PRIME RETAIL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 1998
OR

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

Commission file number: 0-23616

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

Document

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

PRIME RETAIL, INC.

Form 10-K

December 31, 1998

TABLE OF CONTENTS

Part I Page

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

Part II

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

Part III

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

Part IV

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

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

PART I
ITEM 1 - BUSINESS

The Company

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

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

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

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

Tax Status

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

Business of the Company

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

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

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

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

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

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

Strategies For Growth

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

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

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

o Strategic Expansions of Existing Centers. The Company selectively
expands its existing manufacturers' outlet centers in phased developments
that respond to merchant and consumer demand, thereby maximizing returns
from these outlet centers through higher effective rents from new merchants
based on the proven success and customer drawing power of existing phases.
The Company expects to open approximately 380,000 square feet of GLA during
1999 in connection with planned expansions of existing centers. As of
February 28, 1999, the Company owned, or held under long-term lease, land
contiguous to its outlet centers to construct additional phases totaling
approximately 2,000,000 square feet of GLA. The Company also holds options
to purchase property adjoining its existing manufacturers' outlet centers
upon which additional expansions could be constructed.

o Active Property Management. The Company monitors and seeks to
enhance the operating performance of its centers through intensive merchant
and property management, and by providing experienced and professional
on-site management. Property managers and marketing directors work with
leasing representatives of the Company to systematically review merchant
performance, merchandising mix and layout in order to improve sales per
square foot. Through its intensive management efforts, the Company attempts
to reduce the average occupancy cost on its outlet portfolio while at the
same time continuing to provide a high level of merchant and customer
service, maintenance and security.

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

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

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

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

Competition

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

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

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

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

Relationship with Municipalities

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

Environmental Matters

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

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

Insurance

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

Employees

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

Executive Officers

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

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

Biographies of Executive Officers

Michael W. Reschke. Michael W. Reschke has been the Chairman of the Board
of Directors of the Company since the Company's inception. Mr. Reschke founded
PGI in 1981 and, since that time, has acted as PGI's Chairman, Chief Executive
Officer, and President. For the last 17 years, Mr. Reschke has directed and
managed the development, finance, construction, leasing, marketing, acquisition,
renovation, and property management activities of PGI. Mr. Reschke also is
Chairman of the Board of Directors of Prime Group Realty Trust (NYSE: PGE), a
real estate investment trust engaged in the ownership, operation, acquisition
and development of office and industrial properties, primarily in the greater
Chicago market, and is the successor in interest to the former office and
industrial divisions of PGI. Mr. Reschke also is Chairman of the Board of
Directors of Brookdale Living Communities, Inc. (NASD: BLCI), a corporation
engaged in the ownership, operation, acquisition, and development of senior
housing and assisted living facilities and is the successor in interest to the
former senior housing division of PGI. Mr. Reschke also is a member of the Board
of Directors of Horizon Group Properties, Inc. (NASD:HGPI), a real estate
investment trust engaged in the ownership, operation, acquisition and renovation
of distressed real estate assets including the outlet centers spun-off by the
Company following its merger with Horizon Group, Inc. in June of 1998. Mr.
Reschke received a Juris Doctorate degree (summa cum laude) from the University
of Illinois after having received a B.A. degree (summa cum laude) in Accounting
from Northern Illinois University. Mr. Reschke is licensed to practice law in
the State of Illinois and is a certified public accountant. Mr. Reschke is a
member of the Chairman's Roundtable and the Executive Committee of the National
Realty Committee, as well as a full member of the Urban Land Institute. Mr.
Reschke is the brother of Glenn D. Reschke, an executive officer of the Company.

Abraham Rosenthal. Abraham Rosenthal has been the Chief Executive Officer
and a Director of Prime Retail since Prime's inception. Mr. Rosenthal joined PGI
in 1988, serving as Vice President, Senior Vice President and, immediately prior
to joining the Company, as Executive Vice President. Mr. Rosenthal's
responsibilities with the Company include strategic planning, new business
development, investor relations, capital markets, financing, site selection,
pre-development activities and building designs. Mr. Rosenthal has been involved
in retail design and development for the past 25 years. Prior to joining PGI,
Mr. Rosenthal was Vice President, Design and Construction of Cordish/Embry and
Associates. Mr. Rosenthal received a Bachelor of Architecture degree from the
University of Maryland School of Architecture, is a registered architect in the
State of Maryland and is certified by the

National Council of Architectural Registration Board. Mr. Rosenthal is a full
member of the Urban Land Institute, the International Council of Shopping
Centers ("ICSC") and the National Realty Committee and the National Association
of Real Estate Investment Trusts ("NAREIT"). Mr. Rosenthal is on the executive
committee of the Baltimore Museum of Art and chairs the organization's
Development, Marketing and Finance Committee. Mr. Rosenthal is also a member of
the Maryland/Israel Development Center and is on the board and a member of the
executive committee for the Baltimore's Downtown Partnership. Mr. Rosenthal is
also a board member of Sinai Hospital and Bryn Mawr School. Mr. Rosenthal was
the recipient of the 1995 Entrepreneur of the Year Award for Maryland Real
Estate.

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

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

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

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

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

practice law in Illinois.

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

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

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

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

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

ITEM 2 - PROPERTIES

General

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

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

Portfolio of Properties
December 31, 1998

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

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

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

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

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

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

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

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

Portfolio of Properties (continued)
December 31, 1998

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Portfolio of Properties (continued)
December 31, 1998

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Portfolio of Properties (continued)
December 31, 1998

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

Manufacturers' Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

Prime Outlets at Florida City - Florida City, Florida.................. I September 1994 208,000 94

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

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

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

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

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

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

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

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

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

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

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

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

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

Notes:
(1) Percentage reflects fully executed leases as of December 31, 1998 as a
percent of square feet of GLA.

(2) The Company acquired this manufacturers' outlet center on June 15, 1998 as
a result of its merger with Horizon Group, Inc.

(3) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. An unrelated third
party holds a 35% limited partnership interest and the Company holds a 65%
general partnership interest in the partnership that owns Phase II of this
property. Phase I of this mixed- use development includes 154,000 square
feet of office space and Phase II includes 5,000 square feet of office
space. The total office space of

159,000 square feet is not included in this table and such space was 74%
leased as of December 31, 1998.

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

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

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

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

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

Lease Terms

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

The following table sets forth, as of December 31, 1998, tenant lease
expirations for the next 10 years at the Company's manufacturers' outlet centers
(assuming that none of the tenants exercise any renewal option and including
leases at manufacturers' outlet centers owned through joint venture
partnerships):

- ------------------------------------------------------------------------------------------------------------------------------------
Lease Expirations - Outlet Centers

% of Total
Annualized
Number of Approximate Annualized Minimum Rent
Leases GLA Minimum Rent of Represented by
Year Expiring (Sq. Ft.) Expiring Leases Expiring Leases
- ------ ------------- ---------------- -------------------- ---------------

1999 444 1,450,893 $19,882,733 10.19%
2000 674 2,326,253 35,642,961 18.27
2001 653 2,354,139 36,087,572 18.50
2002 575 2,071,812 33,889,303 17.38
2003 564 2,329,036 36,239,319 18.58
2004 176 910,425 13,870,278 7.11
2005 102 665,466 8,884,674 4.56
2006 47 360,808 4,079,233 2.09
2007 27 157,322 1,847,793 0.95
2008 32 179,086 2,744,474 1.41

====================================================================================================================================

Tenants

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

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

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

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

NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ --------- --------------

PHILLIPS-VAN HEUSEN
BASS ............................................................................. 48 2.53%
VAN HEUSEN ....................................................................... 47 1.50
GEOFFREY BEENE ................................................................... 32 1.02
IZOD ............................................................................. 28 0.46
GANT ............................................................................. 7 0.15
--- ----
SUBTOTAL PHILLIPS-VAN HEUSEN................................................... 162 5.66

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

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

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

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

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

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

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

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

NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ --------- --------------

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

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

ITEM 3 - LEGAL PROCEEDINGS

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

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

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

PART II

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

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

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

Market Price of Common Stock and Cash Dividends Paid Per Common Share

- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------- ----------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------- ----------------------------------------------------

Market price per common
share:
High.................. $11.13 $12.81 $15.19 $15.56 $16.50 $15.63 $13.63 $13.38
Low................... 7.50 9.06 11.81 13.75 13.31 13.13 11.88 12.00
End of period close... 9.81 9.81 11.94 14.94 14.19 15.63 13.44 13.00

Cash dividends paid per
common share.......... $0.295 $0.295 $0.795 (1) $0.295 $0.295 $0.295 $0.295 $0.295
====================================================================================================================================

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

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

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

ITEM 6 - SELECTED FINANCIAL DATA
(Amounts in thousands, except per share and per unit amounts)

Prime Retail
Properties
Prime Retail, Inc. (Combined)
-------------------------------------------------------------------------- --------------
Year ended December 31 Period from March 21,
--------------------------------------------------------- March 22 to January 1 to
December 31, March 21,
1998 1997 1996 1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------

Revenues
Base rents............................... $ 148,376 $ 78,046 $ 54,710 $ 46,368 $ 28,657 $ 3,670
Percentage rents......................... 6,384 3,277 1,987 1,520 1,404 187
Tenant reimbursements.................... 67,152 37,519 25,254 22,283 11,858 2,113
Interest and other....................... 11,063 10,288 7,089 7,227 3,450 360
---------- --------- --------- --------- --------- ------------
Total revenues................ 232,975 129,130 89,040 77,398 45,369 6,330
Expense
Property operating....................... 52,684 29,492 20,421 17,389 9,952 1,927
Real estate taxes........................ 16,705 9,417 5,288 4,977 2,462 497
Depreciation and amortization............ 52,959 26,715 19,256 15,438 9,803 2,173
Corporate general and administrative..... 7,980 5,603 4,018 3,878 2,710
Interest................................. 60,704 36,122 24,485 20,821 9,485 3,280
Property management fees................. - - - - - 299
Other charges............................ 6,496 3,234 8,586 2,089 1,503 562
---------- --------- --------- --------- -------- ------------
Total expenses................ 197,528 110,583 82,054 64,592 35,915 8,738
---------- --------- --------- --------- --------- ------------

Income (loss) before loss on sale of real
estate, minority interests and
extraordinary item.................... 35,447 18,547 6,986 12,806 9,454 (2,408)
Loss on sale of real estate.............. (15,461) - - - - -
---------- --------- --------- --------- --------- -----------
Income (loss) before minority interests
and extraordinary item................ 19,986 18,547 6,986 12,806 9,454 (2,408)
(Income) loss allocated to minority
interests............................. (2,456) (10,581) 2,092 5,364 5,204 -
---------- --------- --------- --------- --------- -----------
Income (loss) before extraordinary item.. 17,530 7,966 9,078 18,170 14,658 (2,408)
Extraordinary item....................... - (2,061) (1,017) - - -
---------- --------- --------- --------- ---------- -----------
Net income (loss)......................... 17,530 5,905 8,061 18,170 14,658 $ (2,408)
Income allocated to preferred shareholders 24,604 12,726 14,236 20,944 16,290 ===========
---------- --------- --------- --------- ----------

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

Prime Retail
Properties
Prime Retail, Inc. (Combined)
------------------------------------------------------------------------- ---------------
Year ended December 31 Period from March 21,
--------------------------------------------------------- March 22 to January 1 to
December 31, March 21,
1998 1997 1996 1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------

Balance Sheet Data
Rental property (before accumulated
depreciation)......................... $2,015,722 $904,782 $640,759 $454,480 $376,181 $180,170
Net investment in rental property........ 1,887,975 822,749 583,085 414,290 349,513 164,159
Total assets............................. 1,976,464 904,183 666,803 462,405 385,930 186,034
Bonds and notes payable.................. 1,217,507 515,265 499,523 305,954 214,025 188,378
Total liabilities and minority interests. 1,332,730 559,655 527,594 340,921 258,279 198,244
Shareholders' equity (deficit)........... 643,734 344,528 139,209 121,484 127,651 (12,210)

====================================================================================================================================

Notes:

(1) Management believes that in order to facilitate a clear understanding of
the consolidated historical operating results of the Company, Funds from
Operations ("FFO") should be considered in conjunction with net income
(loss) as presented in the financial statements included in this Annual
Report on Form 10-K. Management believes that FFO is an important and
widely accepted measure of the operating performance of REITs which
provides a relevant basis for comparison to other REITs. Therefore, FFO is
presented to assist investors in analyzing the performance of the Company.
FFO represents net income (loss) (computed in accordance with generally
accepted accounting principles ("GAAP"), excluding gains or losses from
debt restructuring and sales of property, plus depreciation and
amortization and after adjustments for unconsolidated investment
partnerships and joint ventures. In March 1995, the National Association of
Real Estate Investment Trusts ("NAREIT") issued a clarification of its
definition of FFO. Although the Company has adopted the NAREIT definition
of FFO, the Company cautions that the calculation of FFO may vary from
entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly titled measures of other reporting
companies. FFO does not represent cash flow from operating activities in
accordance with GAAP and is not indicative of cash available to fund all of
the Company's cash needs. FFO should not be considered as an alternative to
net income or any other GAAP measure as an indicator of performance and
should not be considered as an alternative to cash flow as a measure of
liquidity or the ability to service debt or to pay dividends. A
reconciliation of income (loss) before allocations to minority interests
and preferred shareholders to FFO is as follows:

Prime Retail
Properties
Prime Retail, Inc. (Combined)
-------------------------------------------------------------------------- --------------
Year ended December 31 Period from March 21,
--------------------------------------------------------- March 22 to January 1 to
December 31, March 21,
1998 1997 1996 1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------

Income (loss) before allocations
to minority interests and
preferred shareholders............. $19,986 $ 18,547 $ 6,986(i) $ 12,806 $ 9,454 $(2,408)
FFO adjustments:
Loss on sale of real estate........... 15,461 - - - - -
Real estate depreciation and
amortization....................... 52,295 26,413 18,703 14,884 9,508 2,173
Unconsolidated joint venture
adjustments (ii)................... 1,211 1,758 1,948 306 2,514 374
FFO before allocations to minority ------- -------- ------- -------- -------- -------
minority interests and
preferred shareholders............. $ 88,953 $ 46,718 $27,637 $ 27,996 $ 21,476 $ 139
======== ========= ======= ======== ======== =======
shareholders..........................

==================================================================================================================================

Notes:

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

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

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

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

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

Prime Retail
Properties
Prime Retail, Inc. (Combined)
------------------------------------------------------------------------------- -----------------
December 31
------------------------------------------------------------------------------- March 21,
1998 1997 1996 1995 1994 1994
- ------------------------------------------------------------------------------------------------------------------------------------

Aggregate GLA............................ 595 595 800 901 599 121
Number of manufacturers' outlet
centers.................................. 3 3 4 4 3 1

====================================================================================================================================

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

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

Introduction

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

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

Merger with Horizon Group, Inc.

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

Portfolio Growth

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

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

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

Results of Operations

Table 1-Consolidated Statements of Operations

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

Revenues

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

Expenses

Property operating...................................................................... 52,684 29,492 20,421
Real estate taxes....................................................................... 16,705 9,417 5,288
Depreciation and amortization........................................................... 52,959 26,715 19,256
Corporate general and administrative.................................................... 7,980 5,603 4,018
Interest................................................................................ 60,704 36,122 24,485
Other charges........................................................................... 6,496 3,234 8,586
--------- -------- -------
Total expenses....................................................................... 197,528 110,583 82,054

Income before loss on sale of real estate, minority interests
and extraordinary item................................................................ 35,447 18,547 6,986
Loss on sale of real estate............................................................. (15,461) - -
--------- -------- -------
Income before minority interests and extraordinary item................................. 19,986 18,547 6,986
(Income) loss allocated to minority interests........................................... (2,456) (10,581) 2,092
--------- -------- -------
Income before extraordinary item........................................................ 17,530 7,966 9,078

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

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

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

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

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

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

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

Portfolio weighted average per square foot (2):

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

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

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

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

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

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

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

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

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

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

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

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

Table 3 - Summary of Reported Merchant Sales(1)

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

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

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

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

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

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

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

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

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

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

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

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

Table 5 - Components of Depreciation and Amortization Expense

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

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

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

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

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

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

Table 6 - Components of Interest Expense

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

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

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

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

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

Table 7 - Capital Expenditures

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

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

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

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

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

Table 8 - Consolidated Quarterly Summary of Operations

- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------- ----------------------------------------------

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

Note:

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

Sources and Uses of Cash

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

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

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

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

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

Debt Repayments and Preferred Stock Dividends

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

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

Repurchase of Shares of Series C Preferred Stock

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

Debt and Equity Offerings

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

Property Acquisitions

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

Business Combination

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

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

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

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

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

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

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

Debt Transactions

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

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

On September 25, 1998, the Company closed on a $40,000 unsecured revolving
loan (the "Unsecured Revolving Loan") with a financial institution. The
Unsecured Revolving Loan (i) bears interest equal to 30-day LIBOR plus 1.75%,
(ii) requires monthly interest-only payments, and (iii) matures on September 11,
2001. At December 31, 1998, the Unsecured Revolving Loan had an outstanding
principal balance of $40,000. The Unsecured Revolving Loan requires compliance
with certain financial loan covenants including those relating to the Company's
(i) total outstanding variable indebtedness, (ii) total outstanding indebtedness
to market value, as defined, (iii) consolidated net worth, as defined, and (iv)
debt service coverage ratio.

On December 31, 1998, the Company entered into an agreement to purchase, at
its option, its joint venture partner's 50% ownership interest in Arizona
Factory Shops Partnership for total consideration of approximately $35,000. The
option expires on April 28, 1999. If the Company exercises its option, the
Company will own 100% of Prime Outlets at New River which contains approximately
326,000 square feet and was 95% leased at December 31, 1998.

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

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

Planned Development

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

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

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

Taxability of Distributions

TABLE 9 summarizes the taxability of distributions paid during (i) the
period from January 1 to June 15, 1998, (ii) the period from June 16 to December
31, 1998, and (iii) the year ended December 31, 1997. Distributions paid by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gains dividends) will constitute taxable distributions to
each holder. To the extent the Company makes distributions (not designated as
capital gains dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each holder, reducing the adjusted basis which such holder has in his
shares of stock by the amount of such distributions (but not below zero), with
distributions in excess of a holder's adjusted basis in his stock taxable as
capital gains (provided that the shares have been held as a capital asset).

Table 9 - Taxability of Distributions
-----------------------------------------------------------------------------------------------------------------------------------

Period from Period from
January 1 to June 16 to Year ended
June 15, December 31, December 31,
1998 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------

Senior Preferred Stock
Ordinary income..................................... 100.0% 100.0% 100.0%
Series B Convertible Preferred Stock
Ordinary income..................................... 100.0% 63.7% 91.3%
Return of capital................................... - 36.3% 8.7%
Series C Preferred Stock
Ordinary income..................................... 18.7% - -
Return of capital.................................... 81.3 100.0% -
Common Stock
Return of capital.................................... 100.0% 100.0% 100.0%

===================================================================================================================================

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

Economic Conditions

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

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

Year 2000

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

Information Technology

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

Non-information Technology

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

Third Parties

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

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

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

Impact of Recently Issued Accounting Standards

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

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

Funds from Operations

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

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

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

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

Table 10 - Funds from Operations

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

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

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

Table 11- Consolidated Quarterly Summary of Funds from Operations

- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------

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

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL RISK

Market Risk Sensitivity

Interest Rate Risk

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

- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------

Fixed rate:
Principal........................... $16,306 $43,150 $ 50,742 $88,985 $348,735 $405,526 $953,444
Average interest rate............... 7.15% 7.07% 7.23% 6.97% 7.76% 7.04% 7.31%
Variable rate:
Principal........................... $68,728 $ 2,171 $135,000 $ 386 $ 774 $ 57,004 $264,063
Average interest rate............... 7.11% 7.23% 6.94% 7.13% 7.13% 5.51% 6.68%
====================================================================================================================================

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

PART III

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

PART IV

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

(a) 1. Financial Statements

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

2. Financial Statement Schedules

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

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

3. Exhibits

Exhibit
Number Description

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

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

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

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

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

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

Exhibit
Number Description

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exhibit
Number Description

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

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

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

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

10.14B First Amendment to Purchase and Option Agreement (Huntley Factory Shops)
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-11 (Registration No. 333-1666).]

10.15 Registration Rights Agreement dated June 15, 1998 by and between Prime
Retail, Inc. and Prime Retail, L.P. for the benefit of holders of
common units of Prime Retail, L.P. and certain stockholders of Prime
Retail, Inc.

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

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

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

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

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

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

Exhibit
Number Description

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

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

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

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

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

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

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

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

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

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

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

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

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

Exhibit
Number Description

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

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

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

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

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

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

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

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

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

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

21 Subsidiaries of Prime Retail, Inc.

23 Consent of Ernst & Young LLP

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

(b) Reports on Form 8-K

None

(c) Exhibits

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

(d) Financial Statements and Schedules

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

SIGNATURES

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

PRIME RETAIL, INC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

/s/ Marvin S. Traub March 31, 1999
-------------------
Marvin S. Traub
Director

Report of Independent Auditors

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

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

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

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

/s/ Ernst & Young LLP

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

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

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

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

See accompanying notes to financial statements.

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

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

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

See accompanying notes to financial statements.

Prime Retail, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)

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

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

===================================================================================================================================

See accompanying notes to financial statements.

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

Supplemental Disclosure of Noncash Investing and Financing Activities:

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

Assumption of notes payable..................................................... $ - $ 31,368 $ -
======== ========= =========

The following assets and liabilities were acquired and sold in connection
with the consummation of the Merger Transactions on June 15, 1998:
Acquisition of Horizon, net of spin-off of HGP:

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

See accompanying notes to financial statements.

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

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

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

See accompanying notes to financial statements.

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

Note 1 - Organization and Basis of Presentation

Organization

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

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

A summary of the holders of units in the Operating Partnership as of
December 31, 1998 is as follows:

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

Number of Units
-----------------------------------------------------------
Holder Series A Series B Series C Common
- ------------------------------------------------------------------------------------------------------------------------------------

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

Note:

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

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

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

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

Basis of Presentation

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

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

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

Note 2 - Summary of Significant Accounting Policies

Rental Property

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

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

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

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

Cash Equivalents

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

Accounts Receivable

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

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

Deferred Charges

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

Due from Affiliates, Net

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

Revenue Recognition

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

Earnings per Share

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

Stock Based Compensation

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

Impact of Recently Issued Accounting Standards

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

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

Income Taxes

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

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

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

Period from Period from
January 1 to June 16 to Years end December 31,
June 15, December 31, ----------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------

Senior Preferred Stock
Ordinary income ......................................................... $1.3125 $1.3125 $2.625 $2.625
======= ======= ====== ======
Series B Convertible Preferred Stock
Ordinary income ......................................................... $ 1.663 $ 0.922 $1.940 $0.808
Return of capital........................................................ - 0.525 0.185 1.317
------- ------- ------ ------
$ 1.663 $ 1.447 $2.125 $2.125
Series C Preferred Stock ======= ======= ====== ======
Ordinary income ......................................................... $ 0.167 $ - $ - $ -
Return of capital........................................................ 0.725 0.912 - -
------- ------- ------ ------
$ 0.892 $ 0.912 $ - $ -
Common Stock ======= ======= ====== ======
Return of capital......................................................... $ 1.090 $ 0.912 $1.180 $1.325
======= ======= ====== ======
====================================================================================================================================

Risks and Uncertainties

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

Note 3 - Acquisitions and Dispositions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note 4 - Restricted Cash

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

Note 5 - Deferred Charges

Deferred charges were as follows:

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

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

Note 6 - Bonds and Notes Payable

Bonds payable consisted of the following:

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

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

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

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

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

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

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

Notes payable consisted of the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On September 25, 1998, the Company closed on a $40,000 unsecured revolving
loan (the "Unsecured Revolving Loan") with a financial institution. The
Unsecured Revolving Loan (i) bears interest equal to 30-day LIBOR plus 1.75%,
(ii) requires monthly interest-only payments, and (iii) matures on September 11,
2001. The Unsecured Revolving Loan requires compliance with certain financial
loan covenants including those relating to the Company's (i) total outstanding
variable indebtedness, (ii) total outstanding indebtedness to market value, as
defined, (iii) consolidated net worth, as defined, and (iv) debt service
coverage ratio. At December 31, 1998, the Unsecured Revolving Loan had an
outstanding principal balance of $40,000.

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

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

Note 7 - Equity Offerings and Other Transactions

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

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

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

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

Note 8 - Minority Interests

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

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

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

Note 9 - Preferred Stock

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

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

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

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

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

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

Note 10 - Stock Incentive Plans

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

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

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

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

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

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

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

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

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

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

- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------- -------------- -------------- -- -------------- -------------- -- ----------------- ----------------

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

- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Price Shares Life in Years Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

Note 11 - Lease Agreements

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

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

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

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

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

Note 12 - Legal Proceedings

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

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

PRIME RETAIL, INC.

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

Costs Capitalized Gross Amount at Which
Initial Cost to Subsequent to Carried at Close of
Company Acquisition Period
------------------------ ------------------------- ------------------------
Buildings & Buildings & Buildings & Accumulated Constructed(C)
Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation Acquired(A)
- ----------- ------------ ---- ------------ ---- ------------ ---- ------------ ----- ------------ ------------

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

PRIME RETAIL, INC.

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

Costs Capitalized Gross Amount at Which
Initial Cost to Subsequent to Carried at Close of
Company Acquisition Period
------------------------ ------------------------- ------------------------
Buildings & Buildings & Buildings & Accumulated Constructed(C)
Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation Acquired(A)
- ----------- ------------ ---- ------------ ---- ------------ ---- ------------ ----- ------------ ------------

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

PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
(in thousands)

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

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

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

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