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


                                    FORM 10-Q

[X]      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the Quarterly Period Ended September 30, 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 333-50139
                                                ---------

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

              Delaware                                  52-1844882
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


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


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

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

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

Yes   X           No      
    -----        ----- 
Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practical date.

As of November 10, 1998, the issuer had outstanding 11,312,131 Common Units.

<PAGE>

                             Prime Retail, L.P.
                                    Form 10-Q

                                      INDEX





PART I:  FINANCIAL INFORMATION                                              PAGE
                                                                           -----

Item 1.  Financial Statements (Unaudited)
 
     Consolidated Balance Sheets as of September 30, 1998 and
     December 31, 1997.                                                        1

     Consolidated Statements of Operations for the three and
     nine months ended September 30, 1998 and 1997.                            2

     Consolidated Statements of Cash Flows for the nine
     months ended September 30, 1998 and 1997.                                 3

     Notes to the Consolidated Financial Statements                            5

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


PART II:  OTHER INFORMATION
 
Item 1.  Legal Proceedings                                                    25
Item 2.  Changes in Securities                                                25
Item 3.  Defaults Upon Senior Securities                                      25
Item 4.  Submission of Matters to a Vote of Security Holders                  25
Item 5.  Other Information                                                    25
Item 6.  Exhibits or Reports on Form 8-K                                      26
 
Signatures                                                                    27
<PAGE>
<TABLE>

PART I:  FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
                               Prime Retail, L.P.
                           Consolidated Balance Sheets
                    (in thousands, except share information)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                      September 30, 1998         December 31, 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                           <C>    
Assets
Investment in rental property:                                                                                  
     Land                                                                                  $  204,878                     $ 66,277
     Buildings and improvements                                                             1,702,986                      779,191
     Property under development                                                                52,024                       53,139
     Furniture and equipment                                                                   10,658                        5,911
                                                                                            ---------                     --------
                                                                                            1,970,546                      904,518
     Accumulated depreciation                                                                (110,011)                     (82,016)
                                                                                            ---------                     --------
                                                                                            1,860,535                      822,502
Cash and cash equivalents                                                                      13,371                        6,277
Restricted cash                                                                                43,432                       41,736
Accounts receivable, net                                                                        9,843                        9,745
Deferred charges, net                                                                          13,422                       16,206
Due from affiliates, net                                                                       16,098                        9,982
Investment in partnerships                                                                      5,082                        3,278
Other assets                                                                                    1,303                        2,108
                                                                                           ----------                     --------
     Total assets                                                                          $1,963,086                     $911,834
                                                                                           ==========                     ========
Liabilities and shareholders' equity
Bonds payable                                                                              $   32,900                     $ 32,900
Notes payable                                                                               1,146,877                      482,365
Accrued interest                                                                                7,542                        3,767
Real estate taxes payable                                                                      14,728                        4,639
Construction costs payable                                                                      2,948                        5,849
Accounts payable and other liabilities                                                         68,491                       19,022
Distributions payable                                                                          22,899                            -
                                                                                            ---------                     --------
     Total liabilities                                                                      1,296,385                      548,542

Minority interests                                                                              3,773                        3,911

Redeemable equity:
  Series A Senior Cumulative Preferred Units,                                      
     2,300,000 units issued and outstanding                                                    61,126                       60,525
  Series B Cumulative Participating Convertible Preferred Units,
     7,828,125 and 2,981,800 units issued and outstanding, respectively                       203,562                       78,949
  Series C Cumulative Participating Convertible Redeemable
     Preferred Units, 4,363,636 units issued and outstanding                                   60,000                       60,000
                                                                                            ---------                     --------
Total redeemable equity                                                                       324,688                      199,474

Partners' capital (deficit):
  General partner                                                                             424,821                      269,239
  Limited partners                                                                            (86,581)                    (109,332)
                                                                                            ---------                     --------
Total partners' capital (deficit)                                                             338,240                      159,907
                                                                                            ---------                     --------
Total liabilities, minority interests, redeemable equity and
     partners' capital (deficit)                                                           $1,963,086                     $911,834
                                                                                           ==========                     ========
==================================================================================================================================

See accompanying notes to financial statements.
</TABLE>

<PAGE>

<TABLE>
                               Prime Retail, L.P.
                      Consolidated Statements of Operations
                   (in thousands, except per unit information)
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                                                                             Three months                   Nine months
                                                                          ended September 30             ended September 30
                                                                      ----------------------------   ---------------------------
                                                                                1998         1997             1998         1997
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>         <C>               <C>         <C>    

Revenues
Base rents                                                                   $47,595      $19,243         $ 98,776      $56,315
Percentage rents                                                               1,960        1,008            3,999        2,398
Tenant reimbursements                                                         21,338        8,731           45,315       26,649
Interest and other                                                             2,059        2,567            6,902        7,562
                                                                             -------     --------          -------     --------
     Total revenues                                                           72,952       31,549          154,992       92,924
Expenses
Property operating                                                            16,836        6,840           35,461       20,495
Real estate taxes                                                              5,380        2,449           11,600        7,238
Depreciation and amortization                                                 16,441        6,641           34,126       19,508
Corporate general and administrative                                           1,748        1,184            4,601        3,203
Interest                                                                      20,086        9,079           39,399       27,951
Other charges                                                                  1,129          982            2,634        2,474
                                                                             -------     --------          -------     --------
     Total expenses                                                           61,620       27,175          127,821       80,869
Income before loss on sale of real estate,
     minority interests and extraordinary item                                11,332        4,374           27,171       12,055
Loss on sale of real estate                                                        -            -           15,461            -
                                                                             -------     --------          -------     --------
Income before minority interests and
   extraordinary item                                                         11,332        4,374           11,710       12,055
Income allocated to minority interests                                           (29)         (63)             (69)        (145)
                                                                             -------     --------          -------     --------
Income before extraordinary item                                              11,303        4,311           11,641       11,910
Extraordinary item, loss on early
   extinguishment of debt                                                          -       (2,061)               -       (2,061)
                                                                             -------     --------          -------     --------
Net income                                                                    11,303        2,250           11,641        9,849
Income allocated to preferred unitholders                                     13,910        3,383           21,952        9,676
Adjustment to reflect redeemable equity at redemption value                    4,603          586            6,479        1,716
                                                                             -------     --------          -------     --------
Loss applicable to common units                                              $(7,210)     $(1,719)        $(16,790)     $(1,543)
                                                                             =======     ========          =======     ========  
Loss per common unit:
     General partner                                                         $ (0.13)     $ (0.06)        $  (0.39)     $ (0.06)
                                                                             =======     ========          =======     ========
     Limited partners                                                        $ (0.13)     $ (0.06)        $  (0.39)     $ (0.06)
                                                                             =======     ========          =======     ========
Net loss applicable to common units:
     General partner                                                         $(5,645)     $(1,191)        $(12,962)     $(1,017)
     Limited partners                                                         (1,565)        (528)          (3,828)        (526)
                                                                             -------     --------          -------     --------
         Total                                                               $(7,210)     $(1,719)        $(16,790)     $(1,543)
Weighted average common units outstanding:                                   =======     ========          =======     ========
     General partner                                                          42,314       19,159           33,211       16,458
     Limited partners                                                         11,735        8,505            9,809        8,505
                                                                             -------     --------          -------     --------
         Total                                                                54,049       27,664           43,020       24,963
Distributions declared per common unit:                                      =======     ========          =======     ========
     General partner                                                         $ 0.295      $ 0.295         $  1.385       $0.885
                                                                             =======     ========          =======     ========
     Limited partners                                                        $ 0.295      $ 0.295         $  1.385       $0.885
                                                                             =======     ========          =======     ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
                                                       Prime Retail, L.P.
                                              Consolidated Statements of Cash Flows
                                                         (in thousands)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                               Nine months ended September 30
                                                                                           ---------------------------------------
                                                                                                     1998                    1997
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                     <C>    
Operating Activities
Net income                                                                                       $ 11,641                $  9,849
Adjustments to reconcile net income to
    net cash provided by operating activities:
      Income allocated to minority interests                                                           69                     145
Extraordinary item, loss on early extinguishment of debt                                                -                   2,061
      Loss on sale or real estate                                                                  15,461                       -
      Depreciation                                                                                 33,272                  18,157
      Amortization of deferred financing costs and
         interest rate protection contracts                                                         2,199                   2,861
      Amortization of leasing commissions                                                             854                   1,351
      Provision for uncollectible accounts receivable                                                 788                     748
Changes in operating assets and liabilities:
      Increase in accounts receivable                                                              (1,653)                 (3,199)
      Increase in due from affiliates, net                                                         (6,010)                 (1,961)
      (Increase) decrease in other assets                                                          (1,224)                  2,486
      Increase in accrued interest                                                                  2,553                      67
      Increase (decrease) in accounts payable and other liabilities                                (9,189)                    345
                                                                                                  -------                 -------
         Net cash provided by operating activities                                                 48,761                  32,910

Investing Activities                                                                                                               
Proceeds from sale of Prime Transferred Properties                                                 26,015                       -
Acquisition of Horizon, net of cash acquired and spin-off of HGP                                  (35,124)                      -
Purchase of buildings and improvements                                                            (39,296)                (13,227)
Increase in property under development                                                            (70,821)                (32,659)
Acquisition of outlet centers                                                                           -                 (60,819)
                                                                                                 --------                 -------
         Net cash used in investing activities                                                   (119,226)               (106,705)

Financing Activities
Contributions from general partner:
    Common units                                                                                        -                 180,174
    Series B preferred units                                                                            -                   3,800
    Series C preferred units                                                                            -                   9,710
Proceeds from notes payable                                                                       421,970                  91,767
Principal repayments on notes payable                                                            (266,722)               (162,770)
Deferred financing fees                                                                            (3,247)                   (477)
Distributions paid                                                                                (74,235)                (28,290)
Distributions to minority interests                                                                  (207)                   (264)
                                                                                                  -------                 -------
    Net cash provided by financing activities                                                      77,559                  93,650
                                                                                                  -------                 -------
Increase (decrease) in cash and cash equivalents                                                    7,094                  19,855
Cash and cash equivalents at beginning of period                                                    6,277                   3,918
                                                                                                =========                 ======= 
Cash and cash equivalents at end of period                                                      $  13,371                $ 23,773
                                                                                                =========                 =======
==================================================================================================================================
See accompanying notes to financial statements.
</TABLE>

<PAGE>
<TABLE>
                                                      Prime Retail, L.P.
                                       Consolidated Statements of Cash Flows (continued)
                                                        (in thousands)
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                 <C>    

Supplemental Disclosure of Noncash Investing and Financing Activities:

The following assets and liabilities were acquired and sold in connection with the consummation of the Merger
Transactions on June 15, 1998:

Acquisition of Horizon Partnership, net of spin-off of HGP:
    Fair value of assets acquired                                                                                    $1,007,329
    Cash paid, net of cash and cash equivalents acquired                                                                (35,124)
    Common units of partnership interest issued                                                                        (270,305)
    Series B convertible preferred units issued                                                                        (118,735)
                                                                                                                     ----------  
    Fair value of liabilities assumed                                                                                $  583,165
                                                                                                                     ==========
Disposition of Prime Transferred Properties: 
    Book value of assets disposed                                                                                    $   42,201
    Cash received                                                                                                       (26,015)
    Loss on sale                                                                                                        (15,461)
                                                                                                                     ----------
    Liabilities disposed                                                                                             $      725
                                                                                                                     ==========
====================================================================================================================================
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 Partnership herein
mean Prime Retail,  L.P. and those entities owned or controlled by Prime Retail,
L.P.,  The  consolidated  financial  statements  include  the  accounts  of  the
Partnership,  the Partnership and the  partnerships in which the Partnership has
operational  control.  Profits and losses are allocated in  accordance  with the
terms of the agreement of limited partnership of the Partnership. Investments in
partnerships  in which the  Partnership  does not have  operational  control are
accounted for under the equity method of accounting. Income (loss) applicable to
minority interests and common units as presented in the consolidated  statements
of operations is allocated  based on income  (loss)  before  minority  interests
after income allocated to preferred unitholders.

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 -- Business Combination

On June 15, 1998, the merger and other transactions  (collectively,  the "Merger
Transactions")  as set forth in the  agreement  and plan of merger (the  "Merger
Agreement") between Prime Retail, Inc. (the Partnership's "General Partner") and
Horizon Group, L.P. ("Horizon") were consummated for an aggregate  consideration
of  approximately   $1,083,100,   including   liabilities  assumed  and  related
transaction costs.

Pursuant to the terms of the Merger Agreement,  the General Partner acquired (i)
all of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the General  Partner's  Series B Convertible  Preferred Stock
and 0.597 of a share of the Partnership's  Common Stock for each share of common
stock of Horizon,  and (ii) all of the outstanding  limited partnership units of
Horizon/Glen  Outlet Centers Limited Partnership  ("Horizon  Partnership") at an
exchange ratio of 0.9193 of a unit of the Partnership's Common Units. A total of
4,846,325 shares of Series B Convertible  Preferred Stock and 14,466,329  shares
of Common  Stock  were  issued by the  General  Partner to the  shareholders  of
Horizon and 3,782,121 Common Units were issued by the Partnership to the limited
partners of Horizon Partnership. 
<PAGE>

Immediately prior to the merger,  Horizon  Partnership  contributed 13 of its 35
centers to Horizon Group  Properties,  L.P.,  of which Horizon Group  Properties
L.P.  ("HGP"),  a subsidiary of Horizon,  is the sole general  partner.  HGP was
spun-off from the  Partnership on June 15, 1998. The remaining 22 outlet centers
of Horizon were integrated into the Partnership's  existing  portfolio.  On June
19, 1998,  all of the common equity of HGP was  distributed  to the  convertible
preferred and common shareholders and unitholders of the General Partner and the
Partnership  and the  shareholders  and limited  partners of Horizon and Horizon
Partnership  based  on  their  ownership  in  the  General  Partner  immediately
following  consummation  of the  merger.  One share of  common  stock of HGP was
distributed  for  every 20  shares of  Common  Stock  and  Series C  Convertible
Preferred  Stock of the  General  Partner  and for every 20 Common  Units of the
Partnership. Additionally, approximately 1.196 shares of the common stock of HGP
were distributed for every 20 shares of Series B Convertible  Preferred Stock of
the General Partner.

In connection with the Merger Transactions, the Partnership sold Indiana Factory
Shops and Nebraska Crossing Factory Shops (collectively,  the "Prime Transferred
Properties") to HGP for an aggregate  consideration  of $26,015,  resulting in a
loss of $15,461. Proceeds from the sale of the Prime Transferred Properties were
used to repay indebtedness associated with the Horizon properties.

Concurrent with the closing of the merger, a special cash  distribution was made
aggregating  $21,871 consisting of $0.50 per unit to holders of Common Units and
Series C Preferred  Units and $0.60 per unit to holders of Series B  Convertible
Preferred  Units.  Shareholders  of  Horizon  and  limited  partners  of Horizon
Partnership did not participate in these distributions.

The merger has been  accounted for using the purchase  method of accounting  and
the purchase  price of $1,083,100  was allocated to the assets  acquired and the
liabilities assumed based on estimates of their respective fair values.  Certain
assumptions  were  made  which  management  of  the  Partnership   believes  are
reasonable.  The Partnership expects to finalize the preliminary  purchase price
allocation  before the end of 1998.  The final  allocation  is not  expected  to
differ materially from the allocation made at September 30, 1998.

The  operating  results of those  properties  acquired have been included in the
Partnership's  consolidated  results  of  operations  commencing  on the date of
acquisition. The operating results of the Prime Transferred Properties have been
included in the  Partnership's  consolidated  results of operations  through the
date of disposition.

The following unaudited pro forma summary financial  information gives effect to
the Merger Transactions as if they had occurred on January 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Nine months ended September 30
                                                                                                       1998               1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>                <C>    
Total revenues                                                                                     $208,340           $195,505
                                                                                                   ========           ========
Net income from continuing operations                                                              $ 31,593           $ 22,465
                                                                                                   ========           ========

Net loss applicable to common units:
  General partner                                                                                 $ (5,234)           $(2,571)
  Limited partners                                                                                  (1,509)            (1,014)
                                                                                                  --------            --------
  Total                                                                                           $ (6,734)           $(3,585)
                                                                                                  ========            ========

Loss per common unit:
  General partner                                                                                 $  (0.12)           $ (0.08)
                                                                                                  ========            ========
  Limited partners                                                                                $  (0.12)           $ (0.08)
                                                                                                  ========            ========


Weighted average common units outstanding:
  General partner                                                                                   41,954             30,924
  Limited partners                                                                                  12,095             12,203
                                                                                                  --------           -------- 
  Total                                                                                             54,049             43,127
                                                                                                  ========           ========
====================================================================================================================================
</TABLE>

These  unaudited pro forma results are presented for  comparative  purposes only
and are not necessarily indicative of what the Partnership's actual consolidated
results  of  operations  would  have  been  for  the  periods  presented  if the
Transactions  had been  completed  at January 1,  1997,  nor do they  purport to
represent the Partnership's future consolidated results of operations.

Note 3 - Notes Payable


On September 25, 1998 the Partnership  closed on an unsecured  $40,000 revolving
loan (the "Revolving Loan") with a financial institution. The Revolving Loan (i)
bears  interest  equal  to  30-day  LIBOR  plus  1.75%,  (ii)  requires  monthly
interest-only  payments,  and (iii)  matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.

The Revolving  Loan requires  compliance  with certain  financial loan covenants
including those relating to the  Partnership's  (i) total  outstanding  variable
indebtedness,  (ii) total outstanding  indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.

On June 15, 1998, the  Partnership  closed on $292,000 of loan  facilities  with
Nomura  Asset  Capital  Corporation.  The  transaction  provided  (i) a $180,000
nonrecourse  permanent  loan (the  "Permanent  Loan") and (ii) a  $112,000  full
recourse  bridge  loan of which  $95,000  was funded (the  "Bridge  Loan").  The
Permanent Loan is (i)  collateralized  by first mortgages on four factory outlet
centers,  (ii) bears a fixed rate of interest of 6.99%,  (iii) requires  monthly
principal and interest payments pursuant to an approximate 26-year  amortization
schedule,   and  (iv)  matures  on  June  15,  2008.  The  Bridge  Loan  is  (i)
collateralized  by first mortgages on six factory outlet  centers,  (ii) bears a
variable  rate of  interest  equal to 30-day  LIBOR plus 1.35%,  (iii)  requires
monthly interest-only payments, and (iv) matures on June 15, 2001.
<PAGE>

As of November 11, 1998, the Partnership is a guarantor or otherwise  obligated
with respect to $39,570 of the indebtedness of HGP and its affiliates, including
$10,000 of obligations under HGP's $108,205  three-year secured credit facility.

On  April  1,  1998,  Horizon  consummated  an  agreement  with  Castle  & Cooke
Properties,  Inc. which released Horizon from its forward  obligations under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations  under such lease.
The  agreement  also  provided  that  Horizon  transfer  to such  joint  venture
substantially  all of Horizon's  economic  interest in its outlet center in Lake
Elsinore,  California  together  with  legal  title to vacant  property  located
adjacent to the center.  As of September 30, 1998, the Partnership holds a small
minority  interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Partnership   is  legally   obligated  for  $30,864  of  mortgage   indebtedness
outstanding  at September  30, 1998 which is secured by a first  mortgage on the
Lake  Elsinore  outlet  center.  In  addition,  Castle & Cooke has  provided the
Partnership a guaranty,  without limitation, of the obligations relating to such
mortgage indebtedness.

On March 18, 1998,  the  Partnership  obtained  from a financial  institution  a
commitment  for  a  construction  mortgage  loan  (the  "Construction   Mortgage
Loan")relating  to Phase I of Prime Outlets at Hagerstown  ("Hagerstown")  in an
amount not to exceed  $21,600  which was  subsequently  increased  to $32,860 on
October 2, 1998 as a result of obtaining a commitment for construction financing
on Phase II. The Construction  Mortgage Loan (i) bears a variable  interest rate
at 30-day  LIBOR plus 1.50%,  (ii) matures on June 1, 2004,  and (iii)  requires
monthly interest-only payments. The Construction Mortgage Loan is collateralized
by  a  first  mortgage  on  Hagerstown.  At  September  30,  1998,  $15,969  was
outstanding on the Construction Mortgage Loan.

Note 4 - Legal Proceedings

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

The  Partnership  is defendant  in a lawsuit  filed on July 27, 1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Partnership and its related  entities  overcharged  tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the  Partnership,  if any, from, this lawsuit cannot  currently be predicted.
Management  believes  that the  Partnership  has acted  properly  and intends to
defend this lawsuit vigorously.

In the Partnership's  previously filed Form 10-Q for the quarter ended March 31,
1998,  it reported  that on December 10, 1997 in the Circuit  Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit  against  Horizon,  the  Partnership,  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 Partnership and that the  consideration to be paid
to  Horizon's  shareholders  in  connection  with  the  merger  was  unfair  and
inadequate.

On  September  8, 1998,  a hearing was held before  Judge James M. Graves of the
Court. At the hearing, the defendants,  including the Partnership,  continued to
deny any wrongdoing  and liability.  The Court approved the settlement set forth
in the Stipulation of Settlement (the "Stipulation")  previously executed by the
parties to the  lawsuit on July 21, 1998 and found that the  settlement  was, in
all respects,  fair, reasonable,  and adequate, and dismissed with prejudice the
litigation against the defendants.  The settlement required that the Partnership
pay legal expenses of $325.
<PAGE>
Item 2.             Management's Discussion and Analysis of
               Financial Condition and Results of Operations

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


Introduction

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

The following  discussion in "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect  management's  current views with respect to future events and financial
performance.  Actual results may differ  materially from those reflected in such
forward-looking   statements   because  of  various  risks  and   uncertainties;
including, but not limited to, the effects of future events on the Partnership's
financial  performance;  the risk that the  Partnership may be unable to finance
its planned acquisition and development activities;  risks related to the retail
industry  in which the  Partnership'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  Partnership's  property  acquisitions,  such as the lack of
predictability  with respect to financial  returns;  risks  associated  with the
Partnership'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 Partnership's properties.

Merger with Horizon Group, Inc.

On June 15, 1998, the merger and other transactions  (collectively,  the "Merger
Transaction")  between Prime Retail, Inc. (the Partnership's  "General Partner")
and  Horizon  Group,   Inc.   ("Horizon")  were  consummated  for  an  aggregate
consideration of approximately  $1,083,100,  including  liabilities  assumed and
related  transaction costs. The merger has been accounted for using the purchase
method of accounting  and the purchase  price of $1,083,100 was allocated to the
assets  acquired  and the  liabilities  assumed  based  on  estimates  of  their
respective fair values. Accordingly,  the operating results of the 22 properties
acquired  from  Horizon  have been  included in the  Partnership's  consolidated
results of operations  commencing on June 15, 1998.  See  "Liquidity and Capital
Resources - Business Combination" for further information.

Portfolio Growth

The Partnership has grown by developing and acquiring factory outlet centers and
expanding  certain of its existing  factory  outlet  centers.  As  summarized in
TABLE 1,  the Partnership's  factory outlet portfolio  consisted of 50 operating
factory outlet centers  totaling  14,029,000  square feet of gross leasable area
("GLA") at September 30, 1998,  compared to 24 operating  factory outlet centers
totaling 6,316,000 square feet of GLA at September 30, 1997.
<PAGE>


During the nine months ended September 30, 1998, the Partnership  opened two new
factory  outlet  centers and six  expansions to existing  factory outlet centers
totaling  612,000  square feet of GLA in the aggregate.  In connection  with the
Merger  Transactions,  the  Partnership  acquired and integrated 22 of Horizon's
factory outlet centers into its existing  portfolio adding 6,626,000 square feet
of  GLA  in  the  aggregate.   Additionally,   in  connection  with  the  Merger
Transactions,  the Company  sold two  factory  outlet  centers to Horizon  Group
Properties,  Inc. ("HGP") totaling 426,000 square feet of GLA. During the period
October 1, 1997 through  December  31,  1997,  the  Partnership  purchased  four
factory  outlet  centers  totaling  863,000  square  feet of GLA and  opened  an
expansion to an existing  factory outlet center  totaling  38,000 square feet of
GLA.

The significant increase in the number of the Partnership's operating properties
and total GLA since  September  30,  1997 are  collectively  referred  to as the
"Portfolio Expansion and the Horizon Merger."
<PAGE>


<TABLE>


TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand          GLA         Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>                 <C>                 <C>  
Prime Outlets at Niagara Falls USA (2) - Niagara Falls, New York.......     I             July 1992        300,000             100%
                                                                           II           August 1995        234,000              89
                                                                                                           -------             ---- 
                                                                                                           534,000              95

Prime Outlets at Kittery (3) - Kittery Maine...........................     I            April 1984         25,000             100
                                                                           II              May 1984         78,000              99
                                                                          III           August 1989         18,000              99
                                                                           IV              May 1998         10,000             100
                                                                                                           -------             ---- 
                                                                                                           131,000              99

Prime Outlets at Fremont (4) - Fremont, Indiana........................     I          October 1985        118,000             100
                                                                           II         November 1993         51,000              92
                                                                          III          October 1994         60,000             100
                                                                                                           -------             ----
                                                                                                           229,000              98

Prime Outlets at Birch Run (4) - Birch Run, Michigan................... I-XIV               Various        583,000              99
                                                                           XV             June 1996          6,000             100
                                                                         XVII             June 1996          2,000             100
                                                                         XVII                  1997         15,000              99
                                                                        XVIII                  1997        118,000             100
                                                                                                           -------             ----
                                                                                                           724,000              99

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

Prime Outlets at Michigan City (4) - Michigan City, Michigan...........     I         November 1987        199,000             100
                                                                           II              May 1988        130,000              97
                                                                          III             July 1991         36,000              85
                                                                           IV             July 1994         42,000             100
                                                                            V         December 1994         26,000              98
                                                                           VI              May 1995         58,000              99
                                                                                                           -------             ----
                                                                                                           491,000              98

Prime Outlets at Williamsburg (4) - Williamsburg, Virginia.............     I            April 1988         67,000              99
                                                                           II         November 1988         60,000             100
                                                                          III          October 1990         49,000             100
                                                                           IV                  1995         98,000             100
                                                                                                           -------             ----
                                                                                                           274,000             100

Prime Outlets at Kenosha (4) - Kenosha, Wisconsin......................     I        September 1988         89,000             100
                                                                           II             July 1989         65,000              97
                                                                          III              May 1990        115,000              99
                                                                                                           -------             ----
                                                                                                           269,000              99

Prime Outlets at Silverthorne (4) - Silverthorne, Colorado.............     I         November 1988         95,000              92
                                                                           II         November 1990         75,000              98
                                                                          III         November 1993         88,000              93
                                                                                                           -------             ----
                                                                                                           258,000              94

Prime Outlets at Edinburgh (4) - Edinburgh, Indiana....................    I                  1988         156,000             100
                                                                          II         November 1994         142,000             100
                                                                                                           -------             ----
                                                                                                           298,000             100  

Prime Outlets at Burlington (4) - Burlington, Washington ..............     I              May 1989         89,000             100
                                                                           II          October 1989         36,000             100
                                                                          III            April 1993         49,000             100
                                                                                                           -------             ----
                                                                                                           174,000             100
</TABLE>
<PAGE>
<TABLE>


TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>                  <C>                <C>  

Prime Outlets at Queenstown (4) - Queenstown, Maryland.................     I             June 1989         67,000             100%
                                                                           II             June 1990         55,000              99
                                                                          III          January 1991         16,000              97
                                                                           IV             June 1992         14,000              97
                                                                            V           August 1993         69,000             100
                                                                                                           -------             ----
                                                                                                           221,000              99

Prime Outlets at Hillsboro (4) - Hillsboro, Texas......................     I          October 1989         95,000              90
                                                                           II          January 1992        101,000             100
                                                                          III              May 1995        163,000             100
                                                                                                           -------             ----
                                                                                                           359,000              97

Prime Outlets at Oshkosh (4) - Oshkosh, Wisconsin......................     I         November 1989        215,000              95
                                                                           II             July 1991         45,000              99
                                                                                                           -------             ----
                                                                                                           260,000              96

Prime Outlets at Warehouse Row (5)- Chattanooga, Tennessee.............     I         November 1989         95,000              98
                                                                           II           August 1993         26,000              94
                                                                                                           -------             ----
                                                                                                           121,000              95

Prime Outlets at Gilroy (4) - Gilroy, California.......................     I          January 1990         94,000             100
                                                                           II           August 1991        109,000             100
                                                                          III          October 1992        137,000              95
                                                                           IV             July 1994        170,000              99
                                                                            V         November 1995         69,000             100
                                                                                                           -------             ----
                                                                                                           579,000              99

Prime Outlets at Perryville (4) - Perryville, Maryland.................     I             June 1990        148,000              98

Prime Outlets at Sedona (6) - Sedona, Arizona .........................     I           August 1990         82,000              99

Prime Outlets at San Marcos - San Marcos, Texas........................     I           August 1990        177,000              98
                                                                           II           August 1991         70,000             100
                                                                          III           August 1993        117,000              97
                                                                         IIIB         November 1994         20,000              91
                                                                         IIIC         November 1995         35,000             100
                                                                         IIID              May 1998         18,000             100
                                                                                                           -------             ----
                                                                                                           437,000              98

Prime Outlets at Anderson (2) - Anderson, California...................     I           August 1990        165,000              98

Prime Outlets at Post Falls (6) - Post Falls, Idaho ...................     I             July 1991        111,000              85
                                                                           II             July 1992         68,000              86
                                                                                                           -------             ----
                                                                                                           179,000              85

Prime Outlets at Ellenton - Ellenton, Florida..........................     I          October 1991        187,000             100
                                                                           II           August 1993        123,000             100
                                                                          III          October 1996         30,000             100
                                                                                                           -------             ----
                                                                                                           340,000             100

Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........     I          October 1991        181,000             100
                                                                           II             July 1996          6,000             100
                                                                                                           -------             ----
                                                                                                           187,000             100

Prime Outlets at Naples - Naples/Marco Island, Florida.................     I         December 1991         94,000              95
                                                                           II         December 1992         32,000             100
                                                                          III            March 1998         20,000              98
                                                                                                           -------             ----
                                                                                                           146,000              96
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>                   <C>                 <C>  
Prime Outlets at Conroe (4) - Conroe, Texas............................     I         January 1992          93,000              92%
                                                                           II            June 1994         163,000              96
                                                                          III         October 1994          26,000              87
                                                                                                           -------             ----
                                                                                                           282,000              93

Prime Outlets at Woodbury (4) - Woodbury, Minnesota....................     I            July 1992         129,000              93
                                                                           II        November 1993         100,000              93
                                                                          III          August 1994          21,000             100
                                                                                                           -------             ----
                                                                                                           250,000              94

Prime Outlets at Calhoun (4) - Calhoun, Tennessee......................     I         October 1992         123,000             100
                                                                           II         October 1995         131,000             100
                                                                                                           -------             ----
                                                                                                           254,000             100

Prime Outlets at Castle Rock - Castle Rock, Colorado...................     I        November 1992         181,000             100
                                                                           II          August 1993          94,000              97
                                                                          III        November 1993          95,000              96
                                                                           IV          August 1997         110,000              97
                                                                                                           -------             ----
                                                                                                           480,000              99

Prime Outlets at Bend (6) - Bend, Oregon...............................     I        December 1992          97,000              97
                                                                           II       September 1998          35,000              93
                                                                                                           -------             ----
                                                                                                           132,000              96

Prime Outlets at Jeffersonville II (4) - Jeffersonville, Ohio..........     I           March 1993         126,000              76
                                                                           II          August 1993         123,000              70
                                                                          III         October 1994          65,000             100
                                                                                                           -------             ----
                                                                                                           314,000              79

Prime Outlets at Jeffersonville I - Jeffersonville, Ohio................    I            July 1993         186,000              96
                                                                           II        November 1993         100,000             100
                                                                          IIB        November 1994          13,000              64
                                                                         IIIA          August 1996          35,000             100
                                                                         IIIB           March 1997          73,000              94
                                                                                                           -------             ----
                                                                                                           407,000              96

Prime Outlets at Gainesville - Gainesville, Texas......................     I          August 1993         210,000              88
                                                                           II        November 1994         106,000             100
                                                                                                           -------             ----
                                                                                                           316,000              92

Prime Outlets at Loveland - 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

Prime Outlets at Oxnard (7) - Oxnard, California.......................     I            June 1994         148,000              95

Prime Outlets at Grove City - Grove City, Pennsylvania.................     I          August 1994         235,000             100
                                                                           II        November 1994          95,000             100
                                                                          III        November 1995          85,000              99
                                                                           IV        November 1996          18,000              99
                                                                                                           -------             ----
                                                                                                           533,000             100

Prime Outlets at Huntley - Huntley, Illinois...........................     I          August 1994         192,000              95
                                                                           II        November 1995          90,000              99
                                                                                                           -------             ----
                                                                                                           282,000              96
Prime Outlets at Florida City - Florida City, Florida..................     I       September 1994         208,000              95

Prime Outlets at Pismo Beach (4) - Pismo Beach, California.............     I        November 1994         148,000              98
</TABLE>
<PAGE>

<TABLE>

TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>                  <C>                 <C> 

Prime Outlets at Tracy  (4) - Tracy, California........................     I         November 1994        153,000             100%

Prime Outlets at Vero Beach (4) - Vero Beach, Florida..................     I         November 1994        210,000              99
                                                                           II           August 1995        116,000              92
                                                                                                           -------            -----
                                                                                                           326,000              96

Prime Outlets at Waterloo (4) - Waterloo, New York.....................     I            March 1995        208,000             100
                                                                           II        September 1996        115,000             100
                                                                          III            April 1997         68,000              90
                                                                                                           -------            -----
                                                                                                           391,000              98

Prime Outlets at Odessa - Odessa, Missouri.............................     I             July 1995        191,000             100
                                                                           II         November 1996        105,000              61
                                                                                                           -------            -----
                                                                                                           296,000              86

Prime Outlets at Darien (8) - Darien, Georgia..........................     I             July 1995        238,000              85
                                                                          IIA         November 1995         49,000              99
                                                                          IIB             July 1996         20,000             100
                                                                                                           -------            -----
                                                                                                           307,000              88

Prime Outlets at New River (9) - Phoenix, Arizona......................     I        September 1995        217,000              96
                                                                           II        September 1996        109,000              93
                                                                                                           -------            -----
                                                                                                           326,000              95

Prime Outlets at Gulfport (10) - Gulfport, Mississippi.................     I         November 1995        228,000              99
                                                                          IIA         November 1996         40,000              93
                                                                          IIB         November 1997         38,000             100
                                                                                                           -------            -----
                                                                                                           306,000              98

Prime Outlets at Lodi (11) - Burbank, Ohio.............................     I         November 1996        205,000              97
                                                                          IIA              May 1998         33,000              78
                                                                                                           -------            -----
                                                                                                           238,000              94

Prime Outlets at Gaffney - Gaffney, South Carolina.....................     I         November 1996        235,000              99
                                                                           II             July 1998         70,000              81
                                                                                                           -------            -----
                                                                                                           305,000              95

Prime Outlets at Lee (4) - Lee, Massachusetts..........................     I             June 1997        224,000              99

Prime Outlets at Lebanon -  Lebanon, Tennessee.........................     I            April 1998        208,000              92

Prime Outlets at Hagerstown - Hagerstown, Maryland.....................     I           August 1998        218,000              96
                                                                                                        ----------            -----
Total Factory Outlet Centers (12)                                                                       14,029,000              96%
                                                                                                        ==========            =====
====================================================================================================================================
</TABLE>
<PAGE>

Notes:
(1) Percentage  reflects  fully  executed  leases as of September 30, 1998 as a
    percent of square feet of GLA.  
(2) The Partnership  acquired  this  factory  outlet center on  December  2,
    1997 from an  unrelated  third  party.  
(3) The  Partnership acquired this factory outlet center on October 29, 1997
    from an unrelated  third party. 
(4) The Partnership acquired this factory outlet center on June 15, 1998 as a
    result of its  merger  with  Horizon. 
(5) The  Partnership  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 Partnership 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 74%
    leased as of September  30,  1998.  
(6) The Partnership  acquired  this  factory  outlet  center on  February  13,
    1997 from an unrelated  third  party.  
(7) On February  7, 1997, the Partnership purchased an additional 20% interest
    from a joint venture partner, increasing the Partnership's ownership 
    interest in this  property  to 50%.
(8) The  Partnership operates this property pursuant to a long-term ground lease
    under which the partnership receives the economic benefit of a 100% 
    ownership interest.  
(9) The Partnership 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 Partnership receives the economic benefit of a
    100% ownership  interest.  
(11)On September 2, 1997, the Partnership 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 Partnership also owns three community  centers not included in this
    table containing 424,000 square feet of GLA in the aggregate that were 88%
    leased as of September 30, 1998.
<PAGE>

Results of Operations

Comparison  of the three  months  ended  September  30, 1998 to the three months
ended September 30, 1997

Summary

The  Partnership  reported net income of $11,303 and $4,311 for the three months
ended  September  30, 1998 and 1997,  respectively.  The 1997 results  include a
third quarter  extraordinary loss on the early extinguishment of debt of $2,061.
For the three months ended September 30, 1998, the net loss applicable to common
unitholders  was $7,210,  or $0.13 per common  unit.  For the three months ended
September 30, 1997, the net loss applicable to common unitholders was $1,719, or
$0.06 per common unit.

Revenues

Total  revenues  were  $72,592 for the three  months  ended  September  30, 1998
compared to $31,549 for the three months ended  September  30, 1997, an increase
of $41,043, or 130.1%. Base rents increased $28,352, or 147.3%, in 1998 compared
to 1997. Straight-line rents (included in base rents) were $713 and $140 for the
three months ended  September 30, 1998 and 1997,  respectively.  These increases
are primarily due to the Portfolio Expansion and the Horizon Merger.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified  threshold,  increased $952, or 94.4%, during the three months
ended  September 30, 1998 compared to the same period in 1997. This increase was
attributable  to  the  Portfolio  Expansion  and  the  Horizon  Merger.   Tenant
reimbursements, which represent the contractual recovery from tenants of certain
operating  expenses,  increased by $12,607,  or 144. 4%, during the three months
ended  September  30,  1998 over the same  period  in 1997.  This  increase  was
primarily due to the Portfolio Expansion and the Horizon Merger.

Interest and other  income  decreased by $508,  or 19.8%,  to $2,059  during the
three months ended September 30, 1998 as compared to $2,567 for the three months
ended  September 30, 1997.  The decrease  reflects  reductions in (i) interest
income  of $254 and (ii)  other  ancillary  income  of $254.  The  reduction  in
interest  income  was  primarily  the  result  of the  use of a  portion  of the
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.
<PAGE>
Expenses

Property  operating  expenses increased by $9,996, or 146.1%, to $16,836 for the
three months  ended  September  30, 1998  compared to $6,840 for the same period
in 1997.  Real estate taxes  increased by $2,931,  or 119.7%,  to $5,830 for the
three months ended September 30, 1998, from $2,899 in the same period  for 1997.
The  increases  in  property  operating  expenses  and real  estate  taxes  were
primarily due to the Portfolio  Expansion  and the Horizon  Merger.  As shown in
TABLE 2,  depreciation and amortization  expense increased by $9,800, or 147.6%,
to $16,441 for the three months  ended  September  30, 1998,  compared to $6,641
for 1997. This increase results from the depreciation and amortization of assets
associated with the Portfolio Expansion and the Horizon Merger.

TABLE 2 - Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                            Three months ended
                                                               September 30
                                                          ----------------------
                                                         1998              1997
--------------------------------------------------------------------------------
 
Buildings and improvements                                $ 9,440         $3,423
Land improvements                                             899            715
Tenant improvements                                         5,611          1,872
Furniture and fixtures                                        275            211
Leasing commissions(1)                                        216            420
                                                        ---------        -------
Total                                                     $16,441         $6,641
                                                        =========        =======
================================================================================

Note:
(1)  In accordance  with generally  accepted  accounting  principles  ("GAAP"),
     leasing  commissions  are classified as intangible assets. Therefore, the
     amortization of leasing commissions is reported as a component of
     depreciation and amortization expense.

TABLE 3 - Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                          Three months ended
                                                             September 30
                                                      --------------------------
                                                                  
                                                            1998            1997
--------------------------------------------------------------------------------
 
Interest incurred                                         $20,950        $9,265
Interest capitalized                                       (1,734)       (1,123)
Amortization of deferred financing costs                      545           589
Amortization of interest rate protection contracts            325           348
                                                          -------        ------
Total                                                     $20,086        $9,079
                                                          =======        ======
================================================================================

As shown in TABLE 3, interest  expense for the three months ended  September 30,
1998 increased by $11,007, or 121.2%, to $20,086 compared to $9,079 for the same
period in 1997.  This  increase  reflects  higher  interest  incurred of $11,685
partially  offset by (i) an increase in the amount of  interest  capitalized  in
connection with development projects of $611 and (ii) a decrease in amortization
of deferred financing costs of $67.
<PAGE>

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $656,098 in the Partnership's average debt outstanding during the
three  months  ended  September  30,  1998  compared  to the same period in 1997
partially  offset by a slight decrease in the weighted average interest rate for
the three months ended  September  30, 1998 compared to the same period in 1997.
The weighted  average  interest rates were 7.15% and 7.28% for the 1998 and 1997
periods, respectively.

Other charges  increased by $147, or 15.0%,  to $1,129.  This increase  reflects
higher ground lease expense of $80 and other ancillary charges of $67.

In connection with re-leasing space to new merchants,  the Partnership  incurred
$1,055 and $100 in capital  expenditures during the three months ended September
30, 1998 and 1997, respectively.

Comparison  of nine  months  ended  September  30,  1998 to  nine  months  ended
September 30, 1997.

Summary

The  Partnership  reported net income of $11,641 and $11,910 for the nine months
ended  September  30, 1998 and 1997,  respectively.  The 1998 results  include a
second quarter loss on the sale of real estate of $15,461 in connection with the
Merger Transactions. The 1997 results include a third quarter extraordinary loss
on the  early  extinguishment  of debt of  $2,061.  For the  nine  months  ended
September 30, 1998, the net loss  applicable to common  unitholders was $16,790,
or $0.39 per common unit. For the nine months ended  September 30, 1997, the net
loss applicable to common unitholders was $1,543, or $0.06 per common unit.

Revenues

Total  revenues  were  $154,992  for the nine months  ended  September  30, 1998
compared to $92,924 for the nine months ended September 30, 1997, an increase of
$62,068,  or 66.8%.  Base rents increased  $42,461,  or 75.4%,  in 1998 compared
to 1997. Straight-line rents (included in base rents) were $974 and $392 for the
nine months ended September 30, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion and the Horizon Merger.

Percentage  rents,  which  represent rents based on a percentage of sales volume
above a specified threshold,  increased $1,601, or 66.8%, during the nine months
ended  September 30, 1998 compared to the same period in 1997. This increase was
attributable  to the Portfolio  Expansion and the Horizon  Merger.  For the nine
months  ended  September  30,  1998,  same-space  sales in centers  owned by the
Partnership  decreased by 0.8% compared to the same period in 1997. For the nine
months ended September 30, 1998, same-store sales decreased 2.0% compared to the
same period in 1997.  Tenant  reimbursements,  which  represent the  contractual
recovery from tenants of certain operating  expenses,  increased by $18,666,  or
70.0%,  during the nine months ended  September 30, 1998 over the same period in
1997. This increase was primarily due to the Portfolio Expansion and the Horizon
Merger.

Interest and other income  decreased by $660, or 8.7%, to $6,902 during the nine
months ended  September 30, 1998 as compared to $7,562 for the nine months ended
September 30, 1997. The decrease  reflects  reductions in (i) interest income of
$1,131 and (ii) gains on sales of outlots of $456.  Partially  offsetting  these
decreases were higher (i) push cart,  temporary  tenant,  and late fee income of
$816 and (ii) other  ancillary  income of $111. The reduction in interest income
was primarily the result of the use of a portion of the Partnership'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.
<PAGE>

Expenses

Property operating  expenses increased by $14,966,  or 73.0%, to $35,461 for the
nine months  ended  September  30, 1998  compared to $20,495 for the same period
in 1997.  Real estate taxes  increased by $4,362,  or 60.3%,  to $11,600 for the
nine months ended September 30, 1998,  from $7,238 in the same period  for 1997.
The increases in property operating expenses and real estate taxes are primarily
due to the  Portfolio  Expansion  and the Horizon  Merger.  As shown in TABLE 4,
depreciation and amortization expense increased by $14,618, or 74.9%, to $34,126
for the nine months ended September 30, 1998, compared to $12,871 for 1997. This
increase results from the  depreciation  and  amortization of assets  associated
with the Portfolio Expansion and the Horizon Merger.

TABLE 4 - Components of Depreciation and Amortization Expense

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

--------------------------------------------------------------------------------
                                                           Nine months ended
                                                              September 30
                                                       -------------------------
                                                                  
                                                          1998              1997
--------------------------------------------------------------------------------
Buildings and improvements                                $19,433        $10,131
Land improvements                                           2,618          2,069
Tenant improvements                                        10,429          5,348
Furniture and fixtures                                        792            609
Leasing commissions(1)                                        854          1,351
                                                          --------       -------
Total                                                     $34,126        $19,508
                                                          ========       =======
================================================================================

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 5 - Components of Interest Expense

The components of interest expense are summarized as follows:

--------------------------------------------------------------------------------
                                                           Nine months ended
                                                              September 30
                                                         -----------------------
                                                                  
                                                         1998               1997
--------------------------------------------------------------------------------
 
Interest incurred                                         $41,711       $28,032
Interest capitalized                                       (4,511)       (2,942)
Amortization of deferred financing costs                    1,193         1,818
Amortization of interest rate protection contracts          1,006         1,043
                                                          -------       ------
Total                                                     $39,399       $27,951
                                                          =======       =======
================================================================================

As shown in TABLE 5,  interest  expense for the nine months ended  September 30,
1998 increased by $11,448, or 41.0%, to $39,399 compared to $27,951 for the same
period in 1997.  This  increase  reflects  higher  interest  incurred of $13,679
partially  offset by (i) an increase in the amount of  interest  capitalized  in
connection  with  development   projects  of  $1,569  and  (ii)  a  decrease  in
amortization of deferred financing costs of $662.

The increase in interest  incurred is primarily  attributable  to an increase of
approximately  $257,025 in the Partnership's average debt outstanding during the
nine  months  ended  September  30,  1998  compared  to the same  period in 1997
partially  offset by a slight decrease in the weighted average interest rate for
the nine months ended  September  30, 1998  compared to the same period in 1997.
The weighted  average  interest rates were 7.19% and 7.24% for the 1998 and 1997
periods, respectively.

In connection with re-leasing space to new merchants,  the Partnership  incurred
$1,496 and $241 in capital  expenditures  during the nine months ended September
30, 1998 and 1997, respectively.

Loss on Sale of Real Estate

In connection  with the closing of its merger with Horizon on June 15, 1998, the
Partnership  sold Indiana  Factory  Shops and Nebraska  Crossing  Factory  Shops
(collectively  "the  Prime  Transferred  Properties")  to HGP  for an  aggregate
consideration of $26,015 resulting in a loss of $15,461.

Liquidity and Capital Resources

Sources and Uses of Cash

For the nine months ended  September  30, 1998,  net cash  provided by operating
activities was $48761, net cash used in investing  activities was $119,226,  and
net cash provided by financing activities was $77,559.

The primary uses of cash for investing  activities  during the nine months ended
September 30, 1998  included:  (i) costs  associated  with the  development  and
construction  of new factory outlet  centers and expansions to existing  factory
outlet centers aggregating 928,000 square feet of GLA which are expected to open
during 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, (iii) costs for pre-development  activities  associated with future
developments,  and (iv) costs  associated  with the  Partnership's  merger  with
Horizon. Such uses were partially offset by proceeds from the Partnership's sale
of the Prime Transferred Properties. 
<PAGE>

The  primary  source of cash from  financing  activities  during the nine months
ended  September  30, 1998 was proceeds from new  borrowings  of $421,970.  Such
proceeds were partially  offset by (i) principal  repayments on notes payable of
$266,722,  (ii) distributions of $74,442,  and (iii) deferred financing costs of
$3,247.

Property Acquisitions

During 1998 and 1999,  the  Partnership  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 Partnership has
evaluated and is evaluating such  opportunities  and prospects and will continue
to do so  throughout  1998 and  1999.  The  Partnership  cannot  predict  if any
transaction  will be  consummated,  nor  the  terms  or  form  of  consideration
required.

Business Combination

On June 15, 1998, the merger and other transactions  (collectively,  the "Merger
Transactions")  as set forth in the  agreement  and plan of merger (the  "Merger
Agreement")   between  the  Partnership's   General  Partner  and  Horizon  were
consummated  for  an  aggregate   consideration  of  approximately   $1,083,100,
including liabilities assumed and related transaction costs.

Pursuant to the terms of the Merger Agreement,  the General Partner acquired (i)
all of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the General  Partner's  Series B Convertible  Preferred Stock
and 0.597 of a share of the  General  Partner's  Common  Stock for each share of
common stock of Horizon,  and (ii) all of the  outstanding  limited  partnership
units of Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership")
at an exchange  ratio of 0.9193 of a unit of the  Partnership's  Common Units. A
total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329
shares of Common Stock were issued by the General Partner to the shareholders of
Horizon and 3,782,121 Common Units were issued by the Partnership to the limited
partners of Horizon Partnership.

Immediately prior to the merger,  Horizon  Partnership  contributed 13 of its 35
centers to Horizon  Group  Properties,  L.P.,  of which  HGP,  a  subsidiary  of
Horizon,  is the sole general partner.  HGP was spun-off from the Partnership on
June 15, 1998. The remaining 22 outlet centers of Horizon were  integrated  into
the Partnership's existing portfolio. On June 19, 1998, all of the common equity
of HGP was distributed to the convertible  preferred and common shareholders and
unitholders of the General Partner and the Partnership and the  shareholders and
limited partners of Horizon and Horizon  Partnership based on their ownership in
the General Partner immediately following  consummation of the merger. One share
of common stock of HGP was  distributed  for every 20 shares of Common Stock and
Series C  Convertible  Preferred  Stock of the General  Partner and for every 20
Common Units of the Partnership. Additionally, approximately 1.196 shares of the
common stock of HGP were distributed for every 20 shares of Series B Convertible
Preferred Stock of the General Partner.

In  connection  with the Merger  Transactions,  the  Partnership  sold the Prime
Transferred  Properties  to  HGP  for an  aggregate  consideration  of  $26,015,
resulting in a loss of $15,461.  Proceeds from the sale of the Prime Transferred
Properties  were  used  to  repay  indebtedness   associated  with  the  Horizon
properties.

Concurrent with the closing of the merger, a special cash  distribution was made
aggregating  $21,871 consisting of $0.50 per unit to holders of Common Units and
Series C Preferred  Units and $0.60 per unit to holders of Series B  Convertible
Preferred  Units.  Shareholders  of  Horizon  and  limited  partners  of Horizon
Partnership did not participate in these distributions.
<PAGE>

The merger has been  accounted for using the purchase  method of accounting  and
the purchase  price of $1,083,100  was allocated to the assets  acquired and the
liabilities assumed based on estimates of their respective fair values.  Certain
assumptions  were  made  which  management  of  the  Partnership   believes  are
reasonable.  The Partnership  expects to finalize the purchase price  allocation
before  the  end of  1998.  The  final  allocation  is not  expected  to  differ
materially from the allocation made at September 30, 1998.

The  operating  results of those  properties  acquired have been included in the
Partnership's  consolidated  results  of  operations  commencing  on the date of
acquisition. The operating results of the Prime Transferred Properties have been
included in the  Partnership's  consolidated  results of operations  through the
date of disposition.

Legal Proceedings

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

The  Partnership  is defendant  in a lawsuit  filed on July 27, 1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Partnership and its related  entities  overcharged  tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the  Partnership,  if any, from, this lawsuit cannot  currently be predicted.
Management  believes  that the  Partnership  has acted  properly  and intends to
defend this lawsuit vigorously.

Debt Transactions

On September 25, 1998, the Partnership  closed on an unsecured $40,000 revolving
loan (the "Revolving Loan") with a financial institution. The Revolving Loan (i)
bears  interest  equal  to  30-day  LIBOR  plus  1.75%,  (ii)  requires  monthly
interest-only  payments,  and (iii)  matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.

The Revolving  Loan requires  compliance  with certain  financial loan covenants
including those relating to the  Partnership's  (i) total  outstanding  variable
indebtedness,  (ii) total outstanding  indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.

On June 15, 1998, the  Partnership  closed on $292,000 of loan  facilities  with
Nomura  Asset  Capital  Corporation.  The  transaction  provided  (i) a $180,000
nonrecourse  permanent  loan (the  "Permanent  Loan") and (ii) a  $112,000  full
recourse  bridge  loan of which  $95,000  was funded (the  "Bridge  Loan").  The
Permanent Loan is (i)  collateralized  by first mortgages on four factory outlet
centers,  (ii) bears a fixed rate of interest of 6.99%,  (iii) requires  monthly
principal and interest payments pursuant to an approximate 26-year  amortization
schedule,   and  (iv)  matures  on  June  15,  2008.  The  Bridge  Loan  is  (i)
collateralized  by first mortgages on six factory outlet  centers,  (ii) bears a
variable  rate of  interest  equal to 30-day  LIBOR plus 1.35%,  (iii)  requires
monthly interest-only payments, and (iv) matures on June 15, 2001.

As of November 11, 1998, the Partnership is a guarantor or otherwise  obligated
with respect to $39,570 of the indebtedness of HGP and its affiliates, including
$10,000 of obligations under HGP's $108,205  three-year secured credit facility.

<PAGE>

On  April  1,  1998,  Horizon  consummated  an  agreement  with  Castle  & Cooke
Properties,  Inc. which released Horizon from its forward  obligations under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations  under such lease.
The  agreement  also  provided  that  Horizon  transfer  to such  joint  venture
substantially  all of Horizon's  economic  interest in its outlet center in Lake
Elsinore,  California  together  with  legal  title to vacant  property  located
adjacent to the center.  As of September 30, 1998, the Partnership holds a small
minority  interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Partnership   is  legally   obligated  for  $30,864  of  mortgage   indebtedness
outstanding  at September  30, 1998 which is secured by a first  mortgage on the
Lake  Elsinore  outlet  center.  In  addition,  Castle & Cooke has  provided the
Partnership a guaranty,  without limitation, of the obligations relating to such
mortgage indebtedness.

On March 18, 1998,  the  Partnership  obtained  from a financial  institution  a
commitment for a construction  mortgage loan (the "Construction  Mortgage Loan")
relating to Phase I of Prime Outlets at Hagerstown  ("Hagerstown")  in an amount
not to exceed $21,600 which was subsequently  increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for  construction  financing on Phase
II. The Construction  Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR plus  1.50%,  (ii)  matures on June 1, 2004,  and (iii)  requires  monthly
interest-only  payments.  The Construction  Mortgage Loan is collateralized by a
first mortgage on Hagerstown.  At September 30, 1998, $15,969 was outstanding on
the Construction Mortgage Loan.

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 Partnership expects to open 928,000 square feet of GLA during 1998
including  the Prime Outlets at Lebanon which opened on April 17, 1998 and Prime
Outlets at Hagerstown  which opened on August 7, 1998.  Prime Outlets at Lebanon
is located in Lebanon, Tennessee,  approximately 25 miles east of Nashville, and
contains 208,000 square feet of GLA. Prime Outlets at Lebanon was  approximately
92% leased at September  30, 1998.  Prime  Outlets at  Hagerstown  is located in
Hagerstown,  Maryland, west of Baltimore and northwest of Washington, D.C. Prime
Outlets at  Hagerstown  was  approximately  96% leased at September 30, 1998. At
September 30, 1998, the remaining budgeted capital expenditures for 1998 planned
developments   aggregated   approximately  $32,736.

Management  believes that the  Partnership  has  sufficient  capital and capital
commitments to fund the remaining capital expenditures  associated with its 1998
development  activities.  These funding  requirements are expected to be met, in
large part, with the proceeds from various loan facilities.

The  Partnership  currently  plans to open one new  factory  outlet  center  and
several  expansions in 1999 that are expected to contain  approximately  700,000
square feet of GLA, in the aggregate, and have a total expected development cost
of approximately  $95,000.  The Partnership expects to fund the development cost
of these projects from (i) certain line of credit facilities, (ii) retained cash
flow from operations,  (iii)  construction  loans,  (iv) the potential sale of a
joint venture interest in certain factory outlet centers,  and  (v)contributions
from the  General  Partner.  As of  September  30,  1998,  the  Partnership  had
committed  $13,757  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  Partnership  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  Partnership  has
experienced in prior periods.
 <PAGE>
Debt Repayments and Preferred Unit Distributions

The  Partnership's   aggregate  indebtedness  was  $1,179,777  and  $515,265  at
September 30, 1998 and December 31,  1997, respectively.  At September 30, 1998,
such indebtedness had a weighted average maturity of 6.0 years and bore interest
at a weighted  average  interest rate of 7.01% per annum. At September 30, 1998,
$588,457,  or 49.9%,  of such  indebtedness  bore  interest  at fixed  rates and
$591,320, or 50.1%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates.  Of the variable rate indebtedness  outstanding
at September 30, 1998,  $353,803 converted to a fixed rate of 7.782% on November
11, 1998 for the remaining five-year term of such indebtedness.

At September 30, 1998, the Partnership  held interest rate protection  contracts
on all $28,250 of its floating rate tax-exempt indebtedness which expire in 1999
and approximately  $353,803 of other floating rate indebtedness which expired on
November  11,  1998  (or   approximately   64.6%  of  its  total  floating  rate
indebtedness).  In addition,  the  Partnership  held  additional  interest  rate
protection contracts on $21,900 (expires in April 1999) of the $353,803 floating
rate indebtedness to further reduce the  Partnership's  exposure to increases in
interest rates.

The Partnership's ratio of debt to total market  capitalization at September 30,
1998  (defined as total debt  divided by the sum of:  (a) the  aggregate  market
value of the outstanding  shares of Common Units,  assuming the full exchange of
Partnership Series C Preferred Units into Common Units; (b) the aggregate market
value of the outstanding units of Series B Convertible  Preferred Units; (c) the
aggregate  liquidation  preference of the Series A Senior  Cumulative  Preferred
Units ("Senior  Preferred  Units") at $25.00 per unit; and (d) the total debt of
the Partnership) was 60.7%.

The Partnership is obligated to repay $4,962 of mortgage indebtedness during the
remainder of 1998 and $77,498 in 1999.  Annualized  cumulative  distributions on
the Partnership's  Senior Preferred Units, Series B Convertible  Preferred Units
and Series C Preferred Units outstanding September 30, 1998 are $6,038, $16,635,
and $5,149, respectively. These distributions are payable quarterly, in arrears.

The  Partnership  anticipates  that cash flow  from (i)  certain  line of credit
facilities, (ii) operations,  (iii) new borrowings, (iv) refinancings of certain
existing  debt,  (v) the potential  sale of a joint venture  interest in certain
factory outlet centers,  and (vi) contributions from the General Partner will be
sufficient  to  satisfy  its debt  service  obligations,  expected  distribution
requirements  and  operating  cash  needs  for the next  year.  There  can be no
assurance  that the  Partnership  will be  successful  in obtaining the required
amount of funds for these items or that the terms of capital raising activities,
if any,  will be as  favorable  as the  Partnership  has  experienced  in  prior
periods.

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  Partnership  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  Partnership's  exposure to increased costs and operating  expenses
resulting  from  inflation.  At September 30, 1998, the  Partnership  maintained
interest rate protection  contracts to protect against significant  increases in
interest rates on certain floating rate  indebtedness  (see "Debt Repayments and
Preferred Unit Distributions").

The  Partnership  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.
<PAGE>

Year 2000

Recognizing  the need to ensure that the  Partnership'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 Partnership's computerized information systems. Based on this
assessment,  management  believes that the  Partnership's  primary  computerized
information systems are Year 2000 compliant. Additionally, the Partnership is in
the process of querying  its  significant  vendors and tenants  about their Year
2000 compliance  status. To date, the Partnership is not aware of any vendors or
tenants  with a Year  2000  issue  that  would  have a  material  impact  on the
Partnership's results of operations,  liquidity, or capital resources.  However,
the  Partnership  has no means of ensuring  that its vendors or tenants  will be
Year 2000 ready.  The  inability of these  vendors or tenants to complete  their
Year 2000  resolution  process in a timely fashion could  materially  impact the
Partnership.  The effect of non-compliance by significant vendors and tenants is
not  determinable.  However,  the Partnership  will continue to monitor the Year
2000 status of its significant vendors and tenants. 
<PAGE>

Funds from Operations

Management   believes   that  to  facilitate  a  clear   understanding   of  the
Partnership's  operating  results,  funds  from  operations  ("FFO")  should  be
considered in conjunction  with net income (loss)  presented in accordance  with
GAAP. In March 1995, the National  Association of Real Estate  Investment Trusts
("NAREIT")  established  guidelines  clarifying  the  definition  of FFO. FFO is
defined as net income  (loss)  (determined  in accordance  with GAAP)  excluding
gains  (or  losses)  from  debt  restructuring  and  sales  of  property,   plus
depreciation and amortization after adjustments for unconsolidated  partnerships
and joint ventures.

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

TABLE 6  provides a  reconciliation  of income  before  allocation  to  minority
interests  to FFO for the three and nine  months  ended  September  30, 1998 and
1997. FFO increased  $16,575,  or 145.6%,  to $27,962 for the three months ended
September  30, 1998 from $11,387 for the three months ended  September 30, 1997.
FFO increased $28,766,  or 87.6%, to $61,596 for the nine months ended September
30, 1998 from  $32,830 for the nine  months  ended  September  30,  1997.  These
increases are primarily  attributable to the Portfolio Expansion and the Horizon
Merger.
<TABLE>

TABLE 6 - Funds from Operations
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                        Three months ended                Nine months ended
                                                            September 30                    September 30
                                                     -------------------------        --------------------------
                                                     1998                 1997        1998                  1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>             <C>                 <C>    
Income before allocation to minority
  interests                                           $11,332         $  4,374        $11,710            $12,055
FFO adjustments:
Loss on sale of real estate                                 -                -         15,461                  -
Real estate depreciation and amortization              16,327            6,553         33,820             19,289
Unconsolidated joint venture adjustments                  303              460            605              1,486
                                                      -------         --------        -------            -------
FFO before allocation to minority interests           $27,962         $ 11,387        $61,596            $32,830
                                                      =======         ========        =======            =======

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

PART II:  OTHER INFORMATION

Item 1.           Legal Proceedings

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

The  Partnership  is defendant  in a lawsuit  filed on July 27, 1998 in the U.S.
District  Court for the Central  District of  California  whereby the  plaintiff
alleges that the Partnership and its related  entities  overcharged  tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the  Partnership,  if any, from, this lawsuit cannot  currently be predicted.
Management  believes  that the  Partnership  has acted  properly  and intends to
defend this lawsuit vigorously.

In the Partnership's  previously filed Form 10-Q for the quarter ended March 31,
1998,  it reported  that on December 10, 1997 in the Circuit  Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit  against  Horizon,  the  Partnership,  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 Partnership and that the  consideration to be paid
to  Horizon's  shareholders  in  connection  with  the  merger  was  unfair  and
inadequate.

On  September  8, 1998,  a hearing was held before  Judge James M. Graves of the
Court. At the hearing, the defendants,  including the Partnership,  continued to
deny any wrongdoing  and liability.  The Court approved the settlement set forth
in the Stipulation of Settlement (the "Stipulation")  previously executed by the
parties to the  lawsuit on July 21, 1998 and found that the  settlement  was, in
all respects,  fair, reasonable,  and adequate, and dismissed with prejudice the
litigation against the defendants.  The settlement required that the Partnership
pay legal expenses of $325.

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
<PAGE>

Item 6.           Exhibits or Reports on Form 8-K

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

              Exhibit 12.1 - Ratio of Earnings to Fixed Charges
              and Preferred Stock Distributions and Dividends

              Exhibit 27.1 - Financial Data Schedule (EDGAR filing only)

     (b)      Reports on Form 8-K:
              On August 27, 1998, the  Partnership  filed a Current Report on
              Form 8-K/A,  dated June 15, 1998,  reporting (i) the merger an
              other transactions  (collectively,  the "Transactions") as set
              forth in the agreement and plan of merger  between the General
              Partner and Horizon  Group,  L.P. was  consummated on June 15,
              1998 and (ii) the General Partner completed a $292.0 million debt
              financing with Nomura Asset Capital  Corporation in connection 
              with the Transactions.  Unaudited pro forma consolidated financial
              statements of the Partnership and unaudited  statements of revenue
              and certain  expense of (i) the Prime  Transferred  Properties and
             (ii)Horizon Group Properties, L.P. 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.



                                                       BY: PRIME RETAIL, L.P.
                                                           Registrant

                                                       BY: PRIME RETAIL, INC.
                                                           its general partner

Date: November 12, 1998                                 /s/ Abraham Rosenthal
      -----------------                                 -----------------------
                                                        Abraham Rosenthal
                                                        Chief Executive Officer



Date: November 12, 1998                                /s/ Robert P. Mulreaney
      -----------------                                 ----------------------- 
                                                       Robert P. Mulreaney
                                                       Executive Vice President,
                                                       Chief Financial Officer
                                                       and Treasurer