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


FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 2003

Or

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

Commission file number 001-13301
----------------------

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

Maryland 38-2559212
- ---------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)


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


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

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

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

Yes X No-----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No------

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

As of November 12, 2003, the issuer had outstanding 43,577,916 shares of Common
Stock, $.01 par value per share.


Page - (2)


Prime Retail, Inc.
Form 10-Q


INDEX


PART I: FINANCIAL INFORMATION PAGE
----


Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002............................................. 1

Consolidated Statements of Operations for the three
and nine months ended September 30, 2003 and 2002............. 2

Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2003 and 2002............. 3

Notes to the Consolidated Financial Statements.................. 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 22

Item 3. Quantitative and Qualitative Disclosures of Market Risk..... 48


Item 4. Controls and Procedures..................................... 49

PART II: OTHER INFORMATION

Item 1. Legal Proceedings........................................... 50

Item 3. Defaults Upon Senior Securities............................. 51

Item 4. Submission of Matters to a Vote of Security Holders......... 52

Item 6. Exhibits and Reports on Form 8-K............................ 52

Signatures........................................................... 53


Page - (3)


Introduction

Unless the context otherwise requires, all references to "we," "us," "our"
or the "company" contained in this Quarterly Report on Form 10-Q mean Prime
Retail, Inc. and those entities owned or controlled by Prime Retail, Inc.,
including Prime Retail, L.P. (the "Operating Partnership").

Historical results and percentage relationships set forth in this Quarterly
Report on Form 10-Q are not necessarily indicative of future operations.

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q, including the
section entitled "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. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief, or
current expectations of us or our officers, including statements preceded by,
followed by, or including forward-looking terminology such as "may," "will,"
"should," believe," "expect," "anticipate," "estimate," "continue," "predict,"
or similar expressions with respect to various matters.

These statements are subject to potential risks and uncertainties and,
therefore, actual results may differ materially. Such forward-looking statements
are subject to certain risks and uncertainties, including, but not limited to,
the risk associated with our high level of leverage and our ability to refinance
such indebtedness as it becomes due; the risk that we or one or more of our
subsidiaries are not able to satisfy scheduled debt service obligations or will
not remain in compliance with existing loan covenants; the risk of material
adverse affects of future events, including but not limited to tenant
bankruptcies, abandonments and the non-payment by tenants of contractual rents
and additional rents, on our financial performance; the risk related to the
retail industry in which our outlet centers compete, including the potential
adverse impact of external factors, such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences; the risk associated with
our potential asset sales; the risk of potential increases in market interest
rates from current levels; the risk associated with real estate ownership, such
as the potential adverse impact of changes in local economic climate on the
revenues and the value of our properties; the risk associated with litigation;
and the risk associated with competition from web-based and catalogue retailers.

All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise.


Page - (4)


PRIME RETAIL, INC.

Unaudited Consolidated Balance Sheets

(Amounts in thousands, except share information)



- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Assets
Investment in rental property:
Land $ 97,893 $ 101,546
Buildings and improvements 699,161 740,024
Furniture and equipment 11,889 13,292
--------- ---------
808,943 854,862
Accumulated depreciation (206,693) (213,604)
--------- ---------
602,250 641,258
Cash and cash equivalents 7,362 6,908
Restricted cash 109,866 107,037
Accounts receivable, net 1,093 3,049
Deferred charges, net 2,620 3,766
Investment in unconsolidated joint ventures 49,286 49,889
Other assets 5,990 6,181
--------- ---------
Total assets $ 778,467 $ 818,088
========= =========

Liabilities and Shareholders' Equity
Bonds payable $ 22,361 $ 22,495
Notes payable, including $24,919 in default in 2003 488,597 511,443
Defeased notes payable 74,046 74,764
Accrued interest 4,327 3,984
Real estate taxes payable 5,729 3,484
Accounts payable and other liabilities 36,987 43,059
--------- ---------
Total liabilities 632,047 659,229

Minority interests 1,487 1,487

Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $80,895),
2,300,000 shares issued and outstanding 23 23
8.5% Series B Cumulative Participating Convertible
Preferred Stock, $0.01 par value (liquidation preference
of $260,163), 7,828,125 shares issued and outstanding 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $0.01 par value, 43,577,916 shares
issued and outstanding 436 436
Additional paid-in capital 709,373 709,373
Distributions in excess of earnings (564,977) (552,538)
--------- ---------
Total shareholders' equity 144,933 157,372
--------- ---------
Total liabilities and shareholders' equity $ 778,467 $ 818,088
========= =========
====================================================================================================================================

See accompanying notes to consolidated financial statements.


Page - (5)


PRIME RETAIL, INC.

Unaudited Consolidated Statements of Operations

(Amounts in thousands, except per share information)



- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Revenues
Base rents $ 19,001 $ 19,622 $ 55,934 $ 66,096
Percentage rents 404 834 1,853 2,589
Tenant reimbursements 10,676 11,424 32,921 36,498
Interest and other 2,892 3,664 10,573 8,737
-------- -------- -------- ----------
Total revenues 32,973 35,544 101,281 113,920

Expenses
Property operating 8,936 9,927 28,184 30,687
Real estate taxes 2,600 2,999 8,392 10,012
Depreciation and amortization 6,645 8,229 20,948 27,446
Corporate general and administrative 5,253 3,366 13,247 9,662
Interest 11,700 13,693 34,929 47,831
Other charges 1,556 1,667 2,979 8,372
Provision for asset impairment - 81,619 6,590 81,619
-------- -------- -------- ----------
Total expenses 36,690 121,500 115,269 215,629
-------- -------- -------- ----------
Loss before gain on sale of real estate (3,717) (85,956) (13,988) (101,709)
Gain on sale of real estate - - - 5,802
-------- -------- -------- ----------
Loss from continuing operations (3,717) (85,956) (13,988) (95,907)
Discontinued operations, including gains of
$2,153 on dispositions in 2003 periods,
respectively, and gains of $17,121 and $9,619
on dispositions in 2002 periods, respectively 2,071 2,451 1,549 (16,103)
-------- -------- -------- ----------
Net loss (1,646) (83,505) (12,439) (112,010)
Allocations to preferred shareholders (5,668) (5,668) (17,004) (17,004)
-------- -------- -------- ----------
Net loss applicable to common shares $ (7,314) $(89,173) $(29,443) $ (129,014)
======== ======== ======== ==========

Basic and diluted earnings per common share:
Loss from continuing operations $ (0.22) $ (2.11) $ (0.72) $ (2.59)
Discontinued operations 0.05 0.06 0.04 (0.37)
-------- -------- -------- ----------
Net loss $ (0.17) $ (2.05) $ (0.68) $ (2.96)
======== ======== ======== ==========

Weighted-average common shares
outstanding - basic and diluted 43,578 43,578 43,578 43,578
======== ======== ======== ==========
====================================================================================================================================

See accompanying notes to consolidated financial statements.


Page - (6)


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



- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Operating Activities
Loss from continuing operations $ (13,988) $ (95,907)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating activities:
Gain on sale of real estate - (5,802)
Provision for asset impairment 6,590 81,619
Equity in earnings of unconsolidated joint ventures (2,273) 181
Depreciation and amortization 20,948 27,446
Amortization of deferred financing costs 1,251 4,015
Amortization of debt premiums (1,482) (1,416)
Bad debt expense 972 2,985
Discontinued operations (341) 7,873
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,127 (585)
Increase in restricted cash (2,833) (3,851)
Decrease (increase) in other assets 313 (2,229)
Decrease in accounts payable and other liabilities (6,070) (764)
Increase in real estate taxes payable 2,559 2,628
Increase in accrued interest 854 233
--------- ---------
Net cash provided by operating activities 7,627 16,426
--------- ---------

Investing Activities
Additions to investment in rental property (5,631) (4,127)
Distributions from unconsolidated joint ventures 2,876 -
Proceeds from sales of operating properties and land 1,085 22,320
--------- ---------
Net cash provided by (used in) investing activities (1,670) 18,193
--------- ---------

Financing Activities
Principal repayments on notes payable (5,503) (36,117)
--------- ---------
Cash used in financing activities (5,503) (36,117)
--------- ---------

Increase (decrease) in cash and cash equivalents 454 (1,498)
Cash and cash equivalents at beginning of period 6,908 7,537
--------- ---------
Cash and cash equivalents at end of period $ 7,362 $ 6,039
========= =========
====================================================================================================================================

See accompanying notes to consolidated financial statements.


Page - (7)


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


Supplemental Disclosure of Non-cash Investing and Financing Activities

The following assets and liabilities were disposed in connection with the
disposition of properties during the period indicated:



- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Book value of net assets disposed $ 14,490 $ 269,381
Notes payable paid - (147,845)
Notes payable assumed by buyer - (46,862)
Notes payable transferred to lender (16,643) (58,685)
Accounts payable and other liabilities - 17,237
Investment in unconsolidated joint ventures - (26,327)
Discontinued operations - net gain on disposals 2,153 9,619
Gain on sale of real estate, net - 5,802
-------- ---------
Cash received, net $ - $ 22,320
======== =========
====================================================================================================================================


See accompanying notes to consolidated financial statements.


Page - (8)


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


Note 1 - Interim Financial Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments, consisting only of recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for such interim periods are not necessarily indicative of the
results that may be expected for a full fiscal year. For further information,
refer to the consolidated financial statements and notes thereto included in
Prime Retail, Inc.'s (the "Company") Annual Report on Form 10-K for the year
ended December 31, 2002.

Unless the context otherwise requires, all references to "we," "us," "our"
or the Company herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating
Partnership").

The consolidated financial statements include the accounts of the Company,
the Operating Partnership and the partnerships in which it has a controlling
financial interest. 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 GAAP requires us to make
estimates and assumptions that affect the (i) reported amounts of assets and
liabilities, (ii) disclosure of contingent liabilities at the date of the
financial statements and (iii) reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Investments in unconsolidated joint ventures are accounted for under the
equity method of accounting. Income (loss) applicable to minority interests and
common shares as presented in the consolidated statements of operations is
allocated based on income (loss) before minority interests after income
allocated to preferred shareholders.

Significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period financial information has been reclassified
to conform to the current period presentation, which did not have an impact on
our results of operations or financial position.

Note 2 - Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in
interim and annual financial statements about the obligations under certain
guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize,
at the inception of the guarantee, an initial liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN No. 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. We adopted the disclosure provisions of
FIN No. 45 effective December 31, 2002. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We did not issue or
modify any guarantees during the nine months ended September 30, 2003. See
"Guarantees and Guarantees of Indebtedness of Others" contained in Note 4 -
"Debt" for additional information.


Page - (9)


In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by FIN No. 46. We did not create any variable interest entities during the nine
months ended September 30, 2003. We plan to adopt FIN No. 46 in the fourth
quarter of 2003 and do not believe that this adoption will have a significant
impact on our financial statements for our existing investments in
unconsolidated joint ventures.

In May 2003, the FASB issued FAS No 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously classified as equity. In October 2003, the FASB decided to
indefinitely delay the effective date of the provisions of FAS No. 150 related
to finite life entities and also indicated that it may modify other guidance in
FAS No. 150. In its original form, we did not anticipate FAS No. 150 having a
significant impact on our financial statements. However, that assessment may
change if the FASB modifies the guidance in FAS No. 150.

Note 3 - Property Dispositions

We disposed of 17 and 2 properties through various transactions (including
sale, joint venture arrangements, foreclosure and transfer of ownership to the
respective lender) during 2002 and 2003. In accordance with FAS No. 144, the
operating results of these properties are reflected in either our results from
continuing operations or discontinued operations through the respective dates of
disposition as discussed below.

2002 Dispositions

The operating results for seven properties that were sold to joint venture
partnerships during 2002 and in which we still have a significant continuing
involvement are not classified as discontinued operations in the Consolidated
Statements of Operations. Such properties and/or their operating results through
the dates of their respective disposition are collectively referred to as the
"2002 Joint Venture Properties". The 2002 Joint Venture Properties consist of
our sales of (i) Prime Outlets at Hagerstown (the "Hagerstown Center") and six
outlet centers (collectively, the "Bridge Properties"). Additionally, the
operating results of Phases II and III of the Bellport Outlet Center (the
"Bellport Outlet Center"), which was previously owned through a joint venture
partnership and was sold during 2002, are not classified as discontinued
operations. We accounted for our ownership interest in the Bellport Outlet
Center through the date of disposition in accordance with the equity method of
accounting.

The following table summarizes these dispositions.



- ------------------------------------------------------------------------------------------------------------------------------------
Gain/(Loss) Provision
Date of Sales Reduction Net on Sale/ for Asset
Continuing Operations: Disposition Property Type GLA Price of Debt Proceeds Disposition Impairment
- ------------------------------------------------------------------------------------------------------------------------------------

Hagerstown Center January 2002 1 Outlet Center 487,000 $ 80,500 $ (57,914) $ 12,113 $ 16,793 $ -
Bellport Outlet Center
- Phases II/III April 2002 1 Outlet Center 197,000 6,500 - 522 (703) -
Bridge Properties July 2002 6 Outlet Centers 1,304,000 118,650 (111,009) - (10,288) -
--------- --------- --------- -------- -------- ----
Total 1,988,000 $ 205,650 $(168,923) $ 12,635 $ 5,802 $ -
========= ========= ========= ======== ======== ====
====================================================================================================================================


We have classified the operating results, including gains and losses
related to disposition, for certain properties disposed of during 2002 as
discontinued operations in the Consolidated Statements of Operations through
their respective dates of disposition.


Page - (10)


The following table summarizes these dispositions.



- ------------------------------------------------------------------------------------------------------------------------------------
Gain/(Loss) Provision
Date of Sales Reduction Net on Sale/ for Asset
Discontinued Operations: Disposition Property Type GLA Price of Debt Proceeds Disposition Impairment
- ------------------------------------------------------------------------------------------------------------------------------------

Conroe Center January 2002 1 Outlet Center 282,000 $ - $(15,621.00) $(554.00) $ - $ -
Edinburgh Center April 2002 1 Outlet Center 305,000 27,000 (16,317) 9,551 (9,623) -
Western Plaza June 2002 1 Community Center 205,000 9,500 (9,467) 688 2,121 -
Jeffersonville II August 2002 1 Outlet Center 314,000 - (17,938) - 17,121 -
Vero Beach September 2002 1 Outlet Center 326,000 - (25,126) - - 12,200
Melrose Place October 2002 1 Community Center 27,000 2,500 (1,935) 555 990 -
Puerto Rico Center December 2002 1 Outlet Center 176,000 36,500 (19,202) 13,958 - 15,557
Colorado Properties December 2002 2 Outlet Centers 808,000 96,000 (74,849) 12,628 15,543 -
--------- --------- ----------- -------- -------- ---------
Total 2,443,000 $ 171,500 $ (180,455) $ 36,826 $ 26,152 $ 27,757
========= ========= =========== ======== ======== =========
====================================================================================================================================


2003 Dispositions

Latham Center

On March 31, 2003, PFP Venture LLC (the "PFP Venture"), a joint venture
partnership in which we indirectly have an ownership interest of approximately
26.4% as of September 30, 2003, completed the sale of Prime Outlets at Latham
(the "Latham Center"), an outlet center located in Latham, New York. The Latham
Center, which was one of the Bridge Properties, was sold to 400 Old Loudon Road
Realty, LLC for cash consideration of $2,200. The net cash proceeds from the
sale were $184, after (i) repayment of $1,870 of existing mortgage indebtedness
on the Bridge Properties and (ii) prorations, closing costs and fees. In
connection with the sale of the Latham Center, the PFP Venture recorded a gain
on the sale of real estate of $117 during the first quarter of 2003. We account
for our investment in the Bridge Properties in accordance with the equity method
of accounting.

Woodbury Center

During August of 2002, certain of our subsidiaries suspended regularly
scheduled monthly debt service payments on two non-recourse mortgage loans which
were cross-collateralized by Prime Outlets at Vero Beach (the "Vero Beach
Center"), located in Vero Beach, Florida, and Prime Outlets at Woodbury (the
"Woodbury Center"), located in Woodbury, Minnesota (collectively, the "John
Hancock Properties"). These non-recourse mortgage loans were held by John
Hancock Life Insurance Company ("John Hancock").

During the second quarter of 2002, we incurred a provision for asset
impairment of $12,200 to adjust our carrying value of the Vero Beach Center to
its estimated fair value in accordance with the provisions of FAS No. 144.
Effective September 9, 2002, John Hancock foreclosed on the Vero Beach Center
and its related assets and liabilities, including our carrying value of the
indebtedness of $25,126 (principal outstanding of $24,497 and unamortized debt
premium of $629), were transferred to John Hancock. Foreclosure on the Vero
Beach Center did not have a material impact on our results of operations or
financial condition.

Effective July 24, 2003, John Hancock foreclosed on the Woodbury Center and
its related assets and liabilities, including our carrying value of the
indebtedness of $16,643 (principal of $16,331 and unamortized debt premium of
$312) were transferred to John Hancock. In connection with the foreclosure of
the Woodbury Center, we recorded a non-recurring gain on disposition (included
in discontinued operations) of $2,153. Foreclosure on the Woodbury Center did
not have a material impact on our results of operations or financial condition.

The operating results of the Woodbury Center are classified as discontinued
operations in the Consolidated Statements of Operations through the date of
disposition for all periods.


Page - (11)


The following table summarizes the operating results of all properties
classified as discontinued operations in the Consolidated Statements of
Operations.



- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------ ------------------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Revenues
Base rents $ 77 $ 4,670 $ 672 $ 16,539
Percentage rents - 139 1 514
Tenant reimbursements 60 2,644 589 8,601
Interest and other 6 192 42 744
------- ------- ------- ----------
Total revenues 143 7,645 1,304 26,398

Expenses
Property operating 79 2,093 537 6,598
Real estate taxes 36 901 314 3,155
Depreciation and amortization 31 1,561 289 5,514
Interest 73 2,363 644 8,760
Other charges 6 (160) 124 336
Provision for asset impairment - 15,557 - 27,757
------- ------- ------- ----------
Total expenses 225 22,315 1,908 52,120
------- ------- ------- ----------
Loss before gain on (82) (14,670) (604) (25,722)
sale of real estate
Gain on sale of real estate 2,153 17,121 2,153 9,619
------- ------- ------- ----------
Discontinued operations $ 2,071 $ 2,451 $ 1,549 $ (16,103)
======= ======= ======= ==========
====================================================================================================================================


Note 4 - Debt

We have fixed rate tax-exempt revenue bonds collateralized by properties
located in Chattanooga, Tennessee (the "Chattanooga Bonds") which contain (i)
certain covenants, including a minimum debt-service coverage ratio financial
covenant (the "Financial Covenant") and (ii) cross-default provisions with
respect to certain of our other credit agreements. Based on the operations of
the collateral properties, we were not in compliance with the Financial Covenant
for the quarters ended June 30, September 30 and December 31, 2002. In the event
of non-compliance with the Financial Covenant or default, the holders of the
Chattanooga Bonds (the "Bondholders") had the ability to put such obligations to
us at a price equal to par plus accrued interest. On January 31, 2003, we
entered into an agreement (the "Forbearance Agreement") with the Bondholders.
The Forbearance Agreement provides amendments to the underlying loan and other
agreements that enable us to be in compliance with various financial covenants,
including the Financial Covenant. So long as we continue to comply with the
provisions of the Forbearance Agreement and are not otherwise in default of the
underlying loan and other documents through December 31, 2004, the revised
financial covenants will govern. Additionally, certain quarterly tested
financial covenants and other covenants become effective June 30, 2004. Pursuant
to the terms of the Forbearance Agreement, in February 2003 we funded $1,000
into an escrow account to be used for the potential conversion of certain of the
retail space to office space in the collateral properties and agreed that an
event of default with respect to the other debt obligations related to the
collateral properties would also constitute a default under the Chattanooga
Bonds. The outstanding balance of the Chattanooga Bonds was $17,920 as of
September 30, 2003.


Page - (12)


Notes payable included unamortized debt premiums of $6,091 in the aggregate
at September 30, 2003. Our debt premiums are being amortized over the terms of
the related debt instruments in accordance with the effective interest method.
Amortization of debt premiums (included in interest expense in the Consolidated
Statements of Operations) was $499 and $1,482 for the three and nine months
ended September 30, 2003, respectively, and $478 and $1,416 for the three and
nine months ended September 30, 2002, respectively.

Defaults on Certain Non-recourse Mortgage Indebtedness

In December 2002, we notified the servicer of certain non-recourse mortgage
loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post
Falls and Prime Outlets at Sedona) totaling $24,919 as of September 30, 2003
that the net cash flow from the properties securing the loans was insufficient
to fully pay the required monthly debt service. At that time, certain of our
subsidiaries suspended the regularly scheduled monthly debt service payments.
Subsequent to our notification to the servicer, we have been remitting on a
monthly basis all available cash flow from the properties, after a reserve for
monthly operating expenses, as partial payment of the debt service. The failure
to pay the full amount due constitutes a default under the loan agreements which
allows the lender to accelerate the loan and to exercise various remedies
contained in the loan agreements, including application of escrow balances to
delinquent payments and, ultimately, foreclosure on the properties which
collateralize the loans. The lender has notified us that it has accelerated the
loans and intends to acquire the properties through a foreclosure action on the
collateral properties unless the parties can negotiate a mutually acceptable
transfer of the properties to the lender. However, any foreclosure action on, or
other transfer of, these properties is not expected to have a material impact on
our results of operations or financial condition because we are currently only
remitting available cash flow. The aggregate carrying value of these properties
was $21,415 as of September 30, 2003. Such amount is exceeded by the aggregate
outstanding balance of the non-recourse mortgage loans of $24,919 as of
September 30, 2003. Upon foreclosure or transfer of the collateral properties,
we will record a non-recurring gain for the difference between the carrying
value of the properties and their related net asset, including the outstanding
loan balances.

Defeased Notes Payable

On December 6, 2002, we completed the sale of two outlet centers (together,
the "Colorado Properties"), which were part of the 15 properties contained in
the collateral pool securing a first mortgage and expansion loan (the "Mega Deal
Loan"), which had a then outstanding balance of $338,940. In connection with the
release of the Colorado Properties from the collateral pool, we were required to
partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was
bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased
Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which
is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and
the Mega Deal Loan (i) bore interest at a fixed-rate of 7.782% through their
optional prepayment date of November 11, 2003 and (ii) required monthly payments
of principal and interest pursuant to a 30-year amortization schedule. The Mega
Deal Loan is secured by the remaining 13 properties contained in the collateral
pool.

We used $79,257 of the gross proceeds from the sale of the Colorado
Properties to purchase US Treasury Securities with a par value of $78,277,
including accrued interest of $226. The US Treasury Securities were deposited
into an escrow account controlled by a trustee (the "Trustee Escrow"). The
Trustee Escrow was used to pay all scheduled debt service, including a balloon
payment of $73,882 on November 11, 2003, due under the Defeased Notes Payable.
The $980 premium we paid for the US Treasury Securities was amortized as a
reduction to the interest income (included in interest and other income in the
Consolidated Statements of Operations) earned on the Trustee Escrow on basis
that approximated the effective interest method.


Page - (13)


As of September 30, 2003, the outstanding balance of the Defeased Notes
Payable was $74,046 and the balance of the Trustee Escrow was $74,103 (included
in restricted cash in the Consolidated Balance Sheet). As stated above, on
November 11, 2003, the Defeased Notes Payable was repaid in full with the
remaining funds in the Trustee Escrow.

Furthermore, in connection with the partial defeasance of the Mega Deal
Loan we amended the Mega Deal Loan so that (i) we were required to fund 10
monthly payments of $500 (an aggregate of $5,000) into a lender escrow to be
used as additional cash collateral and (ii) release prices for the remaining 13
properties in the collateral pool were amended to provide for a more orderly
refinancing of the Mega Deal Loan. As of September 30, the additional cash
collateral had been fully funded and is included in restricted cash in the
Consolidated Balance Sheet.

Debt Service Obligations

The following table summarizes (A) the scheduled principal maturities of
our debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of
aggregate non-recourse mortgage indebtedness in default (see "Defaults on
Certain Non-recourse Mortgage Indebtedness" above) and (iii) the Defeased Notes
Payable of $74,046, which was paid in full on November 11, 2003 (see above), and
(B) the related average contractual interest rates by year of maturity as of
September 30, 2003.



- ------------------------------------------------------------------------------------------------------------------------------------
Bonds Payable
(including sinking fund payments) Notes Payable Total Debt
----------------------------------- ------------------------ ----------------------------------
Average Average Average
Interest Principal Interest Principal Interest Principal
Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities
- ------------------------------------------------------------------------------------------------------------------------------------

2003 6.79% $ 546 7.78% $ 262,008 7.78% $ 262,554
2004 6.34% 726 7.97% 4,571 7.75% 5,297
2005 6.34% 773 8.58% 11,574 8.44% 12,347
2006 6.34% 820 8.83% 120,437 8.81% 121,257
2007 6.34% 878 7.60% 1,002 7.02% 1,880
Thereafter 6.52% 18,618 7.59% 57,995 7.33% 76,613
---- -------- ---- --------- ---- ---------
6.50% $ 22,361 8.06% $ 457,587 7.98% $ 479,948
==== ======== ==== ========= ==== =========
====================================================================================================================================


Such indebtedness in the amount of $479,948 had a weighted-average maturity
of 2.1 years and bore contractual interest at a weighted-average rate of 7.98%
per annum. At September 30, 2003, all of such indebtedness bore interest at
fixed rates. Our remaining scheduled principal payments during 2003 for such
indebtedness aggregated $262,555, which includes $261,259 related to the Mega
Deal Loan. See "Going Concern" for additional information.

Additionally, we are obligated to refinance a first mortgage loan (the
"Hagerstown First Mortgage Loan") in the amount of $46,862 on Prime Outlets at
Hagerstown (the "Hagerstown Center") on or before June 1, 2004. The Hagerstown
First Mortgage Loan was assumed by an unconsolidated joint venture partnership
(the "Prime/Estein Venture"), in which we have an indirect 30% ownership
interest, in January 2002. See "Prime/Estein Venture Guarantees" contained in
"Guarantees and Guarantees of Indebtedness of Others" for additional
information.


Page - (14)


Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships

Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
An affiliate of ours has a 50% ownership interest in the partnership, which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns the Oxnard Factory Outlet.

Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. A judgment for
foreclosure was entered on January 25, 2003 in the amount of $12,711. The
foreclosure occurred on March 17, 2003 with Union Labor acquiring the property
for $5,100. Approximately $1,100 of post-judgment interest and fees was
subsequently awarded to Union Labor. We continue to negotiate the terms of a
transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do
not manage or lease Oxnard Factory Outlet.

We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome, and our ultimate liability,
if any, cannot be predicted at this time.

In addition, we are currently not receiving, directly or indirectly, any
cash flow from Oxnard Factory Outlet and were not receiving any cash flow from
Phase I of the Bellport Outlet Center prior to the loss of control of such
project. We account for our interests in (i) Phases I of the Bellport Outlet
Center and (ii) the Oxnard Factory Outlet in accordance with the equity method
of accounting. As of September 30, 2003, we had no carrying value for our
investment in these properties.

Guarantees and Guarantees of Indebtedness of Others

HGP Guarantees

On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Secured Credit Facility in the
amount of $10,000. In connection with the refinancing, our guarantee was reduced
to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000
mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's
outlet shopping center located in Monroe, Michigan. In the event the HGP Monroe
Mortgage Loan was reduced to $5,000 or less through repayments then our
guarantee would be extinguished. In August 2003, HGP repaid $2,000 of the HGP
Mortgage Loan and our guarantee obligation was satisfied.

Additionally, we were a guarantor with respect to certain mortgage
indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 on
HGP's corporate office building and related equipment located in Norton Shores,
Michigan. However, the HGP Office Building Mortgage was refinanced in August
2003 and our guarantee obligation was, thus removed.


Page - (15)


Prime/Estein Venture Guarantees

We indirectly have a 30% ownership interest in the Prime/Estein Venture, an
unconsolidated joint venture partnership which owns three outlet centers
(collectively, the "Prime/Estein Properties"). The Prime/Estein Properties
consist of Prime Outlets at Birch Run (the "Birch Run Center"), Prime Outlets at
Hagerstown (the "Hagerstown Center") and Prime Outlets at Williamsburg (the
"Williamsburg Center"). Pursuant to Prime/Estein Venture-related documents to
which affiliates of ours are parties, we are obligated to provide to, or obtain
for, the Prime/Estein Venture fixed-rate financing at an annual rate of 7.75%
(the "Interest Rate Subsidy Agreement") for the Prime/Estein Venture Properties.

In August 2001, we, through affiliates, completed a refinancing of $63,000
of first mortgage loans secured by the Birch Run Center. The refinanced loan
(the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest
at an effective rate of 8.12% and (iii) requires monthly payments of principal
and interest pursuant to a 25-year amortization schedule. Pursuant to the
Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein
Venture the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 8.12% (the
"Interest Rate Subsidy Obligation"). The net present value of the Interest Rate
Subsidy Obligation (included in accounts payable and other liabilities in the
Consolidated Balance Sheet) was $1,354 as of September 30, 2003.

In October 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by the Williamsburg Center. The new first
mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years,
(ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments
of principal and interest pursuant to a 25-year amortization schedule. Pursuant
to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to
pay to us the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 7.69%.

On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein
Venture. In connection with the sale, the Prime/Estein Venture assumed the
Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of
such indebtedness remains in place. Additionally, we are obligated to refinance
the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before
June 1, 2004, the date on which such indebtedness matures. Additionally, the
Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing
of it are fixed at an annual rate of 7.75% for a period of 10 years. If the
actual cost of such indebtedness should exceed 7.75% at any time during the
10-year period, we will be obligated to pay the difference to the Prime/Estein
Venture. If the actual cost of such indebtedness is less than 7.75% at any time
during the 10-year period, however, the Prime/Estein Venture will be obligated
to pay the difference to us. The actual cost of the Hagerstown First Mortgage is
30-day LIBOR plus 1.50%, or 2.62% as of September 30, 2003. Because the
Hagerstown First Mortgage bears interest at a variable rate, we are exposed to
the impact of interest rate changes. We have not recorded any liability related
to our guarantee of the Hagerstown First Mortgage; however, in connection with
the sale of the Hagerstown Center, we established a reserve for estimated
refinancing costs in the amount of $937, which is included in accounts payable
and other liabilities in the Consolidated Balance Sheet as of September 30,
2003. See Note 3 - "Property Dispositions" for additional information.


Page - (16)


Second Horizon First Mortgage Loan

In April 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. ("CCP") which released Horizon from future obligations under a
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii. In
connection with an amendment of the Second Horizon Group Limited Partnership
("Second Horizon") agreement (the "Amended Partnership Agreement"), Horizon
transferred to an affiliate of CCP (the "CCP Affiliate") substantially all of
Horizon's economic interest, but not legal title, in an outlet center (the "Lake
Elsinore Center") in Lake Elsinore, California. The Lake Elsinore Center is one
of five properties owned by Second Horizon which jointly and severally secure a
non-recourse, first mortgage loan (the "Second Horizon Mortgage Loan"). As a
result of our merger with Horizon in June 1998, we own the economic interests of
the other four properties (the "Prime Properties") and legal title to all five
entities. The outstanding balance of the Second Horizon Mortgage Loan as of
September 30, 2003 was $94,586, of which $66,330 was allocated to the Prime
Properties and is included in notes payable in our Consolidated Balance Sheet as
of that date. The remaining $28,034 outstanding as of September 30, 2003 was
allocated to the Lake Elsinore Center.

We, through our affiliates, assumed certain obligations under the Amended
Partnership Agreement with respect to the Second Horizon Mortgage Loan in
connection with our merger with Horizon in June 1998. Specifically, we are
obligated to contribute sufficient capital to Second Horizon (i) for certain
operating expenses associated with the Prime Properties and (ii) to satisfy the
outstanding balances of the allocated loan amounts for the Prime Properties
under the Second Horizon Mortgage Loan (including any associated expenses) to
enable the Second Horizon Mortgage Loan to be repaid in full at its optional
prepayment date of October 11, 2006. CCP Affiliate and its parent company are
similarly obligated with respect to the Lake Elsinore Center. No claims have
been made with respect to these obligations and we have not recorded any
liability related to these obligations as of September 30, 2003.

Mandatory Redemption Obligation

On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT PRT Bridge Acquisition LLC
("FRIT"), a third-party joint venture partner, (i) a 13% return on its initial
$17,236 of invested capital and (ii) the full return of its invested capital
(the "Mandatory Redemption Obligation") by December 31, 2003. As of September
30, 2003, our Mandatory Redemption Obligation with respect to the full return of
FRIT's invested capital was $14,489 (included in accounts payable and other
liabilities in the Consolidated Balance Sheet). See "Going Concern" for
additional information.

Going Concern

Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancing of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service and
other obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.


Page - (17)


As of September 30, 2003, our Mega Deal Loan had an outstanding principal
balance of $261,259. The Mega Deal Loan had an optional prepayment date of
November 11, 2003 and an outstanding principal balance of $260,681 on such date.
As discussed below, certain restrictions have been placed upon us with respect
to refinancing the Mega Deal Loan. The Mega Deal Loan was not repaid on the
optional prepayment date and as a result the interest rate shall be increased by
up to 5.0% to 12.782%. Additionally, commencing on November 11, 2003 the lender
may retain all excess cash flow from the 13 properties which secure the Mega
Deal Loan. Any excess cash flow retained by the lender can be applied to
principal after payment of interest. The aforementioned increase in the Mega
Deal Loan's interest rate and the potential loss of excess cash flow from the 13
properties could have severe consequences on our ability to fund our operations.

We currently believe a shortfall could occur with respect to refinancing
the Mega Deal Loan because we may be unable to place mortgage indebtedness at
commercially reasonable terms on all of the properties in the current collateral
pool. We are actively marketing for sale several of the collateral properties
because their sale could alleviate some or all of any potential shortfall. We
also continue to evaluate other capital raising activities, such as the
placement of mezzanine level debt on certain of the collateral properties. We
caution that our assumptions regarding the refinancing and sale of the
collateral properties are based on current market conditions and, therefore, are
subject to various risks and uncertainties, including changes in economic
conditions which may adversely impact our ability to refinance the Mega Deal
Loan at favorable rates or in a timely and orderly fashion and which may
adversely impact our ability to consummate various asset sales or other capital
raising activities.

On July 8, 2003, an affiliate of The Lightstone Group, LLC ("Lightstone")
and the Company entered into a merger agreement (the "Merger Agreement")
pursuant to which the Company would be acquired by such affiliate (the "Merger"
or the "Transaction"). (See Note 10 - "Merger Agreement" for additional
information.) In connection with the execution of the Merger Agreement, certain
restrictions were placed on us with respect to the refinancing of the Mega Deal
Loan. Specifically, we were restricted from negotiating or discussing the
refinancing of the properties securing the Mega Deal Loan with any lenders until
September 15, 2003, at which time we were permitted to discuss refinancing of
the Mega Deal Loan with certain enumerated lenders. However, we are precluded
from closing any loans relating to the refinancing of the Mega Deal Loan until
January 11, 2004. Lightstone is obligated to (i) pay (A) one-half of the
additional interest incurred by us between November 11, 2003 and December 31,
2003, and (B) all of the additional interest incurred by us between January 1,
2004 and January 11, 2004 with respect to the Mega Deal Loan and (ii) loan us,
at a rate of 7% and for a term of not less than one year, an amount equal to any
excess cash flow retained by the lender and applied to principal under the Mega
Deal Loan commencing on November 11, 2003 and through January 11, 2004.

In addition to the restrictions with respect to the refinancing of the Mega
Deal Loan discussed above, pursuant to the terms of the Merger Agreement, we
have also agreed to certain conditions pending the closing of the Transaction.
These conditions provide for certain restrictions with respect to our operating
and refinancing activities (see Note 10 - "Merger Agreement" for additional
information). These restrictions could adversely affect our liquidity in
addition to our ability to refinance the Mega Deal Loan in a timely and orderly
fashion.

If the Merger Agreement is terminated under certain circumstances, we would
be required to make payments to Lightstone ranging from $3,500 to $6,000 which
would adversely affect our liquidity. See Note 10 - "Merger Agreement" for
additional information.


Page - (18)


In connection with the completion of the sale of the Bridge Properties in
July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested
capital, and (ii) the full return of the Mandatory Redemption Obligation by
December 31, 2003. As of September 30, 2003, the Mandatory Redemption Obligation
(included in accounts payable and other liabilities in the Consolidated Balance
Sheet) was $14,489.

We continue to seek to generate additional liquidity to repay the Mandatory
Redemption Obligation through the placement of additional indebtedness on the
Bridge Properties. There can be no assurance that we will be able to complete
such capital raising activities by December 31, 2003 or that such capital
raising activities, if they should occur, will generate sufficient proceeds to
repay the Mandatory Redemption Obligation in full. Failure to repay the
Mandatory Redemption Obligation by December 31, 2003 would constitute a default,
which would enable FRIT to exercise its rights with respect to the collateral
pledged as security to the guarantee, including some of our partnership
interests in the 13 properties which secure the Mega Deal Loan. Because the
Mandatory Redemption Obligation is secured by some of our partnership interests
in the 13 properties which secure the Mega Deal Loan, we may be required to
repay the Mandatory Redemption Obligation before, or in connection with, the
refinancing of the Mega Deal Loan. Additionally, any change in control with
respect to us accelerates the Mandatory Redemption Obligation.

In connection with the execution of the Merger Agreement, Lightstone has
agreed to provide sufficient financing, if necessary, to repay the Mandatory
Redemption Obligation in full at its maturity. The new financing would be at
substantially similar economic terms and conditions as those currently in place
for the Mandatory Redemption Obligation and would have a one-year term. See Note
10 - "Merger Agreement" for additional information.

As previously discussed, we currently have a Forbearance Agreement in place
with respect to our Chattanooga Bonds in the amount of $17,920. However, based
on our current projections, we believe we will not be in compliance with certain
quarterly tested financial covenants when they become effective on June 30, 2004
which would enable the Bondholders to elect to put the Chattanooga Bonds to us
at their par amount plus accrued interest. We continue to explore opportunities
to (i) obtain alternative financing from other financial institutions, (ii) sell
the properties securing the Chattanooga Bonds and (iii) explore other possible
capital transactions in order to generate cash to repay the Chattanooga Bonds.
There can be no assurance that we will be able to complete any such activity
sufficient to repay the amount outstanding under the Chattanooga Bonds in the
event the Bondholders are able and elect to exercise their put rights.

These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

Note 5 - Shareholders' Equity

To qualify as a real estate investment trust ("REIT") for federal income
tax purposes, we are required to pay distributions to our common and preferred
shareholders of at least 90% of our REIT taxable income in addition to
satisfying other requirements. Although we intend to make distributions, if
necessary, to remain qualified as a REIT under the Code, we also intend to
retain such amounts as we consider necessary from time to time for our capital
and liquidity needs.


Page - (19)


Our policy remains to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. During 2002, we
were not required to pay any distributions in order to maintain our status as a
REIT and based on our current federal income tax projections, we do not expect
to pay any distributions during 2003. On November 15, 2003 we will be in arrears
on 16 quarters of preferred stock distributions due February 15, 2000 through
November 15, 2003, respectively.

We may not make distributions to our common shareholders or our holders of
common units of limited partnership interests in the Operating Partnership
unless we are current with respect to distributions to our preferred
shareholders. As of September 30, 2003, unpaid dividends for the period
beginning on November 16, 1999 through September 30, 2003 on our Series A Senior
Cumulative Preferred Stock ("Series A Senior Preferred Stock") and Series B
Cumulative Convertible Participating Preferred Stock ("Series B Convertible
Preferred Stock") aggregated $23,395 and $64,460, respectively. The annualized
dividends on our 2,300,000 shares of Series A Senior Preferred Stock and
7,828,125 shares of Series B Convertible Preferred Stock outstanding as of
September 30, 2003 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share),
respectively.

Note 6 - Legal Proceedings

Except as described below, neither we nor any of our properties are
currently subject to any material litigation, nor to our knowledge, is any
material or other litigation threatened against us, other than routine
litigation arising in the ordinary course of business, some of which is expected
to be covered by liability insurance and all of which collectively is not
expected to have an adverse effect on our consolidated financial statements.

Certain tenants in our and our affiliates' outlet centers have made or may
make allegations concerning overcharging for common area maintenance ("CAM") and
promotion fund charges because of varying clauses in their leases pursuant to
which they claim under various circumstances that they were not required to pay
some or all of the pass-through charges. Such claims if asserted and found
meritorious, could have a material affect on our financial condition.
Determination of whether liability would exist to us would depend on
interpretation of various lease clauses within a tenant's lease and all of the
other leases at each center collectively. To date such issues have been raised
and resolved with various tenants, some of which at one time or another were the
subject of litigation, or threatened litigation with us. Additionally, on April
9, 2003, Gap Inc. notified us that it believes it is entitled to a refund of
certain pass-through charges as a result of certain clauses in its leases. The
Company and Gap, Inc. are in discussions concerning the claims of Gap, Inc.

In the second quarter of 2002, we recorded a non-recurring charge to
establish a reserve in the amount of $3,000 for resolution of these matters.
This reserve was estimated in accordance with our established policies and
procedures concerning loss contingencies for additional information. The balance
of the unused reserve (which is included in the accounts payable and other
liabilities in the Consolidated Balance Sheet) is $2,240 as of September 30,
2003. Based on presently available information, we believe it is probable the
remaining reserve will be utilized over the next several years in resolving
claims relating to the pass-through and promotional fund provisions contained in
our leases, inclusive of amounts that may be owed, if any, to Gap Inc. We
caution, however, that given the inherent uncertainties of litigation and the
complexities associated with a large number of leases and other factual
questions at issue, actual costs may vary from this estimate. No other such
tenant, however, has filed a suit or indicated to us that it intends to file a
suit. Nevertheless, it is too early to make any predictions as to whether we or
our affiliates may be found liable with respect to other tenants, or to predict
damages should liability be found.


Page - (20)


Our affiliates routinely file lawsuits to collect past rent due from, and
to evict, tenants which have defaulted under their leases. There are currently
dozens of such actions pending. In addition to defending against our affiliates'
claims and eviction actions, some tenants file counterclaims against our
affiliates. A tenant who files such a counterclaim typically claims that our
affiliate which owns the outlet center in question defaulted under the tenant's
lease, overcharged the tenant for CAM and promotion fund charges, made
misrepresentations during the leasing process, or failed to maintain or market
the outlet center in question as required by the lease. One such case involves a
collections and eviction action in Puerto Rico captioned Outlet Village of
Puerto Rico Limited Partnership, S.E. v. WEPA, Inc., and another, for instance,
involves a collection case in San Marcos, Texas, captioned, San Marcos Factory
Stores, Ltd. v. SM Collectibles, Inc. d/b/a Country Clutter. In response to such
counterclaims our affiliates usually continue to pursue their collection or
eviction actions and defend against the counterclaims. Despite the fact that we
and our affiliates believe such counterclaims are without merit and defend
against them vigorously, the outcome of all such counterclaims, and, thus, the
liability, if any, of us and our affiliates, cannot be predicted at this time.

Several entities (the "eOutlets Plaintiffs") filed or stated an intention
to file lawsuits (collectively, the "eOutlets Lawsuits") against us and our
affiliates arising out of our on-line venture, primeoutlets.com. inc., also
known as eOutlets, an affiliate of ours. primeoutlets.com, inc. filed for
protection under Chapter 7 of the United States Bankruptcy Code in November of
2000 under the name E-Outlets Resolution Corp. (the "Debtor"). The eOutlets
Plaintiffs sought to hold us and our affiliates responsible under various legal
theories for liabilities incurred by primeoutlets.com, inc., including the
theories that we guaranteed the obligations of eOutlets and that we were the
"alter-ego" of eOutlets. Other than the suit filed on November 5, 2002 and
discussed below, these eOutlets Lawsuits against us have been resolved or are
now barred by the applicable statute of limitations or otherwise. On November 5,
2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail,
L.P., Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity
Defendants") and certain former directors of the Debtor (the "Individual
Defendants"). Motions to dismiss the suit were filed by all Defendants and a
hearing was held on September 23, 2003. After the hearing, the Trustee's
remaining claims involve promissory estoppel, breach of contract, breach of
fiduciary duty, tortious interference with prospective business advantage, and
preferences against the Entity Defendants, and breach of fiduciary duty and
gross negligence against the individual defendants. We have tendered the suit,
both as to the Entity Defendants and Individual Defendants, to the Directors'
and Officers' insurance carrier. All Defendants believe the suit is without
merit and plan on defending it vigorously. Nevertheless, the outcome of this
lawsuit, and the ultimate liability of us, if any, cannot be predicted at this
time.

In May 2001, we, through affiliates, filed suit against Fru-Con
Construction, Inc. ("FCC"), the lender on Prime Outlets at New River ("New
River") as a result of FCC's foreclosure of New River upon the maturation of the
loan. We and our affiliates allege that they have been damaged because of FCC's
failure to dispose of the collateral in a commercially reasonable manner and as
a result of a violation of federal trademark laws. We, through affiliates, have
also filed suit against The Fru-Con Projects, Inc. ("Fru-Con"), a partner in
Arizona Factory Shops Partnership and an affiliate of FCC. We and our affiliates
allege that Fru-Con failed to use reasonable efforts to assist in obtaining
refinancing. Fru-Con has claims pending against us and our affiliates, as part
of the same suit, alleging that we and our affiliates breached our contract with
Fru-Con by not allowing Fru-Con to participate in an outlet project in Sedona,
Arizona (the "Sedona Project") and breached a management and leasing agreement
by simultaneously managing and leasing the Sedona Project. We believe our
affiliates and us acted property and FCC did not act properly. We and our
affiliates will vigorously defend the claims filed against them and prosecute
the claims they filed. Nevertheless, the ultimate outcome of the suit, including
the liability, if any, of us and our affiliates, cannot be predicted at this
time.


Page - (21)


On August 29, 2003, the Company received notice of a purported class action
lawsuit against the Company, the Company's board of directors, Prime Outlets
Acquisition Company, LLC and The Lightstone Group, LLC (collectively,
"Lightstone") filed by four related series A preferred stockholders (the
"Plaintiffs"), in the Circuit Court for Baltimore City, Maryland (the "Court")
on August 12, 2003 concerning the Merger. The lawsuit alleges, among other
things, that the Company's directors breached their fiduciary duties in
approving the Merger, that the consideration payable in respect of the series A
preferred stock is unfair and inadequate and that the information made available
by the Company in connection with the transaction is deficient. The plaintiffs
sought, among other things, that the transaction contemplated by the Merger
Agreement be enjoined or, in the event such transaction is consummated, that it
be rescinded and damages be awarded to class members. On September 29, 2003, the
defendants filed a motion to dismiss the original complaint. In response, on
October 8, 2003, the Plaintiffs filed a Verified First Amended Class Action
Complaint along with a motion for expedited proceedings and subsequent
preliminary injunction hearing. After a court conference, the Plaintiffs
converted their motion for a preliminary injunction into one for a temporary
restraining order seeking to enjoin the special meeting for and the scheduled
vote on the transaction. The Court held a hearing on the defendants' motion to
dismiss and the motion for temporary restraining order on October 24 and 28,
2003. On October 28, 2003, the Plaintiffs announced that they were withdrawing
their request for injunctive relief, and would not seek to prevent the special
meeting from occurring. The Court ruled that it would dismiss the First Amended
Complaint, but allow the Plaintiffs 30 days to file a second amended complaint.

Note 7 - Investment in Unconsolidated Partnerships

We account for our investment in unconsolidated joint ventures in
accordance with the equity method of accounting as we exercise significant
influence, but do not control these entities. In all of our joint venture
arrangements, the rights of the investors are both protective as well as
participating. Therefore, these participating rights preclude us from
consolidating our investments. Our investments are recorded initially at our
cost and subsequently adjusted for equity in earnings (losses) and cash
contributions and distributions.

As of September 30, 2003 our interests in joint venture partnerships
included (i) three outlet centers owned by the Prime/Estein Venture and (ii)
five properties owned by the PFP Venture. The Prime/Estein Venture owns the
Birch Run Center, the Williamsburg Center and the Hagerstown Center which
contain an aggregate 1,485,000 square feet of GLA. The PFP Venture owns the
Bridge Properties (Prime Outlets at Anderson, Prime Outlets at Calhoun, Prime
Outlets at Gaffney, Prime Outlets at Lee and Prime Outlets at Lodi) which
contain an aggregate 1,261,000 square feet of GLA.

Our equity in earnings of unconsolidated joint venture partnerships was
$521 and $2,273 during the three and nine months ended September 30, 2003,
respectively, and $255 and $(181) during the three and nine months ended
September 30, 2002, respectively. Our equity in earnings of unconsolidated joint
venture partnerships is included in interest and other income in the
Consolidated Statements of Operations.

The following summarizes unaudited condensed financial information for our
investment in unconsolidated joint venture partnerships:



- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Total revenues $ 14,599 $ 12,945 $ 43,791 $ 30,753
Total expenses 12,705 10,892 38,323 28,298
-------- -------- -------- --------
Net income $ 1,894 $ 2,053 $ 5,468 $ 2,455
======== ======== ======== ========
====================================================================================================================================


Page - (22)


Note 8 - Stock-Based Compensation

In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." FAS No. 148 provides transition
methods for entities that elect to adopt the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 requires disclosure
of comparable information regarding our method of accounting for stock-based
employee compensation for all interim periods. We account for our stock-based
employee compensation, which is in the form of common share option grants, under
the intrinsic method of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, no compensation
expense is to be recognized for the common share option grants when the exercise
price of the options equals or exceeds the market price of the underlying shares
at the date of grant. Under our stock incentive plans, the exercise price for
all stock options granted have been no less than the fair market value of our
common stock on the date of grant. Accordingly, we have not recorded any
compensation expense.

Pro-forma information regarding net income and earnings per share is
required by FAS No. 123, "Accounting for Stock-Based Compensation," and has been
determined as if we had accounted for our stock compensation under the fair
value method of that statement. Under the fair value method of FAS No. 123, we
would have recognized no additional compensation expense during the three and
nine months ended September 30, 2003 and 2002.


Note 9 - Special Charges

Provision for Asset Impairment

During the second quarter of 2003, certain events and circumstances related
to two of our properties occurred, including further reduced occupancy and
limited leasing success, that indicated these properties were impaired on an
other than temporary basis. As a result, we recorded a provision for asset
impairment aggregating $6,590 representing the write-down of these properties to
their estimated fair values in accordance with the requirements of FAS No. 144,
"Accounting for Impairment of Disposal of Long-lived Assets."

During the third quarter of 2002, certain events and circumstances
occurred, including changes to our anticipated holding periods, reduced
occupancy and limited leasing success, that indicated certain of our properties
were impaired on an other than temporary basis. As a result, we recorded a
provision for asset impairment aggregating $81,619 representing the write-down
of these properties to their estimated fair values in accordance with the
requirements of FAS No. 144.

Non-recurring Other Charges

During the second quarter of 2002, we recorded a non-recurring charge in
the amount of $3,000 to establish a reserve for pending and potential tenant
claims with respect to lease provisions related to their pass-through charges
and promotional fund charges. We had previously recorded a non-recurring charge
in the amount of $2,000 to establish a reserve for similar matters during the
fourth quarter of 2001. To date, we have entered into settlement agreements,
which provided for payments aggregating $2,760, of which $2,607 was paid in 2002
and $153 was paid in January 2003. The remaining reserve of $2,240 is included
in accounts payable and other liabilities in the Consolidated Balance Sheet as
of September 30, 2003. See Note 6 - "Legal Proceedings" for additional
information.


Page - (23)


These reserves were estimated in accordance with our established policies
and procedures with respect to loss contingencies and are based on our current
assessment of the likelihood of any adverse judgments or outcomes to these
matters. Based on presently available information, we believe it is probable the
remaining reserve will be utilized over the next several years in connection
with the resolution of further claims relating to the pass-through and
promotional fund provisions contained in our leases. We caution, however, that
given the inherent uncertainties of litigation and the complexities associated
with a large number of leases and other factual questions at issue, actual costs
may vary from our estimate.

Note 10 - Merger Agreement

In June 2002, we selected Houlihan Lokey Howard & Zukin Capital to assist
us in exploring recapitalization, restructuring, financing and other strategic
alternatives designed to strengthen our financial position and address our
long-term capital requirements. Costs incurred related to such activities are
reflected in corporate general and administrative expense in the accompanying
Consolidated Statements of Operations.

We are currently a party to the Merger Agreement (dated as of July 8, 2003
and as amended by that first amendment dated as of September 3, 2003, and as
otherwise amended), with Prime Outlets Acquisition Company, LLC (the "Buyer"), a
Delaware limited liability company which is an affiliate of Lightstone, a New
Jersey-based real estate company, which provides for us to be merged with and
into the Buyer. Consummation of the Transaction is subject to a number of
conditions including the approval of the Transaction and the Merger Agreement by
the holders of at least 66 2/3% of both our Series A Senior Preferred Stock and
Series B Convertible Preferred Stock, each voting separately as a class, and the
approval of a majority of our common stockholders voting as a separate class, as
well as other customary approvals.

The Transaction, which will result in aggregate consideration of $115,514
payable to our stockholders and unit holders, has a total value of approximately
$638,000, including debt expected to be assumed by the Buyer. Under the terms of
the Merger Agreement, each holder of our Series A Senior Preferred Stock will
receive cash in the amount of $18.40 per share, each holder of our Series B
Convertible Preferred Stock will receive cash in the amount of $8.169 per share,
and each holder of our common stock will receive cash in the amount of $0.17 per
share.

Pursuant to the terms of the Merger Agreement, the Buyer and the Company
have agreed to certain conditions pending the closing of the Transaction. These
conditions provide for certain restrictions with respect to our operating and
refinancing activities, including our refinancing of the Mega Deal Loan (see
Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional
information).

Our board of directors, as well as a special committee comprised of
disinterested members of the board of directors (the "Special Committee"), have
approved the Transaction and the Merger Agreement and recommended that the
stockholders vote in favor of the Transaction. Because our charter does not
address the allocation of consideration among our various classes of capital
stock in the Transaction, such allocation was determined by the Special
Committee and approved by the board of directors. Houlihan Lokey Howard & Zukin
Capital acted as financial advisor to the Special Committee and Houlihan Lokey
Howard & Zukin Financial Advisors, Inc., an affiliate of Houlihan Lokey Howard &
Zukin Capital, has provided an opinion to the Special Committee and our board of
directors that the consideration to be received by each of the classes of our
stock, considered independently, is fair to such respective classes, from a
financial point of view.

Formal documentation relating to the Transaction and the Merger Agreement
has been filed with the Securities and Exchange Commission and sent to our
stockholders and limited partners.


Page - (24)


Concurrent with the consummation of the Transaction, the agreement of
limited partnership of the Operating Partnership will be amended and restated
(the "Amended Partnership Agreement") pursuant to which holders of common units
in the Operating Partnership (other than common units held by us) will have the
opportunity to exchange all, but not less than all, of their units for a like
number of preferred units in the Operating Partnership ("Preferred Unit"). Each
holder of Preferred Units will be entitled to require the Operating Partnership
to redeem all of such holder's Preferred Units for an amount per unit equal to
$0.17 (the consideration paid for a share of common stock of the Company in the
Transaction) plus accrued and unpaid distributions at the rate of 6% per annum.
In addition, the Amended Partnership Agreement contains certain tax related
provisions that, subject to certain exceptions, will benefit holders of
Preferred Units for a period of seven years including restrictions on the sale
of properties and requirements to allocate debt in a certain manner.

We have agreed to pay the Buyer a termination fee of $4,500, plus expenses
of up to $1,500, if the Transaction is not completed under certain
circumstances, including our election to pursue an alternative transaction. In
certain other circumstances in which the Transaction has not been completed,
including the failure to obtain the stockholder approval of the Transaction, a
termination fee will not be payable but we have agreed to reimburse the Buyer
for its expenses up to $3,500. As collateral for these obligations, we also
entered into an agreement with Lightstone providing for the assignment of our
rights to, and interest in, an escrow of $2,800 which was established in
connection with our sale of Prime Outlets of Puerto Rico in December 2002 to an
affiliate of Lightstone.

The special meeting of stockholders (the "Special Meeting") for the purpose
of, among other things, voting on the Transaction was originally scheduled for
Thursday, October 30, 2003. On October 30, 2003, we announced that the Special
Meeting had been adjourned to November 4, 2003 and later announced on November
4, 2003 that the Special Meeting had been adjourned again until Tuesday,
November 18, 2003 to provide stockholders with additional time to cast their
vote on the Transaction. Before the adjournment of the Special Meeting on
October 30, 2003, our common stockholders approved an amendment to our charter
to reduce the required vote of the common stockholders to approve a merger from
two-thirds to a majority.

There can be no assurance as to the timing, terms or completion of the
Transaction.


Page - (25)


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

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


Introduction

Unless the context otherwise requires, all references to "we," "us," "our"
or the "company" herein mean Prime Retail, Inc. and those entities owned or
controlled by Prime Retail, Inc., including Prime Retail, L.P. (the "Operating
Partnership").

The following discussion and analysis of our consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q. Our operations are substantially conducted
through the Operating Partnership. We have an 80% general partnership interest
in the Operating Partnership with full and complete control over its management,
not subject to removal by the limited partners. We are dependent upon the
distributions or other payments from the Operating Partnership to meet our
financial obligations. Historical results and percentage relationships set forth
herein are not necessarily indicative of future operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q. These
Consolidated Financial Statements and Notes thereto have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of such statements requires us to make certain estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent liabilities. We evaluate our
estimates on an on-going basis; including those related to (i) revenue
recognition, (ii) provisions for bad debt on accounts receivable, (iii)
potential impairment of the carrying value of rental properties held for use,
(iv) capitalization and depreciation of significant renovations and improvements
and (v) contingencies for debt guarantees and litigation. We base our estimates
on historical trends and certain other assumptions that we believe are
reasonable under the particular circumstances. These estimates ultimately form
the basis for making judgments about the carrying values of our assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

To assist you in understanding our financial condition and results from
operations, we have identified our critical accounting policies and discussed
them below. These accounting policies are most important to the portrayal of our
financial condition and results from operations, either because of the
significance of the financial statement items to which they relate or because
they require our management's most difficult, subjective or complex judgments.

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, net in the accompanying
Consolidated Balance Sheets. 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. These contingent rents are not
recognized until the required thresholds are exceeded. 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.


Page - (26)


Bad Debt Expense

We regularly review our accounts receivable to determine an appropriate
amount for the allowance for doubtful accounts based upon the impact of economic
conditions on ours tenants' ability to pay, past collection experience and such
other factors which, in our judgment, deserve current recognition. In turn, a
provision for uncollectible accounts receivable ("bad debt expense") is charged
against the allowance to maintain the allowance level within this range. If the
financial condition of our tenants were to deteriorate, resulting in impairment
in their ability to make payments due under their leases, additional allowances
may be required.

Impairment of Rental Property

We monitor our Properties for indicators of impairment on an on-going
basis. We record a provision for impairment when we believe certain events and
circumstances have occurred which indicate that the carrying value of our
Properties might have experienced a decline in value that is other than
temporary and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Impairment losses are
measured as the difference between the carrying value and the estimated fair
value for assets held in the portfolio. For assets held for sale, impairment is
measured as the difference between the carrying value and fair value, less
estimated costs to dispose. Fair value is based on estimated cash flows
discounted at a risk-adjusted rate of return. Adverse changes in market
conditions or deterioration in the operating results of our outlet centers and
other rental properties could result in losses or an inability to recover the
current carrying value of such assets. Such potential losses or the inability to
recover the current carrying value may not be reflected in our Properties'
current carrying value, thereby possibly requiring an impairment charge in the
future.

Capitalization and Depreciation of Significant Renovations and Improvements

Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets, based upon management's estimates. Significant
renovations and improvements, which improve and/or extend the useful life of
assets are capitalized and depreciated over their estimated useful lives, based
upon management's estimates.

Contingencies

We are subject to proceedings, lawsuits, and other claims related to
various matters (see Note 6 - "Legal Proceedings" of the Notes to the
Consolidated Financial Statements for additional information). Additionally, we
have guaranteed certain indebtedness of others (see Note 4 - "Debt" of the Notes
to Consolidated Financial Statements for additional information). With respect
to these contingencies, we assess the likelihood of any adverse judgments or
outcomes to these matters and, if appropriate potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual issue. Future
reserves may be required because of (i) new developments or changes to the
approach in which we deal with each matter or (ii) if unasserted claims arise.


Page - (27)


Outlet Center Portfolio

Portfolio GLA and Occupancy

Our outlet center portfolio size reflects (i) our past development (both
new outlet centers and expansions to outlet centers) and acquisition activities
and (ii) our more recent disposition activities. Our outlet portfolio (including
properties owned through joint venture partnerships) consisted of 35 properties
totaling 9,976,000 square feet of gross leasable area ("GLA") at September 30,
2003 compared to 40 properties totaling 11,253,000 square feet of GLA at
September 30, 2002 and 38 properties totaling 10,269,000 square feet of GLA at
December 31, 2002. The change in our outlet center GLA is because of certain
property dispositions, which are discussed below. Our outlet center portfolio
was 85.3% and 86.8% occupied as of September 30, 2003 and 2002, respectively.
The weighted-average occupancy of our outlet center portfolio (excluding those
properties disposed of whose results are included in discontinued operations)
during the three months ended September 30, 2003 and 2002 was 84.4% and 86.7%,
respectively. The weighted-average occupancy of our outlet center portfolio
(excluding those properties disposed of whose results are included in
discontinued operations) during the nine months ended September 30, 2003 and
2002 was 85.2% and 87.0%, respectively.

We disposed of certain properties through various transactions (including
sale, joint venture arrangements, foreclosure and transfer of ownership to the
applicable lender). These transactions have had a significant impact on the size
of our portfolio for the periods presented and are summarized below. See Note 3
- - "Property Dispositions" of the Notes to Consolidated Financial Statements for
additional information.

2002 Dispositions

During 2002, we completed transactions involving 17 properties aggregating
4,431,000 square feet of GLA. These transactions included (i) the sale of seven
outlet centers aggregating 1,791,000 square feet of GLA into joint venture
arrangements, (ii) the sale of five (including one consisting of 197,000 square
feet of GLA that we partially owned through an unconsolidated joint venture)
outlet centers aggregating 1,486,000 square feet of GLA to unrelated third
parties, (iii) the foreclosure sale and/or transfer of three outlet centers
aggregating 922,000 square feet of GLA to the applicable lender and (iv) the
sale of two community centers aggregating 232,000 square feet of GLA to
unrelated third parties.

The seven centers sold into joint venture arrangements consisted of two
separate transactions involving (i) Prime Outlets at Hagerstown (the "Hagerstown
Center"), which was sold to an existing joint venture partnership (the
"Prime/Estein Venture"), and (ii) six outlet centers (collectively, the Bridge
Properties"), which were sold to PFP Venture LLC (the "PFP Venture"), a joint
venture partnership in which we indirectly had a initial ownership interest of
18.2%. Such properties are collectively referred to as the "2002 Joint Venture
Properties". Commencing on the date of disposition, we account for our ownership
interest in the 2002 Joint Venture Properties in accordance with the equity
method of accounting. The operating results of the 2002 Joint Venture Properties
are reflected in our results from continuing operations for all periods
presented through their respective dates of disposition. Their operating results
have not been classified to discontinued operations because we have a
significant continuing involvement in these properties. Additionally, we sold
Phases II and III of the Bellport Outlet Center (the "Bellport Outlet Center").
We accounted for our ownership interest in the Bellport Outlet Center in
accordance with the equity method of accounting through its date of disposition.

The operating results of the remaining disposed properties through their
respective dates of disposition have been classified as discontinued operations
in the accompanying Consolidated Statements of Operations.


Page - (28)


2003 Dispositions

During 2003, we completed transactions involving 2 properties aggregating
293,000 square feet of GLA. These transactions included (i) the sale of one
outlet center, Prime Outlets at Latham (the "Latham Center") consisting of
43,000 square feet of GLA that we partially owned through an unconsolidated
joint venture and (ii) the foreclosure sale of one outlet center aggregating
250,000 square feet of GLA to the applicable lender. We accounted for our
ownership interest in the Latham Center in accordance with the equity method of
accounting through its date of disposition. The operating results of the other
disposed property through its respective date of disposition have been
classified as discontinued operations in the accompanying Consolidated
Statements of Operations.

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("FAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In accordance with the requirements of FAS No. 144, we have
classified the operating results, including gains and losses related to
disposition, for certain properties disposed of during 2003 and 2002 as
discontinued operations in the accompanying Consolidated Statements of
Operations for all periods presented. The operating results for properties that
were sold into joint venture partnerships during 2002 have not been classified
to discontinued operations in the accompanying Consolidated Statements of
Operations because we still retain a significant continuing involvement in their
operations. Such properties and/or their operating results through the dates of
their respective disposition are collectively referred to as the "2002 Joint
Venture Properties". The following discussion and tables regarding operating
results for the comparable periods are reflective of the classification
requirements under FAS No. 144 and relate to operating results from continuing
operations unless otherwise indicated.

The table set forth below summarizes certain information with respect to
our outlet centers as of September 30, 2003 (see Note 4 - "Debt" of the Notes to
Consolidated Financial Statements contained herein for additional information
with respect to indebtedness on our Properties):




- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage (1)
- ------------------------------------------------------------------------------------------------------------------------------------


Prime Outlets at Fremont - Fremont, Indiana October 1985 229,000 81%

Prime Outlets at Birch Run (2) - Birch Run, Michigan September 1986 724,000 85

Prime Outlets at Williamsburg (2) - Williamsburg, Virginia April 1988 274,000 99

Prime Outlets at Pleasant Prairie - Kenosha, Wisconsin September 1988 269,000 97

Prime Outlets at Burlington - Burlington, Washington May 1989 174,000 88

Prime Outlets at Queenstown - Queenstown, Maryland June 1989 221,000 99

Prime Outlets at Hillsboro - Hillsboro, Texas October 1989 359,000 88

Prime Outlets at Oshkosh - Oshkosh, Wisconsin November 1989 260,000 89

Prime Outlets at Warehouse Row (4) - Chattanooga, Tennessee November 1989 95,000 69

Prime Outlets at Perryville - Perryville, Maryland June 1990 148,000 96

Prime Outlets at Sedona - (5) Sedona, Arizona August 1990 82,000 90

Prime Outlets at San Marcos - San Marcos, Texas August 1990 549,000 82

Prime Outlets at Anderson - (3) Anderson, California August 1990 165,000 95



Page - (29)




- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage(1)
- ------------------------------------------------------------------------------------------------------------------------------------


Prime Outlets at Post Falls - (5) Post Falls, Idaho July 1991 179,000 62%

Prime Outlets at Ellenton - Ellenton, Florida October 1991 481,000 99

Prime Outlets at Morrisville - Raleigh - Durham, North Carolina October 1991 187,000 78

Prime Outlets at Naples - Naples/Marco Island, Florida December 1991 146,000 84

Prime Outlets at Niagara Falls USA - Niagara Falls, New York July 1992 534,000 86

Prime Outlets at Calhoun - (3) Calhoun, Georgia October 1992 254,000 86

Prime Outlets at Bend - (5) Bend, Oregon December 1992 132,000 90

Prime Outlets at Jeffersonville I - Jeffersonville, Ohio July 1993 407,000 93

Prime Outlets at Gainesville - Gainesville, Texas August 1993 316,000 62

Prime Outlets at Grove City - Grove City, Pennsylvania August 1994 533,000 100

Prime Outlets at Huntley - Huntley, Illinois August 1994 282,000 68

Prime Outlets at Florida City - Florida City, Florida September 1994 208,000 68

Prime Outlets at Pismo Beach - Pismo Beach, California November 1994 148,000 97

Prime Outlets at Tracy - Tracy, California November 1994 153,000 94

Prime Outlets at Odessa - Odessa, Missouri July 1995 296,000 64

Prime Outlets at Darien (6) - Darien, Georgia July 1995 307,000 57

Prime Outlets at Gulfport (7) - Gulfport, Mississippi November 1995 306,000 84

Prime Outlets at Lodi - (3)Burbank, Ohio November 1996 313,000 86

Prime Outlets at Gaffney (3) (6) - Gaffney, South Carolina November 1996 305,000 91

Prime Outlets at Lee - (3) Lee, Massachusetts June 1997 224,000 95

Prime Outlets at Lebanon - Lebanon, Tennessee April 1998 229,000 87

Prime Outlets at Hagerstown (2) - Hagerstown, Maryland August 1998 487,000 82
--------- ---
Total Outlet Centers (8) 9,976,000 85%
========= ===
====================================================================================================================================

Notes:
(1) Percentage reflects occupied space as of September 30, 2003 as a percent
of available square feet of GLA.
(2) Through affiliates, we have a 30% ownership interest in the joint
venture partnership that owns this outlet center.
(3) Through affiliates, we have an ownership interest of approximately 26.4%
in the joint venture partnership that owns this outlet center as of
September 30, 2003.
(4) We own a 2% partnership interest as the sole general partner in this
property, but are entitled to 99% of the property's operating cash flow
and net proceeds from a sale or refinancing. This mixed-use development
also includes approximately 154,000 square feet of office space, not
included in this table, which was 95% occupied as of September 30, 2003.
(5) Non-recourse mortgage loans cross-collateralized by Prime Outlets at
Bend, Prime Outlets at Post Falls and Prime Outlets at Sedona are
currently in default and we are in the process of negotiating a transfer
of our ownership interests in these outlet centers to the lender. See
Note 4 - "Debt" of the Notes to Consolidated Financial Statements for
additional information.
(6) We operate this outlet center pursuant to a long-term ground lease under
which we receive the economic benefit of a 100% ownership interest.
(7) The real property on which this outlet center is located is subject to a
long-term ground lease.
(8) Excludes Oxnard Factory Outlet. Through an affiliate, we have a 50%
legal ownership interest in the joint venture partnership that owns this
outlet center. However, we are currently receiving no economic benefit
from the Oxnard Factory Outlet.


Page - (30)


Results of Operations

Table 1 - Consolidated Statements of Operations



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

Three Months Ended 2003 vs. 2002 Nine Months Ended 2003 vs. 2002
----------------- -----------------
September 30, % September 30, %
-------------------- --------------------
2003 2002 Change Change 2003 2002 Change Change
- ------------------------------------------------------------------------------------------------------------------------------------

Revenues
Base rents $ 19,001 $ 19,622 $ (621) -3.2% $ 55,934 $ 66,096 $(10,162) -15.4%
Percentage rents 404 834 (430) -51.6% 1,853 2,589 (736) -28.4%
Tenant reimbursements 10,676 11,424 (748) -6.5% 32,921 36,498 (3,577) -9.8%
Interest and other 2,892 3,664 (772) -21.1% 10,573 8,737 1,836 21.0%
-------- -------- -------- ----- -------- --------- -------- ------
Total revenues 32,973 35,544 (2,571) -7.2% 101,281 113,920 (12,639) -11.1%

Expenses
Property operating 8,936 9,927 (991) -10.0% 28,184 30,687 (2,503) -8.2%
Real estate taxes 2,600 2,999 (399) -13.3% 8,392 10,012 (1,620) -16.2%
Depreciation and amortization 6,645 8,229 (1,584) -19.2% 20,948 27,446 (6,498) -23.7%
Corporate general and administrative 5,253 3,366 1,887 56.1% 13,247 9,662 3,585 37.1%
Interest 11,700 13,693 (1,993) -14.6% 34,929 47,831 (12,902) -27.0%
Other charges 1,556 1,667 (111) -6.7% 2,979 8,372 (5,393) -64.4%
Provision for asset impairment - 81,619 (81,619) n/m 6,590 81,619 (75,029) n/m
-------- -------- -------- ----- -------- --------- -------- ------
Total expenses 36,690 121,500 (84,810) -69.8% 115,269 215,629 (100,360) -46.5%
-------- -------- -------- ----- -------- --------- -------- ------
Loss before gain on sale of real estate (3,717) (85,956) 82,239 -95.7% (13,988) (101,709) 87,721 -86.2%
Gain on sale of real estate, net - - - n/m - 5,802 (5,802) n/m
-------- -------- -------- ----- -------- --------- -------- ------
Loss from continuing operations (3,717) (85,956) 82,239 -95.7% (13,988) (95,907) 81,919 -85.4%
Discontinued operations, including gains of
$2,153 on dispositions in 2003 periods,
respectively, and gains of $17,121 and
$9,619 in 2002 periods, respectively 2,071 2,451 (380) n/m 1,549 (16,103) 17,652 n/m
-------- -------- -------- ----- -------- --------- -------- ------
Net loss (1,646) (83,505) 81,859 -98.0% (12,439) (112,010) 99,571 -88.9%
Allocations to preferred shareholders (5,668) (5,668) - 0.0% (17,004) (17,004) - 0.0%
-------- -------- -------- ----- -------- --------- -------- ------
Net loss applicable to common shares $ (7,314) $(89,173) $ 81,859 -91.8% $(29,443) $(129,014) $ 99,571 -77.2%
======== ======== ======== ===== ======== ========= ======== ======

Basic and diluted earnings per common share:
Loss from continuing operations $ (0.22) $ (2.11) $ (0.72) $ (2.59)
Discontinued operations 0.05 0.06 0.04 (0.37)
-------- -------- -------- --------
Net loss $ (0.17) $ (2.05) $ (0.68) $ (2.96)
======== ======== ======== ========

Weighted-average common shares
outstanding - basic and diluted 43,578 43,578 43,578 43,578
======== ======== ======== ========
====================================================================================================================================



Page - (31)


Comparison of the three months ended September 30, 2003 to the three months
ended September 30, 2002

Summary

We reported losses from continuing operations of $3,717 and $85,956 for the
three months ended September 30, 2003 and 2002, respectively. For the three
months ended September 30, 2003, the net loss applicable to our common
shareholders was $7,314, or $0.17 per common share. For the three months ended
September 30, 2002, the net loss applicable to our common shareholders was
$89,173, or $2.05 per common share.

During the three months ended September 30, 2003, we reported a gain from
discontinued operations of $2,071, or $0.05 per common share. This gain from
discontinued operations included a gain related to dispositions of $2,153.
During the three months ended September 30, 2002, we reported a gain from
discontinued operations of $2,451, or $0.06 per common share. This gain from
discontinued operations included (i) a gain related to dispositions of $17,121
and (ii) a provision for asset impairment of $15,557.

The 2002 results from continuing operations include a third quarter
provision for asset impairment of $81,619, or $1.87 per common share.

Revenues

Total revenues were $32,973 for the three months ended September 30, 2003
compared to $35,544 for the same period in 2002, a decrease of $2,571, or 7.2%.
Base rents decreased $621, or 3.2%, to $19,001 in 2003 compared to $19,622 in
2002. These decreases are primarily due to (i) transactions involving the 2002
Joint Venture Properties, (ii) changes in economic rental rates and (iiii) the
reduction in outlet center occupancy during the 2003 period. Straight-line rent
(expense), included in base rent was $18 and $(255) for the three months ended
September 30, 2003 and 2002, respectively.

Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $430, or 51.6%, to $404 during the
three months ended September 30, 2003 compared to $834 for the same period in
2002. This decrease was primarily due to (i) transactions involving the 2002
Joint Venture Properties and (ii) changes in economic rental rates.

Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, decreased by $748, or 6.5%, to $10,676
during the three months ended September 30, 2003 compared to $11,424 for the
same period in 2002. This decline is primarily due to (i) transactions involving
the 2002 Joint Venture Properties, (ii) changes in economic rental rates and
(iii) the reduced aggregate outlet center weighted-average occupancy during the
2003 period.

As shown in TABLE 2, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 92.5% during the three
months ended September 30, 2003 compared to 88.4% for the same period in 2002.
This increase reflects the aforementioned changes in economic rental rates.


Page - (32)


Table 2 - Tenant Recoveries as a Percentage of Total Recoverable Expenses




- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Tenant reimbursements $ 10,676 $ 11,424
======== ========

Recoverable Expenses:
Property operating $ 8,936 $ 9,927
Real estate taxes 2,600 2,999
-------- --------
Total recoverable expenses $ 11,536 $ 12,926
======== ========

Tenant reimbursements as a percentage
of total recoverable expenses 92.5% 88.4%
======== ========
====================================================================================================================================


Interest and other income decreased by $772, or 21.1%, to $2,892 during the
three months ended September 30, 2003 compared to $3,664 for the same period in
2002. This decrease reflects lower (i) interest income of $364, (ii) other
income of $249, (iii) gains on sales of outparcel land of $195, (iv) lease
termination income of $86, (v) leasing commissions of $86 and (vi) municipal
assistance income of $58, partially offset by higher equity in earnings of
unconsolidated joint venture partnerships of $266.

Expenses

Property operating expenses decreased by $991, or 10.0%, to $8,936 during
the three months ended September 30, 2003 compared to $9,927 for the same period
in 2002. Real estate taxes expense decreased by $399, or 13.3%, to $2,600 during
the three months ended September 30, 2003 compared to $2,999 for the same period
in 2002. The decrease in property operating expenses is primarily because of (i)
the transactions involving the 2002 Joint Venture Properties and (ii) reduced
marketing costs during the 2003 period. The decrease in real estate taxes
expense is primarily attributable to (i) the transactions involving the 2002
Joint Venture Properties and (ii) reduced assessments on certain properties.

As shown in TABLE 3, depreciation and amortization expense decreased by
$1,584 or 19.2%, to $6,645 during the three months ended September 30, 2003
compared to $8,229 for the same period in 2002. This decrease was primarily due
to (i) a reduction in depreciation and amortization resulting from certain
provisions for asset impairment recorded during 2002 and 2003 and (ii) the
transactions involving the 2002 Joint Venture Properties.

Table 3 - Components of Depreciation and Amortization Expense

The components of depreciation and amortization expense for the three
months ended September 30, 2003 and 2002 are summarized as follows:




- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Building and improvements $ 3,133 $ 4,695
Land improvements 935 944
Tenant improvements 2,167 1,935
Furniture and fixtures 365 606
Leasing commissions 45 49
------- -------
Total $ 6,645 $ 8,229
======= =======
====================================================================================================================================


Page - (33)


As shown in TABLE 4, interest expense decreased by $1,993, or 14.6%, to
$11,700 during the three months ended September 30, 2003 compared to $13,693 for
the same period in 2002. This decrease reflects (i) lower interest incurred,
excluding defeased debt, of $2,883, (ii) a decrease in amortization of deferred
financing costs of $628 and (iii) higher amortization of debt premiums of $21.
Partially offsetting these items was interest expense of $1,539 associated with
certain mortgage debt that was defeased in December 2002. See Note 4 - "Debt" of
the Notes to Consolidated Financial Statements for additional information.

The decrease in interest incurred, excluding defeased debt, is primarily
attributable to (i) a reduction of approximately $15,476 in our weighted-average
debt outstanding, excluding debt premiums, during the three months ended
September 30, 2003 compared to the same period in 2002 and (ii) a decrease in
the weighted-average contractual interest rate on our debt for the three months
ended September 30, 2003 compared to the same period in 2002. The decrease in
weighted-average debt outstanding was primarily attributable to asset
dispositions. The weighted-average contractual interest rates for the 2003 and
2002 periods were approximately 8.07% and 8.76%, respectively.

Table 4 - Components of Interest Expense

The components of interest expense for the three months ended September 30,
2003 and 2002 are summarized as follows:



- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Interest incurred $ 10,256 $ 13,139
Amortization of deferred financing costs 404 1,032
Amortization of debt premiums (499) (478)
Interest incurred - defeased debt 1,539 -
-------- --------
Total $ 11,700 $ 13,693
======== ========
====================================================================================================================================


Other charges decreased by $111, or 6.7%, to $1,556 for the three months
ended September 30, 2003 compared to $1,667 for same period in 2002. This
decrease reflects lower (i) other expenses of $88 and (ii) bad debt expense of
$23.

Corporate general and administrative expenses increased by $1,987, or
59.0%, to $5,253 during the three months ended September 30, 2003 compared to
$3,366 for the same period in 2002. This increase is primarily attributable to
legal, financial advisory and proxy costs aggregating $1,469 related to our
proposed merger transaction and higher insurance costs of $276.

During the third quarter of 2002 certain events and circumstances occurred,
including (i) changes to the anticipated holding periods and (ii) further
reduced occupancy and limited leasing success, that indicated certain of our
properties were impaired on an other than temporary basis. As a result, we
recorded a provision for asset impairment aggregating $81,619 representing the
write-down of these properties to their estimated fair values in accordance with
the requirements of Statement of Financial Accounting Standards ("FAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."


Page - (34)


Comparison of the nine months ended September 30, 2003 to the nine months ended
September 30, 2002

Summary

We reported losses from continuing operations of $13,988 and $95,907 for
the nine months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003, the net loss applicable to our common
shareholders was $29,443, or $0.68 per common share. For the nine months ended
September 30, 2002, the net loss applicable to our common shareholders was
$129,014, or $2.96 per common share.

During the nine months ended September 30, 2003, we reported a gain from
discontinued operations of $1,549, or $0.04 per common share. This gain from
discontinued operations included a gain related to dispositions of $2,153.
During the nine months ended September 30, 2002, we reported a gain from
discontinued operations of $16,103, or $0.37 per common share. This gain from
discontinued operations included a (i) a net gain related to dispositions of
$9,619 and (ii) a provision for asset impairment of $27,757.

The 2003 results from continuing operations include a second quarter
provision for asset impairment of $6,590, or $0.15 per common share. The 2002
results from continuing operations include (i) a third quarter provision for
asset impairment of $81,619, or $1.87 per common share, (ii) a net gain on the
sale of real estate of $5,802, or $0.13 per common share and (ii) a second
quarter non-recurring charge (included in other charges) of $3,000, or $0.07 per
common share, related to pending and potential tenant claims with respect to
certain lease provisions.

Revenues

Total revenues were $101,281 for the nine months ended September 30, 2003
compared to $113,920 for the same period in 2002, a decrease of $12,639, or
11.1%. Base rents decreased $10,162, or 15.4%, to $55,934 in 2003 compared to
$66,096 in 2002. These decreases are primarily due to (i) transactions involving
the 2002 Joint Venture Properties, (ii) changes in economic rental rates and
(iiii) the reduction in outlet center occupancy during the 2003 period.
Straight-line rent expense, included in base rent was $348 and $300 for the nine
months ended September 30, 2003 and 2002, respectively.

Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $736, or 28.4%, to $1,853 during
the nine months ended September 30, 2003 compared to $2,589 for the same period
in 2002. This decrease was primarily due to (i) transactions involving the 2002
Joint Venture Properties and (ii) changes in economic rental rates.

Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, decreased by $3,577, or 9.8%, to $32,921
during the nine months ended September 30, 2003 compared to $36,498 for the same
period in 2002. This decline is primarily due to (i) transactions involving the
2002 Joint Venture Properties, (ii) changes in economic rental rates and (iii)
the reduced aggregate outlet center weighted-average occupancy during the 2003
period.

As shown in TABLE 5, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 90.0% during the nine
months ended September 30, 2003 compared to 89.7% for the same period in 2002.
This increase reflects the aforementioned changes in economic rental rates.


Page - (35)


Table 5 - Tenant Recoveries as a Percentage of Total Recoverable Expenses



- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Tenant reimbursements $ 32,921 $ 36,498
======== ========

Recoverable Expenses:
Property operating $ 28,184 $ 30,687
Real estate taxes 8,392 10,012
-------- --------
Total recoverable expenses $ 36,576 $ 40,699
======== ========

Tenant reimbursements as a percentage
of total recoverable expenses 90.0% 89.7%
======== ========
====================================================================================================================================


Interest and other income increased by $1,836, or 21.0%, to $10,573 during
the nine months ended September 30, 2003 compared to $8,737 for the same period
in 2002. This increase reflects higher (i) equity in earnings of unconsolidated
joint ventures of $2,092, (ii) property management fee income of $398 and (iii)
other income of $204. Partially offsetting these items were lower (i) municipal
assistance income of $518 and (ii) interest income of $340. The significant
increase in equity in earnings of unconsolidated joint ventures is primarily
associated with the transactions involving the 2002 Joint Venture Properties.

Expenses

Property operating expenses decreased by $2,503, or 8.2%, to $28,184 during
the nine months ended September 30, 2003 compared to $30,687 for the same period
in 2002. Real estate taxes expense decreased by $1,620, or 16.2%, to $8,392
during the nine months ended September 30, 2003 compared to $10,012 for the same
period in 2002. The decrease in property operating expenses is primarily because
of the transactions involving the 2002 Joint Venture Properties partially offset
by higher insurance and marketing costs during the 2003 period. The decrease in
real estate taxes expense is primarily because of the transactions involving the
2002 Joint Venture Properties.

As shown in TABLE 6, depreciation and amortization expense decreased by
$6,498, or 23.7%, to $20,948 during the nine months ended September 30, 2003
compared to $27,446 for the same period in 2002. This decrease was primarily due
to (i) a reduction in depreciation and amortization resulting from certain
provisions for asset impairment recorded during 2002 and 2003 and (ii) the
transactions involving the 2002 Joint Venture Properties.

Table 6 - Components of Depreciation and Amortization Expense

The components of depreciation and amortization expense for the nine months
ended September 30, 2003 and 2002 are summarized as follows:



- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Building and improvements $ 9,859 $ 14,069
Land improvements 2,806 3,135
Tenant improvements 6,361 8,223
Furniture and fixtures 1,766 1,861
Leasing commissions 156 158
-------- --------
Total $ 20,948 $ 27,446
======== ========
====================================================================================================================================


As shown in TABLE 7, interest expense decreased by $12,902, or 27.0%, to
$34,929 during the nine months ended September 30, 2003 compared to $47,831 for
the same period in 2002. This decrease reflects (i) lower interest incurred,
excluding defeased debt, of $14,606, (ii) a decrease in amortization of deferred
financing costs of $2,764 and (iii) higher amortization of debt premiums of $66.
Partially offsetting these items was interest expense of $4,534 associated with
certain mortgage debt that was defeased in December 2002. See Note 4 - "Debt" of
the Notes to Consolidated Financial Statements for additional information.


Page - (36)


The decrease in interest incurred, excluding defeased debt, is primarily
attributable to (i) a reduction of approximately $120,657 in our
weighted-average debt outstanding, excluding debt premiums, during the nine
months ended September 30, 2003 compared to the same period in 2002 and (ii) a
decrease in the weighted-average contractual interest rate on our debt for the
nine months ended September 30, 2003 compared to the same period in 2002. The
decrease in weighted-average debt outstanding was primarily attributable to
asset dispositions. The weighted-average contractual interest rates for the 2003
and 2002 periods were approximately 8.08% and 8.61%, respectively.

Table 7 - Components of Interest Expense

The components of interest expense for the nine months ended September 30,
2003 and 2002 are summarized as follows:



- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Interest incurred $ 30,626 $ 45,232
Amortization of deferred financing costs 1,251 4,015
Amortization of debt premiums (1,482) (1,416)
Interest incurred - defeased debt 4,534 -
-------- --------
Total $ 34,929 $ 47,831
======== ========
====================================================================================================================================


Other charges were $2,979 and $8,372 for the nine months ended September
30, 2003 and 2002, respectively, which includes a non-recurring charge of $3,000
in the 2002 period. Excluding the effect of this non-recurring charge, which is
discussed below, other charges decreased by $2,393, or 44.5%, to $2,979 for the
nine months ended September 30, 2003 compared to $5,372 for the same period in
2002. This decrease reflects lower (i) bad debt expense of $2,013 and (ii) other
expenses of $380. The significant decrease in bad debt expense resulted
primarily from (i) resolution of certain disputes with tenants and (ii) reduced
tenant bankruptcies, abandonments and store closings during 2003.

During the second quarter of 2002, we recorded a non-recurring charge
(included in other charges) of $3,000 to establish a reserve for pending and
potential tenant claims with respect to lease provisions related to their
pass-through charges and promotional fund charges. See "Liquidity and Capital
Resources" for additional information.

Corporate general and administrative expenses increased by $3,585, or
37.1%, to $13,247 during the nine months ended September 30, 2003 compared to
$9,662 for the same period in 2002. This increase is primarily attributable to
legal, financial advisory and proxy costs aggregating $2,645 related to our
proposed merger transaction and higher insurance costs of $1,034.

During the second quarter of 2003, certain events and circumstances related
to two of our properties occurred, including further reduced occupancy and
limited leasing success, that indicated these properties were impaired on an
other than temporary basis. As a result, we recorded a provision for asset
impairment aggregating $6,590 representing the write-down of these properties to
their estimated fair values in accordance with the requirements of FAS No. 144.

During the third quarter of 2002 certain events and circumstances occurred,
including (i) changes to the anticipated holding periods and (ii) further
reduced occupancy and limited leasing success, that indicated certain of our
properties were impaired on an other than temporary basis. As a result, we
recorded a provision for asset impairment aggregating $81,619 representing the
write-down of these properties to their estimated fair values in accordance with
the requirements of FAS No. 144.


Page - (37)


Merchant Sales

For the three and nine months ended September 30, 2003, same-store sales in
our outlet center portfolio increased by 1.4% and decreased by 1.2%,
respectively, compared to the same periods in 2002. "Same-store sales" is
defined as the weighted-average sales per square foot reported by merchants for
stores open since January 1, 2002. The weighted-average sales per square foot
reported as reported by our merchants were $245 for the year ended December 31,
2002.

Liquidity and Capital Resources

Sources and Uses of Cash

For the nine months ended September 30, 2003, net cash provided by
operating activities was $7,627, net cash used in investing activities was
$1,670 and cash used in financing activities was $5,503.

The net cash used in investing activities during the nine months ended
September 30, 2003 consisted of $5,631 of additions to rental property partially
offset by $1,085 of net proceeds from the disposition of excess land and $2,876
of distributions from unconsolidated joint venture partnerships. The additions
to rental property included costs incurred in connection with re-leasing space
to new merchants and costs associated with renovations. During the nine months
ended September 30, 2003, we did not engage in any significant development
activities other than pre-leasing for an expansion to Prime Outlets at
Williamsburg and certain consulting activities in Europe. We do not expect these
activities to have a significant impact on our liquidity or financial condition.

The gross uses of cash for financing activities of $5,503 during nine
months ended September 30, 2003 consisted of scheduled principal amortization on
debt.

Defaults on Certain Non-recourse Mortgage Indebtedness

In December 2002, we notified the servicer of certain non-recourse mortgage
loans (cross-collateralized by Prime Outlets at Bend, Prime Outlets at Post
Falls and Prime Outlets at Sedona) totaling $24,919 as of September 30, 2003
that the net cash flow from the properties securing the loans was insufficient
to fully pay the required monthly debt service. At that time, certain of our
subsidiaries suspended the regularly scheduled monthly debt service payments.
Subsequent to our notification to the servicer, we have been remitting on a
monthly basis all available cash flow from the properties, after a reserve for
monthly operating expenses, as partial payment of the debt service. The failure
to pay the full amount due constitutes a default under the loan agreements which
allows the lender to accelerate the loan and to exercise various remedies
contained in the loan agreements, including application of escrow balances to
delinquent payments and, ultimately, foreclosure on the properties which
collateralize the loans. The lender has notified us that it has accelerated the
loans and intends to acquire the properties through a foreclosure action on the
collateral properties unless the parties can negotiate a mutually acceptable
transfer of the properties to the lender. However, any foreclosure action on, or
other transfer of, these properties is not expected to have a material impact on
our results of operations or financial condition because we are currently only
remitting available cash flow. The aggregate carrying value of these properties
was $21,415 as of September 30, 2003. Such amount is exceeded by the aggregate
outstanding balance of the non-recourse mortgage loans of $24,919 as of
September 30, 2003. Upon foreclosure or transfer of the collateral properties,
we will record a non-recurring gain for the difference between the carrying
value of the properties and their related net asset, including the outstanding
loan balances.


Page - (38)


Defeased Notes Payable

On December 6, 2002, we completed the sale of two outlet centers (together,
the "Colorado Properties"), which were part of the 15 properties contained in
the collateral pool securing a first mortgage and expansion loan (the "Mega Deal
Loan"), which had a then outstanding balance of $338,940. In connection with the
release of the Colorado Properties from the collateral pool, we were required to
partially defease the Mega Deal Loan. Therefore, the Mega Deal Loan was
bifurcated into (i) a defeased portion in the amount of $74,849 (the "Defeased
Notes Payable") and (ii) an undefeased portion in the amount of $264,091, which
is still referred to as the Mega Deal Loan. Both the Defeased Notes Payable and
the Mega Deal Loan (i) bore interest at a fixed-rate of 7.782% through their
optional prepayment date of November 11, 2003 and (ii) required monthly payments
of principal and interest pursuant to a 30-year amortization schedule. The Mega
Deal Loan is secured by the remaining 13 properties contained in the collateral
pool.

We used $79,257 of the gross proceeds from the sale of the Colorado
Properties to purchase US Treasury Securities with a par value of $78,277,
including accrued interest of $226. The US Treasury Securities were deposited
into an escrow account controlled by a trustee (the "Trustee Escrow"). The
Trustee Escrow was used to pay all scheduled debt service, including a balloon
payment of $73,882 on November 11, 2003, due under the Defeased Notes Payable.
The $980 premium we paid for the US Treasury Securities was amortized as a
reduction to the interest income (included in interest and other income in the
Consolidated Statements of Operations) earned on the Trustee Escrow on basis
that approximated the effective interest method.

As of September 30, 2003, the outstanding balance of the Defeased Notes
Payable was $74,046 and the balance of the Trustee Escrow was $74,103 (included
in restricted cash in the Consolidated Balance Sheet). As stated above, on
November 11, 2003, the Defeased Notes Payable was repaid in full with the
remaining funds in the Trustee Escrow.

Furthermore, in connection with the partial defeasance of the Mega Deal
Loan we amended the Mega Deal Loan so that (i) we were required to fund 10
monthly payments of $500 (an aggregate of $5,000) into a lender escrow to be
used as additional cash collateral and (ii) release prices for the remaining 13
properties in the collateral pool were amended to provide for a more orderly
refinancing of the Mega Deal Loan. As of September 30, the additional cash
collateral had been fully funded and is included in restricted cash in the
Consolidated Balance Sheet.

Debt Service Obligations

The following table summarizes (A) the scheduled principal maturities of
our debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of
aggregate non-recourse mortgage indebtedness in default (see "Defaults on
Certain Non-recourse Mortgage Indebtedness" above) and (iii) the Defeased Notes
Payable of $74,046, which was paid in full on November 11, 2003 (see above), and
(B) the related average contractual interest rates by year of maturity as of
September 30, 2003:



- ------------------------------------------------------------------------------------------------------------------------------------
Bonds Payable
(including sinking fund payments) Notes Payable Total Debt
----------------------------------- ------------------------ ----------------------------------
Average Average Average
Interest Principal Interest Principal Interest Principal
Years Ended December 31, Rates Maturities Rates Maturities Rates Maturities
- ------------------------------------------------------------------------------------------------------------------------------------

2003 6.79% $ 546 7.78% $ 262,008 7.78% $ 262,554
2004 6.34% 726 7.97% 4,571 7.75% 5,297
2005 6.34% 773 8.58% 11,574 8.44% 12,347
2006 6.34% 820 8.83% 120,437 8.81% 121,257
2007 6.34% 878 7.60% 1,002 7.02% 1,880
Thereafter 6.52% 18,618 7.59% 57,995 7.33% 76,613
---- -------- ---- --------- ---- ---------
6.50% $ 22,361 8.06% $ 457,587 7.98% $ 479,948
==== ======== ==== ========= ==== =========
====================================================================================================================================


Page - (39)


Such indebtedness in the amount of $479,948 had a weighted-average maturity
of 2.1 years and bore contractual interest at a weighted-average rate of 7.98%
per annum. At September 30, 2003, all of such indebtedness bore interest at
fixed rates. Our remaining scheduled principal payments during 2003 for such
indebtedness aggregated $262,554, which includes $261,259 related to the Mega
Deal Loan. See "Going Concern" for additional information.

Additionally, we are obligated to refinance a first mortgage loan (the
"Hagerstown First Mortgage Loan") in the amount of $46,862 on Prime Outlets at
Hagerstown (the "Hagerstown Center") on or before June 1, 2004. The Hagerstown
First Mortgage Loan was assumed by an unconsolidated joint venture partnership
(the "Prime/Estein Venture"), in which we have an indirect 30% ownership
interest, in January 2002. See "Prime/Estein Venture Guarantees" contained in
"Guarantees and Guarantees of Indebtedness of Others" for additional
information.

Defaults on Certain Non-recourse Mortgage Indebtedness of Unconsolidated
Partnerships

Two mortgage loans related to projects in which we, through subsidiaries,
indirectly own joint venture interests have matured and are in default. The
mortgage loans, at the time of default, were (i) a $10,389 first mortgage loan
on Phase I of the Bellport Outlet Center, held by Union Labor Life Insurance
Company ("Union Labor"); and (ii) a $13,338 first mortgage loan on Oxnard
Factory Outlet, an outlet center located in Oxnard, California, held by Fru-Con.
An affiliate of ours has a 50% ownership interest in the partnership, which owns
Phase I of the Bellport Outlet Center. Fru-Con and us are each a 50% partner in
the partnership that owns the Oxnard Factory Outlet.

Union Labor filed for foreclosure on Phase I of the Bellport Outlet Center
and a receiver was appointed March 27, 2001 by the court involved in the
foreclosure action. Effective May 1, 2001, a manager hired by the receiver began
managing and leasing Phase I of the Bellport Outlet Center. A judgment for
foreclosure was entered on January 25, 2003 in the amount of $12,711. The
foreclosure occurred on March 17, 2003 with Union Labor acquiring the property
for $5,100. Approximately $1,100 of post-judgment interest and fees was
subsequently awarded to Union Labor. We continue to negotiate the terms of a
transfer of our ownership interest in Oxnard Factory Outlet to Fru-Con. We do
not manage or lease Oxnard Factory Outlet.

We believe neither of these mortgage loans is recourse to us. It is
possible, however, that either or both of the respective lenders will, after
completing its foreclosure action, file a lawsuit seeking to collect from us the
difference between the value of the mortgaged property and the amount due under
the loan. If such an action is brought, the outcome, and our ultimate liability,
if any, cannot be predicted at this time.

In addition, we are currently not receiving, directly or indirectly, any
cash flow from Oxnard Factory Outlet and were not receiving any cash flow from
Phase I of the Bellport Outlet Center prior to the loss of control of such
project. We account for our interests in (i) Phases I of the Bellport Outlet
Center and (ii) the Oxnard Factory Outlet in accordance with the equity method
of accounting. As of September 30, 2003, we had no carrying value for our
investment in these properties.


Page - (40)


Guarantees and Guarantees of Indebtedness of Others

HGP Guarantees

On July 15, 2002, Horizon Group Properties, Inc. and its affiliates ("HGP")
announced they had refinanced a secured credit facility (the "HGP Secured Credit
Facility") through a series of new loans aggregating $32,500. Prior to the
refinancing, we were a guarantor under the HGP Secured Credit Facility in the
amount of $10,000. In connection with the refinancing, our guarantee was reduced
to a maximum of $4,000 as security for a $3,000 mortgage loan and a $4,000
mortgage loan (collectively, the "HGP Monroe Mortgage Loan") secured by HGP's
outlet shopping center located in Monroe, Michigan. In the event the HGP Monroe
Mortgage Loan was reduced to $5,000 or less through repayments then our
guarantee would be extinguished. In August 2003, HGP repaid $2,000 of the HGP
Mortgage Loan and our guarantee obligation was satisfied.

Additionally, we were a guarantor with respect to certain mortgage
indebtedness (the "HGP Office Building Mortgage") in the amount of $2,129 on
HGP's corporate office building and related equipment located in Norton Shores,
Michigan. However, the HGP Office Building Mortgage was refinanced in August
2003 and our guarantee obligation was thus, removed.

Prime/Estein Venture Guarantees

We indirectly have a 30% ownership interest in the Prime/Estein Venture
which owns three outlet centers (collectively, the "Prime/Estein Properties").
The Prime/Estein Properties consist of Prime Outlets at Birch Run (the "Birch
Run Center"), Prime Outlets at Hagerstown (the "Hagerstown Center") and Prime
Outlets at Williamsburg (the "Williamsburg Center"). Pursuant to Prime/Estein
Venture-related documents to which affiliates of ours are parties, we are
obligated to provide to, or obtain for, the Prime/Estein Venture fixed-rate
financing at an annual rate of 7.75% (the "Interest Rate Subsidy Agreement") for
the Prime/Estein Venture Properties.

In August 2001, we, through affiliates, completed a refinancing of $63,000
of first mortgage loans secured by the Birch Run Center. The refinanced loan
(the "Birch Run First Mortgage") (i) has a term of 10-years, (ii) bears interest
at an effective rate of 8.12% and (iii) requires monthly payments of principal
and interest pursuant to a 25-year amortization schedule. Pursuant to the
Interest Rate Subsidy Agreement, we are required to pay to the Prime/Estein
Venture the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 8.12% (the
"Interest Rate Subsidy Obligation"). The net present value of the Interest Rate
Subsidy Obligation (included in accounts payable and other liabilities in the
Consolidated Balance Sheet) was $1,354 as of September 30, 2003.

In October 2001, we, through affiliates, completed the refinancing of a
$32,500 first mortgage loan secured by the Williamsburg Center. The new first
mortgage loan (the "Williamsburg First Mortgage") (i) has a term of 10-years,
(ii) bears interest at a fixed-rate of 7.69% and (iii) requires monthly payments
of principal and interest pursuant to a 25-year amortization schedule. Pursuant
to the Interest Rate Subsidy Agreement, the Prime/Estein Venture is required to
pay to us the difference between the cost of the financing at an assumed rate of
7.75% and the actual cost of such financing at the annual rate of 7.69%.


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On January 11, 2002, we sold the Hagerstown Center to the Prime/Estein
Venture. In connection with the sale, the Prime/Estein Venture assumed the
Hagerstown First Mortgage in the amount of $46,862; however, our guarantee of
such indebtedness remains in place. Additionally, we are obligated to refinance
the Hagerstown First Mortgage on behalf of the Prime/Estein Venture on or before
June 1, 2004, the date on which such indebtedness matures. Additionally, the
Prime/Estein Venture's cost of the Hagerstown First Mortgage and any refinancing
of it are fixed at an annual rate of 7.75% for a period of 10 years. If the
actual cost of such indebtedness should exceed 7.75% at any time during the
10-year period, we will be obligated to pay the difference to the Prime/Estein
Venture. If the actual cost of such indebtedness is less than 7.75% at any time
during the 10-year period, however, the Prime/Estein Venture will be obligated
to pay the difference to us. The actual cost of the Hagerstown First Mortgage is
30-day LIBOR plus 1.50%, or 2.62% as of September 30, 2003. Because the
Hagerstown First Mortgage bears interest at a variable rate, we are exposed to
the impact of interest rate changes. We have not recorded any liability related
to our guarantee of the Hagerstown First Mortgage; however, in connection with
the sale of the Hagerstown Center, we established a reserve for estimated
refinancing costs in the amount of $937, which is included in accounts payable
and other liabilities in the Consolidated Balance Sheet as of September 30,
2003. See Note 3 - "Property Dispositions" of the Notes to Consolidated
Financial Statements for additional information.

Second Horizon First Mortgage Loan

In April 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. ("CCP") which released Horizon from future obligations under a
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii. In
connection with an amendment of the Second Horizon Group Limited Partnership
("Second Horizon") agreement (the "Amended Partnership Agreement"), Horizon
transferred to an affiliate of CCP (the "CCP Affiliate") substantially all of
Horizon's economic interest, but not legal title, in an outlet center (the "Lake
Elsinore Center") in Lake Elsinore, California. The Lake Elsinore Center is one
of five properties owned by Second Horizon which jointly and severally secure a
non-recourse, first mortgage loan (the "Second Horizon Mortgage Loan"). As a
result of our merger with Horizon in June 1998, we own the economic interests of
the other four properties (the "Prime Properties") and legal title to all five
entities. The outstanding balance of the Second Horizon Mortgage Loan as of
September 30, 2003 was $94,586, of which $66,330 was allocated to the Prime
Properties and is included in notes payable in our Consolidated Balance Sheet as
of that date. The remaining $28,034 outstanding as of September 30, 2003 was
allocated to the Lake Elsinore Center.

We, through our affiliates, assumed certain obligations under the Amended
Partnership Agreement with respect to the Second Horizon Mortgage Loan in
connection with our merger with Horizon in June 1998. Specifically, we are
obligated to contribute sufficient capital to Second Horizon (i) for certain
operating expenses associated with the Prime Properties and (ii) to satisfy the
outstanding balances of the allocated loan amounts for the Prime Properties
under the Second Horizon Mortgage Loan (including any associated expenses) to
enable the Second Horizon Mortgage Loan to be repaid in full at its optional
prepayment date of October 11, 2006. CCP Affiliate and its parent company are
similarly obligated with respect to the Lake Elsinore Center. No claims have
been made with respect to these obligations and we have not recorded any
liability related to these obligations as of September 30, 2003.


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Mandatory Redemption Obligation

On July 26, 2002, we sold the Bridge Properties to the PFP Venture. In
connection with the sale, we guaranteed FRIT PRT Bridge Acquisition LLC
("FRIT"), a third-party joint venture partner, (i) a 13% return on its initial
$17,236 of invested capital and (ii) the full return of its invested capital
(the "Mandatory Redemption Obligation") by December 31, 2003. As of September
30, 2003, our Mandatory Redemption Obligation with respect to the full return of
FRIT's invested capital was $14,489 (included in accounts payable and other
liabilities in the Consolidated Balance Sheet). See "Going Concern" for
additional information.

Going Concern

Our liquidity depends on cash provided by operations and potential capital
raising activities such as funds obtained through borrowings, particularly
refinancing of existing debt, and cash generated through asset sales. Although
we believe that estimated cash flows from operations and potential capital
raising activities will be sufficient to satisfy our scheduled debt service and
other obligations and sustain our operations for the next year, there can be no
assurance that we will be successful in obtaining the required amount of funds
for these items or that the terms of the potential capital raising activities,
if they should occur, will be as favorable as we have experienced in prior
periods.

As of September 30, 2003, our Mega Deal Loan had an outstanding principal
balance of $261,259. The Mega Deal Loan had an optional prepayment date of
November 11, 2003 and an outstanding principal balance of $260,681 on such date.
As discussed below, certain restrictions have been placed upon us with respect
to refinancing the Mega Deal Loan. The Mega Deal Loan was not repaid on the
optional prepayment date and as a result the interest rate shall be increased by
up to 5.0% to 12.782%. Additionally, commencing on November 11, 2003 the lender
may retain all excess cash flow from the 13 properties which secure the Mega
Deal Loan. Any excess cash flow retained by the lender can be applied to
principal after payment of interest. The aforementioned increase in the Mega
Deal Loan's interest rate and the potential loss of excess cash flow from the 13
properties could have severe consequences on our ability to fund our operations.

We currently believe a shortfall could occur with respect to refinancing
the Mega Deal Loan because we may be unable to place mortgage indebtedness at
commercially reasonable terms on all of the properties in the current collateral
pool. We are actively marketing for sale several of the collateral properties
because their sale could alleviate some or all of any potential shortfall. We
also continue to evaluate other capital raising activities, such as the
placement of mezzanine level debt on certain of the collateral properties. We
caution that our assumptions regarding the refinancing and sale of the
collateral properties are based on current market conditions and, therefore, are
subject to various risks and uncertainties, including changes in economic
conditions which may adversely impact our ability to refinance the Mega Deal
Loan at favorable rates or in a timely and orderly fashion and which may
adversely impact our ability to consummate various asset sales or other capital
raising activities.


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On July 8, 2003, an affiliate of The Lightstone Group, LLC ("Lightstone")
and the Company entered into a merger agreement (the "Merger Agreement")
pursuant to which the Company would be acquired by such affiliate (the "Merger"
or the "Transaction"). (See Note 10 - "Merger Agreement" of the Notes to
Consolidated Financial Statements for additional information.) In connection
with the execution of the Merger Agreement, certain restrictions were placed on
us with respect to the refinancing of the Mega Deal Loan. Specifically, we were
restricted from negotiating or discussing the refinancing of the properties
securing the Mega Deal Loan with any lenders until September 15, 2003, at which
time we were permitted to discuss refinancing of the Mega Deal Loan with certain
enumerated lenders. However, we are precluded from closing any loans relating to
the refinancing of the Mega Deal Loan until January 11, 2004. Lightstone is
obligated to (i) pay (A) one-half of the additional interest incurred by us
between November 11, 2003 and December 31, 2003, and (B) all of the additional
interest incurred by us between January 1, 2004 and January 11, 2004 with
respect to the Mega Deal Loan and (ii) loan us, at a rate of 7% and for a term
of not less than one year, an amount equal to any excess cash flow retained by
the lender and applied to principal under the Mega Deal Loan commencing on
November 11, 2003 and through January 11, 2004.

In addition to the restrictions with respect to the refinancing of the Mega
Deal Loan discussed above, pursuant to the terms of the Merger Agreement, we
have also agreed to certain conditions pending the closing of the Transaction.
These conditions provide for certain restrictions with respect to our operating
and refinancing activities (see Note 10 - "Merger Agreement" for additional
information). These restrictions could adversely affect our liquidity in
addition to our ability to refinance the Mega Deal Loan in a timely and orderly
fashion.

If the Merger Agreement is terminated under certain circumstances, we would
be required to make payments to Lightstone ranging from $3,500 to $6,000 which
would adversely affect our liquidity. See Note 10 - "Merger Agreement" of the
Notes to Consolidated Financial Statements for additional information.

In connection with the completion of the sale of the Bridge Properties in
July 2002, we guaranteed to FRIT (i) a 13% return on its $17,236 of invested
capital, and (ii) the full return of the Mandatory Redemption Obligation by
December 31, 2003. As of September 30, 2003, the Mandatory Redemption Obligation
(included in accounts payable and other liabilities in the Consolidated Balance
Sheet) was $14,489.

We continue to seek to generate additional liquidity to repay the Mandatory
Redemption Obligation through the placement of additional indebtedness on the
Bridge Properties. There can be no assurance that we will be able to complete
such capital raising activities by December 31, 2003 or that such capital
raising activities, if they should occur, will generate sufficient proceeds to
repay the Mandatory Redemption Obligation in full. Failure to repay the
Mandatory Redemption Obligation by December 31, 2003 would constitute a default,
which would enable FRIT to exercise its rights with respect to the collateral
pledged as security to the guarantee, including some of our partnership
interests in the 13 properties which secure the Mega Deal Loan. Because the
Mandatory Redemption Obligation is secured by some of our partnership interests
in the 13 properties which secure the Mega Deal Loan, we may be required to
repay the Mandatory Redemption Obligation before, or in connection with, the
refinancing of the Mega Deal Loan. Additionally, any change in control with
respect to us accelerates the Mandatory Redemption Obligation.

In connection with the execution of the Merger Agreement, Lightstone has
agreed to provide sufficient financing, if necessary, to repay the Mandatory
Redemption Obligation in full at its maturity. The new financing would be at
substantially similar economic terms and conditions as those currently in place
for the Mandatory Redemption Obligation and would have a one-year term. See Note
10 - "Merger Agreement" of the Notes to Consolidated Financial Statements for
additional information.


Page - (44)


We have fixed rate tax-exempt revenue bonds collateralized by properties
located in Chattanooga, Tennessee (the "Chattanooga Bonds") which contain (i)
certain covenants, including a minimum debt-service coverage ratio financial
covenant (the "Financial Covenant") and (ii) cross-default provisions with
respect to certain of our other credit agreements. Based on the operations of
the collateral properties, we were not in compliance with the Financial Covenant
for the quarters ended June 30, September 30 and December 31, 2002. In the event
of non-compliance with the Financial Covenant or default, the holders of the
Chattanooga Bonds (the "Bondholders") had the ability to put such obligations to
us at a price equal to par plus accrued interest. On January 31, 2003, we
entered into an agreement (the "Forbearance Agreement") with the Bondholders.
The Forbearance Agreement provides amendments to the underlying loan and other
agreements that enable us to be in compliance with various financial covenants,
including the Financial Covenant. So long as we continue to comply with the
provisions of the Forbearance Agreement and are not otherwise in default of the
underlying loan and other documents through December 31, 2004, the revised
financial covenants will govern. Additionally, certain quarterly tested
financial covenants and other covenants become effective June 30, 2004. Pursuant
to the terms of the Forbearance Agreement, in February 2003 we funded $1,000
into an escrow account to be used for the potential conversion of certain of the
retail space to office space in the collateral properties and agreed that an
event of default with respect to the other debt obligations related to the
collateral properties would also constitute a default under the Chattanooga
Bonds. The outstanding balance of the Chattanooga Bonds was $17,920 as of
September 30, 2003.

With respect to the Chattanooga Bonds, based on our current projections, we
believe we will not be in compliance with certain quarterly tested financial
covenants when they become effective on June 30, 2004 which would enable the
Bondholders to elect to put the Chattanooga Bonds to us at their par amount plus
accrued interest. We continue to explore opportunities to (i) obtain alternative
financing from other financial institutions, (ii) sell the properties securing
the Chattanooga Bonds and (iii) explore other possible capital transactions in
order to generate cash to repay the Chattanooga Bonds. There can be no assurance
that we will be able to complete any such activity sufficient to repay the
amount outstanding under the Chattanooga Bonds in the event the Bondholders are
able and elect to exercise their put rights.

These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements contained herein do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

Dividends and Distributions

To qualify as a real estate investment trust ("REIT") for federal income
tax purposes, we are required to pay distributions to our common and preferred
shareholders of at least 90% of our REIT taxable income in addition to
satisfying other requirements. Although we intend to make distributions, if
necessary, to remain qualified as a REIT under the Code, we also intend to
retain such amounts as we consider necessary from time to time for our capital
and liquidity needs.

Our policy remains to pay distributions only to the extent necessary to
maintain our status as a REIT for federal income tax purposes. During 2002, we
were not required to pay any distributions in order to maintain our status as a
REIT and based on our current federal income tax projections, we do not expect
to pay any distributions during 2003. On November 15, 2003 we will be in arrears
on 16 quarters of preferred stock distributions due February 15, 2000 through
November 15, 2003, respectively.


Page - (45)


We may not make distributions to our common shareholders or our holders of
common units of limited partnership interests in the Operating Partnership
unless we are current with respect to distributions to our preferred
shareholders. As of September 30, 2003, unpaid dividends for the period
beginning on November 16, 1999 September 30, 2003 on our Series A Senior
Cumulative Preferred Stock ("Series A Senior Preferred Stock") and Series B
Cumulative Convertible Participating Preferred Stock ("Series B Convertible
Preferred Stock") aggregated $23,395 and $64,460, respectively. The annualized
dividends on our 2,300,000 shares of Series A Senior Preferred Stock and
7,828,125 shares of Series B Convertible Preferred Stock outstanding as of
September 30, 2003 are $6,037 ($2.625 per share) and $16,635 ($2.125 per share),
respectively.

Merger Agreement

In June 2002, we selected Houlihan Lokey Howard & Zukin Capital to assist
us in exploring recapitalization, restructuring, financing and other strategic
alternatives designed to strengthen our financial position and address our
long-term capital requirements. Costs incurred related to such activities are
reflected in corporate general and administrative expense in the accompanying
Consolidated Statements of Operations.

We are currently a party to the Merger Agreement (dated as of July 8, 2003
and as amended by that first amendment dated as of September 3, 2003, and as
otherwise amended) with Prime Outlets Acquisition Company, LLC (the "Buyer"), a
Delaware limited liability company which is an affiliate of Lightstone, a New
Jersey-based real estate company, which provides for us to be merged with and
into the Buyer. Consummation of the Transaction is subject to a number of
conditions including the approval of the Transaction and the Merger Agreement by
the holders of at least 66 2/3% of both our Series A Senior Preferred Stock and
Series B Convertible Preferred Stock, each voting separately as a class, and the
approval of a majority of our common stockholders voting as a separate class, as
well as other customary approvals.

The Transaction, which will result in aggregate consideration of $115,514
payable to our stockholders and unit holders, has a total value of approximately
$638,000, including debt expected to be assumed by the Buyer. Under the terms of
the Merger Agreement, each holder of our Series A Senior Preferred Stock will
receive cash in the amount of $18.40 per share, each holder of our Series B
Convertible Preferred Stock will receive cash in the amount of $8.169 per share,
and each holder of our common stock will receive cash in the amount of $0.17 per
share.

Pursuant to the terms of the Merger Agreement, the Buyer and the Company
have agreed to certain conditions pending the closing of the Transaction. These
conditions provide for certain restrictions with respect to our operating and
refinancing activities, including our refinancing of the Mega Deal Loan (see
Note 4 - "Debt" of the Notes to Consolidated Financial Statements for additional
information).

Our board of directors, as well as a special committee comprised of
disinterested members of the board of directors (the "Special Committee"), have
approved the Transaction and the Merger Agreement and recommended that the
stockholders vote in favor of the Transaction. Because our charter does not
address the allocation of consideration among our various classes of capital
stock in the Transaction, such allocation was determined by the Special
Committee and approved by the board of directors. Houlihan Lokey Howard & Zukin
Capital acted as financial advisor to the Special Committee and Houlihan Lokey
Howard & Zukin Financial Advisors, Inc., an affiliate of Houlihan Lokey Howard &
Zukin Capital, has provided an opinion to the Special Committee and our board of
directors that the consideration to be received by each of the classes of our
stock, considered independently, is fair to such respective classes, from a
financial point of view.

Formal documentation relating to the Transaction and the Merger Agreement
has been filed with the Securities and Exchange Commission and sent to our
stockholders and limited partners.


Page - (46)


Concurrent with the consummation of the Transaction, the agreement of
limited partnership of the Operating Partnership will be amended and restated
(the "Amended Partnership Agreement") pursuant to which holders of common units
in the Operating Partnership (other than common units held by us) will have the
opportunity to exchange all, but not less than all, of their units for a like
number of preferred units in the Operating Partnership ("Preferred Unit"). Each
holder of Preferred Units will be entitled to require the Operating Partnership
to redeem all of such holder's Preferred Units for an amount per unit equal to
$0.17 (the consideration paid for a share of common stock of the Company in the
Transaction) plus accrued and unpaid distributions at the rate of 6% per annum.
In addition, the Amended Partnership Agreement contains certain tax related
provisions that, subject to certain exceptions, will benefit holders of
Preferred Units for a period of seven years including restrictions on the sale
of properties and requirements to allocate debt in a certain manner.

We have agreed to pay the Buyer a termination fee of $4,500, plus expenses
of up to $1,500, if the Transaction is not completed under certain
circumstances, including our election to pursue an alternative transaction. In
certain other circumstances in which the Transaction has not been completed,
including the failure to obtain the stockholder approval of the Transaction, a
termination fee will not be payable but we have agreed to reimburse the Buyer
for its expenses up to $3,500. As collateral for these obligations, we also
entered into an agreement with Lightstone providing for the assignment of our
rights to, and interest in, an escrow of $2,800 which was established in
connection with our sale of Prime Outlets of Puerto Rico in December 2002 to an
affiliate of Lightstone.

The special meeting of stockholders (the "Special Meeting") for the purpose
of, among other things, voting on the Transaction was originally scheduled for
Thursday, October 30, 2003. On October 30, 2003, we announced that the Special
Meeting had been adjourned to November 4, 2003 and later announced on November
4, 2003 that the Special Meeting had been adjourned again until Tuesday,
November 18, 2003 to provide stockholders with additional time to cast their
vote on the Transaction. Before the adjournment of the Special Meeting on
October 30, 2003, our common stockholders approved an amendment to our charter
to reduce the required vote of the common stockholders to approve a merger from
two-thirds to a majority.

There can be no assurance as to the timing, terms or completion of the
Transaction.

Settlement of Tenant Matters

During 2002, we entered into settlement agreements with respect to certain
tenant matters providing for aggregate payments of $2,760. Through December 31,
2002, we made approximately $2,607 of such required payments. The 2002 payments
were principally made from certain funds escrowed under a mezzanine loan, which
was repaid in full in December 2002. The remaining payment of $153 was made in
January 2003 with cash from operations. These settlement agreements did not have
a material impact on our financial condition or our results from operations. We
had previously established reserves aggregating $5,000 for the settlement of
such matters.

Development Activities and Capital Expenditures

During 2003, we will continue to explore potential international
opportunities and will selectively consider expansion and/or redevelopment of
certain of our existing outlet centers. We do not currently expect such
activities to have a significant impact on our liquidity or financial condition.

Additionally, we expect to incur costs during the remainder of 2003 (i) in
connection with releasing space to new tenants and (ii) for repairs and
maintenance of our properties. However, we do not expect such expenditures to
have a significant impact on our liquidity or financial condition because
reserves for such costs are paid monthly into escrow accounts under many of our
loans.


Page - (47)


Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in
interim and annual financial statements about the obligations under certain
guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize,
at the inception of the guarantee, an initial liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN No. 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. We adopted the disclosure provisions of
FIN No. 45 effective December 31, 2002. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We did not issue or
modify any guarantees during the nine months ended September 30, 2003. See
"Guarantees and Guarantees of Indebtedness of Others" contained in Note 4 -
"Debt" of the Notes to Consolidated Financial Statements for additional
information.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 requires the consolidation of an entity by an
enterprise (i) if that enterprise, known as a "primary beneficiary", has a
variable interest that will absorb a majority of the entity's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur, or both and (ii) if the entity is a variable interest entity, as defined
by FIN No. 46. We did not create any variable interest entities during the nine
months ended September 30, 2003. We plan to adopt FIN No. 46 in the fourth
quarter of 2003 and do not believe that this adoption will have a significant
impact on our financial statements for our existing investments in
unconsolidated joint ventures.

In May 2003, the FASB issued FAS No 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously classified as equity. In October 2003, the FASB decided to
indefinitely delay the effective date of the provisions of FAS No. 150 related
to finite life entities and also indicated that it may modify other guidance in
FAS No. 150. In its original form, we did not anticipate FAS No. 150 having a
significant impact on our financial statements. However, that assessment may
change if the FASB modifies the guidance in FAS No. 150.

Risk Management Activities

We are subject to various market risks and uncertainties, including, but
not limited to, the effects of current and future economic conditions, and the
resulting impact on our tenants' sales and our revenue; the effects of increases
in market interest rates from current levels (see below); the risks associated
with existing vacancy rates or potential increases in vacancy rates because of,
among other factors, tenant bankruptcies and store closures, and the resulting
impact on our revenue; and risks associated with refinancing our current debt
obligations or obtaining new financing under terms less favorable than we have
experienced in prior periods.


Page - (48)


Interest Rate Risk

In the ordinary course of business, we are exposed to the impact of
interest rate changes. We employ established policies and procedures to manage
our exposure to interest rate changes. Historically, we have used a mix of fixed
and variable-rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs. In certain cases, we have used derivative financial instruments such as
interest rate protection agreements to manage interest rate risk associated with
variable-rate indebtedness. Nevertheless, as of September 30, 2003, all of our
outstanding indebtedness bore interest at fixed rates. See Item 3 -
"Quantitative and Qualitative Disclosures About Material Risk" for additional
information. Also see "Guarantees of Debt and Indebtedness of Others" for
additional information.

Economic Conditions

In general, the leases relating to our outlet centers have terms of three
to five years and most contain provisions that somewhat mitigate the impact of
inflation. Such provisions include clauses providing for increases in base rent
and clauses enabling us to receive percentage rents for annual sales in excess
of certain thresholds based on merchants' gross sales. In addition, lease
agreements generally provide for (i) the recovery of a merchant's proportionate
share of actual costs of common area maintenance ("CAM"), refuse removal,
insurance, and real estate taxes, (ii) a contribution for advertising and
promotion and (iii) an administrative fee. CAM includes items such as utilities,
security, parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses. We continually monitor our
lease provisions in light of current and expected economic conditions and other
factors. In this regard, we may consider alternative lease provisions (e.g.,
fixed CAM) where appropriate.

Funds from Operations

Industry analysts generally consider funds from operations ("FFO"), as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
an alternative non-GAAP measure of performance of an equity REIT. In 1991,
NAREIT adopted its definition of FFO. This definition was clarified in 1995,
1999 and 2002. FFO is currently defined by NAREIT as net income or loss
(computed in accordance with GAAP), excluding gains or losses from provisions
for asset impairment and sales of depreciable operating property, plus
depreciation and amortization (other than amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures and discontinued operations. FFO
includes non-recurring events, except for those that are defined as
"extraordinary items" in accordance with GAAP. FFO excludes the earnings impact
of "cumulative effects of accounting changes" as defined by GAAP. Effective
January 1, 2002, FFO related to assets held for sale, sold or otherwise
transferred and included in results of discontinued operations (in accordance
with the requirements of FAS No. 144) should continue to be included in FFO.

Previously, we excluded provisions for asset impairment from our reported FFO
computations in accordance with guidelines established by NAREIT; however,
because of recent guidance issued by the Securities and Exchange Commission
("SEC"), we now include provisions for asset impairment in our FFO computations.
Accordingly, the provision for asset impairment of $6,590 incurred in the second
quarter of 2003 is included in the FFO computation for the nine months ended
September 30, 2003 and the FFO for the quarter and nine months ended September
30, 2002 have been restated to include provisions for asset impairment
aggregating $97,176 (of which $15,557 is included in discontinued operations)
and $109,376 (of which $27,757 is included in discontinued operations),
respectively.


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We believe that FFO is an important and widely used non-GAAP measure of the
operating performance of REITs, which provides a relevant basis for comparison
to other REITs. Therefore, FFO is presented to assist investors in analyzing our
performance. Our 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 we do. Therefore, we caution that the
calculation of FFO may vary from entity to entity and, as such the presentation
of FFO by us may not be comparable to other similarly titled measures of other
reporting companies. We believe that to facilitate a clear understanding of our
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 our performance or to cash flows
as a measure of liquidity or ability to make distributions.

FFO was $3,914 for the three months ended September 30, 2003 compared to
$(90,286) for the same period in 2002. The FFO results for the third quarter of
2003 include $1,224 of net interest expense (the "Defeased Interest Expense")
attributable to mortgage indebtedness that was defeased in December 2002. This
net interest expense had no impact on our operating cash flow during 2003
because such payments were made from previously established escrows. The FFO
results for the third quarter of 2002 reflect an aggregate provision for asset
impairment of $97,176 (of which $15,557 is included in discontinued operations).

Excluding the impact of (i) the Defeased Interest Expense and (ii) the
provision for asset impairment, FFO for the third quarter of 2003 and 2002 was
$5,138 and $6,890, respectively. This decrease in our FFO results for the third
quarter of 2003 compared to our FFO results for the same period in 2002 is
attributable to (i) the impact of reduced weighted-average portfolio occupancy
during the 2003 period, (ii) the impact of changes in economic rental rates,
(iii) legal, financial advisory and proxy costs associated with the Transaction
during the 2003 period and (iv) the loss of net operating income resulting from
dispositions of properties primarily during 2002. Partially offsetting these
items were interest savings resulting from the repayment of indebtedness.

FFO was $8,466 for the nine months ended September 30, 2003 compared to
$(93,267) for the same period in 2002. The FFO results for the nine months ended
September 30, 2003 include $3,177 of Defeased Interest Expense. The FFO results
for the nine months ended September 30, 2003 also reflect a provision for asset
impairment of $6,590 and the FFO results for the nine months ended September 30,
2002 reflect an aggregate provision for asset impairment of $109,376 (of which
$27,757 is included in discontinued operations).

Excluding the impact of (i) the Defeased Interest Expense and (ii) the
provisions for asset impairment, FFO for the nine months ended September 30,
2003 and 2002 was $18,233 and $16,109, respectively. This increase in our FFO
results during the nine months ended September 30, 2003 compared to our FFO
results for the same period in 2002 was attributable to (i) interest savings
resulting from the repayment of indebtedness, (ii) the previously discussed
non-recurring charge of $3,000 in the second quarter of 2002 and (iii) reduced
bad debt expense. These items were partially offset by (i) the impact of reduced
weighted-average portfolio occupancy during the 2003 period, (ii) the impact of
changes in economic rental rates, (iii) legal, financial advisory and proxy
costs associated with the Transaction during the 2003 period and (iv) the loss
of net operating income resulting from dispositions of properties primarily
during 2002.


Page - (50)


TABLE 8 provides a reconciliation of loss from continuing operations to
FFO for the three and nine months ended September 30, 2003 and 2002.

Table 8 - Funds from Operations



- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Loss from continuing operations $ (3,717) $ (85,956) $ (13,988) $ (95,907)
Adjustments:
Gain on sale of real estate - - - (5,802)
Depreciation and amortization 6,645 8,229 20,948 27,446
Non-real estate depreciation and amortization (377) (601) (1,654) (1,693)
Unconsolidated joint ventures' adjustments 1,414 1,151 3,475 2,897
Discontinued operations (51) (13,109) (315) (20,208)
-------- --------- --------- ---------
FFO per NAREIT Definition $ 3,914 $ (90,286) $ 8,466 $ (93,267)
======== ========= ========= =========

Other Data:
Net cash provided by operating activities $ 3,629 $ 6,490 $ 7,627 $ 16,426
Net cash provided by (used in) investing activities (480) (1,478) (1,670) 18,193
Cash used in financing activities (1,795) (4,174) (5,503) (36,117)
====================================================================================================================================


Page - (51)


Item 3. Quantitative and Qualitative Disclosures of Market Risk


Market Risk Sensitivity

We are subject to various market risks and uncertainties, including, but
not limited to, the effects of current and future economic conditions, and the
resulting impact on our revenue; the effects of increases in market interest
rates from current levels (see below); the risks associated with existing
vacancy rates or potential increases in vacancy rates because of, among other
factors, tenant bankruptcies and store closures, and the resulting impact on our
revenue; and risks associated with refinancing our current debt obligations or
obtaining new financing under terms less favorable than we have experienced in
prior periods.

Interest Rate Risk

In the ordinary course of business, we are exposed to the impact of
interest rate changes. We employ established policies and procedures to manage
our exposure to interest rate changes. Historically, we have used a mix of fixed
and variable-rate debt to (i) limit the impact of interest rate changes on our
results from operations and cash flows and (ii) lower our overall borrowing
costs. Nevertheless, as of September 30, 2003, all of our outstanding
indebtedness bore interest at fixed rates.

The following table summarizes (A) scheduled principal maturities of our
debt, excluding (i) unamortized debt premiums of $6,091, (ii) $24,919 of
aggregate non-recourse mortgage indebtedness in default and (iii) defeased notes
payable in the amount of $74,046, which was paid in full on November 11, 2003,
and (B) the related average contractual interest rates by year of maturity as of
September 30, 2003. See Note 4 - "Debt" of the Notes to Consolidated Financial
Statements contained herein for additional information.



- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------


Bonds Payable
Principal $ 546 $ 726 $ 773 $ 820 $ 878 $ 18,618 $ 22,361
Average interest rate 6.79% 6.34% 6.34% 6.34% 6.34% 6.52% 6.50%

Notes Payable
Principal $262,008 $ 4,571 $ 11,574 $ 120,437 $ 1,002 $ 57,995 $ 457,587
Average interest rate 7.78% 7.97% 8.58% 8.83% 7.60% 7.59% 8.06%
====================================================================================================================================


We sold Prime Outlets at Hagerstown (the "Hagerstown Center") on January
11, 2002 to an existing joint venture partnership (the "Prime/Estein Venture").
In connection with the sale, the Prime/Estein Venture assumed the first mortgage
loan on the Hagerstown Center (the "Hagerstown First Mortgage") in the amount of
$46,862; however, our guarantee of such indebtedness remains in place.
Additionally, we are obligated to refinance the Hagerstown First Mortgage on
behalf of the Prime/Estein Venture on or before June 1, 2004, the date on which
such indebtedness matures. The Prime/Estein Venture's cost of the Hagerstown
First Mortgage and any refinancing of it are fixed at an annual rate of 7.75%
for a period of 10 years. If the actual cost of such indebtedness should exceed
7.75% at any time during the 10-year period, we will be obligated to pay the
difference to the Prime/Estein Venture. If the actual cost of such indebtedness
is less than 7.75% at any time during the 10-year period, however, the
Prime/Estein Venture will be obligated to pay the difference to us. The actual
cost of the Hagerstown First Mortgage is 30-day LIBOR plus 1.50%, or 2.62% as of
September 30, 2003. Because the Hagerstown First Mortgage bears interest at a
variable rate, we are exposed to the impact of interest rate changes. At
September 30, 2003, a hypothetical 100 basis point move in the LIBOR rate would
impact our interest rate agreement by $469. See Note 4 - "Debt" of the Notes to
Consolidated Financial Statements for additional information.


Page - (52)


Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We have conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended)
as of the end of the period covered by this quarterly report on Form
10-Q, which was conducted with the participation of our Chairman and
Chief Executive Officer along with our President, Chief Financial
Officer and Treasurer, Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within the Company have been detected. However, based upon the
evaluation, the Company's Chairman and Chief Executive Officer along
with the Company's President, Chief Financial Officer and Treasurer
concluded that, subject to the limitations described above, the
Company's disclosure controls and procedures are effective. In
addition, they concluded that there were no significant deficiencies in
the design or operations of internal controls, which could
significantly affect our ability to record, process, summarize and
report financial data.

(b) Changes in Internal Controls

There was no significant change in our internal controls over financial
reporting that occurred during the fiscal quarter covered by this
report that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.


Page - (53)


PART II: OTHER INFORMATION

Item 1. Legal Proceedings

For a description of legal proceedings involving us and our properties, please
see Part I, Item 3 - "Legal Proceedings" of our Annual Report on Form 10-K for
the year ended December 31, 2002 and Note 6 - "Legal Proceedings" of the Notes
to Consolidated Financial Statements contained herein. The following information
updates such disclosure.

Certain tenants in our and our affiliates' outlet centers have made or may make
allegations concerning overcharging for common area maintenance ("CAM") and
promotion fund charges because of varying clauses in their leases pursuant to
which they claim under various circumstances that they were not required to pay
some or all of the pass-through charges. Such claims if asserted and found
meritorious, could have a material affect on our financial condition.
Determination of whether liability would exist to us would depend on
interpretation of various lease clauses within a tenant's lease and all of the
other leases at each center collectively. To date such issues have been raised
and resolved with various tenants, some of which at one time or another were the
subject of litigation, or threatened litigation with us. Additionally, on April
9, 2003, Gap Inc. notified us that it believes it is entitled to a refund of
certain pass-through charges as a result of certain clauses in its leases. The
Company and Gap, Inc. are in discussions concerning the claims of Gap, Inc.

In the second quarter of 2002, we recorded a non-recurring charge to establish a
reserve in the amount of $3,000 for resolution of these matters. This reserve
was estimated in accordance with our established policies and procedures
concerning loss contingencies for additional information. The balance of the
unused reserve (which is included in the accounts payable and other liabilities
in the Consolidated Balance Sheet) is $2,240 as of September 30, 2003. Based on
presently available information, we believe it is probable the remaining reserve
will be utilized over the next several years in resolving claims relating to the
pass-through and promotional fund provisions contained in our leases, inclusive
of amounts that may be owed, if any, to Gap Inc. We caution, however, that given
the inherent uncertainties of litigation and the complexities associated with a
large number of leases and other factual questions at issue, actual costs may
vary from this estimate. No other such tenant, however, has filed a suit or
indicated to us that it intends to file a suit. Nevertheless, it is too early to
make any predictions as to whether we or our affiliates may be found liable with
respect to other tenants, or to predict damages should liability be found.


Page - (54)


Several entities (the "eOutlets Plaintiffs") filed or stated an intention to
file lawsuits (collectively, the "eOutlets Lawsuits") against us and our
affiliates arising out of our on-line venture, primeoutlets.com. inc., also
known as eOutlets, an affiliate of ours. primeoutlets.com, inc. filed for
protection under Chapter 7 of the United States Bankruptcy Code in November of
2000 under the name E-Outlets Resolution Corp. (the "Debtor"). The eOutlets
Plaintiffs sought to hold us and our affiliates responsible under various legal
theories for liabilities incurred by primeoutlets.com, inc., including the
theories that we guaranteed the obligations of eOutlets and that we were the
"alter-ego" of eOutlets. Other than the suit filed on November 5, 2002 and
discussed below, these eOutlets Lawsuits against us have been resolved or are
now barred by the applicable statute of limitations or otherwise. On November 5,
2002, the bankruptcy trustee for the Debtor brought suit against Prime Retail,
L.P., Prime Retail, Inc., and Prime Retail E-Commerce, Inc. (the "Entity
Defendants") and certain former directors of the Debtor (the "Individual
Defendants"). Motions to dismiss the suit were filed by all Defendants and a
hearing was held on September 29, 2003. After the hearing, the Trustee's
remaining claims involve promissory estoppel, breach of contract, breach of
fiduciary duty, tortious interference with prospective business advantage, and
preferences against the Entity Defendants, and breach of fiduciary duty and
gross negligence against the individual defendants. We have tendered the suit,
both as to the Entity Defendants and Individual Defendants, to the Directors'
and Officers' insurance carrier. All Defendants believe the suit is without
merit and plan on defending it vigorously. Nevertheless, the outcome of this
lawsuit, and the ultimate liability of us, if any, cannot be predicted at this
time.

On August 29, 2003, the Company received notice of a purported class action
lawsuit against the Company, the Company's board of directors, Prime Outlets
Acquisition Company, LLC and The Lightstone Group, LLC (collectively,
"Lightstone") filed by four related series A preferred stockholders (the
"Plaintiffs"), in the Circuit Court for Baltimore City, Maryland (the "Court")
on August 12, 2003 concerning the Company's merger with Lightstone (the
"Merger"). The lawsuit alleges, among other things, that the Company's directors
breached their fiduciary duties in approving the Merger, that the consideration
payable in respect of the series A preferred stock is unfair and inadequate and
that the information made available by the Company in connection with the
transaction is deficient. The plaintiffs sought, among other things, that the
transaction contemplated by the Merger Agreement be enjoined or, in the event
such transaction is consummated, that it be rescinded and damages be awarded to
class members. On September 29, 2003, the defendants filed a motion to dismiss
the original complaint. In response, on October 8, 2003, the Plaintiffs filed a
Verified First Amended Class Action Complaint along with a motion for expedited
proceedings and subsequent preliminary injunction hearing. After a court
conference, the Plaintiffs converted their motion for a preliminary injunction
into one for a temporary restraining order seeking to enjoin the special meeting
for and the scheduled vote on the transaction. The Court held a hearing on the
defendants' motion to dismiss and the motion for temporary restraining order on
October 24 and 28, 2003. On October 28, 2003, the Plaintiffs announced that they
were withdrawing their request for injunctive relief, and would not seek to
prevent the special meeting from occurring. The Court ruled that it would
dismiss the First Amended Complaint, but allow the Plaintiffs 30 days to file a
second amended complaint.

Item 3. Defaults Upon Senior Securities

We are currently in arrears in the payment of distributions on our 10.5% Series
A Senior Cumulative Preferred Stock ("Series A Senior Preferred Stock") and 8.5%
Series B Cumulative Participating Convertible Preferred Stock ("Series B
Convertible Preferred Stock"). As of September 30, 2003, the aggregate arrearage
on the Series A Senior Preferred Stock and the Series B Convertible Preferred
Stock was approximately $23.4 million and approximately $64.6 million,
respectively.


Page - (55)


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

On October 30, 2003 at a special meeting, our common stockholders approved an
amendment to our charter which reduced the required vote to approve a merger
from two-thirds to a majority. 23,377,680 shares voted for the amendment,
4,345,594 shares voted against the amendment, and 214,241 shares abstained. See
Note 10 - "Merger Agreement" of the Notes to Consolidated Financial Statements
contained herein for additional information.

Item 6. Exhibits and Reports on Form 8-K

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

Exhibit 3.1 Charter Amendment

Exhibit 31.1 Certification of Glenn D. Reschke pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated November
13, 2003.

Exhibit 31.2 Certification of Robert A. Brvenik pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 13, 2003.

Exhibit 32.1 Certification of Glenn D. Reschke pursuant to
Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003, dated as of November 13,
2003.

Exhibit 32.2 Certification of Robert A. Brvenik pursuant to
Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003, dated as of November 13,
2003.

Reports on Form 8-K:

On August 14, 2003, we filed a Current Report on Form 8-K dated August
14, 2003 announcing our second quarter financial results pursuant to
Item 12., Results of Operations and Financial Condition, under Item 9.,
Regulation FD Disclosure, in accordance with the Securities and
Exchange Commission's interim filing guidance set forth in Release
No. 34-47583.

On September 4, 2003, we filed a Current Report on Form 8-K dated
September 3, 2003, under Item 5, Other Events, relating to the joint
announcement between us and The Lightstone Group, LLC ("Lightstone"), a
New Jersey-based real estate company, that they amended the merger
agreement (the "Merger Agreement") entered into on July 8, 2003 between
Prime Outlets Acquisition Company, LLC (the "Buyer), a Delaware limited
liability company which is an affiliate of Lightstone, and us, which
provides for us to be merged with and into the Buyer. The amendment
increases the aggregate consideration payable to our shareholders and
unit holders from $115.0 million to $115.5 million and reflects a
revised allocation of the consideration among our classes of capital
stock. The filing included as exhibits: (i) a copy of the amendment to
the Merger Agreement and (ii) a copy of the joint press release issued
by us and Lightstone regarding the amendment of the Merger Agreement.*

* Pursuant to General Instruction B of Form 8-K, the report submitted
to the Securities and Exchange C ommission under Item 9, Regulation FD
Disclosure, is not deemed to be "filed" for purpose of Section 18 of
the Securities Exchange Act of 1934 (the "Exchange Act"), and we are
not subject to the liabilities of that section with respect to such
reports. We are not incorporating, and will not incorporate by
reference, such report into filings under the Securities Act of 1933 or
the Exchange Act.

Page - (56)


SIGNATURES



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



PRIME RETAIL, INC.
Registrant



Date: November 13, 2003 /s/ Robert A. Brvenik
----------------------------------
Robert A. Brvenik
President, Chief Financial Officer and Treasurer