                                  ---------     ---------     ---------  ----------
Numerator
Numerator for basic and diluted earnings per share -
     net income available to common shareholders............       $24,705       $13,408       $43,118     $25,295

Denominator
Denominator for basic earnings per share-
   Weighted average shares..................................        42,041        37,877        41,801      37,725

Effect of dilutive securities-
  Stock options.............................................         1,956         1,498         1,854       1,351

Denominator for diluted earnings per share-
  Adjusted weighted average shares assumed conversions......        43,997        39,375        43,655      39,076

Per share amounts:
  Net income - basic........................................         $0.59         $0.35         $1.03       $0.67
  Net income - diluted......................................         $0.56         $0.34         $0.99       $0.65`

12. Commitments and Contingencies

In connection with the Simon joint ventures, the Company has
committed to provide 50% of the development costs, or approximately $48.0
million for Las Vegas Premium Outlets and $46.0 million for Chicago Premium
Outlets. As of June 30, 2003, the Company had contributed $36.6 million and
$12.8 million to the Las Vegas and Chicago projects, respectively.

Borrowings related to Chelsea Japan for which the Company and
the OP have provided guarantees for repayment of debt as of June 30, 2003, are
as follows:

`Total Facility                |                                Outstanding
      --------------                |                                -----------
                                    |                                                  Due    Interest
     Yen            US $ Equivalent |   Yen        US $ Equivalent    US $ Guarantee   Date    Rate
     ---            --------------- |   ---        ---------------    --------------   ----    ----
 4.0 billion (1)    $33.4 million   |0.9 billion   $7.9 million       $7.9 million     2004    1.41%
 3.8 billion (2)     31.7 million   |3.4 billion   28.1 million       11.2 million     2015    2.20%
 0.6 billion (2)      5.0 million   |0.5 billion    4.5 million        1.8 million     2012    1.50%`

|1) | Facility entered into by an equity investee of the Company that has a one-year
extension option until April 1, 2005.
|-- | --------------------------------------------------------------------------------------------------------------------

|2) | Facilities entered into by Chelsea Japan, secured by Gotemba and Rinku and 40%
severally guaranteed by the Company.
|-- | -------------------------------------------------------------------------------------------------------------------

In May 2002, the Company entered into a 50/50 joint venture
agreement with Sordo Madaleno y Asociados and Mr. Carlos Peralta of Mexico City
to jointly develop premium outlet centers in Mexico. Subject to leasing and
entitlements, construction on the 232,000 square-foot first phase of the outlet
project is scheduled to commence later in 2003 and open in late 2004. The site
can support a second phase containing approximately 165,000 square feet of GLA.
Once Phase I of the project has been approved, the Company will be committed to
fund approximately $14 million which is 50% of the development costs.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

12. Commitments and Contingencies (continued)

As of June 30, 2003, the Company had provided limited debt
service guarantees of approximately $17.3 million to Value Retail and
affiliates, under a standby facility for loans provided to Value Retail and
affiliates to construct outlet centers in Europe. The standby facility, which
has a maximum limit of $22.0 million, expired in November 2001 and outstanding
guarantees shall not survive more than five years after project completion.

At June 30, 2003, other assets includes $9.4 million and accrued
expenses and other liabilities include $12.8 million related to the 2002
deferred unit incentive program which may be paid to certain key officers in
2007.

The Company is not presently involved in any material litigation
nor, to its knowledge, is any material litigation threatened against the Company
or its properties, other than routine litigation arising in the ordinary course
of business. Management believes the cost incurred by the Company related to any
of its litigation will not be material and have been adequately provided for in
the consolidated financial statements.

13.   Related Party Information

In 1999, the OP established a $6.0 million secured loan facility
that will expire in June 2004 for the benefit of certain unitholders. Each
borrower issued a note that is secured by OP units, bears interest at a rate of
LIBOR plus 200 basis points per annum payable quarterly and is due by the
facility expiration date. At June 30, 2003, loans made to two unitholders, who
are also officers of the Company, totaled $3.2 million, $0.5 million of which
was used to exercise Company stock options and is reflected as a reduction to
stockholder's equity in the accompanying financial statements. Effective June
2002, the Company changed its policy to eliminate new loans to directors and
officers.

In August 1997, the Company and one of its directors entered
into a Consulting Agreement pursuant to which the director agreed to perform
services for the Company in connection with the development and operation of
manufacturer's outlet centers in Japan and Hawaii. The agreement provided for
payments to the director of $10,000 per month and was terminated by the Company
in December 1999. During the term of the agreement and for four years after the
termination of the agreement, the director will be entitled to deferred
compensation of 1% of the development costs, up to a maximum amount of $0.5
million per project, on all projects in which he was involved in Japan or Hawaii
either directly or as a result of Mitsubishi and/or Nissho Iwai committing to
develop such project with the Company in Japan. Fees paid under this agreement
totaled $0.3 million for the six months ended June 30, 2003. These fees are
included in investment in affiliates in the accompanying financial statements.

14. Segment Information

The Company is principally engaged in the development,
ownership, acquisition and operation of manufacturers' outlet centers and has
determined that under SFAS No.131 "Disclosures About Segments of an Enterprise
and Related Information" it has three reportable retail real estate segments:
Premium domestic, other domestic and international. The Company evaluates real
estate performance and allocates resources based on Net Operating Income ("NOI")
defined as total revenue less operating and maintenance expense. The primary
sources of revenue are generated from tenant base rents, percentage rents and
reimbursement revenue. Operating expenses primarily consist of common area
maintenance, real estate taxes and promotional expenses. The retail real estate
business segments meet the quantitative threshold for determining reportable
segments.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

14. Segment Information (continued)

`Premium      Other
(in thousands)                          Domestic     Domestic       International     Other      Total
------------------------------------- ------------- ------------- ---------------- ----------  -----------
                                                          (1)           (2)            (3)
Total revenues
  Three months ended:
        June 30, 2003..............      $64,605      $23,248          $   -         $(447)      $87,406
        June 30, 2002..............       50,924       12,555              -         1,363        64,842

  Six months ended:
        June 30, 2003..............      126,770       45,193              -          (415)      171,548
        June 30, 2002..............       94,799       23,784              -         2,740       121,323

Interest income
  Three months ended:
        June 30, 2003..............          252           10              -            61           323
        June 30, 2002..............          257           40              -            78           375

  Six months ended:
        June 30, 2003..............          507           14              -            93           614
        June 30, 2002..............          540           64              -           171           775

Income from unconsolidated
      investments
  Three months ended:
        June 30, 2003..............            -            -          2,495          (905)        1,590
        June 30, 2002..............        1,819            -          1,163        (3,776)         (794)

  Six months ended:
        June 30, 2003..............            -            -          3,946        (1,742)        2,204
        June 30, 2002..............        4,672            -          2,080        (6,476)          276

NOI
  Three months ended:
        June 30, 2003..............       46,738       15,525          4,102        (4,278)       62,087
        June 30, 2002..............       40,453        6,017          2,148        (1,819)       46,799

  Six months ended:
        June 30, 2003..............       92,005       29,988          6,516        (7,135)      121,374
        June 30, 2002..............       77,039       10,947          3,851        (2,563)       89,274

Fixed asset additions
  Six months ended:
        June 30, 2003..............        6,711       61,424              -           661        68,796
        June 30, 2002..............       47,036       29,088              -           831        76,955

Total assets
        June 30, 2003..............    1,147,618      620,863         17,928        30,206     1,816,615
        December 31, 2002..........    1,262,190      394,984         16,077        29,779     1,703,030`

|(1) | Approximately 15% and 25% of the GLA is occupied by and approximately 7% and 13%
of annualized base rent is derived from one tenant during the 2003 and 2002
periods, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2)
(3) | Principally comprised of the Company's interest in Chelsea Japan.
Includes corporate overhead assets and results from Chelsea Interactive.
|------- | ------------------------------------------------------------------------------------------------------------------------------------------

Notes to Condensed Consolidated Financial Statements
(Unaudited)

14. Segment Information (continued)

Following is a
reconciliation of net operating income to net income for the three and six
months ended June 30, 2003, and 2002 (in thousands):

`Three Months Ended          Six Months Ended
                                                               June 30,                   June 30,
                                                           2003        2002             2003      2002
                                                         -----------------------    ------------------------
Segment NOI............................................    $62,087      $46,799       $121,374    $89,274
Interest expense - consolidated........................    (16,553)     (10,843)       (33,187)   (20,593)
Interest expense - unconsolidated investments..........       (189)        (139)          (333)      (267)
Depreciation and amortization expense - consolidated...    (17,269)     (14,243)       (34,901)   (27,184)
Depreciation and amortization
      expense - unconsolidated investments.............       (694)      (1,159)        (1,293)    (2,802)
Depreciation and amortization
      expense - Chelsea Interactive....................          -      (2,060)              -     (3,568)
Income tax - unconsolidated investments................       (724)        (413)          (944)      (672)
Gain on sale of discontinued operations................      4,008            -          4,008          -
Minority interest......................................     (5,127)      (3,685)        (9,938)    (7,140)
                                                        -------------------------   -----------------------
Net income.............................................    $25,539      $14,257        $44,786    $27,048
                                                        =========================   =======================`

15.  Fair Value of Financial Instruments

The following disclosures of estimated fair value were
determined by management, using available market information and appropriate
valuation methodologies. Considerable judgment is necessary to interpret market
data and develop estimated fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
on disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

Cash equivalents, accounts receivable, accounts payable, and
revolving credit facilities balances reasonably approximate their fair values
due to the short maturities of these items. Mortgage debt and the unsecured
notes payable have an estimated fair value based on discounted cash flow models
of approximately $1.0 billion, which exceeds the book value by $0.1 billion.
Unsecured bank debt is carried at an amount which reasonably approximates its
fair value since it is a variable rate instrument whose interest rate reprices
frequently.

Disclosure about fair value of financial instruments is based on
pertinent information available to management as of June 30, 2003. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since such date and current
estimates of fair value may differ significantly from the amounts presented
herein.

16. Subsequent Events

On August 1, 2003, the Company acquired Belz Factory Outlet
World  Las Vegas, a 477,000 square-foot outlet center in Las Vegas, Nevada
for $104.0 million including the assumption of a $24.4 million 8.12% mortgage
loan due 2012. As part of the same transaction, the Company acquired Belz
Factory Outlet World  Lakeland, a 319,000 square-foot outlet center near
Memphis, Tennessee for an additional $3.5 million. The Lakeland property is
expected to be marketed for sale shortly after closing. The approximately $84.0
million cash portion of the overall transaction was financed through a $100
million one-year bridge loan facility at an annual interest rate of LIBOR plus
0.80% that is due on July 31, 2004 and extendible for six months until January
31, 2005 at the Company's option. The LIBOR rate spread ranges from 0.70% to
1.35% depending on the Company's Senior Debt rating. Surplus proceeds from the
financing of approximately $16.0 million will be used for general corporate
purposes.

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

The following discussion should be read in connection with the
accompanying unaudited condensed consolidated financial statements and notes
thereto. These financial statements include all adjustments, which in the
opinion of management are necessary to reflect a fair statement of results for
all interim periods presented, and all such adjustments are of a normal
recurring nature.

General Overview

From July 1, 2002 to June 30, 2003, the Company has grown rental
revenue by $39.8 million to $128.9 million. This was achieved by increasing
rents, expanding three wholly-owned centers and acquiring seven centers in 2002
and one center in 2003. These increases were partially offset by rent decreases
from selling three non-core centers. Increasing rents at operating centers
resulted in base rent growth of $1.6 million. The Company re-leased or renewed
approximately 1.2 million square feet of Premium Property GLA during the twelve
months ended June 30, 2003, for which initial contractual cash rents under new
leases were 12% higher than expiring leases. The expansion of three wholly-owned
centers increased base rents by $0.8 million. The acquisition of eight centers
increased rental revenue by $17.4 million. In addition, the purchase of
ownership interests in the five centers previously held as unconsolidated
investments resulted in rental revenue growth of $19.5 million and a decrease in
income from unconsolidated investments of $2.8 million. Income from
unconsolidated investments for Chelsea Japan grew due to higher earnings,
increased fees, the expansion of Rinku Premium Outlets in March 2002 and the
opening of Sano Premium Outlets in March 2003.

At June 30, 2003, the Company wholly or partially-owned 14.9
million square feet of GLA. Since July 1, 2002, the Company has added 2.2
million square feet ("sf") of net GLA and details are as follows:

Net GLA added since July 1, 2002 is detailed as follows:

`12 months         6 months         6 months
                                                          ended            ended              ended
                                                         June 30,          June 30,         December 31,
                                                         2003                2003             2002
                                                     ----------------    -------------    --------------
Changes in GLA (sf in 000's):

New centers developed:
     Sano Premium Outlets (40% owned) ............             180              180              -
                                                     ----------------    -------------   ----------------

Centers expanded:
    Desert Hills Premium Outlets..................              23                -             23
    Liberty Village Premium Outlets...............              23                -             23
    Other.........................................             (31)            (22)             (9)
                                                     ----------------    -------------    ---------------
Total centers expanded............................              15             (22)             37

Centers acquired:
    The Crossings Factory Stores..................             390             390               -
    Factory Outlet Village Osage Beach ...........             391               -             391
    St. Augustine Premium Outlets ................             329               -             329
    Outlets at Albertville........................             305               -             305
    Factory Merchants Branson.....................             300               -             300
    Jackson Outlet Village........................             292               -             292
    Johnson Creek Outlet Center...................             278               -             278
                                                     ----------------    -------------    -------------
Total centers acquired............................           2,285             390           1,895

Centers sold:
    St. Helena Premium Outlets....................            (23)             (23)              -
    Three Other Properties........................           (256)               -            (256)
                                                     ----------------    -------------    -------------
Total centers sold................................           (279)             (23)           (256)

Net GLA added during the period...................           2,201             525           1,676

GLA at end of period..............................          14,911          14,911          14,386`

Results of Operations

Comparison of the three months ended June 30, 2003, to the
three months ended June 30, 2002.

Income from continuing operations before minority interest,
increased $8.7 million, or 48.9 %, to $26.6 million for the three months ended
June 30, 2003, from $17.9 million for the three months ended June 30, 2002. This
increase was primarily the result of the buyout of ownership interests in four
centers in 2002, the acquisition of six centers in 2002 and one center in 2003,
higher rents from releasing and renewals, and a decrease in the loss from
Chelsea Interactive, partially offset by increases in general and
administrative, interest and other expenses.

Base rentals increased $16.8 million, or 39.0%, to $60.0 million
for the three months ended June 30, 2003, from $43.2 million for the three
months ended June 30, 2002, due to the buyout of ownership interests in four
centers in 2002 and the acquisition of six centers in 2002 and one center in
2003, higher average rents on releasing and renewals, and the expansion of two
wholly-owned centers in late 2002.

Percentage rents increased $0.5 million, or 11.8%, to $5.0
million for the three months ended June 30, 2003, from $4.5 million for the
three months ended June 30, 2002, primarily due to the buyout of ownership
interests in four centers in 2002 and the acquisition of six centers in 2002.

Expense reimbursements, representing contractual recoveries from
tenants of certain common area maintenance, operating, real estate tax,
promotional and management expenses, increased $6.1 million, or 42.2%, to $20.6
million for the three months ended June 30, 2003, from $14.5 million for the
three months ended June 30, 2002, due to the recovery of operating and
maintenance costs from increased GLA. The average recovery of reimbursable
expenses for the Premium Portfolio was 90% for the three months ended June 30,
2003, compared to 88% for the three months ended June 30, 2002. The average
recovery of reimbursable expenses for the Other Retail Centers was 70% for the
three months ended June 30, 2003, compared to 55% for the three months ended
June 30, 2002. The increase in average recovery on the Other Retail Centers is a
result of the centers acquired in 2002.

Other income decreased $0.9 million or 33.0% to $1.8 million for
the three months ended June 30, 2003, from $2.7 million for the three months
ended June 30, 2002, primarily due to the expiration of the non-compete
agreement which included income recognition of $1.3 million in 2002 partially
offset by a $0.3 million gain on an outparcel sale in 2003.

Operating and maintenance expenses increased $6.4 million, or
35.2%, to $24.5 million for the three months ended June 30, 2003, from $18.1
million for the three months ended June 30, 2002. The increase was primarily due
to costs related to increase in GLA.

Depreciation and amortization expense increased $3.1 million, or
21.3% to $17.3 million for the three months ended June 30, 2003, from $14.2
million for the three months ended June 30, 2002. The increase was due to
depreciation of the increased GLA.

General and administrative expense increased $0.6 million or
28.5% to $2.5 million for the three months ended June 30, 2003, from $1.9
million for the three months ended June 30, 2002, primarily due to increases in
deferred unit incentive program accrual, salaries and professional fees.

Other expenses increased $0.5 million or 50.4% to $1.6 million
for the three months ended June 30, 2003, from $1.1 million for the three months
ended June 30, 2002, due to a non-cash charge of $0.5 million on an interest
rate swap resulting from the pay down of a hedged mortgage loan in June 2003
related to the sale of St. Helena Premium Outlets.

Income from unconsolidated investments decreased $0.5 million or
16.3% to $2.5 million for the three months ended June 30, 2003, from $3.0
million for the three months ended June 30, 2002, due to the buyout of ownership
interest in four centers which were previously held as unconsolidated
investments partially offset by higher income and fees including a one-time
leasing fee of $0.6 million from Chelsea Japan.

The loss from Chelsea Interactive decreased $2.9 million or
76.0% to $0.9 million for the three months ended June 30, 2003, from $3.8
million for the three months ended June 30, 2002, due to the write-off of the
Company's investment at December 31, 2002. The June 30, 2003 loss represents
second quarter funding to Chelsea Interactive.

Interest expense increased $5.7 million or 52.7% to $16.5
million for the three months ended June 30, 2003, from $10.8 million for the
three months ended June 30, 2002, due to higher debt that partially financed
acquisitions and the buyouts of partner's interests.

Income from discontinued operations of $0.1 million for the
three months ended June 30, 2003 and 2002, and gain on sale of discontinued
operations of $4.0 million, net of minority interest of $0.7 million for the
three months ended June 30, 2003, relates to the June 2003 sale of St. Helena
Premium Outlets, a 23,000 square-foot Premium Property.

Results of Operations

Comparison of the six months ended June 30, 2003, to the
six months ended June 30, 2002.

Income from continuing operations before minority interest,
increased $16.6 million, or 48.8%, to $50.5 million for the six months ended
June 30, 2003, from $34.0 million for the six months ended June 30, 2002. This
increase was primarily the result of the buyouts of ownership interests in five
centers in 2002, the acquisition of seven centers in 2002 and one center in
2003, higher rents from releasing and renewals and decrease in the
loss from Chelsea Interactive, partially offset by increases in general and
administrative, interest and other expenses.

Base rentals increased $38.2 million, or 46.8%, to $119.8
million for the six months ended June 30, 2003, from $81.6 million for the six
months ended June 30, 2002, due to the buyouts of ownership interests in five
centers in 2002, the acquisition of seven centers in 2002 and one center in
2003, higher average rents on releasing and renewals, and the expansion of two
wholly-owned centers in late 2002.

Percentage rents increased $1.7 million, or 22.1%, to $9.2
million for the six months ended June 30, 2003, from $7.5 million for the six
months ended June 30, 2002, primarily due to the buyouts of ownership interests
in five centers in 2002 and the acquisition of seven centers in 2002.

Expense reimbursements, representing contractual recoveries from
tenants of certain common area maintenance, operating, real estate tax,
promotional and management expenses, increased $12.3 million, or 45.6%, to $39.3
million for the six months ended June 30, 2003, from $27.0 million for the six
months ended June 30, 2002, due to the recovery of operating and maintenance
costs from increased GLA. The average recovery of reimbursable expenses for the
Premium Portfolio was 89% for the six months ended June 30, 2003 compared to 88%
for the six months ended June 30, 2002. The average recovery of reimbursable
expenses for the Other Retail Centers was 69% for the six months ended June 30,
2003, compared to 54% for the six months ended June 30, 2002. The increase in
average recovery on the Other Retail Centers is a result of the centers acquired
in 2002.

Other income decreased $1.9 million or 36.9% to $3.3 million for
the six months ended June 30, 2003, from $5.2 million for the six months ended
June 30, 2002, primarily due to the expiration of the non-compete agreement
which included income recognition of $2.6 million in 2002 partially offset by an
increase in ancillary operating income and gain from an outparcel sale in 2003.

Operating and maintenance expenses increased $13.1 million, or
38.4%, to $47.4 million for the six months ended June 30, 2003, from $34.3
million for the six months ended June 30, 2002. The increase was primarily due
to costs related to increase in GLA.

Depreciation and amortization expense increased $7.7 million, or
28.5% to $34.9 million for the six months ended June 30, 2003, from $27.2
million for the six months ended June 30, 2002. The increase was due to
depreciation of the increased GLA.

General and administrative expense increased $1.3 million or
35.8% to $4.7 million for the six months ended June 30, 2003, from $3.4 million
for the six months ended June 30, 2002, primarily due to increases in deferred
unit incentive program accrual, salaries and professional fees.

Other expenses increased $0.9 million or 40.0% to $3.1 million
for the six months ended June 30, 2003, from $2.2 million for the six months
ended June 30, 2002, due to a non-cash charge of $0.5 million on an interest
rate swap resulting from the pay down of a hedged mortgage loan in June 2003
related to the sale of St. Helena Premium Outlets, and increased reserve for bad
debt and center rent expense.

Income from unconsolidated investments decreased $2.8 million or
41.6% to $3.9 million for the six months ended June 30, 2003, from $6.7 million
for the six months ended June 30, 2002, due to the buyouts of ownership
interests in five centers in 2002 which were previously held as unconsolidated
investments partially offset by higher income and fees including one-time
leasing fees of $1.1 million from Chelsea Japan.

The loss from Chelsea Interactive decreased $4.8 million or
73.1% to $1.7 million for the six months ended June 30, 2003, from $6.5 million
for the six months ended June 30, 2002, due to the write-off of the Company's
investment at December 31, 2002. The loss represents funding to Chelsea
Interactive during the six months ended June 30, 2003.

Interest expense increased $12.6 million or 61.2% to $33.2
million for the six months ended June 30, 2003, from $20.6 million for the six
months ended June 30, 2002, due to higher debt that partially financed
acquisitions and the buyouts of partner's interests.

Income from discontinued operations of $0.2 million for the six
months ended June 30, 2003 and 2002, and gain on sale of discontinued operations
of $4.0 million, net of minority interest of $0.7 million for the six months
ended June 30, 2003, relates to the June 2003 sale of St. Helena Premium
Outlets, a 23,000 square-foot Premium Property.

Liquidity and Capital Resources

The Company believes it has adequate financial resources to fund
operating expenses, distributions, and planned development, construction and
acquisition activities over the short term, which is less than 12 months and the
long term, which is 12 months or more. Operating cash flow for the year ended
December 31, 2002, of $128.2 million is expected to increase with a full year of
operations from the five joint venture buyout centers and the 1.8 million square
feet of GLA added during 2002 as well as scheduled openings of approximately
800,000 square feet of new joint venture GLA in 2003 and recent acquisition
activity. The Company has adequate funding sources to complete and open all
current development projects from available cash, credit facilities and secured
construction financing. The Company also has access to the public markets
through its $1.55 billion debt and equity shelf registration for funding or
refinancing requirements.

Operating cash flow is expected to provide sufficient funds for
dividends and distributions in accordance with REIT federal income tax
requirements. In addition, the Company anticipates retaining sufficient
operating cash to fund re-tenanting and lease renewal tenant improvement costs,
as well as capital expenditures to maintain the quality of its centers, meet
funding requirements of Chelsea Interactive and partially fund development
projects.

Common distributions declared and recorded in 2003 were $53.4
million, or $1.07 per share or unit. The Company's dividend payout ratio as a
percentage of net income before minority interest, gain or loss on sale or
writedown of assets and depreciation and amortization (reduced by amortization
of deferred financing costs, depreciation of non-real estate assets and
preferred dividends ("FFO")) was 65.8%. The Company's senior unsecured bank line
of credit ("Senior Credit Facility") limits aggregate dividends and
distributions to the lesser of (i) 90% of FFO on an annual basis or (ii) 100% of
FFO for any two consecutive quarters.

The Company's $200 million Senior Credit Facility expires in
March 2005 (unless extended until March 2006), bears interest on the outstanding
balance at an annual rate equal to the London Interbank Offered Rate ("LIBOR")
plus 1.05% (2.21% at June 30, 2003) or the prime rate, at the Company's option,
and has an annual facility fee of 0.125%. The LIBOR rate spread ranges from
0.85% to 1.50% depending on the Company's Senior Debt rating. The Company
received a debt rating upgrade in July 2003, resulting in a reduction of the
LIBOR rate spread to 0.95% from 1.05%. At June 30, 2003, $78.0 million was
outstanding under the Senior Credit Facility.

During 2003, the Company completed two acquisition transactions
valued at approximately $219 million. On June 12, 2003, the Company purchased
The Crossings Factory Stores, a 390,000 square-foot outlet center located in
Tannersville, Pennsylvania, for $111.3 million, including closing costs, and
assumed a $60.7 million 5.85% mortgage loan due 2013. In conjunction with the
Crossings Factory Stores acquisition, the Company completed an offering of 1.2
million shares of common stock at a price of $42.10 per share on June 18, 2003.
Net proceeds after expenses of $49.4 million were used to fund substantially the
entire cash portion of the acquisition.

On August 1, 2003, the Company acquired Belz Factory Outlet
World  Las Vegas, a 477,000 square-foot outlet center in Las Vegas, Nevada
for $104.0 million including the assumption of a $24.4 million 8.12% mortgage
loan due 2012. As part of the same transaction, the Company acquired Belz
Factory Outlet World  Lakeland, a 319,000 square-foot outlet center near
Memphis, Tennessee for an additional $3.5 million. The Lakeland property is
expected to be marketed for sale shortly after closing. The approximately $84.0
million cash portion of the overall transaction was financed through a $100
million one-year bridge loan facility at an annual interest rate of LIBOR plus
0.80% that is due on July 31, 2004 and extendible for six months until January
31, 2005 at the Company's option. The LIBOR rate spread ranges from 0.70% to
1.35% depending on the Company's Senior Debt rating. Surplus proceeds from the
financing of approximately $16.0 million will be used for general corporate
purposes.

A summary of the maturity of the Company's contractual debt
obligations (at par) as of June 30, 2003, is as follows (in thousands):

`Less than       1 to 3        4 to 5         After 5
                                 Total           One Year         Years          Years          Years
                              -------------    -------------   ------------   -----------    ------------
Unsecured bank debt              $83,035         $    -           $83,035      $      -        $      -
Unsecured notes                  625,000              -            50,000       125,000         450,000
Mortgage debt                    354,662          3,126            13,206       166,634         171,696
                              ------------    --------------    -----------   -----------    ------------
   Total                      $1,062,697         $3,126          $146,241      $291,634        $621,696
                              ============    ==============    ===========   ===========    ============`

Construction projects underway at June 30, 2003 included a
170,000 square-foot second phase at Gotemba Premium Outlets, which opened on
July 8, 2003; and the 435,000 square-foot Las Vegas Premium Outlets, which
opened on August 1, 2003. The 180,000 square-foot first phase of Sano Premium
Outlets, located north of Tokyo, Japan opened March 14, 2003. The Company is
also under construction on the 438,000 square-foot Chicago Premium Outlets in
Aurora, Illinois, scheduled to open in mid-2004, and the 124,000 square-foot
third phase of Outlets at Albertville, scheduled to open in March 2004. The
Gotemba and Sano projects are developments of Chelsea Japan Co., Ltd., the
Company's 40%-owned Japanese joint venture. The Las Vegas and Chicago projects
are 50/50 joint ventures with Simon. Other projects in various stages of
development are expected to open in 2004 and beyond. There can be no assurance
that these projects will be completed or opened, or that there will not be
delays in opening or completion. All current development activity is fully
financed either through project specific secured construction financing, the yen
denominated line of credit, available cash or through the Senior Credit
Facility. The Company will seek to obtain permanent financing once the projects
are completed and income has been stabilized.

In connection with the Simon joint ventures, the Company has
committed to provide 50% of the development costs, which are expected to be
approximately $48.0 million for Las Vegas Premium Outlets and $46.0 million for
Chicago Premium Outlets. As of June 30, 2003, the Company had contributed $36.6
million and $12.8 million to the Las Vegas and Chicago projects, respectively.

The Company has an agreement with Mitsubishi Estate Co., Ltd.
and Nissho Iwai Corporation to jointly develop, own and operate premium outlet
centers in Japan under the joint venture Chelsea Japan. Borrowings related to
Chelsea Japan for which the Company and the OP have provided guarantees as of
June 30, 2003, are as follows:

`Total Facility         |                   Outstanding
            -------------          |                   -----------
                                   |                                                     Due    Interest
    Yen           US $ Equivalent  |   Yen        US $ Equivalent    US $ Guarantee      Date    Rate
    ---           ---------------  |   ---        ---------------    --------------      ----    ----
 4.0 billion (1)   $33.4 million   | 0.9 billion   $7.9 million       $7.9 million        2004     1.41%
 3.8 billion (2)    31.7 million   | 3.4 billion   28.1 million       11.2 million        2015     2.20%
 0.6 billion (2)     5.0 million   | 0.5 billion    4.5 million        1.8 million        2012     1.50%`

|1) | Facility entered into by an equity investee of the Company that has a one-year
extension option until April 1, 2005.
|-- | --------------------------------------------------------------------------------------------------------------------

|2) | Facilities entered into by Chelsea Japan, secured by Gotemba and Rinku and 40%
severally guaranteed by the Company.
|-- | -------------------------------------------------------------------------------------------------------------------

In May 2002, the Company, through an affiliated entity, entered
into a 50/50 strategic alliance with Sordo Madaleno y Asociados and Mr. Carlos
Peralta of Mexico City to jointly develop premium outlet centers in Mexico.
Subject to leasing and entitlements, construction on a 232,000 square-foot first
phase of an outlet project north of Mexico City is expected to commence later in
2003 and to open in late 2004. The site can support a second phase containing
approximately 165,000 square feet of GLA. Once phase one of the project has been
approved, the Company will be committed to fund approximately $14 million which
is 50% of the development costs. As of June 30, 2003, the Company had incurred
costs of approximately $1.9 million related to predevelopment costs and
formation of the joint venture.

At December 31, 2002, the Company recognized an impairment loss
equal to the net book value of its investment in Chelsea Interactive. The
Company believes that it will not be able to recover the net book value of its
investment in Chelsea Interactive through future cash flows before reaching the
Company's $60.0 million funding limit. Through June 30, 2003, the Company had
funded $54.1 million and anticipates that the $5.9 million funding balance may
be used to further develop the platform and to finance operating cash shortfalls
and potential costs related to the disposal or discontinuance of the business. A
$0.9 million and $1.7 million funding loss was reported for the three and six
months ended June 30, 2003 respectively. Future funding by the Company will be
reported as a loss in the period funding is required. The Company has signed an
agreement with a third party to restructure Chelsea Interactive, subject to the
satisfaction of certain conditions. There can be no assurance that this joint
venture will be successful or that Chelsea Interactive will be able to continue
as a going concern.

The Company has minority interests ranging from 3% to 8% in
several outlet centers and outlet development projects in Europe operated by
Value Retail. The Company's total investment in Europe as of June 30, 2003, was
$3.6 million. The Company has also provided $17.3 million in limited debt
service guarantees under a standby facility for loans arranged by Value Retail
to construct outlet centers in Europe. The standby facility for new guarantees,
which has a maximum of $22.0 million, expired in November 2001 and outstanding
guarantees shall not survive more than five years after project completion.

To achieve planned growth and favorable returns in both the
short and long-term, the Company's financing strategy is to maintain a strong,
flexible financial position by: (i) maintaining a conservative level of
leverage; (ii) extending and sequencing debt maturity dates; (iii) managing
exposure to floating interest rates; and (iv) maintaining liquidity. Management
believes these strategies will continue to enable the Company to access a broad
array of capital sources, including bank or institutional borrowings and secured
and unsecured debt and equity offerings, subject to market conditions.

Net cash provided by operating activities was $88.7 million and
$52.5 million for the six months ended June 30, 2003, and 2002, respectively.
The increase was primarily due to increased operating cash flow generated on the
growth of the Company's GLA and decreased losses from Chelsea Interactive offset
by the payout of the deferred incentive compensation in March 2002 and the
receipt in January 2002 of the final non-compete installment. Net cash used in
investing activities decreased to $80.9 million from $93.2 for the six months
ended June 30, 2003, and 2002, respectively primarily as a result of a decrease
in joint venture and wholly-owned property acquisition activity and an increase
in proceeds from sale of a center. Net cash used in financing activities
increased to $9.0 million from cash provided of $57.9 million for the six months
ended June 30, 2003, and 2002, respectively. The increase was primarily a result
of decreased debt proceeds and repayments offset by common stock issuance in
2003, preferred stock redemptions in 2002 and increased distributions in 2003.

Funds from Operations

Management believes that funds from operations ("FFO") should be
considered in conjunction with net income, as presented in the statements of
income included elsewhere herein, to facilitate a clearer understanding of the
operating results of the Company. The White Paper on Funds from Operations
approved by the Board of Governors of NAREIT in October 1999 defines FFO as net
income (loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that FFO is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes FFO in accordance with the current
standards established by NAREIT which may not be comparable to FFO reported by
other REITS that do not define the term in accordance with current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions.

`Three Months Ended          Six Months Ended
                                                                     June 30,                    June 30,
                                                                2003          2002           2003          2002
                                                            -----------  ------------     -----------    -------------

Net income to common shareholders.....................         $24,705        $13,408        $43,118      $25,295
Add (deduct):
  Depreciation and amortization - wholly owned........          17,269         14,243         34,901       27,184
  Depreciation and amortization - joint ventures......             694          1,159          1,293        2,802
  Amortization of deferred financing costs and
    depreciation of non-rental real estate assets.....            (583)          (616)        (1,183)      (1,168)
Gain on sale of discontinued operations...............          (4,008)             -         (4,008)           -
  Preferred units distribution........................          (1,462)        (1,462)        (2,924)      (2,924)
  Minority interest...................................           5,127          3,685          9,938        7,140
                                                            ------------   ------------   -----------   -----------
FFO...................................................         $41,742        $30,417        $81,135      $58,329
                                                            ============   ============   ===========   ===========
Average diluted shares/units outstanding .............          51,439         45,656         51,156       45,366
Dividends declared per share..........................          $0.535         $0.485          $1.07        $0.89`

Recent Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value, instead of recording a liability only when a loss is
probable and reasonably estimatable, as those terms are defined in FASB Statement
No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company adopted the disclosure provisions of FIN 45
effective December 31, 2002. FIN 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002.

In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 will be immediately effective for all variable interests in variable
interest entities created after January 31, 2003, and the Company will need to
apply its provisions to any existing variable interests in variable interest
entities by no later than September 30, 2003. The Company does not believe that
FIN 46 will have a significant impact on the Company's financial
statements.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.

Bad Debt

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its tenants to make required rent payments. If
the financial condition of the Company's tenants were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be
required. The Company's allowance for doubtful accounts included in tenant
accounts receivable totaled $2.3 million and $2.6 million at June 30, 2003, and
December 31, 2002, respectively.

Valuation of Investments

On a periodic basis, management assesses whether there are any indicators that
the value of real estate properties, including joint venture properties, may be
impaired. If the carrying amount of the property is greater than the estimated
expected future cash flow (undiscounted and without interest charges) of the
asset, impairment has occurred. The Company will then record an impairment loss
equal to the difference between the carrying amount and the fair value of the
asset. The Company does not believe that the value of any of its rental
properties were impaired at June 30, 2003. The Company currently believes that
it will not be able to recover the net book value of its investment in Chelsea
Interactive through future cash flows unless Chelsea Interactive is able to
achieve positive cash flow before reaching the $60.0 million funding limit. Due
to current market conditions and the costs of operating the platform, future
funding by the Company will be reported as a loss in the period funding occurs.
As of June 30, 2003, $54.1 million had been funded and $0.9 million and $1.7
million has been reported as a loss for the three and six month periods then
ended.

Economic Conditions

Substantially all leases contain provisions, including escalations of base rents
and percentage rentals calculated on gross sales, to mitigate the impact of
inflation. Inflationary increases in common area maintenance and real estate tax
expenses are substantially reimbursed by tenants.

Virtually all tenants have met their lease obligations and the Company continues
to attract and retain quality tenants. The Company intends to reduce operating
and leasing risks by continually improving its tenant mix, rental rates and
lease terms and by pursuing contracts with creditworthy upscale and national
brand-name tenants.

Item 3. Quantitative and Qualitative Disclosures
about Market Risk

The Company is exposed to changes in interest rates primarily
from its floating rate debt arrangements. In December 2000, the Company
implemented a policy to protect against interest rate and foreign exchange risk.
The Company's primary strategy is to protect against this risk by using
derivative transactions as appropriate to minimize the variability that floating
rate interest and foreign currency fluctuations could have on cash flow. In
December 2000, a wholly-owned subsidiary of the Company entered into an interest
rate swap agreement effective January 2, 2001 with a financial institution for a
notional amount of $69.3 million amortizing to $64.1 million to hedge against
unfavorable fluctuations in the LIBOR rates of its secured mortgage loan
facility. The hedge effectively produces a fixed rate of 7.2625% on the notional
amount until January 1, 2006.

At June 30, 2003, a hypothetical 100 basis point adverse move
(increase) in US Treasury and LIBOR rates applied to unhedged debt would
adversely affect the Company's annual interest cost by approximately $0.8
million annually.

Following is a summary of the Company's debt obligations at June
30, 2003, (in thousands):

`Expected Maturity Date
--------------------------------------------------------------------------- ----------------------------------------
                         2004      2005      2006     2007          2008      Thereafter      Total      Fair Value
                         ----      ----      ----     ----          ----      ----------      -----      ----------
Fixed Rate Debt:         -        $49,937     -      $124,857     $166,236     $581,927    $922,957     $1,046,412
Average Interest Rate:   -           8.38%    -          7.25%        6.99%        7.14%       7.19%
Variable Rate Debt:      -        $83,035     -             -            -      $61,975    $145,010     $  145,010
Average Interest Rate:   -           2.21%    -             -            -         2.82%       2.47%`

Item 4.   Controls and Procedures

Our chief executive officer and chief financial officer
evaluated the effectiveness of our disclosure controls and procedures (as
defined in rule 13a-14(c) under the Securities Exchange Act of 1934, as amended)
as of June 30, 2003 and, based on that evaluation, concluded that, as of the
end of the period covered by this report, we had sufficient controls and procedures for recording,
processing, summarizing and reporting information that is required to be
disclosed in our reports under the Securities Exchange Act of 1934, as amended,
within the time periods specified in the SEC's rules and forms.

During the quarter ended June 30, 2003, there have not been any significant
changes to our internal controls including any corrective actions with regard to
significant deficiencies and material weaknesses or other factors that could
significantly affect these controls.

Chelsea Property Group, Inc.

Part II. Other Information

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

The Company held an annual meeting of stockholders on June 5,
2003, at which the following matters were voted upon:

| | 1.
2.
3. | Election of three directors
Approval of the Amendment to Employee Stock Purchase Plan
Approval of appointment of Ernst & Young LLP as independent auditors for the
fiscal year ending December 31, 2003
| | -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The results of the meeting were as follows:

`Broker
                             For           Against         Abstain    Non-Votes
                             ---           -------         -------    ---------
Proposal 1:
William D. Bloom           33,907,125     2,011,140            -          -
Robert Frommer             34,086,230     1,832,035            -          -
Reuben S. Leibowitz        34,073,631     1,844,634            -          -


Proposal 2:
Amendment to Employee
Stock Purchase Plan        35,166,399       414,568      337,298

Proposal 3:
Independent Auditors       34,160,207     1,360,337      397,721`

Messrs. David C. Bloom, Brendan T. Byrne, Barry Ginsburg and Philip Kaltenbacher
continued as directors after the meeting.

Item 6.      Exhibits and
Reports on Form 8-K

| | Exhibit No. | Description
| | ----------- | -----------

|(a) | 31
   32 | Section 302 Certifications
Section 906 Certifications
|--- | -------- | -----------------------------------------------------

|(b) | Current Report on Form 8K reporting under Items 7 and 9 on an event that
occurred May 6, 2003.
|--- | ----------------------------------------------------------------------------------------------

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.

| | CHELSEA PROPERTY GROUP, INC.

By: /s/ Michael J. Clarke
      Michael J. Clarke
      Chief Financial Officer
| | -------------------------------------------------------------------------------------------------------------

Date:  August 12 , 2003