<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (Fee Required)

For the fiscal year ended December 31, 1998
                                       OR

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 (No Fee Required)

                         Commission file number: 0-23616

                               PRIME RETAIL, INC.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

                 Maryland                               38-2559212
------------------------------------            --------------------------------
     (State or other jurisdiction of           (IRS employer identification no.)
      incorporation or organization)

       100 East Pratt Street
       Baltimore, MD  21202                                 (410) 234-0782
-------------------------------------------    ---------------------------------
 (Address of principal executive offices,      (Registrant's telephone number,
           including zip code)                             including area code)

           Securities registered pursuant to Section 12(b) of the Act:
           ----------------------------------------------------------
                          Common Stock, $0.01 par value
           10.5% Series A Cumulative Preferred Stock, $0.01 par value
 8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par
                                     value
  -----------------------------------------------------------------------------
                                (Title of class)


           Securities registered pursuant to Section 12(g) of the Act:
           ----------------------------------------------------------
                                      None
                                      ----
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of  registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
registrant  was  approximately  $352,327,153  on February 23, 1999 (based on the
closing  price per share as  reported on the New York Stock  Exchange  Composite
Transactions).

The number of shares of the registrant's Common Stock outstanding as of February
23, 1999 was 43,032,324.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents of the registrant are incorporated herein by
reference:

Document 

Proxy Statement for the 1999 annual meeting of 
shareholders                                               Part III of Form 10-K
<PAGE>

                               PRIME RETAIL, INC.

                                    Form 10-K

                                December 31, 1998

                                TABLE OF CONTENTS


Part I                                                                      Page

Item 1.       Business.........................................................1
Item 2.       Properties.......................................................8
Item 3.       Legal Proceedings...............................................14
Item 4.       Submission of Matters to a Vote of Security Holders.............14

Part II

Item 5.       Market for Registrant's Common Equity and Related Shareholder 
              Matters.........................................................15
Item 6.       Selected Financial Data.........................................16
Item 7.       Management's Discussion and Analysis of Financial Condition and
                Results of Operations.........................................18
Item 7A.      Quantitative and Qualitative Disclosures About Material Risk....32
Item 8.       Financial Statements and Supplementary Data.....................32
Item 9.       Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure..........................................32

Part III

Item 10.      Directors and Executive Officers of the Registrant..............33
Item 11.      Executive Compensation..........................................33
Item 12.      Security Ownership of Certain Beneficial Owners and Management..33
Item 13.      Certain Relationships and Related Transactions..................33

Part IV

Item 14.      Exhibits, Financial Statement Schedules, and Reports on 
              Form 8-K........................................................33

              Signatures......................................................38


<PAGE>
                                     PART I
                                ITEM 1 - BUSINESS

The Company

     Prime  Retail,   Inc.  (including  its  predecessors,   collectively,   the
"Company") was organized as a Maryland corporation on July 16, 1993. The Company
commenced  operations  upon  completion  of its  initial  public  offering  (the
"Initial Public Offering") on March 22, 1994. The Company is a self-administered
and self-managed  real estate  investment trust ("REIT") and operates  primarily
within one  business  segment.  Concurrent  with the  completion  of the Initial
Public  Offering,  the Company became the general partner of Prime Retail,  L.P.
(the "Operating  Partnership") which owns interests in and provides development,
leasing,  marketing and management services for 50 manufacturers' outlet centers
and  three  community  shopping  centers  (the  "Properties")  with a  total  of
14,348,000  and 424,000  square feet of gross  leasable area ("GLA") at December
31, 1998, respectively. The Properties are located throughout the United States,
generally near large metropolitan areas.

     On November 1, 1994, the Company  organized Prime Retail  Services  Limited
Partnership and Prime Retail  Services,  Inc.  (collectively  referred to as the
"Services  Corporation").  The  Services  Corporation  was formed  primarily  to
operate business lines of the Company that are not directly  associated with the
collection of rents.

     As used herein,  unless the context otherwise requires,  the term "Company"
shall mean the Company, including its predecessors,  and those entities owned or
controlled by the Company.

     The  Company's  executive  offices  are  located at 100 East Pratt  Street,
Baltimore, Maryland 21202 (telephone 410-234-0782).

Tax Status

     The Company has  elected to be taxed as a REIT under  Sections  856 through
860 of the Internal  Revenue Code of 1986, as amended (the  "Code").  As a REIT,
the  Company  generally  is not subject to federal  income tax at the  corporate
level on income it distributes to its  stockholders so long as it distributes at
least 95% of its taxable  income  (excluding  any net  capital  gain) each year.
Since the Initial  Public  Offering,  the Company  believes that it has complied
with the tax  regulations  to maintain its REIT status.  If the Company fails to
qualify as a REIT in any taxable  year,  the Company  will be subject to federal
income tax  (including any  applicable  alternative  minimum tax) on its taxable
income at regular  corporate rates. Even if the Company qualifies as a REIT, the
Company  may be  subject  to  certain  state and local  taxes on its  income and
property.

Business of the Company

     The  Company  is  engaged   primarily   in  the   ownership,   development,
construction,  acquisition,  leasing, marketing and management of manufacturers'
outlet centers throughout the United States.  Manufacturers' outlet centers have
become an established  segment of the retail industry,  enabling  value-oriented
shoppers  to  purchase   designer  and   brand-name   products   directly   from
manufacturers  at  discounts  generally  ranging  from 25% to 70% below  regular
department and specialty store prices.

     Since entering the  manufacturers'  outlet center business in 1988 (through
the retail  division of The Prime Group,  Inc.  ("PGI"),  from which the Company
acquired  certain  Properties and management and  development  operations),  the
Company has become the leading  developer  and operator in the  industry  having
successfully  developed or acquired outlet centers containing  14,348,000 square
feet of GLA at December 31, 1998,  including 22  manufacturers'  outlet  centers
containing  6,626,000  square  feet of GLA that was  added to our  portfolio  in
connection  with the  Company's  June 1998 merger with Horizon  Group,  Inc. The
Company also developed and opened 931,000 square feet of GLA during 1998.

     The Company pursues acquisition and development strategies designed to take
advantage of growth  opportunities in the  manufacturers'  outlet segment of the
retail  industry and to distinguish  itself among its  competitors.  The Company
strives to  differentiate  itself from competitors in the outlet center industry
by owning and operating larger outlet centers with highly accessible  locations,
a larger and more diverse  merchandising  mix,  extensive food and  recreational
amenities and quality  architecture and  landscaping,  all designed to create an
upscale environment in which to showcase merchandise and encourage shopping.

     The  average  manufacturers'  outlet  center  in  the  Company's  portfolio
contains  286,960  square  feet of GLA at  December  31,  1998,  compared  to an
industry  average of  approximately  190,168 square feet as reported in February
1999 by Value Retail News ("VRN"),  an industry  trade  magazine  whose Advisory
Board and executive committee includes William H. Carpenter,  Jr., President and
Chief Operating Officer of the Company.
<PAGE>

     Management  believes  that the  considerable  size of its  outlet  centers,
coupled  with the  Company's  established  base of  national  and  international
manufacturers of designer and brand-name merchandise, significantly enhances the
competitive position of the Company's manufacturers' outlet centers.

     The Company's  manufacturers'  outlet centers  feature a diversified mix of
nationally recognized  manufacturers of designer and brand-name merchandise with
which  the   Company   and  its   employees   have   established   long-standing
relationships,   including  AnnTaylor/AnnTaylor  Loft,  Bose,  Brooks  Brothers,
Corning-Revere,  Danskin,  Donna Karan, Eddie Bauer, Ellen Tracy,  Esprit, First
Choice/Escada,  Guess?, J. Crew, Jones New York,  Levi's/Dockers Outlet, Mikasa,
Nautica,  Nike,  Phillips-Van Heusen (including Bass, Gant, Geoffrey Beene, Izod
and Van Heusen),  Polo/Ralph Lauren, Reebok, Off-5th Saks Fifth Avenue, Sara Lee
(including  Champion,  Coach,  L'eggs,  Hanes, Bali, Playtex, and Socks Galore),
Sony, Springmaid-Wamsutta, Tommy Hilfiger and VF Corporation (including Barbizon
and  Vanity  Fair).  As  a  group,   the  foregoing   merchants   accounted  for
approximately  27.38% of the gross revenues of the Company during the year ended
December 31, 1998,  and  occupied  approximately  31.87% of the total leased GLA
contained in the Company's  manufacturers'  outlet centers at December 31, 1998.
During the year ended  December  31, 1998,  no group of  merchants  under common
control  accounted  for more than 4.84% of the gross  revenues of the Company or
occupied  more than 5.66% of the total leased GLA of the Company at December 31,
1998.

Strategies For Growth

     The Company intends,  on a long-term basis, to increase its per share funds
from operations ("FFO") and the value of its portfolio of manufacturers'  outlet
centers through the active  management and expansion of existing  manufacturers'
outlet centers and the selective  acquisition and development of  manufacturers'
outlet  centers.  FFO does not represent cash flow from operating  activities in
accordance  with  generally  accepted  accounting  principles  ("GAAP"),  is not
indicative of cash  available to fund all of the Company's cash needs and should
not be considered as an  alternative  to net income or any other GAAP measure as
an indicator of the Company's performance or as an alternative to cash flow as a
measure of liquidity or the ability to service debt or pay dividends. See "Funds
from Operations" of Management's  Discussion and Analysis of Financial Condition
and Results of Operations.

     The Company  intends to continue to increase its FFO per share over time by
(i)  selectively  acquiring,  expanding,  and developing  manufacturers'  outlet
centers  that  offer  strong   prospects   for  cash  flow  growth  and  capital
appreciation,  subject to the  availability of debt financing on favorable terms
and  additional  equity  capital and (ii)  managing,  leasing and  marketing its
portfolio of retail properties to increase  consumer  traffic,  sales per square
foot,  tenant  occupancy  levels,  and  base  and  percentage  rents.  While  no
assurances  can be given  that  the  Company  will  successfully  implement  the
foregoing objectives, the Company intends to employ the following strategies:

          o  Planned  Development  of New  Manufacturers'  Outlet  Centers.  The
     Company develops new manufacturers'  outlet centers on sites with favorable
     demographics,  access to interstate highways, good visibility and favorable
     market  conditions  that  generally  can  accommodate  a minimum of 300,000
     square feet of GLA over multiple  phases.  In September  1998,  the Company
     commenced   construction  on  Prime  Outlets  of  Puerto  Rico  located  in
     Barceloneta. Prime Outlets of Puerto Rico, which will contain approximately
     175,000  square  feet of  GLA,  has a total  expected  development  cost of
     approximately  $33,700,000 and is expected to open in the fourth quarter of
     1999.  Management  believes that there is  sufficient  demand for continued
     development  of new  manufacturers'  outlet  centers and the  expansion  of
     existing outlet centers.

          o Strategic  Expansions of Existing Centers.  The Company  selectively
     expands its existing  manufacturers'  outlet centers in phased developments
     that respond to merchant and consumer demand,  thereby  maximizing  returns
     from these outlet centers through higher effective rents from new merchants
     based on the proven success and customer  drawing power of existing phases.
     The Company expects to open approximately 380,000 square feet of GLA during
     1999 in  connection  with planned  expansions  of existing  centers.  As of
     February 28, 1999, the Company owned, or held under long-term  lease,  land
     contiguous to its outlet centers to construct  additional  phases  totaling
     approximately  2,000,000 square feet of GLA. The Company also holds options
     to purchase property adjoining its existing  manufacturers'  outlet centers
     upon which additional expansions could be constructed.
<PAGE>
          o Active  Property  Management.  The  Company  monitors  and  seeks to
     enhance the operating performance of its centers through intensive merchant
     and property  management,  and by providing  experienced  and  professional
     on-site  management.  Property  managers and marketing  directors work with
     leasing  representatives  of the Company to systematically  review merchant
     performance,  merchandising  mix and layout in order to  improve  sales per
     square foot. Through its intensive management efforts, the Company attempts
     to reduce the average  occupancy cost on its outlet  portfolio while at the
     same time  continuing  to provide a high  level of  merchant  and  customer
     service, maintenance and security.

          o  Acquisition  of  Existing  Outlet  Centers.  The  Company  explores
     opportunities to acquire manufacturers' outlet centers or interests therein
     that are  compatible  with  the  Company's  existing  portfolio  and  offer
     attractive yields, potential cash flow growth and capital appreciation. The
     Company  draws  upon its  development,  leasing,  operating  and  marketing
     expertise to improve such centers through expansion and/or  remerchandising
     or  reletting.  Properties  may be  acquired  separately  or as  part  of a
     portfolio,  and may be  acquired  for cash  and/or in  exchange  for equity
     securities of the Company.

          o Branding.  During 1998, the Company  adopted a branding  strategy to
     create customer  awareness and loyalty,  to generate brand equity that will
     translate  into a price  premium  for its  leased  space and to create  the
     opportunity  for  product  extensions.  The  Company has renamed all of its
     manufacturers'  outlet  centers and  replaced  its signage  with the "Prime
     Outlets at..." brand name. All promotion and marketing  activities refer to
     the "Prime  Outlets  at..." brand name.  In December  1998,  as part of its
     branding  strategy,   the  Company  entered  into  an  exclusive  marketing
     partnership  agreement  with  Coca-Cola  USA. The Company  intends to build
     Prime  Outlets into a widely  recognized  brand  associated  with  quality,
     selection,  value and fun.  Creating  strategic  alliances with brands like
     Coca-Cola  will create  superior  value for our  customers,  merchants  and
     shareholders. The Company intends to seek relationships with other national
     and  global  companies,  such  as  those  in  the  lodging,  entertainment,
     financial services, automobile and tourism industries.

          o Innovative  Marketing and Promotion.  The Company continuously seeks
     to increase the sales performance of each manufacturers'  outlet center and
     markets its  manufacturers'  outlet centers with promotional  materials and
     advertising strategies that target and attract customers. Substantially all
     manufacturers'  outlet centers have an experienced  marketing  director who
     creates and administers  retail  marketing  strategies that are designed to
     highlight  each   manufacturers'   outlet  center's  unique   merchandising
     strengths,  customized  to the local  customer base and  demographics.  The
     Company  advertises  its  centers  using a wide  variety  of media that can
     include television,  radio and print advertising,  promotions,  billboards,
     special events, and an extensive public relations program. These activities
     are supported by quantitative and qualitative market research based on such
     information  gathering  techniques  as focus groups and  detailed  customer
     surveys.  To better understand the needs and expectations of its customers,
     the  Company  routinely  conducts  exit  surveys,  the results of which are
     closely reviewed by senior management and, when  appropriate,  merchants in
     the center.  All of these  activities  are  monitored and reviewed at least
     quarterly by senior  marketing  management of the Company.  

          o Joint  Venture  Development  Opportunities  in Western  Europe.  The
     Company is pursuing  opportunities to develop manufacturers' outlet centers
     in Western Europe. In order to take advantage of local market expertise and
     reduce its financial  exposure,  the Company intends to pursue  development
     projects in Western Europe through joint ventures with European partners.

Competition

     The  Company's   outlet  centers  compete  for  customers   primarily  with
traditional shopping malls,  "off-price" retailers and other outlet centers. The
Company carefully  considers the degree of existing and planned competition in a
proposed trade area before  developing a new outlet center.  Merchants of outlet
centers  generally avoid direct  competition  with major retailers and their own
full-price stores. Generally, this is accomplished by locating outlet centers at
least 20 miles from the nearest  regional mall.  For this reason,  the Company's
outlet centers compete only to a limited extent with traditional retail malls in
or near metropolitan areas.

     The  Company's  outlet  centers  compete to a limited  extent with  various
full-price and off-price retailers in the highly fragmented  retailing industry.
However,  management believes that the majority of the Company's customers visit
outlet  centers  specifically  for designer and  brand-name  goods at discounted
prices.  Traditional  full-price  and  off-price  retailers  are often unable to
provide such a variety of products at attractive prices.
<PAGE>

     Because a number of the Company's  outlet centers are located in relatively
undeveloped  areas,  there are often other  potential  sites near the  Company's
outlet centers that may be developed into outlet centers by  competitors.  As of
December 31, 1998,  13 projects in the Company's  portfolio  are located  within
approximately  12  miles  of  competing   manufacturers'   outlet  centers  and,
therefore, are subject to existing competition.  The existence or development of
an outlet center with a more convenient  location or lower rents may attract the
Company's merchants or cause them to seek more favorable lease terms at or prior
to renewal of their leases and, accordingly,  may affect adversely the business,
revenues and/or sales volume of the Company's outlet centers.

     The Company's  community  shopping  centers compete with similar  community
shopping centers located in the same geographic trade areas.

Relationship with Municipalities

     Because of the favorable impact that the Company's properties may have on a
local community's  economy by generating sales and property taxes and increasing
employment in the area, local  communities often assist the Company with respect
to zoning,  economic incentives or favorable business  development  legislation.
The Company explores  opportunities to obtain incentives from local,  county and
state  governments  in connection  with the  development  of its  manufacturers'
outlet centers.  Such incentives often fund the cost of off-site sewer and water
services to the site, required highway  improvements and, on occasion,  the cost
of land and various on-site improvements.

Environmental Matters

     Under various federal,  state and local laws and  regulations,  an owner of
real  estate is liable  for the  costs of  removal  or  remediation  of  certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous  substances.  The costs of remediation or removal may be  substantial,
and the  presence  of the  hazardous  substances,  or the  failure  to  promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to  borrow  using the real  estate  as  collateral.  In  connection  with its
ownership and operation of the Properties, the Company may be potentially liable
for the costs of removal or remediation of hazardous substances.

     The Company has no  knowledge,  nor has the  Company  been  notified by any
governmental  authority,  of any  material  noncompliance,  liability  or  claim
relating to hazardous  substances in connection with any properties in which any
of such entities now has or heretofore had an interest.  However,  no assurances
can be given that (i) future laws, ordinances or regulations will not impose any
material environmental  liability or (ii) the current environmental condition of
the  Properties  will  not  be  affected  by  merchants  and  occupants  of  the
Properties,  by the condition of  properties  in the vicinity of the  Properties
(such  as the  presence  of  underground  storage  tanks)  or by  third  parties
unrelated to the Company.

Insurance

     Management  believes  that each of the  Properties  is covered by  adequate
fire,  flood, and property  insurance  provided by reputable  companies and with
commercially reasonable deductibles and limits.

Employees

     As of December  31,  1998,  the Company  had 1,095  employees.  The Company
believes that its relations with its employees are satisfactory.
<PAGE>

Executive Officers

     The following table sets forth the names, positions and, as of December 31,
1998, ages of the executive officers of the Company:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Name                                                    Position                                                  Age
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                                                       <C>    

Michael W. Reschke                                      Chairman of the Board, Director                            43
Abraham Rosenthal                                       Chief Executive Officer, Director                          49
William H. Carpenter, Jr.                               President and Chief Operating Officer, Director            47
Glenn D. Reschke                                        Executive Vice President - Development                     47
                                                           and Acquisitions, Director
Robert P. Mulreaney                                     Executive Vice President - Chief Financial                 40
                                                           Officer and Treasurer
David G. Phillips                                       Executive Vice President - Operations and Marketing        37
C. Alan Schroeder                                       Executive Vice President - General Counsel                 41
                                                           and Secretary
R. Bruce Armiger                                        Senior Vice President - Development 
                                                           and Construction Management Services                    53
Steven S. Gothelf                                       Senior Vice President - Finance                            38
Anya T. Harris                                          Senior Vice President - Marketing and Communications       32
John S. Mastin                                          Senior Vice President - Leasing                            52
Frederick J. Meno                                       Senior Vice President - Operations                         41

</TABLE>

Biographies of Executive Officers

     Michael W.  Reschke.  Michael W. Reschke has been the Chairman of the Board
of Directors of the Company since the Company's  inception.  Mr. Reschke founded
PGI in 1981 and, since that time, has acted as PGI's  Chairman,  Chief Executive
Officer,  and  President.  For the last 17 years,  Mr.  Reschke has directed and
managed the development, finance, construction, leasing, marketing, acquisition,
renovation,  and property  management  activities  of PGI.  Mr.  Reschke also is
Chairman of the Board of Directors  of Prime Group  Realty Trust (NYSE:  PGE), a
real estate  investment trust engaged in the ownership,  operation,  acquisition
and  development of office and industrial  properties,  primarily in the greater
Chicago  market,  and is the  successor  in  interest  to the former  office and
industrial  divisions  of PGI.  Mr.  Reschke  also is  Chairman  of the Board of
Directors of Brookdale  Living  Communities,  Inc.  (NASD:  BLCI), a corporation
engaged in the  ownership,  operation,  acquisition,  and  development of senior
housing and assisted  living  facilities and is the successor in interest to the
former senior housing division of PGI. Mr. Reschke also is a member of the Board
of  Directors  of Horizon  Group  Properties,  Inc.  (NASD:HGPI),  a real estate
investment trust engaged in the ownership, operation, acquisition and renovation
of distressed  real estate assets  including the outlet centers  spun-off by the
Company  following  its merger with  Horizon  Group,  Inc. in June of 1998.  Mr.
Reschke  received a Juris Doctorate degree (summa cum laude) from the University
of Illinois after having  received a B.A. degree (summa cum laude) in Accounting
from Northern  Illinois  University.  Mr. Reschke is licensed to practice law in
the State of Illinois and is a certified  public  accountant.  Mr.  Reschke is a
member of the Chairman's  Roundtable and the Executive Committee of the National
Realty  Committee,  as well as a full  member of the Urban Land  Institute.  Mr.
Reschke is the brother of Glenn D. Reschke, an executive officer of the Company.
       
     Abraham  Rosenthal.  Abraham Rosenthal has been the Chief Executive Officer
and a Director of Prime Retail since Prime's inception. Mr. Rosenthal joined PGI
in 1988, serving as Vice President, Senior Vice President and, immediately prior
to  joining  the  Company,   as  Executive  Vice  President.   Mr.   Rosenthal's
responsibilities  with the Company  include  strategic  planning,  new  business
development,  investor relations,  capital markets,  financing,  site selection,
pre-development activities and building designs. Mr. Rosenthal has been involved
in retail design and  development  for the past 25 years.  Prior to joining PGI,
Mr. Rosenthal was Vice President,  Design and Construction of Cordish/Embry  and
Associates.  Mr. Rosenthal  received a Bachelor of Architecture  degree from the
University of Maryland School of Architecture,  is a registered architect in the
State of Maryland  and is certified  by the  
<PAGE>
National  Council of Architectural  Registration  Board. Mr. Rosenthal is a full
member of the Urban  Land  Institute,  the  International  Council  of  Shopping
Centers ("ICSC") and the National Realty Committee and the National  Association
of Real Estate Investment Trusts  ("NAREIT").  Mr. Rosenthal is on the executive
committee  of  the  Baltimore  Museum  of  Art  and  chairs  the  organization's
Development,  Marketing and Finance Committee. Mr. Rosenthal is also a member of
the  Maryland/Israel  Development Center and is on the board and a member of the
executive committee for the Baltimore's Downtown  Partnership.  Mr. Rosenthal is
also a board member of Sinai  Hospital and Bryn Mawr School.  Mr.  Rosenthal was
the  recipient  of the 1995  Entrepreneur  of the Year Award for  Maryland  Real
Estate. 

     William H.  Carpenter,  Jr. William H.  Carpenter,  Jr. has been President,
Chief Operating  Officer and a Director of the Company since Prime's  inception.
Mr.  Carpenter  joined  PGI in 1988,  serving  as  Senior  Vice  President  and,
immediately prior to joining Prime, as Executive Vice President. Mr. Carpenter's
responsibilities   with  Prime  include  leasing,   marketing,   operations  and
management,  development, and construction for Prime's retail projects. Prior to
joining PGI, Mr.  Carpenter  was President of D.I.  Realty,  Inc. (a division of
Design International) from 1988 to 1989 and in such capacity managed all aspects
of retail leasing and  development for D.I.  Realty,  Inc.,  including  property
management,  construction,  and merchant coordination.  Mr. Carpenter previously
was senior regional  leasing  director with the Rouse Company and a partner with
Cordish/Embry  and Associates in Baltimore,  Maryland.  In these positions,  Mr.
Carpenter  directed  the  development  and  leasing  of a number of major  urban
projects  in  cooperation  with city  governments.  Over the last 23 years,  Mr.
Carpenter has been involved in over 57 major urban, suburban and outlet projects
throughout the United States. Mr. Carpenter attended the University of Baltimore
and is a member of ICSC, a member of  Developers of Outlet  Centers,  and a full
member of the Urban Land Institute. Mr. Carpenter sits on the ICSC/VRN Executive
Committee and also sits on the Board for Severn  School.  Mr.  Carpenter was the
recipient of the 1995  Entrepreneur  of the Year Award for Maryland Real Estate.

     Glenn  D.  Reschke.  Glenn  D.  Reschke  is  Executive  Vice  President  -
Development  and  Acquisitions  and a  Director  of  the  Company,  where  he is
responsible for site selection,  design and  construction  for the Company's new
retail   projects  as  well  as  the  acquisition  of  existing  outlet  centers
nationwide.  Mr. Reschke joined PGI in 1983 and, since that time, served as Vice
President,  Senior Vice  President and Executive  Vice President of PGI, and was
responsible  for PGI's  multi-family,  senior  housing,  single  family and land
development divisions.  Prior to that, Mr. Reschke was the Director of the EPA's
Automotive  Emission Testing Laboratory in Ann Arbor,  Michigan where he managed
the nation's automotive emission certification and fuel economy testing programs
for  the  Federal  Government.  Mr.  Reschke  received  a  Masters  in  Business
Administration from Eastern Michigan University with a specialization in finance
after receiving a Bachelor of Science degree with honors in Chemical Engineering
from Rose Hulman Institute of Technology in Terre Haute, Indiana. Mr. Reschke is
the brother of Michael W. Reschke, the Company's Chairman of the Board.

     Robert P.  Mulreaney.  Robert P.  Mulreaney is Executive  Vice  President -
Chief Financial  Officer and Treasurer of the Company.  Mr. Mulreaney joined the
Company in 1994.  Mr.  Mulreaney's  responsibilities  with the  Company  include
capital market activities,  corporate budgeting,  financial reporting,  investor
relations,  accounting,  taxation, treasury, and management information systems.
Prior to joining the Company,  Mr.  Mulreaney was  associated  for 14 years with
Ernst & Young LLP, where he  specialized  in accounting  and  consulting  issues
related to real estate and  financial  institutions.  Mr.  Mulreaney  received a
Bachelor  of  Business  Administration  in  Accounting  in  1980  from  Marshall
University.  Mr.  Mulreaney is a member of the  American  Institute of Certified
Public  Accountants,  the Maryland  Association of Certified Public Accountants,
and the West Virginia Society of Certified Public Accountants.

     David  G.  Phillips.  David G.  Phillips  is  Executive  Vice  President  -
Operations  and Marketing of the Company.  Mr.  Phillips  oversees the Company's
development  efforts  in Western  Europe.  Mr.  Phillips  joined PGI in 1989 and
served as Vice President,  Senior Vice President,  and Executive Vice President,
Leasing. Mr. Phillips' responsibilities with the Company previously included the
management  and   supervision  of  the  Company's   operations,   marketing  and
advertising  efforts for all of the Company's  outlet centers.  Prior to joining
PGI, Mr. Phillips was a leasing  representative at D.I. Realty,  Inc., leasing a
variety  of  retail  projects  including  outlet  centers  and  traditional  and
specialty  malls.  Mr.  Phillips  received a Masters  of Science in Real  Estate
Development  at Johns  Hopkins  University  and  received a Bachelor  of Science
degree in Business  Administration from the University of Vermont.  Mr. Phillips
is a member of the ICSC with a CLS (Certified  Leasing  Specialist)  designation
and the Urban Land Institute.

     C. Alan Schroeder.  C. Alan Schroeder is Executive Vice President - General
Counsel and Secretary of the Company. Mr. Schroeder has been General Counsel and
Secretary  of the  Company  since the  initial  public  offering of stock in the
Company in 1994.  From 1990 to 1994,  Mr.  Schroeder  was an  Assistant  General
Counsel of PGI and was  responsible  for legal  matters  relating  to the retail
division of PGI.  Prior to joining PGI, Mr.  Schroeder was  associated  for four
years with Hopkins & Sutter,  a Chicago,  Illinois based law firm. Mr. Schroeder
received a Juris Doctorate degree from The University of Chicago Law School. Mr.
Schroeder  received an A.B.  degree in  Economics  and  Sociology  from  Bowdoin
College in Brunswick, Maine. Mr. Schroeder is licensed to
<PAGE>

practice  law in Illinois.

     R. Bruce Armiger.  R. Bruce Armiger is Senior Vice  President - Development
and   Construction   Management   Services  for  the  Company.   Mr.   Armiger's
responsibilities with the Company include supervision of project development and
construction for all of the Company's outlet centers.  Mr. Armiger joined PGI in
1992,  and since that time,  acted as Vice  President of the Retail  Division of
PGI.  Prior to joining  PGI,  Mr.  Armiger was Vice  President  and  Director of
Construction  and  Engineering of The Rouse Company for a period of 15 years. At
The Rouse  Company,  Mr.  Armiger was  responsible  for all of the  construction
activities of the company consisting of over 5,000,000 square feet of GLA during
his  tenure.  Mr.  Armiger has a Bachelor of Arts degree and Masters of Business
Administration from Loyola College, Baltimore, Maryland.

     Steven  Gothelf.  Steven Gothelf is Senior Vice  President - Finance of the
Company.  Mr. Gothelf  joined PGI in 1990 and,  since that time,  served as Vice
President of Asset and Development  Management.  Mr. Gothelf's  responsibilities
with the Company include financing,  capital market  activities,  and the review
and analysis of potential  outlet  center  acquisitions.  For two years prior to
joining PGI, Mr.  Gothelf was Vice  President of Finance and  Administration  of
Clarion  Development Inc. Before joining Clarion  Development  Inc., Mr. Gothelf
was a Market Maker for financial futures at the Chicago Board of Trade and prior
to that was a Manager of Real Estate Tax and  Consulting  for KPMG Peat  Marwick
LLP. Mr. Gothelf  received his B.S.  degree in Accounting from the University of
Illinois and is a certified public accountant.

     Anya T.  Harris.  Anya T. Harris is Senior Vice  President - Marketing  and
Communications  of the  Company.  Ms.  Harris began her tenure at the Company in
September 1994 as Director of Public Relations,  responsible for media relations
and  community  outreach  programs  for the  Company's  various  outlet  centers
nationwide.  In her present  position,  Ms.  Harris  oversees all aspects of the
Company's  center  marketing,  public  relations  and  corporate  communications
programs in order to increase the Company's  marketing  power and reach in terms
of  advertising,  company  identity  and media  relations.  Prior to joining the
Company,  Ms. Harris  served as Senior  Account  Executive for Trahan,  Burden &
Charles,  Inc., an advertising and public  relations firm in Baltimore.  In this
capacity,  Ms.  Harris  managed  advertising,  public  relations  and  marketing
campaigns for numerous clients,  including the Company. Formerly, she was Senior
Account Executive for New York-based  Edelman Public Relations,  responsible for
managing  multi-million-dollar  corporate communications and media relations for
clients such as Motts  U.S.A.  and Weight  Watchers  International.  Ms.  Harris
received her Bachelor of Arts in Political  Science and  Sociology  from Goucher
College.

     John S.  Mastin.  John S. Mastin is Senior Vice  President - Leasing of the
Company. Mr. Mastin's  responsibilities  with the Company include supervision of
leasing and  merchandising  for all of the Company's outlet centers.  Mr. Mastin
joined the Company in June of 1996.  Prior to joining the  Company,  Mr.  Mastin
spent 24 years with The Rouse Company.  At The Rouse  Company,  Mr. Mastin began
his career as a Junior Leasing Representative and was promoted to Vice President
and Assistant  Director of Leasing.  Mr.  Mastin led the leasing  effort for The
Rouse Company with numerous regional malls as well as inner-city festival market
places  which  include  Bayside  in Miami,  Florida,  and the  redevelopment  of
Underground  Atlanta  in  Atlanta,  Georgia.  Mr.  Mastin  was  involved  in the
releasing and  remerchandising  effort for the operating  properties division of
The Rouse Company.  Prior to The Rouse  Company,  Mr. Mastin was a Naval Aviator
for four years. Mr. Mastin received his Bachelor of Arts in English from Niagara
University. Mr. Mastin is a member of the ICSC.

     Frederick J. Meno  Frederick J. Meno is Senior Vice  President - Operations
of Prime  Retail,  where  he is  responsible  for  supervising  the  management,
operations  and  temporary  leasing for Prime's  nationwide  portfolio of outlet
centers.   Prior  to  joining  Prime,   Mr.  Meno  was  Executive   Director  of
Insignia/ESG,  Inc., where he was responsible for all management,  leasing,  and
business  development  activities  for  Insignia/ESG's  10 million  square  foot
national enclosed mall portfolio,  as well as  Insignia/ESG's  Dallas/Fort Worth
office,  industrial and  non-enclosed  retail  portfolio.  For 10 years prior to
joining  Insignia/ESG,  Inc.,  Mr. Meno was  President of the Woodmont  Property
management  Company  in  Fort  Worth,  Texas.  A 1979  graduate  of  Ohio  State
University, having majored in Urban Land Development and Economics with a degree
in Business Administration, Mr. Meno is a member of the Institute of Real Estate
Management  and the ICSC.  Mr. Meno has achieved the  designations  of Certified
Property Manager, Real Property Administrator and Certified Shopping Manager and
is a licensed Real Estate Salesman in the State of Texas.

<PAGE>

                               ITEM 2 - PROPERTIES

General

     The Company's  strategy is to build on its reputation and experience in the
manufacturers'  outlet center business and to capitalize on the current trend in
value-oriented  retailing  through the selective  acquisition and development of
manufacturers'  outlet  centers  and the  strategic  expansion  of its  existing
manufacturers'  outlet centers. As a fully-integrated  real estate company,  the
Company  provides  development,   construction,  finance,  leasing,  accounting,
marketing and  management  services for all of its  properties.  At December 31,
1998, the Company's portfolio consisted of (i) 50 manufacturers'  outlet centers
aggregating  14,348,000 square feet of GLA (including 474,000 square feet of GLA
at manufacturers' outlet centers owned through joint venture partnerships), (ii)
three  community  shopping  centers  aggregating  424,000 square feet of GLA and
(iii) 159,000 square feet of GLA of office space.

     The table set forth below  summarizes  certain  information with respect to
the Company's  existing centers as of December 31, 1998 (see "Note 6 - Bonds and
Notes Payable" of the Notes to the Consolidated  Financial  Statements contained
herein for  information  with respect to mortgage  indebtedness on the Company's
properties).
<TABLE>

                             Portfolio of Properties
                                December 31, 1998

<CAPTION>

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

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

Prime Outlets at Fremont (2) - Fremont, Indiana........................     I          October 1985        118,000             100
                                                                           II         November 1993         51,000             100
                                                                          III          October 1994         60,000             100
                                                                                                           -------             ---
                                                                                                           229,000             100

Prime Outlets at Birch Run (2) - Birch Run, Michigan................... I-XVI               Various        591,000              99
                                                                         XVII                  1997         15,000              99
                                                                        XVIII                  1997        118,000             100
                                                                                                           -------             ---
                                                                                                           724,000              99

Prime Outlets at Latham - Latham, New York.............................     I           August 1987         43,000              98

Prime Outlets at Michigan City (2) - Michigan City, Indiana............     I         November 1987        199,000             100
                                                                           II              May 1988        130,000              99
                                                                          III             July 1991         36,000              90
                                                                           IV             July 1994         42,000              93
                                                                            V         December 1994         26,000              98
                                                                           VI              May 1995         58,000              99
                                                                                                           -------             ---
                                                                                                           491,000              98

Prime Outlets at Williamsburg (2) - Williamsburg, Virginia.............     I            April 1988         67,000              99
                                                                           II         November 1988         60,000             100
                                                                          III          October 1990         49,000             100
                                                                           IV                  1995         98,000              97
                                                                                                           -------             ---
                                                                                                           274,000              99

Prime Outlets at Kenosha (2) - Kenosha, Wisconsin......................     I        September 1988         89,000             100
                                                                           II             July 1989         65,000              97
                                                                          III              May 1990        115,000              97
                                                                                                           -------             ---
                                                                                                           269,000              98
</TABLE>
<PAGE>
<TABLE>

                       Portfolio of Properties (continued)
                                December 31, 1998
<CAPTION>

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

Prime Outlets at Silverthorne (2) - Silverthorne, Colorado.............     I         November 1988         95,000              94%
                                                                           II         November 1990         75,000             100
                                                                          III         November 1993         88,000              94
                                                                                                           -------             ---
                                                                                                           258,000              96

Prime Outlets at Edinburgh (2) - Edinburgh, Indiana....................     I                  1988        156,000             100
                                                                           II         November 1994        142,000             100
                                                                                                           -------             ---
                                                                                                           298,000             100

Prime Outlets at Burlington (2) - Burlington, Washington ..............     I              May 1989         89,000             100
                                                                           II          October 1989         36,000             100
                                                                          III            April 1993         49,000             100
                                                                                                           -------             ---
                                                                                                           174,000             100

Prime Outlets at Queenstown (2) - Queenstown, Maryland.................     I             June 1989         67,000             100
                                                                           II             June 1990         55,000              99
                                                                          III          January 1991         16,000              97
                                                                           IV             June 1992         14,000              97
                                                                            V           August 1993         69,000             100
                                                                                                           -------             ---
                                                                                                           221,000              99

Prime Outlets at Hillsboro (2) - Hillsboro, Texas......................     I          October 1989         95,000             100
                                                                           II          January 1992        101,000             100
                                                                          III              May 1995        163,000             100
                                                                                                           -------             ---
                                                                                                           359,000             100

Prime Outlets at Oshkosh (2) - Oshkosh, Wisconsin......................     I         November 1989        215,000              95
                                                                           II             July 1991         45,000              99
                                                                                                           -------             ---
                                                                                                           260,000              96

Prime Outlets at Warehouse Row (3) - Chattanooga, Tennessee............     I         November 1989         95,000              95
                                                                           II           August 1993         26,000              94
                                                                                                           -------             ---
                                                                                                           121,000              95

Prime Outlets at Gilroy (2) - Gilroy, California.......................     I          January 1990         94,000             100
                                                                           II           August 1991        109,000             100
                                                                          III          October 1992        137,000              97
                                                                           IV             July 1994        170,000              99
                                                                            V         November 1995         69,000             100
                                                                                                           -------             ---
                                                                                                           579,000              99

Prime Outlets at Perryville (2) - Perryville, Maryland.................     I             June 1990        148,000              96

Prime Outlets at Sedona - Sedona, Arizona .............................     I           August 1990         82,000              97

Prime Outlets at San Marcos - San Marcos, Texas........................     I           August 1990        177,000              99
                                                                           II           August 1991         70,000             100
                                                                          III           August 1993        117,000             100
                                                                         IIIB         November 1994         20,000              91
                                                                         IIIC         November 1995         35,000             100
                                                                         IIID              May 1998         18,000             100
                                                                                                           -------             ---
                                                                                                           437,000              99

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

Prime Outlets at Post Falls - Post Falls, Idaho .......................     I             July 1991        111,000              82
                                                                           II             July 1992         68,000              85
                                                                                                           -------             ---
                                                                                                           179,000              83

Prime Outlets at Ellenton - Ellenton, Florida..........................     I         October 1991         187,000              94
                                                                           II          August 1993         123,000             100
                                                                          III         October 1996          30,000             100
                                                                           IV        November 1998         141,000              89
                                                                                                           -------             ---
                                                                                                           481,000              94
</TABLE>
<PAGE>
<TABLE>

                       Portfolio of Properties (continued)
                                December 31, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Grand                GLA         Percentage
Manufacturers' Outlet Centers                                           Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>                   <C>                 <C>

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

Prime Outlets at Naples - Naples/Marco Island, Florida.................     I        December 1991          94,000              98
                                                                           II        December 1992          32,000             100
                                                                          III           March 1998          20,000              98
                                                                                                           -------             ---
                                                                                                           146,000              98

Prime Outlets at Conroe (2) - Conroe, Texas............................     I         January 1992          93,000              95
                                                                           II            June 1994         163,000              98
                                                                          III         October 1994          26,000              87
                                                                                                           -------             ---
                                                                                                           282,000              96

Prime Outlets at Niagara Falls USA - Niagara Falls, New York...........     I             July 1992        300,000             100
                                                                           II           August 1995        234,000              89
                                                                                                           -------             ---
                                                                                                           534,000              95

Prime Outlets at Woodbury (2) - Woodbury, Minnesota....................     I            July 1992         129,000              93
                                                                           II        November 1993         100,000              93
                                                                          III          August 1994          21,000             100
                                                                                                           -------             ---
                                                                                                           250,000              94

Prime Outlets at Calhoun (2) - Calhoun, Georgia........................     I         October 1992         123,000              95
                                                                           II         October 1995         131,000              98
                                                                                                           -------             ---
                                                                                                           254,000              96

Prime Outlets at Castle Rock - Castle Rock, Colorado...................     I        November 1992         181,000              99
                                                                           II          August 1993          94,000              94
                                                                          III        November 1993          95,000              97
                                                                           IV          August 1997         110,000             100
                                                                                                           -------             ---
                                                                                                           480,000              98

Prime Outlets at Bend - Bend, Oregon...................................     I        December 1992          97,000              97
                                                                           II       September 1998          35,000              99
                                                                                                           -------             ---
                                                                                                           132,000              97

Prime Outlets at Jeffersonville II (2) - Jeffersonville, Ohio..........     I           March 1993         126,000              82
                                                                           II          August 1993         123,000              67
                                                                          III         October 1994          65,000             100
                                                                                                           -------             ---
                                                                                                           314,000              80

Prime Outlets at Jeffersonville I - Jeffersonville, Ohio...............     I            July 1993         186,000             100
                                                                           II        November 1993         100,000             100
                                                                          IIB        November 1994          13,000              82
                                                                         IIIA          August 1996          35,000             100
                                                                         IIIB           March 1997          73,000              97
                                                                                                           -------             ---
                                                                                                           407,000              99

Prime Outlets at Gainesville - Gainesville, Texas......................     I           August 1993        210,000              89
                                                                           II         November 1994        106,000             100
                                                                                                           -------             ---
                                                                                                           316,000              93

Prime Outlets at Loveland - Loveland, Colorado.........................     I              May 1994        139,000              98
                                                                           II         November 1994         50,000             100
                                                                          III              May 1995        114,000              98
                                                                           IV              May 1996         25,000             100
                                                                                                           -------             ---
                                                                                                           328,000              98

Prime Outlets at Oxnard (4) - Oxnard, California.......................     I             June 1994        148,000              92

</TABLE>
<PAGE>
<TABLE>
                       Portfolio of Properties (continued)
                                December 31, 1998
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Manufacturers' Outlet Centers                                           Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>                   <C>                 <C>

Prime Outlets at Grove City - Grove City, Pennsylvania.................     I           August 1994        235,000             100%
                                                                           II         November 1994         95,000             100
                                                                          III         November 1995         85,000              99
                                                                           IV         November 1996        118,000              99
                                                                                                           -------             ---
                                                                                                           533,000             100

Prime Outlets at Huntley - Huntley, Illinois...........................     I           August 1994        192,000              98  
                                                                           II         November 1995         90,000              91
                                                                                                           -------             ---
                                                                                                           282,000              96
 
Prime Outlets at Florida City - Florida City, Florida..................     I        September 1994        208,000              94

Prime Outlets at Pismo Beach (2) - Pismo Beach, California.............     I         November 1994        148,000             100

Prime Outlets at Tracy  (2) - Tracy, California........................     I         November 1994        153,000             100

Prime Outlets at Vero Beach (2) - Vero Beach, Florida..................     I         November 1994        210,000              99
                                                                           II           August 1995        116,000              94
                                                                                                           -------             ---
                                                                                                           326,000              97

Prime Outlets at Waterloo (2) - Waterloo, New York.....................     I            March 1995        208,000             100
                                                                           II        September 1996        115,000             100
                                                                          III            April 1997         68,000             100
                                                                                                           -------             ---
                                                                                                           391,000             100

Prime Outlets at Odessa - Odessa, Missouri.............................     I             July 1995        191,000              96
                                                                           II         November 1996        105,000              58
                                                                                                           -------             ---
                                                                                                           296,000              83

Prime Outlets at Darien (5) - Darien, Georgia..........................     I             July 1995        238,000              87
                                                                          IIA         November 1995         49,000              99
                                                                          IIB             July 1996         20,000             100
                                                                                                           -------             ---
                                                                                                           307,000              90

Prime Outlets at New River (4) - Phoenix, Arizona......................     I        September 1995        217,000              96
                                                                           II        September 1996        109,000              94
                                                                                                           -------             ---
                                                                                                           326,000              95

Prime Outlets at Gulfport (6) - Gulfport, Mississippi..................     I         November 1995        228,000              98
                                                                          IIA         November 1996         40,000             100
                                                                          IIB         November 1997         38,000              95
                                                                                                           -------             ---
                                                                                                           306,000              98

Prime Outlets at Lodi - Burbank, Ohio..................................     I         November 1996        205,000              97
                                                                          IIA              May 1998         33,000              92
                                                                          IIB         November 1998         75,000              74
                                                                                                           -------             ---
                                                                                                           313,000              91

Prime Outlets at Gaffney - Gaffney, South Carolina.....................     I         November 1996        235,000              99
                                                                           II             July 1998         70,000              85
                                                                                                           -------             ---
                                                                                                           305,000              96

Prime Outlets at Lee (2) - Lee, Massachusetts..........................     I             June 1997        224,000             100

Prime Outlets at Lebanon -  Lebanon, Tennessee.........................     I            April 1998        208,000              98

Prime Outlets at Hagerstown - Hagerstown, Maryland.....................     I           August 1998        218,000              98
                                                                           II         November 1998        103,000              84
                                                                                                           -------             ---  
                                                                                                           321,000              93
                                                                                                           -------             ---
Total Manufacturers' Outlet Centers (7)                                                                 14,348,000              96%
                                                                                                        ==========              ==
====================================================================================================================================
</TABLE>

Notes:
(1)  Percentage  reflects  fully  executed  leases as of December  31, 1998 as a
     percent of square feet of GLA.
 
(2)  The Company acquired this manufacturers'  outlet center on June 15, 1998 as
     a result of its merger with Horizon Group, Inc.

(3)  The Company owns a 2% partnership  interest as the sole general  partner in
     Phase I of this property but is entitled to 99% of the property's operating
     cash flow and net proceeds from a sale or  refinancing.  An unrelated third
     party holds a 35% limited partnership  interest and the Company holds a 65%
     general partnership  interest in the partnership that owns Phase II of this
     property.  Phase I of this mixed- use development  includes  154,000 square
     feet of office  space and Phase II  includes  5,000  square  feet of office
     space.  The total  office  space of 
<PAGE>
     159,000  square  feet is not  included in this table and such space was 74%
     leased as of December 31, 1998.

(4)  The  Company  owns  50% of this  manufacturers'  outlet  center  in a joint
     venture partnership with an unrelated third party.

(5)  The  Company  operates  this  manufacturers'  outlet  center  pursuant to a
     long-term  ground  lease  under  which the Company  receives  the  economic
     benefit of a 100% ownership interest.

(6)  The real  property on which this  outlet  center is located is subject to a
     long-term ground lease.

(7)  The Company  also owns three  community  centers not included in this table
     containing 424,000 square feet of GLA in the aggregate that were 88% leased
     as of December 31, 1998.

     As of February 28, 1999, the Company owned, or held under long-term leases,
land  contiguous to its outlet centers to construct  additional  phases totaling
approximately  2,000,000  square feet of GLA. The Company also holds  options to
purchase  property  adjoining its existing  manufacturers'  outlet  centers upon
which  additional  expansion could be  constructed.  Property held for sale by a
REIT is subject to significant  restrictions imposed by the Code.  Consequently,
it is the  Company's  intention  to hold  its  undeveloped  parcels  for  future
development, expansion or lease, rather than for sale.

Lease Terms

     In general, the leases relating to the Company's outlet centers have a term
of five to seven years.  Most leases provide for the payment of percentage rents
for annual sales in excess of certain thresholds. In addition, the typical lease
agreement provides for the recovery of all of a merchant's  proportionate  share
of actual common area maintenance ("CAM"), refuse removal,  insurance,  and real
estate  taxes as well as a  collection  for  advertising  and  promotion  and an
administrative fee. CAM includes such items as common area utilities,  security,
parking  lot  cleaning,   maintenance  and  repair  of  common  areas,   capital
replacement  reserves,   landscaping,   seasonal  decorations,  public  restroom
maintenance and certain administrative expenses.

     The  following  table sets forth,  as of December  31,  1998,  tenant lease
expirations for the next 10 years at the Company's manufacturers' outlet centers
(assuming  that none of the tenants  exercise any renewal  option and  including
leases  at   manufacturers'   outlet   centers   owned   through  joint  venture
partnerships):
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
                       Lease Expirations - Outlet Centers
<CAPTION>
                                                                                                                       % of Total
                                                                                                                       Annualized
                         Number of                   Approximate                       Annualized                     Minimum Rent
                          Leases                        GLA                          Minimum Rent of                 Represented by
 Year                    Expiring                     (Sq. Ft.)                      Expiring Leases                 Expiring Leases
------                -------------              ----------------                --------------------                ---------------
<S>                        <C>                        <C>                            <C>                                   <C>    
 1999                      444                        1,450,893                      $19,882,733                           10.19%
 2000                      674                        2,326,253                       35,642,961                           18.27
 2001                      653                        2,354,139                       36,087,572                           18.50
 2002                      575                        2,071,812                       33,889,303                           17.38
 2003                      564                        2,329,036                       36,239,319                           18.58
 2004                      176                          910,425                       13,870,278                            7.11
 2005                      102                          665,466                        8,884,674                            4.56
 2006                       47                          360,808                        4,079,233                            2.09
 2007                       27                          157,322                        1,847,793                            0.95
 2008                       32                          179,086                        2,744,474                            1.41

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


Tenants

     In management's  view,  tenant mix is one of the most important  factors in
promoting an outlet  center's  success.  Virtually  all aspects of the Company's
outlet centers, ranging from site selection to architectural design, are planned
to attract and retain a diverse mix of nationally and internationally recognized
manufacturers  of  upscale  designer  and  brand-name  products.  Crucial to the
development  of a new outlet  center is having  lead  tenants  committed  to the
outlet  center  early in the process.  In  management's  view,  lead tenants are
manufacturers  that during the  development  of an outlet  center  attract other
high-quality  manufacturers to the outlet center and provide for a well-balanced
and diversified mix of tenants that will attract consumers to the outlet center.
During the year ended  December  31,  1998,  no group of  tenants  under  common
control  accounted  for more than 4.84% of the gross  revenues of the Company or
occupied more than 5.66% of the total GLA of the Company.
<PAGE>

     Lead tenants are placed in strategic  locations  designed to draw customers
into the outlet center and to encourage them to shop at more than one store. The
Company continually examines the placement of tenants within each center and, in
collaboration  with its  tenants,  adjusts the size and  location of their space
within the center to improve sales per square foot.

     The  following  list  includes  some of the lead  tenants in the  Company's
outlet centers based on leases executed as of December 31, 1998:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                          NUMBER OF                   % OF LEASED
TENANT                                                                                      STORES                         GLA
------                                                                                    ---------                   --------------
<S>                                                                                          <C>                            <C>    
PHILLIPS-VAN HEUSEN
     BASS .............................................................................       48                            2.53%
     VAN HEUSEN .......................................................................       47                            1.50
     GEOFFREY BEENE ...................................................................       32                            1.02
     IZOD .............................................................................       28                            0.46
     GANT .............................................................................        7                            0.15
                                                                                             ---                            ----
        SUBTOTAL PHILLIPS-VAN HEUSEN...................................................      162                            5.66

CASUAL CORNER GROUP, INC.
     CASUAL CORNER OUTLET..............................................................       35                            1.48
     BANISTER SHOE ....................................................................       16                            0.42
     PETITE SOPHISTICATE ..............................................................       21                            0.40
     EASY SPIRIT.......................................................................       13                            0.29
     CASUAL CORNER WOMAN...............................................................       12                            0.28
                                                                                             ---                            ----
        SUBTOTAL CASUAL CORNER GROUP, INC. ............................................       97                            2.87

DRESS BARN, INC.
     WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN..........................................       48                            2.50
     SBX...............................................................................        2                            0.07
                                                                                             ---                           ----
        SUBTOTAL DRESS BARN, INC.......................................................       50                            2.57

NIKE...................................................................................       27                            2.47
LEVI'S/DOCKERS.........................................................................       34                            2.43
LIZ CLAIBORNE/ELISABETH................................................................       34                            2.20
MIKASA.................................................................................       37                            2.17

SARA LEE
    L'EGGS/HANES/BALI/PLAYTEX..........................................................       41                            1.40
    COACH..............................................................................       17                            0.37
    CHAMPION...........................................................................        9                            0.21
    SOCKS GALORE.......................................................................       14                            0.13
                                                                                             ---                            ----
        SUBTOTAL SARA LEE..............................................................       81                            2.11

GAP/OLD NAVY...........................................................................       29                            2.08

BROWN GROUP RETAIL, INC.
     FACTORY BRAND SHOES...............................................................       33                            1.29
     NATURALIZER.......................................................................       26                            0.52
     FAMOUS FOOTWEAR...................................................................        6                            0.25
                                                                                             ---                            ----
        SUBTOTAL BROWN GROUP...........................................................       65                            2.06

REEBOK/ROCKPORT........................................................................       26                            1.70
BUGLE BOY..............................................................................       41                            1.70
JONES NEW YORK.........................................................................       63                            1.66
SPIEGEL................................................................................        8                            1.66
VANITY FAIR/LEE/WRANGLER/BARBIZON......................................................        9                            1.62
OSHKOSH B'GOSH/GENUINE KIDS............................................................       37                            1.41
POLO/RALPH LAUREN......................................................................       27                            1.39
CORNING-REVERE.........................................................................       36                            1.32
CARTERS................................................................................       33                            1.21
SPRINGMAID-WAMSUTTA....................................................................       22                            1.20
EDDIE BAUER............................................................................       19                            1.14
</TABLE>
<PAGE>


<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                          NUMBER OF                   % OF LEASED
TENANT                                                                                      STORES                         GLA
------                                                                                    ---------                   --------------
<S>                                                                                           <C>                           <C>    
LONDON FOG.............................................................................       30                            1.08%
FAMOUS BRANDS HOUSEWARES...............................................................       38                            1.07
OFF 5TH-SAKS FIFTH AVENUE..............................................................        7                            1.07
SAMSONITE/AMERICAN TOURISTER...........................................................       42                            0.98
NINE WEST..............................................................................       47                            0.90
BIG DOG SPORTSWEAR.....................................................................       38                            0.86
J. CREW................................................................................       17                            0.84
ANN TAYLOR.............................................................................       15                            0.83
JOCKEY.................................................................................       29                            0.79
BROOKS BROTHERS........................................................................       19                            0.79
TOMMY HILFIGER/WOMAN/JEANS.............................................................       26                            0.71
NAUTICA................................................................................       21                            0.59
BOSE...................................................................................       15                            0.45
DONNA KARAN............................................................................       13                            0.42
SONY...................................................................................        7                            0.31
CALVIN KLEIN...........................................................................        6                            0.28
                                                                                           -----                            -----
TOTAL..................................................................................    1,307                            54.60%
                                                                                           =====                            =====
====================================================================================================================================
</TABLE>

     The Company strives to identify  tenants with potential  credit problems at
an early  stage by closely  monitoring  tenant's  performance.  The  Company has
worked  successfully to limit its delinquencies and bad debt losses.  During the
year ended December 31, 1998, total bad debt expense was approximately $1,387 or
0.6% of total revenues. The Company has not lost any material revenue related to
tenant bankruptcies or other lease defaults.

                           ITEM 3 - LEGAL PROCEEDINGS

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

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

           ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security  holders during the quarter
ended December 31, 1998.
<PAGE>

                                     PART II

 ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

     The Company's Common Stock commenced trading on the New York Stock Exchange
("NYSE") on August 27, 1997 under the trading symbol "PRT".  Prior thereto,  the
Common Stock was quoted in the Nasdaq  National  Market under the trading symbol
"PRME".

     The following  table sets forth the quarterly  high,  low and end of period
closing sales prices per share of the Company's  Common Stock as reported on the
NYSE and in the Nasdaq National Market,  as the case may be, as well as the cash
distributions paid during the periods indicated:

<TABLE>
      Market Price of Common Stock and Cash Dividends Paid Per Common Share


<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                1998                                                   1997
                           -------------------------------------------------    ----------------------------------------------------
                             Fourth        Third       Second        First       Fourth          Third        Second          First
                            Quarter      Quarter      Quarter      Quarter      Quarter        Quarter       Quarter        Quarter
                           -------------------------------------------------    ----------------------------------------------------
<S>                          <C>          <C>          <C>          <C>          <C>            <C>           <C>            <C>
Market   price  per  common
   share:
   High..................    $11.13       $12.81       $15.19       $15.56       $16.50          $15.63       $13.63         $13.38
   Low...................      7.50         9.06        11.81        13.75        13.31           13.13        11.88          12.00
   End of period close...      9.81         9.81        11.94        14.94        14.19           15.63        13.44          13.00

Cash dividends paid per
   common share..........    $0.295       $0.295       $0.795 (1)   $0.295       $0.295          $0.295       $0.295         $0.295
====================================================================================================================================
</TABLE>

Note:
(1)  Includes  a  special  cash  distribution  of $0.50 per  common  share
     relating to the Company's merger with Horizon  completed in June 1998 (see
     Note 3 - "Acquisitions  and  Dispositions" of the Notes to Consolidated
     Financial Statements).

     Instruments governing the Company's  indebtedness contain certain covenants
restricting  the payment of dividends (see Note 6 - "Bonds and Notes Payable" of
the Notes to  Consolidated  Financial  Statements) if the Company's debt service
coverage ratio, as defined, falls below a minimum threshold. Based on continuing
favorable operations and available funds from operations,  management intends to
continue to pay regular quarterly distributions.

     The  approximate  number of holders  of record of the Common  Stock was 860
including participants in security position listings as of February 23, 1999.
<PAGE>


                        ITEM 6 - SELECTED FINANCIAL DATA
          (Amounts in thousands, except per share and per unit amounts)
                                                                                
 <TABLE> 
 <CAPTION>
                                                                                                                        Prime Retail
                                                                                                                         Properties
                                                                     Prime Retail, Inc.                                   (Combined)
                                          --------------------------------------------------------------------------  --------------
                                                            Year ended December 31                      Period from       March 21,
                                          ---------------------------------------------------------    March 22 to     January 1 to
                                                                                                       December 31,        March 21,
                                                1998             1997          1996        1995              1994              1994
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>          <C>          <C>               <C>              <C>

Revenues
Base rents............................... $  148,376       $   78,046    $   54,710   $  46,368         $  28,657       $     3,670
Percentage rents.........................      6,384            3,277         1,987       1,520             1,404               187
Tenant reimbursements....................     67,152           37,519        25,254      22,283            11,858            2,113
Interest and other.......................     11,063           10,288         7,089       7,227             3,450               360
                                          ----------        ---------     ---------   ---------         ---------      ------------
          Total revenues................     232,975          129,130        89,040      77,398            45,369             6,330
Expense
Property operating.......................     52,684           29,492        20,421      17,389             9,952             1,927
Real estate taxes........................     16,705            9,417         5,288       4,977             2,462               497
Depreciation and amortization............     52,959           26,715        19,256      15,438             9,803             2,173
Corporate general and administrative.....      7,980            5,603         4,018        3,878            2,710                   
Interest.................................     60,704           36,122        24,485       20,821            9,485             3,280
Property management fees.................          -                -             -            -                -               299
Other charges............................      6,496            3,234         8,586        2,089            1,503               562
                                          ----------        ---------     ---------    ---------         --------      ------------
           Total expenses................    197,528          110,583        82,054       64,592           35,915             8,738
                                          ----------        ---------     ---------    ---------        ---------      ------------
  
Income (loss) before loss on sale of real
   estate, minority interests and
   extraordinary item....................     35,447           18,547         6,986       12,806            9,454           (2,408)
Loss on sale of real estate..............    (15,461)               -             -            -                -                - 
                                          ----------        ---------     ---------    ---------        ---------       -----------
Income (loss) before minority interests
   and extraordinary item................     19,986           18,547         6,986       12,806            9,454           (2,408)
(Income) loss allocated to minority                                                                                             
   interests.............................     (2,456)         (10,581)        2,092        5,364            5,204                 -
                                          ----------        ---------     ---------    ---------        ---------       -----------
Income (loss) before extraordinary item..     17,530            7,966         9,078       18,170           14,658           (2,408)
 Extraordinary item.......................         -           (2,061)       (1,017)           -                -                - 
                                          ----------        ---------     ---------    ---------       ----------       -----------
Net income (loss).........................    17,530            5,905         8,061       18,170           14,658       $   (2,408)
Income allocated to preferred shareholders    24,604           12,726        14,236       20,944           16,290       ===========
                                          ----------       ---------      ---------    ---------       ----------        

Net loss applicable to common shares..... $   (7,074)      $   (6,821)   $   (6,175)   $  (2,774)      $   (1,632)
                                          ==========       =========     ==========    =========       ==========
Net loss per common share-basic and
   diluted............................... $   ( 0.20)      $   (0. 36)   $   ( 0.75)   $  ( 0.96)      $   ( 0.57) 
                                          ==========       =========     ==========    =========       ==========
Other Data
Funds from operations (1)................ $   88,953       $   46,718    $   27,637    $  27,996       $   21,476       $       139
Net cash provided by (used in) operating
   activities............................ $   61,335       $   49,856    $   45,191    $  36,399       $   17,458       $   (1,873)
Net cash used in investing activities.... $ (145,596)      $ (229,956)   $ (232,290)   $ (81,978)      $ (149,435)      $   (1,239)
Net cash provided by financing activities $   83,653       $  182,549    $  176,096    $  57,547       $  134,936       $     4,087
Distributions declared per common share.. $     1.68(2)    $     1.18    $     1.33(3) $    1.18       $    0.623       $         -
Reported merchant sales.................. $3,169,268       $1,434,163    $1,044,348    $ 809,623       $  497,624       $    73,553
Total manufacturers' outlet GLA at end of
   period (4)............................     14,348            7,217         5,780        4,331            3,382             1,839
Number of manufacturers' outlet centers                                                                
   at end of period (4)..................         50               28            21           17               14                 7

                                                                                                                            
</TABLE>

<PAGE>
<TABLE> 
<CAPTION>

                                                                                                                       Prime Retail
                                                                                                                         Properties
                                                                     Prime Retail, Inc.                                   (Combined)
                                          -------------------------------------------------------------------------  ---------------
                                                            Year ended December 31                      Period from      March 21,
                                          ---------------------------------------------------------    March 22 to    January 1 to
                                                                                                       December 31,       March 21,
                                                1998            1997           1996             1995          1994            1994
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>             <C>              <C>            <C>            <C>
Balance Sheet Data
Rental property (before accumulated
   depreciation).........................  $2,015,722       $904,782       $640,759         $454,480       $376,181       $180,170
Net investment in rental property........   1,887,975        822,749        583,085          414,290        349,513        164,159
Total assets.............................   1,976,464        904,183        666,803          462,405        385,930        186,034
Bonds and notes payable..................   1,217,507        515,265        499,523          305,954        214,025        188,378
Total liabilities and minority interests.   1,332,730        559,655        527,594          340,921        258,279        198,244
Shareholders' equity (deficit)...........     643,734        344,528        139,209          121,484        127,651        (12,210)

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

Notes:

(1)  Management  believes that in order to facilitate a clear  understanding  of
     the consolidated  historical  operating results of the Company,  Funds from
     Operations  ("FFO")  should be  considered in  conjunction  with net income
     (loss) as presented  in the  financial  statements  included in this Annual
     Report on Form  10-K.  Management  believes  that FFO is an  important  and
     widely  accepted  measure  of the  operating  performance  of  REITs  which
     provides a relevant basis for comparison to other REITs. Therefore,  FFO is
     presented to assist  investors in analyzing the performance of the Company.
     FFO  represents  net income (loss)  (computed in accordance  with generally
     accepted  accounting  principles  ("GAAP"),  excluding gains or losses from
     debt   restructuring   and  sales  of  property,   plus   depreciation  and
     amortization   and  after   adjustments   for   unconsolidated   investment
     partnerships and joint ventures. In March 1995, the National Association of
     Real Estate  Investment  Trusts  ("NAREIT")  issued a clarification  of its
     definition of FFO.  Although the Company has adopted the NAREIT  definition
     of FFO,  the Company  cautions  that the  calculation  of FFO may vary from
     entity to entity and as such the presentation of FFO by the Company may not
     be  comparable  to other  similarly  titled  measures  of  other  reporting
     companies.  FFO does not represent cash flow from  operating  activities in
     accordance with GAAP and is not indicative of cash available to fund all of
     the Company's cash needs. FFO should not be considered as an alternative to
     net income or any other GAAP  measure as an indicator  of  performance  and
     should not be  considered  as an  alternative  to cash flow as a measure of
     liquidity  or  the  ability  to  service  debt  or  to  pay  dividends.   A
     reconciliation  of income (loss) before  allocations to minority  interests
     and preferred shareholders to FFO is as follows: 
<PAGE>
<TABLE>
<CAPTION> 
                                                                                                                       Prime Retail
                                                                                                                         Properties
                                                                     Prime Retail, Inc.                                   (Combined)
                                          --------------------------------------------------------------------------  --------------
                                                            Year ended December 31                      Period from       March 21,
                                          ---------------------------------------------------------    March 22 to     January 1 to
                                                                                                       December 31,        March 21,
                                                1998             1997          1996        1995              1994              1994
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>          <C>          <C>               <C>              <C>
  Income (loss) before allocations
     to minority interests and
     preferred shareholders.............  $19,986        $ 18,547         $ 6,986(i)     $ 12,806             $ 9,454       $(2,408)
  FFO adjustments:
  Loss on sale of real estate...........   15,461               -               -               -                   -             -
  Real estate depreciation and
     amortization.......................   52,295          26,413          18,703          14,884               9,508         2,173
  Unconsolidated joint venture
     adjustments (ii)...................    1,211           1,758           1,948             306               2,514           374
  FFO before allocations to minority      -------        --------         -------        --------            --------       -------
     minority interests and
     preferred shareholders.............  $ 88,953       $ 46,718         $27,637        $ 27,996            $ 21,476       $  139
                                          ========       =========        =======        ========            ========       =======
     shareholders..........................

  ==================================================================================================================================
</TABLE>
 
 Notes:

(i)  Includes  a  nonrecurring  charge of $6,131  related to the  prepayment  of
     long-term debt recorded during 1996. 

(ii) Amounts include net preferential partner distributions from a joint venture
     partnership of $400, $162 and $2,538 for the years ended December 31, 1996
     and 1995 and for the  period  from March 22,  1994 to  December  31,  1994,
     respectively.

(2)  Includes a special cash  distribution of $0.50 per common share relating to
     the  Company's  merger with  Horizon  completed  in June 1998 (see Note 3 -
     "Acquisitions  and  Dispositions"  of the Notes to  Consolidated  Financial
     Statements).

(3)  Includes a special cash distribution of $0.145 per common share relating to
     the Company's exchange offer completed in June 1996.

(4)  Includes   manufacturers'  outlet  centers  operated  under  joint  venture
     partnerships with unrelated third parties as follows:

<TABLE>
<CAPTION>
                                                                                                                   Prime Retail
                                                                                                                     Properties
                                                             Prime Retail, Inc.                                      (Combined)
                                   ------------------------------------------------------------------------------- -----------------
                                                                December 31                                                
                                   -------------------------------------------------------------------------------         March 21,
                                             1998             1997                1996             1995       1994              1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>                 <C>              <C>        <C>               <C>
Aggregate GLA............................     595              595                800               901        599               121
Number of manufacturers' outlet
centers..................................       3                3                  4                 4          3                 1

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

                ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Introduction

     The  following  discussion  and  analysis  of  the  consolidated  financial
condition  and  results  of  operations   of  Prime  Retail,   Inc.   (including
predecessors,  collectively,  the "Company")  should be read in conjunction with
the Consolidated  Financial  Statements and Notes thereto appearing elsewhere in
this Annual Report on Form 10-K. The Company's  operations are conducted through
Prime  Retail,  L.P. (the  "Operating  Partnership").  The Company  controls the
Operating  Partnership  as its sole general  partner and is  dependent  upon the
distributions  or other  payments  from the  Operating  Partnership  to meet its
financial obligations. Historical results and percentage relationships set forth
herein are not necessarily indicative of future operations.
Cautionary Statements

     The  following  discussion  in  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations" contains certain  forward-looking
statements  within the meaning of the Private  Securities  Litigation Reform Act
of 1995 which reflect  management's  current views with respect to future events
and  financial  performance.   These  statements  contain  potential  risks  and
uncertainties  and,  therefore,  actual  results  may  differ  materially.  Such
forward-looking  statements  are  subject  to certain  risks and  uncertainties;
including,  but not limited to, the  effects of future  events on the  Company's
financial  performance;  the risk that the  Company may be unable to finance its
planned  acquisition  and  development  activities;  risks related to the retail
industry in which the Company's outlet centers compete,  including the potential
adverse  impact of external  factors,  such as inflation,  consumer  confidence,
unemployment  rates and consumer tastes and  preferences;  risks associated with
the Company's  property  acquisitions,  such as the lack of predictability  with
respect to financial  returns;  risks  associated  with the  Company's  property
development activities,  such as the potential for cost overruns, delays and the
lack of  predictability  with respect to the financial  returns  associated with
these development activities;  the risk of potential increase in market interest
rates from current levels; 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;  and risks  associated with
the  impact  of  the  Year  2000  issue  on  the  processing  of  date-sensitive
information by the Company's  computerized  information systems as well as those
of the Company's tenants and vendors.

Merger with Horizon Group, Inc.

     On June 15,  1998,  the merger and other  transactions  (collectively,  the
"Merger  Transactions")  between the Company and Horizon Group, Inc. ("Horizon")
were  consummated  for  an  aggregate  consideration  of  $1,134,682,  including
liabilities assumed and related transaction costs. The merger has been accounted
for using the purchase method of accounting and the purchase price of $1,134,682
was  allocated  to the assets  acquired  and the  liabilities  assumed  based on
estimates of their respective fair values. Accordingly, the operating results of
the 22  properties  acquired  from Horizon have been  included in the  Company's
consolidated  results of operations  commencing on June 15, 1998. See "Liquidity
and Capital Resources - Business Combination" for further information.

Portfolio Growth

     The Company has grown by  developing  and acquiring  manufacturers'  outlet
centers and expanding its existing  manufacturers' outlet centers. The Company's
manufacturers'  outlet portfolio  consisted of 50 manufacturers'  outlet centers
totaling  14,348,000  square feet of gross leasable area ("GLA") at December 31,
1998,  compared to 28  manufacturers'  outlet centers totaling  7,217,000 square
feet of GLA at December 31, 1997 and 21  manufacturers'  outlet centers totaling
5,780,000 square feet of GLA at December 31, 1996.

     During 1998, the Company opened two new  manufacturers'  outlet centers and
added nine expansions to existing manufacturers' outlet centers totaling 931,000
square feet of GLA in the aggregate. In connection with the Merger Transactions,
the Company (i) acquired and  integrated 22 of Horizon's  manufacturers'  outlet
centers into its existing  portfolio  adding 6,626,000 square feet of GLA in the
aggregate  and (ii) sold two  manufacturers'  outlet  centers to  Horizon  Group
Properties, Inc. ("HGP") totaling 426,000 square feet of GLA.
<PAGE>

     During 1997,  the Company  purchased  seven  manufacturers'  outlet centers
totaling  1,221,000  square  feet  of GLA  and  opened  expansions  to  existing
manufacturers' outlet centers totaling 224,000 square feet of GLA. Additionally,
on  September  2, 1997 the Company  acquired  its joint  venture  partner's  25%
ownership interest in Buckeye Factory Shops Limited Partnership  ("Buckeye") and
now owns 100% of Prime Outlets at Lodi. The significant  increases in the number
of the  Company's  operating  properties  and total GLA during 1998 and 1997 are
referred  to as the  "Portfolio  Expansion  and  the  Horizon  Merger"  and  the
"Portfolio Expansion", respectively.

Results of Operations
<TABLE>
Table 1-Consolidated Statements of Operations

<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                        1998           1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>             <C>              <C>    
 
Revenues

 Base rents..............................................................................  $ 148,376       $ 78,046         $ 54,710
 Percentage rents........................................................................      6,384          3,277           1,987
 Tenant reimbursements...................................................................     67,152         37,519          25,254
 Interest and other......................................................................     11,063         10,288           7,089
                                                                                           ---------       --------         -------
   Total revenues........................................................................    232,975        129,130          89,040

 Expenses

 Property operating......................................................................     52,684         29,492          20,421
 Real estate taxes.......................................................................     16,705          9,417           5,288
 Depreciation and amortization...........................................................     52,959         26,715          19,256
 Corporate general and administrative....................................................      7,980          5,603           4,018
 Interest................................................................................     60,704         36,122          24,485
 Other charges...........................................................................      6,496          3,234           8,586
                                                                                           ---------       --------         ------- 
    Total expenses.......................................................................    197,528        110,583          82,054
 
 Income before loss on sale of real estate, minority interests
   and extraordinary item................................................................     35,447         18,547           6,986
 Loss on sale of real estate.............................................................    (15,461)             -               -
                                                                                           ---------       --------         -------
 Income before minority interests and extraordinary item.................................     19,986         18,547           6,986
 (Income) loss allocated to minority interests...........................................     (2,456)       (10,581)          2,092
                                                                                           ---------       --------         -------
 Income before extraordinary item........................................................     17,530          7,966           9,078

 Extraordinary item - loss on early extinguishment of debt,
   net of minority interests in the amount of $0 in 1997 and $3,263 in 1996..............          -         (2,061)         (1,017)
                                                                                           ---------       --------         -------
 Net income..............................................................................     17,530          5,905           8,061

 Income allocated to preferred shareholders..............................................     24,604         12,726          14,236
                                                                                           ---------       --------         -------
 Net loss applicable to common shares....................................................  $  (7,074)      $ (6,821)        $(6,175)
                                                                                                             (6,821)         (6,175)

 Earnings per common share - basic and diluted:
    Loss before extraordinary item.......................................................  $   (0.20)      $  (0.25)        $ (0.63)
    Extraordinary item...................................................................          -          (0.11)          (0.12)
                                                                                           ---------       --------         -------
    Net loss.............................................................................  $   (0.20)      $  (0.36)        $ (0.75)
                                                                                           =========       ========        ========
 Weighted average common shares outstanding..............................................     35,612         19,189           8,211
                                                                                           =========       ========        ========
====================================================================================================================================
</TABLE>
<PAGE>

Table 2 - Statements of Operations on a Weighted Average per Square Foot Basis

     A summary of the operating  results for the years ended  December 31, 1998,
1997  and  1996 is  presented  in the  following  table,  expressed  in  amounts
calculated on a weighted average occupied GLA basis.
<TABLE>

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                      1998           1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>             <C>            <C>    

GLA at end of period (1).................................................................   14,457          7,326           5,684
Executed leases at end of period (GLA) (1)...............................................   13,894          6,854           5,252
Weighted average occupied GLA (1)(3).....................................................   10,390          5,735           4,075
Manufacturers' outlet centers in operation at end of period (2)..........................       50             28              21
New manufacturers' outlet centers opened and acquired (2)................................       24              7               4
Manufacturers' outlet centers expanded (2)...............................................        8              4               9
Community centers in operation at end of period..........................................        3              3               3
States operated in at end of period......................................................       26             20              16

Portfolio weighted average per square foot (2):

Revenues
Base rents...............................................................................   $14.28         $13.61          $13.43
Percentage rents.........................................................................     0.61           0.57            0.49
Tenant reimbursements....................................................................     6.46           6.54            6.20
Interest and other.......................................................................     1.06           1.79            1.74
                                                                                            ------         ------          ------
   Total revenues........................................................................    22.41          22.51           21.86

Expenses
Property operating.......................................................................     5.07           5.14            5.01
Real estate taxes........................................................................     1.61           1.64            1.30
Depreciation and amortization............................................................     5.10           4.66            4.73
Corporate general and administrative.....................................................     0.77           0.98            0.99
Interest.................................................................................     5.84           6.30            6.01
Other charges............................................................................     0.63           0.56            2.11(4)
                                                                                            ------         ------          ------
   Total expenses........................................................................    19.02          19.28           20.15
                                                                                            ------         ------          ------
Income before minority interests and extraordinary item..................................   $ 3.39         $ 3.23          $ 1.71
                                                                                            ======         ======          ======

Manufacturers' outlet center weighted average per square foot (3):

Revenues
Base rents...............................................................................   $14.66         $14.19          $14.18
Percentage rents.........................................................................     0.68           0.63            0.55
Tenant reimbursements....................................................................     6.67           6.96            6.75
Interest and other.......................................................................     0.85           1.57            0.82
                                                                                            ------         ------          ------
   Total revenues........................................................................    22.86          23.35           22.30

Expenses
Property operating.......................................................................     5.17           5.40            5.45
Real estate taxes........................................................................     1.62           1.67            1.29
Depreciation and amortization............................................................     5.09           4.67            4.87
Interest.................................................................................     5.95           6.31            6.82
Other charges............................................................................     0.33           0.43            0.81(5)
                                                                                            ------         ------          ------   
   Total expenses........................................................................    18.16          18.48           19.24
                                                                                            ------         ------          ------
Income before minority interests, corporate general and administrative expenses,
   and extraordinary item................................................................    $4.70         $ 4.87          $ 3.06
                                                                                            ======         ======          ======
====================================================================================================================================
</TABLE>

Notes:
(1)  Includes total GLA in which the Company receives  substantially  all of the
     economic benefit. 
(2)  Includes  manufacturers' outlet centers operated under unconsolidated joint
     venture  partnerships  with unrelated third parties.  
(3)  Based on occupied GLA weighted by months of operation.  The occupied GLA on
     a weighted average basis from the 22 properties the Company acquired from
     Horizon have been included in the weighted  average GLA  commencing on June
     15, 1998.
<PAGE>

(4)  Includes certain  nonrecurring charges of $6,131, or $1.51 per square foot,
     relating to the  prepayment  of long-term  debt recorded  during 1996.  
(5)  Includes certain  nonrecurring charges of $1,806, or $0.51 per square foot,
     relating to the prepayment of long-term debt recorded during 1996. 
<PAGE>

Comparison  of the year ended  December 31, 1998 to the year ended  December 31,
1997

     For the year ended  December 31, 1998,  the Company  reported net income of
$17,530.  The 1998  results  include a second  quarter  loss on the sale of real
estate of $15,461 in connection with the Merger Transactions. For the year ended
December 31, 1998, the net loss applicable to common shareholders was $7,074, or
$0.20 per common share on a basic and diluted basis. For the year ended December
31, 1997, the Company reported net income of $5,905. The 1997 results include an
extraordinary  loss of $2,061,  related to the pre-payment of certain  long-term
debt. For the year ended  December 31, 1997,  the net loss  applicable to common
shareholders was $6,821, or $0.36 per common share on a basic and diluted basis.

     Total revenues were $232,975 for the year ended December 31, 1998, compared
to $129,130 for the year ended  December 31, 1997,  an increase of $103,845,  or
80.4%. Base rents increased  $70,330,  or 90.1%, in 1998 compared to 1997. These
increases are primarily due to the Portfolio  Expansion and the Horizon  Merger.
Straight-line  rents (included in base rents) were $1,229 and $643 for the years
ended December 31, 1998 and 1997, respectively. The average base rent per square
foot for new manufacturers' outlet leases negotiated and executed by the Company
was  $16.12  and  $15.52  for the  years  ended  December  31,  1998  and  1997,
respectively.

     Percentage  rents,  which  represent  rents based on a percentage  of sales
volume above a specified threshold,  increased $3,107, or 94.8%, during the year
ended  December 31, 1998 compared to the same period in 1997.  This increase was
attributable to higher reported  merchant sales in 1998 as well as the Portfolio
Expansion and the Horizon Merger.

     As summarized in TABLE 3, merchant sales reported to the Company  increased
by $1,735.1  million,  or 121.0%,  to $3,169.3 million from $1,434.2 million for
the years ended December 31, 1998 and 1997, respectively.  The increase in total
reported  merchant  sales is primarily  due to the  Portfolio  Expansion and the
Horizon Merger.  The weighted  average  reported  merchant sales per square foot
increased  by 7.8% to $254.56  per square  foot in 1998 from  $236.20 per square
foot in 1997. Total merchant  occupancy cost per square foot decreased  slightly
from $21.36 in 1997 to $21.30 in 1998 and  decreased as a percentage of reported
sales from 8.39% to 7.65%,  respectively.  The  decrease in the cost of merchant
occupancy  to reported  sales is  primarily  due to an increase in the  weighted
average  reported  merchant  sales  per  square  foot for the  Company's  entire
manufacturers' outlet portfolio.

Table 3 - Summary of Reported Merchant Sales(1)

     A summary of reported manufacturers' outlet merchant sales and related data
for 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>

 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                              1998        1997         1996
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>         <C>          <C>    

 Total reported merchant sales (in millions)(1).................................................   $3,169.3    $1,434.2     $1,044.3
                                                                                                   ========    ========     ========
 Weighted average reported merchant sales per square foot(2):
    All store sales.............................................................................   $ 254.56    $ 236.20     $ 229.08
                                                                                                   ========    ========     ========
    Same-space sales............................................................................   $ 248.44    $ 231.89
                                                                                                   ========    ========     
 Total merchant occupancy cost per square foot(3)...............................................   $  21.30    $  21.36     $  21.12
                                                                                                   ========    ========     ========
 Cost of merchant occupancy to reported sales(4)................................................      8.37%       9.04%        9.22%
                                                                                                   ========    ========     ========
 Cost of merchant occupancy (excluding marketing contributions) to reported sales(5)............      7.65%       8.39%        8.64%
                                                                                                   ========    ========     ========
 ===================================================================================================================================
</TABLE>

Notes:
(1)  Total reported merchant sales summarizes gross sales generated by merchants
     and includes  changes in merchant  mix and the effect of new space  created
     from the acquisition and opening of new and expanded  manufacturers' outlet
     centers.  Several  of the  Company's  manufacturers'  outlet  centers  were
     constructed,  expanded or acquired  during the time  periods  contained  in
     TABLE 3 and therefore, reported sales for such new openings, expansions and
     acquisitions  were  reported  only  for the  partial  period  and  were not
     annualized.  TABLE 3 should  be read in  conjunction  with the  information
     summarized  under the caption  "Properties--Portfolio  of Properties".  
(2)  Weighted  average reported sales per square foot is based on reported sales
     divided by the weighted  average square  footage  occupied by the merchants
     reporting those sales.  Same-space sales is defined as the weighted average
     reported  merchant  sales per square  foot for space open since  January 1,
     1997. 
(3)  Total  merchant  occupancy  cost  per  square  foot  includes  base  rents,
     percentage rents and tenant  reimbursements which includes tenant marketing
     contributions. 
(4) Computed as follows: total merchant occupancy
     cost per square foot divided by total weighted  average  reported  merchant
     sales per square foot. 
(5)  Computed  as  follows:  total  merchant  occupancy  cost  per  square  foot
     (excluding  marketing  contributions  paid by  merchants)  divided by total
     weighted average reported merchant sales per square foot.
<PAGE>

     Tenant  reimbursements,  which  represent  the  contractual  recovery  from
tenants of certain operating  expenses,  increased by $29,633, or 79.0%, in 1998
over 1997. These increases are primarily due to the Portfolio  Expansion and the
Horizon Merger.

     As shown in TABLE 4, tenant  reimbursements  as a percentage of recoverable
property  operating expenses and real estate taxes was 96.8% in 1998 compared to
96.4% in 1997. These levels reflect the Company's  continued  efforts to contain
operating expenses at its properties while requiring  merchants to pay their pro
rata share of these expenses.  TABLE 4 sets forth recoveries from merchants as a
percentage of total recoverable expenses for 1998, 1997, and 1996:

Table 4 - Tenant Recoveries as a Percentage of Total Recoverable Expenses

--------------------------------------------------------------------------------
                                                         Percentage of Expenses
Year                                                   Recovered from Tenants(1)
--------------------------------------------------------------------------------

1998.......................................................................96.8%
1997.......................................................................96.4%
1996...................................................................... 98.2%

================================================================================
Note:(1) Total  recoverable  expenses  include property  operating  expenses and
     real estate taxes.

     Interest and other income increased by $775, or 7.5%, to $11,063 during the
year ended  December 31, 1998 as compared to $10,288 for the year ended December
31, 1997. The increase  reflects  higher (i) temporary  tenant income of $1,432,
(ii) lease termination income of $475, and (iii) other ancillary income of $130.
Partially  offsetting  these  increases  was a decrease  in  interest  income of
$1,262.  The reduction in interest income was primarily the result of the use of
a portion of the Company's  expansion loan escrow account to fund certain of its
development  activities  during 1997 and 1998. The expansion loan escrow account
is included in restricted cash in the Consolidated Balance Sheets.

     Property  operating expense  increased by $23,192,  or 78.6%, to $52,684 in
1998 compared to $29,492 in 1997. Real estate taxes expense increased by $7,288,
or 77.4%,  to $16,705 in 1998 from  $9,417 in 1997.  The  increases  in property
operating  expenses and real estate  taxes are  primarily  due to the  Portfolio
Expansions  and the  Horizon  Merger.  As  show in  TABLE  5,  depreciation  and
amortization  expense  increased  by  $26,244,  or 98.2%,  to  $52,959  in 1998,
compared to $26,715 in 1997.  This increase  results from the  depreciation  and
amortization of assets  associated with the Portfolio  Expansion and the Horizon
Merger.

Table 5 - Components of Depreciation and Amortization Expense

     The components of depreciation and amortization  expense for 1998, 1997 and
1996 are summarized as follows:

 -------------------------------------------------------------------------------
 Years ended December 31,                       1998          1997          1996
 -------------------------------------------------------------------------------

 Building and improvements...................$30,299       $13,987       $ 9,471
 Land improvements...........................  3,609         2,838         2,161
 Tenant improvements......................... 16,616         7,372         5,165
 Furniture and fixtures......................  1,316           858           671
 Leasing commissions(1)......................  1,119         1,660         1,788
                                             -------       -------       -------
       Total................................ $52,959       $26,715       $19,256
                                             =======       =======       =======
================================================================================

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

     As shown in TABLE 6, interest  expense  increased by $24,582,  or 68.1%, to
$60,704 in 1998  compared  to $36,122 in 1997.  This  increase  reflects  higher
interest incurred of $27,194.  Partially offsetting this item was an increase in
the amount of interest  capitalized in connection with  development  projects of
$1,737,  a decrease in amortization  of deferred  financing costs of $637, and a
decrease in amortization of interest rate protection contracts of $238.

     The increase in interest incurred is primarily  attributable to an increase
of $379,018  in the Company's average debt outstanding  during 1998 compared to
1997.

Table 6 - Components of Interest Expense

     The components of interest  expense for 1998,  1997 and 1996 are summarized
as follows:

 -------------------------------------------------------------------------------
 Years ended December 31,                      1998          1997          1996
 -------------------------------------------------------------------------------

 Interest incurred..........................$63,630       $36,436       $24,109
 Interest capitalized....................... (5,793)       (4,056)       (3,348)
 Amortization of deferred financing costs...  1,715         2,352         2,341
 Amortization of interest rate protection 
     contracts..............................  1,152         1,390         1,383
                                            -------       -------       ------- 
       Total................................$60,704       $36,122       $24,485
                                            =======       =======       =======
 ===============================================================================

     Other charges  increased by $3,262 to $6,496 in 1998 compared to $3,234 for
1997.  This increase  reflects (i) increased  selling and marketing  expenses of
$2,162  associated  with the  Company's  operation  of the outlet store known as
Designer  Connection,  (ii) a  higher  provision  for  potentially  unsuccessful
pre-development  efforts  of  $508,  (iii)  an  increase  in the  provision  for
uncollectible  accounts receivable of $417, (iv) higher marketing costs of $121,
and (v) an increase in other miscellaneous charges of $54.

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

Table 7 - Capital Expenditures

     The  components  of  capital  expenditures  for  1998,  1997  and  1996 are
summarized as follows:

--------------------------------------------------------------------------------
Years ended December 31,                      1998         1997          1996
                                                                                
--------------------------------------------------------------------------------

New developments.....................  $   43,459      $ 34,175      $ 33,787
Property acquisitions, net...........   1,013,231 (1)   191,345(3)    131,593(4)
Property dispositions, net...........     (46,585)(2)         -             -
Expansions and renovations...........      98,705        37,941        20,428
Re-leasing tenant allowances.........       2,130           561           473
                                       ----------      --------      --------
      Total..........................  $1,110,940      $264,022      $186,281

================================================================================
Notes: 
(1) Includes the assets acquired by the Company during 1998 in connection
     with its merger with Horizon,  net of the spin-off of HGP. 
(2)  Includes the assets of the Prime Transferred Properties sold by the Company
     during 1998 to HGP in  connection  with the closing of the Horizon  merger.
(3)  Includes the assets  acquired by the Company during 1997  consisting of (i)
     the purchase of seven manufacturers' outlet centers ($166,987) and (ii) the
     purchase of the Company's joint venture partner's  partnership  interest in
     Prime Outlet at Lodi ($24,358). 
(4)  Includes the assets  acquired by the Company during 1996  consisting of (i)
     the purchase of two  manufacturers'  outlet centers  ($71,770) and (ii) the
     purchase of the Company's joint venture partner's  partnership  interest in
     Prime Outlets at Grove City ($57,094).
<PAGE>
<TABLE>

Table 8 - Consolidated Quarterly Summary of Operations
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                            1998                                     1997
                                        ----------------------------------------------- --------------------------------------------
                                        Fourth        Third    Second        First       Fourth       Third      Second      First
                                       Quarter      Quarter   Quarter      Quarter      Quarter     Quarter     Quarter     Quarter
------------------------------------------------------------------------------------- ----------------------------------------------
<S>                                  <C>        <C>          <C>          <C>          <C>        <C>          <C>         <C>

Total revenues.....................   $ 77,516   $   73,187  $ 44,764     $ 37,508     $ 36,206   $ 31,549     $ 31,213    $ 30,162
Total expenses.....................     67,251       62,615    37,605       30,057       28,826     27,458       27,630      26,669
                                      --------   ----------  --------     --------     --------   --------     --------    --------
Income before loss on sale of real
   estate, minority interests and                                                                                           
   extraordinary item..............     10,265       10,572     7,159        7,451        7,380      4,091        3,583       3,493
Loss on sale of real estate........          -            -   (15,461)           -            -          -            -           - 
                                      --------   ----------  --------     --------     --------   --------     --------    --------
Income (loss) before minority
   interests and extraordinary item.    10,265       10,572    (8,302)       7,451        7,380      4,091        3,583       3,493
(Income) loss allocated to minority
   interests.........................        -         (214)    3,219       (5,461)      (2,778)    (2,540)      (2,672)     (2,591)
                                      --------   ----------  --------     --------     --------   --------     --------    --------
Income (loss) before extraordinary                            
   item.............................    10,265       10,358    (5,083)       1,990        4,602      1,551          911         902
Extraordinary item - loss on early
   extinguishment of                                                                                                       
   debt.............................         -            -         -            -            -     (2,061)           -           -
                                      --------   ----------  --------     --------     --------   --------     --------    --------
Net income (loss)...................    10,265       10,358    (5,083)       1,990        4,602       (510)         911         902
Income allocated to preferred
   shareholders.....................     6,956        6,741     6,741        4,166        3,446      3,094        3,093       3,093
                                       -------    ---------   -------      -------      -------    -------      -------     --------
Net income (loss) applicable to
   common shares....................   $ 3,309    $   3,617  $(11,824)     $(2,176)     $  1,156   $ (3,604)    $ (2,182)   $(2,191)
                                       =======    =========  ========      =======     =========   ========     ========    ========
Earnings per common share - basic
   and diluted:
     Income (loss) before
      extraordinary item............   $  0.08    $    0.09  $  (0.40)     $ (0.08)    $   0.04   $  (0.08)    $  (0.14)   $ (0.15)
     Extraordinary item.............         -            -         -            -            -      (0.11)           -          - 
                                       -------    ---------  --------      -------     --------   --------     --------    --------
    Net income (loss)...............   $  0.08    $    0.09  $  (0.40)     $ (0.08)    $   0.04   $  (0.19)    $  (0.14)   $ (0.15)
                                       =======    =========  ========      =======     ========   ========     ========    =======
Weighted average common shares
   outstanding......................    42,736       42,314    29,859       27,295       27,295     19,159       15,795     14,344
                                       =======    =========  ========      =======     ========   ========     =======     =======
Distributions paid per common
    Share...........................   $ 0.295    $   0.295  $  0.795 (1)  $ 0.295     $  0.295   $  0.295     $  0.295    $ 0.295
                                       =======    =========  ========      =======     ========   ========     ========    =======
====================================================================================================================================
</TABLE>

Note:

(1)  Includes a special cash  distribution of $0.50 per common share relating to
     the  Company's  merger with  Horizon  completed  in June 1998 (see Note 3 -
     "Acquisitions  and  Dispositions"  of the Notes to  Consolidated  Financial
     Statements).

Comparison  of the year ended  December 31, 1997 to the year ended  December 31,
1996

     For the year ended  December 31, 1997,  the Company  reported net income of
$5,905.  During the third quarter of 1997, the Company recorded an extraordinary
loss of $2,061  related to the  pre-payment of certain  long-term  debt. For the
year ended December 31, 1997, the net loss applicable to common shareholders was
$6,821,  or $0.36 per common  share on a basic and diluted  basis.  For the year
ended  December  31,  1996,  the Company  reported  net income of $8,061.  These
results included a nonrecurring  charge and an extraordinary  loss of $6,131 and
$1,017  (net of minority  interests  of  $3,263),  respectively,  related to the
pre-payment of certain long-term debt. For the year ended December 31, 1996, the
net loss applicable to common shareholders was $6,175, or $0.75 per common share
on a basic and diluted basis.

     Total revenues were $129,130 for the year ended December 31, 1997, compared
to $89,040 for the year ended  December  31,  1996,  an increase of $40,090,  or
45.0%. Base rents increased  $23,336,  or 42.7%, in 1997 compared to 1996. These
increases are primarily due to the Portfolio Expansion,  including the effect of
the  acquisition of seven  manufacturers' outlet  centers from unrelated  third
parties  and  the  Company's   purchase  of  its  joint  venture  partner's  25%
partnership  interest in a  manufacturers'  outlet  center on September 2, 1997.
Straight-line  rents  (included  in base rents) were $643 and $600 for the years
ended December 31, 1997 and 1996, respectively. The average base rent per square
foot for new manufacturers' outlet leases negotiated and executed by the Company
was  $15.52  and  $15.36  for the  years  ended  December  31,  1997  and  1996,
respectively.

     Percentage  rents,  which  represent  rents based on a percentage  of sales
volume above a specified threshold,  increased $1,290, or 64.9%, during the year
ended  December 31 1997  compared to the same period in 1996.  This increase was
attributable  to  higher  reported  merchant  sales  in 1997  and the  Portfolio
Expansion.
<PAGE>

     As summarized in TABLE 3, merchant sales reported to the Company  increased
by $389.9 million,  or 37.3%, to $1,434.2  million from $1,044.3 million for the
years ended  December  31, 1997 and 1996,  respectively.  The  increase in total
reported merchant sales is primarily due to the Portfolio  Expansion,  including
the  effect of the  acquisition  of certain  properties  in 1997.  The  weighted
average reported merchant sales per square foot increased by 3.1% to $236.20 per
square  foot in 1997  from  $229.08  per  square  foot in 1996.  Total  merchant
occupancy cost per square foot increased  slightly from $21.12 in 1996 to $21.36
in 1997 but  decreased  as a percentage  of reported  sales from 8.64% to 8.39%,
respectively.  The decrease in the cost of merchant  occupancy to reported sales
is primarily due to an increase in the weighted average reported  merchant sales
per square foot for the Company's entire manufacturers' outlet portfolio.

     Tenant  reimbursements,  which  represent  the  contractual  recovery  from
tenants of certain operating  expenses,  increased by $12,265, or 48.6%, in 1997
over  1996.  These  increases  are  primarily  due to the  Portfolio  Expansion,
including the effect of the acquisition of seven  manufacturers'  outlet centers
from  unrelated  third parties and the  Company's  purchase   outlet  center  on
September 2, 1997.

     As shown in TABLE 4, tenant  reimbursements  as a percentage of recoverable
property  operating expenses and real estate taxes was 96.4% in 1997 compared to
98.2% in 1996. These levels reflect the Company's  continued  efforts to contain
operating expenses at its properties while requiring  merchants to pay their pro
rata share of these expenses.

     Interest and other income increased by $3,199,  or 45.1%, to $10,288 during
the year  ended  December  31, 1997 as  compared  to $7,089  for the year  ended
December 31, 1996. The increase  reflects  higher (i) interest income of $2,954,
(ii)  gains on sales of land of $988,  (iii)  push  cart  income  of $304,  (iv)
temporary  tenant  income of $218,  and (v) all other  ancillary  income of $43.
Partially  offsetting  these  increases were reduced  property  development  and
construction  management fees and leasing commissions of $1,308. The increase in
interest  income  was  primarily  due to  interest  earnings  on  the  Company's
expansion loan escrow account  included in restricted  cash in the  Consolidated
Balance Sheets.

     Property  operating  expense  increased by $9,071,  or 44.4%, to $29,492 in
1997 compared to $20,421 in 1996. Real estate taxes expense increased by $4,129,
or  78.1%,  to  $9,417  in 1997  from  $5,288  in  1996.  As  shown  in TABLE 5,
depreciation and amortization  expense increased by $7,459, or 38.7%, to $26,715
in 1997, compared to $19,256 in 1996. The increases in property operating,  real
estate taxes, and depreciation and amortization expense are primarily due to the
Portfolio Expansion,  including the acquisition of seven  manufacturers'  outlet
centers from an unrelated third parties and the Company's  purchase of its joint
venture partner's partnership interest in two manufacturers' outlet centers.

     As shown in TABLE 6, interest  expense  increased by $11,637,  or 47.5%, to
$36,122 in 1997  compared  to $24,485 in 1996.  This  increase  reflects  higher
interest incurred of $12,327,  an increase in amortization of deferred financing
costs of $11,  and an  increase in  amortization  of  interest  rate  protection
contracts of $7. Partially  offsetting these items was an increase in the amount
of interest capitalized in connection with development projects of $708.

     The increase in interest incurred is primarily  attributable to an increase
of $166,015 in the Company's  average debt  outstanding  during 1997 compared to
1996. The increase in interest  incurred also reflects  slightly higher weighted
average  interest rate for the year ended December 31, 1997 compared to the same
period in 1996.  The weighted  average  interest  rates were 7.23% and 7.17% for
1997 and 1996, respectively.

     Other charges  decreased by $5,352 to $3,234 in 1997 compared to $8,586 for
1996.  The 1996 amount  reflects a  nonrecurring  loss of $6,131  related to the
prepayment of certain long-term debt.  Excluding this  nonrecurring  loss, other
charges  increased by $779,  or 31.2% in 1997.  This  increase  reflects  higher
marketing costs of $272, an increase in the provision for uncollectible accounts
receivable   of  $260,  a  higher   provision   for   potentially   unsuccessful
pre-development  efforts of $150, and an increase in other miscellaneous charges
of $97.

Liquidity and Capital Resources

Sources and Uses of Cash

     For the year ended  December  31,  1998,  net cash  provided  by  operating
activities was $61,335, net cash used in investing activities was $145,596,  and
net cash provided by financing activities was $83,653.

     The primary uses of cash for investing  activities during 1998 included (i)
costs associated with development and construction of new manufacturers'  outlet
centers and expansions to existing  manufacturers'  outlet  centers  aggregating
931,000 square feet of GLA which opened during 1998, (ii) costs  associated with
the  completion  of  manufacturers'  outlet  centers and  expansions to existing
manufacturers'  outlet  centers  aggregating  224,000  square  feet of GLA which
opened during 1997, and (iii) costs for  pre-development  activities  associated
with future developments.

     The sources of cash from financing activities during 1998 included proceeds
from new  borrowings of $467,998.  Such proceeds  were  partially  offset by (i)

<PAGE>

principal  repayments  on notes payable of $283,806,  (ii)  preferred and common
stock  distributions of $79,451,  and (iii)  distributions to minority interests
(including  distributions to limited  partners of the Operating  Partnership) of
$17,811.

     The  Company  anticipates  that cash flow from (i)  certain  line of credit
facilities,  (ii) operations,  (iii) new borrowings, (iv) refinancing of certain
existing  debt,  (v) the potential  sale of a joint venture  interest in certain
manufacturers'  outlet  centers,  and (vi) the potential  sale of equity or debt
securities  in the public or  private  capital  markets  will be  sufficient  to
satisfy  its  debt  service  obligations,  expected  distribution  and  dividend
requirements  and  operating  cash  needs  for the next  year.  There  can be no
assurance  that the Company will be successful in obtaining the required  amount
of funds for these  items or that the terms of capital  raising  activities,  if
any, will be as favorable as the Company has  experienced in prior  periods.  At
December 31, 1998,  unused  commitments  available for borrowings  under various
loan facilities were $37,392 in the aggregate.

Debt Repayments and Preferred Stock Dividends

     The  Company's  aggregate  indebtedness  was  $1,217,507  and  $515,265  at
December  31,  1998  and  1997,   respectively.   At  December  31,  1998,  such
indebtedness  had a weighted average maturity of 5.72 years and bore interest at
a weighted  average  interest  rate of 7.19% per annum.  At December  31,  1998,
$953,443,  or 78.3%,  of such  indebtedness  bore  interest  at fixed  rates and
$264,063, or 21.7%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable rates.

     The  Company  is  obligated  to  repay  $85,034  and  $45,321  of  mortgage
indebtedness during 1999 and 2000, respectively. Annualized cumulative dividends
on the Company's Series A Senior Cumulative  Preferred Stock ("Senior  Preferred
Stock"), Series B Cumulative Participating Convertible Preferred Stock, ("Series
B Convertible  Preferred Stock"),  and Series C Cumulative  Redeemable Preferred
Stock  ("Series C Preferred  Stock")  outstanding  as of  December  31, 1998 are
$6,038, $16,635, and $5,149,  respectively.  These dividends are paid quarterly,
in arrears.

Repurchase of Shares of Series C Preferred Stock

     On March 31, 1999, the Company entered into an agreement  pursuant to which
it will repurchase all of its outstanding shares of Series C Preferred Stock for
$43,636 or $10.00 per share. The agreement  provides for the repurchase to occur
in two stages.  In the first stage,  on March 31, 1999, the Company  repurchased
3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of
a $33,000  unsecured  promissory  note.  The  unsecured  promissory  note  bears
interest at a rate of 12.0% per annum,  matures on September 30, 1999,  requires
monthly  interest-only  payments  and may be prepaid by the  Company at any time
without  penalty.  Second,  the Company will repurchase the remaining  1,063,636
shares of its  Series C  Preferred  Stock  for an  aggregate  purchase  price of
$10,636 on or before  September  30, 1999.  In addition,  the sole holder of the
Series C Preferred  Stock  waived the  Company's  obligation  to comply with the
financial  covenants contained in its charter relating to the Series C Preferred
Stock, as well as the rights of such holder to require the Company to repurchase
the Series C Preferred Stock in certain  circumstances at its original  issuance
price of $13.75 per share, plus accrued but unpaid distributions. This waiver is
irrevocable.

Debt and Equity Offerings

     Management   intends  to  continually  have  access  to  capital  resources
necessary  to expand and  develop its  business  and,  accordingly,  may seek to
obtain  additional funds through the potential sale of equity or debt securities
in the public or private  capital  markets.  On December 17,  1998,  the Company
registered  with the  Securities  and  Exchange  Commission  $400,000  of equity
securities pursuant to a universal shelf registration statement on Form S-3.

Property Acquisitions

     During 1999, the Company will explore acquisitions of manufacturers' outlet
centers in the United  States and Western  Europe as well as  consider  possible
strategic  acquisitions  of other assets in the retail  sector.  The Company has
evaluated and is evaluating such  opportunities  and prospects and will continue
to do so throughout  1999. The Company cannot predict if any transaction will be
consummated, nor the terms or form of consideration required.

Business Combination

     On June 15, 1998, the Merger Transactions as set forth in the agreement and
plan of merger (the  "Merger  Agreement")  between the Company and Horizon  were
consummated for an aggregate consideration of $1,134,682,  including liabilities
assumed and related transaction costs.

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

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

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

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

     The merger has been  accounted for using the purchase  method of accounting
and the purchase price was allocated to the assets  acquired and the liabilities
assumed based on estimates of their respective fair values.  Certain assumptions
were made which management of the Company believes are reasonable.

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

Debt Transactions

     On March 18, 1998,  the Company  obtained  from a financial  institution  a
commitment for a construction  mortgage loan (the "Construction  Mortgage Loan")
relating to Phase I of Prime Outlets at Hagerstown  ("Hagerstown")  in an amount
not to exceed $21,600 which was subsequently  increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for  construction  financing on Phase
II. The Construction  Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR  plus  1.50%,  (ii)  matures  on  June 1,  2004,  (iii)  requires  monthly
interest-only payments through May 31, 2002, and (iv) requires monthly principal
and  interest   payments   thereafter.   The   Construction   Mortgage  Loan  is
collateralized  by a first  mortgage on  Hagerstown.  At December 31, 1998,  the
Construction Mortgage Loan had an outstanding principal balance of $29,914.

     On June 15, 1998, the Company closed on $292,000 of loan  facilities with a
financial  institution.  The  transaction  provided  (i) a $180,000  nonrecourse
permanent loan (the "Permanent  Loan") and (ii) a $112,000 full recourse secured
revolving loan of which $95,000 was funded (the "Secured  Revolving Loan").  The
Permanent Loan is (i)  collateralized by first mortgages on four  manufacturers'
outlet  centers,  (ii) bears a fixed rate of interest of 6.99%,  (iii)  requires
monthly  principal  and interest  payments  pursuant to an  approximate  26-year
amortization  schedule, and (iv) matures on July 11, 2008. The Secured Revolving
Loan is (i)  collateralized  by first  mortgages  on six  manufacturers'  outlet
centers,  (ii)  bears a variable  rate of  interest  equal to 30-day  LIBOR plus
1.35%, (iii) requires monthly interest-only  payments,  and (iv) matures on June
11, 2001.

     On September 25, 1998, the Company closed on a $40,000 unsecured  revolving
loan  (the  "Unsecured  Revolving  Loan")  with  a  financial  institution.  The
Unsecured  Revolving  Loan (i) bears  interest equal to 30-day LIBOR plus 1.75%,
(ii) requires monthly interest-only payments, and (iii) matures on September 11,
2001. At December 31, 1998,  the  Unsecured  Revolving  Loan had an  outstanding
principal balance of $40,000.  The Unsecured  Revolving Loan requires compliance
with certain financial loan covenants  including those relating to the Company's
(i) total outstanding variable indebtedness, (ii) total outstanding indebtedness
to market value, as defined,  (iii) consolidated net worth, as defined, and (iv)
debt service coverage ratio.
     
     On December 31, 1998, the Company entered into an agreement to purchase, at
its  option,  its joint  venture  partner's  50%  ownership  interest in Arizona
Factory Shops Partnership for total consideration of approximately  $35,000. The
option  expires on April 28,  1999.  If the Company  exercises  its option,  the
Company will own 100% of Prime Outlets at New River which contains approximately
326,000 square feet and was 95% leased at December 31, 1998.

     As of December 31, 1998, the Company is a guarantor or otherwise  obligated
with  respect to an  aggregate  of $39,479  of the  indebtedness  of HGP and its
affiliates.  As of  December  31,  1998,  the  components  of such  indebtedness
included (i) a mortgage loan with an outstanding  balance of $11,793 which bears
interest at a rate of prime,  matures in April 1999, and is  collateralized by a
first mortgage on Phases II and III of property located in Patchogue,  New York;
(ii) a mortgage loan with an outstanding balance of $10,731 which bears interest
at a rate of  10.25%,  matures in July 2018,  and is  collateralized  by a first
mortgage on Phase I of property  located in  Patchogue,  New York;  (iii) a loan
with an  outstanding  balance of $2,645 which bears  interest at a rate of prime
and matures in December 2000;  and (v) an unsecured  revolving  credit  facility
with an  outstanding  balance of $4,000  which bears a rate of interest of prime
and matures in April 1999. In addition, the Company is a guarantor of $10,000 of
obligations  under HGP's $108,205  secured credit facility which bears a rate of
interest of LIBOR plus 1.90%,  matures in July 2001, and is collateralized by 13
properties  located  throughout  the United  States.  The Company is pursuing an
agreement with HGP pursuant to which it would purchase HGP's general partnership
interest and a portion of a third party's  limited  partnership  interest in the
Bellport Outlet Center and undeveloped  parcels located in Patchogue,  New York.
If the agreement is consummated,  it is expected that the aggregate indebtedness
of HGP for which the Company remains contingently liable as a guarantor would be
reduced to $12,955.

     On April 1, 1998,  Horizon  consummated  an  agreement  with Castle & Cooke
Properties,  Inc. which released Horizon from its future  obligations  under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of all of Horizon's rights and obligations under
such lease.  The agreement  also  provided  that Horizon  transfer to such joint
venture substantially all of Horizon's economic interest in its outlet center in
Lake Elsinore,  California  together with  Horizon's  interest in certain vacant
property  located  adjacent to the center.  As of December 31, 1998, the Company
held a small  minority  interest in the joint  venture but has no  obligation or
commitment  with  respect to the  post-closing  operations  of the Dole  Cannery
project.  Mortgage  indebtedness  with an  outstanding  balance  of  $29,134  at
December  31,  1998,  for which  one of the  Company's  subsidiary  partnerships
remains legally  responsible,  is collateralized by a first mortgage on the Lake
Elsinore  outlet  center.  The  joint  venture,  as a  limited  partner  in such
subsidiary  partnership,  is  obligated  to make  capital  contributions  to the
partnership  to pay debt  financing,  operating and other expenses under certain
conditions.  The subsidiary partnership will remain legally responsible for such
expenses in case of any  shortfalls  by the joint  venture  with respect to such
capital  contributions.  Castle  &  Cooke  has  provided  the  Company  with  an
unconditional guaranty with respect to any such shortfalls.

Planned Development

     Management   believes  that  there  is  sufficient   demand  for  continued
development  of new  manufacturers'  outlet  centers and  expansions  of certain
existing  manufacturers'  outlet centers. The Company opened 931,000 square feet
of GLA during 1998 including
<PAGE>

     Prime  Outlets at Lebanon  which opened on April 17, 1998 and Prime Outlets
at  Hagerstown  of which Phase I opened on August 7, 1998 and Phase II opened on
November 20, 1998.  Prime  Outlets at Lebanon is located in Lebanon,  Tennessee,
approximately  25 miles east of Nashville,  and contains  208,000 square feet of
GLA. Prime Outlets at Lebanon was 98% leased at December 31, 1998. Prime Outlets
at  Hagerstown  is  located  in  Hagerstown,  Maryland,  west of  Baltimore  and
northwest of Washington,  D.C.,  and contains  321,000 square feet of GLA in the
aggregate  Prime Outlets at  Hagerstown  was 93% leased at December 31, 1998. At
December 31, 1998, the remaining budgeted capital  expenditures for 1998 planned
developments  aggregated  approximately  $16,154.  Management  believes that the
Company has  sufficient  capital and capital  commitments  to fund the remaining
capital  expenditures  associated with its 1998  development  activities.  These
funding  requirements  are expected to be met, in large part,  with the proceeds
from various loan facilities.

     The Company  currently plans to open one new  manufacturers'  outlet center
and four expansions to existing  manufacturers'  outlet centers in 1999 that are
expected to contain  approximately 555,000 square feet of GLA, in the aggregate,
and have a total expected development cost of approximately $85,000. The Company
expects to fund the development  cost of these projects from (i) certain line of
credit facilities,  (ii) retained cash flow from operations,  (iii) construction
loans, and (iv) the potential sale of equity or debt securities in the public or
private  capital  markets.  As of December 31, 1998,  the Company had  committed
$17,931 with regard to the construction of the new manufacturers'  outlet center
and  expansions  scheduled to open in 1999.  There can be no assurance  that the
Company will be successful  in obtaining the required  amount of capital or debt
financing  for the  1999  planned  openings  or that the  terms of such  capital
raising  activities will be as favorable as the Company has experienced in prior
periods.  If  adequate  financing  for such  development  and  expansion  is not
available, the Company may not be able to develop new centers or expand existing
centers at currently planned levels.

Taxability of Distributions

     TABLE 9 summarizes  the  taxability  of  distributions  paid during (i) the
period from January 1 to June 15, 1998, (ii) the period from June 16 to December
31, 1998, and (iii) the year ended December 31, 1997.  Distributions paid by the
Company  out of its  current  or  accumulated  earnings  and  profits  (and  not
designated as capital gains dividends) will constitute taxable  distributions to
each holder.  To the extent the Company makes  distributions  (not designated as
capital gains  dividends) in excess of its current and accumulated  earnings and
profits,  such  distributions  will be  treated  first as a  tax-free  return of
capital to each holder, reducing the adjusted basis which such holder has in his
shares of stock by the amount of such  distributions  (but not below zero), with
distributions  in excess of a holder's  adjusted  basis in his stock  taxable as
capital gains (provided that the shares have been held as a capital asset).
<PAGE>
<TABLE>
Table 9 - Taxability of Distributions
 -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                        Period from    Period from
                                                                        January 1 to     June 16 to              Year ended
                                                                            June 15,    December 31,           December 31, 
                                                                                1998            1998                   1997
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>                    <C>    
 
Senior Preferred Stock
     Ordinary income.....................................                      100.0%          100.0%                  100.0%
Series B Convertible Preferred Stock
     Ordinary income.....................................                      100.0%           63.7%                   91.3%
     Return of capital...................................                          -            36.3%                    8.7%
Series C Preferred Stock
     Ordinary income.....................................                       18.7%              -                       -
     Return of capital....................................                      81.3           100.0%                      -
Common Stock
     Return of capital....................................                     100.0%          100.0%                  100.0%

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

     No  assurances  can be made  that  future  distributions  will  be  treated
similarly.  Each  holder of stock may have a  different  basis in its stock and,
accordingly, each holder is advised to consult its tax advisors.

Economic Conditions

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

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

Year 2000

     The year 2000 ("Y2K") issue refers generally to computer applications using
only the last two digits to refer to a year  rather than all four  digits.  As a
result,  these  applications  could  fail or create  erroneous  results  if they
recognize "00" as the year 1900 rather than the year 2000. The Company has taken
Y2K initiatives in the following three general areas:

Information Technology

     The Company has focused its efforts on the high-risk areas of the corporate
office  computer  hardware,  operating  systems and software  applications.  The
principal  risks to the  Company  relating  to its  information  technology  are
failure to  correctly  bill tenants and pay  invoices.  However,  the  Company's
assessment and testing of existing equipment revealed that its hardware, network
operating systems and software applications are Y2K compliant.

Non-information Technology

     Non-information technology consists mainly of facilities management systems
such as telephone, utility and security systems for the corporate office and the
outlet  centers.  Based on the  Company's  inquiry of the  building  owner,  the
corporate office's non-information technology is expected to be Y2K compliant by
mid-1999.  The Company is in the process of identifying  date sensitive  systems
and equipment at its outlet centers. To date, the Company has not identified any
critical  non-compliant  systems.  Assessment  and  testing  of  non-information
technology  at the  Company's  outlet  centers is  expected to be  completed  by
mid-1999.

Third Parties

     The Company has  third-party  relationships  with tenants and suppliers and
contractors.  Many of these third parties are  publicly-traded  corporations and
subject to disclosure  requirements.  The Company has begun  assessment of major
third  parties' Y2K  readiness  including  tenants,  key suppliers of outsourced
services  including  stock  transfer,  debt  servicing,  banking  collection and
disbursement,  payroll and benefits,  while  simultaneously  responding to their
inquiries regarding the Company's readiness.  The principal risks to the Company
in its relationships  with third parties are the failure of third-party  systems
used to conduct  business  such as (i) tenants being unable to stock stores with
merchandise,  use cash registers,  and pay invoices;  (ii) banks being unable to
process receipts and disbursements;  (iii) vendors being unable to supply needed
materials  and  services  to the  centers;  and (iv)  processing  of  outsourced
employee payroll.  Based on Y2K compliance work done to date, the Company has no
reason  to  believe  that  key  tenants,  banks  and  suppliers  will not be Y2K
compliant in all material  respects or cannot be replaced  within an  acceptable
timeframe.  Additionally,  the  Company  has  obtained  or is in the  process of
obtaining compliance certification from suppliers of key services.

     Contingency  plans generally  involve the development and testing of manual
procedures  or the  use of  alternate  systems.  Viable  contingency  plans  are
difficult  to develop  for  potential  third  party Y2K  failures.  Based on the
Company's   current   assessment  of  Y2K  readiness   relating  to  information
technology,  non-information  technology, and third parties, the Company has not
implemented a Y2K contingency plan to date.  However,  the Company will continue
to assess the need for such a plan.

     Currently,  the Company believes its cost to successfully  mitigate the Y2K
issue,  estimated at less than $250,  has not been and is not  anticipated to be
material  to the  Company's  financial  position  or  results  from  operations.
However,  the Company's  description of its Y2K  compliance  issue is based upon
information  obtained by management  through  evaluations  of internal  business
systems and from  inquiries of key tenants and major  vendors  concerning  their
compliance  efforts.  If key tenants or major vendors with whom the Company does
business fail to adequately  address their Y2K issues,  the Company's  financial
position or results from operations could be materially adversely affected.

Impact of Recently Issued Accounting Standards

     In March 1998 the  American  Institute  of  Certified  Public  Accountants'
("AICPA") issued  Statement of Position ("SOP") 98-1,  "Accounting for the Costs
of  Computer  Software  Developed  for  or  Obtained  for  Internal  Use."  This
statement,  which is effective  for fiscal years  beginning  after  December 15,
1998,  requires the  capitalization of certain costs incurred in connection with
developing  or  obtaining  software  for  internal  use.  The  Company  does not
anticipate  a  material  impact  on its  results  of  operations  and  financial
position.

     In April  1998,  the  AICPA  issued  SOP 98-5,  "Reporting  on the Costs of
Start-up  Activities." This  statement,  which is  effective  for fiscal  years
beginning after December 15, 1998,  requires that costs of start-up  activities,
including  organization  costs,  be expensed as  incurred.  The Company does not
anticipate  a  material  impact  on its  results  of  operations  and  financial
position. 

Funds from Operations

     Management  believes  that  to  facilitate  a  clear  understanding  of the
Company's operating results, funds from operations ("FFO")
<PAGE>

should  be  considered  in  conjunction  with net  income  (loss)  presented  in
accordance  with GAAP. In March 1995,  the National  Association  of Real Estate
Investment Trusts ("NAREIT") established guidelines clarifying the definition of
FFO. FFO is defined as net income (loss)  (determined  in accordance  with GAAP)
excluding gains (or losses) from debt restructuring and sales of property,  plus
depreciation and amortization after adjustments for unconsolidated  partnerships
and joint ventures. 

     Management bleieves that FFO is an important and widely used measure of the
operating performance of REITs which provides a relevant basis for comparison to
other REITs.  Therefore,  FFO is presented to assist  investors in analyzing the
performance of the Company.  The Company's FFO is not comparable to FFO reported
by other REITs that do not define the term using the current  NAREIT  definition
or that  interpret  the  current  NAREIT  definition  differently  than does the
Company.  Therefore,  the Company  cautions that the calculation of FFO may vary
from entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly  titled measures of other reporting  companies.
The Company  believes that in order to facilitate a clear  understanding  of its
operating  results,  FFO  should be  examined  in  conjunction  with net  income
determined in accordance  with GAAP.  FFO does not represent cash generated from
operating  activities in accordance with GAAP and should not be considered as an
alternative  to net income as an indication of the Company's  performance  or to
cash flows as a measure of liquidity or ability to make distributions.

     TABLE 10 provides a reconciliation of income before allocations to minority
interests and  preferred  shareholders  to FFO for the years ended  December 31,
1998,  1997 and 1996.  FFO increased  $42,235,  or 90.4% to $88,953 for the year
ended December 31, 1998 from $46,718 for the year ended December 31, 1997.  This
increase in FFO is primarily  attributable  to the  Portfolio  Expansion and the
Horizon Merger.
<TABLE>

Table 10 - Funds from Operations
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                            1998         1997         1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>         <C>          <C>    
Income before allocations to minority interests and preferred shareholders..............        $ 19,986     $ 18,547     $  6,986
FFO adjustments:
Loss on sale of real estate.............................................................          15,461            -            -
Real estate depreciation and amortization...............................................          52,295       26,413       18,703
Unconsolidated joint venture adjustments................................................           1,211        1,758        1,948
                                                                                                 -------     --------     -------- 
FFO before allocations to minority interests and preferred shareholders.................         $88,953     $ 46,718     $ 27,637
                                                                                                 =======     ========     ========
Other Data:
Net cash provided by operating activities...............................................        $ 61,335     $ 49,856     $ 45,191
Net cash used in investing activities...................................................        (145,596)    (229,956)    (232,290)
Net cash provided by financing activities...............................................          83,653      182,549      176,096
====================================================================================================================================
</TABLE>

     The payout ratios based on distributions made by the Company divided by FFO
for 1998, 1997 and 1996 were 94.0%, 103.7%, and 106.4%, respectively.
<TABLE>

Table 11- Consolidated Quarterly Summary of Funds from Operations
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                 1998                                       1997
                                              ------------------------------------------- ------------------------------------------
                                                   Fourth     Third    Second     First      Fourth      Third    Second     First
                                                  Quarter   Quarter   Quarter   Quarter     Quarter    Quarter   Quarter   Quarter
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>       <C>        <C>         <C>         <C>        <C>       <C>
Income (loss) before allocations to
   minority interests and preferred               
   shareholders............................       $ 10,265  $ 10,572  $ (8,302)  $ 7,451     $  7,380  $  4,091   $ 3,583  $  3,493 
FFO adjustments:
Loss on sale of real estate................              -         -    15,461         -            -         -         -         - 
 Real estate depreciation and amortization..        18,475    16,327     9,792     7,701        7,108     6,558     6,473     6,274 
Unconsolidated joint venture adjustments...            303       303       302       303          288       455       530       485
                                                  --------  --------  --------   -------     --------  --------   -------  --------
FFO before allocations to minority interests
   and preferred shareholders..............       $ 29,043  $ 27,202  $ 17,253   $15,455     $ 14,776  $ 11,104   $10,586  $ 10,252
                                                  ========  ========  ========   =======     ========  ========   ======== ========
Other Data:
Net cash provided by (used in) operating
   activities..............................       $  8,817  $ 34,346  $(7,406)   $25,578     $ 15,298  $ 18,301   $ 9,301  $  6,956
 Net cash used in investing activities.....        (22,750)  (44,469) (50,975)   (27,402)    (123,220)  (41,697)  (17,492)  (47,547)
Net cash provided by (used in) financing
   activities..............................          5,940     5,144   76,595     (4,026)      90,518    46,188   (10,906)   56,749 
====================================================================================================================================
</TABLE>
<PAGE>


     ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL RISK

Market Risk Sensitivity

Interest Rate Risk

     In the ordinary course of business, the Company is exposed to the impact of
interest rate changes.  The Company employs established  policies and procedures
to manage its exposure to interest rate changes. The Company uses a mix of fixed
and variable  rate debt to (i) limit the impact of interest  rate changes on its
results from  operations and cash flows and (ii) to lower its overall  borrowing
costs.  The  following  table  provides  a summary of  principal  cash flows and
related interest rates by fiscal year of maturity.  Variable  interest rates are
based on the weighted average rates of the portfolio at December 31, 1998.
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Year of Maturity
------------------------------------------------------------------------------------------------------------------------------------
                                           1999          2000          2001          2002          2003     Thereafter       Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>            <C>          <C>           <C>           <C>
Fixed rate:
Principal...........................    $16,306       $43,150       $ 50,742       $88,985      $348,735      $405,526      $953,444
Average interest rate...............      7.15%         7.07%          7.23%         6.97%         7.76%         7.04%         7.31%
Variable rate:
Principal...........................    $68,728       $ 2,171       $135,000       $   386      $    774      $ 57,004      $264,063
Average interest rate...............      7.11%         7.23%          6.94%         7.13%         7.13%         5.51%         6.68%
====================================================================================================================================
</TABLE>


              ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Information  required by this Item is set forth at the pages  indicated  in
Item 14(a) below.

             ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.
<PAGE>

                                    PART III

     The  information  required  by  Items  10,  11,  12  and  13  (except  that
information regarding executive officers called for by Item 10 that is contained
in Part I) is  incorporated  herein  by  reference  from  the  definitive  proxy
statement that the Company  intends to file pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, on or before April 30, 1999.

                                     PART IV

     ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   1. Financial Statements

         Report of Independent Auditors                                      F-1
         Consolidated Balance Sheets as of December 31, 1998 and 1997        F-2
         Consolidated  Statements  of  Operations  for the years ended
            December 31, 1998, 1997 and 1996                                 F-3
         Consolidated  Statements of Cash Flows for the years ended  
            December 31, 1998, 1997 and 1996                                 F-4
         Consolidated  Statements of Shareholders' Equity for the 
            years ended December 31, 1998, 1997 and 1996                     F-6
         Notes to Consolidated Financial Statements                          F-7

      2.  Financial Statement Schedules

         The following financial statement schedule is included in Item 14 (d):
         Report of Independent Auditors on Schedule (included with
           consent filed as Exhibit 23)
         Schedule III--Real Estate and Accumulated Depreciation             F-21
         Notes to Schedule III                                              F-23

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions  or are  inapplicable,  and therefore  have been
omitted.

3.  Exhibits

Exhibit
Number                               Description


3.1  Amended and Restated  Articles of Incorporation  of Prime Retail,  Inc. 

3.2  Articles Supplementary of Prime Retail, Inc. relating to Series B Preferred
     Stock

3.3  Amended and Restated By-Laws of Prime Retail, Inc.

4.1  Form of Series A Preferred Stock Certificate  [Incorporated by reference to
     the same titled exhibit in the Company's Annual Report on Form 10-K for the
     fiscal year ended December 31, 1996 (File No. 0-23616).]

4.2  Form of Series B Preferred Stock Certificate  [Incorporated by reference to
     the same titled exhibit in the Company's Annual Report on Form 10-K for the
     fiscal year ended December 31, 1996 (File No. 0-23616).]

4.3  Form of Common  Stock  Certificate  [Incorporated  by reference to the same
     titled  exhibit in the Company's  Annual Report on Form 10-K for the fiscal
     year ended December 31, 1996 (File No. 0-23616).]
<PAGE>
Exhibit
Number                                 Description


4.4    Form of Series C Preferred Stock Certificate  [Incorporated by reference 
       to the same titled  exhibit in the  Company's  registration  statement on
       Form S-3]

10.1   Third  Amended  and  Restated  Agreement  of Limited  Partnership  of 
       Prime Retail,  L.P.  dated as of October  15, 1998 and  effective  as of 
       June 15, 1998.

10.1A  Common Unit Contribution  Agreement  [Incorporated by reference to the 
       same titled  exhibit  in the  Company's  registration  statement  on  
       Form S-11(Registration No. 333-1666).]

#10.2  1994 Stock  Incentive  Plan  [Incorporated  by  reference  to the same
       titled  exhibit  in the  Company's  registration  statement  on  Form  
       S-11 (Registration No. 33-68536).]

#10.3  1995 Stock  Incentive  Plan  [Incorporated  by  reference  to the same
       titled  exhibit  in the  Company's  registration  statement  on  Form  
       S-11 (Registration No. 333-1666).]

#10.4  Executive Employment  Agreement (Michael W. Reschke)  [Incorporated by
       reference to the same titled exhibit in the Company's Annual Report on 
       Form 10-K for the fiscal year ended  December  31,  1994,  as amended  
       File No. 0-23616).]

10.5   Combined Service and Special Distribution and Allocation Agreement 
       Abraham Rosenthal)  [Incorporated  by reference  to the same titled  
       exhibit in the Company's registration statement on Form S-4 
      (Registration No. 333-1784).]

10.5A  Special  Distribution and Allocation  Agreement by and between the 
       Company, the Operating  Partnership and the Rosenthal  Family LLC  
       [Incorporated  by reference  to  the  same  titled  exhibit  in  the  
       Company's  registration statement on Form S-4 (Registration No. 
       333-1784).]

10.5B  Indemnification  and Option Agreement by and between the Prime Group, 
       Inc., the Rosenthal Family LLC and Abraham  Rosenthal  [Incorporated by
       reference to the same titled exhibit in the Company's  registration
       statement on Form S-4 (Registration No. 333-1784).]

10.6   Combined Service and Special Distribution and Allocation Agreement 
       (William H. Carpenter, Jr.) [Incorporated by reference to the same titled
       exhibit in the  Company's   registration  statement  on  Form  S-4
       (Registration  No. 333-1784).]

10.6A  Special  Distribution and Allocation  Agreement by and between the 
       Company, the  Operating   Partnership  and  the  Carpenter  Family
       Associates  LLC [Incorporated  by  reference  to the same titled  exhibit
       in the  Company's registration statement on Form S-4 (Registration No.
       333-1784).]

10.6B  Indemnification and Option Agreement by and between the Prime Group,Inc.,
       William  H.  Carpenter,  Jr.  and  the  Carpenter  Family  Associates LLC
       [Incorporated by  reference  to the same titled  exhibit in the Company's
       registration statement on Form S-4 (Registration No. 333-1784).]

#10.7  Form  of  Executive   Employment   Agreement   (David  G.   Phillips)
       [Incorporated  by reference  to the same titled  exhibit in the Company's
       registration statement on Form S-11 (Registration No. 33-68536).]

#10.8  Letter  Agreement with R. Bruce Armiger  [Incorporated by reference to
       the same titled exhibit in the Company's Annual Report on Form 10-K for
       the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]

10.9   Right of First  Refusal  Agreement  (Northgate   Plaza--Improved  Parcel)
       [Incorporated  by  reference to the same titled exhibit in the  Company's
       Annual Report on Form 10-K for the fiscal year ended December 31, 1994, 
       as amended (File No. 0-23616).]

10.10  Right  of  First Refusal  Agreement  (Northgate   Plaza--Vacant   Parcel)
       [Incorporated  by  reference  to the same titled exhibit in the Company's
       Annual Report on Form 10-K for the fiscal year ended  December 31, 1994,
       as amended (File No. 0-23616).]
<PAGE>

Exhibit
Number                        Description


10.11  Right of First Refusal Agreement (Huntley Factory Shops) [Incorporated by
       reference  to  the same  titled  exhibit  in  the  Company's registration
       statement on Form S-11  (Registration No.  33-68536).] 

10.12  Right of First Refusal Agreement (San Marcos Factory Shops) [Incorporated
       by reference to the same titled exhibit in the Company's Annual Report on
       Form 10-K for the fiscal year ended December 31, 1994, as amended (File
       No. 0-23616).] 

10.13  Purchase Option Agreement(Northgate  Plaza--Excluded Parcel)[Incorporated
       by reference to the same titled exhibit in the Company's Annual Report on
       Form 10-K for the fiscal year ended December 31, 1994, as amended (File
       No. 0-23616).] 

10.14A Purchase  Option  Agreement  (Huntley  Factory  Shops)  [Incorporated  by
       reference  to  the  same  titled exhibit  in  the  Company's registration
       statement on Form S-11 (Registration No. 33-68536).] 

10.14B First Amendment to Purchase and Option Agreement  (Huntley Factory Shops)
       [Incorporated  by  reference to the same titled  exhibit in the Company's
       registration statement on Form S-11 (Registration No. 333-1666).]
 
10.15  Registration  Rights Agreement  dated June 15, 1998 by and  between Prime
       Retail,  Inc. and Prime  Retail, L.P. for the benefit of holders of 
       common units of Prime Retail, L.P. and certain stockholders of Prime 
       Retail, Inc.

10.16  Form of Property  Level  General Partnership  Agreement [Incorporated  by
       reference  to  the  same  titled exhibit  in  the  Company's registration
       statement on Form S-11 (Registration No. 33-68536).] 

10.17  Form of Property  Level  Limited  Partnership  Agreement [Incorporated by
       reference  to  the  same titled  exhibit  in  the  Company's registration
       statement on Form S-11 (Registration No.  33-68536).]

10.18  Noncompetition  and Restriction Agreement  with Michael W. Reschke of PGI
       [Incorporated  by  reference to the same titled  exhibit in the Company's
       Annual Report on Form 10-K for the fiscal year ended  December 31, 1994, 
       as amended (File No. 0-23616).] 

10.19  Second  Amended and Restated Subscription  Agreement of Abraham Rosenthal
       regarding Common Units of Prime Retail, L.P.[Incorporated by reference to
       the same titled exhibit in the Company's Annual Report on Form 10-K for
       the fiscal year ended December 31, 1994, as amended (File No. 0-23616).] 

10.20  Second   Amended and  Restated  Subscription   Agreement  of  William  H.
       Carpenter,  Jr. regarding Common Units of Prime Retail, L.P.[Incorporated
       by reference to the same titled exhibit in the Company's Annual Report on
       Form 10-K for the fiscal year ended December 31, 1994, as amended (File
       No. 0-23616).] 

#10.21 Consulting Agreement between the Company and Marvin Traub Associates,
       Inc. [Incorporated by reference to the same titled exhibit in the 
       Company's Annual Report on Form 10-K for the fiscal year ended December  
       31, 1996 (File No. 0-23616).]
<PAGE>

Exhibit
Number                        Description


10.22   Secured Promissory  Note of  Rosenthal Family LLC  with  respect  to the
        purchase of the Restricted Common Units [Incorporated by reference to 
        the same titled  exhibit in the  Company's Annual Report on Form 10-K 
        for the fiscal year ended December 31, 1994, as amended 
        (File No. 0-23616).]

10.22A   Allonge related to the Secured Promissory  Note of Rosenthal Family LLC
         [Incorporated  by reference to the same titled exhibit in the Company's
         registration statement on Form S-4 (Registration No. 333-1784).]

10.23    Secured  Promissory Note of Carpenter Family Associates LLC with 
         respect to the purchase of the Restricted  Common Units  [Incorporated
         by reference to the same titled exhibit in the Company's Annual Report
         on Form 10-K for the fiscal year ended December 31, 1994, as amended
        (File No 0-23616).]

10.23A   Allonge  related  to the  Secured  Promissory  Note of Carpenter Family
         Associates LLC [Incorporated by reference to the same titled exhibit in
         the Company's registration statement on Form S-4 (Registration No. 333-
         1784).]

10.24    Pledge and Security  Agreement of Rosenthal  Family LLC with respect to
         the purchase of the Restricted Common Units [Incorporated by reference 
         to the same titled  exhibit in the  Company's  Annual  Report on Form 
         10-K for the fiscal year ended December 31, 1994, as amended (File No.
         0-23616).]

10.25    Pledge and  Security  Agreement of Carpenter Family Associates LLC with
         respect to the purchase of the  Restricted  Common Units [Incorporated 
         by reference to the same titled exhibit in the Company's Annual Report 
         on Form 10-K for the fiscal year ended  December  31,  1994,  as 
         amended  (File No.0-23616).]

10.26    Guaranty  of  Abraham  Rosenthal  with  respect  to  the  purchase  of
         the Restricted  Common  Units  [Incorporated  by  reference  to the
         same titled exhibit in the  Company's  Annual  Report on Form 10-K for
         the fiscal  year ended December 31, 1994, as amended (File No. 
         0-23616).]

10.26A  Reaffirmation  of Pledge and  Guaranty  with  respect to the  Restricted
        Common Units of Rosenthal Family LLC and Abraham Rosenthal [Incorporated
        by reference  to  the  same  titled  exhibit  in  the  Company's
        registration statement on Form S-4 (Registration No. 333-1784).]

10.27   Guaranty of William H.  Carpenter,  Jr. with respect to the purchase of
        the Restricted  Common  Units  [Incorporated  by  reference  to the same
        titled exhibit in the  Company's  Annual  Report on Form 10-K for the
        fiscal year ended December 31, 1994, as amended (File No. 0-23616).]

10.27A  Reaffirmation  of Pledge and  Guaranty  with  respect to the  Restricted
        Common Units of Carpenter  Family  Associates LLC and William H. 
        Carpenter, Jr.  [Incorporated by reference to the same titled exhibit in
        the Company's registration statement on Form S-4 (Registration No. 333-
        1784).]

10.28   Waiver,  Recontribution  and Indemnity Agreement by the Limited Partners
        [Incorporated  by reference to the same titled  exhibit in the Company's
        Annual Report on Form 10-K for the fiscal year ended  December 31, 1994,
        as amended (File No. 0-23616).]

10.29   Indemnity Agreement made by the Company in favor of The Prime Group, 
        Inc. and Prime Group Limited Partnership  [Incorporated by reference to
        the same titled  exhibit  in the  Company's  registration  statement  on
        Form  S-11 (Registration No. 333-1666).]

10.30   Promissory Note dated October 31, 1996 by and between Prime Retail, L.P.
        and Nomura Asset Capital Corporation [Incorporated by reference to the
        same titled exhibit in the Company's  Annual Report on Form 10-K for the
        fiscal year ended December 31, 1996 (File No. 0-233616).]
<PAGE>

Exhibit
Number                            Description

10.30A  Form of Deed of  Trust,  Security  Agreement,  Assignment  of  Rents and
        Fixture  Filings with Nomura Asset  Capital  Corporation  [Incorporated
        by reference to the same titled exhibit in the Company's Annual Report
        on Form 10-K for the fiscal year ended December 31, 1996 (File No. 
        0-23616).]

10.31   Form of Standby Bond Purchase and  Indemnity Agreement [Incorporated  by
        reference  to  the  same titled  exhibit  in  the Company's registration
        statement on Form S-11 (Registration No. 33-68536).]

10.32   Consulting Agreement between the Company and Financo, Inc. [Incorporated
        by reference to the same titled exhibit in the Company's Annual Report 
        on Form 10-K for the fiscal year ended December 31, 1996 (File No. 
        0-23616).]

10.33   Amended and  Restated  Agreement  and Plan of Merger  among  Prime  
        Retail, Inc., Prime Retail,  L.P., Horizon Group,  Inc., Sky Merger 
        Corp.,  Horizon Group Properties,  Inc.,  Horizon Group Properties, 
        L.P., and Horizon/Glen Outlet Centers  Limited  Partnership dated as of
        February  1,  1998 [Incorporated  by  reference  to the same titled
        exhibit in the  Company's Current Report on Form 8-K dated February 1,
        1998 (File No. 0-23616).]

10.34   Agreement  among Prime Retail,  Inc., Horizon Group, Inc., Mr. David H.
        Murdock, Castle & Cooke Properties, Inc., and Pacific Holding Company 
        dated as of  February  1, 1998 [Incorporated  by  reference  to the same
        titled exhibit in the Company's  Current Report on Form 8-K dated
        February 1, 1998 (File No. 0-23616).]

#10.35  Letter  Agreement with David G. Phillips regarding the purchase of units
        in Prime Retail, L.P. dated August 6, 1996. [Incorporated by reference 
        to the same titled exhibit in the Company's Annual Report on Form 10-K 
        for the fiscal year ended December 31, 1997 (File No.0-23616).]

#10.36  Non-employee  Director  Stock Plan  [Incorporated  by  reference  to
        Appendix I in the  Company's  registration  statement on Form S-4 (File
        No.333-51285).]

#10.37  1998 Long-Term  Stock  Incentive Plan  [Incorporated  by reference to
        Appendix J in the  Company's  registration  statement on Form S-4 (File
        No. 333-51285).]

#10.38  Description of the 1999 Long-Term Incentive Program.

12      Statement re  Computation  of Ratio  Earnings to Combined Fixed Charges
        and Preferred Stock Dividends

21      Subsidiaries of Prime Retail, Inc.

23      Consent of Ernst & Young LLP

27.1    Financial Data Schedule
---------------------------------
     Note:
     # Management  contract or compensatory  plan or arrangement required to be
       filed pursuant to Item 14(c).

 (b)    Reports on Form 8-K

     None

 (c)    Exhibits

     The list of  exhibits  filed with this  report is set forth in  response to
Item 14  (a)(3).  The  required  exhibits  have been filed as  indicated  in the
Exhibit  Index.  The  Company  agrees to  furnish a copy of any  long-term  debt
instrument  wherein the  securities  authorized  do not exceed 10 percent of the
registrant's  total  assets on a  consolidated  basis  upon the  request  of the
Securities and Exchange Commission.

(d)     Financial Statements and Schedules

     Schedule III -- Real Estate and Accumulated Depreciation attached hereto is
hereby incorporated by reference to this Item.
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                   PRIME RETAIL, INC.

Dated:  March 31, 1999                            /s/ Abraham Rosenthal
                                                  ---------------------
                                                  Abraham Rosenthal
                                                 Chief Executive Officer

Dated:  March 31, 1999                           /s/ Robert P. Mulreaney
                                                 -----------------------
                                                 Robert P. Mulreaney
                                                 Executive Vice President, Chief
                                                 Financial Officer and Treasurer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the date indicated.


         /s/ Michael W. Reschke                                   March 31, 1999
         ----------------------
         Michael W. Reschke
         Chairman of the Board

         /s/ Abraham Rosenthal                                    March 31, 1999
         ---------------------
         Abraham Rosenthal
         Chief Executive Officer and Director

         /s/ William H. Carpenter, Jr.                            March 31, 1999
         ----------------------------
         William H. Carpenter, Jr.
         President, Chief Operating Officer and Director

         /s/ Glenn D. Reschke                                     March 31, 1999
         --------------------
         Glenn D. Reschke
         Executive Vice President - Development and
         Acquisitions and Director

         /s/ William P. Dickey                                    March 31, 1999
         ---------------------
         William P. Dickey
         Director

         /s/ Terence C. Golden                                    March 31, 1999
         ---------------------
         Terence C. Golden
         Director

         /s/ Norman Perlmutter                                    March 31, 1999
         ---------------------
         Norman Perlmutter
         Director

         /s/ Robert D. Perlmutter                                 March 31, 1999
         ------------------------
         Robert D. Perlmutter
         Director

         /s/ Kenneth A. Randall                                   March 31, 1999
         ----------------------
         Kenneth A. Randall
         Director

         /s/ Sharon Sharp                                         March 31, 1999
         ----------------
         Sharon Sharp
         Director

         /s/ James R. Thompson                                    March 31, 1999
         ---------------------
         James R. Thompson
         Director

         /s/ Marvin S. Traub                                      March 31, 1999
         -------------------
         Marvin S. Traub
         Director
<PAGE>
                         Report of Independent Auditors



To the Board of Directors and Shareholders
Prime Retail, Inc.


We have audited the  accompanying  consolidated  balance sheets of Prime Retail,
Inc.  (the  "Company")  as  of  December 31,  1998  and  1997, and  the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the three years in the period ended  December 31,  1998. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of the Company at
December 31, 1998 and 1997, and the  consolidated  results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
1998, in conformity with generally accepted accounting principles.

                                                           /s/ Ernst & Young LLP



Baltimore, Maryland
January 29, 1999, except
for paragraph 7 of Note 9, 
as to which the date
is March 31, 1999
<PAGE>
<TABLE>

                               Prime Retail, Inc.
                           Consolidated Balance Sheets
                (Amounts in thousands, except share information)

<CAPTION>

 -----------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                                                                     1998         1997
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                        <C>             <C>    

 Assets
 Investment in rental property:
    Land                                                                                                    $  206,386     $ 66,277
    Buildings and improvements..........................................................................     1,753,641      779,191
    Property under development..........................................................................        45,068       53,139
    Furniture and equipment.............................................................................        10,627        6,175
                                                                                                            ----------     --------
                                                                                                             2,015,722      904,782
    Accumulated depreciation............................................................................      (127,747)     (82,033)
                                                                                                            ----------     --------
                                                                                                             1,887,975      822,749 
Cash and cash equivalents..............................................................................          5,765        6,373
 Restricted cash........................................................................................        34,969       41,736
 Accounts receivable, net...............................................................................        21,233        9,745
 Deferred charges, net..................................................................................        12,518       16,206
 Due from affiliates, net...............................................................................           988        1,052
 Investment in partnerships.............................................................................         8,386        3,278
 Other assets...........................................................................................         4,630        3,044
                                                                                                            ----------    ---------
          Total assets..................................................................................    $1,976,464    $ 904,183
                                                                                                            ==========    =========
 Liabilities and Shareholders' Equity
 Bonds payable..........................................................................................    $   32,900    $  32,900
 Notes payable..........................................................................................     1,184,607      482,365
 Accrued interest.......................................................................................         7,878        3,767
 Real estate taxes payable..............................................................................        11,229        4,639
 Construction costs payable.............................................................................         3,754        5,849
 Accounts payable and other liabilities.................................................................        69,879       20,210
                                                                                                            ----------     --------
          Total liabilities.............................................................................     1,310,247      549,730
 Minority interests.....................................................................................        22,483        9,925
 Shareholders' equity:
    Shares of preferred stock, 24,315,000 shares authorized:
       10.5% Series A Senior Cumulative Preferred Stock, $.01 par value
         (liquidation preference of $57,500), 2,300,000 shares issued and outstanding...................            23           23
       8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01 par
         value (liquidation preference of $195,703 and $74,545, respectively), 7,828,125
         and 2,981,800 shares issued and outstanding, respectively......................................            78           30
       Series C Cumulative Convertible Redeemable Preferred Stock, $.01 par value
         (liquidation preference of $60,000 and $50,000, respectively), 4,363,636 and 3,636,363 shares
         issued and outstanding, respectively...........................................................            44           36
    Shares of common stock, 150,000,000 shares authorized:
       Common stock, $.01 par value, 42,736,742 and 27,294,951 issued and outstanding, respectively.....           427          273
    Additional paid-in capital..........................................................................       759,105      398,188
    Distributions in excess of net income...............................................................      (115,943)     (54,022)
                                                                                                            ----------    ---------
          Total shareholders' equity....................................................................       643,734      344,528
                                                                                                            ----------    ---------
              Total liabilities and shareholders' equity................................................    $1,976,464    $ 904,183
                                                                                                            ==========    =========
 ===================================================================================================================================
</TABLE>

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

                               Prime Retail, Inc.
                      Consolidated Statements of Operations
              (Amounts in thousands, except per share information)

<CAPTION>

 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                          1998           1997         1996
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>            <C>          <C>    
 Revenues
 Base rents................................................................................... $148,376       $ 78,046     $ 54,710
 Percentage rents.............................................................................    6,384          3,277        1,987
 Tenant reimbursements........................................................................   67,152         37,519       25,254
 Interest and other...........................................................................   11,063         10,288        7,089
                                                                                               --------       --------     --------
       Total revenues.........................................................................  232,975        129,130       89,040
 Expenses
 Property operating...........................................................................   52,684         29,492       20,421
 Real estate taxes............................................................................   16,705          9,417        5,288
 Depreciation and amortization................................................................   52,959         26,715       19,256
 Corporate general and administrative.........................................................    7,980          5,603        4,018
 Interest.....................................................................................   60,704         36,122       24,485
 Other charges................................................................................    6,496          3,234        8,586
                                                                                               --------       --------     --------
       Total expenses.........................................................................  197,528        110,583       82,054
                                                                                               --------       --------     --------
 Income before loss on sale of real estate, minority interests and extraordinary item.........   35,447         18,547        6,986
 Loss on sale of real estate..................................................................  (15,461)             -            -
                                                                                               --------       --------     --------
 Income before minority interests and extraordinary item......................................   19,986         18,547        6,986
 (Income) loss allocated to minority interests................................................   (2,456)       (10,581)       2,092
                                                                                               --------       --------     --------
 Income before extraordinary item.............................................................   17,530          7,966        9,078
 Extraordinary item - loss on early extinguishment of debt,                                     
    net of minority interests in the amount of $0 in 1998 and 1997 and $3,263 in 1996.........        -         (2,061)      (1,017)
                                                                                               --------       --------     --------
 Net income...................................................................................   17,530          5,905        8,061
 Income allocated to preferred shareholders...................................................   24,604         12,726       14,236
                                                                                               --------       --------     --------
 Net loss applicable to common shares......................................................... $ (7,074)      $ (6,821)    $ (6,175)
                                                                                               ========       ========     ========
 Earnings per common share - basic and diluted:
       Loss before extraordinary item......................................................... $  (0.20)      $  (0.25)    $  (0.63)
       Extraordinary item.....................................................................        -          (0.11)       (0.12)
                                                                                               --------       --------     --------
       Net loss............................................................................... $  (0.20)      $  (0.36)    $  (0.75)
                                                                                               ========       ========     ========
 Weighted average common shares outstanding...................................................   35,612         19,189        8,221
                                                                                               ========       ========     ========
 ===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>

                               Prime Retail, Inc.
                      Consolidated Statements of Cash Flows
                             (Amounts in thousands)
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                             1998         1997        1996
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>          <C>         <C>    
 Operating Activities
 Net income...................................................................................     $17,530      $ 5,905     $ 8,061
 Adjustments to reconcile net income to net cash provided by operating activities:
       Income (loss) allocated to minority interests..........................................       2,456       10,581      (2,092)
       Extraordinary loss for early extinguishment of debt, net...............................           -        2,061       1,017
       Write-off of financing costs related to early extinguishment of debt...................           -            -       6,131
       Loss on sale of real estate............................................................      15,461            -           -
       Depreciation...........................................................................      51,840       25,055      17,468
       Amortization of deferred financing costs and interest rate protection contracts........       2,867        3,742       3,724
       Amortization of leasing commissions....................................................       1,119        1,660       1,788
       Provision for uncollectible accounts receivable........................................       1,387          970         710
       Gain on sale of land...................................................................        (274)        (904)          -
 Changes in operating assets and liabilities:
    (Increase) decrease in accounts receivable................................................     (17,605)      (4,619)      1,945
    (Increase) decrease in other assets.......................................................      (4,185)       1,400      (3,597)
    Increase (decrease) in other liabilities..................................................     (11,620)       3,381       9,785
    Increase in accrued interest..............................................................       2,279          127         606
    (Increase) decrease in due from affiliates, net...........................................          80          497        (355)
                                                                                                   -------      -------     -------
       Net cash provided by operating activities..............................................      61,335       49,856      45,191 
 Investing Activities                                                                              -------      -------     -------
 Purchase of land.............................................................................           -         (667)       (953)
 Additions to buildings and improvements......................................................     (46,862)     (20,390)    (85,103)
 Increase in property under development.......................................................     (89,190)     (49,668)    (11,566)
 Acquisition of outlet centers................................................................           -     (159,232)   (134,668)
 Acquisition of Horizon, net of cash acquired and spin-off of HGP.............................     (35,559)           -           -
 Proceeds from sale of Prime Transferred Properties...........................................      26,015            -           -
                                                                                                  --------     --------     -------
       Net cash used in investing activities..................................................    (145,596)    (229,956)   (232,290)
 Financing Activities                                                                             --------     --------     -------
 Net proceeds from offerings..................................................................           -      242,729      36,948
 Proceeds from notes payable..................................................................     467,998      160,057     591,520
 Principal repayments on notes payable........................................................    (283,806)    (175,683)   (397,951)
 Deferred financing fees......................................................................      (3,277)        (583)    (18,036)
 Distributions and dividends paid.............................................................     (79,451)     (33,605)    (27,470)
 Distributions to minority interests..........................................................     (17,811)     (10,366)     (8,915)
                                                                                                  --------     --------     -------
       Net cash provided by financing activities..............................................      83,653      182,549     176,096
                                                                                                  --------     --------     -------
 Increase (decrease) in cash and cash equivalents.............................................        (608)       2,449     (11,003)
 Cash and cash equivalents at beginning of period.............................................       6,373        3,924      14,927
                                                                                                  --------     --------     -------
 Cash and cash equivalents at end of period...................................................    $  5,765     $  6,373     $ 3,924
                                                                                                  ========     ========     ========

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

<TABLE>

                               PRIME RETAIL, INC.
                Consolidated Statements of Cash Flows (continued)
                             (Amounts in thousands)

     Supplemental Disclosure of Noncash Investing and Financing Activities:
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                     1998              1997         1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>             <C>            <C>    

Assumption of notes payable.....................................................        $      -         $  31,368     $       -
                                                                                        ========         =========     =========  
</TABLE>                                                                   
     The following  assets and liabilities  were acquired and sold in connection
with the consummation of the Merger Transactions on June 15, 1998:
Acquisition of Horizon, net of spin-off of HGP:

    Fair value of assets acquired.................................  $ 1,014,973
    Cash paid, net of cash and cash equivalents acquired..........      (35,559)
    Common shares issued..........................................     (214,282)
    Common units issued...........................................      (56,023)
    Series B convertible preferred shares issued..................     (118,735)
                                                                    -----------
    Fair value of liabilities assumed...........................    $   590,374
                                                                    ===========
Disposition of Prime Transferred Properties:
    Book value of assets disposed...............................    $    42,218
    Cash received...............................................        (26,015)
    Loss on sale...............................................         (15,461)
                                                                    -----------
    Liabilities disposed......................................      $       742
                                                                    ===========
================================================================================

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

                               Prime Retail, Inc.
                 Consolidated Statements of Shareholders' Equity
                (Amounts in thousands, except share information)

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                             Series A    Series B     Series C               Additional  Distributions      Total
                                            Preferred   Preferred     Preferred    Common      Paid-in   in Excess of  Shareholders'
                                              Stock       Stock          Stock     Stock      Capital     Net Income       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>      <C>           <C>          <C>       <C>          <C>          <C>

Balance, January 1, 1996...................    $  23     $    70                   $  29     $128,275     $  (6,913)   $    121,484
Series B preferred stock exchanged and
  retired (4,209,000 shares) for common
  (6,734,323 shares).......................        -         (42)                     67       (1,822)            -          (1,797)
Issuance of 3,795,328 shares of common 
   stock, net of issuance costs............        -           -                      38       38,893             -          38,931 
Net income.................................        -           -                       -            -         8,061           8,061 
Common distributions declared 
   ($1.325 per share).....                         -           -                       -            -       (10,998)        (10,998)
Preferred distributions and dividends 
   declared:
        Series A ($2.625 per share)........        -           -                       -            -        (6,037          (6,037)
        Series B ($2.125 per share)........        -           -                       -            -       (10,435)        (10,435)
                                               -----       -----                   -----     --------     ---------     -----------
Balance, December 31, 1996.................       23          28                     134      165,346       (26,322)        139,209
Issuance of 175,800 shares of Series B 
   preferred stock, net of issuance cost....       -           2                       -        3,798             -           3,800
Issuance of 13,890,300 shares of common 
   stock, net of issuance cost..............       -           -                     139      180,035             -         180,174
Issuance of 3,636,363 shares of Series C 
    preferred stock, net of issuance cost...       -           -       $   36          -       49,009             -          49,045
Net income..................................       -           -            -          -            -         5,905           5,905
Common distributions declared 
    ($1.18 per share).......................       -           -            -          -            -       (21,232)        (21,232)
Preferred distributions and dividends 
    declared:
         Series A ($2.625 per share)........       -           -            -          -            -        (6,037)         (6,037)
         Series B ($2.125 per share)........       -           -            -          -            -        (6,336)         (6,336)
                                               -----       -----       ------      -----     --------     ---------     -----------
Balance, December 31, 1997..................      23          30           36        273      398,188       (54,022)        344,528
Issuance of 14,466,329 shares of common 
   stock, net of issuance cost..............       -           -            -        145      214,137             -         214,282
Issuance of 4,846,325 shares of Series B
   preferred stock, net of issuance cost....       -          48            -          -      118,687             -         118,735
Exchange of 975,462 common units for common
    stock ..................................       -           -            -          9       18,754             -          18,763
Exchange of 727,273 Series C preferred 
    units for 727,273 shares of Series C 
    Series C preferred stock................       -           -            8          -        9,339             -           9,347
Net income..................................       -           -            -          -            -        17,530          17,530
Common distributions declared 
    ($1.68 per share).......................       -           -            -          -            -       (54,750)        (54,750)
Preferred distributions and dividends declared:
     Series A ($2.625 per share)............       -           -            -          -            -        (6,037)         (6,037)
     Series B ($2.725 per share)............       -           -            -          -            -       (13,275)        (13,275)
     Series C ($1.680 per share)............       -           -            -          -            -        (5,389)         (5,389)
                                               -----       -----       ------   --------     --------      ---------     -----------
Balance, December 31, 1998..................   $  23       $  78       $   44   $    427     $759,105      $(115,943)    $   643,734
                                               =====       =====       ======   ========     ========      =========     ===========
====================================================================================================================================
</TABLE>

  See accompanying notes to financial statements.

<PAGE>

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


Note 1 - Organization and Basis of Presentation

Organization

     Prime Retail, Inc. (the "Company") is a self-administered  and self-managed
real  estate  investment  trust  ("REIT")  that  operates  primarily  within one
business segment and develops, acquires, owns and operates manufacturers' outlet
centers  in the  United  States.  The  Company's  manufacturers'  outlet  center
portfolio,  including  three  manufacturers'  outlet centers owned through joint
venture partnerships, consists of 50 manufacturers' outlet centers in 26 states,
which total  14,348,000  square feet of gross  leasable area ("GLA") at December
31,  1998.  As  a  fully-integrated  real  estate  firm,  the  Company  provides
development,   construction,   accounting,   finance,  leasing,  marketing,  and
management services for all of its properties (the "Properties").  The Company's
Properties are held and all of its business and operations are conducted through
Prime  Retail,  L.P. (the  "Operating  Partnership").  The Company  controls the
Operating  Partnership  as its sole general  partner and is  dependent  upon the
distributions  or other  payments  from the  Operating  Partnership  to meet its
financial obligations.

     At December 31, 1998, the Company owned 2,300,000 Senior Preferred Units of
the Operating  Partnership (the "Senior  Preferred  Units"),  7,828,125 Series B
Convertible  Preferred  Units  of  the  Operating  Partnership  (the  "Series  B
Convertible  Preferred  Units"),  4,363,636  Series  C  Preferred  Units  of the
Operating  Partnership (the "Series C Preferred  Units"),  and 42,736,742 Common
Units of partnership interest in the Operating Partnership (the "Common Units").
Each Senior  Preferred Unit,  Series B Convertible  Preferred Unit, and Series C
Preferred Unit  (collectively,  the "Preferred  Units")  entitles the Company to
receive  distributions from the Operating  Partnership in an amount equal to the
dividend  declared  or paid with  respect to a share of the  Company's  Series A
Senior  Cumulative   Preferred  Stock  ("Senior  Preferred  Stock"),   Series  B
Cumulative  Convertible  Participating  Preferred  Stock  ("Series B Convertible
Preferred  Stock"),  and Series C Cumulative  Convertible  Redeemable  Preferred
Stock ("Series C Preferred  Stock"),  respectively,  prior to the payment by the
Operating  Partnership of distributions with respect to the Common Units. Series
B Convertible Preferred Units and Series C Preferred Units will be automatically
converted  into  Common  Units  to the  extent  of any  conversion  of  Series B
Convertible  Preferred Stock or Series C Preferred Stock into Common Stock.  The
Preferred  Units will be redeemed by the Operating  Partnership to the extent of
any redemption of Senior Preferred Stock, Series B Convertible  Preferred Stock,
or  Series  C  Preferred  Stock.  (See  Note 8 -  "Equity  Offerings  and Other
Transactions"  of  the  Notes  to  the  Consolidated  Financial  Statements  for
additional information concerning equity transactions that were completed by the
Company in 1997 and 1998.)

     A  summary  of the  holders  of units in the  Operating  Partnership  as of
December 31, 1998 is as follows:
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                              Number of Units
                                                                         -----------------------------------------------------------
Holder                                                                    Series A       Series B        Series C          Common
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>             <C>            <C>    

Prime Retail, Inc......................................................  2,300,000      7,828,125       4,363,636      42,736,742
PGI, management and other (1)..........................................          -              -               -      11,312,131
                                                                         ---------      ---------       ---------      ----------   
                                                                         2,300,000      7,828,125       4,363,636      54,048,873
====================================================================================================================================
</TABLE>

Note:

(1)  Includes 993,480 units beneficially owned by management and 4,102,923 units
     owned by certain executive  officers based on their ownership  interests in
     PGI.

     As of  December  31,  1998,  the Company  has a 79.1%  general  partnership
interest in the Operating  Partnership  with full and complete  control over the
management of the Operating  Partnership as the sole general partner not subject
to removal by the limited partners.
<PAGE>

     The Operating  Partnership  is the 1% sole general  partner of Prime Retail
Services  Limited  Partnership  (the  "Services  Partnership").   The  Operating
Partnership  owns  100%  of the  non-voting  preferred  stock  of  Prime  Retail
Services,  Inc. (the "Services  Corporation") which, in turn, is the 99% limited
partner of the Services  Partnership.  Certain members of management own 100% of
the voting common stock of the Services  Corporation  and no cash  distributions
were made during the years ended December 31, 1998,  1997 and 1996. The Services
Partnership was formed  primarily to operate  business lines of the Company that
are  not  directly  associated  with  the  collection  of  rents.  The  Services
Corporation is subject to federal, state and local taxes.

     Unless the context otherwise requires, all references to the Company herein
mean Prime Retail,  Inc. and those entities owned or controlled by Prime Retail,
Inc., including the Operating Partnership and the Services Partnership.

Basis of Presentation

     The consolidated  financial statements include the accounts of the Company,
the  Operating  Partnership  and the  partnerships  in  which  the  Company  has
operational  control.  Profits and losses are allocated in  accordance  with the
terms of the agreement of limited partnership of the Operating Partnership.  The
preparation  of financial  statements  in  conformity  with  generally  accepted
accounting  principles  ("GAAP")  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

     Investments in partnerships in which the Company does not have  operational
control are  accounted  for on the equity  method of  accounting.  Income (loss)
applicable  to  minority  interests  and  common  shares  as  presented  in  the
consolidated statements of operations is allocated based on income (loss) before
minority interests after income allocated to preferred shareholders.

     Significant  intercompany accounts and transactions have been eliminated in
consolidation.  Certain  amounts in prior  years have been  reclassified  to the
current year presentation.

Note 2 - Summary of Significant Accounting Policies

Rental Property

     Depreciation  is calculated on the  straight-line  basis over the estimated
useful lives of the assets which are as follows:

    Land improvements....................................               20 years
    Buildings and improvements...........................   Principally 40 years
    Tenant improvements..................................  Term of related lease
    Furniture and equipment..............................                5 years

     Rental   property  is  carried  at  historical   cost  net  of  accumulated
depreciation.  Development  costs,  which  include  fees and costs  incurred  in
developing  new  properties,  are  capitalized as incurred.  Upon  completion of
construction,  development  costs are  amortized  over the  useful  lives of the
respective properties on a straight-line basis. The Company evaluates its rental
properties  periodically  to  assess  whether  any  impairment  indications  are
present, including recurring operating losses and significant adverse changes in
the business  climate that affect the recovery of recorded  asset value.  If any
rental  property  is  considered  impaired,  a loss is  provided  to reduce  the
carrying  value of the asset to its estimated fair value.  No impairment  losses
have been recorded in any of the periods presented.

     Expenditures   for  ordinary   maintenance  and  repairs  are  expensed  to
operations as incurred.  Significant  renovations and improvements which improve
and/or extend the useful life of assets are  capitalized  and  depreciated  over
their estimated useful lives.

Cash Equivalents

     The Company  considers  highly liquid  investments with a maturity of three
months or less when purchased to be cash equivalents.

Accounts Receivable

     Management   regularly  reviews  accounts   receivable  and  determines  an
appropriate  range for the allowance for doubtful accounts based upon the impact
of  economic  conditions  on the  merchants'  ability  to pay,  past  collection
experience  and such other factors  which,  in  management's  judgment,  deserve
current  recognition.  In turn, a provision is charged against earnings in order
to maintain the  allowance  level within this range.  The allowance for doubtful
accounts at December 31, 1998 and 1997 was $4,288 and $1,780, respectively.

<PAGE>

     Accounts receivable due after one year primarily representing straight-line
rents were $7,233 and $5,969 at December 31, 1998 and 1997, respectively.

Deferred Charges

     Deferred  charges  consist  of leasing  commissions  and  financing  costs.
Deferred  leasing  commissions  incurred to originate and renew operating leases
are amortized on a straight-line  basis over the term of the related lease. Fees
and costs incurred to obtain financing are deferred and are being amortized as a
component of interest  expense over the terms of the respective loans on a basis
that approximates the interest method.

Due from Affiliates, Net

     Due from  affiliates,  net  consists  of  amounts  due from  joint  venture
partnerships  related to the reimbursement of costs paid by the Company on their
behalf.

Revenue Recognition

     Leases with tenants are accounted for as operating  leases.  Minimum rental
income is  recognized  on a  straight-line  basis over the term of the lease and
unpaid rents are included in accounts  receivable  in the  accompanying  balance
sheet. Certain lease agreements contain provisions which provide for rents based
on a  percentage  of  sales or based on a  percentage  of sales  volume  above a
specified threshold. In addition, the lease agreements generally provide for the
reimbursement  of real estate taxes,  insurance,  advertising and certain common
area maintenance  costs.  These additional rents and tenant  reimbursements  are
accounted for on the accrual basis.

Earnings per Share

     On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards  ("SFAS") No. 128,  "Earnings per Share" which specifics the method of
computation,  presentation  and disclosure for earnings per share ("EPS").  SFAS
No. 128 requires the  presentation  of both basic EPS and diluted EPS. Basic EPS
is calculated  by dividing net income  available to common  shareholders  by the
weighted  average number of shares  outstanding  during the period.  Diluted EPS
includes  the  potentially  dilutive  effect,  if  any,  which  would  occur  if
outstanding  (i) options to purchase  Common Stock were  exercised,  (ii) Common
Units were  converted  into  shares of Common  Stock,  (iii)  shares of Series C
Preferred  Stock were converted into shares of Common Stock,  and (iv) shares of
Series B Convertible Preferred Stock were converted into shares of Common Stock.
For all periods  presented,  the effect of these  exercises and  conversions was
anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS.

Stock Based Compensation

     The Company  accounts for stock option grants in accordance with Accounting
Principles  Board  Opinion  ("APB")  No.  25,  "Accounting  for Stock  Issued to
Employees" and,  accordingly,  recognizes no  compensation  expense for employee
stock  option  grants.  The  Company  has  elected to adopt only the  disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."

Impact of Recently Issued Accounting Standards

     In March 1998 the  American  Institute  of  Certified  Public  Accountants'
("AICPA") issued  Statement of Position ("SOP") 98-1,  "Accounting for the Costs
of  Computer  Software  Developed  for  or  Obtained  for  Internal  Use."  This
statement,  which is effective  for fiscal years  beginning  after  December 15,
1998,  requires the  capitalization of certain costs incurred in connection with
developing  or  obtaining  software  for  internal  use.  The  Company  does not
anticipate  a  material  impact  on its  results  of  operations  and  financial
position.

     In April  1998,  the  AICPA  issued  SOP 98-5,  "Reporting  on the Costs of
Start-up  Activities." This  statement,  which is  effective  for fiscal  years
beginning after December 15, 1998,  requires that costs of start-up  activities,
including  organization  costs,  be expensed as  incurred.  The Company does not
anticipate  a  material  impact  on its  results  of  operations  and  financial
position.

Income Taxes

     The Company has  elected to be taxed as a REIT under  Sections  856 through
860 of the Internal  Revenue Code of 1986,  as amended.  As a REIT,  the Company
generally  will not be subject to federal  income tax at the corporate  level on
income it distributes to its shareholders so long as it distributes at least 95%
of its taxable income (excluding any net capital gain) each year. If the Company
fails to qualify as a REIT in any taxable  year,  the Company will be subject to
federal income tax (including  any  applicable  alternative  minimum tax) on its
taxable income at regular  corporate rates.  Even if the Company  qualifies as a
REIT,  the Company may be subject to certain state and local taxes on its income
and property. The Company incurred $337, $263, and $116 of state and local taxes
for the years ended December 31, 1998, 1997 and 1996, respectively.  The Company
paid  $424,  $170,  and $102 of state and local  taxes  during  the years  ended
December 31, 1998 and 1997, and 1996, respectively.
<PAGE>

     The   following   table   summarizes   the   taxability  of  dividends  and
distributions  paid during (i) the period from January 1 to June 15, 1998,  (ii)
the period from June 16 to December 31, 1998, and (iii) the years ended December
31, 1997 and 1996:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                 
                                                                                 Period from    Period from
                                                                                January 1 to     June 16 to   Years end December 31,
                                                                                    June 15,   December 31,   ----------------------
                                                                                        1998           1998        1997         1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>           <C>          <C>   
 
Senior Preferred Stock
    Ordinary income .........................................................       $1.3125        $1.3125       $2.625       $2.625
                                                                                    =======        =======       ======       ======
 Series B Convertible Preferred Stock
    Ordinary income .........................................................       $ 1.663        $ 0.922       $1.940       $0.808
    Return of capital........................................................             -          0.525        0.185        1.317
                                                                                    -------        -------       ------       ------
                                                                                    $ 1.663        $ 1.447       $2.125       $2.125
 Series C Preferred Stock                                                           =======        =======       ======       ======
    Ordinary income .........................................................       $ 0.167        $     -       $    -       $    -
    Return of capital........................................................         0.725          0.912            -            -
                                                                                    -------        -------       ------       ------
                                                                                    $ 0.892        $ 0.912       $    -       $    -
Common Stock                                                                        =======        =======       ======       ======
    Return of capital.........................................................      $ 1.090        $ 0.912       $1.180       $1.325
                                                                                    =======        =======       ======       ======
====================================================================================================================================
</TABLE>

Risks and Uncertainties

     The Company's  results of  operations  are  significantly  dependent on the
overall health of the retail  industry.  The Company's  tenant base is comprised
almost  exclusively of merchants in the retail industry.  The retail industry is
subject to external factors such as inflation, consumer confidence, unemployment
rates and  consumer  tastes and  preferences.  A decline in the retail  industry
could reduce merchant sales,  which could adversely affect the operating results
of the Company.

Note 3 - Acquisitions and Dispositions

     On June 15,  1998,  the merger and other  transactions  (collectively,  the
"Merger  Transactions")  as set forth in the  agreement  and plan of merger (the
"Merger Agreement") between the Company and Horizon Group, Inc. ("Horizon") were
consummated for an aggregate consideration of $1,134,682,  including liabilities
assumed and related transaction costs.

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

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

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

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

     The merger has been  accounted for using the purchase  method of accounting
and the purchase price was allocated to the assets  acquired and the liabilities
assumed based on estimates of their respective fair values.  Certain assumptions
were made which management of the Company believes are reasonable.

     On February 13, 1997, the Company,  acquired Prime Outlets at Sedona, Prime
Outlets at Bend and Prime  Outlets at Post Falls from an  unrelated  third party
for an aggregate  purchase price of $37,250.  The Company  financed the purchase
with loan proceeds from a financial  institution  and a $4,000  promissory  note
issued to the seller.  The operating results of the Company for 1997 include the
results of these acquisitions effective with the closing on February 13, 1997.

     On  September 2, 1997,  the Company  acquired a 25%  ownership  interest in
Prime  Outlets at Lodi  ("Lodi")  from its joint  venture  partner  for  $23,148
(including $22,642 of mortgage indebtedness relating to such property),  thereby
increasing its ownership percentage in such property to 100%. Prior to September
2, 1997,  the Company  accounted for its 75% investment in Lodi using the equity
method of accounting.  Commencing  September 2, 1997,  the operating  results of
Lodi are  consolidated.  The Company financed the acquisition with proceeds from
the September 1997 Offering.

     On  October  29,  1997,  the  Company   acquired   Tidewater  Outlet  Mall,
Manufacturer's  Outlet Mall, Kittery Outlet Village (collectively "Prime Outlets
at Kittery"),  and Prime Outlets at Latham from an unrelated  third party for an
aggregate purchase price of $26,000. The Company financed the purchase primarily
with the proceeds from the September 1997 Offering.

     In addition,  on December 2, 1997,  the Company  acquired  Prime Outlets at
Niagara Falls USA and Prime  Outlets at Anderson  from an unrelated  third party
for an  aggregate  purchase  price of  $100,975,  including  the  assumption  of
mortgage  indebtedness  of  $31,368.  The Company  financed  the  purchase  with
proceeds from the September 1997 Offering and the Private Placement.

     The Company  accounted for these  acquisitions and  dispositions  using the
purchase method of accounting.  The operating results of these acquisitions have
been included in the Company's  consolidated results of operations commencing on
the  date  of  acquisition.  The  operating  results  of the  Prime  Transferred
Properties  have  been  included  in  the  Company's   consolidated  results  of
operations through the date of disposition.

     The  following  unaudited pro forma  information  presents a summary of the
Company's  consolidated  results  of  operations  as if these  acquisitions  and
dispositions had occurred on January 1, 1997:

--------------------------------------------------------------------------------
Year ended December 31,                                     1998            1997
--------------------------------------------------------------------------------
Total revenues....................................       $286,323       $266,294
                                                         ========       ========
Net income from continuing operations.................   $ 35,699       $ 28,009
                                                         ========       ========
Net income applicable to common shares.................  $  7,775       $  6,527
                                                         ========       ========
Earnings per common share - basic and diluted........... $   0.18       $   0.19
                                                         ========       ========
Weighted average common shares outstanding..............   42,151         33,655
                                                         ========       ========
================================================================================

     These  unaudited  pro forma  results  have been  prepared  for  comparative
purposes only and include certain adjustments,  such as additional  depreciation
expense based on the purchase price of such assets acquired and interest expense
on debt incurred to finance the acquisitions.  These unaudited pro forma results
do not purport to be  indicative  of the results of  operations  which  actually
would have resulted had the combination  been in effect on January 1, 1997 or of
future results of operations of the Company.

Note 4 - Restricted Cash

     At December 31, 1998 and 1997, the Company had placed in escrow $34,969 and
$41,736,  respectively,  to be used to complete certain development projects, to
fund real estate taxes and debt service and to pay certain operating costs under
a mortgage  loan  agreement.  At December 31,  1998,  restricted  cash  included
$18,308 relating to a nonrecourse  expansion loan which can only be used to fund
certain  development  costs  relating to the  expansion of ten of the  Company's
manufacturers'  outlet centers,  provided certain occupancy and other conditions
have been attained.
<PAGE>

Note 5 - Deferred Charges

        Deferred charges were as follows:

  ------------------------------------------------------------------------------
  December 31,                                                  1998        1997
  ------------------------------------------------------------------------------

  Leasing commissions............................           $ 10,775   $ 11,261
  Financing costs................................             17,787     18,145
                                                            --------   --------
                                                              28,562     29,406
Accumulated amortization.......................              (16,044)   (13,200)
                                                            --------   --------
                                                            $ 12,518   $ 16,206
                                                            ========   ========
================================================================================

Note 6 - Bonds and Notes Payable

     Bonds payable consisted of the following:
<TABLE>
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                                                                      1998         1997
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                             <C>          <C>    

 Variable rate tax-exempt  revenue bonds (the "Bonds"),  rate determined by remarketing  agents,  ranging
    from 3.50% to 4.05% at December 31,  1998,  interest-only payments, due 2012 to 2014,  collateralized
    by properties in Chattanooga, TN and Knoxville, TN...................................................       $28,250      $28,250

 Urban  Development  Action Grant Loans,  3% through  August 31,  1997 and 6%  thereafter,  interest-only
    payments, due 2016 to 2019, collateralized by property in Chattanooga, TN............................         4,650        4,650
                                                                                                                -------      -------
                                                                                                                $32,900      $32,900
                                                                                                                =======      =======
 ===================================================================================================================================
</TABLE>

     Under the terms of the loan agreements  relating to the Bonds,  the issuing
partnerships  are required to make  interest-only  payments  calculated  using a
variable rate  determined by the remarketing  agents of the Bonds.  The interest
rates  ranged  from 2.85% to 4.45% in 1998,  3.00% to 4.70% in 1997 and 2.45% to
5.30% in 1996. Under certain  conditions,  the interest rate on the Bonds may be
converted to a fixed rate at the request of the Company. A bondholder may tender
bonds  during the  variable  interest  rate period and receive  principal,  plus
accrued  interest through the tender date. Upon tender,  the remarketing  agents
are required to  immediately  remarket the Bonds.  In the event the  remarketing
agents fail to remarket any bonds,  the  remarketing  agents may draw on certain
liquidity  facilities as described  below.  The remarketing  agents receive fees
varying from 0.1% to 0.125% per annum on the outstanding  bond balance,  payable
quarterly in arrears.

     The Bonds are collateralized by letters of credit (the "Letters of Credit")
issued  by a group of  financial  institutions  pursuant  to a master  letter of
credit  agreement.  The Letters of Credit are  collateralized by a reimbursement
agreement  under  the  master  letter of credit  agreement  (the  "Reimbursement
Agreement")  which  obligates an insurance  company to reimburse  the  financial
institutions  for any funds drawn on the  Letters of Credit.  In  addition,  the
issuing partnerships, the Operating Partnership and an insurance company entered
into standby bond purchase and indemnity  agreements (the "Standby  Agreements")
in order to address the scheduled  expirations of various  credit  enhancements,
including the Letters of Credit, through June 25, 1999.

     Pursuant to the Standby  Agreements,  the insurance  company agreed that in
the event that any of the issuing partnerships are unable to arrange replacement
credit enhancement facilities as necessary,  the insurance company will purchase
the  applicable  Bonds and hold the same until June 25, 1999,  at which time the
issuing  partnership  and the  Operating  Partnership  will  purchase  the Bonds
pursuant to the terms of the related Standby Agreement.

     The Letters of Credit are  scheduled to expire on December  31,  1999.  The
total  commitments  outstanding  under the Letters of Credit,  the Reimbursement
Agreement and the Standby  Agreements as of December 31, 1998 were $28,909.  The
due date of the Bonds  accelerates  upon the expiration of the Letters of Credit
unless the Letters of Credit are extended or replaced.
<PAGE>
        Notes payable consisted of the following:
<TABLE>

<CAPTION>
  ----------------------------------------------------------------------------------------------------------------------------------
  December 31,                                                                                                   1998        1997
  ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                           <C>         <C>    
 
  First Mortgage and Expansion Loan, LIBOR plus 1.51% through November 10, 1998, 7.782% thereafter, monthly
     installments of $2,580 including interest, due November 11, 2003, collateralized by fifteen properties
     located throughout the United States.................................................................... $353,018    $355,996

  Permanent Loan, 6.99%, monthly installments of $1,248 including interest, due July 11, 2008, collateralized
     by four properties located throughout the United States.................................................  179,096           -

  Secured Revolving Loan, LIBOR plus 1.35%, 6.90% at December 31, 1998, monthly interest-only payments, 
     due June 11, 2001, collateralized by six properties located throughout the United States................   95,000           -

  Mortgage, 6.927%, monthly installments of $565 including interest, due October 11, 2006, collateralized by
     four properties located throughout the United States....................................................   77,365           -

  Mortgage, 6.927%, monthly installments of $527 including interest, due  March 11, 2006, collateralized by
     four properties located throughout the United States....................................................   68,495           -

  Mortgage, 6.915%, monthly installments of $402 including interest, due June 10, 2002, collateralized by
     property located in Birch Run, MI.......................................................................   47,572           -

  Mortgage, 6.95%, monthly installments of $351 including interest, due November 1, 2005, collateralized by
     property located in Vero Beach, FL and Woodbury, MN....................................................    46,037           -

  Term loan, LIBOR plus 1.95%, 7.23% at December 31, 1998, monthly interest-only payments through
     February 10, 1998; quarterly principal and monthly interest payments thereafter, due November 11, 1999,
     collateralized by excess cash flow of fifteen properties located throughout the United States..........    45,260      53,290

  Unsecured Revolving Loan, LIBOR plus 1.75%, 7.03% at December 31, 1998, monthly interest-only payments, due
     September 11, 2001.....................................................................................    40,000           -

  Mortgage, 6.915%, monthly installments of $357 including interest, due June 10, 2002, collateralized by
     property located in Conroe, TX and Jeffersonville, OH..................................................    38,381           -

  Mortgage, 6.83%, monthly installments of $218 including interest, due June 6, 2006, collateralized by
     property in Niagara Falls, NY..........................................................................    30,832      31,328

  Construction Mortgage Loan, LIBOR plus 1.50%, 7.13% at December 31, 1998, monthly interest-only payments
     through May 31, 2002; monthly principal and interest payments thereafter, due June 1, 2004,
     collateralized by property located in Hagerstown, MD...................................................    29,914           -

  Mortgage, 8.35%, monthly installments of $215 including interest, due June 11, 2007, collateralized by three
     properties located throughout the United States........................................................    26,463      26,784

  Mortgage, 6.93%, monthly installments of $221 including interest, due November 1, 2000, collateralized by
     property located in Williamsburg, VA...................................................................    23,754           -

  Construction mortgage loan, prime rate or LIBOR plus 1.75%, 6.85% at December 31, 1998, monthly
     interest-only payments, due December 31, 1999, collateralized by property located in Lebanon, TN.......    19,951           -

  Mortgage, 6.91%, monthly installments of $154 including interest, due June 10, 2001, collateralized by
     property located in Edinburgh, IN......................................................................    17,965           -

  Mortgage, 6.91%, monthly installments of $93 including interest, due June 10, 2001, collateralized by
     property located in Birch Run, MI......................................................................    10,952           -

  Mortgage, 6.95%, monthly installments of $81 including interest, due November 1, 2005, collateralized by
     property located in Perryville, MD.....................................................................    10,433           -

  Note Payable, 9.50%, monthly interest-only payments, due November 1, 2001, collateralized by land located in
     Camarillo, CA..........................................................................................     7,400           -

   Mortgage, 9.375%, monthly installments of $71 including interest, due March 1, 2004, collateralized by
      property located in Lombard, IL.......................................................................     6,507       6,735

  Mortgage, 7.50%, monthly installments of $29 including interest, due June 22, 2000, collateralized by
     property in Knoxville, TN..............................................................................     3,666       3,732

  Unsecured Corporate Line, $20,000 at December 31, 1998, LIBOR plus 2.50%, 7.55% at December 31, 1998,
     monthly interest-only payments, due July 11, 1999......................................................     3,000           -

  Term loan, LIBOR plus 1.95%, 7.23% at December 31, 1998, monthly interest-only payments through April 10,
     1998; monthly principal and interest payments thereafter, due February 13, 2000, collateralized by excess
     cash flow of three properties located throughout the United States.....................................     2,688       3,000

  Other notes payable.......................................................................................       858           -

  Unsecured term loans, 8.25%...............................................................................         -       1,500
                                                                                                            ----------    --------  
                                                                                                            $1,184,607    $482,365
                                                                                                            ==========    ========
  ==================================================================================================================================
</TABLE>

<PAGE>


     At December 31, 1998,  unused  commitments  available for borrowings  under
various  loan  facilities  were  $37,392 in the  aggregate.  Interest  costs are
summarized as follows: 
<TABLE>

<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                             1998         1997        1996
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>          <C>        <C>    

 Interest incurred..............................................................................    $63,630      $36,436    $24,109
 Interest capitalized...........................................................................     (5,793)      (4,056)    (3,348)
 Amortization of deferred financing costs and interest
    rate protection contracts...................................................................      2,867        3,742      3,724
                                                                                                    -------      -------    -------
 Interest expense...............................................................................    $60,704      $36,122    $24,485
                                                                                                    =======      =======    =======
 Interest paid..................................................................................    $61,114      $36,424    $23,703
                                                                                                    =======      =======    =======
 ==================================================================================================================================
</TABLE>

     The  scheduled  maturities  of bonds and notes payable at December 31, 1998
were as follows:

 -------------------------------------------------------------------------------
 December 31,                                                               1998
 -------------------------------------------------------------------------------

 1999............................................................       $ 85,034
 2000............................................................         45,321
 2001............................................................        185,742
 2002............................................................         89,371
 2003............................................................        349,509
 Thereafter......................................................        462,530
                                                                       ---------
                                                                      $1,217,507
                                                                      ==========
 ===============================================================================

     Bonds and notes payable include unamortized debt premiums of $40,804 in the
aggregate at December 31, 1998. Debt premiums are being amortized over the terms
of the related  debt  instruments  in  accordance  with the  effective  interest
method. The aggregate carrying amount of bonds and notes payable at December 31,
1998 approximated their fair value. At December 31, 1998, the aggregate carrying
amount  of  rental  property   collateralizing   bonds  and  notes  payable  was
$1,866,644.

     On March 18, 1998,  the Company  obtained  from a financial  institution  a
commitment for a construction  mortgage loan (the "Construction  Mortgage Loan")
relating to Phase I of Prime Outlets at Hagerstown  ("Hagerstown")  in an amount
not to exceed $21,600 which was subsequently  increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for  construction  financing on Phase
II. The Construction  Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR  plus  1.50%,  (ii)  matures  on  June 1,  2004,  (iii)  requires  monthly
interest-only payments through May 31, 2002, and (iv) requires monthly principal
and  interest   payments   thereafter.   The   Construction   Mortgage  Loan  is
collateralized  by a first  mortgage on  Hagerstown.  At December 31, 1998,  the
Construction Mortgage Loan had an outstanding principal balance of $29,914.

     On June 15, 1998, the Company closed on $292,000 of loan  facilities with a
financial  institution.  The  transaction  provided  (i) a $180,000  nonrecourse
permanent loan (the "Permanent  Loan") and (ii) a $112,000 full recourse secured
revolving loan of which $95,000 was funded (the "Secured  Revolving Loan").  The
Permanent Loan is (i)  collateralized by first mortgages on four  manufacturers'
outlet  centers,  (ii) bears a fixed rate of interest of 6.99%,  (iii)  requires
monthly  principal  and interest  payments  pursuant to an  approximate  26-year
amortization  schedule, and (iv) matures on July 11, 2008. The Secured Revolving
Loan is (i)  collateralized  by first  mortgages  on six  manufacturers'  outlet
centers,  (ii)  bears a variable  rate of  interest  equal to 30-day  LIBOR plus
1.35%, (iii) requires monthly interest-only  payments,  and (iv) matures on June
11, 2001.
<PAGE>
     On September 25, 1998, the Company closed on a $40,000 unsecured  revolving
loan  (the  "Unsecured  Revolving  Loan")  with  a  financial  institution.  The
Unsecured  Revolving  Loan (i) bears  interest equal to 30-day LIBOR plus 1.75%,
(ii) requires monthly interest-only payments, and (iii) matures on September 11,
2001. The Unsecured  Revolving Loan requires  compliance with certain  financial
loan covenants  including those relating to the Company's (i) total  outstanding
variable indebtedness,  (ii) total outstanding  indebtedness to market value, as
defined,  (iii)  consolidated  net  worth,  as  defined,  and (iv) debt  service
coverage  ratio.  At December  31, 1998,  the  Unsecured  Revolving  Loan had an
outstanding principal balance of $40,000.

     As of December 31, 1998, the Company is a guarantor or otherwise  obligated
with  respect to an  aggregate  of $39,479  of the  indebtedness  of HGP and its
affiliates.  As of  December  31,  1998,  the  components  of such  indebtedness
included (i) a mortgage loan with an outstanding  balance of $11,793 which bears
interest at a rate of prime,  matures in April 1999, and is  collateralized by a
first mortgage on Phases II and III of property located in Patchogue,  New York;
(ii) a mortgage loan with an outstanding balance of $10,731 which bears interest
at a rate of  10.25%,  matures in July 2018,  and is  collateralized  by a first
mortgage on Phase I of property located in Patchogue,  New York; (iii) a secured
loan with an  outstanding  balance of $2,645  which bears  interest at a rate of
LIBOR  plus 2.50% and  matures in  December  2002;  (iv) a secured  loan with an
outstanding  balance of $310 which bears interest at a rate of prime and matures
in  December  2000;  and (v) an  unsecured  revolving  credit  facility  with an
outstanding  balance  of  $4,000  which  bears a rate of  interest  of prime and
matures in April 1999.  In  addition,  the Company is a guarantor  of $10,000 of
obligations  under HGP's $108,205  secured credit facility which bears a rate of
interest of LIBOR plus 1.90%,  matures in July 2001, and is collateralized by 13
properties located throughout the United States.

     On April 1, 1998,  Horizon  consummated  an  agreement  with Castle & Cooke
Properties,  Inc. which released Horizon from its future  obligations  under its
long-term  lease of the Dole  Cannery  outlet  center in  Honolulu,  Hawaii,  in
connection  with the  formation of a joint  venture with certain  affiliates  of
Castle & Cooke,  Inc.  ("Castle & Cooke") to operate  such  property.  Under the
terms of the  agreement,  Castle & Cooke  Properties,  Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations  under the lease,  which  expires in 2045, in exchange for Horizon's
conveyance to the joint venture of all of Horizon's rights and obligations under
such lease.  The agreement  also  provided  that Horizon  transfer to such joint
venture substantially all of Horizon's economic interest in its outlet center in
Lake Elsinore,  California  together with  Horizon's  interest in certain vacant
property  located  adjacent to the center.  As of December 31, 1998, the Company
held a small  minority  interest in the joint  venture but has no  obligation or
commitment  with  respect to the  post-closing  operations  of the Dole  Cannery
project.  Mortgage  indebtedness  with an  outstanding  balance  of  $29,134  at
December  31,  1998,  for which  one of the  Company's  subsidiary  partnerships
remains legally  responsible,  is collateralized by a first mortgage on the Lake
Elsinore  outlet  center.  The  joint  venture,  as a  limited  partner  in such
subsidiary  partenrship,  is  obligated  to make  capital  contributions  to the
partnership  to pay debt  financing,  operating and other expenses under certain
conditions.  The subsidiary partnership will remain legally responsible for such
expenses in case of any  shortfalls  by the joint  venture  with respect to such
capital  contributions.  Castle  &  Cooke  has  provided  the  Company  with  an
unconditional guaranty with respect to any such shortfalls.

Note 7 - Equity Offerings and Other Transactions

     On February 20, 1997,  the Company  completed a public  offering by issuing
2,080,000  shares of its Common Stock at $12.50 per share and 175,800  shares of
its Series B Convertible  Preferred Stock at $22.75 per share.  In addition,  on
March  10,  1997,  the  underwriter  of  the  public   offering   exercised  its
overallotment option to purchase 310,300 shares of the Company's Common Stock at
$12.50 per share.  As a result of the public  offering  and the  exercise of the
overallotment  option,  the Company  received  net proceeds of $31,754 that were
used to (i) repay certain outstanding  indebtedness aggregating $26,500, (ii) to
fund development and construction  activities,  and (iii) for general  corporate
purposes.

     On August 8, 1997,  the  Company  entered  into a purchase  agreement  with
Security Capital Preferred Growth  Incorporated  ("Security  Capital") providing
for the issuance of a new series of cumulative  convertible non-voting preferred
securities  (the  "Series C Preferred  Securities")  at $13.75 per share,  or an
aggregate of $60,000 in cash (the "Private  Placement").  The Series C Preferred
Securities  pay  dividends  equivalent to the amount being paid on the Company's
Common Stock,  with an annual minimum equal to $1.18 per security.  In addition,
the Company,  subject to certain  conditions,  has agreed to waive the ownership
limitations  otherwise applicable to the Common Stock to permit Security Capital
to own, at any one time, the shares of Common Stock issuable upon  conversion of
the Series C Preferred Securities.  The Company has the right to call the Series
C  Preferred  Securities,  at par,  after  10  years.  The  Series  C  Preferred
Securities  were issued in the form of shares of preferred  stock in the Company
and preferred units of partnership  interest in the Operating  Partnership  that
are  exchangeable  for shares of preferred stock or Common Stock on a one-to-one
basis.  Commencing  August 8, 1998,  the Series C  Preferred  Securities  may be
converted into shares of Common Stock on a one-to-one basis.
<PAGE>

     In September  1997, the Company  completed a public  offering of 11,500,000
shares (including  1,500,000 shares related to the exercise of the underwriters'
overallotment  option) of its Common  Stock at $14.00 per share (the  "September
1997 Offering").  In addition,  on September 8, 1997, the Company issued 727,273
Series C Preferred  Units at $13.75 per unit  pursuant to the initial sale under
the  Private  Placement.  As a result of the  September  1997  Offering  and the
initial sale under the Private Placement  (collectively,  the "September Capital
Transactions"),  the Company received net proceeds of $161,930 after commissions
and  underwriting  discounts.  A portion of the net proceeds  from the September
Capital  Transactions  were  used (i) to  repay  certain  outstanding  corporate
indebtedness aggregating $113,410 and (ii) to acquire the 25% ownership interest
of the Company's joint venture partner in Lodi for $23,148 (including $22,642 of
mortgage  indebtedness  relating to such  property).  The remaining net proceeds
from  the  September  Capital  Transactions  of  $26,192  were  used (i) to fund
development and construction activities, (ii) to fund property acquisitions, and
(iii) for general corporate purposes.

     On December 2, 1997,  the Company issued  3,636,363  shares of its Series C
Preferred Stock at $13.75 per share pursuant to the final sale under the Private
Placement.  As a result of this issuance,  the Company  received net proceeds of
$49,045 that were used in the  acquisition of Prime Outlets at Niagara Falls USA
and Prime Outlets at Anderson.

Note 8 - Minority Interests

     In  conjunction  with  the  formation  of the  Company  and  the  Operating
Partnership,  the predecessor owners contributed interests in certain properties
to the Operating  Partnership  and, in exchange,  received  limited  partnership
interests in the  Operating  Partnership.  Subject to certain  conditions,  each
Common Unit held by a Limited  Partner may be exchanged  for one share of Common
Stock or, at the option of the Company, cash equal to the fair market value of a
share  of  Common  Stock at the  time of  exchange.  As of  December  31,  1998,
11,312,131  Common Units were issued and  outstanding.  Minority  interests also
includes  interests in three property  partnerships that are not wholly owned by
the Company.  During the years ended December 31, 1998, 1997 and 1996,  expenses
totaling $3,035, $1,468, and $884, respectively, related solely to the operation
of the Company were allocated only to the common  shareholders.  Such allocation
is consistent with the federal and state tax treatment of these expenses. During
the year ended December 31, 1997,  cash  distributions  and losses  allocated to
minority  interests  reduced  the  minority  interests  balance  to zero.  After
reducing the minority  interests balance to zero,  additional  distributions and
losses of $2,433 and $8,739  that were  allocable  to  minority  interests  were
allocated to common  shareholders  during the years ended  December 31, 1998 and
1997, respectively.

     On September 8, 1997, the Company  issued 727,273 Series C Preferred  Units
at $13.75 per unit  pursuant  to the  initial  $10,000  sale  under the  Private
Placement (see Note 7 - "Equity  Offerings and Other  Transactions" of the Notes
to the Consolidated Financial  Statements).  The terms of the Series C Preferred
Units are  substantially  the same as those of the Series C Preferred  Stock. On
October 19,  1998,  the Series C Preferred  Units were  converted  into  727,273
shares of Series C Preferred Stock and the related minority interests balance of
$9,347 was reclassified to shareholders' equity.

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

Note 9 - Preferred Stock

     The Company is  authorized  to issue up to  24,315,000  shares of preferred
stock in one or more  series.  At December  31, 1998,  2,300,000  shares  Senior
Preferred Stock,  7,828,125 shares of Series B Convertible  Preferred Stock, and
4,363,636  shares of Series C Preferred Stock were issued and  outstanding.  The
Senior  Preferred  Stock  and  Series  B  Convertible  Preferred  Stock  have  a
liquidation  preference  equivalent to $25.00 per share plus the amount equal to
any accrued and unpaid  dividends  thereon.  The Series C Preferred  Stock has a
liquidation  preference  equivalent to $13.75 per share plus the amount equal to
any accrued and unpaid dividends thereon.

     Dividends on the Senior Preferred Stock are payable quarterly in the amount
of $2.625 per share per annum.  Dividends on the Series B Convertible  Preferred
Stock are payable  quarterly at the greater of (i) $2.125 per share per annum or
(ii) the dividends on the number of shares of Common Stock into which a share of
Series B Convertible Preferred Stock will be convertible at the conversion price
of $20.90 per share of Common Stock. At December 31, 1998, there were 13,727,422
shares of Common  Stock  reserved for future  issuance  upon  conversion  of the
Series B Convertible Preferred Stock and the Series C Preferred Stock. Dividends
on the Series C Preferred  Stock are  equivalent to the amount being paid on the
Company's Common Stock, with an annual minimum equal to $1.18 per share.
<PAGE>

     The  Company  has the right to redeem  the Senior  Preferred  Stock and the
Series B Convertible  Preferred  Stock  beginning on and after March 31, 1999 at
$26.75 and $27.125 per share, respectively, plus the amount equal to any accrued
and unpaid dividends thereon. The redemption price decreases  incrementally each
year  thereafter  through March 31, 2004, at which date the redemption  price is
fixed at $25.00  per share  plus the  amount  equal to any  accrued  and  unpaid
dividends  thereon.  

     The  holders  of the  Senior  Preferred  Stock  and  Series  B  Convertible
Preferred  Stock,  each series voting  separately as a class,  have the right to
elect  two  additional  members  to the  Company's  Board  of  Directors  if the
equivalent of six quarterly  dividends on these series of preferred stock are in
arrears.  Each of such two directors  will be elected to serve until the earlier
of (i) the election and  qualification  of such  directors'  successor,  or (ii)
payment of the dividend  arrearage.  

     The Series C Preferred Stock is convertible  into shares of Common Stock on
a one-to-one basis, subject to adjustment. The Company has the right to call the
Series C Preferred Stock, at par, after 10 years. If distributions on any Series
C  Preferred  Stock have been in arrears  for two  consecutive  quarters  or the
Company fails to pay distributions on the Common Stock in an amount per share at
least equal to $0.25 (subject to adjustment) for two consecutive  quarters,  the
number of  directors  of the Company  shall be  increased  by one (or two if the
board of  directors  of the  Company  then  consists  of 10 or more  members) as
elected by the holders of Series C Preferred  Stock together with the holders of
shares on a parity as to distributions with the Series C Preferred Stock, voting
as a single  class  regardless  of series.  Each of such two  directors  will be
elected to serve until the earlier of (i) the election and qualification of such
directors'  successor,  or (ii) payment of the dividend arrearage.  

     On March 31, 1999, the Company entered into an agreement  pursuant to which
it will repurchase all of its outstanding shares of Series C Preferred Stock for
$43,636 or $10.00 per share. The agreement  provides for the repurchase to occur
in two stages.  In the first stage,  on March 31, 1999, the Company  repurchased
3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of
a $33,000  unsecured  promissory  note.  The  unsecured  promissory  note  bears
interest at a rate of 12.0% per annum,  matures on September 30, 1999,  requires
monthly  interest-only  payments  and may be prepaid by the  Company at any time
without  penalty.  Second,  the Company will repurchase the remaining  1,063,636
shares of its  Series C  Preferred  Stock  for an  aggregate  purchase  price of
$10,636 on or before  September  30, 1999.  In addition,  the sole holder of the
Series C Preferred  Stock  waived the  Company's  obligation  to comply with the
financial  covenants contained in its charter relating to the Series C Preferred
Stock, as well as the rights of such holder to require the Company to repurchase
the Series C Preferred Stock in certain  circumstances at its original  issuance
price of $13.75 per share, plus accrued but unpaid distributions. This waiver is
irrevocable.

Note 10 - Stock Incentive Plans

     Under various  plans,  the Company may grant stock options and other awards
to executive officers,  other key employees,  outside directors and consultants.
The  exercise  price for stock  options  granted is the fair market value of the
Company's common stock on the date of grant.

     In general,  stock options are fully vested on the date of grant and have a
term of 10 years. In certain cases for executive officers, stock options granted
become exercisable over periods up to six years.

     The Company has adopted  the  disclosure-only  provisions  of SFAS No. 123,
"Accounting for Stock Based Compensation."  Accordingly, no compensation expense
has been recognized for employee stock option grants. If the Company had elected
to  recognize  compensation  based on the fair value of the  options  granted at
grant date as  prescribed  by SFAS No. 123,  unaudited  pro forma net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                     1998             1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>           <C>             <C>    
Income before extraordinary item.........................................................   $ 15,348      $  7,442        $  8,765
Extraordinary item.......................................................................          -        (2,061)         (1,017)
                                                                                            --------      --------        ---------
Net income...............................................................................   $ 15,348      $  5,381        $  7,748
                                                                                            ========      ========        ========
Net loss applicable to common shares.....................................................   $ (9,256)     $ (7,345)       $ (6,488)
                                                                                            ========      ========        ========
Earnings per common share - basic and diluted:
    Loss before extraordinary item.......................................................   $  (0.26)     $  (0.27)       $  (0.67)
    Extraordinary item...................................................................          -         (0.11)          (0.12)
                                                                                            --------      --------        --------
    Net loss.............................................................................   $  (0.26)     $  (0.38)       $  (0.79)
                                                                                            ========      ========        ========
====================================================================================================================================
</TABLE>


<PAGE>

     The fair value for these options was estimated at the date of grant using a
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions:

--------------------------------------------------------------------------------
Years ended December 31,                     1998             1997          1996
--------------------------------------------------------------------------------

Risk-free interest rate..................    5.0%             5.5%          6.5%
Dividend yield...........................   12.0%             8.3%          9.0%
Volatility factor........................   0.36             0.36          0.35
Weighted average life (in years).........   10.0             10.0          10.0
================================================================================

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

     A summary of the Company's stock options plans for the years ended December
31 are as follows:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                            1998                             1997                               1996
                                -----------------------------    -----------------------------   -----------------------------------
                                                    Weighted                         Weighted                               Weighted
                                                     Average                          Average                                Average
                                                    Exercise                         Exercise                               Exercise
                                       Shares          Price            Shares          Price               Shares             Price
------------------------------- -------------- -------------- -- -------------- -------------- -- ----------------- ----------------
<S>                                 <C>               <C>              <C>             <C>                <C>                 <C>

Beginning of year..........         1,148,250         $15.64           903,500         $16.49              605,000            $18.78
Granted....................         1,724,575          13.10           246,250          12.53              302,500             11.83
Transferred (Horizon)......           959,742          18.62                 -              -                    -                 -
Cancelled..................           (21,500)         12.64            (1,500)         11.88               (4,000)            11.88
                                    ---------         ------         ---------         ------              -------            ------
End of year................         3,811,067         $14.90         1,148,250         $15.64              903,500            $16.49
Exercisable -                       =========         ======         =========         ======              =======            ======
   end of year.............         3,083,570         $15.24         1,017,753         $15.18              640,253            $15.45
                                    =========         ======         =========         ======              =======            ======
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                      Options Outstanding                                Options Exercisable
                                     -------------------------------------------------------     -----------------------------------
                                                                Weighted           Weighted                                Weighted
                                                                 Average            Average                                 Average
             Range of                                          Remaining           Exercise                                Exercise
          Exercise Price                     Shares        Life in Years              Price                 Shares            Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                    <C>                <C>                 <C>                  <C>    

$11.15 to $13.09...............           2,615,167             8.9                 $12.60              2,015,164            $12.46
$13.60 to $14.19...............             262,490             8.8                  13.91                162,490             13.73
          $19.00...............             585,000             5.2                  19.00                557,506             19.00
          $23.53...............              13,788             7.3                  23.53                 13,788             23.53
$24.55 to $26.53...............             334,622             0.6                  26.11                334,622             26.11
                                          ---------             ---                 ------              ---------            ------
                                          3,811,067             7.6                 $14.90              3,083,570            $15.24
                                          =========             ===                 ======              =========            ======
====================================================================================================================================
</TABLE>

     The weighted fair value of options  granted during the years ended December
31,  1998,  1997 and 1996 was $0.96 per share,  $1.90 per  share,  and $1.69 per
share,  respectively.  Under the Company's  various plans there were 774,424 and
106,250  shares  reserved  for  future  grants at  December  31,  1998 and 1997,
respectively.
<PAGE>
Note 11 - Lease Agreements

     The Company is the lessor of retail and office space under operating leases
with lease terms that expire from 1999 to 2016.  Most leases are  renewable  for
five years at the lessee's option. Future minimum base rent to be received under
noncancelable operating leases were as follows:

 -------------------------------------------------------------------------------
 December 31,                                                               1998
 -------------------------------------------------------------------------------
 1999....................................................               $187,664
 2000....................................................                161,177
 2001....................................................                127,365
 2002....................................................                 90,568
 2003....................................................                 55,682
 Thereafter..............................................                 72,472
                                                                        --------
                                                                        $694,928
                                                                        ========
 ===============================================================================

     The Company leases  certain land,  buildings,  and equipment  under various
noncancelable  operating lease  agreements.  Rental expense for operating leases
was $1,818,  $1,059, and $1,011 for the years ended December 31, 1998, 1997, and
1996,  respectively.  Future  minimum  rental  payments,  by  year  and  in  the
aggregate,  payable under these  noncancelable  operating leases with initial or
remaining terms of one year or more consisted of the following:

 -------------------------------------------------------------------------------
 December 31,                                                               1998
 -------------------------------------------------------------------------------

 1999...............................................                     $ 1,684
 2000...............................................                       1,582
 2001...............................................                       1,378
 2002...............................................                       1,123
 2003...............................................                         767
                                                                         -------
                                                                         $ 6,534
                                                                         =======
 ===============================================================================

Note 12 - Legal Proceedings

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

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

                               PRIME RETAIL, INC.

            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1998
                                 (in thousands)

<CAPTION>
                                                            Costs Capitalized      Gross Amount at Which
                                    Initial Cost to            Subsequent to         Carried at Close of
                                      Company                 Acquisition                 Period
                           ------------------------ ------------------------- ------------------------
                                       Buildings &           Buildings &          Buildings &           Accumulated   Constructed(C)
Description     Encumbrances  Land     Improvements   Land   Improvements  Land   Improvements  Total   Depreciation    Acquired(A)
-----------     ------------  ----     ------------   ----   ------------  ----   ------------  -----   ------------   ------------
<S>             <C>          <C>      <C>           <C>      <C>        <C>       <C>         <C>        <C>          <C>
Prime Outlets 
 at Anderson     $ 5,795     $1,125   $ 11,036      $   -    $   393    $1,125    $ 11,429    $12,554    $ 329        Dec. 1997(A)
Prime Outlets 
 at Bend           7,841      2,560      8,476      1,101      4,468     3,661      12,944     16,605      486        Feb. 1997(A)
Prime Outlets 
 at Birch Run     58,523     13,584    123,476          -        398    13,584     123,874    137,458    2,397        Jun. 1998(A)
Prime Outlets 
 at  Burlington   14,911      3,694     21,370          -        213     3,694      21,583     25,277      526        Jun. 1998(A)
Prime Outlets 
 at Calhoun       19,105      3,839     24,551          -         78     3,839      24,629     28,468      641        Jun. 1998(A)
Prime Outlets                                    
 at Castle Rock   35,642      4,424     47,200      2,717     16,268     7,141      63,468     70,609    9,544        Mar. 1994(A0
Prime Outlets 
 at Conroe        18,196        405     18,714          -         23       405      18,737     19,142      547        Jun. 1998(A)
Prime Outlets 
 at Darien        25,119          -          -      3,074     31,203     3,074      31,203     34,277    4,665        July 1995(C)
Prime Outlets 
 at Edinburgh     17,964      2,726     37,952          -      1,059     2,726      39,011     41,737      899        Jun. 1998(A)
Prime Outlets 
 at Ellenton      29,192          -          -      5,454     44,925     5,454      44,925     50,379    7,128        Oct.1991(C)
Prime Outlets          
 at Florida City  15,501          -          -      2,875     21,521     2,875      21,521     24,396    4,102        Sept.1994(C)
Prime Outlets 
 at Fremont       14,331      3,250     24,096          -         39     3,250      24,135     27,385      522        Jun. 1998(A)
Prime Outlets 
 at Gaffney       21,841          -          -      1,885     32,548     1,885      32,548     34,433    2,746        Nov.1996(C)
Prime Outlets 
 at Gainesville   20,650          -          -        535     30,559       535      30,559     31,094    6,390        Aug. 1993(C)
Prime Outlets 
 at Gilroy        74,272     21,173     93,667          -        860    21,173      94,527    115,700    1,667        Jun. 1998(A)
Prime Outlets at                                                    
 at Grove City    40,960      1,123     58,630          -      3,228     1,123      61,858     62,981    5,052        Nov. 1996(A)
Prime Outlets 
 at Gulfport      19,801          -          -          -     34,591         -      34,591     34,591    4,254        Oct. 1995(C) 
Prime Outlets                   
 at Hagerstown    29,914          -          -       3,099    38,549     3,099      38,549     41,648      899        Aug. 1998(C)
Prime Outlets 
 at Hillsboro     31,402      7,121     50,894           -       180     7,121      51,074     58,195      992        Jun. 1998(A)
Prime Outlets 
 at Huntley       17,651          -          -       1,506    34,817     1,506      34,817     36,323    5,326        Sept.1994(C)
Prime Outlets at                             
 Jeffersonville 
 I                26,307         843     31,084        250    14,969     1,093      46,053     47,146     7,297       Mar. 1994(A)
Prime Outlets at                                     
 Jeffersonville 
 II               20,185         174     21,058          -        49       174      21,107     21,281       580       Jun. 1998(A)
Prime Outlets 
 at Kenosha       24,500       6,995     39,558          -       109     6,995      39,667     46,662       885       Jun. 1998(A)
Prime Outlets 
 of Kittery       12,296         820     24,061          -     1,199       820      25,260     26,080       726       Oct. 1997(A)
Prime Outlets 
 at Latham         1,720         507      1,476          -         2       507       1,478      1,985        43       Oct. 1997(A)
Prime Outlets 
 at Lebanon       19,952           -          -      2,462    27,628     2,462      27,628     30,090       490       Apr. 1998(C)
Prime Outlets 
 at Lee           25,736       8,035     31,656          -       248     8,035      31,904     39,939     1,097       Jun. 1998(A)
 Prime Outlets 
 at Lodi          20,805       1,013     21,455        707    12,256     1,720      33,711     35,431     1,834       Sept. 1997(A)
Prime Outlets 
 at Loveland      22,617       6,400     33,244          -        20     6,400      33,264     39,664     3,452       Nov. 1996(A)
Melrose Place      2,000           -          -        499     1,880       499       1,880      2,379       788       Aug. 1987(C)
Prime Outlets 
 at Michigan 
 City             51,250       7,241     74,277          -       494     7,241      74,771     82,012     1,582       Jun. 1998(A)
Prime Outlets      9,342           -          -      2,502    22,194     2,502      22,194     24,696     5,917       Oct. 1991(C)
 at Morrisville                                                                                                                    
Prime Outlets 
 at Naples        10,749       2,753     15,602          5     2,699     2,758      18,301     21,059     2,050       Mar. 1994(A)
Prime Outlets at 
 Niagara Falls  
 USA              30,832       7,247     82,842          -       738     7,247      83,580     90,827     2,362       Dec. 1997(A)
                                                                                                                                    
</TABLE>
<TABLE>

                               PRIME RETAIL, INC.

            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1998
                                 (in thousands)

<CAPTION>
                                                            Costs Capitalized      Gross Amount at Which
                                    Initial Cost to            Subsequent to         Carried at Close of
                                      Company                 Acquisition                 Period
                           ------------------------ ------------------------- ------------------------
                                       Buildings &           Buildings &          Buildings &           Accumulated   Constructed(C)
Description     Encumbrances  Land     Improvements   Land   Improvements  Land   Improvements  Total   Depreciation    Acquired(A)
-----------     ------------  ----     ------------   ----   ------------  ----   ------------  -----   ------------   ------------
<S>             <C>           <C>       <C>         <C>         <C>        <C>       <C>          <C>        <C>      <C>
Northgate Plaza    $ 6,507    $ 3,626   $  11,630   $      -    $     142  $  3,626  $   11,772   $  15,398  $  1,621  Mar. 1994(A)
Prime Outlets 
  at Odessa         14,483        815      31,311          -        2,168       815      33,479      34,294     3,490  Nov. 1996(A)
Prime Outlets 
  at Oshkosh        14,753      2,160      26,895          -          955     2,160      27,850      30,010       766  Jun. 1998(A)
Prime Outlets                  
  at Perryville     10,433      3,089      16,287          -           21     3,089      16,308      19,397       333  Jun. 1998(A)
Prime Outlets            
  at Pismo Beach    13,201      9,048      17,617          -           35     9,048      17,652      26,700       426  Jun. 1998(A)
Prime Outlets             
  at Post Falls     11,663      3,100      12,163          -           72     3,100      12,235      15,335       658  Feb. 1997(A)
Prime Outlets                  
  at Queenstown     19,289      4,422      35,592          -           37     4,422      35,629      40,051       635  Jun. 1998(A)
Prime Outlets 
  at San Marcos     39,206          -           -      1,626       43,621     1,626      43,621      45,247    11,579  Aug. 1990(C)
Prime Outlets 
  at Sedona          6,959      1,924       9,099        750           94     2,674       9,193      11,867       461  Feb. 1997(A)
Prime Outlets at                  
  Silverthorne      25,798      9,294      34,932          -          111     9,294      35,043      44,337       764  Jun. 1998(A)
Prime Outlets 
  at Tracy          13,473      6,170      16,715          -           33     6,170      16,748      22,918       454  Jun. 1998(A)
Prime Outlets 
  at Vero Beach     27,623       4,530      41,878         -          248     4,530      42,126      46,656     1,169  Jun. 1998(A)
Prime Outlets at             
  Warehouse Row     23,900           -           -     1,175       32,856     1,175      32,856      34,031    11,245  Nov. 1989(C)
Prime Outlets at
  Warehouse 
  Row II                 -          -           -         350       2,600       350       2,600       2,950       422  Dec. 1993(A)
Prime Outlets 
  at Waterloo       41,277      1,927       55,358          -         142     1,927      55,500      57,427     1,326  Jun. 1998(A)
Western Plaza       10,666          -            -      2,000       7,128     2,000       7,128       9,128     1,230  Jun. 1993(A)
Prime Outlets at                  
 Williamsburg       23,754     12,129       55,216          -          66    12,129      55,282      67,411       980  Jun. 1998(A)
Prime Outlets 
 at Woodbury        18,415      2,528       27,645          -         107     2,528      27,752      30,280       508  Jun. 1998(A)
Property Under 
 Development         7,400          -            -          -      45,068         -      45,068      45,068         -         Under
                                                                                                                        Construction
Other Property           -          -        1,588          -       3,126         -       4,714       4,714     1,465   Mar. 1994-
                ----------   --------   ----------    -------    --------   -------  ----------  ----------  --------  Dec. 1998(A)
                $1,125,702   $171,814   $1,290,301    $34,572    $519,035  $206,386  $1,809,336  $2,015,722  $127,747            
                ==========   ========   ==========    =======    ========  ========  ==========  ==========  ========              
</TABLE>
<PAGE>
                               PRIME RETAIL, INC.
        Notes to Schedule III - Real Estate and Accumulated Depreciation
                                December 31, 1998
                                 (in thousands)

     Depreciation on building and  improvements is calculated on a straight-line
basis over the estimated useful lives of the asset as follows:

       Land improvements...................................20  years 
       Buildings and improvements..........................Principally 40 years 
       Tenant improvements.................................Term of related lease
       Furniture and equipment.............................5 years

     The  aggregate  cost for federal  income tax  purposes  was  $1,727,099  at
December 31, 1998.
                                               Investment in Rental Property
                                                  Year Ended December 31
                                     -------------------------------------------
                                              1998            1997          1996
                                     -------------   -------------  ------------
Balance, beginning of period......     $  904,782        $640,759      $454,480
Retirements.......................           (880)           (718)           (8)
Acquisitions......................      1,013,231         191,345       131,593
Improvements......................        145,174          73,773        54,694
Dispositions......................        (46,585)           (377)            -
                                       ----------        --------      --------
Balance, end of period............     $2,015,722        $904,782      $640,759
                                       ==========        ========      ========

                                                  Accumulated Depreciation
                                                   Year Ended December 31
                                     -------------------------------------------
                                              1998            1997          1996
                                     -------------   -------------  ------------
Balance, beginning of period......        $ 82,033         $57,674     $ 40,190
Retirements.......................            (880)           (718)          (8)
Other.............................            ( 68)             22           24
Dispositions......................          (5,178)              -            -
Depreciation for the period.......          51,840          25,055       17,468
                                          --------         -------     --------
Balance, end of period............        $127,747         $82,033     $ 57,674
                                          ========         =======     ========