<PAGE>


                         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


                          Commission file number:  0-24123
                          --------------------------------


                           HORIZON GROUP PROPERTIES, INC.
                           ------------------------------
               (Exact name of Registrant as specified in its Charter)


           MARYLAND                                    38-3407933
---------------------------------                  -------------------
  (State or other jurisdiction                      (I.R.S. employer
of incorporation or organization)                  identification no.)


77 WEST WACKER DRIVE, SUITE 3900, CHICAGO , IL            60601
----------------------------------------------         ----------
   (Address of principal executive offices)            (Zip Code)


                                   (312) 917-1500
                                   --------------
                (Registrant's telephone number, including area code)


                                   Not Applicable
                                   --------------
Former name, former address and 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 period 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   
                                                          ---


NUMBER OF COMMON SHARES OUTSTANDING AT NOVEMBER 13, 1998      2,782,075
                                                              ---------
                                                              ---------

                                       1
<PAGE>

                         HORIZON GROUP PROPERTIES, INC.
                               Index to Form 10-Q
                               September 30, 1998

<TABLE>
<CAPTION>
<S>                                                                                <C>
Part I.   Financial Information:                                                    Page No.
                                                                                    --------

Item 1.  Financial Statements (unaudited)

     Consolidated Condensed Statement of Operations of the Company for the 
          Three Months Ended September 30, 1998 and Combined Condensed
          Statement of Operations of the Predecessor Properties for the
          Three Months Ended September 30, 1997..................................       3

     Consolidated Condensed Statement of Operations of the Company
          for the period June 15, 1998 to September 30, 1998 and
          Combined Condensed Statements of Operations of the 
          Predecessor Properties for the periods
          January 1, 1998 to June 14, 1998 and
          the Nine Months Ended September 30, 1997...............................       4

     Consolidated Condensed Balance Sheet of the 
          Company at September 30, 1998 and
          Combined Condensed Balance Sheet of the Predecessor
          Properties at December 31, 1997........................................       5

     Consolidated Condensed Statement of Cash Flows of the Company
          for the period June 15, 1998 to September 30, 1998 and
          Combined Condensed Statements of Cash Flows of the
          Predecessor Properties for the periods
          January 1, 1998 to June 14, 1998 and
          for the Nine Months Ended September 30, 1997...........................       6

     Notes to Consolidated and Combined Condensed Financial Statements...........       7

Item 2.  Management's Discussion and Analysis of Financial Condition 
     and Results of Operations...................................................      15

Part II. Other Information:

Item 1.  Legal Proceedings.......................................................      22
Item 2.  Changes in Securities...................................................      22
Item 3.  Defaults Upon Senior Securities.........................................      22
Item 4.  Submission of Matters to a Vote of Security Holders.....................      22
Item 5.  Other Information.......................................................      22
Item 6.  Exhibits or Reports on Form 8-K.........................................      23

Signatures.......................................................................      25
</TABLE>

                                       2
<PAGE>

                          HORIZON GROUP PROPERTIES, INC.
           Consolidated and Combined Condensed Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>

                                                   Horizon Group
                                                  Properties, Inc.         Predecessor Properties
                                                for the three months        for the three months
                                              ended September 30, 1998     ended September 30, 1997
                                              ------------------------     ------------------------
                                                       (thousands, except per share data)
<S>                                                   <C>                          <C>
REVENUE
      Base rent                                        $  5,721                     $  4,236
      Percentage rent                                        57                           57
      Expense recoveries                                  1,473                        1,694
      Other                                                 445                        1,022
                                                       --------                     --------
         Total revenue                                    7,696                        7,009
                                                       --------                     --------

EXPENSES
      Property operating                                  1,722                        1,337
      Real estate taxes                                     905                          673
      Land leases and other                                 207                          122
      Depreciation and amortization                       1,250                        2,680
      General and administrative                          1,157                          779
      Provision for impairment                                -                        6,028
      Interest                                            2,405                        2,974
                                                       --------                     --------
         Total expenses                                   7,646                       14,593
                                                       --------                     --------

Income (loss) before minority interest                       50                       (7,584)

Minority interest                                           (16)                           -
                                                       --------                     --------

NET INCOME (loss)                                      $     34                     $ (7,584)
                                                       --------                     --------
                                                       --------                     --------

PER COMMON SHARE - BASIC AND DILUTED:
      Net income                                       $    .01
                                                       --------
                                                       --------

Weighted average common shares outstanding - basic    2,754,355
                                                      ---------
                                                      ---------
</TABLE>

         See accompanying notes to consolidated and combined condensed
                            financial statements.

                                       3
<PAGE>

                          HORIZON GROUP PROPERTIES, INC.
           Consolidated and Combined Condensed Statements of Operations
                                  (unaudited)

<TABLE>
<CAPTION>

                                            Horizon Group               Predecessor Properties
                                       Properties, Inc. for the          for the period from             Predecessor Properties
                                       period from June 15, 1998           January 1, 1998                for the nine months
                                         to September 30, 1998             to June 14, 1998             ended September 30, 1997
                                       -------------------------        ----------------------          ------------------------
                                                                   (thousands, except per share data)

<S>                                           <S>                            <S>                              <S>
REVENUE
      Base rent                                $  6,674                       $  9,167                         $ 13,766
      Percentage rent                                57                             44                               96
      Expense recoveries                          1,624                          2,631                            4,920
      Other                                         503                            534                            1,702
                                               --------                       --------                         --------
         Total revenue                            8,858                         12,376                           20,484
                                               --------                       --------                         --------

EXPENSES
      Property operating                          1,921                          2,634                            4,182
      Real estate taxes                           1,042                          1,379                            2,212
      Land leases and other                         230                            785                              498
      Depreciation and amortization               1,494                          4,640                            6,784
      General and administrative                  1,383                          1,101                            2,018
      Provision for impairment                        -                              -                            6,028
      Interest                                    2,775                          5,684                            7,876
                                               --------                       --------                         --------
         Total expenses                           8,845                         16,223                           29,598
                                               --------                       --------                         --------

Income (loss) before minority interest
      and extraordinary charge                       13                         (3,847)                          (9,114)

Minority interest                                   (10)                             -                                -
                                               --------                       --------                         --------
Net income (loss) before extraordinary 
      charge                                          3                         (3,847)                          (9,114)

Extraordinary charge on debt prepayment               -                              -                             (763)
                                               --------                       --------                         --------

NET INCOME (loss)                              $      3                       $ (3,847)                        $ (9,877)
                                               --------                       --------                         --------
                                               --------                       --------                         --------

PER COMMON SHARE - BASIC AND DILUTED:
      Net income                               $      -
                                               --------
                                               --------

Weighted average common shares
      outstanding - basic                     2,752,165
                                              ---------
                                              ---------
</TABLE>

         See accompanying notes to consolidated and combined condensed
                            financial statements.

                                       4

<PAGE>

                           HORIZON GROUP PROPERTIES, INC.
                      Consolidated and Combined Balance Sheets
                                    (unaudited)

<TABLE>
<CAPTION>

                                                Horizon Group        Predecessor Properties
                                             Properties, Inc. at               at
                                             September 30, 1998         December 31, 1997
                                             -------------------     ----------------------
                                                             (thousands)
<S>                                               <C>                       <C>
ASSETS
Real estate - at cost:
   Land                                            $ 12,197                  $  16,421
   Buildings and improvements                       130,754                    200,058
   Less accumulated depreciation                     (1,494)                   (17,951)
                                                   --------                   --------
      Total net real estate                         141,457                    198,528

Cash and cash equivalents                             2,502                      3,729
Restricted cash                                       3,446                          -
Tenant accounts receivable                              360                        368
Due from joint venture                                8,726                     11,639
Assets held for sale                                  2,500                      1,933
Deferred costs                                          769                      4,696
Other assets                                          5,374                        954
                                                   --------                   --------
   Total assets                                    $165,134                   $221,847
                                                   --------                   --------
                                                   --------                   --------

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt                           $115,200                   $139,636
Accounts payable and accrued expenses                 5,154                      4,790
Prepaid rents and other tenant liabilities              897                        959
Other liabilities                                     3,305                      1,272
                                                   --------                   --------
   Total liabilities                                124,556                    146,657
                                                                              --------

NET ASSETS OF PREDECESSOR PROPERTIES                                          $ 75,190
                                                                              --------
                                                                              --------

MINORITY INTEREST                                     7,280

SHAREHOLDERS' EQUITY:
Common shares                                            28
Additional paid-in capital                           33,267
Accumulated earnings                                      3
                                                   --------
   Total shareholders' equity                        33,298
                                                   --------
      Total liabilities and shareholders' equity   $165,134
                                                   --------
                                                   --------
</TABLE>

         See accompanying notes to consolidated and combined condensed
                            financial statements.

                                       5

<PAGE>

                           HORIZON GROUP PROPERTIES, INC.
            Consolidated and Combined Condensed Statements of Cash Flows
                                    (unaudited)

<TABLE>
<CAPTION>

                                                               Horizon Group         Predecessor Properties
                                                          Properties, Inc. for the    for the period from    Predecessor Properties
                                                          period from June 15, 1998     January 1, 1998       for the nine months
                                                            to September 30, 1998       to June 14, 1998    ended September 30, 1997
                                                          -------------------------  ---------------------- ------------------------
                                                                                          (thousands)

<S>                                                              <S>                       <S>                    <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) before minority interest
      and extraordinary charge                                    $    13                   $  (3,847)             $ (9,114)
   Adjustments to reconcile net income (loss) 
      before minority interest and extraordinary charge
      to net cash provided by operating activities:
      Depreciation and amortization                                 1,494                       5,031                 7,496
      Provision for impairment                                          -                           -                 6,028
      Changes in assets and liabilities:
      Restricted cash                                                  91                           -                     -
      Tenant accounts receivable                                     (299)                       (409)                  473
      Due from joint venture                                          882                       2,032                 2,357
      Deferred costs and other assets                              (2,628)                        409                  (297)
      Accounts payable and accrued expenses                         1,993                        (704)                 (553)
      Other liabilities                                               (17)                        (47)                2,454
      Prepaid rents and other tenant liabilities                      220                        (366)                 (859)
                                                                  -------                   ---------              --------
         Net cash provided by operating activities                  1,749                       2,099                 7,985
                                                                  -------                   ---------              --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Expenditures for real estate and improvements                   (2,101)                     (2,305)               (9,641)
                                                                  -------                   ---------              --------
      Net cash used in investing activities                        (2,101)                     (2,305)               (9,641)
                                                                  -------                   ---------              --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net contributions/(distributions)                                    -                      (4,044)              (13,307)
   Proceeds from net increase in debt                                   -                       4,459                13,861
   Repayment of borrowings                                           (314)                          -                     -
   Debt issue costs                                                     -                        (140)                 (390)
                                                                  -------                   ---------              --------
      Net cash provided by (used in) financing
      activities                                                     (314)                        275                   164
                                                                  -------                   ---------              --------

Net increase (decrease) in cash and
   cash equivalents                                                  (666)                         69                (1,492)

CASH AND CASH EQUIVALENTS:
   Beginning of period                                              3,168                       3,729                 4,511
                                                                  -------                   ---------              --------
   End of period                                                  $ 2,502                   $   3,798              $  3,019
                                                                  -------                   ---------              --------
                                                                  -------                   ---------              --------
</TABLE>

         See accompanying notes to consolidated and combined condensed
                            financial statements.

                                       6

<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


NOTE 1 - FORMATION OF THE COMPANY

Horizon Group Properties, Inc. (together with its subsidiaries "HGP" or the 
"Company") is a self-administered and self-managed Maryland corporation that 
was established in connection with the merger of Horizon Group, Inc., a 
Michigan corporation ("Horizon") with and into Prime Retail, Inc., a Maryland 
corporation ("Prime") which was consummated on June 15, 1998 ("the Merger").  
HGP's portfolio consists of 14 factory outlet centers and one power center 
located in 12 states.  Twelve of the factory outlet centers and the power 
center were contributed to the Company by Horizon immediately prior to the 
consummation of the Merger pursuant to a Contribution Agreement entered into 
in connection with the Merger (the "Contribution Agreement") and two factory 
outlet centers were purchased by the Company from Prime immediately 
subsequent to the consummation of the Merger.

Also in connection with the Merger and pursuant to the Amended and Restated 
Agreement and Plan of Merger dated as of February 1, 1998 by and among Prime, 
Horizon, HGP and other parties thereto (the "Merger Agreement"), the common 
shares of the Company were distributed to the holders of Prime common stock, 
Prime Series B Preferred stock, Prime Series C Preferred stock and Horizon 
common stock in accordance with the applicable exchange ratio for each such 
security.

The operations of the Company are primarily conducted through a subsidiary 
limited partnership, Horizon Group Properties, L.P. ("HGP LP") in which the 
Company is the sole general partner and, as of September 30, 1998, owns 
approximately 82% of the partnership interests (the "Common Units").  In 
connection with the Merger, the Common Units were distributed to the original 
holders (other than Prime) of partnership interests of a limited partnership 
affiliate of Prime and a limited partnership affiliate of Horizon, 
respectively, in accordance with the exchange ratios set forth in the Merger 
Agreement. Common Units are exchangeable for shares of HGP common stock on a 
one-for-one basis at any time (or for an equivalent cash amount at the 
Company's election).

The Company owns Horizon's former administrative offices located in Norton 
Shores, Michigan and the following centers which were owned by Horizon prior 
to the Merger and contributed to the Company pursuant to the Contribution 
Agreement (collectively, such assets are referred to as the "Predecessor 
Properties" for periods prior to the Merger):

   Bellport Outlet Center in Patchogue, New York (held in joint ventures)
   Dry Ridge Outlet Center in Dry Ridge, Kentucky
   Horizon Outlet Center--Holland in Holland, Michigan
   Horizon Outlet Center--Laughlin in Laughlin, Nevada
   Horizon Outlet Center--Monroe in Monroe, Michigan
   Horizon Outlet Center--Somerset in Somerset, Pennsylvania
   Horizon Outlet Center--Traverse City in Traverse City, Michigan
   Horizon Outlet Center--Tulare in Tulare, California
   Lakeshore Marketplace in Norton Shores, Michigan
   Medford Outlet Center in Medford, Minnesota
   New Mexico Outlet Center in Algodones, New Mexico (vacant)
   Sealy Outlet Center in Sealy, Texas
   Warrenton Outlet Center in Warrenton, Missouri

                                       7
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


Immediately after the Merger, the Company acquired the two properties listed 
below.  Each property was purchased from an affiliate of Prime.

<TABLE>
<CAPTION>

                                                                             Approximate
Date Acquired  Property                  Location        Total Sq. Feet    Purchase Price
<S>           <C>                   <C>                    <C>              <C>
June 15, 1998  Nebraska Crossing     Gretna, Nebraska       192,000          $ 8,000,000
               Factory Shops

June 15, 1998  Indiana               Daleville, Indiana     234,000          $18,015,000
               Factory  Shops                              ---------        -------------

Total                                                       426,000          $26,015,000
</TABLE>

HGP currently intends to seek shareholder approval to be treated as a 
subchapter C corporation for federal income tax purposes for its initial tax 
year which will end December 31,1998.  In conjunction with the Merger, the 
Company had indicated its intent to be treated as a real estate investment 
trust ("REIT") for federal income tax purposes and currently believes it 
operates in the manner required to qualify for REIT status.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited consolidated and combined financial statements of 
the Company 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, the consolidated 
and combined financial statements contain all normal, recurring adjustments 
necessary for a fair statement of financial results for the interim period 
presented.  The preparation of these financial statements requires management 
to make estimates and assumptions that affect the amounts reported in the 
financial statements and accompanying notes.  Actual results could differ 
from these estimates.

STATEMENTS OF PREDECESSOR PROPERTIES

The financial statements for the dates and periods prior to the Merger 
reflect the results of operations, financial position, and cash flows of the 
Predecessor Properties prior to the Merger as if the Company had been a 
separate entity and owned such assets for all periods presented. The 
historical results of operations and financial condition of the Predecessor 
Properties are based on the manner in which Horizon historically managed such 
net assets.  Accordingly, the combined condensed financial statements of the 
Predecessor Properties have been prepared using Horizon's historical basis of 
the assets and liabilities and historical results of operations related to 
the Predecessor Properties.  In this regard, because Horizon owned the 
Predecessor Properties, together with other properties which were not 
contributed to the Company prior to the Merger, the Predecessor Properties 
were not insulated from the obligations and commitments of Horizon. Certain 
assumptions relating to the allocation of cash and cash equivalents, debt and 
financing costs, interest expense and general and administrative expenses, 
all of which were historically aggregated by Horizon, have been made in the 
combined financial statements for the periods prior to the Merger. These 
statements have been combined based upon the historical common ownership and 
management of the outlet centers.

These statements include an allocation of the aggregate debt balances of 
Horizon (which had historically been secured by a pool of Horizon's assets) 
based upon the proportionate use of debt proceeds by the Predecessor 
Properties compared to Horizon's total historical portfolio of outlet 
centers. Financing costs were allocated based upon the same ratio. Interest 
expense has been estimated based upon the aforementioned proportionate debt 
balances and the historical weighted average interest rate incurred by 
Horizon on its debt balances. The allocation was made in this manner because 
management believes it best represented the use of funds borrowed during the 
periods presented and 

                                       8
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


because allocating the debt in this manner results in the statements of 
operations of the Predecessor Properties reflecting the stand-alone interest 
cost of doing business.   General and administrative expenses of Horizon have 
been allocated to the Predecessor Properties based upon the ratio of GLA of 
the Predecessor Properties portfolio of outlet centers compared to Horizon's 
total historical portfolio of outlet centers.

Cash and cash equivalents have been included in the combined condensed 
financial statements of the Predecessor Properties based upon the respective 
periods' ratio of GLA of the Predecessor Properties compared to Horizon's 
total historical portfolio of outlet centers. Horizon considered all highly 
liquid investments with a maturity of three months or less when purchased to 
be cash and cash equivalents.
 
Net contributions (distributions) are the net amounts advanced from and 
repaid to Horizon. Excess cash flows have been reflected as being distributed 
back to Horizon. Net contributions represent Horizon's funding of the 
Predecessor Properties' development cost needs in excess of cash flows 
generated from the Predecessor Properties' operations.

The aforementioned allocations may not reflect actual balances had the 
Company existed as a separate entity.

REAL ESTATE AND DEPRECIATION

The carrying values of the Predecessor Properties for the period prior to the 
Merger are stated at Horizon's historic cost, less accumulated depreciation. 
For the period subsequent to the Merger, the Predecessor Properties are 
stated on the books of the Company at fair value as of June 15, 1998, the 
date the Predecessor Properties were contributed to the Company, less 
accumulated depreciation. The two centers purchased from an affiliate of 
Prime are stated at their purchase prices less accumulated depreciation. The 
carrying values as of September 30, 1998 are preliminary. Costs incurred for 
the acquisition, development, construction and improvement of properties, as 
well as significant renovations and betterments to the properties, are 
capitalized. Maintenance and repairs are charged to expense as incurred. 
Interest costs incurred with respect to qualified expenditures relating to 
the construction of assets are capitalized during the construction period.

In accordance with FASB Statement No. 121, "Accounting for the Impairment of 
Long-lived Assets and for Long-lived Assets to be Disposed of", the financial 
statements of HGP and the Predecessor Properties reflect impairment losses on 
long-lived assets used in operations when events and circumstances indicate 
that the assets might be impaired and the undiscounted cash flows estimated 
to be generated by those assets are less than the carrying amounts of those 
assets. Impairment losses are measured as the difference between carrying 
value and fair value for assets to be held in the portfolio. For assets to be 
sold, impairment is measured as the difference between carrying value and 
fair value, less costs to dispose. Fair value is based on estimated cash 
flows discounted at a risk-adjusted rate of interest or a value derived from 
comparable sales transactions in the marketplace. 
 
Periodically, in the course of reviewing the performance of its outlet 
centers, management may determine that certain outlet centers no longer meet 
the parameters set forth for its operating properties and accordingly, such 
outlet centers will be classified as held for sale.  As of December 31, 1997 
and September 30, 1998 the Algodones, New Mexico outlet center is classified 
as held for sale.

REVENUE RECOGNITION

Leases with tenants are accounted for as operating leases. Minimum annual 
rentals are generally recognized on a straight-line basis over the term of 
the respective lease. Rents which represent basic occupancy costs, including 
fixed amounts and amounts computed as a function of sales, are classified as 
base rent.  Amounts which may become payable in addition to base rent and 
which are computed as a function of sales in excess of certain thresholds are 
classified as percentage rents. Expense recoveries based on common area 
maintenance expenses and certain other expenses are accrued in the period in 
which the related expense is incurred. For periods beginning on and after 
April 1, 1998, percentage rents are accrued on the basis of reported tenant 
sales only after the sales exceed the thresholds 

                                       9
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


above which such rent is due.  For periods prior to April 1, 1998, percentage 
rents were accrued based upon an estimate of total percentage rent expected 
to be collected for the year.  

OTHER REVENUE

Other revenue consists primarily of interest income and income related to
marketing services that is recovered from tenants pursuant to lease agreements.

DEFERRED COSTS AND OTHER ASSETS

Leasing and deferred financing costs are capitalized at cost. Amortization is
recorded on the straight-line method over the life of the lease or the debt,
respectively.

INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 

The Company accounts for its investment in two joint ventures using the equity
method of accounting.  Under this method of accounting, the net equity
investment of the Company is reflected on the balance sheet and the statements
of operations include the Company's share of the net income or loss from such
joint ventures.

INCOME TAXES

The Company currently intends to seek shareholder approval to not elect status
as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended.  If the Company were a REIT, it generally would not be subject to
federal income tax if it were to distribute at least 95% of its taxable income
for each tax year to its shareholders. REITs are subject to a number of
organizational and operational requirements.  The Company expects it will report
a loss for federal income tax purposes for the period ending December 31, 1998
whether or not it elects REIT status.

RECLASSIFICATIONS

Certain reclassifications have been made to the previously reported statements
of the Predecessor Properties in order to provide comparability with the
Company's statements reported herein.  These reclassifications have not changed
the previously reported results.

                                       10
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


NOTE 3 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>


                                                 Three months ended   Period from June 15, 1998
                                                 September 30, 1998     to September 30, 1998
                                                 ------------------   -------------------------
<S>                                                   <C>                      <C>
 NUMERATOR:
 Net income - basic                                    $   34                   $    3
 Minority interest of unitholders                          16                       10
                                                       ------                   ------
 Net income - diluted                                  $   50                   $   13
                                                       ------                   ------
                                                       ------                   ------

 DENOMINATOR:
 Weighted average common shares outstanding - basic     2,754                    2,752
 Effect of converting units to shares                     636                      638
                                                       ------                   ------
 Weighted average common shares outstanding - diluted   3,390                    3,390
                                                       ------                   ------
                                                       ------                   ------

 Net income per share - basic and diluted               $ .01                   $    -
                                                       ------                   ------
                                                       ------                   ------
</TABLE>

Outstanding options were excluded because the effect of such items was 
anti-dilutive for the periods presented.

NOTE 4 - LONG TERM STOCK INCENTIVE PLAN

The Company has adopted the HGP 1998 Long Term Stock Incentive Plan (the "HGP 
Stock Plan") to advance the interests of the Company by encouraging and 
enabling the acquisition of a financial interest in the Company by key 
employees and officers of the Company and its subsidiaries through equity 
awards.  The Company reserved 338,900 common shares for issuance pursuant to 
the HGP Stock Plan, an amount equal to approximately 10% of the aggregate of 
the total outstanding common shares of the Company and outstanding Common 
Units of HGP LP as of November 13, 1998.

NOTE 5 - MORTGAGE DEBT AND OTHER LIABILITIES

On June 15, 1998, certain wholly owned affiliates of the Company entered into 
a credit facility (the "HGP Credit Facility") with Nomura Asset Capital 
Corporation ("Nomura") providing for initial borrowings of $108,205,000. The 
HGP Credit Facility is guaranteed by HGP and HGP LP.  The HGP Credit Facility 
has a term of three years and bears interest at the 30-day LIBOR Rate (as 
defined in the HGP Credit Facility) plus 1.90% per annum. The HGP Credit 
Facility is cross-collateralized by mortgages on the Company's 12 wholly 
owned outlet centers and one power center.  The HGP Credit Facility requires 
monthly payments of interest. In addition, the HGP Credit Facility requires 
principal payments totaling $1.5 million, $1.5 million and $2.0 million 
during the first, second and third years, respectively, payable in equal 
monthly installments.  A principal payment of $2.2 million which was due on 
October 31, 1998 was paid on November 10, 1998 with the proceeds of a loan 
from Prime.  The HGP Credit Facility also contains a contingent repayment 
penalty equal to 1% of amounts repaid during the first loan year and 2% of 
amounts repaid thereafter through the stated maturity date.  Such penalty is 
not payable in the event the Company refinances the HGP Credit Facility with 
Nomura.  The Company currently intends to seek such financing from Nomura on 
or before the maturity of the HGP Credit Facility and accordingly does not 
currently anticipate that such fee will be paid.  As a result, the condensed 
consolidated financial statements do not include any adjustment relating to 
this penalty.  The HGP Credit Facility contains restrictions on the ability 
of HGP and HGP LP to incur additional indebtedness, and 

                                       11
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


under certain circumstances, requires the Company to enter into an interest 
rate lock arrangement which would fix the interest rate on the full 
outstanding amount of the HGP Credit Facility. 

In connection with the HGP Credit Facility, the Company established certain 
escrow accounts and cash collection accounts for the benefit of Nomura which 
are classified on the balance sheet of the Company as restricted cash.

Prime has guaranteed approximately $10 million of obligations under the HGP 
Credit Facility (after the $2.2 million principal payment made on November 
10, 1998) and together with other indebtedness (the "Prime Guarantee"). In 
connection with the Prime Guarantee, HGP has agreed to pay Prime a fee of 
$400,000 per annum until the Prime Guarantee terminates. 

The Company has loans totaling $3.0 million as of September 30, 1998 secured 
by a mortgage on the office building and related equipment which the Company 
utilizes as a corporate office in Norton Shores, Michigan.  This building was 
previously owned by an affiliate of Horizon and was contributed to the 
Company pursuant to the Contribution Agreement.  The consent of the lender to 
the previous owner of the property is required in connection with the 
transfer of the property to the Company. The Company is currently seeking 
such consent but as of November 13, 1998, such consent has not been obtained. 

The Company also has a $4.0 million revolving credit facility that matured 
October 31, 1998.  Prime is obligated to lend the Company $4.0 million at an 
interest rate of 10% (the "Prime Loan") in order to repay such indebtedness 
pursuant to the terms of a Working Capital Agreement between the Company and 
Prime (the "Working Capital Agreement").  The Company has requested such 
funds from Prime, but as of November 13, 1998, Prime had not lent the funds 
to the Company.  The terms of the Working Capital Agreement require the 
Company to repay the Prime Loan or other related indebtedness on which Prime 
is contingently liable to the extent of net proceeds from an equity offering 
or the sale of the Company's Algodones, New Mexico Outlet Center.  

Pursuant to the Contribution Agreement, the Company agreed to assume, 
undertake to pay, satisfy and discharge when due in accordance with their 
terms certain assumed liabilities (the "Assumed Liabilities"), which are 
defined to include all liabilities of Horizon which arise from the ownership 
and operation of the Predecessor Properties and include (i) all obligations 
to indemnify present and former officers and directors of Horizon under 
certificates or articles of incorporation, by-laws, partnership agreements, 
employment agreements, indemnification agreements or otherwise, for any 
matter existing or occurring after the Merger, (ii) all leases and related 
contracts, and service contracts, relating to any Contributed Asset (as 
defined in the Contribution Agreement) and (iii) certain other specified 
obligations. 

Also pursuant to the Contribution Agreement, certain partnership interests in 
two joint ventures, MG Patchogue Limited Partnership and MG Patchogue II 
Limited Partnership, which own the Bellport Factory Outlet Center, were 
transferred from an affiliate of Horizon to HGP LP and an affiliate of HGP 
LP.  The Company is currently seeking the consents of the limited partners to 
such transfers but as of November 13, 1998, such consents had not been 
obtained. 

Additionally, the transfer of the general partnership interest in MG 
Patchogue Limited Partnership pursuant to the Contribution Agreement required 
the consent of MG Patchogue Limited Partnership's mortgage lender.  The 
Company is currently seeking such consent but, as of November 13, 1998, such 
consent had not been obtained.  The Company accounts for its investment in 
these partnerships using the equity method of accounting.

MG Patchogue II Limited Partnership, of which the Company is 1% general 
partner and 44% limited partner, is subject to indebtedness totaling 
approximately $11.8 million which originally matured August 14, 1998.  The 
lender has indicated its willingness to extend such facility to November 12, 
1998.  The Company is seeking to further extend the maturity date.  Nomura 
originally issued a commitment to lend the partnership $14 million under the 
HGP Credit Facility on or before September 1, 1998 and has verbally indicated 
that it may consider such refinancing after such date.  The consent of the 
limited partners is required in order to complete such financing with Nomura. 
 The Company is currently seeking such consent, but as of November 

                                       12
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


13, 1998 such consent had not been obtained.  Prime is a guarantor on the 
indebtedness.  If the financing with Nomura is completed, the Company will 
utilize the proceeds of such financing to repay the existing indebtedness and 
repay the $2.2 million loan which it received from Prime as discussed above 
in connection with the HGP Credit Facility.  The Company accounts for its 
investment in this partnership using the equity method of accounting.

The Company can give no assurances that it will be able to obtain the above 
mentioned consents or that it will be able to finance or refinance its 
indebtedness as it matures or that any such financing will be obtained will 
be on favorable terms.  Any such failure to obtain such consents or such 
financings could have a material adverse effect upon the Company.  The 
condensed consolidated financial statements of the Company do not include any 
adjustments that may result from the ultimate outcome of these uncertainties.

Prior to the Merger, Horizon entered into an agreement (the "PVH Agreement") 
with Phillips Van Heusen, Inc. ("PVH") which deleted or delayed the effective 
date of certain provisions of PVH leases in exchange for certain payments. 
Prime is liable for future payments relating to the PVH Agreement.  The 
Company is obligated to reimburse Prime for two payments relating to the PVH 
Agreement totaling $2,334,000, payable in the amounts of $1,167,000 on each 
of June 15, 1999 and June 15, 2000.

NOTE 6 - RELATED PARTY TRANSACTIONS

The Company utilizes Thilman & Filippini as agent for its insurance and risk 
management programs.  E. Thomas Thilman is a Director of the Company and a 
partner in Thilman & Filippini.  During the period June 15, 1998 to September 
30, 1998, the Company paid premiums totaling approximately $340,000 on 
insurance policies placed by Thilman & Filippini.

The Company leases office space for its senior executives at 77 W. Wacker, 
Chicago, Illinois from Prime Group Realty Trust.  Prime Group Realty Trust is 
an affiliate of Michael W. Reschke, a Director of the Company.  

NOTE 7 - PRO FORMA INFORMATION

The Pro Forma Consolidated Condensed Statements of Operations for the nine 
months ended September 30, 1998 and 1997 reflect the following transactions, 
which occurred June 15, 1998, as if they had occurred on January 1, 1997: (a) 
the contribution of the Predecessor Properties and the acquisition of the two 
centers from Prime; (b) the entry into the HGP Credit Facility; and (c) the 
issuance of stock of HGP and Common Units.

The accompanying Pro Forma Consolidated Condensed Statements of Operations 
are not necessarily indicative of the results which would actually have been 
obtained had the transactions described above been completed on the dates 
indicated or which may be obtained in the future.

<TABLE>
<CAPTION>

                                                     Nine months ended September 30,
                                                     -------------------------------
                                                           1998         1997
                                                           ----         ----
    <S>                                                <C>          <C>
     Total Revenue                                      $  24,443    $  25,723

     Income (Loss) Before Extraordinary Items
          and Minority Interests                            1,392       (2,940)

     Net Income (Loss)                                      1,117       (2,376)

     Net Income (Loss) per Share                              .41         (.86)

</TABLE>

                                       13

<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
         Notes to Consolidated and Combined Condensed Financial Statements
                                    (unaudited)


NOTE 8 - NON-CASH INVESTING AND FINANCING ACTIVITIES

Additional supplemental disclosures of non-cash investing and financing 
activities for the period ended June 30, 1998 are as follows:

     The following summarizes the assets, liabilities and equity contributed to
     and assumed by the Company pursuant to the Contribution Agreement and the
     acquisition of the two centers from Prime referred to in Note 1:

<TABLE>
<CAPTION>
                                                     (in thousands)

         <S>                                           <C>
          Investment in real estate                       141,646
          Other assets                                     21,575
                                                          -------
                                                          163,221
                                                          -------
                                                          -------

          Debt                                            115,514
          Other liabilities                                 7,142
          Minority interests                                7,513
          Owners' equity                                   33,052
                                                          -------
                                                          163,221
                                                          -------
                                                          -------
</TABLE>

The above allocations are preliminary. 

NOTE 9 - WORKING CAPITAL AGREEMENT

In connection with the Merger, the Company entered into a Working Capital 
Agreement with Prime (the "Working Capital Agreement"). The Working Capital 
Agreement provides that Prime will transfer to the Company net working 
capital of $545,000. This amount is net of the current assets and current 
liabilities of the Predecessor Properties and the two centers which the 
Company purchased from Prime as of the date of the Merger. Prime transferred 
$3,000,000 to the Company at the closing of the Merger as a portion of the 
estimated amount due under the Working Capital Agreement. The Company has 
recorded a receivable from Prime for the balance of the amount due under the 
Working Capital Agreement and expects that such amount will be paid during 
the fourth quarter of 1998.

                                       14

<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


INTRODUCTION

The following discussion and analysis of the consolidated financial condition 
and results of operations of Horizon Group Properties, Inc. (together with 
its subsidiaries "HGP" or the "Company") and the Predecessor Properties (as 
herein after defined) should be read in conjunction with the Consolidated and 
Combined Condensed Financial Statements and Notes thereto. The Company's 
operations are conducted primarily through a subsidiary limited partnership, 
Horizon Group Properties, L.P. ("HGP LP").  The Company is the sole general 
partner of HGP LP and, as of September 30, 1998, owns approximately 82% of 
the HGP LP partnership interests ("Common Units"). Common Units of HGP LP are 
exchangeable for shares of HGP common stock on a one-for-one basis at any 
time (or for an equivalent cash amount at the Company's election).  The 
Company controls HGP LP and is dependent on distributions or other payments 
from HGP LP to meet its financial obligations.

CAUTIONARY STATEMENTS

The following discussion in "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" contains certain 
forward-looking statements within the meaning of the Private Securities 
Litigation Reform Act of 1995 which reflect management's current views with 
respect to future events and financial performance.  Such forward-looking 
statements are subject to certain risks and uncertainties; including, but not 
limited to, the effects of future events on the Company's financial 
performance; the risk that the Company may be unable to finance its planned 
acquisition and development activities; risks related to the retail industry 
in which the Company's outlet centers compete, including the potential 
adverse impact of external factors, such as inflation, consumer confidence, 
unemployment rates and consumer tastes and preferences; risks associated with 
the Company's property acquisitions, such as the lack of predictability with 
respect to financial returns; risks associated with the Company's property 
development activities, such as the potential for cost overruns, delays and 
the lack of predictability with respect to the financial returns associated 
with these development activities; the potential impact of Year 2000 issues, 
the risk of potential increase in market interest rates from current levels; 
and risks associated with real estate ownership,  such as the potential 
adverse impact of changes in local economic climate on the revenues and the 
value of the Company's properties.  For further information on factors which 
could impact the Company and the statements contained herein, reference is 
made to the Company's other filings with the Securities and Exchange 
Commission, including the Company's Registration Statement on Form 10, as 
amended, dated as of June 4, 1998, with respect to the Company's initial 
registration of its common stock under the Securities Exchange Act of 1934, 
as amended and the Sky Merger Corp. Registration Statement on Form S-4, as 
filed with the Securities and Exchange Commission on May 12, 1998 
(Registration No. 333-51285).

GENERAL OVERVIEW

The Company is a self-administered and self-managed corporation that was
established in connection with the merger of Horizon Group, Inc., a Michigan
corporation ("Horizon") with and into Prime Retail, Inc., a Maryland corporation
("Prime") which was consummated on June 15, 1998 ("the Merger").  HGP's
portfolio consists of 14 factory outlet centers and one power center located in
12 states comprising an aggregate of approximately 3.0 million square feet of
gross leasable area ("GLA").  Twelve of the factory outlet centers and the power
center were contributed to the Company immediately prior to the consummation of
the Merger by Horizon pursuant to a Contribution Agreement entered into in
connection with the Merger (the "Contribution Agreement") and two factory outlet
centers were purchased by the Company from Prime immediately subsequent to the
consummation of the Merger.

                                       15
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


RESULTS OF OPERATIONS

The statements for the periods subsequent to June 15, 1998, the date of the 
Company's acquisition of the 12 outlet centers, one power center and 
Horizon's former administrative office from Horizon (the "Predecessor 
Properties") pursuant to the Contribution Agreement, reflect the operation of 
the Company as a separate entity with its current assets.  The financial 
statements of the Company for the periods subsequent to June 15, 1998 are not 
directly comparable to the statements of the Predecessor Properties for 
periods prior to the Merger due to a number of factors, including (1) a 
significant change in the indebtedness of the Company which occurred in 
conjunction with the Merger; (2) the acquisition by the Company of two 
additional outlet centers immediately after the Merger, the results of which 
are not included in the financial statements of the Predecessor Properties; 
(3) the fact that the outlet center in Algodones, New Mexico was 
substantially occupied during the periods presented prior to the Merger but 
was completely vacant during the periods subsequent to June 15, 1998 and (4) 
the carrying value of the Predecessor Properties for the periods prior to the 
Merger are stated at Horizon's historic cost and depreciation expense is 
based on those costs.  For the period subsequent to the Merger, the 
Predecessor Properties are stated at the fair value as of the date of the 
Merger, resulting in a substantial decrease in value and a related decrease 
in depreciation expense. For these and other reasons, the combination of the 
results of operation for the periods prior to the Merger with those for the 
periods subsequent to the Merger is not indicative of the ongoing results of 
the Company for future periods.

The financial statements for the periods prior to the Merger reflect the 
results of operations, financial position, and cash flows of the Predecessor 
Properties prior to the Merger as if the Predecessor Properties had been a 
separate entity which owned such assets for all periods presented. The 
historical results of operations and financial condition of the Predecessor 
Properties are based on the manner in which Horizon historically managed such 
net assets. Accordingly, the combined condensed financial statements of the 
Predecessor Properties have been prepared using Horizon's historical basis of 
the assets and liabilities and historical results of operations related to 
the Predecessor Properties. In this regard, because Horizon owned the 
Predecessor Properties, together with other properties which were not 
contributed to the Company, the Predecessor Properties were not insulated 
from the obligations and commitments of Horizon.  Certain assumptions 
relating to the allocation of cash and cash equivalents, debt and financing 
costs, interest expense and general and administrative expenses, all of which 
were historically aggregated by Horizon, have been made in the combined 
financial statements for the periods prior to the Merger. See Note 2 to the 
Financial Statements. These statements have been combined based upon the 
historical common ownership and management of the outlet centers.

Rental revenue for the Predecessor Properties (excluding the Algodones, New 
Mexico Center which was vacant in 1998) for the nine months ended September 
30, 1998 increased 6% compared to the same period in the prior year.  Rental 
revenue for the Algodones, New Mexico center totaled $1,235,000 for the nine 
months ended September 30, 1997.  Operating expenses and real estate taxes 
for the nine months ended September 30, 1998 for the Predecessor Properties 
(excluding the Algodones, New Mexico center) decreased slightly less than 4% 
compared to the same period in the prior year.  Operating expenses and real 
estate taxes for the Algodones, New Mexico center were $312,000 for the nine 
months ended September 30, 1997.

Rental revenue for the Predecessor Properties (excluding the New Mexico 
center) for the three months ended September 30, 1998 increased 2% compared 
to the same period in the prior year. Rental revenue for the New Mexico 
center totaled $487,000 for the three months ended September 30, 1997. 
Operating expenses and real estate taxes for the three months ended September 
30, 1998 for the Predecessor Properties (excluding New Mexico) decreased 11% 
compared to the same period in the prior year. Operating expenses for the New 
Mexico center were $42,000 for the three months ended September 30, 1997.

Average occupancy for the Predecessor Properties (excluding the Algodones, 
New Mexico Center) for the nine months ended September 30, 1998 was 77.4% 
compared to 74.4% for the same period in the prior year.  Average 

                                       16
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


occupancy for the Predecessor Properties (excluding the New Mexico center) 
for the three month period ended September 30, 1998 was 79.1% compared to 
74.3% for the same period in the prior year. As of September 30, 1998, 
occupancy of the Company's total operating portfolio was 81.3%.

The financial statements for the three months ended September 30, 1998 
include a net $221,000 charge as part of a budgeted 1998 marketing landlord 
contribution. This $600,000 total contribution will supplement the 
insufficient funds received from tenants to market five key centers.  The 
remainder of the costs will be reflected in the fourth quarter financial 
statements.
 
The Company operates primarily from the former headquarters of Horizon in 
Norton Shores, Michigan in an office building previously owned by Horizon and 
now owned by the Company. Most employees of the Company, with the exception 
of some of its senior management, were former employees of Horizon.  In 
connection with the Merger, a substantial number of former Horizon employees 
were either not offered employment with the Company or offered continued 
employment for a limited period of time.  The Company has currently leased a 
small portion of its office building to an unrelated tenant and is seeking 
additional tenants to occupy the space not required by the Company to 
accommodate its operations.  The Company also leases office space in Chicago 
for its senior management and leases office space in McLean, Virginia for its 
leasing staff.  During the third quarter of 1998, the Company amended its 
lease in Virginia and relocate to smaller offices. As a result of the above 
mentioned factors, among others, the general and administrative expenses of 
the Company for the periods subsequent to June 15, 1998 are not necessarily 
representative of the expenses which will be incurred on an ongoing basis.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1998, the aggregate amount of outstanding mortgages and 
other debt on the Company's balance sheet was approximately $115.2 million. 
While the Company is contemplating the expansion of the Tulare Outlet Center, 
during the remainder of 1998, the Company does not plan to expand its other 
outlet centers.  However, the Company does plan to spend approximately $3 
million for tenant allowances, capital improvements and repairs to its outlet 
centers over the next twelve months, of which $1.2 million will come from an 
escrow which was established at the closing of the HGP Credit Facility with 
Nomura (each as hereinafter defined). The Company plans to fund the remaining 
costs with existing cash balances and cash flow from operations.

In connection with the Merger, the Company entered into a Working Capital 
Agreement with Prime (the "Working Capital Agreement").  The Working Capital 
Agreement provides that Prime will transfer to the Company net working 
capital of $545,000.  This amount is net of the current assets and current 
liabilities of the Predecessor Properties and the two centers which the 
Company purchased from Prime as of the date of the Merger.  Prime transferred 
$3,000,000 to the Company at the closing of the Merger as a portion of the 
estimated amount due under the Working Capital Agreement. The Company has 
recorded a receivable from Prime for the balance of the amount due under the 
Working Capital Agreement and expects that such amount will be paid during 
the fourth quarter of 1998.

The Company expects to meet its short-term liquidity requirements generally 
through working capital, cash flows from operations and from the proceeds of 
a loan which Prime is obligated to make to the Company pursuant to the terms 
of the Working Capital Agreement.  The Company expects to meet its long-term 
requirements, such as tenant allowances for new leases and capital 
improvements, through the additional borrowing of long-term debt and the 
potential offering of equity securities in the private or public capital 
markets.  As a result of the Company's leverage, the Company's ability to 
obtain additional financing sources is limited. There can be no assurance 
that the Company will be able to successfully obtain such funding sources or, 
if obtained, on favorable terms.

                                       17
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


On June 15, 1998, certain wholly owned affiliates of the Company entered into 
a credit facility (the "HGP Credit Facility") with Nomura Asset Capital 
Corporation ("Nomura") providing for initial borrowings of $108,205,000. The 
HGP Credit Facility is guaranteed by HGP and HGP LP.  The HGP Credit Facility 
has a term of three years and bears interest at the 30-day LIBOR Rate (as 
defined in the HGP Credit Facility) plus 1.90% per annum. The HGP Credit 
Facility is cross-collateralized by mortgages on the Company's 12 wholly 
owned outlet centers and one power center.  The HGP Credit Facility requires 
monthly payments of interest. In addition, the HGP Credit Facility requires 
principal payments totaling $1.5 million, $1.5 million and $2.0 million 
during the first, second and third years, respectively, payable in equal 
monthly installments.  A principal payment of $2.2 million which was due on 
October 31, 1998 was paid on November 10, 1998 with the proceeds of a loan 
from Prime.  The HGP Credit Facility also contains a contingent repayment 
penalty equal to 1% of amounts repaid during the first loan year and 2% of 
amounts repaid thereafter through the stated maturity date.  Such penalty is 
not payable in the event the Company refinances the HGP Credit Facility with 
Nomura.  The Company currently intends to seek such financing from Nomura on 
or before the maturity of the HGP Credit Facility and accordingly does not 
currently anticipate that such fee will be paid.  As a result, the condensed 
consolidated financial statements do not include any adjustment relating to 
this penalty.  The HGP Credit Facility contains restrictions on the ability 
of HGP and HGP LP to incur additional indebtedness, and under certain 
circumstances, requires the Company to enter into an interest rate lock 
arrangement which would fix the interest rate on the full outstanding amount 
of the HGP Credit Facility. 

Prime has guaranteed approximately $10 million of obligations under the HGP 
Credit Facility (after the $2.2 million principal payment made on November 
10, 1998) and together with other indebtedness (the "Prime Guarantee"). In 
connection with the Prime Guarantee, HGP has agreed to pay Prime a fee of 
$400,000 per annum until the Prime Guarantee terminates. 

The Company has loans totaling $3.0 million as of September 30, 1998 secured 
by a mortgage on the office building and related equipment which the Company 
utilizes as a corporate office in Norton Shores, Michigan.  This building was 
previously owned by an affiliate of Horizon and was contributed to the 
Company pursuant to the Contribution Agreement.  The consent of the lender to 
the previous owner of the property was required in connection with the 
transfer of the property to the Company. The Company is currently seeking 
such consent but as of November 13, 1998, such consent has not been obtained. 

The Company also has a $4.0 million revolving credit facility that matured 
October 31, 1998.  Prime is obligated to lend the Company $4.0 million at an 
interest rate of 10% (the "Prime Loan") in order to repay such indebtedness 
pursuant to the terms of a Working Capital Agreement between the Company and 
Prime (the "Working Capital Agreement").  The Company has requested such 
funds from Prime, but as of November 13, 1998, Prime had not lent the funds 
to the Company.  The terms of the Working Capital Agreement require the 
Company to repay the Prime Loan or other related indebtedness on which Prime 
is contingently liable to the extent of net proceeds from an equity offering 
or the sale of the Company's Algodones, New Mexico Outlet Center.  

The transfer of the general partnership interest in MG Patchogue Limited 
Partnership pursuant to the Contribution Agreement also required the consent 
of MG Patchogue Limited Partnership's mortgage lender. The Company is 
currently seeking such consent but, as of November 13, 1998 such consent had 
not been obtained.

MG Patchogue II Limited Partnership, of which the Company is 1% general 
partner and 44% limited partner, is subject to indebtedness totaling 
approximately $11.8 million which originally matured August 14, 1998.  The 
lender has indicated its willingness to extend such facility to November 12, 
1998.  The Company is seeking to further extend the maturity date.  Nomura 
originally issued a commitment to lend the partnership $14 million under the 
HGP Credit Facility on or before September 1, 1998 and has verbally indicated 
that it may consider such refinancing after such date.  The consent of the 
limited partners is required in order to complete such financing with Nomura. 
 The Company is currently seeking such consent, but as of November 13, 1998 
such consent had not been obtained.  Prime is a guarantor on the 
indebtedness.  If the financing with 

                                       18
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


Nomura is completed, the Company will utilize the proceeds of such financing 
to repay the existing indebtedness and repay the $2.2 million loan which it 
received from Prime as discussed above in connection with the HGP Credit 
Facility.  The Company accounts for its investment in this partnership using 
the equity method of accounting.

The Company can give no assurances that it will be able to obtain the above 
mentioned consents or that it will be able to finance or refinance its 
indebtedness as it matures or that any such financing will be obtained will 
be on favorable terms.  Any such failure to obtain such consents or such 
financings could have a material adverse effect upon the Company.

Prior to the Merger, Horizon entered into an agreement (the "PVH Agreement") 
with Phillips Van Heusen, Inc. ("PVH") which deleted or delayed the effective 
date of certain provisions of PVH leases for the benefit of Horizon in 
exchange for certain payments.  Prime is liable for future payments relating 
to the PVH Agreement.  The Company is obligated to reimburse Prime for two 
payments relating to the PVH Agreement totaling $2,334,000, payable each in 
the amount of $1,167,000 on June 15, 1999 and June 15, 2000.

The Company intends to seek shareholder approval to not elect REIT status on 
its initial tax return.  Until such consent is obtained, the Company intends 
to operate so as to qualify as a REIT, if it were to so elect.  In order to 
qualify as a REIT for federal income tax purposes, the Company would be 
required to pay dividends to its shareholders of at least 95% of its REIT 
taxable income in addition to satisfying other requirements.  Although the 
Company intends to make distributions to its shareholders in accordance with 
the requirements of the Internal Revenue Code of 1986, as amended, it also 
intends to retain such amounts as it considers necessary from time to time 
for the acquisition or development of new properties as suitable 
opportunities arise, for the expansion and renovation of its existing 
properties and for the retirement of debt.  As of November 13, 1998, HGP is 
not required to pay a dividend to its shareholders in order to be in 
compliance with the regulations applicable to REITs.

YEAR 2000

    GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
            YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS

The Year 2000 Issue is the result of computer programs being written using 
two digits rather than four to define the applicable year.  Any of the 
Company's computer programs that have time-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000.  This could 
result in a system failure or miscalculations causing disruptions of 
operations, including, among other things, a temporary inability to process 
transactions, send invoices or engage in similar normal business activities.

Based on recent assessments, the Company has determined that it will be 
required to modify or replace certain portions of its software and certain 
hardware so that those systems will properly utilize dates beyond December 
31, 1999.  The Company presently believes that with the modifications or 
replacements of existing software and certain hardware, the Year 2000 Issue 
can be mitigated. However, if such modifications and replacements are not 
completed timely, the Year 2000 Issue could have a material impact on the 
operations of the Company.

The Company's plan to resolve the Year 2000 Issue involves the following four 
phases: assessment, remediation, testing and implementation.  To date, the 
Company has completed the assessment of the critical information technology 
systems and has initiated the assessment of all systems that could be 
significantly affected by the Year 2000.  The results of the assessment 
completed to date indicate that most of the Company's significant information 
processing technology systems could be affected, particularly the general 
ledger and billing systems.  That assessment also indicated that software and 
hardware used in certain equipment at the Company's properties are also at 
risk. Potentially affected systems include security, lighting, automatic 
sprinklers, and heating and ventilating systems.

                                       19
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


    STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
                         COMPLETION OF EACH REMAINING PHASE

The Company has completed the assessment of its most critical information 
technology systems and determined that most of the IT systems could be 
affected, particularly the general ledger and billing systems.  The Company 
uses a JD Edwards based accounting system which is currently Year 2000 
compliant.  The accounting system is run on an IBM AS/400 which requires an 
updated operating system in order to be Year 2000 compliant.  The Company 
expects to install such software by the end of the first quarter of 1999.  
The Company has numerous desktop computers which are connected via a network 
to the AS/400.  Most of these computers are Year 2000 compliant, but certain 
older computers may require software upgrades to be fully Year 2000 
compliant.  Such upgrades are generally available at no charge and the 
Company intends to install such upgrades by the end of the first quarter of 
1999. The testing and implementation of the critical information technology 
is expected to be completed by the end of the second quarter of 1999.

The assessment phase of the other components of the Company's information 
technology hardware and software began in the fourth quarter of 1998 and is 
expected to be completed by the end of the first quarter of 1999. The 
remediation, testing and implementation of those components is expected to be 
completed by the end of the third quarter of 1999.

The Company expects to have completed the assessment phase of non-information 
technology exposures by the end of the first quarter of 1999.  The 
remediation, testing and implementation of those systems is expected to be 
completed by the end of the third quarter of 1999.

   NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
                                   YEAR 2000

The Company is in the process of identifying significant suppliers and other 
third parties with which the Company does business to assess their compliance 
with and the Company's exposure to their non-compliance with Year 2000 
issues. The Company expects to have completed this assessment by the end of 
the first quarter of 1999. There can be no guarantee that the systems of such 
suppliers will be timely converted and would not have an adverse effect on 
the Company.

                                       RISKS

Management of the Company believes it has an effective program in place to 
resolve Year 2000 issues in a timely manner.  As noted above, the Company has 
not yet completed all necessary phases of the Year 2000 program.  In the 
event the Company does not complete any additional phases of the Year 2000 
program, the Company would be unable to fully utilize its general ledger and 
billing computer systems.  The Company could experience delays in collecting 
rents from tenants in the event their systems are not Year 2000 compliant.  
The Company also faces operational risks at its operating properties if 
certain equipment located at or related to the operation of those properties 
is not Year 2000 compliant.  In addition, disruptions in the economy 
generally resulting from Year 2000 issues could also materially adversely 
affect the Company.  The amount of lost revenue cannot be reasonably 
estimated at this time.

                                 CONTINGENCY PLANS

The Company has contingency plans for certain critical applications and is 
working on such plans for others.  These contingency plans include, among 
other actions, utilizing offsite vendor hardware and software to process 
general ledger and billing transactions related to the operation of 

                                       20
<PAGE>

                        HORIZON GROUP PROPERTIES, INC.
            Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
               For the three and nine months ended September 30, 1998
                                    (unaudited)


the Company and its properties and the manual operation of certain equipment 
at the Company's operating properties. Since the Company cannot anticipate 
all possible future outcomes of the year 2000 problem, nor predict the 
readiness of entities with which it transacts business, there can be no 
assurance these events will not have a material adverse effect on the 
Company's business, financial condition, results of operations or cash flows.

                               OTHER YEAR 2000 ISSUES

The majority of actions previously taken and expected to be taken by the 
Company to be Year 2000 compliant with respect to its software have been or 
would have been made in the ordinary course of utilizing such software.  
Typically, such actions involve updating existing software with newer 
versions, which the Company typically does on an ongoing basis.  The Company 
maintains an agreement with JD Edwards which entitles it to upgrades of its 
general ledger and billing systems on a periodic basis. The Company expects 
to spend approximately $10,000 to upgrade the software used in its voicemail 
system and the operating system and network software related to the Company's 
AS/400 computer in order to make them Year 2000 compliant.  The Company has 
not fully completed the assessment phase related to other software and 
hardware and cannot currently quantify the cost of other actions which may be 
required to become Year 2000 compliant.  The Company expects to internally 
fund or lease the hardware or software required to become Year 2000 compliant.

The Company's IT department is conducting its Year 2000 compliance programs 
simultaneously with its other functions.  To date, such actions have not, and 
the Company does not expect future actions in this regard, to significantly 
impact other projects undertaken by the IT department.

                                       21
<PAGE>

                          HORIZON GROUP PROPERTIES, INC.
                            Part II - Other Information


ITEM 1.  LEGAL PROCEEDINGS - None.

ITEM 2.  CHANGES IN SECURITIES - None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

The Company has loans totaling $3.0 million as of September 30, 1998 secured 
by a mortgage on the office building and related equipment which the Company 
utilizes as a corporate office in Norton Shores, Michigan.  This building was 
previously owned by an affiliate of Horizon and was contributed to the 
Company pursuant to the Contribution Agreement.  The consent of the lender to 
the previous owner of the property was required in connection with the 
transfer of the property to the Company.  The Company is currently seeking 
such consent but as of November 13, 1998, such consent has not been obtained.

The Company also has a $4.0 million revolving credit facility that matured 
October 31, 1998.  Prime is obligated to lend the Company $4.0 million at an 
interest rate of 10% (the "Prime Loan") in order to repay such indebtedness 
pursuant to the terms of a Working Capital Agreement between the Company and 
Prime (the "Working Capital Agreement").  The Company has requested such 
funds from Prime, but as of November 13, 1998, Prime had not lent the funds 
to the Company.  The terms of the Working Capital Agreement require the 
Company to repay the Prime Loan or other related indebtedness on which Prime 
is contingently liable to the extent of net proceeds from an equity offering 
or the sale of the Company's Algodones, New Mexico Outlet Center.  

The transfer of the general partnership interest in MG Patchogue Limited 
Partnership pursuant to the Contribution Agreement also required the consent 
of MG Patchogue Limited Partnership's mortgage lender. The Company is 
currently seeking such consent but, as of November 13, 1998 such consent had 
not been obtained.

MG Patchogue II Limited Partnership, of which the Company is 1% general 
partner and 44% limited partner, is subject to indebtedness totaling 
approximately $11.8 million which originally matured August 14, 1998.  The 
lender has indicated its willingness to extend such facility to November 12, 
1998.  The Company is seeking to further extend the maturity date.  Nomura 
originally issued a commitment to lend the partnership $14 million under the 
HGP Credit Facility on or before September 1, 1998 and has verbally indicated 
that it may consider such refinancing after such date.  The consent of the 
limited partners is required in order to complete such financing with Nomura. 
 The Company is currently seeking such consent, but as of November 13, 1998 
such consent had not been obtained.  Prime is a guarantor on the 
indebtedness.  If the financing with Nomura is completed, the Company will 
utilize the proceeds of such financing to repay the existing indebtedness and 
repay the $2.2 million loan which it received from Prime as discussed above 
in connection with the HGP Credit Facility.  The Company accounts for its 
investment in this partnership using the equity method of accounting.

The Company can give no assurances that it will be able to obtain the above 
mentioned consents or that it will be able to finance or refinance its 
indebtedness as it matures or that any such financing will be obtained will 
be on favorable terms.  Any such failure to obtain such consents or such 
financings could have a material adverse effect upon the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None

ITEM 5.  OTHER INFORMATION

                                       22
<PAGE>

                          HORIZON GROUP PROPERTIES, INC.
                            Part II - Other Information

ITEM 6.  EXHIBITS OR REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit 3(i)      Articles of Incorporation of Horizon Group Properties, Inc.
                  (the "Company")(1)
Exhibit 3(ii)     By-laws of the Company(1)
Exhibit 4.1       Specimen certificate for common stock, $.01 par value per
                  share, of the Company(1)
Exhibit 10.1      Sky Merger Corp. Registration Statement on Form S-4
                  (excluding exhibits thereto), as filed with the Securities
                  and Exchange Commission on May 12, 1998 (Registration No.
                  333-51285)(1)
Exhibit 10.2      Amended and Restated Agreement and Plan of Merger by and
                  among Prime Retail, Inc., Prime Retail, L.P., Horizon Group,
                  Inc., Sky Merger Corp., the Company, Horizon Group
                  Properties, L.P. and Horizon/Glen Outlet Centers Limited
                  Partnership dated as of February 1, 1998 (Incorporated 
                  by reference to Exhibit 10(a) to Horizon Group, Inc.'s
                  current report on Form 8-K dated February 1, 1998 (SEC File
                  No. 1-12424)(1)
Exhibit 10.3      Form of 1998 Stock Option Plan of the Company(1)
Exhibit 10.4      Employment Agreement between Gary J. Skoien and the
                  Company(1)
Exhibit 10.5      Employment Agreement between David R. Tinkham and the
                  Company(1)
Exhibit 10.6      Form of Indemnification Agreement for the Board of Directors
                  of the Company(1)
Exhibit 10.7      Form of Registration Rights Agreement(1)
Exhibit 10.8      Form of Contribution Agreement (incorporated by reference to
                  Appendix E to Exhibit 10.1)(1)
Exhibit 10.9      Employment Agreement between Richard Berman and the Company
                  (3)
Exhibit 10.10     Working Capital Agreement with Prime Retail, Inc. (3)
Exhibit 10.11     Loan Agreement dated as of June 15, 1998 by and among Third
                  Horizon Group Limited Partnership, Nebraska Crossing Factory
                  Shops, L.L.C., and Indiana Factory Shops, L.L.C. and Nomura
                  Asset Capital Corporation(2)
Exhibit 10.12     Form of Deed of Trust, Assignment of Leases and Rents and
                  Security Agreement with Nomura Asset Capital Corporation(2)
Exhibit 10.13     Form of Mortgage, Assignment of Leases and Rents and Security
                  Agreement by and between Horizon Group Properties, Inc. and
                  Nomura Asset Capital Corporation(2)
Exhibit 10.14     Form of Assignment of Leases and Rents by and between Horizon
                  Group Properties, Inc. and Nomura Asset Capital
                  Corporation(2)
Exhibit 10.15     Guaranty dated as of June 15, 1998 by the Company and Horizon
                  Group Properties, L.P. to and for the benefit of Nomura Asset
                  Capital Corporation(2)
Exhibit 10.16     Guaranty and Indemnity Agreement dated as of June 15, 1998 by
                  and among the Company, Horizon Group Properties, L.P., Prime
                  Retail, Inc., and Prime Retail, L.P.(2)
Exhibit 10.17     Assignment and Assumption Agreement, dated as of June 15,
                  1998 by and among Prime Retail, Inc., Prime Retail, L.P.,
                  Indianapolis Factory Shops Limited Partnership, and Indiana
                  Factory Shops, L.L.C. (3)
Exhibit 10.18     Assignment and Assumption Agreement, dated as of June 15,
                  1998 by and among Prime Retail, Inc., Prime Retail, L.P.,
                  Nebraska Factory Shops Limited Partnership, and Nebraska
                  Factory Shops L.L.C. (3)
Exhibit 10.19     Form of Option Agreement (3)
Exhibit 27        Financial Data Schedule
Exhibit 99        Excerpt of Press Release issued by the Company on June 15,
                  1998 announcing the completion of 
                  the debt financing with Nomura Asset Capital Corporation(2)
                  
1   Incorporated by reference to the Company's Registration Statement on Form
    10, as amended, dated as of June 4, 1998 (Commission file no. 0-24123).
2   Incorporated by reference to the Company's Current Report on Form 8-K dated
    as of June 30, 1998 (Commission file no. 0-24123). 
3   Incorporated by reference to the Company's Form 10-Q dated as of August 14,
    1998 (Commission file no. 0-24123).

                                       23

<PAGE>

                          HORIZON GROUP PROPERTIES, INC.
                            Part II - Other Information


(b) Reports on Form 8-K

None.

                                       24

<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.

                               HORIZON GROUP PROPERTIES, INC.
                               Registrant





Date:  November 13, 1998       By: /s/ Gary J. Skoien
------------------------       ------------------------------------
                               Gary J. Skoien, President and
                               Chief Executive Officer



Date:  November 13, 1998       By: /s/ David R. Tinkham
------------------------       ------------------------------------
                               David R. Tinkham, Chief Accounting
                               and Chief Financial Officer

                                       25