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 March 31, 1998
                                       or

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

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

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



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

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

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

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

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

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

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

As of May 11,  1998,  the issuer  had  outstanding  27,294,951  shares of Common
Stock, $.01 par value per share.

<PAGE>


                               Prime Retail, Inc.
                                    Form 10-Q


                                      INDEX





PART I:  FINANCIAL INFORMATION                                     PAGE
                                                                   ----         

Item 1.  Financial Statements (Unaudited)

     Consolidated Balance Sheets as of March 31, 1998 and
     December 31,1997                                                 1
        

     Consolidated Statements of Operations for the three months
     ended March 31, 1998 and 1997                                    2
     
     Consolidated Statements of Cash Flows for the three
     months ended March 31, 1998 and 1997                             3         

     Notes to the Consolidated Financial Statements                   4         

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                          7         

PART II:  OTHER INFORMATION
Item 1.  Legal Proceedings                                           19         
Item 2.  Changes in Securities                                       19         
Item 3.  Defaults Upon Senior Securities                             19         
Item 4.  Submission of Matters to a Vote of Security Holders         19         
Item 5.  Other Information                                           19         
Item 6.  Exhibits or Reports on Form 8-K                             19         

Signatures                                                           20 



<PAGE>

PART I:  FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
<TABLE>
                               Prime Retail, Inc.
                           Consolidated Balance Sheets
                    (in thousands, except share information)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                          March 31, 1998                         December 31, 1997
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                                       <C>
Assets
Investment in rental property:
      Land                                                                    $   66,277                                $   66,277
      Buildings and improvements                                                 781,583                                   779,191
      Property under development                                                  76,403                                    53,139
      Furniture and equipment                                                      6,666                                     6,175
                                                                            -------------                             ------------- 
                                                                                 930,929                                   904,782
      Accumulated depreciation                                                   (89,458)                                  (82,033)
                                                                            -------------                             ------------- 
                                                                                 841,471                                   822,749 
Cash and cash equivalents                                                            523                                     6,373
Restricted cash                                                                   27,936                                    41,736
Accounts receivable, net                                                           9,329                                     9,745
Deferred charges, net                                                             13,670                                    16,206
Due from affiliates,net                                                              413                                     1,052  
Investment in partnerships                                                         3,921                                     3,278  
Other assets                                                                       4,054                                     3,044  
                                                                            -------------                             ------------- 
              Total assets                                                    $  901,317                                $  904,183
                                                                            =============                             ============= 
Liabilities and Shareholders' Equity
Bonds payable                                                                 $   32,900                                $   32,900  
Notes payable                                                                    492,874                                   482,365  
Accrued interest payable                                                           3,884                                     3,767
Real estate taxes payable                                                          5,996                                     4,639
Construction costs payable                                                         5,958                                     5,849
Accrued dividends and distributions payable                                       14,942                                         -
Accounts payable and other liabilities                                            12,251                                    20,210
                                                                            -------------                             ------------- 
              Total liabilities                                                  568,805                                   549,730
                              
Minority interests                                                                 9,710                                     9,925
                                   
Shareholders' equity:
    Shares of preferred stock, 24,315,000 shares authorized:
       10.5% Series A Senior Cumulative Preferred Stock, $0.01
       par value (liquidation preference of $57,500), 2,300,000
       shares issued and outstanding                                                  23                                        23  
       8.5% Series B Cumulative Participating Convertible Preferred
       Stock, $0.01 par value (liquidation preference of $74,545)
       2,981,800 shares issued and outstanding                                        30                                        30  
       Series C Cumulative Participating Convertible Redeemable
       Preferred Stock, $.01 par value (liquidation preference of
       $50,000), 3,636,363 shares issued and outstanding                              36                                        36  
Shares of common stock, 75,000,000 shares authorized:
       Common stock, $0.01 par value, 27,294,951
       shares issued and outstanding,                                                273                                       273  
Additional paid-in capital                                                       398,188                                   398,188
Distributions in excess of net income                                            (75,748)                                  (54,022) 
                                                                            -------------                             -------------
      Total shareholders' equity                                                 322,802                                   344,528
                                                                            -------------                             ------------- 
              Total liabilities and shareholders' equity                      $  901,317                                $  904,183
                                                                            =============                             ============= 
===================================================================================================================================

See accompanying notes to financial statements.
</TABLE>

<PAGE>
<TABLE>

                               Prime Retail, Inc.
                      Consolidated Statements of Operations
                  (in thousands, except per share information)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,                                                        1998                                      1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                                       <C>    
Revenues
Base rents                                                                    $   23,083                                $   18,066  
Percentage rents                                                                     865                                       669  
Tenant reimbursements                                                             10,743                                     8,949  
Interest and other                                                                 2,817                                     2,478  
                                                                            -------------                             ------------- 
    Total revenues                                                                37,508                                    30,162  

Expenses
Property operating                                                                 8,353                                     6,633  
Real estate taxes                                                                  2,856                                     2,390  
Depreciation and amortization                                                      7,823                                     6,328  
Corporate general and administrative                                               1,692                                     1,350  
Interest                                                                           8,374                                     9,169  
Other charges                                                                        959                                       799  
                                                                            -------------                             ------------- 
    Total expenses                                                                30,057                                    26,669  
                                                                            -------------                             ------------- 
Income before minority interests                                                   7,451                                     3,493  
Income allocated to minority interests                                             5,461                                     2,591  
                                                                            -------------                             ------------- 
Net income                                                                         1,990                                       902  
Income allocated to preferred shareholders                                         4,166                                     3,093  
                                                                            -------------                             ------------- 
Net loss applicable to common shares                                          $   (2,176)                               $   (2,191)
                                                                            =============                             =============
Net loss per common share - basic and diluted                                 $    (0.08)                               $    (0.15)
                                                                            =============                             =============

Weighted average common shares outstanding                                        27,295                                    14,344
                                                                            =============                             ============= 

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

===================================================================================================================================
See accompanying notes to financial statements.

</TABLE>

<PAGE>
<TABLE>



                               Prime Retail, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------

Three months ended March 31,                                                        1998                                      1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                                       <C>    
Operating Activities
Net income                                                                    $    1,990                                $      902  
Adjustments to reconcile net income to
  net cash provided by operating activities:
     Income allocated to minority interests                                        5,461                                     2,591  
     Depreciation                                                                  7,511                                     5,914  
     Amortization of deferred financing costs and
      interest rate protection contracts                                             509                                       944  
     Amortization of leasing commissions                                             312                                       414  
     Provision for uncollectible accounts receivable                                 306                                       253  
 Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable                                      110                                    (1,200) 
     Decrease in due from affiliates, net                                            639                                       163
     (Increase) decrease in other assets                                          13,425                                    (1,713) 
     Increase in accrued interest                                                    117                                        61  
     Decrease in accounts payable and other liabilities                           (4,802)                                   (1,373) 
                                                                            -------------                             ------------- 
      Net cash provided by operating activities                                   25,578                                     6,956  
                    
Investing Activities
Purchase of buildings and improvements                                            (4,247)                                   (4,782) 
Increase in property under development                                           (23,155)                                   (5,107) 
Acquisition of outlet centers                                                          -                                   (37,658) 
                                                                            -------------                             ------------- 
      Cash used in investing activities                                          (27,402)                                  (47,547) 
                  
Financing Activities
Net proceeds from issuance of common and preferred stock                               -                                    31,930  
Proceeds from notes payable                                                       32,611                                    58,215  
Principal repayments on notes payable                                            (22,102)                                  (23,329) 
Deferred financing fees                                                              (85)                                     (522)
Distributions and dividends paid                                                 (11,498)                                   (6,954)
Distributions to minority interests                                               (2,952)                                   (2,591) 
                                                                            -------------                             ------------- 
      Net cash provided by (used in) financing activities                         (4,026)                                   56,749  
                                                                            -------------                             ------------- 
Increase (decrease) in cash and cash equivalents                                  (5,850)                                   16,158  
Cash and cash equivalents at beginning of period                                   6,373                                     3,924
                                                                            -------------                             ------------- 
Cash and cash equivalents at end of period                                    $      523                                $   20,082
                                                                            =============                             ============= 

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

See accompanying notes to financial statements.
</TABLE>
                                                            
<PAGE>


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


Note 1 -- Interim Financial Presentation

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial  information  and the  instructions  to Form  10-Q and  Article  10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes required by GAAP for complete financial statements.  In the opinion of
management,  all adjustments  consisting only of recurring  accruals  considered
necessary for a fair presentation have been included. Operating results for such
interim  periods are not  necessarily  indicative  of the  results  which may be
expected  for a  full  fiscal  year.  For  further  information,  refer  to  the
consolidated  financial statements and footnotes included in Prime Retail's (the
"Company") annual report on Form 10-K for the year ended December 31, 1997.

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

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


Note 2 -- Minority Interests

Cash  distributions and losses allocated to the common  unitholders  reduced the
common unitholders' minority interests balance to zero during 1996. Accordingly,
cash  distributions  in excess of income  allocated  to the common  unitholders'
minority  interests of $4,342 and $2,335 during the three months ended March 31,
1998  and  1997,  respectively,  were  allocated  to  common  shareholders.  The
cumulative  amount of  distributions  in excess of income and  losses  that were
allocable to the common  unitholders'  minority interests that were allocated to
common shareholders at March 31, 1998 was $16,538.

As of March 31, 1998 and 1997, loans to certain limited  partners,  who also are
executive officers of the Company,  aggregating $2,375 and $4,750, respectively,
were reported as a reduction in minority  interests in the Consolidated  Balance
Sheets.


<PAGE>

Note 3 -- Merger Agreement

On November  12, 1997 and as amended on  February 1, 1998,  the Company  entered
into a definitive  merger  agreement (as amended,  the "Merger  Agreement") with
Horizon Group, Inc. ("Horizon") for an aggregate  consideration of approximately
$945,200,  including the assumption of $556,900 of Horizon debt and  transaction
costs.  Upon completion of the transaction,  the Company will own and operate 49
outlet centers totaling  approximately  13,634,261 square feet of gross leasable
area ("GLA").

Under the terms of the Merger  Agreement,  the Company will pay a fixed exchange
ratio of 0.20 of a share of 8.5% Series B Cumulative  Participating  Convertible
Preferred Stock ("Series B Convertible Preferred Stock") and 0.597 of a share of
Common Stock for each share of common stock of Horizon. In addition, each common
unit in Horizon  Partnership  will  entitle  the  holder to receive  0.9193 of a
Common Unit of the Operating  Partnership  that will be exchangeable  for a like
number of shares of Common Stock of the Company.

Immediately prior to the merger,  Horizon's operating partnership,  Horizon Glen
Outlet Centers Limited Partnership ("Horizon  Partnership"),  will contribute 13
of its 35 centers to Horizon  Group  Properties,  L.P.  of which  Horizon  Group
Properties,  Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner.
Immediately  after  the  merger,  all of  the  common  equity  of  HGP  will  be
distributed to the convertible preferred and common shareholders and unitholders
of the Company and the  shareholders  and limited  partners of Horizon  based on
their ownership in the Company immediately following the merger. It is presently
expected  that  following  the merger  one share of common  stock of HGP will be
distributed  for every 20 shares of Common Stock or Common Units of the Company,
and that  approximately  1.196 shares of common stock of HGP will be distributed
for every 20 shares of Series B Convertible Preferred Stock held in the Company.
Upon consummation of the merger, the closing of the merger, the Company will pay
a special cash distribution of $0.60 per share of Series B Convertible Preferred
Stock  and  $0.50  per   share/unit  of  Common   Stock,   Series  C  Cumulative
Participating  Convertible  Redeemable Preferred Stock/Unit ("Series C Preferred
Security") and Common Unit, as applicable.  Shareholders and limited partners in
Horizon will not participate in this  distribution.  HGP will own and operate 15
outlet centers  (including  Indiana Factory Shops and Nebraska  Crossing Factory
Stores, collectively the "Prime Transferred Properties",  which will be acquired
from the Company as discussed below) totaling 3,084,823 square feet of GLA.

In connection  with the closing of the merger,  the Company  intends to sell the
Prime  Transferred   Properties  to  HGP  for  an  aggregate   consideration  of
approximately $26,000 resulting in a loss of approximately $15,000. The ultimate
disposition  of  the  Prime  Transferred   Properties  is  contingent  upon  the
successful  completion of the merger and,  prior to the merger closing date, the
Company can elect,  at its sole  discretion,  not to effectuate  the sale of the
Prime  Transferred  Properties  even if the  merger  is  consummated.  While the
Company  intends  to sell the Prime  Transferred  Properties  to HGP,  it is not
contractually  committed to do so. No assurance can be made that the sale of the
Prime Transferred Properties will be effectuated.

The merger will be accounted for as a purchase.  The record date for determining
the  shareholders  entitled  to notice  of,  and vote at,  the 1998  meeting  of
shareholders was April 24, 1999. The 1998 Annual Meeting of Shareholders will be
held on June 12, 1998.  Completion of the merger remains subject to the approval
of each company's  shareholders  and limited  partners and the  satisfaction  of
other  conditions.  The  closing of the merger is  expected to occur on or about
June 15, 1998.  The exchange of shares of Horizon for shares of the Company will
be made on a tax-free basis.

<PAGE>

On December 10, 1997, a shareholder  of Horizon  filed a purported  class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the Company, and certain directors and former directors of Horizon. The
substantive  allegations claim that Horizon's directors breached their fiduciary
duties to  Horizon's  shareholders  in  approving  the merger of Horizon and the
Company  and that the  consideration  to be paid to  Horizon's  shareholders  in
connection with the merger is unfair and inadequate.  The lawsuit  requests that
such  merger be  enjoined  or, in the event that the  purported  transaction  is
consummated, that it be rescinded or damages be awarded to the class members. On
January 16,  1998,  the  defendants  answered  the  complaint,  denying that the
Horizon board of directors breached their fiduciary duties and denying that such
consideration is unfair or inadequate.  On May 4, 1998,  counsel for the parties
appeared  before the Court for the purpose of reporting that a settlement of the
case  had  been  reached  subject  to the  satisfaction  of  several  conditions
including the completion of the merger.  The general terms of the settlement are
contained in a Memorandum of Understanding  ("Memorandum") among counsel for the
parties dated as of May 7, 1998.  Under the Memorandum,  subject to the terms of
the  Stipulation  of Settlement,  the  defendants  will pay to class counsel for
their fees and expenses,  subject to approval by the Court. The Company believes
that the amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Company.


In April 1998, the Company  accepted loan  commitments from Nomura Asset Capital
Corporation  ("Nomura") to provide (i) $305,000 of debt  financing in connection
with the merger and (ii) bridge loan financing to HGP.


The  $305,000  loan  commitment  to  the  Company  contemplates  (i) a  $180,000
nonrecourse  permanent loan (the "Permanent Loan"), (ii) a $85,000 full recourse
bridge loan (the "Bridge  Loan"),  and (iii) a $40,000 full  recourse  unsecured
corporate line of credit (the "Unsecured  Corporate  Line").  The Permanent Loan
will (i) be  collateralized  by first  mortgages on four factory outlet centers,
(ii)  bear a fixed  rate of  interest  equal to the  yield on the  10-year  U.S.
Treasury plus 1.50%, and (iii) require monthly  principal and interest  payments
pursuant  to a  27-year  amortization  schedule.  The  Bridge  Loan  will (i) be
collateralized  by first  mortgages on six factory outlet  centers,  (ii) bear a
variable  rate of interest  equal to 30-day  LIBOR plus 1.25%,  (iii)  mature in
three years,  and (iv) require  monthly  interest-only  payments.  The Unsecured
Corporate  Line will (i) bear a variable rate of interest  equal to 30-day LIBOR
plus 1.75%, (ii) mature in three years, and (iii) require monthly  interest-only
payments.


The  proceeds  from the  Permanent  Loan,  the Bridge  Loan,  and the  Unsecured
Corporate  Line will be used (i) to repay  $190,800  of debt  outstanding  under
various  existing  Horizon  loans,  (ii) to pay loan fees and  closing  costs of
approximately $2,200, (iii) for development and acquisition activities, and (iv)
for general corporate purposes.


In connection with a $120,000 loan commitment  granted to HGP (the "HGP Mortgage
Loan"),  the  proceeds of such will be used to repay  certain  debt  outstanding
under  various  existing  Horizon  loans,  the Company  has agreed to  guarantee
$10,000 of such  obligations.  The Company will be released from its guaranty if
at any time during the term of the loan,  HGP raises at least  $50,000 of equity
and not less than $50,000 of such equity is used to repay the HGP Mortgage Loan.


Each of the Nomura  commitments  is subject to customary  conditions,  including
execution of definitive  loan agreements as well as consummation of the proposed
merger.

<PAGE>

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

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


Introduction

The following  discussion and analysis of the consolidated  financial  condition
and results of operations of Prime Retail,  Inc. (the "Company")  should be read
in conjunction with the Consolidated Financial Statements and Notes thereto. The
Company's  operations are conducted  through Prime Retail,  L.P. (the "Operating
Partnership").  The  Company  controls  the  Operating  Partnership  as its sole
general partner and is dependent upon the  distributions  or other payments from
the Operating Partnership to meet its financial obligations.  Historical results
and percentage  relationships set forth herein are not necessarily indicative of
future operations.

Cautionary Statements

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

Results of Operations

General

The Company has grown by developing  and acquiring  factory  outlet  centers and
expanding certain of its existing factory outlet centers. As summarized in TABLE
1, the Company's  factory  outlet  portfolio  consisted of 28 operating  factory
outlet centers totaling  7,237,000 square feet of gross leasable area ("GLA") at
March 31,  1998,  compared  to 24  operating  factory  outlet  centers  totaling
6,138,000 square feet of GLA at March 31, 1997.

During the three months ending March 31, 1998,  the Company  opened an expansion
to an existing  factory outlet center totaling 20,000 square feet of GLA. During
1997, the Company  purchased  seven factory outlet  centers  totaling  1,221,000
square feet of GLA and opened  expansions  to existing  factory  outlet  centers
totaling  224,000  square feet of GLA.  Additionally,  the Company  acquired its
joint venture partner's 25% ownership  interest in Buckeye Factory Shops Limited
Partnership  ("Buckeye") on September 2, 1997, and now owns 100% of this factory
outlet center with 205,000 square feet of GLA. The  significant  increase in the
number of the Company's operating  properties and total GLA since March 31, 1997
are collectively referred to as the "Portfolio Expansion".

<PAGE>
<TABLE>

                             Portfolio of Properties

                                 March 31, 1998
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>               <C>            <C>    
Niagara International Factory Outlets (2)--Niagara Falls, New York......    I             July 1982        300,000              95%
                                                                           II           August 1985        234,000              78
                                                                                                         ---------            ----  
                                                                                                           534,000              88

Prime Retail Outlets of Kittery (3)--Kittery Maine......................    I            April 1984         25,000             100
                                                                           II              May 1984         78,000             100
                                                                          III           August 1989         18,000             100
                                                                                                         ---------            ----
                                                                                                           121,000             100

Latham Factory Outlets (3)--Latham, New York............................    I           August 1987         43,000             100

Warehouse Row Factory Shops (4)--Chattanooga, Tennessee.................    I         November 1989         95,000              96  
                                                                           II           August 1993         26,000              74  
                                                                                                         ---------            ----  
                                                                                                           121,000              91
                                                                                                                                
Oak Creek Factory Stores (5)--Sedona, Arizona ..........................    I           August 1990         82,000             100

San Marcos Factory Shops--San Marcos, Texas.............................    I           August 1990        177,000             100
                                                                           II           August 1991         70,000             100
                                                                          III           August 1993        117,000             100
                                                                         IIIB         November 1994         20,000              91
                                                                         IIIC         November 1995         35,000             100
                                                                                                         ---------            ----
                                                                                                           419,000             100

Shasta Factory Stores (2)--Anderson, California.........................    I           August 1990        165,000              94

Factory Outlets at Post Falls (5)--Post Falls, Idaho ...................    I             July 1991        111,000              94
                                                                           II             July 1992         68,000              81
                                                                                                         ---------            ----
                                                                                                           179,000              89

Gulf Coast Factory Shops--Ellenton, Florida.............................    I          October 1991        187,000              96
                                                                           II           August 1993        123,000             100
                                                                          III          October 1996         30,000             100
                                                                                                         ---------            ----
                                                                                                           340,000              98

Triangle Factory Shops--Raleigh-Durham, North Carolina..................    I          October 1991        181,000             100
                                                                           II             July 1996          6,000             100
                                                                                                         ---------            ----
                                                                                                           187,000             100
                                                                                                            
Coral Isle Factory Shops--Naples/Marco Island, Florida..................    I         December 1991         94,000             100
                                                                           II         December 1992         32,000             100
                                                                          III            March 1998         20,000              60
                                                                                                         ---------            ----
                                                                                                           146,000              95

Castle Rock Factory Shops--Castle Rock, Colorado........................    I         November 1992        181,000              97
                                                                           II           August 1993         94,000              98
                                                                          III         November 1993         95,000              93
                                                                           IV           August 1997        110,000             100
                                                                                                         ---------            ----
                                                                                                           480,000              97

Bend Factory Outlets (5)--Bend, Oregon..................................    I         December 1992         97,000              97

Ohio Factory Shops--Jeffersonville, Ohio................................    I             July 1993        186,000              93
                                                                           II         November 1993        100,000             100
                                                                          IIB         November 1994         13,000              75
                                                                         IIIA           August 1996         35,000             100
                                                                         IIIB            March 1997         73,000              72
                                                                                                         ---------            ----
                                                                                                           407,000              91
</TABLE>
<PAGE>
<TABLE>
                       Portfolio of Properties (continued)

                                 March 31, 1998
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>               <C>            <C>    
Gainesville Factory Shops--Gainesville, Texas...........................    I           August 1993        210,000              82%
                                                                           II         November 1994        106,000              81
                                                                                                         ---------            ----
                                                                                                           316,000              81

Nebraska Crossing Factory Stores (6)--Gretna, Nebraska..................    I          October 1993        192,000              83

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

Oxnard Factory Outlet (7)--Oxnard, California...........................    I             June 1994        148,000              88

Grove City Factory Shops--Grove City, Pennsylvania......................    I           August 1994        235,000             100
                                                                           II         November 1994         95,000             100
                                                                          III         November 1995         85,000              97
                                                                           IV         November 1996        118,000              99
                                                                                                         ---------            ----
                                                                                                           533,000              99

Huntley Factory Shops--Huntley, Illinois................................    I           August 1994        192,000              97
                                                                           II         November 1995         90,000              83
                                                                                                         ---------            ----
                                                                                                           282,000              92

Florida Keys Factory Shops--Florida City, Florida.......................    I        September 1994        208,000              91

Indiana Factory Shops (6)--Daleville, Indiana...........................    I         November 1994        208,000              88
                                                                          IIA         November 1996         26,000              35
                                                                                                         ---------            ----
                                                                                                           234,000              82

Kansas City Factory Outlets--Odessa, Missouri...........................    I             July 1995        191,000              97
                                                                           II         November 1996        105,000              53
                                                                                                         ---------            ----
                                                                                                           296,000              81

Magnolia Bluff Factory Shops (8)--Darien, Georgia.......................    I             July 1995        238,000              88
                                                                          IIA         November 1995         49,000              99
                                                                          IIB             July 1996         20,000             100
                                                                                                         ---------            ----
                                                                                                           307,000              91

Arizona Factory Shops (9)--Phoenix, Arizona.............................    I        September 1995        217,000              97
                                                                           II        September 1996        109,000              92
                                                                                                         ---------            ----
                                                                                                           326,000              95

Gulfport Factory Shops (10)--Gulfport, Mississippi......................    I         November 1995        228,000              97
                                                                          IIA         November 1996         40,000             100
                                                                          IIB         November 1997         38,000              38
                                                                                                         ---------            ----  
                                                                                                           306,000              90  

Buckeye Factory Shops (11)--Burbank, Ohio...............................    I         November 1996        205,000              94

Carolina Factory Shops--Gaffney, South Carolina.........................    I         November 1996        235,000              96
                                                                                                         ---------            ----

Total Factory Outlet Centers (12)                                                                        7,237,000              93%
                                                                                                         =========            ==== 
===================================================================================================================================
</TABLE>
Notes:
(1)  Percentage reflects fully executed leases as of March 31, 1998 as a percent
     of square feet of GLA.
(2)  The Company  acquired  this factory  outlet center on December 2, 1997 from
     an unrelated  third party.
(3)  The Company acquired this factory outlet center on October 29, 1997 from an
     unrelated third party.
<PAGE>
(4)  The Company owns a 2% partnership  interest as the sole general  partner in
     Phase I of this property but is entitled to 99% of the property's operating
     cash flow and net proceeds from a sale or  refinancing.  An unrelated third
     party holds a 35% limited partnership  interest and the Company holds a 65%
     general partnership  interest in the partnership that owns Phase II of this
     property.  Phase I of this mixed-use  development  includes  154,000 square
     feet of office  space and Phase II  includes  5,000  square  feet of office
     space.  The total  office  space of 159,000  square feet is not included in
     this table and such space was 64% leased as of March 31, 1998.
(5)  The Company  acquired this factory  outlet center on February 13, 1997 from
     an unrelated third party.
(6)  Upon consummation of the Merger Agreement, the Company intends to sell this
     factory  outlet  center  (see Note 3 - "Merger  Agreement"  of the Notes to
     Consolidated Financial Statements).
(7)  On February 7, 1997, the Company  purchased an additional 20% interest from
     a joint venture  partner,  increasing the Company's  ownership  interest in
     this property to 50%.
(8)  The Company  operates  this property  pursuant to a long-term  ground lease
     under which the Company  receives the economic  benefit of a 100% ownership
     interest.
(9)  The  Company  owns 50% of this  factory  outlet  center in a joint  venture
     partnership with an unrelated third party.
(10) The real  property on which this  outlet  center is located is subject to a
     long-term ground lease. The Company receives the economic benefit of a 100%
     ownership interest.
(11) On September 2, 1997, the Company purchased its joint venture partner's 25%
     partnership  interest in Buckeye Factory Shops Limited  Partnership and now
     owns 100% of this factory outlet center.
(12) The Company  also owns three  community  centers not included in this table
     containing 424,000 square feet of GLA in the aggregate that were 90% leased
     as of March 31, 1998.

Comparison  of the three  months  ended March 31, 1998 to the three months ended
March 31, 1997

Summary

The Company  reported  net income of $1,990 and $902 for the three  months ended
March 31,  1998 and 1997,  respectively.  For the three  months  ended March 31,
1998, the net loss applicable to common  shareholders  was $2,176,  or $0.08 per
common share on a basic and diluted basis.  For the three months ended March 31,
1997, the net loss applicable to common  shareholders  was $2,191,  or $0.15 per
common share on a basic and diluted basis.

Revenues

Total  revenues  were $37,508 for the three months ended March 31, 1998 compared
to $30,162 for the three months ended March 31, 1997, an increase of $7,346,  or
24.4%.  Base  rents  increased  $5,017,  or  27.8%,  in 1998  compared  to 1997.
Straight-line  rents  (included in base rents) were $(26) and $125 for the three
months  ended  March  31,  1998 and  1997,  respectively.  These  increases  are
primarily due to the Portfolio Expansion.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified  threshold,  increased $196, or 29.3%, during the three months
ended March 31, 1998  compared to the same  period in 1997.  This  increase  was
attributable  to the Portfolio  Expansion.  For the three months ended March 31,
1998, same-space sales in centers owned by the Company were flat compared to the
same period in 1997. "Same-space sales" is defined as the weighted average sales
per square foot reported by merchants for space open since January 1, 1997.  The
Company's same-space sales for the year ended December 31, 1997 were $231.89 per
square  foot.  For the three  months  ended  March 31,  1998,  same-store  sales
decreased  by 2.4%  compared  to the  same  period  in  1997.  The  decrease  in
same-store  sales is primarily  due to the shift of the Easter  shopping  period
from  March in 1997 to  April in 1998.  "Same-store  sales"  is  defined  as the
weighted  average  sales per square foot reported by merchants for stores opened
since January 1, 1997.  Tenant  reimbursements,  which represent the contractual
recovery from tenants of certain  operating  expenses,  increased by $1,794,  or
20.0%,  during the three  months  ended  March 31,  1998 over the same period in
1997. These increases were primarily due to the Portfolio Expansion.

<PAGE>

Interest and other  income  increased by $339,  or 13.7%,  to $2,817  during the
three  months  ended March 31,  1998 as compared to $2,478 for the three  months
ended March 31, 1997. The increase  reflects higher  temporary  tenant income of
$490,  other  ancillary  income  of $160 and  lease  termination  income  of $92
partially  offset by a decrease in interest  income of $403.  The  reduction  in
interest  income  was  primarily  the  result  of the  use of a  portion  of the
Company's  expansion  loan  escrow  account to fund  certain of its  development
activities  during 1997 and 1998.  The expansion loan escrow account is included
in restricted cash in the Consolidated Balance Sheets.

Expenses

Property  operating  expenses  increased by $1,720,  or 25.9%, to $8,353 for the
three  months  ended  March 31,  1998  compared to $6,633 for the same period in
1997.  Real estate taxes  increased by $466,  or 19.5%,  to $2,856 for the three
months  ended  March 31,  1998,  from  $2,390 in the same  period for 1997.  The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio  Expansion.  As shown in TABLE 2, depreciation and amortization
expense  increased  by $1,495,  or 23.6%,  to $7,823 for the three  months ended
March 31,  1998,  compared to $6,328 for 1997.  This  increase  results from the
depreciation and amortization of assets associated with the Portfolio Expansion.

TABLE 2 -- Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------

Three months ended March 31,                            1998             1997
--------------------------------------------------------------------------------

Building and improvements                             $4,324           $3,258
Land improvements                                        830              627   
Tenant improvements                                    2,075            1,827
Furniture and fixtures                                   282              202   
Leasing commissions(1)                                   312              414   
                                                      ------           ------   
Total                                                 $7,823           $6,328   
                                                      ======           ====== 
================================================================================
Note:
(1)  In accordance  with  generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions are classified as intangible  assets.  Therefore,  the
     amortization  of  leasing   commissions  is  reported  as  a  component  of
     depreciation and amortization expense.

<PAGE>

TABLE 3 -- Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------


Three months ended March 31,                            1998             1997
--------------------------------------------------------------------------------

Interest incurred                                     $9,276           $9,109
Interest capitalized                                  (1,388)            (845)  
Interest earned on interest rate protection contracts    (23)             (39)
Amortization of deferred financing costs                 167              608 
Amortization of interest rate protection contracts       342              336   
                                                      ------           ------   
Total                                                 $8,374           $9,169
                                                      ======           ======

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



As shown in TABLE 3, interest  expense for the three months ended March 31, 1998
decreased by $795, or 8.7%, to $8,374  compared to $9,169 for the same period in
1997.  This  decrease  reflects  (i) an  increase  in  the  amount  of  interest
capitalized in connection with development projects of $543 and, (ii) a decrease
in amortization of deferred financing costs of $441.  Partially offsetting these
items were (i) higher  interest  incurred of $167,  (ii) a reduction in interest
earned on interest  rate  protection  contracts of $16, and (iii) an increase in
amortization of interest rate protection contracts of $6.

<PAGE>

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $3,342 in the Company's average debt outstanding during the three
months  ended  March 31,  1998  compared  to the same period in 1997 offset by a
slight decrease in the weighted average interest rate for the three months ended
March 31,  1998  compared  to the same  period  in 1997.  The  weighted  average
interest rates were 7.10% and 7.12% for the 1998 and 1997 periods, respectively.

Other charges  increased by $160,  or 20.0%,  to $959.  This  increase  reflects
higher  ground  lease  expense  of $121 and  marketing  costs of $85.  Partially
offsetting  these  increases was a reduction in other  miscellaneous  charges of
$46.

In connection with re-leasing space to new merchants,  the Company incurred $195
and $235 in capital  expenditures  during the three  months ended March 31, 1998
and 1997, respectively.

Liquidity and Capital Resources

Sources and Uses of Cash

For the three  months  ended March 31,  1998,  net cash  provided  by  operating
activities was $25,578,  cash used in investing  activities was $27,402, and net
cash used in financing activities was $4,026.

The primary uses of cash for investing  activities during the three months ended
March  31,  1998  included:  (i)  costs  associated  with  the  development  and
construction  of two new  factory  outlet  centers  and  expansions  to existing
factory outlet centers aggregating 751,000 square feet of GLA which are expected
to open during 1998 (20,000  square feet of GLA opened  during the first quarter
of 1998),  (ii) costs  associated  with the completion of expansions to existing
factory  outlet  centers  aggregating  224,000  square feet of GLA which  opened
during 1997,  and (iii) costs for  pre-development  activities  associated  with
future developments.

<PAGE>

The primary uses of cash for financing  activities during the three months ended
March 31, 1998 were (i) principal  repayments on notes payable of $22,102,  (ii)
preferred and common stock  distributions  of $11,498,  (iii)  distributions  to
minority interests (including distributions to limited partners of the Operating
Partnership) of $2,952, and (iv) deferred financing costs of $85. Such uses were
partially offset by proceeds from new borrowings of $32,611 during the period.

Shelf Registration

On January 10, 1997,  the Company filed a Form S-3  Registration  Statement (the
"Shelf  Registration")  with the Securities and Exchange  Commission to register
$100,000  of the  Company's  equity  securities.  As a result of the 1997  Stock
Offering,  as of March 31, 1998, the Company had $66,122 of  availability  under
the Shelf  Registration.  From time to time,  the Company will consider  issuing
additional  securities  under such Shelf  Registration  for the  development  or
acquisition of additional properties,  the expansion and improvement of existing
properties, and for general corporate purposes.

Property Acquisitions

During 1998, the Company will explore  acquisitions of factory outlet centers in
the United States and Europe as well as consider possible strategic acquisitions
of  other  assets  in the  retail  sector.  The  Company  has  evaluated  and is
evaluating  such  opportunities  and  prospects  and  will  continue  to  do  so
throughout  1998.  The  Company  cannot  predict  if  any  transaction  will  be
consummated, nor the terms or form of consideration required.

Merger Agreement

On November  12, 1997 and as amended on  February 1, 1998,  the Company  entered
into a definitive  merger  agreement (as amended,  the "Merger  Agreement") with
Horizon Group, Inc. ("Horizon") for an aggregate  consideration of approximately
$945,200,  including the assumption of $556,900 of Horizon debt and  transaction
costs.  Upon completion of the transaction,  the Company will own and operate 49
outlet centers totaling  approximately  13,634,261 square feet of gross leasable
area ("GLA").

Under the terms of the Merger  Agreement,  the Company will pay a fixed exchange
ratio of 0.20 of a share of 8.5% Series B Cumulative  Participating  Convertible
Preferred Stock ("Series B Convertible Preferred Stock") and 0.597 of a share of
Common Stock for each share of common stock of Horizon. In addition, each common
unit in Horizon  Partnership  will  entitle  the  holder to receive  0.9193 of a
Common Unit of the Operating  Partnership  that will be exchangeable  for a like
number of shares of Common Stock of the Company.

Immediately prior to the merger,  Horizon's operating partnership,  Horizon Glen
Outlet Centers Limited Partnership ("Horizon  Partnership"),  will contribute 13
of its 35 centers to Horizon  Group  Properties,  L.P.  of which  Horizon  Group
Properties,  Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner.
Immediately  after  the  merger,  all of  the  common  equity  of  HGP  will  be
distributed to the convertible preferred and common shareholders and unitholders
of the Company and the  shareholders  and limited  partners of Horizon  based on
their ownership in the Company immediately following the merger. It is presently
expected  that  following  the merger  one share of common  stock of HGP will be
distributed  for every 20 shares of Common Stock or Common Units of the Company,
and that  approximately  1.196 shares of common stock of HGP will be distributed
for every 20 shares of Series B Convertible Preferred Stock held in the Company.

<PAGE>

Upon consummation of the merger, the closing of the merger, the Company will pay
a special cash distribution of $0.60 per share of Series B Convertible Preferred
Stock  and  $0.50  per   share/unit  of  Common   Stock,   Series  C  Cumulative
Participating  Convertible  Redeemable Preferred Stock/Unit ("Series C Preferred
Security") and Common Unit, as applicable.  Shareholders and limited partners in
Horizon will not participate in this  distribution.  HGP will own and operate 15
outlet centers  (including  Indiana Factory Shops and Nebraska  Crossing Factory
Stores, collectively the "Prime Transferred Properties",  which will be acquired
from the Company as discussed below) totaling 3,084,823 square feet of GLA.

In connection  with the closing of the merger,  the Company  intends to sell the
Prime  Transferred   Properties  to  HGP  for  an  aggregate   consideration  of
approximately $26,000 resulting in a loss of approximately $15,000. The ultimate
disposition  of  the  Prime  Transferred   Properties  is  contingent  upon  the
successful  completion of the merger and,  prior to the merger closing date, the
Company can elect,  at its sole  discretion,  not to effectuate  the sale of the
Prime  Transferred  Properties  even if the  merger  is  consummated.  While the
Company  intends  to sell the Prime  Transferred  Properties  to HGP,  it is not
contractually  committed to do so. No assurance can be made that the sale of the
Prime Transferred Properties will be effectuated.

The merger will be accounted for as a purchase.  The record date for determining
the  shareholders  entitled  to notice  of,  and vote at,  the 1998  meeting  of
shareholders was April 24, 1999. The 1998 Annual Meeting of Shareholders will be
held on June 12, 1998.  Completion of the merger remains subject to the approval
of each company's  shareholders  and limited  partners and the  satisfaction  of
other  conditions.  The  closing of the merger is  expected to occur on or about
June 15, 1998.  The exchange of shares of Horizon for shares of the Company will
be made on a tax-free basis.

On December 10, 1997, a shareholder  of Horizon  filed a purported  class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the Company, and certain directors and former directors of Horizon. The
substantive  allegations claim that Horizon's directors breached their fiduciary
duties to  Horizon's  shareholders  in  approving  the merger of Horizon and the
Company  and that the  consideration  to be paid to  Horizon's  shareholders  in
connection with the merger is unfair and inadequate.  The lawsuit  requests that
such  merger be  enjoined  or, in the event that the  purported  transaction  is
consummated, that it be rescinded or damages be awarded to the class members. On
January 16,  1998,  the  defendants  answered  the  complaint,  denying that the
Horizon board of directors breached their fiduciary duties and denying that such
consideration is unfair or inadequate.  On May 4, 1998,  counsel for the parties
appeared  before the Court for the purpose of reporting that a settlement of the
case  had  been  reached  subject  to the  satisfaction  of  several  conditions
including the completion of the merger.  The general terms of the settlement are
contained in a Memorandum of Understanding  ("Memorandum") among counsel for the
parties dated as of May 7, 1998.  Under the Memorandum,  subject to the terms of
the  Stipulation  of Settlement,  the  defendants  will pay to class counsel for
their fees and expenses,  subject to approval by the Court. The Company believes
that the amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Company.


In April 1998, the Company  accepted loan  commitments from Nomura Asset Capital
Corporation  ("Nomura") to provide (i) $305,000 of debt  financing in connection
with the merger and (ii) bridge loan financing to HGP.

<PAGE>

The  $305,000  loan  commitment  to  the  Company  contemplates  (i) a  $180,000
nonrecourse  permanent loan (the "Permanent Loan"), (ii) a $85,000 full recourse
bridge loan (the "Bridge  Loan"),  and (iii) a $40,000 full  recourse  unsecured
corporate line of credit (the "Unsecured  Corporate  Line").  The Permanent Loan
will (i) be  collateralized  by first  mortgages on four factory outlet centers,
(ii)  bear a fixed  rate of  interest  equal to the  yield on the  10-year  U.S.
Treasury plus 1.50%, and (iii) require monthly  principal and interest  payments
pursuant  to a  27-year  amortization  schedule.  The  Bridge  Loan  will (i) be
collateralized  by first  mortgages on six factory outlet  centers,  (ii) bear a
variable  rate of interest  equal to 30-day  LIBOR plus 1.25%,  (iii)  mature in
three years,  and (iv) require  monthly  interest-only  payments.  The Unsecured
Corporate  Line will (i) bear a variable rate of interest  equal to 30-day LIBOR
plus 1.75%, (ii) mature in three years, and (iii) require monthly  interest-only
payments.


The  proceeds  from the  Permanent  Loan,  the Bridge  Loan,  and the  Unsecured
Corporate  Line will be used (i) to repay  $190,800  of debt  outstanding  under
various  existing  Horizon  lines,  (ii) to pay loan fees and  closing  costs of
approximately $2,200, (iii) for development and acquisition activities, and (iv)
for general corporate purposes.


In connection with a $120,000 loan commitment  granted to HGP (the "HGP Mortgage
Loan"),  the  proceeds of such will be used to repay  certain  debt  outstanding
under  various  existing  Horizon  loans,  the Company  has agreed to  guarantee
$10,000 of such  obligations.  The Company will be released from its guaranty if
at any time during the term of the loan,  HGP raises at least  $50,000 of equity
and not less than $50,000 of such equity is used to repay the HGP Mortgage Loan.


Each of the Nomura  commitments  is subject to customary  conditions,  including
execution of definitive  loan agreements as well as consummation of the proposed
merger.

Planned Development

Management believes that there is sufficient demand for continued development of
new factory  outlet centers and  expansions of certain  existing  factory outlet
centers.  The Company expects to open  approximately  751,000 square feet of GLA
during 1998  including  the Outlet  Village of Lebanon which opened on April 17,
1998 and another new factory outlet center  currently  under  construction  (the
Outlet  Village  of  Hagerstown).  The  Outlet  Village of Lebanon is located in
Lebanon,  Tennessee,  approximately  25 miles east of  Nashville,  and  contains
208,000 square feet of GLA and features  approximately 50 designer and specialty
outlet stores.  The Outlet Village of Lebanon was  approximately 86% occupied on
its  grand  opening.   At  March  31,  1998,  the  remaining   budgeted  capital
expenditures for 1998 planned  developments  aggregated  approximately  $59,637,
while anticipated capital  expenditures  related to the completion of expansions
of existing  factory  outlet  centers  opened during 1997  (aggregating  224,000
square feet of GLA) approximated $4,106.

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

<PAGE>

The Company  currently  plans to open one new factory  outlet center and several
expansions  in 1999 that are expected to contain  approximately  400,000  square
feet of GLA, in the  aggregate,  and have a total expected  development  cost of
approximately $56,000. The Company expects to fund the development cost of these
projects  from  (i)  certain  line of  credit  facilities,  (ii)  joint  venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the  potential  sale of common or preferred  equity in the public or private
capital markets.  As of March 31, 1998, the Company had committed  approximately
$4,000 with regard to the  construction  of the new  factory  outlet  center and
expansions scheduled to open in 1999. There can be no assurance that the Company
will be successful in obtaining  the required  amount of equity  capital or debt
financing  for the  1999  planned  openings  or that the  terms of such  capital
raising  activities will be as favorable as the Company has experienced in prior
periods.

Debt Repayments and Preferred Stock Distributions and Dividends

The Company's aggregate indebtedness was $525,774 and $515,265 at March 31, 1998
and December 31, 1997, respectively.  At March 31, 1998, such indebtedness had a
weighted  average  maturity of 6.1 years and bore interest at a weighted average
interest rate of 7.10% per annum. At March 31, 1998,  $74,452, or 14.2%, of such
indebtedness  bore  interest  at fixed  rates and  $451,322,  or 85.8%,  of such
indebtedness,   including   $28,250  of  tax-exempt   bonds,  bore  interest  at
variable-rates. Of the variable rate indebtedness outstanding at March 31, 1998,
$355,178 is scheduled to convert to a fixed rate of 7.782% in November  1998 for
the remaining five-year term of such indebtedness.

At March 31, 1998,  the Company held interest rate  protection  contracts on all
$28,250 of its floating rate  tax-exempt  indebtedness  which expire in 1999 and
approximately  $355,178 of other  floating  rate  indebtedness  which  expire in
November 1998 (or approximately  85.0% of its total floating rate indebtedness).
In addition,  the Company held additional interest rate protection  contracts on
$43,900  (of which  $22,000  expires in July 1998 and  $21,900  expires in April
1999) of the $355,178 floating rate indebtedness to further reduce the Company's
exposure to increases in interest rates.

The  Company's  ratio of debt to total market  capitalization  at March 31, 1998
(defined as total debt divided by the sum of: (a) the aggregate  market value of
the  outstanding  shares of Common  Stock,  assuming the full exchange of Common
Units and Series C Preferred  Securities  into Common  Stock;  (b) the aggregate
market value of the outstanding shares of Series B Convertible  Preferred Stock;
(c) the aggregate liquidation preference of the 10.5% Series A Senior Cumulative
Preferred  Stock  ("Senior  Preferred  Stock") at $25.00 per share;  and (d) the
total debt of the Company) was 41.9%.

The Company is obligated to repay  $10,851 of mortgage  indebtedness  during the
remainder of 1998 and $63,790 in 1999.  Annualized  cumulative  dividends on the
Company's  Senior  Preferred  Stock,  Series B Convertible  Preferred  Stock and
Series C Preferred Securities outstanding March 31, 1998 are $6,038, $6,336, and
$5,149, respectively. These dividends are payable quarterly, in arrears.

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

Economic Conditions

Substantially  all of the  merchants'  leases contain  provisions  that somewhat
mitigate the impact of inflation.  Such provisions include clauses providing for
increases in base rent and clauses  enabling  the Company to receive  percentage
rentals  based on  merchants'  gross  sales.  Substantially  all leases  require
merchants to pay their proportionate share of all operating expenses,  including
common area maintenance,  real estate taxes and promotion,  thereby reducing the
Company's  exposure to increased  costs and operating  expenses  resulting  from
inflation.

<PAGE>

At March 31, 1998, the Company maintained interest rate protection  contracts to
protect against significant increases in interest rates on certain floating rate
indebtedness  (see  "Debt  Repayments  and  Preferred  Stock  Distributions  and
Dividends").

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

Year 2000

Recognizing  the  need to  ensure  that  the  Company's  operations  will not be
adversely impacted by year 2000 software  failures,  management has assessed the
potential  impact  of  the  year  2000  on  the  processing  of   date-sensitive
information by the Company's  computerized  information  systems.  Based on this
assessment,   management  believes  that  the  Company's  primary   computerized
information  systems are year 2000 compliant and the Company's  operations  will
not be adversely impacted by year 2000 software failures.

Funds from Operations

Management  believes that to facilitate a clear  understanding  of the Company's
consolidated   operating  results,  Funds  from  Operations  ("FFO")  should  be
considered in conjunction  with net income (loss)  presented in accordance  with
GAAP.  Management  believes  that FFO is an important and widely used measure of
the  operating  performance  of  REITs  which  provides  a  relevant  basis  for
comparison to other REITs.  Therefore,  FFO is presented to assist  investors in
analyzing  the  performance  of the Company.  FFO  represents  net income (loss)
(computed  in  accordance  with  GAAP)  excluding  gains (or  losses)  from debt
restructuring and sales of property,  plus  depreciation and amortization  after
adjustments for unconsolidated partnerships and joint ventures.

The  Company  has adopted the  National  Association  of Real Estate  Investment
Trusts' definition of FFO. However, the Company cautions that the calculation of
FFO may vary from  entity to entity and as such the  presentation  of FFO by the
Company  may not be  comparable  to other  similarly  titled  measures  of other
reporting companies.  FFO does not represent cash flow from operating activities
in accordance  with GAAP and is not  indicative of cash available to fund all of
the Company's cash needs.  FFO should not be considered as an alternative to net
income or any other GAAP measure as an indicator of  performance  and should not
be considered as an  alternative  to cash flows as a measure of liquidity or the
ability to service debt or to pay dividends and distributions.

TABLE 4  provides a  reconciliation  of income  before  allocation  to  minority
interests and preferred shareholders to FFO for the three months ended March 31,
1998 and 1997.  FFO increased  $5,203,  or 50.8% to $15,455 for the three months
ended March 31, 1998 from  $10,252 for the three  months  ended March 31,  1997.
This increase was primarily due to the Portfolio Expansion.

<PAGE>

TABLE 4 -- Funds from Operations

--------------------------------------------------------------------------------


Three months ended March 31,                            1998             1997
--------------------------------------------------------------------------------

Income before allocations to minority interests and
  preferred shareholders                             $ 7,451          $ 3,493
FFO adjustments:
Real estate depreciation and amortization              7,702            6,274   
Unconsolidated joint venture adjustments                 302              485 
                                                     -------          -------   
FFO before allocations to minority interests and
  preferred shareholders                             $15,455          $10,252   
                                                     =======          =======


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

<PAGE>


PART II:  OTHER INFORMATION

Item 1.           Legal Proceedings


On December 10, 1997, a shareholder  of Horizon  filed a purported  class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the Company, and certain directors and former directors of Horizon. The
substantive  allegations claim that Horizon's directors breached their fiduciary
duties to  Horizon's  shareholders  in  approving  the merger of Horizon and the
Company  and that the  consideration  to be paid to  Horizon's  shareholders  in
connection with the merger is unfair and inadequate.  The lawsuit  requests that
such  merger be  enjoined  or, in the event that the  purported  transaction  is
consummated, that it be rescinded or damages be awarded to the class members. On
January 16,  1998,  the  defendants  answered  the  complaint,  denying that the
Horizon board of directors breached their fiduciary duties and denying that such
consideration is unfair or inadequate.  On May 4, 1998,  counsel for the parties
appeared  before the Court for the purpose of reporting that a settlement of the
case  had  been  reached  subject  to the  satisfaction  of  several  conditions
including the completion of the merger.  The general terms of the settlement are
contained in a Memorandum of Understanding  ("Memorandum") among counsel for the
parties dated as of May 7, 1998.  Under the Memorandum,  subject to the terms of
the  Stipulation  of Settlement,  the  defendants  will pay to class counsel for
their fees and expenses,  subject to approval by the Court. The Company believes
that the amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Company.

Item 2.           Changes in Securities

                  None

Item 3.           Defaults Upon Senior Securities

                  None

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

                  None

Item 5.           Other Information

                  None

Item 6.           Exhibits or Reports on Form 8-K

                  (a)      The following exhibit is included in this Form 10-Q:
                           Exhibit 12.1 -- Ratio of Earnings to Fixed Charges
                           and Preferred Stock Distributions and Dividends

                  (b)      Reports on Form 8-K:
                           On  February  3, 1998,  the  Company  filed a Current
                           Report  on  Form  8-K,   dated   February   1,  1998,
                           announcing  that the Company's  previously  announced
                           merger  agreement  with  Horizon  Group,  Inc.  dated
                           November   12,  1997  was  amended  and  restated  on
                           February  1,  1998.  No  financial   statements  were
                           included.

<PAGE>

                                   SIGNATURES



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



                               PRIME RETAIL, INC.
                                   Registrant



Date: May 15, 1998                           /s/ Abraham Rosenthal
      ------------                           ----------------------
                                             Abraham Rosenthal
                                             Chief Executive Officer



Date: May 15, 1998                           /s/ Robert P. Mulreaney
      ------------                           ------------------------
                                             Robert P. Mulreaney
                                             Executive Vice President,
                                             Chief Financial Officer
                                             and Treasurer