<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, 1997

                                       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                                   52-1836258
------------------------------------------     ---------------------------------
     (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
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:
           -----------------------------------------------------------
           10.5% Series A Cumulative Preferred Stock, $0.01 par value
--------------------------------------------------------------------------------
                                (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  $383,835,248  on March  13,  1998  (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 March
13, 1998 was 27,294,951.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

DOCUMENT
--------
Proxy Statement for the 1998 annual meeting of 
shareholders                                               Part III of Form 10-K
<PAGE>
                               PRIME RETAIL, INC.

                                    Form 10-K

                                December 31, 1997

                                TABLE OF CONTENTS


Part I                                                                     Page

Item 1.       Business.......................................................1
Item 2.       Properties.....................................................8
Item 3.       Legal Proceedings.............................................13
Item 4.       Submission of Matters to a Vote of Security Holders...........13

Part II

Item 5.       Market for Registrant's Common Equity and Related Shareholder 
               Matters......................................................13
Item 6.       Selected Financial Data.......................................15
Item 7.       Management's Discussion and Analysis of Financial Condition 
               and Results of Operations....................................17
Item 8.       Financial Statements and Supplementary Data...................31
Item 9.       Changes in and Disagreements with Accountants on Accounting 
               and Financial Disclosure.....................................31

Part III

Item 10.      Directors and Executive Officers of the Registrant............31
Item 11.      Executive Compensation........................................31
Item 12.      Security Ownership of Certain Beneficial Owners and 
               Management...................................................31
Item 13.      Certain Relationships and Related Transactions................31

Part IV

Item  14.     Exhibits, Financial Statement Schedules, and Reports on 
               Form 8-K.....................................................32

              Signatures....................................................38
<PAGE>
                                     PART I
                               ITEM 1 -- BUSINESS

The Company

        Prime  Retail,   Inc.  (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").  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 28 upscale  factory  outlet  centers and
three community  shopping centers (the  "Properties")  with a total of 7,217,000
and 424,000  square feet of gross  leasable  area  ("GLA") at December 31, 1997,
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 and those  entities owned or controlled by the
Company.

        On November  12,  1997 and as amended on  February 1, 1998,  the Company
entered into a definitive  merger  agreement  ("Merger  Agreement") with Horizon
Group,  Inc.  ("Horizon")  for  an  aggregate   consideration  of  approximately
$945,200,  including the assumption of $556,900 of Horizon debt and  transaction
costs.  Upon completion of the transaction,  the Company will own and operate 48
outlet centers totaling approximately 13,406,261 square feet of GLA. See Note 15
- "Merger Agreement" of the Notes to the Consolidated  Financial  Statements for
additional information.

        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 will not be 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 factory outlet
centers  throughout  the United  States.  Factory  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 50%  below  regular  department  and
specialty store prices.

         Since entering the factory outlet center  business in 1988 (through the
retail division of The Prime Group, Inc. ("PGI"), from whom the Company acquired
certain Properties and management and development  operations),  the Company has
become one of the  leading  developers  and  operators  in the  industry  having
successfully  developed or acquired outlet centers containing  approximately 7.2
million  square  feet  of GLA at  December  31,  1997,  including  approximately
1,221,000 square feet of GLA that was acquired and approximately  224,000 square
feet of GLA that was developed and  completed  during 1997.  

        The Company pursues  acquisition and development  strategies designed to
take  advantage of growth  opportunities  in the factory  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.
<PAGE>
     The average  outlet  center in the  Company's  portfolio  contains  257,750
square  feet of GLA at December  31,  1997,  compared to an industry  average of
approximately  177,656  square feet as reported in January  1998 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 theCompany.  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 factory outlet
centers.

        The  Company's  factory  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, Reading China & Glass, 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 Lee,  Wrangler,  Barbizon and Vanity Fair). As a group, the foregoing
merchants accounted for approximately 50.2% of the gross revenues of the Company
during the year ended December 31, 1997, and occupied approximately 48.9% of the
total  leased GLA  contained  in the  Company's  outlet  centers at December 31,
1997.  During  the year ended  December  31, 1997,  no group of merchants  under
common  control  accounted  for more  than  5.74% of the gross  revenues  of the
Company or  occupied  more than 5.36% of the total  leased GLA of the Company at
December 31, 1997.

        Management has developed close working  relationships with its merchants
to  understand  and better  anticipate  the  merchants'  immediate and long-term
merchandising strategies and retail space requirements.  The Company established
The  Manufacturers  Forum(R),  an  organization of over 100  manufacturers  that
conducts between three and six industry meetings per year--two of which meetings
are held at  semi-annual  conventions.  The meetings are organized and hosted by
executives  of the Company and are  attended  by senior  executives  from member
manufacturers.  Industry  experts  are  invited to attend as guest  speakers  to
discuss ideas,  trends, data and other issues pertinent to the ongoing growth of
the factory outlet center business.  The Manufacturers Forum(R) was developed as
an educational tool for both the Company and the member merchants, including new
manufacturers  that are investigating  opening factory outlet stores, and allows
both the Company and member  merchants  to stay  up-to-date  with changes in the
industry.  Topics  discussed  at The  Manufacturers  Forum(R)  lead to  stronger
relationships  with key merchants and a shared vision with the  manufacturers as
to future growth of the industry.

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 factory outlet
centers through the active  management and expansion of existing  factory outlet
centers and the selective acquisition and development of factory 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 factory 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 the effective 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:

              Acquisition  of Existing  Outlet  Centers.  The  Company  explores
             opportunities  to  acquire  factory  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.
             During 1997, the Company acquired seven centers totaling  1,221,000
             square feet of GLA for an aggregate purchase price of $164,300.
<PAGE>
              Planned  Development  of New Factory Outlet  Centers.  The Company
             develops  new  factory  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
             March  1997,  the  Company  commenced  construction  on the  Outlet
             Village of Lebanon located east of Nashville, Tennessee. The Outlet
             Village of Lebanon, which will contain approximately 208,000 square
             feet of GLA, has a total expected development cost of approximately
             $28,900 and is expected to open in the second  quarter of 1998.  In
             October  1997,  the Company  commenced  construction  on the Outlet
             Village of  Hagerstown  located  west of  Baltimore,  Maryland  and
             northwest of  Washington,  D.C. The Outlet  Village of  Hagerstown,
             which will contain  approximately 216,000 square feet of GLA, has a
             total expected  development  cost of  approximately  $29,300 and is
             expected to open in the third quarter of 1998.  Management believes
             that there is sufficient  demand for continued  development  of new
             factory  outlet  centers  and  the  expansion  of  existing  outlet
             centers.

              Strategic  Expansions of Existing Centers. The Company selectively
             expands its existing factory 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
             327,000  square feet of GLA during 1998 in connection  with planned
             expansions  of existing  centers.  As of  February  28,  1998,  the
             Company owned,  or held under long-term  lease,  land contiguous to
             its  outlet  centers  to  construct   additional   phases  totaling
             approximately  1,500,000 square feet of GLA. The Company also holds
             options to purchase property  adjoining its existing factory outlet
             centers upon which additional expansions could be constructed.

              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.

              Innovative Marketing and Promotion. The Company continuously seeks
             to increase the sales performance of each factory outlet center and
             markets its factory outlet centers with  promotional  materials and
             advertising   strategies   that  target  and   attract   customers.
             Substantially  all  factory  outlet  centers  have  an  experienced
             marketing  director who creates and  administers  retail  marketing
             strategies  that are  designed to  highlight  each  factory  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.

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  carefully 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  several  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.  Seven projects in the Company's portfolio, Factory Outlets at Post
Falls  (Post  Falls,  Idaho),  Gulf Coast  Factory  Shops  (Ellenton,  Florida),
Magnolia   Bluff   Factory   Shops   (Darien,   Georgia),   Ohio  Factory  Shops
(Jeffersonville, Ohio), Oxnard Factory Outlet (Oxnard, California), Prime Retail
Outlets of Kittery (Kittery,  Maine),  and San Marcos Factory Shops (San Marcos,
Texas), are located within twelve miles of competing factory outlet centers and,
therefore,   are  subject  to  direct  outlet  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 factory
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, 1997, the Company  had 560  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, 1997, ages of the executive officers of the Company:

<TABLE>
<CAPTION>                               
Name                                  Position                                                                Age
<S>                                   <C>                                                                     <C>
Michael W. Reschke                    Chairman of the Board, Director                                         42
Abraham Rosenthal                     Chief Executive Officer, Director                                       48
William H. Carpenter, Jr.             President, Chief Operating Officer, Director                            46
Glenn D. Reschke                      Executive Vice President, Development                                   46
                                       and Acquisitions, Director
Robert P. Mulreaney                   Executive Vice President, Chief Financial                               39
                                       Officer and Treasurer
David G. Phillips                     Executive Vice President, Operations and Marketing                      36
C. Alan Schroeder                     Executive Vice President, General Counsel                               40
                                       and Secretary
R. Bruce Armiger                      Senior Vice President, Development and Construction                     52
                                       Management Services
Steven S. Gothelf                     Senior Vice President, Finance                                          37
Anya T. Harris                        Senior Vice President, Marketing and Communications                     31
John S. Mastin                        Senior Vice President, Leasing                                          51
Steven M. McGhee                      Senior Vice President, Operations                                       43
</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 16 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  Ambassador  Apartments,  Inc.  (NYSE:  AAH),  a  real  estate
investment trust engaged in the ownership, operation, acquisition and renovation
of multi-family residential projects and the successor in interest to the former
multi-family  division of PGI. 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 the Company's  inception.  Prime Retail was
formed to succeed  the retail  division of PGI,  which has been a  developer  of
retail and factory outlet centers since 1988. 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,   investor
relations,  capital  markets,  financing,  site  selection,  site  planning  and
building design, and new business development for the
<PAGE>
Company.  Mr.  Rosenthal has been involved in retail design and  development for
the past 20 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  National  Council of  Architectural  Registration  Board.  Mr.
Rosenthal  is a full  member  of the Urban  Land  Institute,  the  International
Council of Shopping Centers ("ICSC"), the National Realty Committee and 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 Baltimore's  Downtown  Partnership.  Mr.  Rosenthal was
therecipient  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 the  Company's
inception.  Immediately prior to the Initial Public Offering,  Mr. Carpenter was
associated with PGI. Mr.  Carpenter  joined PGI in 1989,  serving as Senior Vice
President  and,  immediately  prior to joining the Company,  as  Executive  Vice
President.  Mr. Carpenter's  responsibilities  with the Company include leasing,
marketing,  operations and management,  development,  and  construction  for the
Company'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 specialty  projects  throughout  the United States.  Mr.  Carpenter
attended  the  University  of  Baltimore,  is a member of the ICSC,  a member of
Developers of Outlet Centers, a full member of the Urban Land Institute, sits on
the Board and the  Executive  Committee of the BSO and also sits on the ICSC/VRN
Executive Committee.

        Glenn D.  Reschke.  Glenn D.  Reschke is  Executive  Vice  President  of
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  joined PGI in 1989 and
served as Vice President,  Senior Vice President,  and Executive Vice President,
Leasing. Mr. Phillips'  responsibilities with the Company include 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. Prior to
joining D.I.  Realty,  Inc.,  Mr.  Phillips  owned and operated  Bowdoin  Street
Contracting in Boston, Massachusetts. 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.  From 1990 to 1994,  Mr.  Schroeder was an
Assistant General Counsel of PGI,  responsible for legal matters relating to the
retail  division of PGI and involved in the division's  development,  financing,
corporate,  partnership,  construction and management matters.  Prior to joining
PGI,  Mr.  Schroeder  was  associated  for  four  years  with  Hopkins & Sutter,
<PAGE>
a Chicago, Illinois based law firm, where he worked primarily on real estate and
financing  matters.  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 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.

     Steven M. McGhee. Steven M. McGhee is Senior Vice President,  Operations of
the Company.  Mr. McGhee has been affiliated with PGI since October,  1989, most
recently as Vice President and Director of Operations. Prior to joining PGI, Mr.
McGhee  was  General  Manager  for CBL and  Associates  for two  years  where he
marketed and managed a portfolio of 1,500,000 square feet of retail  properties.
Prior  to that Mr.  McGhee  spent 15 years  with  the  Melville  Corporation,  a
specialty retail chain were he was eventually  responsible for the operations of
approximately  140 stores  nationwide.  Mr.  McGhee  attended the  University of
Tennessee  majoring in Business  Administration.  Mr.  McGhee is a member of the
ICSC, Value Retail News and Building Owners and Managers Association (BOMA), and
Honorary Editorial Board Member for Specialty Retail Report. Mr. McGhee received
designation  as a CSM,  (certified  shopping  center  manager)  from the ICSC in
October 1995.
<PAGE>
                              ITEM 2 -- PROPERTIES

General

        The Company's strategy is to build on its reputation and  experience  in
the factory outlet  center  business  and to  capitalize  on the  current  trend
in value-oriented retailing through the selective acquisition and development of
factory  outlet  centers and the  strategic  expansion of its  existing  factory
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,  1997,  the
Company's  portfolio  consisted  of (i) 28 factory  outlet  centers  aggregating
7,217,000  square feet of GLA  (including  595,000 square feet of GLA at factory
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, 1997 (see "Note 7 -- 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, 1997
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Grand            GLA      Percentage
Factory Outlet Centers                                                  Phase          Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>              <C>            <C>    

Niagara International Factory Outlets (2)--Niagara Falls, New York......   I            July 1982        300,000           96%
                                                                          II            August 1985      234,000           79
                                                                                                        --------          ---
                                                                                                         534,000           88

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

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

Warehouse Row Factory Shops (4)--Chattanooga, Tennessee.................   I            November 1989     95,000           94
                                                                          II            August 1993       26,000           94      
                                                                                                        --------          ---
                                                                                                         121,000           94
                  
Oak Creek Factory Stores (5)--Sedona, Arizona ..........................   I            August 1990       82,000          100

San Marcos Factory Shops--San Marcos, Texas.............................   I            August 1990      177,000           99
                                                                          II            August 1991       70,000          100
                                                                         III            August 1993      117,000           98
                                                                        IIIB            November 1994     20,000           91
                                                                        IIIC            November 1995     35,000          100
                                                                                                        --------          ---
                                                                                                         419,000           99

Shasta Factory Stores (2)--Anderson, California.........................  I             August 1990      165,000           91

Factory Outlets at Post Falls (5)--Post Falls, Idaho ...................  I             July 1991        111,000           92
                                                                         II             July 1992         68,000           71
                                                                                                        --------          ---
                                                                                                         179,000           84

Gulf Coast Factory Shops--Ellenton, Florida.............................  I            October 1991      187,000           98
                                                                         II            August 1993       123,000          100
                                                                        III            October 1996       30,000          100
                                                                                                        --------          ---
                                                                                                         340,000           99

Triangle Factory Shops--Raleigh-Durham, North Carolina..................  I            October 1991      181,000           99
                                                                         II            July 1996           6,000          100
                                                                                                        --------          ---
                                                                                                         187,000           99
</TABLE>
<PAGE>
<TABLE>
                       Portfolio of Properties (continued)

                                December 31, 1997
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Grand              GLA          Percentage
Factory Outlet Centers                                                  Phase        Opening Date        (Sq. Ft.)        Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>                 <C>             <C>    
Coral Isle Factory Shops--Naples/Marco Island, Florida..................   I         December 1991         94,000            100%
                                                                          II         December 1992         32,000             82
                                                                                                         --------            ---
                                                                                                          126,000             95

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

Bend Factory Outlets (5)--Bend, Oregon..................................   I         December 1992         97,000             86

Ohio Factory Shops--Jeffersonville, Ohio................................   I         July 1993            186,000             98
                                                                          II         November 1993        100,000            100
                                                                         IIB         November 1994         13,000             75
                                                                        IIIA         August 1996           35,000            100
                                                                        IIIB         March 1997            73,000             73
                                                                                                         --------            ---
                                                                                                          407,000             93

Gainesville Factory Shops--Gainesville, Texas...........................  I           August 1993         210,000             89
                                                                         II           November 1994       106,000             92
                                                                                                         --------            ---
                                                                                                          316,000             90

Nebraska Crossing Factory Stores (6)--Gretna, Nebraska..................  I           October 1993        192,000             88

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

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

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

Huntley Factory Shops--Huntley, Illinois................................  I           August 1994         192,000             98
                                                                         II           November 1995        90,000             88
                                                                                                         --------            ---
                                                                                                          282,000             92


Florida Keys Factory Shops--Florida City, Florida.......................  I           September 1994       208,000            88

Indiana Factory Shops (6)--Daleville, Indiana...........................  I           November 1994        208,000            90
                                                                         IIA          November 1996         26,000            35
                                                                                                         ---------           ---
                                                                                                           234,000            84

Kansas City Factory Outlets--Odessa, Missouri...........................  I           July 1995            191,000           100
                                                                         II           November 1996        105,000            66
                                                                                                         ---------           ---
                                                                                                           296,000            88

Magnolia Bluff Factory Shops (8)--Darien, Georgia.......................  I           July 1995            238,000            89
                                                                         IIA          November 1995         49,000            99
                                                                         IIB          July 1996             20,000           100
                                                                                                         ---------           ---
                                                                                                           307,000            91
</TABLE>
<PAGE>
<TABLE>
                       Portfolio of Properties (continued)

                                December 31, 1997
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Grand            GLA         Percentage
Factory Outlet Centers                                                  Phase        Opening Date      (Sq. Ft.)       Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>                <C>            <C>    
Arizona Factory Shops (9)--Phoenix, Arizona.............................   I        September 1995        217,000            98%
                                                                          II        September 1996        109,000            93
                                                                                                        ---------           ---
                                                                                                          326,000            96

Gulfport Factory Shops (10)--Gulfport, Mississippi......................   I        November 1995         228,000            97
                                                                          IIA       November 1996          40,000            82
                                                                          IIB       November 1997          38,000            38
                                                                                                        ---------           ---
                                                                                                          306,000            88

Buckeye Factory Shops (11)--Burbank, Ohio...............................   I        November 1996         205,000            95

Carolina Factory Shops--Gaffney, South Carolina.........................   I        November 1996         235,000            95
                                                                                                        ---------           ---
Total Factory Outlet Centers (12)......................................                                 7,217,000            94%
                                                                                                        =========           === 
====================================================================================================================================
</TABLE>
Notes:
(1)  Percentage  reflects  fully  executed  leases as of December  31, 1997 as a
     percent of square feet of GLA.
(2)  The Company acquired this factory outlet center on December 2, 1997 from an
     unrelated third party.
(3)  The Company acquired this factory outlet center on October 29, 1997 from an
     unrelated third party.
(4)  The Company owns a 2% partnership  interest as the sole general  partner in
     Phase I of this property but is entitled to 99% of the property's operating
     cash flow and net proceeds from a sale or  refinancing.  An unrelated third
     party holds a 35% limited partnership  interest and the Company holds a 65%
     general partnership  interest in the partnership that owns Phase II of this
     property.  Phase I of this mixed-use  development  includes  154,000 square
     feet of office  space and Phase II  includes  5,000  square  feet of office
     space.  The total  office  space of 159,000  square feet is not included in
     this table and such space was 78% leased as of December 31, 1997.
(5)  The Company  acquired this factory  outlet center on February 13, 1997 from
     an unrelated third party.
(6)  Upon consummation of the Merger Agreement, the Company intends to sell this
     factory  outlet  center (see Note 15 - "Merger  Agreement"  of the Notes to
     Consolidated Financial Statements).
(7)  On February 7, 1997, the Company  purchased an additional 20% interest from
     a joint venture  partner,  increasing the Company's  ownership  interest in
     this property to 50%.
(8)  The Company  operates  this property  pursuant to a long-term  ground lease
     under which the Company  receives the economic  benefit of a 100% ownership
     interest.
(9)  The  Company  owns 50% of this  factory  outlet  center in a joint  venture
     partnership with an unrelated third party.
(10) The real  property on which this  outlet  center is located is subject to a
     long-term ground lease. The Company receives the economic benefit of a 100%
     ownership interest.
(11) On September 2, 1997, the Company purchased its joint venture partner's 25%
     partnership  interest in Buckeye Factory Shops Limited  Partnership and now
     owns 100% of this factory outlet center.
(12) The Company  also owns three  community  centers not included in this table
     containing 424,000 square feet of GLA in the aggregate that were 96% leased
     as of December 31, 1997.

        As of February  28, 1998,  the Company  owned,  or held under  long-term
leases,  land  contiguous to its outlet centers to construct  additional  phases
totaling  approximately  1,500,000  square feet of GLA.  The Company  also holds
options to purchase property  adjoining its existing factory 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.
<PAGE>

        The following  table sets forth,  as of December 31, 1997,  tenant lease
expirations  for the next 10  years  at the  Company's  factory  outlet  centers
(assuming  that none of the tenants  exercise any renewal  option and  including
leases at factory outlet centers owned through joint venture partnerships):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                       Lease Expirations -- Outlet Centers
                ---------------------------------------------------                                                 % 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>     
 1998                      208                          672,590                     $  8,676,382                            8.95%
 1999                      282                          951,096                       13,884,059                           14.32
 2000                      362                        1,219,241                       19,129,588                           19.73
 2001                      386                        1,318,768                       20,735,895                           21.39
 2002                      280                          974,632                       15,499,971                           15.99
 2003                       67                          309,794                        4,904,704                            5.06
 2004                       53                          328,272                        4,646,025                            4.79
 2005                       46                          272,619                        4,268,191                            4.40
 2006                       30                          178,420                        2,730,946                            2.82
 2007                        9                           36,262                          552,230                            0.57
====================================================================================================================================
</TABLE>
Tenants

        In  management's  view,  the  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,  1997,  no group of
tenants under common control accounted for more than 5.74% of the gross revenues
of the Company or occupied more than 5.36% of the total GLA of the Company.
<PAGE>
<TABLE>
        The  following  list  includes some of the lead tenants in the Company's
outlet centers based on leases executed as of December 31, 1997:
<CAPTION>
                                                                                          NUMBER OF                   % OF LEASED
TENANT                                                                                     STORES                         GLA       
------                                                                                    ---------                   -----------   
<S>                                                                                       <C>                         <C>       
PHILLIPS-VAN HEUSEN
     BASS .............................................................................       19                            1.82%
     VAN HEUSEN .......................................................................       24                            1.46
     GEOFFREY BEENE ...................................................................       21                            1.32
     IZOD .............................................................................       16                            0.51
     GANT .............................................................................        6                            0.25
                                                                                             ---                            ----
        SUBTOTAL PHILLIPS-VAN HEUSEN...................................................       86                            5.36

DRESS BARN, INC.
     WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN..........................................       29                            2.75
     SBX...............................................................................        2                            0.19
                                                                                             ---                            ----
        SUBTOTAL DRESS BARN, INC.......................................................       31                            2.94

SARA LEE
    L'EGGS/HANES/BALI/PLAYTEX..........................................................       22                            1.46
    CHAMPION...........................................................................        6                            0.29
    COACH..............................................................................       11                            0.42
    SOCKS GALORE.......................................................................        3                            0.06
                                                                                             ---                            ----
        SUBTOTAL SARA LEE..............................................................       42                            2.24

CASUAL CORNER GROUP, INC.
     CASUAL CORNER OUTLET..............................................................       16                            1.08
     CASUAL CORNER WOMAN...............................................................        9                            0.35
     PETITE SOPHISTICATE ..............................................................       16                            0.59
                                                                                             ---                            ----
        SUBTOTAL CASUAL CORNER GROUP, INC. ............................................       41                            2.01


OFF 5TH-SAKS FIFTH AVENUE..............................................................        8                            2.39
LEVI'S OUTLET..........................................................................       16                            2.04
BUGLE BOY..............................................................................       23                            1.90
MIKASA.................................................................................       16                            1.83
GAP....................................................................................       12                            1.74
REEBOK.................................................................................       12                            1.57
OSHKOSH B'GOSH/GENUINE KIDS............................................................       25                            1.51
NIKE...................................................................................        9                            1.49
SPRINGMAID-WAMSUTTA....................................................................       14                            1.46
CORNING-REVERE.........................................................................       20                            1.44
JONES NEW YORK.........................................................................       33                            1.42
DESIGN'S INC./BOSTON TRADER............................................................       12                            1.38
VANITY FAIR/LEE/WRANGLER/BARBIZON......................................................        4                            1.36
CARTERS................................................................................       19                            1.34
POLO/RALPH LAUREN......................................................................       11                            1.21
READING CHINA & GLASS..................................................................        3                            1.05
ANN TAYLOR.............................................................................        8                            0.88
JOCKEY.................................................................................       16                            0.82
EDDIE BAUER............................................................................        7                            0.80
LIZ CLAIBORNE..........................................................................        5                            0.73
AMERICAN OUTPOST.......................................................................       13                            0.66
NINE WEST..............................................................................       17                            0.64
DANSKIN................................................................................        9                            0.64
ESPRIT.................................................................................        5                            0.61
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                          NUMBER OF                   % OF LEASED
TENANT                                                                                      STORES                        GLA
------                                                                                    ---------                   -----------   
<S>                                                                                       <C>                         <C>    
GUESS?.................................................................................        7                            0.58%
J. CREW................................................................................        6                            0.58
BROOKS BROTHERS........................................................................        7                            0.53
DONNA KARAN............................................................................        8                            0.50
BOSE...................................................................................        9                            0.50
COUNTY SEAT............................................................................        6                            0.49
VILLEROY & BOCH........................................................................        8                            0.47
TOMMY HILFIGER.........................................................................        9                            0.47
SONY...................................................................................        5                            0.42
NAUTICA................................................................................        6                            0.29

NORDIC TRACK...........................................................................        6                            0.24
ANNE KLEIN.............................................................................        3                            0.14
ELLEN TRACY............................................................................        2                            0.10
FIRST CHOICE/ESCADA....................................................................        2                            0.05
                                                                                             ---                           -----

TOTAL..................................................................................      601                           48.80%
                                                                                             ===                           =====
</TABLE>
        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 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, 1997, total bad debt expense was  approximately  $970 or
 .01% of total revenues. The Company has not lost any material revenue related to
tenant bankruptcies or other lease defaults.


                           ITEM 3 -- LEGAL PROCEEDINGS

        The Company is  involved  in various  legal  matters  incidental  to its
business.  The  outcome  of  litigation  is not  susceptible  to easy or certain
prediction. While an unfavorable outcome in a particular proceeding could have a
significant  effect on the  Company's  consolidated  results of  operations in a
future  reporting  period,  the Company  believes  ultimate  resolution of these
matters would not, either singly or in the aggregate,  significantly  affect the
Company's results of operations, liquidity or financial position.

        On December 10, 1997, a shareholder of Horizon  filed a purported  class
action  lawsuit in the  Circuit  Court for  Muskegon  County,  Michigan  against
Horizon,  the Company,  and certain  directors  and former  directors of Horizon
claiming,  among other things, that Horizon's directors breached their fiduciary
duties to  Horizon's  shareholders  in  approving  the merger of Horizon and the
Company  and that the  consideration  to be paid to  Horizon's  shareholders  in
connection with the merger is unfair and inadequate.  The lawsuit  requests that
such  merger be  enjoined  or, in the event that the  purported  transaction  is
consummated, that it be rescinded or unspecified damages be awarded to the class
members.  On January 16, 1998,  the defendants  answered the complaint,  denying
that the Horizon board of directors  breached their fiduciary duties and denying
that such  consideration is unfair or inadequate.  Although the Company is named
as a  defendant  in the  complaint,  the  substantive  allegations  focus on the
actions  of Horizon  and its board of  directors  and not on any  actions of the
Company or its board of  directors.  Since  this  litigation  is in the  initial
phases  of  discovery,  its  outcome  is not  susceptible  to  easy  or  certain
prediction; however, the Company intends to defend itself 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, 1997.

                                     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".
<PAGE>
        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>
                                                1997                                              1996
                           ---------------------------------------------   ------------------------------------------------
                             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                      $16.50      $15.63      $13.63      $13.38        $12.75      $12.25      $12.00      $12.50
   Low                        13.31       13.13       11.88       12.00         11.38       11.00       10.88       11.00
   End of period close        14.19       15.63       13.44       13.00         12.50       12.00       11.31       11.50

Cash dividends paid per
   common share              $0.295      $0.295      $0.295      $0.295        $0.295      $0.440(1)   $0.295      $0.295
===========================================================================================================================
</TABLE>
Note:
(1)  Includes a special cash distribution of $0.145 per common share relating to
     the Company's  exchange offer completed in June 1996 (see Note 8 -- "Equity
     Offerings and Other  Transactions"  of the Notes to Consolidated  Financial
     Statements).

        Instruments   governing  the  Company's   indebtedness  contain  certain
covenants  regarding  the payment of  dividends  (see Note 7 -- "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 381
including  participants in security  position listings as of March 13, 1998. The
Company believes,  however, they have in excess of 5,000 beneficial shareholders
as of March 13, 1998.
<PAGE>
<TABLE>
                        ITEM 6 -- SELECTED FINANCIAL DATA


          (Amounts in thousands, except per share and per unit amounts)
<CAPTION>
                                                                                                               Prime Retail
                                                              Prime Retail, Inc.                          Properties (Combined)
                                          -----------------------------------------------------------   ----------------------------
                                                                                         Period from     Period from
                                                                                         March 22 to    January 1 to      Year ended
                                                    Year ended December 31               December 31        March 21     December 31
                                          ------------------------------------------------------------------------------------------
                                                 1997           1996             1995           1994            1994            1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>              <C>            <C>             <C>            <C>

Revenues

Base rents............................... $    78,046    $    54,710        $  46,368      $  28,657       $   3,670      $  14,298
                                                        
Percentage rents.........................       3,277          1,987            1,520          1,404             187            709
Tenant reimbursements....................      37,519         25,254           22,283         11,858           2,113          5,370
Income from investment partnerships......         103          1,239            1,729            453             336            821
Interest and other.......................      10,185          5,850            5,498          2,997              24            602
                                            ---------      ---------        ---------      ---------       ---------      ---------
           Total revenues................     129,130         89,040           77,398         45,369           6,330         21,800

Expenses

Property operating.......................      29,492         20,421           17,389          9,952           1,927          5,046
Real estate taxes........................       9,417          5,288            4,977          2,462             497          1,558
Depreciation and amortization............      26,715         19,256           15,438          9,803           2,173          7,632
Corporate general and administrative.....       5,603          4,018            3,878          2,710              --             --
Interest.................................      36,122         24,485           20,821          9,485           3,280          8,928
Property management fees.................          --             --               --             --             299            777
Other charges............................       3,234          8,586            2,089          1,503             562          1,732
                                            ---------      ---------        ---------      ---------       ---------      ---------
           Total expenses................     110,583         82,054           64,592         35,915           8,738         25,673
                                            ---------      ---------        ---------      ---------       ---------      ---------
Income (loss) before minority interests
   and extraordinary item................      18,547          6,986           12,806          9,454          (2,408)        (3,873)
(Income) loss allocated to minority                                                                     
    interests............................     (10,581)         2,092            5,364          5,204              --             --
                                            ---------      ---------        ---------      ---------       ---------      ---------
Income (loss) before extraordinary item..       7,966          9,078           18,170         14,658          (2,408)        (3,873)
                                               
Extraordinary item.......................      (2,061)        (1,017)              --             --              --             -- 
                                            ---------      ---------        ---------      ---------       ---------      ---------
Net income (loss)........................       5,905          8,061           18,170         14,658      $   (2,408)    $   (3,873)
                                            ---------      ---------        ---------      ---------      ==========     ==========
Income allocated to preferred
   shareholders..........................      12,726         14,236           20,944         16,290
                                            ---------      ---------        ---------      ---------
Net loss applicable to common shares..... $    (6,821)    $   (6,175)       $  (2,774)     $  (1,632)     
                                            =========      =========        =========      =========
Net loss per common share-basic and
   diluted (1)........................... $    (0.36)    $     (0.75)       $   (0.96)     $   (0.57)
                                            =========      =========        =========      =========
Other Data
Funds from operations (2)................ $   46,718     $    27,637        $  27,996      $  21,996      $      139     $    4,351
Net cash provided by (used in) operating
   activities............................ $   49,856     $    45,191        $  36,399      $  17,458      $   (1,873)    $   14,450
Net cash used in investing activities....   (229,956)       (232,290)         (81,978)      (149,435)         (1,239)       (54,210)
Net cash provided by financing
   activities............................    182,549         176,096           57,547        134,936           4,087         39,907
Distributions declared per common share.. $     1.18     $      1.33(3)     $    1.18      $   0.623      $       --     $       --
Reported merchant sales.................. $1,434,163     $ 1,044,348        $ 809,623      $ 497,624      $   73,553     $  303,833
Total factory outlet GLA at end of
   period (4)......... ..................      7,217           5,780            4,331          3,382           1,839          1,839
Number of factory outlet centers at end
   of period (4).........................         28              21               17             14               7              7
</TABLE>
<TABLE>
<CAPTION>
                                                                                                                 Prime Retail
                                                                  Prime Retail, Inc.                        Properties (Combined)
                                             -------------------------------------------------------   -----------------------------
                                                              December 31                                  March 21,   December 31,
                                             -------------------------------------------------------   -----------------------------
                                                 1997           1996             1995           1994            1994           1993
----------------------------------------------------------------------------------------------------   -----------------------------
<S>                                          <C>            <C>              <C>            <C>             <C>            <C>
Balance Sheet Data
Rental property (before accumulated
   depreciation).........................    $904,782       $640,759         $454,480       $376,181        $180,170       $185,394
Net investment in rental property........     822,749        583,085          414,290        349,513         164,159        169,674
Total assets.............................     904,183        666,803          462,405        385,930         186,034        190,685
Bonds and notes payable..................     515,265        499,523          305,954        214,025         188,378        184,037
Total liabilities and minority interests.     559,655        527,594          340,921        258,279         198,244        197,400
Shareholders' equity (deficit)...........     344,528        139,209          121,484        127,651         (12,210)        (6,715)
====================================================================================================================================
</TABLE>
<PAGE>
Notes:
(1)  On December 31, 1997, the Company adopted Statement of Financial Accounting
     Standards  ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
     Significant  Accounting  Policies - -  Earnings  per Share" of the Notes to
     Consolidated  Financial  Statements).  The  adoption of SFAS No. 128 had no
     impact on the  Company's  earnings per share  computations  for all periods
     presented and,  therefore,  no restatement of prior period computations was
     required.
(2)  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  generally  considers  FFO  to  be  an
     appropriate  measure of the performance of an equity REIT because  industry
     analysts  have accepted it as a  performance  measure of equity REITs.  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. Prime 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 allocation to minority interests and
     preferred shareholders to FFO is as follows:
<TABLE>
<CAPTION>
                                                                                                                Prime Retail
                                                                  Prime Retail, Inc.                        Properties (Combined)
                                             ---------------------------------------------------------  ----------------------------
                                                                                                Period        Period
                                                                                                  from          from
                                                       Year ended December 31              March 22 to  January 1 to     Year ended
                                             ------------------------------------------   December 31,     March 21,   December 31,
                                                 1997           1996             1995             1994          1994           1993
---------------------------------------------------------------------------------------   ------------  ----------------------------
<S>                                          <C>            <C>              <C>            <C>             <C>            <C>
Income (loss) before allocations to
   minority interests and preferred
   shareholders..........................     $18,547        $ 6,986(i)       $12,806        $ 9,454         $(2,408)       $(3,873)
FFO Adjustments:
Depreciation and amortization............      26,413         18,703           14,884          9,508           2,173          7,504
Unconsolidated joint venture
   adjustments(ii).......................       1,758          1,948              306          2,514             374            720 
                                              -------        -------          -------        -------         -------        -------
FFO before allocation to minority
   interests and preferred shareholders..     $46,718        $27,637          $27,996        $21,476         $   139        $ 4,351 
                                              =======        =======          =======        =======         =======        =======
====================================================================================================================================
</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 $162 and $2,538 for the year ended December 31, 1995 and the
     period from March 22, 1994 to December 31, 1994, respectively.
  
(3)  Includes a special cash distribution of $0.145 per common share relating to
     the Company's  exchange offer completed in June 1996 (see Note 8 -- "Equity
     Offerings and Other  Transactions"  of the Notes to Consolidated  Financial
     Statements).
(4)  Includes factory outlet centers  operated under joint venture  partnerships
     with unrelated third parties as follows:
<TABLE>
<CAPTION>
                                                                                                                  Prime Retail
                                                                Prime Retail, Inc.                           Properties (Combined)
                                                    --------------------------------------------------    --------------------------
                                                                        December 31                          March 21    December 31
                                                    --------------------------------------------------------------------------------
                                                    1997           1996             1995          1994          1994            1993
     -------------------------------------------------------------------------------------------------------------------------------
     <S>                                            <C>            <C>             <C>            <C>       <C>         <C>
     Aggregate GLA............................       595            800              901           599         121            121
     Number of factory outlet centers.........         3              4                4             3           1              1
     ===============================================================================================================================
</TABLE>
<PAGE>
                ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   (Amounts in thousands, except share, 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. (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"  contain certain  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which reflect  management's current views with respect to future events and
financial  performance.  Such forward-looking  statements are subject to certain
risks and  uncertainties;  including,  but not limited to, the effects of future
events on the Company's financial performance;  the risk that the Company may be
unable to finance its planned  acquisition  and  development  activities;  risks
related to the retail  industry in which the Company's  outlet centers  compete,
including the potential  adverse  impact of external  factors such as inflation,
consumer  confidence,  unemployment  rates and consumer tastes and  preferences;
risks associated with the Company's property acquisition activities, 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 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 rates;  and risks associated with
real estate  ownership,  such as the potential  adverse impact of changes in the
local  economic  climate  on  the  revenues  and  the  value  of  the  Company's
properties.

Portfolio Growth

        The Company has grown by developing and acquiring factory outlet centers
and expanding its existing factory outlet centers.  The Company's factory outlet
portfolio  consisted of 28 operating  factory outlet centers totaling  7,217,000
square feet of gross leasable area ("GLA") at December 31, 1997,  compared to 21
factory outlet  centers  totaling  5,780,000  square feet of GLA at December 31,
1996 and 17 factory  outlet  centers  totaling  4,331,000  square feet of GLA at
December 31, 1995.

         During  1997,  the  Company  purchased  seven  factory  outlet  centers
totaling  1,221,000 square feet of GLA and opened expansions to existing factory
outlet centers  totaling 224,000 square feet of GLA.  Additionally,  the Company
acquired its joint venture  partner's 25% ownership  interest in Buckeye Factory
Shops Limited Partnership  ("Buckeye") on September 2, 1997 and now owns 100% of
this factory  outlet center with 205,000  square feet of GLA.  During 1996,  the
Company opened two new factory outlet centers and nine expansions,  and acquired
two factory  outlet  centers from an unrelated  third  party,  adding  1,449,000
square feet of GLA in the  aggregate.  Additionally,  the Company  purchased its
joint venture  partner's  first mortgage and 50%  partnership  interest in Grove
City Factory Shops Partnership on November 1, 1996 and owns 100% of this factory
outlet center with 533,000 square feet of GLA. The significant  increases in the
number of the Company's operating  properties and total GLA during 1996 and 1997
are collectively referred to as the "Portfolio Expansion."
<PAGE>
<TABLE>
Results of Operations

Table 1--Consolidated Statements of Operations
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                  1997            1996            1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>              <C>    
 Revenues

 Base rents......................................................................... $  78,046       $  54,710        $ 46,368
                                                                                       
 Percentage rents...................................................................     3,277           1,987           1,520
 Tenant reimbursements..............................................................    37,519          25,254          22,283
 Income from investment partnerships................................................       103           1,239           1,729
 Interest and other.................................................................    10,185           5,850           5,498
                                                                                     ---------       ---------       ---------
      Total revenues................................................................   129,130          89,040          77,398

 Expenses

 Property operating.................................................................    29,492          20,421          17,389
 Real estate taxes..................................................................     9,417           5,288           4,977
 Depreciation and amortization......................................................    26,715          19,256          15,438
 Corporate general and administrative...............................................     5,603           4,018           3,878
 Interest...........................................................................    36,122          24,485          20,821
 Other charges......................................................................     3,234           8,586           2,089
                                                                                     ---------       ---------       ---------
      Total expenses................................................................   110,583          82,054          64,592
                                                                                     ---------       ---------       ---------
 Income before minority interests and extraordinary item...........................     18,547           6,986          12,806
 (Income) loss allocated to minority interests.....................................    (10,581)          2,092           5,364
                                                                                     ---------       ---------       ---------
 Income before extraordinary item..................................................      7,966           9,078          18,170

 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........................................................................      5,905           8,061          18,170

 Income allocated to preferred shareholders........................................     12,726          14,236          20,944
                                                                                     ---------       ---------       ---------
 Net loss applicable to common shares..............................................  $  (6,821)      $  (6,175)      $  (2,774)
                                                                                     =========       =========       =========
 Earnings per common share - basic and diluted (1):
    Loss before extraordinary item.................................................  $   (0.25)      $   (0.63)      $   (0.96)
    Extraordinary item.............................................................      (0.11)          (0.12)             --
                                                                                     ---------       ---------       ---------
    Net loss.......................................................................  $   (0.36)      $   (0.75)      $   (0.96)
                                                                                     =========       =========       =========
                                                                                        
 Weighted average common shares outstanding........................................ 19,189,000       8,221,000       2,875,000
                                                                                    ==========        ========       =========
=================================================================================================================================
</TABLE>
Note:
(1)  On December 31, 1997, the Company adopted Statement of Financial Accounting
     Standards  ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
     Significant  Accounting  Policies - -  Earnings  per Share" of the Notes to
     Consolidated  Financial  Statements).  The  adoption of SFAS No. 128 had no
     impact on the  Company's  earnings per share  computations  for all periods
     presented and,  therefore,  no restatement of prior period computations was
     required.
<PAGE>
<TABLE>
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, 
1997,  1996 and 1995 is  presented in the  following table, expressed in amounts 
calculated on a weighted average occupied GLA basis.
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                      1997             1996            1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>              <C>             <C>   
GLA at end of period (1)...........................................................          7,326            5,684           4,134
Weighted average occupied GLA (1)..................................................          5,735            4,075           3,458
Executed leases at end of period (GLA) (1).........................................          6,854            5,252           3,950
Factory outlet centers in operation at end of period (2)...........................             28               21              17
New factory outlet centers opened (2)..............................................             --                2               3
Factory outlet centers expanded (2)................................................              4                9               4
Factory outlet centers acquired....................................................              7                2              --
Community centers in operation at end of period....................................              3                3               3
States operated in at end of period................................................             20               16              14

Portfolio weighted average per square foot (2):

Revenues
Base rents.........................................................................         $13.61           $13.43          $13.41
Percentage rents...................................................................           0.57             0.49            0.44
Tenant reimbursements..............................................................           6.54             6.20            6.44
Interest and other.................................................................           1.79             1.74            2.09
                                                                                            ------           ------          ------
Total revenues.....................................................................          22.51            21.86           22.38

Expenses
Property operating.................................................................           5.14             5.01            5.03
Real estate taxes..................................................................           1.64             1.30            1.44
Depreciation and amortization......................................................           4.66             4.73            4.46
Corporate general and administrative...............................................           0.98             0.99            1.12
Interest...........................................................................           6.30             6.01            6.02
Other charges......................................................................           0.56             2.11(4)        0.60
                                                                                            ------           ------          ------
Total expenses.....................................................................          19.28            20.15           18.67
                                                                                            ------           ------          ------
Income before minority interests and extraordinary item............................         $ 3.23           $ 1.71          $ 3.71
                                                                                            ======           ======          ======

Factory outlet center weighted average per square foot (3):

Revenues
Base rents.........................................................................         $14.19          $ 14.18          $14.36
Percentage rents...................................................................           0.63             0.55            0.51
Tenant reimbursements..............................................................           6.96             6.75            7.16
Interest and other.................................................................           1.75             0.82            0.66
                                                                                            ------           ------          ------
Total revenues.....................................................................          23.53            22.30           22.69

Expenses
Property operating.................................................................           5.40             5.45            5.54
Real estate taxes..................................................................           1.67             1.29            1.46
Depreciation and amortization......................................................           4.67             4.87            4.38
Interest...........................................................................           6.31             6.82            6.81
Other charges......................................................................           0.43             0.81(5)         0.23
                                                                                            ------           ------          ------
                                                                                                               
Total expenses.....................................................................          18.48            19.24           18.42
                                                                                            ------           ------          ------

Income before minority interests, corporate general and administrative expenses,            
  and extraordinary item...........................................................         $ 5.05           $ 3.06          $ 4.27
                                                                                            ======           ======          ======
====================================================================================================================================
</TABLE>
Notes:
(1)  Includes total GLA in which the Company receives  substantially  all of the
     economic benefit.
(2)  Includes factory outlet centers operated under unconsolidated joint venture
     partnerships with unrelated third parties.
(3) Based on occupied GLA weighted by months of operation.  
(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, 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%. 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 factory  outlet  centers from unrelated
third  parties and the  Company's  purchase of its joint  venture  partner's 25%
partnership   interest  in  a  factory  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 factory  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.

        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 factory outlet portfolio.
<TABLE>
Table 3--Summary of Reported Merchant Sales(1) A summary of reported factory 
outlet merchant sales and related data for 1997, 1996 and 1995 follows:
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                              1997        1996       1995
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>         <C>          <C>    
Total reported merchant sales (in millions)(1).................................................    $1,434.2    $1,044.3     $ 809.6 
                                                                                                   ========    ========     =======
Weighted average reported merchant sales per square foot(2):
    All store sales............................................................................    $ 236.20    $ 229.08     $235.99
                                                                                                   ========    ========     =======
    Same-space sales...........................................................................    $ 231.89    $ 232.45
                                                                                                   ========    ========
Total merchant occupancy cost per square foot(3)...............................................    $  21.36    $  21.12     $ 21.64
                                                                                                   ========    ========     =======
 Cost of merchant occupancy to reported sales(4)...............................................       9.04%       9.22%       9.17%
                                                                                                   ========    ========     =======
 Cost of merchant occupancy (excluding marketing contributions) to reported sales(5)...........       8.39%       8.64%       8.48%
                                                                                                   ========    ========     =======
 ===================================================================================================================================
</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  factory  outlet
     centers.  Several of the Company's factory 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,
     1996.
(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 $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 factory  outlet  centers from
unrelated  third  parties  and  the  Company's  purchase  of its  joint  venture
partner's 25%  partnership  interest in a factory  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.  TABLE 4 sets  forth  recoveries  from
merchants as a percentage of total recoverable expenses for 1997, 1996 and 1995:
<TABLE>
Table 4--Tenant Recoveries as a Percentage of Total Recoverable Expenses
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Percentage of Expenses
Year                                                                                                   Recovered from Tenants(1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>   
1997................................................................................................             96.4%
1996................................................................................................             98.2%
1995................................................................................................             99.6%
====================================================================================================================================
</TABLE>
Note:
(1) Total  recoverable  expenses  include property  operating  expenses and real
    estate taxes.

        Income from investment  partnerships  decreased by $1,136,  or 91.7%, to
$103 for the year ended  December 31, 1997 compared to $1,239 for the year ended
December 31, 1996.  This decrease  reflects the  Company's  purchases of (i) its
joint venture  partner's  first mortgage and 50%  partnership  interest in Grove
City Factory  Shops  Partnership  on November 1, 1996 and (ii) its joint venture
partner's first mortgage and 25%  partnership  interest in Buckeye Factory Shops
Partnership on September 2, 1997. As a result of these acquisitions, the Company
owns 100% of both Grove City Factory Shops and Buckeye  Factory Shops.  Prior to
the  acquisition  dates,  the operating  results of these factory outlet centers
were  accounted  for by the  Company  under the  equity  method  of  accounting.
Commencing with their respective  acquisition  dates,  the operating  results of
these factory  outlet centers were included in the  consolidated  results of the
Company.

        Interest and other  income  increased  by $4,335,  or 74.1%,  to $10,185
during the year ended December 31, 1997 as compared to $5,850 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) municipal  assistance income of $903,
(iv) push cart income of $304, (v) temporary  tenant income of $218,  (vi) lease
termination  income  of $213,  and  (vii)  all  other  ancillary  income of $63.
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.

        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.  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 factory  outlet centers from an
unrelated  third  parties  and  the  Company's  purchase  of its  joint  venture
partner's partnership interest in two factory outlet centers.
<TABLE>
Table 5--Components of Depreciation and Amortization Expense

        The components of depreciation and  amortization  expense for 1997, 1996
and 1995 are summarized as follows:
<CAPTION>
 ----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                         1997          1996          1995
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>           <C>           <C>    
 Building and improvements.................................................................    $13,987       $ 9,471       $ 8,159
 Land improvements.........................................................................      2,838         2,161         1,440
 Tenant improvements.......................................................................      7,372         5,165         3,563
 Furniture and fixtures....................................................................        858           671           554
 Leasing commissions(1)....................................................................      1,660         1,788         1,722
                                                                                               -------       -------       -------
       Total...............................................................................    $26,715       $19,256       $15,438
                                                                                               =======       =======       =======
===================================================================================================================================
</TABLE>
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 $11,637, or 47.5%, to
$36,122 in 1997  compared  to $24,485 in 1996.  This  increase  reflects  higher
interest  incurred of $12,241,  a reduction in interest  earned on interest rate
protection  contracts of $86, 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 a 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
7.36% and 7.22% for 1997 and 1996, respectively.
<TABLE>
Table 6--Components of Interest Expense

        The  components  of  interest  expense  for  1997,  1996  and  1995  are
summarized as follows:
<CAPTION>
 ----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                         1997          1996          1995
 ----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                           <C>           <C>           <C>    
 Interest incurred......................................................................       $36,551       $24,310       $19,354
 Interest capitalized...................................................................        (4,056)       (3,348)       (2,336)
 Interest earned on interest rate protection contracts..................................          (115)         (201)         (721)
 Amortization of deferred financing costs...............................................         2,352         2,341         3,248
 Amortization of interest rate protection contracts.....................................         1,390         1,383         1,276
                                                                                               -------       -------       -------
       Total............................................................................       $36,122       $24,485       $20,821
                                                                                               =======       =======       =======
 ==================================================================================================================================
</TABLE>

        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.
<TABLE>
Table 7--Capital Expenditures

        The  components  of  capital  expenditures  for 1997,  1996 and 1995 are
summarized as follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                      1997            1996          1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>            <C>             <C>    
New developments..................................................................        $ 34,175       $  33,787       $59,222
Property acquisitions, net.........................................................        191,345(1)      131,593(2)         --
Expansions and renovations.........................................................         37,941          20,428        19,237
Re-leasing tenant allowances.......................................................            561             473           616
                                                                                          --------       ---------       -------
      Total............................................................................   $264,022       $ 186,281       $79,075
                                                                                          ========       =========       ======= 
=================================================================================================================================
</TABLE>
Notes:
(1)  Includes the net assets  acquired by the Company during 1997  consisting of
     (i) the purchase of seven factory  outlet  centers  ($166,987) and (ii) the
     purchase of the Company's joint venture partner's  partnership  interest in
     Buckeye Factory Shops ($24,358).
(2)  Includes the net assets  acquired by the Company during 1996  consisting of
     (i) the  purchase  of two factory  outlet  centers  ($71,770)  and (ii) the
     purchase of the Company's joint venture partner's  partnership  interest in
     Grove City Factory Shops ($57,094).
<PAGE>
<TABLE>
<CAPTION>
Table 8--Consolidated Quarterly Summary of Operations
 -----------------------------------------------------------------------------------------------------------------------------------
                                                           1997                                               1996
                                     -------------------------------------------------- --------------------------------------------
                                       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...................... $36,206     $31,549     $31,213     $30,162       $25,928     $21,831     $20,150     $21,131
 Total expenses......................  28,826      27,458      27,630      26,669        22,224      17,656      24,100      18,074
                                      -------     -------     -------     -------       -------     -------     -------     -------
 Income (loss) before minority
    interests and extraordinary item.   7,380       4,091       3,583       3,493         3,704       4,175      (3,950)      3,057
 (Income) loss allocated to
    minority interests...............  (2,778)     (2,540)     (2,672)     (2,591)       (2,568)     (1,810)      4,993       1,477
                                      -------     -------     -------     -------       -------     -------     -------     -------
 Income before extraordinary item....   4,602       1,551         911         902         1,136       2,365       1,043       4,534

 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 (loss)...................   4,602        (510)        911         902         1,136       2,365          26       4,534
                                                                      
 Income allocated to preferred
    shareholders.....................   3,446       3,094       3,093       3,093         3,000       3,000       3,000       5,236
                                      -------     -------     -------     -------       -------     -------     -------     -------
Net income (loss) applicable to
    common shares.................... $ 1,156     $(3,604)    $(2,182)    $(2,191)      $(1,864)    $  (635)    $(2,974)    $  (702)
                                      =======     =======     =======     =======       =======     =======     =======     ======= 
 Earnings per common share 
   basic and diluted (1):
      Income (loss) before
       extraordinary item............ $  0.04     $ (0.08)    $ (0.14)    $ (0.15)      $ (0.14)    $ (0.05)    $ (0.62)    $ (0.24)
      Extraordinary item.............      --       (0.11)         --          --            --          --       (0.32)         --
                                      -------     -------     -------     -------       -------     -------     -------     -------
      Net income (loss).............. $  0.04     $ (0.19)    $ (0.14)    $  (015)      $ (0.14)    $ (0.05)    $ (0.94)    $ (0.24)
                                      =======     =======     =======     =======       =======     =======     =======     =======
 Weighted average common shares
    outstanding......................  27,295      19,159      15,795      14,344        13,405      13,322       3,171       2,875
                                      =======     =======     =======     =======       =======     =======     =======     =======
Distributions paid per common share.. $ 0.295     $ 0.295     $ 0.295     $ 0.295       $ 0.295     $ 0.440(2)  $ 0.295     $ 0.295
                                      =======     =======     =======     =======       =======     =======     =======     =======
===================================================================================================================================
</TABLE>
 Notes:
(1)  On December 31, 1997, the Company adopted Statement of Financial Accounting
     Standards  ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
     Significant  Accounting  Policies - -  Earnings  per Share" of the Notes to
     Consolidated  Financial  Statements).  The  adoption of SFAS No. 128 had no
     impact on the  Company's  earnings per share  computations  for all periods
     presented and,  therefore,  no restatement of prior period computations was
     required.
 (2) Includes a special cash distribution of $0.145 per common share relating to
     the Company's exchange  offer completed in June 1996 (see Note 8 -- "Equity
     Offerings and Other  Transactions"  of the Notes to Consolidated  Financial
     Statements).

Comparison of the year ended December 31, 1996 to the year ended December 31, 
1995

        For the year ended December 31, 1996, the Company reported net income of
$8,061 on total revenues of $89,040. These results include a nonrecurring charge
and an  extraordinary  loss of $6,131 and $1,017 (net of minority  interests  of
$3,263),  respectively,  related to a binding loan  commitment  that the Company
obtained on June 5, 1996 resulting in 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.
For the year ended December 31, 1995, the Company reported net income of $18,170
on total revenues of $77,398. For the year ended December 31, 1995, the net loss
applicable  to common  shareholders  was $2,774,  or $0.96 per common share on a
basic and diluted basis.
<PAGE>
        Total  revenues  were $89,040 for the year ended  December 31, 1996,  as
compared  to $77,398  for the year ended  December  31,  1995,  an  increase  of
$11,642,  or 15.0%.  Base rents increased  $8,342, or 18.0%, in 1996 compared to
1995. These increases were primarily due to the Portfolio  Expansion,  including
the effect of the  acquisition  of two factory  outlet centers from an unrelated
third party on November 1, 1996 and the Company's  purchase of its joint venture
partner's  50%  partnership  interest in a factory  outlet center on November 1,
1996.  Straight-line  rents  (included in base rents) were $600 and $931 for the
years ended December 31, 1996 and 1995, respectively.  The average base rent per
square foot for new factory outlet leases negotiated and executed by the Company
was  $15.36  and  $14.90  for the  years  ended  December  31,  1996  and  1995,
respectively.

        As  summarized  in TABLE  3,  merchant  sales  reported  to the  Company
increased by $234.7 million,  or 29.0%, to $1,044.3  million from $809.6 million
for the years ended  December 31, 1996 and 1995,  respectively.  The increase in
total  reported  merchant  sales was primarily  due to the Portfolio  Expansion,
including the effect of the acquisition of certain properties in 1996.  However,
the weighted average  reported  merchant sales per square foot decreased by 2.9%
to $229.08  per square  foot from  $235.99  per square  foot for the years ended
December 31, 1996 and 1995,  respectively.  The Company's factory outlet centers
(including  centers  operated under  partnerships  with unrelated third parties)
contained  an average of 275,238 and 254,765  square feet of GLA at December 31,
1996 and 1995,  respectively.  The increase in the cost of merchant occupancy to
reported sales was primarily due to a decrease in the weighted  average reported
merchant  sales  per  square  foot  for  the  Company's  entire  factory  outlet
portfolio.

        Tenant  reimbursements,  which represent the  contractual  recovery from
tenants of certain  operating  expenses,  increased by $2,971, or 13.3%, in 1996
over 1995. This increase was primarily due to the Portfolio Expansion, including
the effect of the  acquisition  of two factory  outlet centers from an unrelated
third party and the  Company's  purchase of its joint  venture  partner's  first
mortgage and 50% partnership  interest in a factory outlet center on November 1,
1996.

        As  shown  in  TABLE  4,  tenant   reimbursements  as  a  percentage  of
recoverable  operating  expenses  were 98.2% in 1996  compared to 99.6% in 1995.
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 highlights the trend of recoveries from merchants as
a percentage of total recoverable expenses.

        Income from  investment  partnerships  decreased by $490,  or 28.3%,  to
$1,239 for the year ended  December  31,  1996  compared  to $1,729 for the year
ended December 31, 1995. This decrease  reflected the Company's  purchase of its
joint venture  partner's  first mortgage and 50%  partnership  interest in Grove
City  Factory  Shops  Partnership  on  November  1,  1996.  As a  result  of its
acquisition, the Company owns 100% of this factory outlet center and, therefore,
commencing  November 1, 1996, its operations  were included in the  consolidated
results of the Company. Prior to November 1, 1996, the Company accounted for its
interest  under the equity  method of  accounting.  The  decrease in income from
investment  partnerships  in 1996  compared to 1995 was offset,  in part, by the
openings of Arizona Factory Shops (Phase  II-September 1996) and Buckeye Factory
Shops (Phase I-November 1996).

        Interest and other income  increased by $352,  or 6.4%, to $5,850 during
the year ended  December  31, 1996 as compared  to the year ended  December  31,
1995. The increase reflected higher temporary and customer service income, lease
termination  income,  and  property  management  fees of $736,  $620,  and $149,
respectively,  partially  offset  by  lower  leasing  commissions,  real  estate
brokerage commissions,  ancillary income, interest income,  municipal assistance
income,  and construction  and development  management fees of $364, $278, $139,
$115, $104 and $47, respectively.  Also offsetting this increase was a $106 gain
on the sale of land during the year ended December 31, 1995.

        Property  operating expense increased by $3,032, or 17.4%, to $20,421 in
1996 compared to $17,389 in 1995.  Real estate taxes expense  increased by $311,
or 6.2%, to $5,288 in 1996 from $4,977 in 1995.  Depreciation  and  amortization
expense increased by $3,818,  or 24.7%, to $19,256 in 1996,  compared to $15,438
in 1995.  The  increases  in property  operating  expense and real estate  taxes
expense,  and depreciation  and  amortization  expense were primarily due to the
Portfolio  Expansion,  including the  acquisition  of two factory outlet centers
from an unrelated  third party and the  Company's  purchase of its joint venture
partner's  50%  partnership  interest in a factory  outlet center on November 1,
1996.

        As shown in TABLE 6, interest expense  increased by $3,664, or 17.6%, to
$24,485 in 1996  compared to $20,821 in 1995.  This  increase  reflected  higher
interest  incurred  of $4,956,  an  increase in  amortization  of interest  rate
protection contracts of $107 and a reduction in interest earned on interest rate
protection  contracts of $520, partially offset by a decrease in amortization of
deferred  financing  costs of $907 and an  increase  in the  amount of  interest
capitalized in connection with development projects of $1,012.

        The  increase in interest  incurred  was  primarily  attributable  to an
increase of  approximately  $86,256 in the  Company's  average debt  outstanding
during 1996 compared to 1995.  Additionally,  the increase in interest  incurred
was offset by a decrease of 0.59% in the weighted  average interest rate for the
year ended  December 31, 1996 compared to the same period in 1995.  The weighted
average interest rates were 7.22% and 7.81% for 1996 and 1995, respectively.
<PAGE>
        The decrease in amortization  of deferred  financing costs was primarily
attributable  to  reduced  amortization  expense  related  to  certain  deferred
financing  costs which were  written-off  in 1996.  These costs were part of the
$10,411  nonrecurring  loss recorded in the second  quarter of 1996 related to a
binding loan commitment that the Company  obtained on June 5, 1996 in connection
with the Company's refinancing approximately $253,000 of debt.

        Other  charges  increased by $6,497 to $8,586 in 1996 compared to $2,089
for 1995.  This increase was primarily  due to the  nonrecurring  loss of $6,131
described above.  Excluding this nonrecurring charge, other charges increased by
$366,  or  17.5%,  to  $2,455  in  1996   reflecting  a  higher   provision  for
uncollectible  accounts  receivable of $364, an increase in ground lease expense
of  $228,   offset   by  a  lower   provision   for   potentially   unsuccessful
pre-development  efforts of $204 and a decline in miscellaneous other charges of
$22.

Liquidity and Capital Resources

Sources and Uses of Cash

     For the year ended  December  31,  1997,  net cash  provided  by  operating
activities was $49,856, net cash used in investing activities was $229,956,  and
net cash provided by financing activities was $182,549.

      The primary uses of cash for investing activities during 1997 included (i)
costs  associated  with the  acquisition of seven factory outlet centers and the
purchase  of an  unrelated  joint  venture  partner's  25% equity  interest in a
factory outlet center,  (ii) costs  associated with development and construction
of expansions to existing factory outlet centers aggregating 224,000 square feet
of GLA which opened during 1997,  (iii) costs  associated with the completion of
factory  outlet  centers and  expansions  to  existing  factory  outlet  centers
aggregating  930,000 square feet of GLA which opened during 1996, and (iv) costs
for pre-development activities associated with future developments.

     The sources of cash from financing activities during 1997 included: (i) net
proceeds from public and private  equity  offerings  totaling  $242,729 and (ii)
proceeds from new borrowings of $160,057. Such proceeds were partially offset by
(i) principal repayments on notes payable of $175,683, (ii) preferred and common
stock  distributions of $33,605,  and (iii)  distributions to minority interests
(including  distributions to limited  partners of the Operating  Partnership) of
$10,366.

Sources and Uses of Cash -- Equity Offerings

        On January 10, 1997, the Company filed a Form S-3 Registration Statement
(the  "January  1997  Shelf  Registration")  with the  Securities  and  Exchange
Commission (the "SEC") to register $100,000 of the Company's equity  securities.
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  Cumulative Participating  Convertible Preferred Stock (the "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)  fund
development   and  construction  activities,  and  (iii)  fund general corporate
expenditures.

        On June 17, 1997,  the Company filed a Form S-3  Registration  Statement
(the "June 1997 Shelf  Registration")  with the SEC to register  $300,000 of the
Company's  equity   securities,   including  $66,122  of  the  Company's  equity
securities that remained available under the January 1997 Shelf Registration.

        On August 8, 1997, the Company entered into a purchase agreement with an
institutional  investor providing for the issuance of a new series of cumulative
convertible   non-voting   preferred   securities   (the   "Series  C  Preferred
Securities")  at $13.75  per  unit,  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 the  investor 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  ten  years.  Subject  to  certain  conditions,  the  Series  C  Preferred
Securities may be issued in the form of shares of preferred stock in the Company
or preferred units of partnership interest in Prime Retail, L.P. (the "Operating
Partnership")  that are  exchangeable  for shares of  preferred  stock or Common
Stock  on  a  one-to-one   basis.  The  Series  C  Preferred  Securities  may be
converted  into  shares  of  Common  stock  on  a  one-to-one  basis  commencing
August 8, 1998 (or  earlier subject to certain conditions). See Note 8 - "Equity
Offerings and Other Transactions" of the  Notes to  the  Consolidated  Financial
Statements for additional information.
<PAGE>
        In September 1997, the Company completed a public offering of 11,500,000
shares  (including   1,500,000  shares  related  to  exercise  of  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  Securities  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 Buckeye 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.

        As a result of the  September  Offering,  as of December 31,  1997,  the
Company had  $139,000 of  availability  under the June 1997 Shelf  Registration.
From  time  to  time,  the  Company  will  consider  issuing  additional  equity
securities  under  the June  1997  Shelf  Registration  for the  development  or
acquisition of additional properties,  the expansion and improvement of existing
properties, repayment of indebtedness, and for general corporate purposes.

        On December 2, 1997 the Company issued  3,636,363 shares of its Series C
Preferred  Securities 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  Niagara
International Factory Outlets and Shasta Factory Stores.

Sources and Uses of Cash -- Property Acquisitions

       On February 13, 1997,  the Company,  acquired Oak Creek  Factory  Stores,
Bend Factory  Outlets and Factory  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.

       Oak Creek Factory Outlets is located in Sedona,  Arizona,  which is north
of Phoenix and south of the Grand  Canyon.  Oak Creek Factory  Outlets  contains
approximately  82,000  square feet of GLA and was 100%  executed at December 31,
1997. Bend Factory Outlets is located in Bend, Oregon,  which is east of Eugene,
Oregon and southeast of Portland.  Bend Factory Outlets  contains  approximately
97,000  square feet of GLA and was 86% executed at December  31,  1997.  Factory
Outlets at Post Falls is located in Post Falls, Idaho, which is 30 miles east of
Spokane,  Washington.  Factory  Outlets  at Post  Falls  contains  approximately
179,000 square feet of GLA and was 84% executed at December 31, 1997.

       On September 2, 1997, the Company acquired the 25% ownership  interest in
Buckeye from its joint venture partner,  SBRC, 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 Buckeye using the equity method of
accounting.  Commencing  September 2, 1997, the operating results of Buckeye are
consolidated.  The Company  financed  the  acquisition  with  proceeds  from the
September Offering.

       On  October  29,  1997,  the  Company  acquired  Tidewater  Outlet  Mall,
Manufacturer's  Outlet Mall, Kittery Outlet Village  (collectively "Prime Retail
Outlets of Kittery"),  and Latham Factory Outlet Center (the "Latham  Property")
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
Offering.

       Prime Retail  Outlets of Kittery are located in Kittery,  Maine and serve
the Boston,  Massachusetts and Portland,  Maine markets. Prime Retail Outlets of
Kittery contain approximately 121,000 square feet of GLA, and were 100% executed
as of December 31,  1997.  The Latham  Property is located in Latham,  New York,
north of Albany,  New York and south of Saratoga  Springs,  New York. The Latham
Property contains  approximately 43,000 square feet of GLA and was 100% executed
as of December 31, 1997.

       On December 2, 1997, the Company acquired Niagara  International  Factory
Outlets ("Niagara") and Shasta Factory Stores ("Shasta") 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 Offering and the Private Placement.
<PAGE>
       Niagara is located in Niagara  Falls,  New York and serves  Buffalo,  New
York;  Ontario,  Canada;  and tourist markets.  Niagara  contains  approximately
534,000 square feet of GLA and was 88% executed as of December 31, 1997.  Shasta
is  located  six miles west of  Redding,  California  and  serves  the  Northern
California tourist market. Shasta contains  approximately 165,000 square feet of
GLA and was 91% executed as of December 31, 1997.

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

Merger Agreement

        On November  12,  1997 and as amended on  February 1, 1998,  the Company
entered into a definitive merger agreement (as amended,  the "Merger Agreement")
with  Horizon  Group,  Inc.  ("Horizon")  for  an  aggregate   consideration  of
approximately $945,200, including the assumption of $556,900 of Horizon debt and
estimated  transaction costs.  Upon completion of  the transaction,  the Company
will own and operate 48 outlet centers totaling approximately  13,406,261 square
feet of GLA,  including    the purchase of  Horizon's  joint  venture  partner's
50%  ownership interest  in   Finger  Lakes  Outlet   Center  for  $46,100  (the
"Finger  Lakes Acquisition").

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

        Immediately prior to the merger, Horizon Group Properties, Inc. ("HGP"),
a subsidiary of Horizon, will become the sole  general  partner of  Horizon/Glen
Outlet Center Limited Partnership  ("Horizon  Partnership") and the common stock
of HGP will be distributed to the  shareholders of both the Company and Horizon.
All of the common equity of HGP will be distributed to the convertible preferred
and common  shareholders and unitholders of the Company and the shareholders and
limited partners of Horizon based on their ownership in the Company  immediately
following the merger.  It is presently  expected  that  following the merger one
share of common stock of HGP will be  distributed  for every 10 shares of Common
Stock or Common Units of the  Company,  and that  approximately  1.196 shares of
common  stock  of HGP  will be  distributed  for  every 10  shares  of  Series B
Convertible  Preferred  Stock  held in the  Company.  Immediately  prior  to the
closing of the merger, the Company will pay a special cash distribution of $0.60
per share of Series B Convertible  Preferred  Stock and $0.50 per  share/unit of
Common  Stock,  Series C Preferred  Security  and Common  Unit,  as  applicable,
totaling  $21,865 (the "Special Cash  Distribution").  Shareholders  and limited
partners in Horizon will not participate in this distribution.  HGP will own and
operate 15 outlet centers (including Indiana Factory Shops and Nebraska Crossing
Factory  Stores  which will be acquired  from the  Company)  totaling  3,084,823
square feet of GLA.

        The merger will be accounted for as a purchase.  It is conditioned upon,
among other things,  the approvals of each Company's  shareholders  and partners
and the  satisfaction  of other  customary  conditions.  The closing is expected
during the second  quarter of 1998. The exchange of shares of Horizon for shares
of the Company will be made on a tax-free basis.

        The Company expects to finance the Finger Lakes Acquisition, the Special
Cash  Distribution  and  estimated  closing  costs of $18,750 with proceeds from
certain  contemplated  loan  facilities  expected to close  concurrent  with the
closing  of the  merger.  There can be no  assurance  that the  Company  will be
successful in obtaining the required  amount of debt financing or that the terms
of such loan  facilities  will be as favorable as the Company has experienced in
prior periods.

Planned Development

        Management  believes  that  there is  sufficient  demand  for  continued
development of new factory  outlet  centers and  expansions of certain  existing
factory outlet centers. The Company expects to open approximately 751,000 square
feet of GLA during 1998 including two new factory outlet centers currently under
construction.  At December 31, 1997, the budgeted remaining capital expenditures
for  1998  planned  developments   aggregated   approximately   $78,200,   while
anticipated  capital  expenditures  related to the  completion  of expansions of
existing factory outlet centers opened during 1997  (aggregating  224,000 square
feet of GLA) approximated $5,200.

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

        The Company  currently  plans to open one new factory  outlet center and
several  expansions in 1999 that are expected to contain  approximately  400,000
square feet of GLA, in the aggregate, and have a total expected development cost
of  approximately  $56,000.  The Company expects to fund the development cost of
these  projects from (i) certain line of credit  facilities,  (ii) joint venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the  potential  sale of common or preferred  equity in the public or private
capital  markets.  As of December 31, 1997,  there were no material  commitments
with regard to the construction of the new factory outlet centers and expansions
scheduled to open in 1999.  There can be no  assurance  that the Company will be
successful in obtaining the required  amount of equity capital or debt financing
for the  1999  planned  openings  or that  the  terms  of such  capital  raising
activities will be as favorable as the Company has experienced in prior periods.

Debt Transactions

        On February 13, 1997, the Company  closed on $30,000 of loan  facilities
with Nomura Asset Capital  Corporation.  The transaction  provided (i) a $27,000
nonrecourse  first mortgage loan (the "First  Mortgage  Loan") and (ii) a junior
secured loan (the "Junior Secured Loan") of $3,000.  The First Mortgage Loan (i)
is cross  collateralized  by first  mortgages on three of the Company's  factory
outlet centers, (ii) bears a fixed rate of interest of 8.35%, and (iii) requires
monthly  principal and interest  payments  pursuant to a 360-month  amortization
schedule.  The Junior Secured Loan is a recourse loan to the Company that (i) is
secured by a pledge of excess cash flow after debt service on the First Mortgage
Loan, (ii) bears a variable  interest rate at the London Interbank  offered rate
for 30-day deposits in U.S. dollars  ("30-day LIBOR") plus 1.95%,  (iii) matures
in three years,  (iv) requires  monthly interest only payments through April 10,
1998 and (v) monthly principal and interest payments thereafter.

        On July 11, 1997,  the Company's  $15,000  unsecured line of credit (the
"Corporate  Line") was renewed.  The purpose of the Corporate Line is to provide
working capital to facilitate the funding of short-term  operating cash needs of
the  Company.  The  Corporate  Line bears an interest  rate of 30-day LIBOR plus
2.50% and  matures on July 11,  1998.  No  amounts  were  outstanding  under the
Corporate Line at December 31, 1997.

        In September  1997,  the Company repaid  certain  outstanding  corporate
indebtedness  aggregating  $113,410,  including the Junior  Secured  Loan,  with
proceeds from certain public and private equity  offerings (see Note 8 - "Equity
Offerings and Other  Transactions"  of the Notes to the  Consolidated  Financial
Statements).  As a result of the  prepayment of such  indebtedness,  the Company
incurred an  extraordinary  loss of $1,423  related to the  write-off of certain
unamortized  financing costs. The Company also incurred an extraordinary loss of
$638  related  to the  write-off  of  certain  unamortized  financing  costs  in
connection  with  the  Buckeye   Acquisition   (see  Note  5  -  "Investment  in
Partnerships" of the Notes to the Consolidated Financial Statements).

        On November  13,  1997,  the  Company  closed on a term loan with Nomura
Securities  (Bermuda) Ltd.  ("Nomura  Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse  loan to the Company that (i) is secured by a pledge
of excess cash flow after debt service on a first  mortgage loan  collateralized
by 16 of the Company's  factory outlet centers,  (ii) bears a variable  interest
rate of 30-day  LIBOR plus 1.95%,  (iii)  matures on  November  11,  1999,  (iv)
requires  monthly  interest-only  payments through February 10, 1998 and monthly
interest payments and quarterly principal payments thereafter that approximate a
six-year  amortization  schedule,  and (v) may be subject  to earlier  principal
payments via "mark-to-market" of the underlying debt instrument.

        In addition,  on November 13,  1997,  the Company  closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan").  The Second Term Loan
is a recourse loan to the Company that (i) is secured by a pledge of excess cash
flow after debt service on a first mortgage loan  collaterlized  by three of the
Company's factory outlet centers,  (ii) bears a variable interest rate of 30-day
LIBOR plus 1.95%,  (iii)  matures on February 13, 2000,  (iv)  requires  monthly
interest-only payments through April 10, 1998 and monthly principal and interest
payments thereafter that approximate a five-year  amortization schedule, and (v)
may be  subject  to  earlier  principal  payments  via  "mark-to-market"  of the
underlying debt instrument.

        On December  2, 1997,  the Company  assumed a $31,328  mortgage  loan in
connection  with the  purchase of Niagara  International  Factory  Outlets  (the
"Niagara  Loan").  The Niagara Loan (i) bears a fixed rate of interest of 6.83%,
(ii) requires  monthly  principal  and interest  payments  that  approximates  a
25-year   amortization   schedule,   and  (iii)  is  collateralized  by  Niagara
International Factory Outlets.

        On December 31, 1997, the Company obtained from a financial  institution
a commitment for a construction mortgage loan in an amount not to exceed $20,396
(the "Construction  Mortgage Loan"). The Construction  Mortgage Loan (i) bears a
variable interest
<PAGE>
rate at the financial  institution's  prime rate or, at the Company's  option, a
LIBOR index plus 1.75%,  (ii) matures on December 31, 1999,  and (iii)  requires
monthly interest-only payments. The Construction Mortgage Loan is collateralized
by a first mortgage on Lebanon Factory Shops, a factory outlet center located in
Lebanon,  Tennessee.  At December 31, 1997, no amounts were  outstanding  on the
Construction Mortgage Loan.

Debt Repayments and Preferred Stock Dividends

        The  Company's  aggregate  indebtedness  was  $515,265  and  $499,523 at
December  31,  1997  and  1996,   respectively.   At  December  31,  1997,  such
indebtedness  had a weighted average maturity of 6. 5 years and bore interest at
a weighted  average  interest  rate of 7.36% per annum.  At December  31,  1997,
$74,729  , or 14.5%,  of such  indebtedness  bore  interest  at fixed  rates and
$440,536, or 85.5%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable rates. Of the variable rate  indebtedness  outstanding
at December 31, 1997, $355,996 is scheduled to convert to a fixed rate of 7.782%
in November 1998 for the remaining five year term of such indebtedness.

        At  December  31,  1997,  the  Company  held  interest  rate  protection
contracts  on all $28,250 of its floating  rate  tax-exempt  indebtedness  which
expire in 1999 and  approximately  $355,996 of other floating rate  indebtedness
which expire in November 1998 (or approximately 80.8% of its total floating rate
indebtedness). In addition, the Company held additional interest rate protection
contracts on $43,900 (of which $22,000  expires in July 1998 and $21,900 expires
in April 1999) of the $355,998  floating rate indebtedness to further reduce the
Company's  exposure to  increases in interest  rates.  See Note 2 -- "Summary of
Significant  Accounting Policies" and Note 7 -- "Bonds and Notes Payable" of the
Notes to Consolidated Financial Statements for additional information concerning
the accounting  policies and  significant  terms of the interest rate protection
contracts.

        The Company's ratio of debt to total market  capitalization at  December
31, 1997 (defined  as  total  long-term  debt divided  by  the  sum  of: (a) the
aggregate market value of the outstanding shares of Common Stock,  assuming  the
full exchange of Common Units, Series C Preferred  Securities into Common Stock;
(b) the aggregate market value of the outstanding shares of Series B Convertible
Preferred Stock; (c) the aggregate liquidation preference of the Series A Senior
Cumulative  Preferred Stock ("Senior  Preferred Stock") at $25.00 per share; and
(d) the total long-term debt of the Company) was 42.4%.

        The Company is obligated  to  repay  $13,951  and  $50,179  of  mortgage
indebtedness during 1998 and 1999, respectively. Annualized cumulative dividends
on the Company's Senior Preferred Stock,  Series B Convertible  Preferred Stock,
and Series C  Preferred  securities  outstanding  as of  December  31,  1997 are
$6,038, $6,336, and $5,149, respectively. These dividends are paid quarterly, in
arrears.

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

Table 9--Taxability of Distributions

        TABLE 9 summarizes the taxability of distributions paid during the years
ended December 31, 1997 and 1996.  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>
<CAPTION>
 --------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                                 1997        1996
 --------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                     <C>         <C> 
Senior Preferred Stock                                                                                        
     Ordinary income.........................................................................           100.0%      100.0%
     Return of capital.......................................................................              --          --
Series B Convertible Preferred Stock
     Ordinary income.........................................................................            91.3%       38.0%
     Return of capital.......................................................................             8.7%       62.0%
 Common Stock
     Ordinary income.........................................................................              --          --
     Return of capital.......................................................................           100.0%      100.0%
 ==========================================================================================================================
</TABLE>
<PAGE>
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  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.  At December 31, 1997, the Company maintained interest
rate  protection  contracts to protect  against  increases in interest  rates on
certain  floating rate  indebtedness  (see "Debt  Repayments and Preferred Stock
Dividends").

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

Year 2000

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

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

         The Company generally considers FFO an appropriate measure of liquidity
of an equity REIT because  industry  analysts  have accepted it as a performance
measure of equity REITs.  The 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  allocation  to
minority  interests  and  preferred  shareholders  to FFO  for the  years  ended
December 31, 1997, 1996 and 1995. FFO increased $19,081, or 69.0% to $46,718 for
the year ended  December 31, 1997 from  $27,637 for the year ended  December 31,
1996.  The increase in FFO  primarily  reflects the $6,131  nonrecurring  charge
related to the  prepayment  of  certain  long-term  debt in 1996,  offset by the
Portfolio  Expansion,  including  the  effect  of  the  acquisition  of  certain
properties in November 1996.
<TABLE>
Table 10--Funds from Operations
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                            1997         1996         1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>          <C>          <C>    
Income before allocations to minority interests and preferred shareholders..............        $ 18,547     $  6,986     $ 12,806
FFO adjustments:
Real estate depreciation and amortization...............................................          26,413       18,703       14,884
Unconsolidated joint venture adjustments................................................           1,758        1,948          306
                                                                                                --------     --------     --------
FFO before allocations to minority interests and preferred shareholders.................        $ 46,718     $ 27,637     $ 27,996
                                                                                                ========     ========     ========
Other Data:
Net cash provided by operating activities...............................................        $ 49,856     $ 45,191     $ 36,399
Net cash used in investing activities...................................................        (229,956)    (232,290)     (81,978)
Net cash provided by financing activities...............................................         182,549      176,096       57,547
==================================================================================================================================
</TABLE>
<PAGE>
        The payout ratios based on distributions made by the Company  divided by
FFO for the  applicable  periods  were 103.7%, 106.4%, and 108.7%, respectively.
<TABLE>
Table 11--Consolidated Quarterly Summary of Funds from Operations
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                          1997                                      1996
                                        -----------------------------------------  ----------------------------------------
                                           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........................  $  7,380  $  4,091  $  3,583   $  3,493    $  3,704   $  4,175  $ (3,950) $  3,057
FFO adjustments:
Real estate depreciation and                         
   amortization........................     7,108     6,558     6,473      6,274       4,905      3,603     3,281     1,757
Unconsolidated joint venture
   adjustments.........................       288       455       530        485         388        822       482       358
                                         --------  --------  --------   --------    --------   --------  --------  --------
FFO before allocations to minority
   interests and preferred
   shareholders........................  $ 14,776  $ 11,104  $ 10,586   $ 10,252    $  9,693   $  9,379  $    951  $  7,614
                                         ========  ========  ========   ========    ========   ========  ========  ========
Other Data:
Net cash provided by operating
   activities....  ....................  $ 15,298  $ 18,301  $  9,301   $  6,956    $ 13,888   $ 11,718  $ 10,366  $  9,219
Net cash used in investing activities..  (123,220)  (41,697)  (17,492)   (47,547)   (184,130)   (24,200)  (12,212)  (11,748)
Net cash provided by (used in)
   financing activities................    90,518    46,188   (10,906)    56,749     164,564     18,044     3,297    (9,809)
===========================================================================================================================
</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.

                                    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, 1998.
<PAGE>
                                     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 of the Company as of 
         December 31, 1997 and 1996                                       F-2

         Consolidated  Statements of Operations of the Company 
         for the years ended December 31, 1997, 1996 and 1995             F-3

         Consolidated  Statements of Cash Flows of the Company 
         for the years ended December 31,1997, 1996 and 1995              F-4

         Consolidated  Statements  of  Shareholders'  Equity 
         of the Company for the years ended December 31, 1997, 
         1996 and 1995                                                    F-5

         Notes to Consolidated Financial Statements of the Company        F-6

      2.  Financial Statement Schedules

         The following  financial  statement schedule of the Company 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-22

        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        Restated  Articles of Incorporation of Prime Retail,  Inc.  
                      [Restated to incorporate  amendment dated August 8, 1997 
                      for purposes of Regulation S-T Section 232.102(c) only]

         3.2        Amended and  Restated  By-Laws of Prime  Retail,  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, 1995 (File No. 0-23616).]

         4.1        Form of Senior  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 Convertible  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).]

         10.1       Amended and Restated Agreement of Limited Partnership of
                      Prime Retail, L.P. dated as of September 8, 1997
<PAGE>
         Exhibit
         Number            Description


         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  [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).]

         10.16      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       Revolving  Loan  Agreement  dated March 2, 1995  between
                       Gainesville Factory shops Limited  Partnership,  Florida
                       Keys Factory  Shops  Limited  Partnership,  Indianapolis
                       Factory  Shops  Limited  Partnership  and  Nomura  Asset
                       Capital  Corporation  [Incorporated  by reference to the
                       same titled  exhibit in the Company's  Current Report on
                       Form 8-K dated December 18, 1995 (File No. 0-23616).]

      #  10.22      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>
         10.23      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).]

         10.23A     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).]

         10.24      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).]


         10.24A     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).]

         10.25      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).]

         10.26      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).]

         10.27      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).]

         10.27A     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).]

         10.28      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).]

         10.28A     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).]

         10.29      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).]

         10.30      Indemnity  Agreement made by the Company in favor of 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).]

         10.31      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. 0-23616).]
<PAGE>
         Exhibit
         Number            Description


         10.31A     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).]

         10.32      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).]

         10.33      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).]

         10.34      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).]

         10.35      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).]

      #  10.36      Letter Agreement with David G. Phillips regarding the 
                      purchase of units in Prime Retail, L.P. dated August 6, 
                      1996

         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

         27.2       Financial Data Schedule -- Restated 1997 Interim Periods

         27.3       Financial Data Schedule -- Restated 1996 Periods

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

 (b)    Reports on Form 8-K

        On October 29,  1997,  the Company  filed a Current  Report on Form 8-K,
dated October 29, 1997,  reporting that the Company  purchased  Tidewater Outlet
Mall,  Manufacturer's  Outlet Mall, Kittery Outlet Village  (collectively "Prime
Retail  Outlets of Kittery")  and Latham  Factory  Outlet  Center.  No financial
statements were included.

        On November 12, 1997,  the Company  filed a Current  Report on Form 8-K,
dated  November 12, 1997,  reporting  that the Company and Horizon  Group,  Inc.
entered  into a  definitive  merger  agreement.  No  financial  statements  were
included.

        On December 2, 1997,  the  Company  filed a Current  Report on Form 8-K,
dated  December  2,  1997,   reporting  that  the  Company   purchased   Niagara
International Factory Outlets and Shasta Factory Stores. No financial statements
were included.

        On December 31, 1997,  the Company filed a Current Report on Form 8-K/A,
dated  October 29,  1997,  reporting  that the Company  purchased  Prime  Retail
Outlets of Kittery,  Latham Factory Outlet Center, Niagara International Factory
Outlets and Shasta Factory Stores. Proforma consolidated financial statements of
the  Company  and audited  statements  of revenue  and  certain  expenses of the
acquired properties were filed with this Form 8-K/A.

        On February 1, 1998,  the  Company  filed a Current  Report on Form 8-K,
dated  February 1, 1998,  reporting  the amended  merger  agreement  between the
Company and Horizon Group, Inc. No financial statements were included.
<PAGE>
(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 25, 1998                            /s/ Abraham Rosenthal
                                                 ---------------------
                                                 Abraham Rosenthal
                                                 Chief Executive Officer

Dated: March 25, 1998                            /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 25, 1998
         -------------------------------------------------
         Michael W. Reschke
         Chairman of the Board

         /s/ Abraham Rosenthal                                    March 25, 1998
         Abraham Rosenthal
         Chief Executive Officer and Director

         /s/ William H. Carpenter, Jr.                            March 25, 1998
         -------------------------------------------------
         William H. Carpenter, Jr.
         President, Chief Operating Officer and Director

         /s/ Glenn D. Reschke                                     March 25, 1998
         -------------------------------------------------
         Glenn D. Reschke
         Executive Vice President, Development and
         Acquisitions and Director

         /s/ Terence C. Golden                                    March 25, 1998
         -------------------------------------------------
         Terence C. Golden
         Director

         /s/ Kenneth A. Randall                                   March 25, 1998
         -------------------------------------------------
         Kenneth A. Randall
         Director

         /s/ Sharon Sharpe                                        March 25, 1998
         Sharon Sharpe
         Director

         /s/ James R. Thompson                                    March 25, 1998
         -------------------------------------------------
         James R. Thompson
         Director

         /s/ Marvin S. Traub                                      March 25, 1998
         -------------------------------------------------
         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,  1997  and  1996  and  the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997.  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, 1997 and 1996, the consolidated results of the Company's operations
and its cash flows for each of the three years in the period ended  December 31,
1997, in conformity with generally accepted accounting principles.



                                            /s/ Ernst & Young LLP



Baltimore, Maryland
January 23, 1998, except
for Note 15, as to which the date
is February 1, 1998
<PAGE>
<TABLE>
                                                         PRIME RETAIL, INC.

                                             Consolidated Balance Sheets of the Company

                                          (Amounts in thousands, except share information)

<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                                                                     1997        1996
 -----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                                         <C>         <C>    
 Assets

 Investment in rental property:
    Land                                                                                                     $  66,277   $  44,731
    Buildings and improvements..........................................................................       779,191     570,761
    Property under development..........................................................................        53,139      20,900
    Furniture and equipment.............................................................................         6,175       4,367
                                                                                                             ---------   ---------
                                                                                                               904,782     640,759 
    Accumulated depreciation............................................................................       (82,033)    (57,674)
                                                                                                             ---------   ---------
                                                                                                               822,749     583,085
 Cash and cash equivalents..............................................................................         6,373       3,924
 Restricted cash........................................................................................        41,736      45,127
 Accounts receivable, net...............................................................................         9,745       6,096
 Deferred charges, net..................................................................................        16,206      20,841
 Due from affiliates, net...............................................................................         1,052       1,549
 Investment in partnerships.............................................................................         3,278       5,625
 Other assets...........................................................................................         3,044         556
                                                                                                             ---------   ---------
          Total assets..................................................................................     $ 904,183   $ 666,803
                                                                                                             =========   =========


 Liabilities and Shareholders' Equity

 Bonds payable..........................................................................................     $  32,900   $  32,900
 Notes payable..........................................................................................       482,365     466,623
 Accrued interest.......................................................................................         3,767       3,640
 Real estate taxes payable..............................................................................         4,639       2,138
 Construction costs payable.............................................................................         5,849       3,047
 Accounts payable and other liabilities.................................................................        20,210      19,246
                                                                                                             ---------   ---------
          Total liabilities.............................................................................       549,730     527,594
 Minority interests.....................................................................................         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   $74,545   and   $70,150,
         respectively), 2,981,800 and 2,806,000 shares issued and outstanding, respectively.............            30          28
       Series C Cumulative Participating Convertible Redeemable Preferred Stock, $.01 par value
         (liquidation preference of $50,000), 3,636,363 shares issued and outstanding at
          December 31, 1997.............................................................................            36          --
    Shares of common stock, 75,000,000 shares authorized:
       Common stock, $.01 par value, 27,294,951 and 13,404,651 issued and outstanding, respectively.....           273         134
    Additional paid-in capital..........................................................................       398,188     165,346
    Distributions in excess of net income...............................................................       (54,022)    (26,322)
                                                                                                             ---------   ---------
          Total shareholders' equity....................................................................       344,528     139,209
                                                                                                             ---------   ---------
              Total liabilities and shareholders' equity................................................     $ 904,183   $ 666,803
                                                                                                             =========   =========
 ===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
                               PRIME RETAIL, INC.

              Consolidated Statements of Operations of the Company

              (Amounts in thousands, except per share information)
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                         1997          1996         1995
 -----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                           <C>           <C>          <C>    
 Revenues

 Base rents................................................................................... $ 78,046      $ 54,710     $ 46,368
 Percentage rents.............................................................................    3,277         1,987        1,520
 Tenant reimbursements........................................................................   37,519        25,254       22,283
 Income from investment partnerships..........................................................      103         1,239        1,729
 Interest and other...........................................................................   10,185         5,850        5,498
                                                                                               --------      --------     --------
       Total revenues.........................................................................  129,130        89,040       77,398

 Expenses

 Property operating...........................................................................   29,492        20,421       17,389
 Real estate taxes............................................................................    9,417         5,288        4,977
 Depreciation and amortization................................................................   26,715        19,256       15,438
 Corporate general and administrative.........................................................    5,603         4,018        3,878
 Interest.....................................................................................   36,122        24,485       20,821
 Other charges................................................................................    3,234         8,586        2,089
                                                                                               --------      --------     -------- 
         Total expenses.......................................................................  110,583        82,054       64,592
                                                                                               --------      --------     --------
 Income before minority interests and extraordinary item......................................   18,547         6,986       12,806
 (Income) loss allocated to minority interests................................................  (10,581)        2,092        5,364
                                                                                               --------      --------     --------
 Income before extraordinary item.............................................................    7,966         9,078       18,170
 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...................................................................................    5,905         8,061       18,170
 Income allocated to preferred shareholders...................................................   12,726        14,236       20,944
                                                                                               --------      --------     --------  
 Net loss applicable to common shares......................................................... $ (6,821)     $ (6,175)    $ (2,774) 
                                                                                               ========      ========     ========  
 Earnings per common share - basic and diluted:
       Loss before extraordinary item......................................................... $  (0.25)     $  (0.63)    $  (0.96) 
       Extraordinary item.....................................................................    (0.11)        (0.12)          --  
                                                                                               --------      --------     --------
       Net loss............................................................................... $  (0.36)     $  (0.75)    $  (0.96) 
                                                                                               ========      ========     ========  
 Weighted average common shares outstanding...................................................   19,189         8,221        2,875  
                                                                                               ========      ========     ========  
 ===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
                               PRIME RETAIL, INC.

              Consolidated Statements of Cash Flows of the Company

                             (Amounts in thousands)
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31                                                                             1997         1996         1995
 -----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                            <C>          <C>          <C>    
 Operating Activities
 Net income............................................................................          $   5,905    $   8,061    $ 18,170
 Adjustments to reconcile net income to net cash provided by operating activities:
       Income (loss) allocated to minority interests...................................            10,581       (2,092)      (5,364)
       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           --
       Depreciation....................................................................            25,055       17,468       13,716
       Amortization of deferred financing costs and interest rate protection contracts.             3,742        3,724        4,524
       Amortization of leasing commissions.............................................             1,660        1,788        1,722
       Equity earnings in excess of cash distributions from joint ventures.............                --         (365)      (1,281)
       Provision for uncollectible accounts receivable.................................               970          710          346
       Gain on sale of land............................................................              (904)          --         (106)
 Changes in operating assets and liabilities:
    (Increase) decrease in accounts receivable.........................................            (4,619)       1,945       (2,941)
    (Increase) decrease in other assets................................................             1,400       (3,232)          47
    Increase in other liabilities......................................................             3,381        9,785        6,047
    Increase in accrued interest........................................................              127          606        1,059
    (Increase) decrease in due from affiliates, net.....................................              497         (355)         460
                                                                                                 --------     --------     -------- 
       Net cash provided by operating activities........................................           49,856       45,191       36,399
                                                                                                 --------     --------     -------- 
 Investing Activities
 Purchase of land.......................................................................             (667)        (953)      (4,765)
 Purchase of buildings and improvements.................................................          (21,345)     (45,036)     (70,781)
 Increase in property under development.................................................          (49,668)     (11,566)      (7,056)
 Acquisition of outlet centers..........................................................         (159,232)    (134,668)          --
 Increase in construction reserves......................................................             (497)     (40,067)          --
 Proceeds from sale of land.............................................................            1,358           --          624
 Lease commissions......................................................................             (537)          --           --
 Cash distributions in excess of equity earnings of joint ventures......................              632           --           --
                                                                                                 --------     --------     -------- 
       Net cash used in investing activities............................................         (229,956)    (232,290)     (81,978)
                                                                                                 --------     --------     -------- 
 Financing Activities
 Net proceeds from offerings............................................................          242,729       36,948           --
 Proceeds from notes payable............................................................          160,057      591,520      185,078
 Principal repayments on notes payable..................................................         (175,683)    (397,951)     (93,149)
 Deferred financing fees................................................................             (583)     (18,036)      (4,822)
 Distributions and dividends paid.......................................................          (33,605)     (27,470)     (24,337)
 Distributions to minority interests....................................................          (10,366)      (8,915)      (5,223)
                                                                                                 --------     --------     -------- 
       Net cash provided by financing activities........................................          182,549      176,096       57,547
                                                                                                 --------     --------     -------- 
 Increase (decrease) in cash and cash equivalents.......................................            2,449      (11,003)      11,968
 Cash and cash equivalents at beginning of period.......................................            3,924       14,927        2,959
                                                                                                 --------     --------     -------- 
 Cash and cash equivalents at end of period.............................................         $  6,373     $  3,924     $ 14,927
                                                                                                 ========     ========     ========

 Supplemental disclosure of noncash financing activity:
 Assumption of notes payable.............................................................        $ 31,368     $     --     $     --
                                                                                                 ========     ========     ========
 ===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
                               PRIME RETAIL, INC.

         Consolidated Statements of Shareholders' Equity of the Company

                (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, 1995........................         $23        $70                   29   $128,275       $   (746)    $127,651
Net income......................................          --         --                   --         --         18,170       18,170
Common distributions declared ($1.18 per share).          --         --                   --         --         (3,393)      (3,393)
Preferred distributions and dividends declared:
     Series A ($2.625 per share)................          --         --                   --         --         (6,037)      (6,037)
     Series B ($2.125 per share)................          --         --                   --                   (14,907)      14,907)
                                                       -----      -----                -----   --------       --------     --------

Balance, December 31, 1995......................          23         70                   29    128,275         (6,913)     121,484
Series B preferred stock exchanged and retired
   (4,209,000 shares) for common stock
   (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
                                                       =====      =====      =====     =====   ========       ========     ========
====================================================================================================================================
</TABLE>
  See accompanying notes to financial statements.
<PAGE>
                               PRIME RETAIL, INC.

            Notes to Consolidated Financial Statements of the Company

            (Amounts in thousands, except share and unit information)


Note 1 -- Organization and Basis of Presentation

Organization

        Prime  Retail,   Inc.  (the  "Company")  was  organized  as  a  Maryland
corporation  on  July  16,  1993.  The  Company  is  a   self-administered   and
self-managed real estate investment trust ("REIT") that develops, acquires, owns
and operates factory outlet centers in the United States.  The Company's factory
outlet center  portfolio,  including  three factory outlet centers owned through
joint venture partnerships,  consists of 28 factory outlet centers in 20 states,
which total  approximately  7,217,000 square feet of gross leasable area ("GLA")
at December  31,  1997.  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, 1997, the Company owned 2,300,000 Senior Preferred Units
of the Operating  Partnership (the "Senior Preferred Units"), 2,981,800 Series B
Convertible  Preferred  Units  of  the  Operating  Partnership  (the  "Series  B
Convertible  Preferred  Units"),  3,636,363  Series  C  Preferred  Units  of the
Operating  Partnership (the "Series C Preferred  Units"),  and 27,294,951 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  Participating  Preferred  Stock  ("Series  B  Convertible  Preferred
Stock"), and Series C Cumulative Participating  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 1996 and 1997.)

        A summary  of the  holders  of units in the Operating  Partnership as of
December 31, 1997 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      2,981,800       3,636,363      27,294,951
PGI, management and other (1)................................       --             --              --       8,505,472
Security Capital Preferred Growth Incorporated...............       --             --         727,273              --
                                                             ---------      ---------       ---------      ----------
                                                             2,300,000      2,981,000       4,363,636      35,800,423
                                                             =========      =========       =========      ==========
=====================================================================================================================
</TABLE>
Note:
(1)  Includes 742,180 units beneficially owned by management and 4,091,255 units
     owned by certain executive  officers based on their ownership  interests in
     PGI.

        As of December 31,  1997,  the Company has a 76.2%  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.

        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, 1997,  1996 and 1995. 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.
<PAGE>
        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 and combination.

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, 1997 and 1996 was $1,780 and $1,349, respectively.

        Accounts  receivable   due   after   one   year  primarily  representing
straight-line  rents  were  $5,969  and  $5,310  at  December 31, 1997 and 1996,
respectively.
<PAGE>
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.

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 specifies the
method of computation,  presentation,  and  disclosure for  earnings  per  share
("EPS"). SFAS No. 128 requires  the  presentation  of 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 and Units were converted into shares of Common Stock,  and (iv)
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.

Interest Rate Protection Contracts

        The Company uses interest rate protection contracts,  including interest
rate caps and corridors,  to manage  interest rate risk associated with floating
rate debt. These contracts  generally  involve  limiting the Company's  interest
costs with an upper limit or specified  range on the  underlying  interest  rate
index. The cost of such contracts are included in deferred charges and are being
amortized on a straight-line  basis as a component of interest  expense over the
life of the contracts.  Amounts earned from interest rate  protection  contracts
are  recorded as a  reduction  of  interest  expense.  The Company is exposed to
credit  losses  in the  event  of  counterparty  nonperformance,  but  does  not
anticipate any such losses based on the creditworthiness of the counterparties.

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 stock
option grants.  The Company has elected to adopt only the disclosure  provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation."

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 $263, $116, and $90 for state and local taxes
for the years ended December 31, 1997, 1996 and 1995, respectively.  The Company
paid $170,  $102, and $81 of state and local income taxes during the years ended
December 31, 1997 and 1996, and 1995, respectively.

        The following  table   summarizes   the   taxability  of  dividends  and
distributions paid during the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                       1997        1996        1995
 -----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>         <C>         <C>
Senior Preferred Stock                                                                                        
     Ordinary income......................................................................... $2.625      $2.625      $2.625
                                                                                              ======      ======      ======
Series B Convertible Preferred Stock
     Ordinary income......................................................................... $1.940      $0.808      $1.607
     Return of capital.......................................................................  0.185       1.317       0.518
                                                                                              ------      ------      ------
                                                                                              $2.125      $2.125      $2.125
                                                                                              ======      ======      ====== 
Common Stock
     Return of capital....................................................................... $1.180      $1.325      $1.180
                                                                                              ======      ======      ====== 
 =============================================================================================================================
</TABLE>
<PAGE>
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.  A number of the merchants  have occupied space in more than one
of the Company's  factory outlet centers;  however,  no single merchant accounts
for more than 5.7% of the Company's revenues.

Note 3 -- Restricted Cash

        At December 31, 1997 and 1996,  the Company had placed in escrow $41,736
and $45,127,  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, 1997, restricted cash included
$34,692 relating to a nonrecourse  expansion loan which can only be used to fund
certain  development  costs  relating to the  expansion  of 13 of the  Company's
factory outlet centers,  provided  certain  occupancy and other  conditions have
been attained.


Note 4 -- Deferred Charges

        Deferred charges were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
December 31,                                                                                  1997          1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>           <C>    
Leasing commissions................................................................       $ 11,261      $ 10,567
Financing costs....................................................................         18,145        25,587
                                                                                           -------       -------        
                                                                                            29,406        36,154
Accumulated amortization...........................................................        (13,200)      (15,313)
                                                                                           -------       -------
                                                                                          $ 16,206      $ 20,841
                                                                                           =======       =======
================================================================================================================
</TABLE>
Note 5 -- Investment In Partnerships

        At December 31, 1997,  the Company owned a 50%  partnership  interest in
two real  estate  ventures  that are  accounted  for using the equity  method of
accounting.  The Company manages these ventures and earns a property  management
fee based on the ventures'  revenues.  The condensed  combined balance sheets of
these  ventures and their  condensed  statements of operations are summarized as
follows:
<TABLE>
<CAPTION>
 --------------------------------------------------------------------------------------------------------------
 December 31,                                                                                1997          1996
 --------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>            <C>    
 Total assets, primarily rental property......................................           $ 51,864       $75,444
                                                                                         ========       =======
 Liabilities, primarily long-term debt........................................           $ 51,077       $70,750
                                                                                                                  
 Partners' capital.............................................................               787         4,694
                                                                                         --------       ------- 
 Total liabilities and partners' capital......................................           $ 51,864       $75,444
                                                                                         ========       =======
</TABLE>
<TABLE>
<CAPTION>
 --------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                 1997       1996        1995
 --------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>        <C>         <C>
 Revenues.....................................................................         $12,368    $17,868     $12,671
 Operating expense............................................................           4,899      6,268       4,504
 Interest expense.............................................................           4,174      5,598       3,923
 Depreciation and amortization................................................           3,206      3,615       2,298
 Extraordinary loss...........................................................             851         --          --
                                                                                       -------    -------     ------- 
  Net income (loss)...........................................................         $  (762)   $ 2,387     $ 1,946
                                                                                       =======    =======     =======

 ====================================================================================================================
</TABLE>
        As of December 31, 1997, the Company guaranteed  long-term debt of joint
venture partnerships of $24,019.
<PAGE>
        On September 2, 1997, the Company  acquired a 25% ownership  interest in
Buckeye  Factory Shops Limited  Partnership  ("Buckeye")  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%
(the "Buckeye  Acquisition").  Prior to September 2, 1997, the Company accounted
for its 75%  investment  in  Buckeye  using the  equity  method  of  accounting.
Commencing September 2, 1997, the operating results of Buckeye are consolidated.
As a result of the  prepayment  of the mortgage  indebtedness  noted above,  the
joint venture partnership  incurred an extraordinary loss of $851 related to the
write-off  of  certain  unamortized  financing  costs  totaling  $624 and a debt
prepayment  penalty of $227. The Company's 75% share of the extraordinary  loss,
or $638, is included in the extraordinary loss in the Consolidated Statements of
Operations.

Note 6 -- Related Party Transactions

        At December 31, 1997,  the net amount due from  affiliates  consisted of
$1,052 due from joint venture  partnerships  relating to  reimbursement of costs
paid by the Company on their  behalf.  At December 31, 1996,  the net amount due
from affiliates consisted of $595 due from joint venture  partnerships  relating
to  reimbursement  of costs paid by the Company on their behalf and $954 of fees
due from joint venture  partnerships  in connection  with the development of two
factory outlet centers.

Note 7 -- Bonds and Notes Payable
<TABLE>
        Bonds payable consisted of the following:
<CAPTION>
 -------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                                                                 1997         1996
 -------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                                      <C>           <C>    
 Variable rate tax-exempt  revenue bonds (the "Bonds"),  rate determined by remarketing  agents,  ranging
    from 3.80% to 3.95% at December 31,  1997,  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 3.00% to 4.70% in 1997,  2.45% to 5.30% in 1996 and
2.65% to 5.30% in 1995. 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.

        At December 31, 1997, 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. A letter of credit fee of 1.0% per annum
of the stated amount of the Letters of Credit is payable quarterly in advance to
such  financial  institutions.  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, in March 1994, 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 March 21,
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 March 21, 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, 1998.  The
total  commitments  outstanding  under the Letters of Credit,  the Reimbursement
Agreement and the Standby  Agreements as of December 31, 1997 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>
<TABLE>
        Notes payable consisted of the following:
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                                                                      1997         1996
 -----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                                           <C>          <C>    
 First Mortgage and Expansion Loan, LIBOR plus 1.51% through November 10, 1998, 7.782%  thereafter,  7.51% at
    December 31,   1997,  monthly  installments  of  $2,580  including  interest,   due  November 11,   2003,
    collateralized by sixteen properties located throughout the United States................................  $355,996     $358,748

 Term  loan,  LIBOR  plus  1.95%,  7.95%  at  December 31,   1997,  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 sixteen properties located throughout the United States.............   53,290       53,290

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

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

  Mortgage,  9.375%,  monthly installments of $71 including interest,  due March 1,  2004,  collateralized by
    property located in Lombard, IL...........................................................................    6,735        6,940

 Mortgage,  7.50%,  monthly  installments of $29 including  interest,  due June 22,  2000,  collateralized by
    property in Knoxville, TN..................................................................................   3,732        3,793

 Term loan, LIBOR plus 1.95%, 7.95% at December 31,  1997, 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..................................   3,000           --

 Unsecured term loans, 8.25%, monthly interest-only payments, due August 31, 1998..............................   1,500       12,000

 Unsecured  term loans,  LIBOR plus 3.50%,  9.09% at December 31, 1996,  monthly
    interest-only payments, due November 11, 1997..............................................................      --       16,000

 Mortgage,  LIBOR plus 2.25%, 7.87% at December 31, 1996, monthly  interest-only
    payments, due September 10, 1998, collateralized by property located in Gaffney, SC........................      --       15,852

 Unsecured line of credit,  $15,000 at December 31,  1997, LIBOR plus 2.50%, monthly interest-only  payments,
    due July 11, 1998..........................................................................................      --           --
                                                                                                               --------     --------
                                                                                                               $482,365     $466,623
                                                                                                               ========     ========
  ==================================================================================================================================
</TABLE>
<TABLE>
        At December 31, 1997,  unused  commitments were $35,396.  Interest costs
are summarized as follows:
<CAPTION>
 -----------------------------------------------------------------------------------------------------------------------------------
 Years ended December 31,                                                                              1997         1996       1995
 -----------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                                <C>          <C>        <C>    
 Interest incurred..............................................................................    $36,551      $24,310    $19,354
 Interest capitalized...........................................................................     (4,056)      (3,348)    (2,336)
 Interest earned on interest rate protection contracts..........................................       (115)        (201)      (721)
 Amortization of deferred financing costs and interest
    rate protection contracts...................................................................      3,742        3,724      4,524
                                                                                                    -------      -------    -------
 Interest expense...............................................................................    $36,122      $24,485    $20,821
                                                                                                    =======      =======    =======
 Interest paid..................................................................................    $36,424      $23,703    $18,295
                                                                                                    =======      =======    =======
 ===================================================================================================================================
</TABLE>
<PAGE>
       The scheduled  maturities of bonds and notes payable at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
 ------------------------------------------------------------------------------------------------------------
 December 31,                                                                                          1997
 ------------------------------------------------------------------------------------------------------------
 <S>                                                                                              <C>    
 1998....................................................................................         $  13,951
 1999....................................................................................            50,179
 2000....................................................................................            10,340
 2001....................................................................................             5,069
 2002....................................................................................             5,484
 Thereafter..............................................................................           430,242
                                                                                                  ---------
                                                                                                  $ 515,265
                                                                                                  =========
 ============================================================================================================
</TABLE>
        The aggregate carrying amount of bonds and notes payable at December 31,
1997 approximated their fair value. At December 31, 1997, the aggregate carrying
amount of rental property collateralizing bonds and notes payable was $712,247.

        At  December  31,  1997,  the  Company  held  interest  rate  protection
contracts  on all $28,250 of its floating  rate  tax-exempt  indebtedness  which
expire in 1999 and  approximately  $355,996 of other floating rate  indebtedness
which expire in November  1998. In addition,  the Company  purchased  additional
interest rate protection  contracts on $43,900 (of which $22,000 expires in July
1998  and  $21,900  expires  in  April  1999)  of  the  $355,996  floating  rate
indebtedness  to further reduce the Company's  exposure to increases in interest
rates.  These contracts have a weighted average  maturity of  approximately  0.9
years.

        The following  table  summarizes the material terms of the interest rate
protection contracts held for purposes other than trading and related borrowings
at December 31, 1997:
<TABLE>
<CAPTION>
 ------------------------------------------------------------------------------------------------------------------
                       Interest Rate Protection Contracts
 ------------------------------------------------------------------------------------------------------------------
 Borrowings                   Notional               Date
 Outstanding (in                Amount         Purchased/
 millions)               (in millions)            Amended            Term           Index      Maximum Index Rate
 ------------------------------------------------------------------------------------------------------------------
 <S>                     <C>                   <C>                   <C>        <C>           <C>             
   $356.0                  $356.0              11/1/96               2 years           LIBOR                  7.0%

     28.3                    28.3              3/21/94               5 years     Kenny Index      Year 1      3.0%
                                                                                                  Year 2      3.5%
                                                                                                  Year 3      4.0%
                                                                                                  Year 4      4.5%
   ______                  ______                                                                 Year 5      5.0%
   $384.3                  $384.3
   ======                  ======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                          Additional Interest Rate Protection on $356.0 Million Floating Rate Indebtedness
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Maximum Spread
                              Notional              Date                                                                     Between
                                Amount        Purchased/                                                               Maximum Index
                         (in millions)           Amended             Term           Index      Maximum Index Rate     Rate and Index
------------------------------------------------------------------------------------------------------------------------------------
                         <S>                  <C>                    <C>            <C>        <C>                    <C>   
                          $  22.0             7/1/94                 4 years        LIBOR      Year 1        5.0%        2.0%
                                                                                               Year 2        5.5%        1.5%
                                                                                               Year 3        6.0%        1.0%
                                                                                               Year 4        6.5%        0.5%
 
                             21.9             3/31/94,               5 years        LIBOR      Year 1        3.75%       3.25%
                                              Amended                                          Year 2        4.25%       2.75%
                                              7/1/94                                           Year 3        4.75%       2.25%
                                                                                               Year 4        5.25%       1.75%
                                                                                               Year 5        5.75%       1.25%
                          -------       
                          $  43.9 
                          =======   
====================================================================================================================================
</TABLE>
<PAGE>
       The net carrying amount of interest rate protection contracts at December
31, 1997 was  $1,266.  The  estimated  fair value of  interest  rate  protection
contracts based on quoted market rates at December 31, 1997 was $99.

        On February 13, 1997, the Company  closed on $30,000 of loan  facilities
with Nomura Asset Capital  Corporation.  The transaction  provided (i) a $27,000
nonrecourse  first mortgage loan (the "First  Mortgage  Loan") and (ii) a junior
secured loan (the "Junior Secured Loan") of $3,000.  The First Mortgage Loan (i)
is cross  collateralized  by first  mortgages on three of the Company's  factory
outlet centers, (ii) bears a fixed rate of interest of 8.35%, and (iii) requires
monthly  principal and interest  payments  pursuant to a 360-month  amortization
schedule.  The Junior Secured Loan is a recourse loan to the Company that (i) is
secured by a pledge of excess cash flow after debt service on the First Mortgage
Loan, (ii) bears a variable  interest rate at the London Interbank  offered rate
for 30-day deposits in U.S. dollars  ("30-day LIBOR") plus 1.95%,  (iii) matures
in three years and (iv) requires  monthly  interest only payments  through April
10, 1998 and monthly principal and interest payments thereafter.

        On July 11, 1997,  the Company's  $15,000  unsecured line of credit (the
"Corporate  Line") was renewed.  The purpose of the Corporate Line is to provide
working capital to facilitate the funding of short-term  operating cash needs of
the  Company.  The  Corporate  Line bears an interest  rate of 30-day LIBOR plus
2.50% and  matures on July 11,  1998.  No  amounts  were  outstanding  under the
Corporate Line at December 31, 1997.

        In September  1997,  the Company repaid  certain  outstanding  corporate
indebtedness  aggregating  $113,410,  including the Junior  Secured  Loan,  with
proceeds from certain public and private equity  offerings (see Note 8 - "Equity
Offerings and Other  Transactions"  of the Notes to the  Consolidated  Financial
Statements).  As a result of the  prepayment of such  indebtedness,  the Company
incurred an  extraordinary  loss of $1,423  related to the  write-off of certain
unamortized  financing costs. The Company also incurred an extraordinary loss of
$638  related  to the  write-off  of  certain  unamortized  financing  costs  in
connection  with  the  Buckeye   Acquisition   (see  Note  5  -  "Investment  in
Partnerships" of the Notes to the Consolidated Financial Statements).

        On November  13,  1997,  the  Company  closed on a term loan with Nomura
Securities  (Bermuda) Ltd.  ("Nomura  Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse  loan to the Company that (i) is secured by a pledge
of excess cash flow after debt service on a first  mortgage loan  collateralized
by 16 of the Company's  factory outlet centers,  (ii) bears a variable  interest
rate of 30-day  LIBOR plus 1.95%,  (iii)  matures on  November  11,  1999,  (iv)
requires  monthly  interest-only  payments through February 10, 1998 and monthly
interest payments and quarterly principal payments thereafter that approximate a
six-year  amortization  schedule,  and (v) may be subject  to earlier  principal
payments via "mark-to-market" of the underlying debt instrument.

        In addition,  on November 13,  1997,  the Company  closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan").  The Second Term Loan
is a recourse loan to the Company that (i) is secured by a pledge of excess cash
flow after debt service on a first mortgage loan  collaterlized  by three of the
Company's factory outlet centers,  (ii) bears a variable interest rate of 30-day
LIBOR plus 1.95%,  (iii)  matures on February 13, 2000,  (iv)  requires  monthly
interest-only payments through April 10, 1998 and monthly principal and interest
payments thereafter that approximate a five-year  amortization schedule, and (v)
may be  subject  to  earlier  principal  payments  via  "mark-to-market"  of the
underlying debt instrument.

        On December  2, 1997,  the Company  assumed a $31,328  mortgage  loan in
connection  with the  purchase of Niagara  International  Factory  Outlets  (the
"Niagara  Loan").  The Niagara Loan (i) bears a fixed rate of interest of 6.83%,
(ii) requires  monthly  principal  and interest  payments  that  approximates  a
25-year   amortization   schedule,   and  (iii)  is  collateralized  by  Niagara
International Factory Outlets.

        On December 31, 1997, the Company obtained from a financial  institution
a commitment for a construction mortgage loan in an amount not to exceed $20,396
(the "Construction  Mortgage Loan"). The Construction  Mortgage Loan (i) bears a
variable  interest  rate at the  financial  institution's  prime rate or, at the
Company's  option, a LIBOR index plus 1.75%,  (ii) matures on December 31, 1999,
and (iii) requires monthly  interest-only  payments.  The Construction  Mortgage
Loan is  collateralized  by a first mortgage on Lebanon Factory Shops, a factory
outlet center  located in Lebanon,  Tennessee.  At December 31, 1997, no amounts
were outstanding on the Construction Mortgage Loan.
<PAGE>
Note 8 - Equity Offerings and Other Transactions

        On June 27, 1996, the Company completed a registered exchange offer (the
"Exchange  Offer") to exchange  shares of its Common  Stock for up to  4,209,000
shares,  or 60%,  of its  Series B  Convertible  Preferred  Stock.  The  Company
received tender offers for 4,648,650  shares,  or approximately  66.27%,  of the
Series B Convertible  Preferred  Stock.  A proration  factor was applied to each
share of Series B Convertible  Preferred Stock validly tendered by holders,  and
on June 27, 1996, the Company issued  6,734,323  shares of its Common Stock.  In
connection  with the Exchange Offer,  certain  affiliates of the Company who are
limited  partners  of  the  Operating   Partnership  (the  "Limited   Partners")
contributed to the Operating  Partnership 625,000 common units for cancellation.
In  addition,  on June 26, 1996,  the  Company's  Board of Directors  approved a
special cash distribution (the "Special Cash  Distribution") on its Common Stock
of $1,393,  or $0.145 per common  share,  to holders of record on June 27, 1996.
The Special Cash  Distribution  was paid on July 15, 1996. The Limited  Partners
were not entitled to receive and did not receive any portion of the Special Cash
Distribution.

        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.   Subject  to  certain
conditions,the Series C Preferred Securities may be issued in the form of shares
of preferred stock in the Company or 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.  The Series C Preferred  Securities  may be
converted into shares of Common Stock on a one-to-one basis commencing August 8,
1998 (or earlier subject to certain conditions).

        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 draw on 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 Buckeye 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  Niagara  International  Factory
Outlets and Shasta Factory Stores.
<PAGE>
Note 9 -- 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,  1997,
8,505,472  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, 1997, 1996 and 1995,  expenses
totaling $1,468, $884, and $1,049, 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, 1996,  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 $8,739 and $3,457  that were  allocable  to  minority  interests  were
allocated to common  shareholders  during the years ended  December 31, 1997 and
1996, 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 8 - "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 (see
Note  10 -  "Preferred  Stock"  of  the  Notes  to  the  Consolidated  Financial
Statements).  The net  proceeds  of $9,710  from the  issuance  of the  Series C
Preferred Units are included in minority  interests in the Consolidated  Balance
Sheets.

       At December 31, 1997 and 1996,  loans to certain  limited  partners,  who
also are executive officers of the Company,  aggregating $4,750 were reported as
a reduction in minority interests in the Consolidated Balance Sheets.

Note 10 -- 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, 1997,  2,300,000  shares  Senior
Preferred Stock,  2,981,800 shares of Series B Convertible  Preferred Stock, and
3,636,363  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, 1997,
there were 3,566,746 shares of Common  Stock  reserved for future  issuance upon
conversion  of the Series B Convertible 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.

        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 unpai
dividends thereon.  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  Stock,  at par,  after 10 years.  The
Series  C  Preferred  Stock is  convertible  into  shares  of  Common  Stoc on a
one-to-one  basis,  subject to adjustment,  commencing August 8, 1998 or earlier
subject to certain conditions.

        The  holders  of  the  Senior Preferred Stock and 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. 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.
<PAGE>
Note 11 -- Stock Option Plans

        Under  the  Company's  1994 and 1995  Stock  Option  Plans,  options  to
purchase shares of the Company's  Common Stock have been or may be granted.  The
option  price for shares  granted  under these plans is the fair market value on
the grant date.

        In 1994,  the Company  granted  options to executive  officers,  outside
directors and  consultants to purchase  585,000 shares of Common Stock at $19.00
per share.  The options granted to executive  officers vest at a rate of 20% per
year over five   years  and have a term of 10 years.   The  options  granted  to
outside directors and consultants (aggregating 35,000 options) were fully vested
at the grant date and have a term of 10 years.

        In 1995, the Company granted options to purchase 20,000 common shares at
$12.45 per share to outside directors and consultants.  These options were fully
vested at the grant date and have a term of 10 years.

        In 1996, the Company  granted options to executive  officers,  other key
employees and consultants to purchase 302,500 shares of Common Stock at exercise
prices ranging from $11.46 to $11.88 per share.  These options were fully vested
at the grant date and have a term of 10 years.

        In 1997, the Company granted options to executive officers and other key
employees to purchase  196,250  shares of Common  Stock at an exercise  price of
$12.53 per share.  These  options were fully vested at the grant date and have a
term of 10 years.

        Unaudited  pro forma  information  regarding net income and earnings per
share is  required by SFAS No.  123,  which  requires  that the  information  be
determined  as if the  Company  has  accounted  for its  stock  options  granted
subsequent to December 31, 1994 under the fair value method of SFAS No. 123. 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:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                                   1997            1996           1995
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>            <C>    
Risk-free interest rate..........................................................          5.5%            6.5%           6.5%
Dividend yield...................................................................          8.3%            9.0%           9.0%
Volatility factor................................................................         0.36            0.35           0.32
Weighted average life (in years).................................................         10.0            10.0           10.0
===============================================================================================================================
</TABLE>

        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.

        For purposes of unaudited  pro forma  disclosures,  the  estimated  fair
value of the  options is  amortized  to  expense  over the  options'  applicable
vesting  period.  The Company's  unaudited pro forma  information  for the years
ended December 31, 1997, 1996 and 1995 follows :

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                              1997              1996            1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>             <C>   
Income before extraordinary item...............................                   $  7,442          $  8,765         $18,163
Extraordinary item.............................................                     (2,061)           (1,017)             --
                                                                                  --------          --------         -------
Net income.....................................................                   $  5,381          $  7,748         $18,163
                                                                                  ========          ========         =======
Net loss applicable to common shares...........................                   $ (7,345)         $ (6,488)        $(2,782)
                                                                                  ========          ========         =======
Earnings per common share - basic and diluted:
    Loss before extraordinary item.............................                   $  (0.27)         $  (0.67)        $ (0.97)
    Extraordinary item.........................................                      (0.11)            (0.12)             --
                                                                                  --------          --------         -------
    Net loss...................................................                   $  (0.38)         $  (0.79)        $ (0.97)
                                                                                  ========          ========         =======
=============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
        The following is a summary of stock option activity and number of shares
reserved for outstanding options:
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                      Weighted
                                                                                       Average
                                                                                      Exercise                  Number
                                                                                         Price               of Shares
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                   <C>    
Balance at December 31, 1994....................................................        $19.00                 585,000
Granted.........................................................................        $12.45                  20,000
                                                                                                             ---------

Balance at December 31, 1995....................................................        $18.78                 605,000
Granted.........................................................................        $11.83                 302,500
Cancelled.......................................................................        $11.88                  (4,000)
                                                                                                             ---------

Balance at December 31, 1996....................................................        $16.49                 903,500
Granted.........................................................................        $12.53                 196,250
Cancelled.......................................................................        $11.88                  (1,000)
                                                                                                             ---------

Balance at December 31, 1997....................................................        $15.78               1,098,750
                                                                                                             =========
========================================================================================================================
</TABLE>

        Options on  961,253,  640,253 and 224,750  shares  were  exercisable  at
December 31, 1997, 1996, and 1995, respectively,  at a weighted average exercise
price of $15.32 per share, $15.45 per share, and $18.42 per share, respectively.
The weighted fair value of options  granted  during the years ended December 31,
1997,  1996, and 1995 was $1.90 per share,  $1.69 per share, and $1.60 per share
respectively.  Exercise  prices for options  outstanding  at  December  31, 1997
ranged  from  $11.46  to  $19.00  per  share.  The  weighted  average  remaining
contractual  life of those options is 7.3 years.  Under the  Company's  1994 and
1995 Stock  Option  Plans,  there were 106,250 and 311,500  shares  reserved for
future grants at December 31, 1997 and 1996, respectively.

Note 12 -- Lease Agreements

        The  Company is the lessor of retail and office  space  under  operating
leases with initial  lease terms that expire from 1998 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:

<TABLE>
<CAPTION>
 ---------------------------------------------------------------------------------------------------------
 December 31,                                                                                        1997
 ---------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>    
 1998...........................................................................                $  91,287
 1999...........................................................................                   81,579
 2000...........................................................................                   66,987
 2001...........................................................................                   48,046
 2002...........................................................................                   28,635
 Thereafter.....................................................................                   55,352
                                                                                                ---------  
                                                                                                $ 371,886
                                                                                                =========
 =========================================================================================================
</TABLE>
<PAGE>
       The Company leases certain land,  buildings,  and equipment under various
noncancelable  operating lease  agreements.  Rental expense for operating leases
was $1,059,  $1,011,  and $961for the years ended  December 31, 1997,  1996, and
1995,  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:

<TABLE>
<CAPTION>
 -----------------------------------------------------------------------------------------------------------
 December 31,                                                                                         1997
 -----------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>    
 1998...........................................................................                     $  977
 1999...........................................................................                        940
 2000...........................................................................                        877
 2001...........................................................................                        835
 2002...........................................................................                        771
 Thereafter.....................................................................                        583
                                                                                                     ------
                                                                                                     $4,983
                                                                                                     ======
 ===========================================================================================================
</TABLE>

Note 13 -- 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 that losses, if any, resulting from such matters,  will not
have a material adverse effect on the consolidated  financial  statements of the
Company.

Note 14 -- Property Acquisitions

       On November 1, 1996, the Company  acquired Rocky Mountain  Factory Stores
and Kansas City Factory Outlets for an aggregate purchase price of $71,700.

       On November 1, 1996,  the Company  purchased its joint venture  partner's
first  mortgage on and 50%  ownership  interest in Grove City Factory  Shops for
$57,094 thereby increasing its ownership interest in such property to 100%.

       On February 13, 1997,  the Company,  acquired Oak Creek  Factory  Stores,
Bend Factory  Outlets and Factory  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
Buckeye  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 Buckeye using the equity method of
accounting.  Commencing  September 2, 1997, the operating results of Buckeye 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 Retail
Outlets of Kittery"),  and Latham Factory Outlet Center (the "Latham  Property")
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  Niagara
International  Factory Outlets  ("Niagara") and Shasta Factory Stores ("Shasta")
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.
<PAGE>
<TABLE>
        The Company accounted for these  acquisitions  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 following Unaudited pro forma information  presents a summary of
the  consolidated  results  of  operations  of  the  Company  as  if  the  these
acquisitions had occurred on January 1, 1996:
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                               1997                  1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                   <C>    
Total revenues..................................................................   $148,788              $129,565
                                                                                   ========              ========
Income before extraordinary item................................................   $  8,983              $ 10,807
                                                                                   ========              ========
Net income......................................................................   $  6,709              $  9,790
                                                                                   ========              ========
Net loss applicable to common shares............................................   $ (6,017)             $ (4,446)
                                                                                   ========              ========

Earnings per common share - basic and diluted:
    Loss before extraordinary item..............................................   $  (0.20)             $  (0.42)
    Extraordinary item..........................................................      (0.11)                (0.12)
                                                                                   --------              --------
    Net loss.....................................................................  $  (0.31)             $  (0.54)
                                                                                   ========              ========
==================================================================================================================
</TABLE>
        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 on  financing  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,
1996 or of future results of operations of the Company.

Note 15-- Merger Agreement

        On November  12,  1997 and as amended on  February 1, 1998,  the Company
entered into a definitive merger agreement (as amended,  the "Merger Agreement")
with  Horizon  Group,  Inc.  ("Horizon")  for  an  aggregate   consideration  of
approximately $945,200, including the assumption of $556,900 of Horizon debt and
transaction costs. Upon completion of the transaction,  the Company will own and
operate 48 outlet centers totaling approximately 13,406,261 square feet of GLA.

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

        Immediately prior to the merger, Horizon Group Properties,  Inc.("HGP"),
a subsidiary of Horizon, will become the sole  general  partner of  Horizon/Glen
Outlet Center Limited Partnership  ("Horizon  Partnership") and the common stock
of HGP will be distributed to the  shareholders of both the Company and Horizon.
All of the common equity of HGP will be distributed to the convertible preferred
and common  shareholders and unitholders of the Company and the shareholders and
limited partners of Horizon based on their ownership in the Company  immediately
following the merger.  It is presently  expected  that  following the merger one
share of common stock of HGP will be  distributed  for every 10 shares of Common
Stock or Common Units of the  Company,  and that  approximately  1.196 shares of
common  stock  of HGP  will be  distributed  for  every 10  shares  of  Series B
Convertible  Preferred  Stock  held in the  Company.  Immediately  prior  to the
closing of the merger, the Company will pay a special cash distribution of $0.60
per share of Series B Convertible  Preferred  Stock and $0.50 per  share/unit of
Common  Stock,  Series C  Preferred  Security  and Common  Unit,  as  applicable
Shareholders  and  limited  partners  in Horizon  will not  participate  in this
distribution.  HGP will own and  operate 15 outlet  centers  (including  Indiana
Factory Shops and Nebraska  Crossing  Factory Stores which will be acquired from
the Company) totaling 3,084,823 square feet of GLA.

        The merger will be accounted for as a purchase.  It is conditioned upon,
among other things,  the approvals of each Company's  shareholders  and partners
and the  satisfaction  of other  customary  conditions.  The closing is expected
during the second  quarter of 1998. The exchange of shares of Horizon for shares
of the Company will be made on a tax-free basis.

        On December 10, 1997, a shareholder of Horizon  filed a purported  class
action  lawsuit in the  Circuit  Court for  Muskegon  County,  Michigan  against
Horizon,  the Company,  and certain  directors  and former  directors of Horizon
claiming,  among other things, that Horizon's directors breached their fiduciary
duties to  Horizon's  shareholders  in  approving  the merger of Horizon and the
Company  and that the  consideration  to be paid to  Horizon's  shareholders  in
connection with the merger is unfair and inadequate.  The lawsuit  requests that
such  merger be  enjoined  or, in the event that the  purported  transaction  is
consummated, that it be rescinded or unspecified damages be awarded to the class
members.  On January 16, 1998,  the defendants  answered the complaint,  denying
that the Horizon board of directors  breached their fiduciary duties and denying
that such  consideration is unfair or inadequate.  Although the Company is named
as a  defendant  in the  complaint,  the  substantive  allegations  focus on the
actions  of Horizon  and its board of  directors  and not on any  actions of the
Company or its board of  directors.  Since  this  litigation  is in the  initial
phases  of  discovery,  its  outcome  is not  susceptible  to  easy  or  certain
prediction; however, the Company intends to defend itself vigorously.
<PAGE>
<TABLE>

                               PRIME RETAIL, INC.

            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1997
                                 (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>
Bend Factory Shops     $  7,936 $ 2,560      $ 8,476             $     42 $ 2,560     $  8,518 $ 11,078    $     215   Feb. 1997(A)
Buckeye Factory 
 Shops                       --   1,013       21,455                  677   1,013       22,132   23,145          398  Sept. 1997(A)
Carolina Factory 
 Shops                       --      --           -- $   827       24,900     827       24,900   25,727        1,268   Nov. 1996(C)
Castle Rock
 Factory Shops           35,942   4,424       47,200   2,717       14,460   7,141       61,660   68,801        7,515   Mar. 1994(A)
Coral Isle Factory
 Shops                   10,840   2,753       15,602      --          278   2,753       15,880   18,633        1,552   Mar. 1994(A)
Factory Outlets at
 Post Falls              11,805   3,100       12,163      --           69   3,100       12,232   15,332          315   Feb. 1997(A)
Florida Keys
 Factory Shops           15,632      --           --   2,874       21,366   2,874       21,366   24,240        3,165  Sept. 1994(C)
Gainesville
 Factory Shops           20,824      --           --     535       29,657     535       29,657   30,192        5,075   Aug. 1993(C)
Grove City
 Factory Shops           41,305   1,193       58,630     (70)       3,116   1,123       61,746   62,869        2,634   Nov. 1996(A)
Gulf Coast
 Factory Shops           29,438      --           --   3,877       28,734   3,877       28,734   32,611        6,135   Oct. 1991(C)
Gulfport Factory 
 Shops                   19,968      --           --      --       33,438      --       33,438   33,438        2,710   Oct. 1995(C)
Huntley Factory 
 Shops                   17,800      --           --   1,506       34,772   1,506       34,772   36,278        4,049  Sept. 1994(C)
Indiana Factory
 Shops                   14,263      --           --     531       24,068     531       24,068   24,599        2,859   Nov. 1994(C)
Kansas City
 Factory Shops           14,605     815       31,311      --        2,151     815       33,277   34,277        1,874   Nov. 1996(A)
Prime Retail
 Outlets of Kittery          --     820       24,061      --           17     820       24,078   24,898          100   Oct. 1997(A)
Latham Factory
 Shops                       --     507        1,476      --           --     507        1,476    1,983            6   Oct. 1997(A)
Magnolia Bluff
 Factory Shops           25,331      --           --   3,074       30,541   3,074       30,541   33,615        3,153   July 1995(C)
Melrose Place             2,000      --           --     499        1,880     499        1,880    2,379          744   Aug. 1987(C)
Nebraska Crossing  
 Factory Stores          11,753   2,904       16,614      --          457   2,904       17,071   19,975        1,600   Mar. 1994(A)
Niagara
 International
 Factory Outlets         31,328   7,247       82,842      --            2   7,247       82,844   90,091          180   Dec. 1997(A)
Northgate Plaza           6,735   3,626       11,630      --          142   3,626       11,772   15,398        1,278   Mar. 1994(A)
Oak Creek Factory 
 Stores                   7,043   1,924        9,099      --           32   1,924        9,131   11,055          218   Feb. 1997(A)
Ohio Factory Shops       26,529     843       31,084     250       12,637   1,093       43,721   44,814        5,588   Mar. 1994(A)
Rocky Mountain 
 Factory Shops           22,808   6,400       33,244      --          (53)  6,400       33,191   39,591        1,851   Nov. 1996(A)
San Marcos Factory                        
 Shops                   39,537      --           --   1,626       40,320   1,626       40,320   41,946        9,940   Aug. 1990(C)
Shasta Factory
 Stores                      --   1,875       11,036      --            1   1,875       11,037   12,912           24   Dec. 1997(A)
Triangle Factory
 Shops                    9,421      --           --   2,502       21,916   2,502       21,916   24,418        5,249   Oct. 1991(C)
Warehouse Row            23,900      --           --   1,175       32,073   1,175       32,073   33,248       10,171   Nov. 1989(C)
Warehouse Row II             --      --           --     350        2,580     350        2,580    2,930          334   Dec. 1993(A)
Western Plaza            10,732      --           --   2,000        6,990   2,000        6,990    8,990          954   Jun. 1993(A)
Property Under                                                                                                                Under
 Development                 --      --           --      --       53,139      --       53,139   53,139           --   Construction
Other Property               --      --        1,588      --          592      --        2,180    2,180          879      Mar.1994-
                       -------- -------     -------- -------     -------- -------     -------- --------    ---------    Dec.1997(A)
                       $457,475 $42,004     $417,511 $24,273     $420,994 $66,277     $838,505 $904,782    $  82,033
                       ======== =======     ======== =======     ======== =======     ======== ========    =========
</TABLE>
<PAGE>
                               PRIME RETAIL, INC.

        Notes to Schedule III - Real Estate and Accumulated Depreciation

                                December 31, 1997

                                 (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 $986,004 at December 31,
1997.
<TABLE>
<CAPTION>
                                                                                                 Investment in Rental Property
                                                                                                      Year Ended December 31
                                                                                              ------------------------------------
                                                                                                  1997           1996         1995
                                                                                              --------       --------     --------
<S>                                                                                           <C>            <C>          <C>
Balance, beginning of period....................................................              $640,759       $454,480     $376,181
Retirements.....................................................................                  (718)           ( 8)        (258)
Acquisitions....................................................................               191,345        131,593           --
Improvements....................................................................                73,773         54,694       79,075
Cost of real estate sold........................................................                  (377)            --         (518)
                                                                                              --------       ---------    --------
Balance, end of period..........................................................              $904,782       $640,759     $454,480
                                                                                              ========       =========    ========
</TABLE>
<TABLE>
<CAPTION>
                                                                                                    Accumulated Depreciation
                                                                                                     Year Ended December 31
                                                                                              ------------------------------------
                                                                                                  1997           1996         1995
                                                                                              --------       --------     --------
<S>                                                                                            <C>           <C>          <C>    
Balance, beginning of period....................................................               $57,674       $40,190       $26,668
Retirements.....................................................................                  (718)           (8)         (258)
Other...........................................................................                    22            24            --
Depreciation for the period.....................................................                25,055        17,468        13,780
                                                                                               -------       -------       -------
Balance, end of period..........................................................               $82,033       $57,674       $40,190
                                                                                               =======       =======       =======
</TABLE>