FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                             SELECTED FINANCIAL DATA
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
                                           Year Ended December 31,
                            ----------------------------------------------------
                               1997       1996       1995       1994       1993
                               ----       ----       ----       ----       ----
<S>                         <C>        <C>        <C>        <C>        <C>
OPERATING DATA (1)(2)(3)(4)
Revenues:
  Vacation ownership, net   $256,141   $194,612   $125,751   $ 80,729   $ 56,701
  Resort management           28,237     26,987     22,264     17,808     15,079
  Interest                    37,179     28,651     23,815     22,874     24,960
  Other                       24,686     25,132     27,691     35,879     52,972
                            --------   --------   --------   --------   --------
                            $346,243   $275,382   $199,521   $157,290   $149,712
                            ========   ========   ========   ========   ========

Net earnings                 $21,177    $22,103    $13,874    $20,034    $12,846
                             =======    =======    =======    =======    =======

Earnings before merger costs
 and extraordinary loss      $34,009    $22,103    $13,874    $20,034    $12,846
                             =======    =======    =======    =======    =======

Net earnings per share:
    Basic                       $.48       $.54       $.37       $.54       $.40
                                ====       ====       ====       ====       ====
    Diluted                     $.46       $.51       $.35       $.51       $.39
                                ====       ====       ====       ====       ====

Earnings per share before merger
  costs and extraordinary loss:
    Basic                       $.77       $.54       $.37       $.54       $.40
                                ====       ====       ====       ====       ====
    Diluted                     $.73       $.51       $.35       $.51       $.39
                                ====       ====       ====       ====       ====

Weighted average shares 
 outstanding:
    Basic                     44,200     40,558     37,691     37,432     32,107
                              ======     ======     ======     ======     ======
    Diluted                   46,282     43,265     39,888     39,497     33,034
                              ======     ======     ======     ======     ======

BALANCE SHEET DATA 
 (AT PERIOD END): (1)(3)
  Loans receivable, net     $291,209   $225,098   $185,098   $162,114   $176,268
  Total assets               463,932    385,570    320,112    280,612    277,219
  Total financing
   arrangements              170,081    113,295    117,763    130,720    122,051
  Stockholders' equity       187,182    162,125    100,485     74,282     43,450

</TABLE>


     (1)  On December 19, 1997, Fairfield completed a merger with Vacation Break
          U.S.A. ("Vacation Break") which has been accounted for as a pooling of
          interests and,  accordingly,  all prior period consolidated  financial
          information  has been  restated  as if the  merger  took  place at the
          beginning of the periods  presented.  In conjunction  with the merger,
          Fairfield  recorded merger costs of $16.9 million ($12.8 million after
          taxes),  of which $3.6 million ($2.2 million after taxes)  related to 
          the  extraordinary  loss  resulting  from early  extinguishment  of  
          substantially  all of  Vacation Break's debt.

     (2)  On June 5, 1997 and December 19, 1997,  Fairfield's Board of Directors
          declared  a  three-for-two  and  a  two-for-one  common  stock  split,
          respectively.  References  to per share  amounts and weighted  average
          shares  outstanding  have been  restated  to reflect the effect of the
          stock splits for all periods presented.

     (3)  Prior to October 31, 1995, certain subsidiaries of Vacation Break were
          taxed as S  Corporations  under the  Internal  Revenue  Code and were,
          therefore,  not  subject  to  federal  and state  income  taxes at the
          corporate  level. On October 31, 1995, these  subsidiaries  terminated
          their S Corporation  elections  and,  accordingly,  became  subject to
          federal and state income taxes.  The net earnings shown above, for the
          years prior to 1995,  include pro forma  amounts for federal and state
          income taxes as if all Vacation Break subsidiaries had been subject to
          federal and state taxation for each of the periods presented.  The pro
          forma  amounts of federal and state taxes  reduced  net  earnings  and
          stockholders'  equity by $4.5  million  for 1994 and $4.7  million for
          1993.

     (4)  Other  revenues for the year ended  December 31, 1994  includes a $5.2
          million  gain from the sale of First  Federal,  and for the year ended
          December  31, 1993  includes  $18.8  million of revenue  generated  by
          savings and loan operations.



                                     F-1
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

         On December 19, 1997,  Fairfield acquired all of the outstanding common
stock  of  Vacation  Break  in  exchange  for  approximately   5,316,000  shares
(10,632,000  shares on a post split  basis) of its  common  stock.  The  resorts
acquired  by the Company in  conjunction  with the merger are located in Pompano
Beach, Florida (four resorts),  Orlando,  Florida and a 50%-owned resort located
in the Bahamas. The merger has been accounted for as a pooling of interests and,
accordingly,  all prior period financial information has been restated as if the
merger took place at the beginning of such periods.

        Additionally, on December 19, 1997, Fairfield acquired the remaining 45%
minority interests in Vacation Break's joint ventures in the Palm Aire and Royal
Vista resorts for approximately  $13.5 million in cash. These  acquisitions have
been  accounted  for as purchases  and the total  results of operations of these
resorts have been included in the  consolidated  financial  statements  from the
date of acquisition.

         Vacation Ownership
         ------------------
         Gross sales of vacation  ownership  interests  ("VOIs")  totaled $250.8
million,   $193.3  million  and  $135.7   million  for  1997,   1996  and  1995,
respectively. Increased sales volumes at the Vacation Break resorts coupled with
positive  sales trends at  Fairfield's  existing  locations  resulted in a 29.7%
increase  in VOI sales  revenue  between  1996 and 1997.  Gross VOI sales at the
Company's destination resorts,  which include Branson,  Missouri;  Myrtle Beach,
South Carolina;  Nashville,  Tennessee; Orlando, Florida; Pompano Beach, Florida
and  Williamsburg,  Virginia  continue to be the largest  dollar  contributor to
total VOI sales.  During 1997,  gross VOI sales increased 26.5% at the Company's
destination  locations,  49.8% at the Company's  regional  resort  locations and
33.8% at the Company's  off-site sales offices.  The Company's  growth  strategy
includes the (i)  acquisition  and  development of properties in new destination
locations,  (ii) further  development  at its existing  destination  resorts and
(iii) expansion of its sales and marketing programs, including the establishment
of additional off-site sales offices.  Future sales growth should be realized as
the Company continues to direct its opportunities to destination locations which
have a higher and more  consistent  stream of potential  customers  generated by
existing attractions.

         Net VOI  revenues  increased  to  $256.1  million  for the  year  ended
December 31, 1997 from $194.6  million in 1996 and $125.8  million for 1995. The
increase in net VOI revenues is  attributable to the same factors as noted above
and the  recognition of previously  net deferred  revenue of $5.3 million during
1997, related to the percentage of completion method of accounting,  as compared
to the  recognition  of previously  net deferred  revenue of $1.3 million during
1996 and the net  deferral of VOI revenue  totaling  $9.9  million  during 1995.
Under the percentage of completion method of accounting, the portion of revenues
attributable to costs incurred as compared to total estimated construction costs
and selling expense,  is recognized in the period of sale. The remaining revenue
is deferred and recognized as the remaining costs are incurred.

         In  addition  to  VOI  sales,   the  Company  sells  vacation   package
certificates on a  non-refundable  basis. The customer has up to eighteen months
to exercise  the  certificate,  at which time the  certificate  expires,  if not
extended  for up to an  additional  twelve  months  generally  upon payment of a
nominal  fee.  The  earnings  impact  related  to the sale of  vacation  package
certificates  is deferred  until either the vacation is taken or the  expiration
period,   including  extension,  has  expired  and  the  Company  is  no  longer
contractually obligated to fulfill the vacation.

                                       F-2
<PAGE>


         Selling
         -------
         Selling  expenses,  including  commissions,  as a percentage of related
revenues,  were 48.1%,  51.7% and 51.3%, for 1997, 1996 and 1995,  respectively.
The  decrease  from  1996 to  1997 is  primarily  attributable  to  efficiencies
experienced  at the  Company's  destination  resorts  in  Orlando,  Florida  and
Nashville,  Tennessee.  The increase in selling expenses from 1995 to 1996, as a
percentage of related  revenues,  was primarily  attributable to  inefficiencies
experienced at these  destination  resorts which began sales efforts in December
1994.  New  projects  typically   experience  lower  operating  margins  in  the
"start-up"  phase of operations as the Company  develops its property owner base
and establishes an efficient  sales and marketing  program at each new location.
Management  continues to work to improve sales efficiencies at its newer resorts
and future  efficiencies  are expected as these projects mature and expand their
bases of property owners.

         General and Administrative
         --------------------------
         Increases in general and  administrative  expenses during 1997 and 1996
resulted  primarily  from  additional  corporate  overhead  associated  with the
increased VOI sales volumes as previously discussed,  and the increased expenses
related  to the  Company's  employee  benefit  plans  (see  Note 15 of "Notes to
Consolidated  Financial  Statements").  Additionally,  in 1997,  Vacation  Break
incurred charges for legal fees and the establishment of reserves in conjunction
with the settlement of various legal and regulatory  matters. As a percentage of
total revenues,  general and  administrative  expenses were 9.4%, 9.2% and 10.8%
for 1997,  1996 and 1995,  respectively.  Management  anticipates  certain  cost
savings and synergies to be realized in 1998 upon  integrating the operations of
Vacation Break into the Company.

         Interest
         --------
         Interest income totaled $37.2 million,  $28.7 million and $23.8 million
in 1997,  1996 and  1995,  respectively.  The  increase  in  interest  income is
primarily  attributable  to higher  average  balances of  outstanding  contracts
receivable,  which totaled  $302.5  million at December 31, 1997, as compared to
$230.2 million and $187.5  million at December 31, 1996 and 1995,  respectively.
The weighted average stated interest rate of the Company's contracts  receivable
were 14.6%,  14.5% and 14.0% at December 31, 1997, 1996 and 1995,  respectively.
The  Company  anticipates  interest  income to  increase  in tandem with the net
increase in contracts receivable.

         Interest expense,  net of amounts  capitalized,  totaled $10.4 million,
$10.8  million  and $10.5  million  in 1997,  1996 and 1995,  respectively.  The
fluctuations  in interest  expense are primarily  attributable to an increase in
weighted  average interest rates in 1996 as compared to 1997 and 1995, which was
partially  offset in 1997 by an increase in the average  outstanding  balance of
interest-bearing  debt.  The weighted  average  interest  rate for the Company's
financing  arrangements,  including certain fees and expenses,  was 10.0%, 10.6%
and 9.8% for the years ended December 31, 1997, 1996 and 1995, respectively. The
average outstanding balance of interest-bearing debt was $133.7 million,  $125.8
million and $124.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.

         Other
         -----
         Other revenues in 1997, 1996 and 1995 include home sales totaling $11.1
million,  $8.8 million and $6.7  million,  respectively.  Also included in other
revenues for 1997,  1996 and 1995 are lot sales  revenue  totaling $8.1 million,
$8.7 million and $7.8 million, respectively.

         Other  expenses for 1997,  1996 and 1995  include  costs of home sales,
including  selling  expenses,  totaling  $9.8  million,  $8.2  million  and $6.0
million, respectively. Also included in other

                                   F-3
<PAGE>



expenses for 1997,  1996 and 1995 are costs of lot sales  totaling $2.2 million,
$2.1 million and $2.0 million, respectively.

PROVISION FOR INCOME TAXES

     The  Company  provides  for  income  taxes  under the  liability  method in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 109,
"Accounting for Income Taxes." The Company emerged from  reorganization  in 1992
and  is  required  to  report  federal  income  tax  expense  on  income  before
utilization of pre-confirmation net operating loss carryforwards and recognition
of the benefit of pre-confirmation  deductible temporary  differences.  Benefits
realized  from  the   utilization   of   pre-confirmation   net  operating  loss
carryforwards   and  recognition  of   pre-confirmation   deductible   temporary
differences  are  recorded  as  reductions  of the  valuation  allowance  and as
additions to paid-in capital. The Company recorded benefits from the utilization
of  pre-confirmation  tax attributes totaling $19.1 million and $6.3 million for
1996 and 1995,  respectively.  The Company has reported operating earnings since
1992 and management believes that it is more likely than not that future taxable
earnings  will be  sufficient  to realize the tax benefits  associated  with the
future  deductible  temporary  differences and net operating loss  carryforwards
prior to their  expiration;  therefore,  the Company  eliminated  the  remaining
valuation allowance in 1996.

     At December  31, 1997,  the Company had net  operating  loss  carryforwards
totaling  $96.0  million which  reflect the amount  available to offset  taxable
income in future periods.  Under  limitations  imposed by Internal  Revenue Code
Section 382  ("Section  382"),  certain  potential  changes in  ownership of the
Company,  which may be outside the Company's knowledge or control,  may restrict
future  utilization  of  these  carryforwards.  More  specifically,  changes  in
ownership   occurring   within  a  rolling   three-year   period,   taking  into
consideration  filings with the Securities and Exchange  Commission on Schedules
13D  and 13G by  holders  of 5% or more of  Fairfield's  Common  Stock,  whether
involving the acquisition or disposition of Fairfield's Common Stock, may impose
a  material  limitation  on the  Company's  use of  these  carryforwards.  If an
ownership  change triggers the Section 382  limitations,  the annual  limitation
imposed on the use of  pre-change  carryforwards  under present law is an amount
equal to the  value of the  Company  immediately  before  the  ownership  change
multiplied by the federally  prescribed long-term tax-exempt rate for the period
in which the change occurs. At December 31, 1997, available  carryovers,  if not
utilized,  expire as follows:  2005 - $12.6 million; 2006 - $8.0 million; 2007 -
$14.5 million;  2008 - $6.3 million;  2009 - $3.5 million; 2010 - $22.0 million;
2011 - $24.2 million and 2012 - $4.9 million.

LIQUIDITY AND CAPITAL RESOURCES

         Cash and cash  equivalents of the Company  decreased $10.2 million from
December 31, 1996 to December 31, 1997.  Cash  provided by operating  activities
totaled $44.0 million,  $33.8 million and $28.8 million in 1997,  1996 and 1995,
respectively.  The deferred tax provision of $16.8 million in 1997 resulted in a
deferred tax  liability of $10.3  million at December 31, 1997, as compared to a
deferred  tax  asset  of  $10.4  million  at  December  31,  1996.  Real  estate
inventories  increased  in 1997  primarily  from land  acquisitions  and new VOI
construction at several of the Company's resorts,  including the Royal Vista and
Sea Gardens resorts.

         Cash used in investing activities totaled $105.3 million, $53.9 million
and $25.2 million in 1997,  1996 and 1995,  respectively.  In 1997,  the Company
acquired the  remaining  inventory  interests in two of Vacation  Break's  joint
ventures for approximately $13.5 million in cash. Additionally, due to

                                  F-4
<PAGE>



increased VOI sales volumes, originations of loans receivable exceeded principal
collections  by $76.6  million in 1997,  as compared to $45.5  million and $29.9
million in 1996 and 1995, respectively.

         Cash provided by financing  activities  totaled $51.1 million and $22.8
million in 1997 and 1996, respectively, as compared to the usage of cash of $7.3
million in 1995. During 1997, the Company financed its operations (including the
payment of certain merger expenses) and the increase in loans receivable through
additional  borrowings  obtained  under  its  financing  arrangements.  In 1997,
borrowings  from the Company's  financing  arrangements  exceeded  repayments by
$56.8  million,  as compared to repayments of financing  arrangements  exceeding
proceeds  therefrom  during  1996 and  1995 of $3.6  million  and $7.1  million,
respectively.

         The Company  generates cash for operations  primarily from the sale and
financing of VOIs which include (i) cash sales,  (ii)  customer  down  payments,
(iii)  principal  collections  on its contracts  receivable  and (iv)  borrowing
availability  generated  by  customer  contracts  receivable  in  amounts  which
typically  range from 65% to 80% of the  outstanding  balance  of the  contracts
receivable.  The Company  generates  additional  cash from the  financing of VOI
sales equal to the  difference  between  the  interest  charged on the  customer
contracts  receivable  (which  averaged  14.6% at  December  31,  1997)  and the
interest paid on the related  borrowings (which averaged 9.6% for the year ended
December 31, 1997).

         Historically,  funds from  operating  cash flows,  borrowings and asset
sales have been used to fund certain  costs which  support the  Company's  sales
efforts (primarily development and marketing costs).  Additionally,  the Company
has  securitized  its  contracts  receivable  in an  effort to lower the cost of
borrowed funds and maintain borrowing  availability under its credit facilities.
The Company continues to evaluate the acquisition  and/or development of certain
resort properties. In addition, the Company is currently evaluating several VOI,
marketing and property  management  acquisitions  to integrate into or to expand
the  operations  of the Company.  The Company  expects to finance its short- and
long-term cash needs from (i) operating cash flows,  (ii)  borrowings  under its
credit  facilities  as described  below and (iii) future  financings,  including
additional securitizations of contracts receivable.

     On December 19,  1997,  Fairfield  amended its Amended and Restated  Credit
Agreement (the "FCI Agreement"), which provided for additional interim borrowing
availability of up to $100.0 million  ($125.0 million in total,  including up to
$7.0 million for letters of credit) for a period  ending no later than March 18,
1998.  Proceeds from the additional  borrowing  availability were used to retire
substantially  all of the secured  obligations  of Vacation Break totaling $81.4
million,  including  interest,  and to pay certain expenses  associated with the
merger.  The  revolving  loans  mature on January 1, 1999,  if not  extended  in
accordance with the terms of the FCI Agreement.  At December 31, 1997, Fairfield
had borrowing  availability  of $26.4  million,  net of  outstanding  letters of
credit totaling $3.4 million.

         At December 31, 1997, FAC had no borrowings outstanding under its Third
Amended and Restated  Revolving Credit Agreement (the "FAC Agreement").  The FAC
Agreement  provides for revolving loans of up to $15.0 million,  including up to
$1.0  million for letters of credit.  The  revolving  loans mature on January 1,
1999, if not extended in accordance  with the terms of the FAC  Agreement,  with
Fairfield being a guarantor pursuant to the FAC Agreement. At December 31, 1997,
FAC had borrowing availability of $15.0 million.

         On January 15,  1998,  Fairfield  Receivables  Corporation  ("FRC"),  a
wholly  owned  subsidiary  of FAC,  entered  into a Credit  Agreement  (the "FRC
Agreement")  which  provided  for  borrowings  of up to $150.0  million  for the
purchase of contracts  receivable  from FAC pursuant to the Receivable  Purchase
Agreement,  among  Fairfield  as  originator,  FAC  as  the  seller  and  FRC as
purchaser.

                                      F-5
<PAGE>


         In  1996,   Fairfield  Capital  Corporation  ("FCC"),  a  wholly  owned
subsidiary of FAC,  amended its Credit  Agreement  (the "FCC  Agreement")  which
provides for total  borrowings  of up to $90.0 million (the "FCC Notes") for the
purchase of contracts  receivable  from FAC pursuant to the Amended and Restated
Receivables Purchase Agreement, among Fairfield as originator, FAC as seller and
FCC as purchaser.  At December 31, 1997,  borrowings  outstanding  under the FCC
Agreement totaled $60.1 million.

         At December 31, 1997,  Fairfield Funding Corporation  ("FFC"), a wholly
owned subsidiary of FAC, had borrowings outstanding totaling $12.3 million under
a private  placement of 7.6% Notes (the "FFC Notes").  The FFC Notes are secured
by and payable from a pool of contracts  receivable  purchased from FAC pursuant
to the Receivables  Purchase  Agreement  among  Fairfield as originator,  FAC as
seller and FFC as purchaser. At December 31, 1997, contracts receivable totaling
$22.5 million collateralized the FFC Notes.

         In 1996,  the Company  completed  an  underwritten  public  offering of
900,000  shares  (2,700,000  shares on a post split  basis) of Common Stock at a
price of  $21.63  per  share  ($7.21  per  share  on a post  split  basis)  (the
"Offering").  The net proceeds  from the Offering of $17.7  million were used to
repay certain indebtedness, totaling $9.1 million, including accrued interest of
$2.7 million,  issued in connection  with the  Company's  reorganization  and to
temporarily pay down the outstanding  indebtedness under the Company's revolving
credit  agreements,  with the  remaining  balance of $3.8  million  invested  in
short-term  investment grade securities (included in "Cash and cash equivalents"
in the  Consolidated  Balance Sheet at December 31, 1996). In February 1997, the
Company was able to draw $7.9 million against its revolving credit agreements to
repay,  in part,  the  outstanding  indebtedness  under the Senior  Subordinated
Secured Notes.

FINANCIAL CONDITION

         Total  consolidated  assets of the Company increased $78.4 million from
December 31, 1996 to December 31, 1997. This increase is primarily  attributable
to an  increase  in  net  loans  receivable  of  $66.1  million  resulting  from
originations of loans receivable  exceeding principal  collections,  and a $26.1
million  increase  in real  estate  inventories.  The  increase  in real  estate
inventories is due primarily to a $15.3 million increase in new VOI construction
at the Company's Royal Vista and Sea Gardens  resorts in Pompano Beach,  Florida
and the acquisitions of additional land located on Edisto Island, South Carolina
and  near  Orlando,  Florida.  Total  consolidated  liabilities  of the  Company
increased $53.3 million in 1997 due to a net increase in the Company's financing
arrangements of $56.8 million,  resulting from the continued  development of the
Company's resorts and the net increase in outstanding contracts receivable.

         Total stockholders' equity increased by $25.1 million from December 31,
1996 to December  31,  1997.  In addition to current  year net earnings of $21.2
million, the increase in stockholders'  equity is primarily  attributable to the
issuance of common stock under the Company's employee stock benefit plans.

SEASONALITY

         The Company  has  historically  experienced  and expects to continue to
experience seasonal fluctuations in its gross revenues and net earnings from the
sale of VOIs, which have been generally

                                   F-6
<PAGE>


higher in the second and third quarters.  This seasonality may cause significant
fluctuations  in the quarterly  operating  results of the Company.  In addition,
material  fluctuations  in  operating  results  may occur  due to the  timing of
construction  of future VOI inventory and the Company's use of the percentage of
completion method of accounting for recognizing revenues and related expenses on
incomplete buildings.

IMPACT OF INFLATION

         Inflation  and  changing  prices have not had a material  impact on the
Company's  revenues  and net  earnings  during any of the  Company's  three most
recent years. Due to the current economic  climate,  the Company does not expect
that inflation and changing  prices will have a material impact on the Company's
revenues or net earnings.  To the extent  inflationary  trends affect short-term
interest rates, a portion of the Company's debt service costs may be affected as
well as the rates the Company charges on its contracts receivable. To the extent
permitted by competition, the Company passes increased costs on to its customers
through increased sales prices.

MARKET CONCENTRATIONS

        As a result of the merger with Vacation Break,  the Company will operate
25 resorts,  and  anticipates  approximately  one-half of VOI  revenues  will be
concentrated  in  the  Florida  market.   The  Company   believes  that  certain
fundamental aspects of Florida,  as a location for resort properties  (including
climate,  quality of life, and opportunities for sports and leisure  activities)
have  contributed  and will continue to  contribute to the Company's  ability to
sell VOIs. The Florida market is one of the largest markets for VOI sales in the
United States. However,  Florida is also one of the most competitive markets for
VOI sales. In addition,  historically,  natural  disasters and media coverage of
crimes  committed in Florida have had significant  adverse effects on tourism in
Florida.  Accordingly,  there can be no assurance  that the Florida  market will
continue to be favorable for VOI sales or that the Company will not be adversely
affected by the concentration in the Florida market.

IMPACT OF YEAR 2000

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

         The Company has completed an initial assessment which indicates that it
will have to modify  portions of its software so that its computer  systems will
function  properly with respect to dates in the year 2000 and thereafter.  As of
December 31, 1997, the reservation  and customer  service  software  systems are
year 2000 compliant,  with all other software systems  scheduled to achieve Year
2000  compliance  by December 31, 1998.  The Company  believes it has  allocated
sufficient  programming  resources to this project and does not  anticipate  the
need to engage outside  consultants.  Therefore,  the costs associated with Year
2000 compliance will not be material. Additionally, hardware support software is
projected to be Year 2000 compliant by December 31, 1998.

         The Company believes that with  modifications to existing  software and
conversions  to new  software,  the Year 2000  issue  will not pose  significant
operational  problems for its computer systems.  However,  if such modifications
and conversions are not made, or not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.

                                     F-7

<PAGE>



         The costs of the project and the date on which the Company  believes it
will  complete  the Year  2000  modifications  are  based on  management's  best
estimates,  which were derived utilizing numerous  assumptions of future events,
including the continued  availability  of certain  resources and other  factors.
However,  there can be no guarantee  that these  estimates  will be achieved and
actual results could differ materially from those anticipated.  Specific factors
that might cause such material  differences include, but are not limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

         The  Company  has  initiated  formal  communications  with  all  of its
significant  vendors to determine  the extent to which the  Company's  interface
systems are  vulnerable to those third parties'  failure to remediate  their own
Year 2000 issues.  There is no guarantee that the systems of other  companies on
which the Company's  systems rely will be timely converted and would not have an
adverse effect on the Company's systems.

FORWARD-LOOKING INFORMATION

         This  Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations,  other  filings by the Company with the  Securities  and
Exchange Commission and other oral and written statements by the Company and its
management may contain certain  forward-looking  statements,  including (without
limitation)   statements  with  respect  to  anticipated  future  operating  and
financial  performance,  growth and acquisition  opportunities and other similar
forecasts and statements of expectation. Words such as "expects," "anticipates,"
"intends,"  "plans,"  "believes,"   "seeks,"   "estimates,"  and  "should,"  and
variations  of these words and  similar  expressions,  are  intended to identify
these forward-looking statements. Forward-looking statements made by the Company
and its management are based on estimates, projections and beliefs of management
made  at  the  time  of  such  statements  and  are  not  guarantees  of  future
performance.  The  Company  disclaims  any  obligation  to update or revise  any
forward-looking  statement based on the occurrence of future events, the receipt
of new information, or otherwise.

         Actual future  performance,  outcomes and results may differ materially
from those expressed in  forward-looking  statements made by the Company and its
management  as a result  of a number of risks,  uncertainties  and  assumptions,
including  those relating to the operations and results of operations  following
the merger with Vacation Break. Representative examples of these factors include
(without  limitation)  general industry and economic  conditions;  interest rate
trends;   regulatory  changes;   cost  of  capital  and  capital   requirements;
availability of real estate  properties;  competition from national  hospitality
companies  and  other  competitive  factors  and  pricing  pressures;  shifts in
customer  demands;  changes in operating  expenses,  including  employee  wages,
commission  structures,  benefits and training;  economic cycles;  the continued
availability  of financing in the amounts and at the terms  necessary to support
the  Company's  future  business;  assumed  cost  savings and other  synergistic
benefits of the merger with Vacation Break and the success  achieved or problems
encountered in integrating the operations of Vacation Break into the Company.

                                   F-8

<PAGE>

                   REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




Stockholders and Board of Directors
Fairfield Communities, Inc.


         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Fairfield  Communities,  Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related  consolidated  statements of earnings,  stockholders' equity and
cash flows for each of the three years in the period  ended  December  31, 1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our  audits.  We did not  audit  the  1996 and  1995  consolidated  financial
statements of Vacation  Break U.S.A.,  Inc., a  wholly-owned  subsidiary,  which
statements  reflect total assets  constituting  36% in 1996,  and total revenues
constituting  37% in 1996, and 30% in 1995 of the related  consolidated  totals.
Those  statements were audited by other auditors whose report has been furnished
to us, and our  opinion,  insofar as it relates to data  included  for  Vacation
Break U.S.A., Inc., is based solely on the report of the other auditors.

         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,  based on our audits and, for 1996 and 1995, the report
of other  auditors,  the  consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Fairfield Communities,  Inc. and subsidiaries at December 31, 1997 and 1996, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1997,  in  conformity  with
generally accepted accounting principles.




                                          ERNST & YOUNG LLP


Little Rock, Arkansas
February 2, 1998




                                    F-9

<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)



<TABLE>
                                                     December 31,
                                           ---------------------------------
                                              1997                   1996
                                              ----                   ----
<S>                                         <C>                    <C>
ASSETS
  Cash and cash equivalents                 $  3,074               $ 13,316
  Loans receivable, net                      291,209                225,098
  Real estate inventories                     93,139                 67,594
  Restricted cash and escrow accounts         25,607                 17,604
  Property and equipment, net                 24,370                 24,802
  Deferred tax assets, net                       -                   10,368
  Other assets                                26,533                 26,788
                                            --------               --------
                                            $463,932               $385,570
                                            ========               ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Financing arrangements                    $170,081               $113,295
  Deferred  revenue                           29,769                 43,327
  Accounts payable                            20,398                 16,035
  Net liabilities of assets held for sale        -                    8,293
  Other liabilities                           56,502                 42,495
                                            --------               --------
                                             276,750                223,445
                                            --------               --------

Stockholders' Equity:
  Common stock, $.01 par value,
   authorized 100,000,000 shares
   in 1997 and 25,000,000 in 1996;
   outstanding 49,491,666 shares in
   1997 and 44,150,714 shares in 1996            495                    189
  Paid-in capital                            107,920                105,324
  Retained earnings                           79,083                 57,906
  Unamortized value of restricted stock         (316)                (1,294)
  Treasury stock, at cost, 4,573,266 shares
   in 1997 and 4,670,590 shares in 1996          -                      -
                                            --------               --------
                                             187,182                162,125
                                            --------               --------
                                            $463,932               $385,570
                                            ========               ========
</TABLE>



See notes to consolidated financial statements.

                                   F-10
<PAGE>

                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
                                              Year Ended December 31,
                                   ---------------------------------------------
                                     1997             1996               1995
                                     ----             ----               ----
<S>                                <C>              <C>                <C>
REVENUES
  Vacation ownership, net          $256,141         $194,612           $125,751
  Resort management                  28,237           26,987             22,264
  Interest                           37,179           28,651             23,815
  Other                              24,686           25,132             27,691
                                   --------         --------           --------
                                    346,243          275,382            199,521
                                   --------         --------           --------

EXPENSES
  Vacation ownership                 67,846           51,385             33,338
  Provision for loan losses          12,121            7,827              8,030
  Selling                           123,122          100,679             64,528
  Resort management                  25,945           25,418             21,375
  General and administrative         32,383           25,466             21,610
  Interest, net                      10,353           10,754             10,521
  Other                              18,066           18,410             17,911
  Costs associated with merger       13,308              -                  -
                                   --------         --------           --------
                                    303,144          239,939            177,313
                                   --------         --------           --------
Earnings before provision for 
 income taxes and extraordinary 
 loss                                43,099           35,443             22,208
Provision for income taxes           19,727           13,340              8,334
                                   --------         --------           --------
Earnings before extraordinary loss   23,372           22,103             13,874
Extraordinary loss from early
  extinguishment of debt, net of
  income tax benefit of $1,379        2,195              -                  -
                                   --------         --------           --------
Net earnings                       $ 21,177         $ 22,103           $ 13,874
                                   ========         ========           ========
BASIC EARNINGS PER SHARE:
  Earnings before extraordinary loss  $ .53             $.54               $.37
  Extraordinary loss                   (.05)             -                  -
                                      -----             ----               ----
  Net earnings                        $ .48             $.54               $.37
                                      =====             ====               ====
DILUTED EARNINGS PER SHARE:
  Earnings before extraordinary loss  $ .51             $.51               $.35
  Extraordinary loss                   (.05)             -                  -
                                      -----             ----               ----
  Net earnings                        $ .46             $.51               $.35
                                      =====             ====               ====
WEIGHTED AVERAGE SHARES OUTSTANDING:
   Basic                             44,200           40,558             37,691
                                     ======           ======             ======
   Diluted                           46,282           43,265             39,888
                                     ======           ======             ======
</TABLE>



See notes to consolidated financial statements.

                                    F-11
<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
                                                             Unamortized
                              Common Stock                     value of
                             --------------  Paid-in Retained Restricted
                             Shares  Amount  Capital Earnings   Stock    Total
                             ------  ------  ------- --------   -----    -----
<S>                          <C>     <C>    <C>       <C>      <C>     <C>
Balance, December 31, 1994 -
 Previously Reported         12,640  $127   $ 46,120  $20,688  $   -   $ 66,935
 Pooling of interests with
 Vacation Break U.S.A., Inc.      3    -       5,191    6,673      -     11,864
                             ------  ----   --------  -------  ------- --------

Balance, December 31, 1994 -
 Restated                    12,643   127     51,311   27,361      -     78,799
 Net earnings                   -      -         -     13,874      -     13,874
 Utilization of pre-
  confirmation
  income tax attributes         -      -       6,263      -        -      6,263
 Initial public offering,
  stock split and
  stockholder distribution
  of Vacation Break
  U.S.A., Inc.               5,039     50      6,931   (5,432)     -      1,549
 Other                         (33)    -         -        -        -        -
                            ------   ----   --------  -------  ------- --------
Balance, December 31, 1995  17,649    177     64,505   35,803      -    100,485
 Net earnings                  -       -         -     22,103      -     22,103
 Utilization of pre-
  confirmation income
  tax attributes               -       -      19,108      -        -     19,108
 Net proceeds of stock
  offering                   1,078     11     19,054      -        -     19,065
 Issuance of restricted
  stock                        -       -       1,380      -     (1,380)     -
 Amortization of unearned
  compensation - restricted
  stock                        -       -         -        -         86       86
 Activity related to 
  employee stock
  benefit plans                159      1      1,277      -        -      1,278
                            ------   ----   --------  -------  ------- --------
Balance, December 31, 1996  18,886    189    105,324   57,906   (1,294) 162,125
  Net earnings                 -       -         -     21,177      -     21,177
  Amortization of unearned
   compensation -
   restricted stock            -       -         -        -        978      978
  Effect of stock splits    30,354    304       (318)     -        -        (14)
  Activity related to
    employee stock
    benefit plans              106      1      2,915      -        -      2,916
  Other                        146      1         (1)     -        -        -
                            ------   ----   --------  -------  ------- --------
Balance, December 31, 1997  49,492   $495   $107,920  $79,083  $  (316)$187,182
                            ======   ====   ========  =======  ======= ========
</TABLE>



See notes to consolidated financial statements.

                                    F-12
<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
                                                  Year Ended December 31,
                                            ----------------------------------
                                              1997         1996        1995
                                              ----         ----        ----
<S>                                         <C>          <C>          <C>
OPERATING ACTIVITIES:
  Net earnings                              $ 21,177     $ 22,103     $ 13,874
  Adjustments to reconcile net
   earnings to net cash provided
   by operating activities:
     Depreciation                              5,157        3,984        3,158
     Amortization                              2,187        1,233          784
     Provision for loan losses                12,121        7,827        8,030
     Utilization of pre-confirmation
      income tax attributes                      -         19,108        6,263
     Deferred taxes, net                      16,784       (7,860)       1,037
     Tax benefit from exercise of
      stock warrants                             612          801          -
     Charges associated with merger            5,869          -            -
  Changes in operating assets and
   liabilities, net of acquisitions:
     Real estate inventories                 (16,647)      (7,240)     (16,312)
     Deferred revenue                        (13,558)      (6,231)      16,318
     Other                                    10,283          116       (4,369)
                                            --------     --------     --------
NET CASH PROVIDED BY OPERATING ACTIVITIES     43,985       33,841       28,783
                                            --------     --------     --------
INVESTING ACTIVITIES:
  Purchases of property
   and equipment, net                         (7,019)     (11,187)      (6,925)
  Cash paid for acquisitions                 (13,500)         -            -
  Principal collections on
   loans receivable                          150,344      104,302       81,932
  Originations of loans receivable          (226,897)    (149,841)    (111,871)
  Net investment activities of
   net liabilities held for sale              (8,293)       1,509        9,375
  Other                                           51        1,306        2,309
                                           ---------    ---------    ---------
NET CASH USED IN INVESTING ACTIVITIES       (105,314)     (53,911)     (25,180)
                                           ---------    ---------    ---------
FINANCING ACTIVITIES:
  Proceeds from financing arrangements       356,199      357,026      247,326
  Repayments of financing arrangements      (299,413)    (360,662)    (254,390)
  Net proceeds of stock offerings                -         19,065        6,982
  Activity related to employee
   stock benefit plans                         2,304          477          -
  Net (increase) decrease in restricted
   cash and escrow accounts                   (8,003)       5,386       (5,141)
   Other                                         -          1,500       (2,044)
                                            --------    ---------    ---------
Net cash provided by (used in)
 financing activities                         51,087       22,792       (7,267)
                                            --------    ---------    ---------
Net (decrease) increase in cash
 and cash equivalents                        (10,242)       2,722       (3,664)
Cash and cash equivalents,
 beginning of year                            13,316       10,594       14,258
                                            --------    ---------    ---------
Cash and cash equivalents, end of year      $  3,074    $  13,316    $  10,594
                                            ========    =========    =========
</TABLE>

See notes to consolidated financial statements.

                                    F-13
<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              DECEMBER 31, 1997


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------   -----------------------------------------------------------

ORGANIZATION
------------

        Fairfield Communities,  Inc.   ("Fairfield"   and   together   with  its
subsidiaries,  the "Company") is one of the largest vacation ownership companies
in the United States in terms of property owners and vacation units constructed.
The Company's  operations,  following the December 19, 1997 merger with Vacation
Break  U.S.A.,  Inc.  ("Vacation  Break"),  consist of 25 resorts  located in 11
states  and  the  Bahamas.  Of the  Company's  25  resorts,  15 are  located  in
destination areas with popular vacation attractions and 10 are located in scenic
regional locations.

        The Company's primary business is selling vacation  ownership  interests
("VOIs"),  commonly  known  as  timeshares,  primarily  through  its  innovative
points-based  vacation  system,  Fairshare Plus. The VOIs offered by the Company
consist of either undivided fee simple interest or specified fixed week interval
ownership in  fully-furnished  vacation homes. The Company also offers financing
for VOI purchasers,  which results in the creation of high-quality,  medium-term
contracts receivable.  The Company holds these receivables and will occasionally
securitize them if the securitization  would lower the cost of borrowed funds or
maintain borrowing availability under its credit facilities.

Principles of Consolidation
---------------------------

        The consolidated  financial statements include the accounts of Fairfield
and its wholly owned  subsidiaries.  All significant  intercompany  accounts and
transactions  have been  eliminated  in  consolidation.  Certain  amounts in the
consolidated  financial  statements  of prior  years have been  reclassified  to
conform to the current year presentation.

Use of Estimates
----------------

        The preparation of the consolidated  financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates and assumptions  that affect the amounts and  disclosures  reported in
the  consolidated  financial  statements and accompanying  notes.  Consequently,
actual  results  could  differ from  estimates.  

Cash and Cash Equivalents
-------------------------

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

Property and Equipment
----------------------

        Property and equipment are recorded at cost and depreciated primarily by
the  straight-line  method  based on the  estimated  useful lives of the assets,
ranging  generally  from 10 to 25 years for  buildings  and from  three to seven
years for machinery,  fixtures and  equipment.  Additions and  improvements  are
capitalized  while  maintenance and repairs are expensed as incurred.  Asset and
accumulated  depreciation  accounts are relieved for dispositions with resulting
gains or losses reflected in operations.

                                      F-14
<PAGE>


Real Estate Inventories
-----------------------

        Real estate inventories are valued at the lower of cost or estimated net
realizable value. Costs include land; land improvements; construction, including
capitalized  interest;  furnishing  of the units  and a portion  of the costs of
amenities constructed for the use and benefit of the property owners.

     Land and  improvement  costs are allocated for the purpose of  accumulating
costs to match with related sales revenues.  The Company  allocates  acquisition
and  carrying  costs to these  areas  on the  acreage  or the  value  basis,  as
appropriate.  Improvement costs in each project are allocated to the appropriate
areas on a specific identification basis. Certain amenity costs are allocated on
an acreage or benefit basis, as appropriate.

Loans Receivable
----------------

        Contracts
        ---------

        The  Company's   contracts   receivable  are   regionally   diversified.
Generally,  VOIs are sold under installment contracts requiring a 10% - 15% down
payment and monthly installments, including interest, for periods of up to seven
years.  The Company  provides  for losses on  contracts  receivable  by a charge
against  earnings  at the  time of  sale  at a rate  based  upon  the  Company's
historical  cancellation  experience and management's estimate of future losses.
The  allowance  for  contracts  receivable  is  maintained  at a level  believed
adequate by management based on periodic  valuation of the contracts  receivable
portfolio.

     When a contract is cancelled in a year  subsequent to the year in which the
underlying sale was recorded,  the outstanding balance,  less recoverable costs,
is charged to the allowance for loan losses. When a contract is cancelled in the
same year as the related sale,  all entries  applicable to the sale are reversed
and  nonrecoverable  selling  expenses are charged to operations.  For financial
statement  purposes,  contracts  receivable are considered  delinquent and fully
reserved if a payment remains unpaid under the following conditions:

         Percent of Contract Price Paid      Delinquency Period
         ------------------------------      ------------------
                Less than 25%                     90 days
            25% but less than 50%                120 days
                50% and over                     150 days

        Mortgages
        ---------

        The  Company's  mortgages  receivable  consist  of  a  small  number  of
non-homogeneous  loans  collateralized  primarily by real estate  geographically
dispersed  throughout  the country.  The allowance  for mortgages  receivable is
maintained  at a  level  believed  adequate  by  management  based  on  periodic
evaluation of each mortgage receivable.  Management's evaluation of the adequacy
of this allowance is based on past loss experience,  known inherent risks in the
portfolio,  adverse  situations that may affect the borrower's  ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral,  composition of the mortgage receivable portfolio,  current economic
conditions and other relevant factors.  This evaluation is inherently subjective
as it requires  material  estimates  including  the amounts and timing of future
cash flows.

Revenue and Profit Recognition
------------------------------

     VOIs sold by the Company consist of either  undivided fee simple  interests
or specified fixed week interval  ownership in  fully-furnished  vacation homes.
VOI revenue is recognized  when a binding sales contract has been executed and a
10%  minimum  down  payment  (including  interest)  has been  received.  Revenue
relating to sales of VOIs in projects under construction is recognized using the


                                    F-15

<PAGE>

percentage  of  completion  method.  Under this method,  the portion of revenues
applicable  to costs  incurred,  as  compared  to total  estimated  acquisition,
construction  and  selling  costs,  is  recognized  in the  period of sale.  The
remaining  revenue  is  deferred  and  recognized  as the  remaining  costs  are
incurred.  Sales  commissions  and direct  marketing  costs relating to the VOIs
accounted for under the  percentage of completion  method are deferred until the
associated revenues are recorded.

        Until a  contract  for  sale  qualifies  for  revenue  recognition,  all
payments  received are accounted for as deposits.  Commissions and other selling
costs,  directly  attributable  to the  sale,  are  deferred  until  the sale is
recorded. If a contract is cancelled before qualifying as a sale, nonrecoverable
selling  expenses are charged to expense and deposits  forfeited are credited to
income.

        The Company sells  vacation  package  certificates  on a  non-refundable
basis.  The customer has up to eighteen months to exercise the  certificate,  at
which time the  certificate  expires,  if not extended  for up to an  additional
twelve  months  generally  upon payment of a nominal  fee.  The earnings  impact
related to the sale of vacation  package  certificates  is deferred until either
the vacation is taken or the expiration period, including extension, has expired
and the Company is no longer contractually obligated to fulfill the vacation.

Earnings Per Share
------------------

        In 1997,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  per
Share".  SFAS No. 128  replaced  the  calculation  of primary and fully  diluted
earnings per share with basic and diluted earnings per share. In accordance with
SFAS No. 128, basic earnings per share excludes the dilutive effects of options,
warrants and convertible  securities.  Diluted  earnings per share considers the
dilutive effect of the Company's outstanding options and warrants.  Earnings per
share amounts for all periods have been restated to conform to the  requirements
of SFAS No. 128.

Income Taxes
------------

        The Company  provides  for income  taxes under the  liability  method in
accordance  with SFAS No. 109,  "Accounting  for Income  Taxes".  The Company is
required to report  federal  income tax expense on income before  utilization of
pre-confirmation net operating loss carryforwards and recognition of the benefit
of pre-confirmation deductible temporary differences. Benefits realized from the
utilization of pre-confirmation net operating loss carryforwards and recognition
of pre-confirmation  deductible temporary differences are recorded as reductions
of the valuation allowance and as additions to paid-in capital.

        In connection with the Company's 1992 reorganization under Chapter 11 of
the  Bankruptcy  Code,  the Company  implemented  the provisions of the American
Institute  of  Certified  Public   Accountants'   Statement  of  Position  90-7,
"Financial  Reporting by Entities in  Reorganization  Under the Bankruptcy Code"
("Fresh Start Reporting").  Fresh Start Reporting requires the Company to report
federal income tax expense on income before utilization of pre-confirmation  net
operating loss carryforwards and recognition of the benefit of  pre-confirmation
deductible  temporary  differences.  Benefits  realized from the  utilization of
pre-confirmation   net  operating   loss   carryforwards   and   recognition  of
pre-confirmation  deductible temporary differences are recorded as reductions of
the valuation allowance and as additions to paid-in capital.

Disclosure About Segments of an Enterprise
------------------------------------------

        In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise  and Related  Information".  SFAS No. 131,  which the Company will be
required  to adopt  in  1998,

                                     F-16
<PAGE>


establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports.  SFAS No. 131 also establishes  standards for related
disclosures  about  products and services,  geographic  areas of operations  and
major customers.  Management is currently studying and analyzing SFAS No. 131 as
well as the Company's operations to determine the applicability of SFAS No. 131.

NOTE 2 - MERGERS AND ACQUISITIONS
------   ------------------------

     On December 19, 1997,  Fairfield  acquired  all of the  outstanding  common
stock  of  Vacation  Break  in  exchange  for  approximately   5,316,000  shares
(10,632,000  shares on a post split basis) of its common stock. Of these shares,
approximately  5.2% are held in escrow to cover liability and litigation  costs,
if any, which may arise from the litigation  described in Note 17. Each share of
Vacation  Break common stock was  exchanged  for .6075 of one share of Fairfield
Common Stock on a pre split  basis.  In addition,  all  outstanding  options and
warrants to purchase  Vacation  Break  common  stock were  converted at the same
exchange factor into options to purchase Fairfield Common Stock.

        The  merger  has been  accounted  for as a  pooling  of  interests  and,
accordingly,  all prior period financial information has been restated as if the
merger took place at the  beginning of such periods.  Certain  reclassifications
were made to the Vacation Break  financial  statements to conform to Fairfield's
presentation.

        Net revenues and net income of the merged  entities  prior to the merger
are presented in the following table (In thousands):

<TABLE>
                               Nine Months Ended            Year Ended
                                 September 30,              December 31,
                                                     --------------------------
                                    1997               1996             1995
                                    ----               ----             ----
                                 (Unaudited)
     <S>                          <C>                <C>               <C>
     Net revenues
      Fairfield                   $169,838           $172,478          $140,775
      Vacation Break                93,383            102,904            58,746
                                  --------           --------          --------
        Combined                  $263,221           $275,382          $199,521
                                  ========           ========          ========

     Net income
      Fairfield                   $ 19,876           $ 14,863          $  8,029
      Vacation Break                 7,619              7,240             5,845
                                  --------           --------          --------
        Combined                  $ 27,495           $ 22,103          $ 13,874
                                  ========           ========          ========
</TABLE>

        Additionally, Fairfield acquired the remaining 45% minority interests in
Vacation  Break's  joint  ventures in the Palm Aire and Royal Vista  resorts for
approximately  $13.5 million in cash. These acquisitions have been accounted for
as purchases  and the total  results of  operations  of these  resorts have been
included in the consolidated financial statements from the date of acquisition.

        Transaction  costs and certain other charges  associated with the merger
of $13.3 million ($10.6 million after taxes) were incurred and have been charged
to  operating  expenses  in the fourth  quarter of 1997.  These  costs  included
expenses for investment  banker and  professional  fees,  and severance  related
costs. In addition, $3.4 million of the merger costs related to the writedown of
unutilized  assets and charges to standardize  the  accounting  practices of the
companies. In conjunction with the merger, the Company retired substantially all
of the secured  obligations of Vacation Break

                                     F-17
<PAGE>

totaling  $81.4  million,  including  interest,  and  refinanced  such debt with
another lender. As a result of the debt extinguishment,  the Company accelerated
amortization  of the  unamortized  debt issue costs and incurred  prepayment and
termination  penalties  totaling  approximately $3.6 million ($2.2 million after
tax),  which has been  presented as an  extraordinary  loss in the  consolidated
statement of earnings.

        On December 3, 1997,  Fairfield exchanged 145,719 shares (291,438 shares
on a post split basis) of common stock for all of the  outstanding  common stock
of Apex Marketing,  Inc.  ("Apex").  The transaction has been accounted for as a
pooling of  interests.  The Apex  operations  are not  material  to  Fairfield's
consolidated   financial  statements  for  any  period;   therefore,   financial
statements  for  periods  prior to the merger  have not been  restated,  and the
consolidated  financial  statements  include operations of Apex from the date of
combination.

NOTE 3 - LOANS RECEIVABLE
------   ----------------
        Loans receivable consisted of the following (In thousands):

<TABLE>
                                                        December 31,
                                                  1997               1996
                                                  ----               ----
          <S>                                   <C>                <C>
          Contracts                             $302,519           $230,213
          Mortgages                                9,538             11,413
                                                --------           --------
                                                 312,057            241,626
          Less allowance for loan losses         (20,848)           (16,528)
                                                --------           --------
                                                $291,209           $225,098
                                                ========           ========
</TABLE>

        The weighted  average stated  interest rates on the Company's  contracts
receivable  were 14.6% and 14.5% at December  31,  1997 and 1996,  respectively,
with interest rates on these receivables  ranging generally from 12.0% to 17.5%.
The  Company's  contracts  receivable  were 96.7% and 96.9%  current on a 60 day
basis at December 31, 1997 and 1996,  respectively.  Amounts charged against the
allowance for loan losses, net of recoveries, totaled $7.8 million, $6.8 million
and $4.6 million during 1997, 1996 and 1995, respectively.

NOTE 4 - VACATION OWNERSHIP REVENUES
------   ---------------------------

        Vacation ownership revenues are summarized as follows (In thousands):
<TABLE>

                                                  Year Ended December 31,
                                           -------------------------------------
                                             1997         1996           1995
                                             ----         ----           ----
        <S>                                <C>          <C>            <C>
        Vacation ownership revenues        $250,802     $193,335       $135,672
        Less:  Deferred revenue on
                current year sales, net      (5,225)     (10,564)       (11,841)
         Add:  Revenue recognized on
                prior year sales             10,564       11,841          1,920
                                           --------     --------       --------
                                           $256,141     $194,612       $125,751
                                           ========     ========       ========
</TABLE>

                                     F-18

<PAGE>



 NOTE 5 - REAL ESTATE INVENTORIES
 ------   -----------------------
        Real estate inventories are summarized as follows (In thousands):

<TABLE>
                                                          December 31,
                                                   ---------------------------
                                                    1997                 1996
                                                    ----                 ----
         <S>                                      <C>                  <C>
         Land:
           Under development                      $20,186              $16,196
           Undeveloped                              6,480                5,515
                                                  -------              -------
                                                   26,666               21,711
                                                  -------              -------
         Residential housing:
            Vacation ownership                     62,410               42,075
            Homes                                   4,063                3,808
                                                  -------              -------
                                                   66,473               45,883
                                                  -------              -------
                                                  $93,139              $67,594
                                                  =======              =======
</TABLE>

NOTE 6 - PROPERTY AND EQUIPMENT
------   ----------------------
        Property and equipment is summarized as follows (In thousands):

<TABLE>
                                                           December 31,
                                                    --------------------------
                                                     1997                1996
                                                     ----                ----
         <S>                                       <C>                <C>
         Land, buildings and improvements:
            Administration                         $ 19,659           $ 16,902
            Lodging and other                         4,393              4,201
         Furniture, fixtures and equipment           18,273             17,830
                                                   --------           --------
                                                     42,325             38,933
         Accumulated depreciation                   (17,955)           (14,131)
                                                   --------           --------
                                                   $ 24,370           $ 24,802
                                                   ========           ========
</TABLE>

        The Company has operating leases which consist primarily of (i) building
and office space used for its sales and marketing  operations and (ii) telephone
and office equipment. Rental expense under operating leases totaled $4.8 million
for both 1997 and 1996 and $3.8  million  for 1995.  The  future  minimum  lease
commitments for non-cancelable  operating leases with initial or remaining terms
in excess of one year are as follows:  1998 - $3.7 million; 1999 - $3.4 million;
2000 - $2.1 million; 2001 - $.9 million and 2002 - $.5 million.


                                  F-19

<PAGE>


NOTE 7 - FINANCING ARRANGEMENTS
------   ----------------------
        Financing arrangements are summarized as follows (In thousands):

<TABLE>
                                                             December 31,
                                                       -----------------------
                                                         1997            1996
                                                         ----            ----
        <S>                                            <C>             <C>
        Revolving credit agreements                    $ 94,101        $ 42,394
        Notes payable collateralized by
         contracts receivable:
          FCC Notes                                      60,147          29,944
          FFC Notes                                      12,330          24,370
        Notes payable - other                             3,503          16,587
                                                       --------        --------
                                                       $170,081        $113,295
                                                       ========        ========
</TABLE>

        Revolving Credit Agreements
        ---------------------------

        On December 19, 1997,  Fairfield amended its Amended and Restated Credit
Agreement (the "FCI Agreement"), which provided for additional interim borrowing
availability of up to $100.0 million  ($125.0 million in total,  including up to
$7.0 million for letters of credit) for a period  ending no later than March 18,
1998.  Proceeds from the additional  borrowing  availability were used to retire
substantially  all of the secured  obligations  of Vacation Break totaling $81.4
million,  including  interest,  and to pay certain expenses  associated with the
merger.  At December 31, 1997,  borrowings under the FCI Agreement bear interest
at the lender's base rate plus 1.75% (10.25%) and are  collateralized  primarily
by contracts receivable, which had a book value of $161.5 million. The revolving
loans mature on January 1, 1999, if not extended in accordance with the terms of
the FCI Agreement. At December 31, 1997, Fairfield had borrowing availability of
$26.4 million, net of outstanding letters of credit totaling $3.4 million.

        At December 31, 1997, FAC had no borrowings  outstanding under its Third
Amended and Restated  Revolving Credit Agreement (the "FAC Agreement").  The FAC
Agreement  provides for revolving loans of up to $15.0 million,  including up to
$1.0  million for letters of credit.  Borrowings  under the FAC  Agreement  bear
interest at the lender's base rate plus 1.75%  (10.25%) at December 31, 1997 and
are collateralized primarily by contracts receivable,  which had a book value of
$20.8  million at December 31, 1997.  The  revolving  loans mature on January 1,
1999, if not extended in accordance  with the terms of the FAC  Agreement,  with
Fairfield being a guarantor pursuant to the FAC Agreement. At December 31, 1997,
FAC had borrowing availability of $15.0 million.

        On January 15, 1998, Fairfield Receivables Corporation ("FRC"), a wholly
owned  subsidiary of FAC,  entered into a Credit Agreement (the "FRC Agreement")
which  provided  for  borrowings  of up to $150.0  million  for the  purchase of
contracts  receivable  from FAC pursuant to the Receivable  Purchase  Agreement,
among Fairfield as originator, FAC as the seller and FRC as purchaser.

        Notes Payable Collateralized by Contracts Receivable
        ----------------------------------------------------

        In  1996,   Fairfield  Capital  Corporation   ("FCC"),  a  wholly  owned
subsidiary of FAC,  amended its Credit  Agreement  (the "FCC  Agreement")  which
provides for total  borrowings  of up to $90.0 million (the "FCC Notes") for the
purchase of contracts  receivable  from FAC pursuant to the Amended and Restated
Receivables Purchase Agreement, among Fairfield as originator, FAC as seller and
FCC as purchaser.  Borrowings under the FCC Agreement mature  principally within
60 months and bear interest at varying rates,  based on commercial  paper rates.
As of December 31, 1997, the weighted average interest rate on the FCC Notes was
5.6%,  including fees totaling .375%. At December 31, 1997, contracts receivable
totaling $79.8 million collateralized the FCC Notes.

                                    F-20

<PAGE>

        On February 2, 1998,  FAC  entered  into an interest  rate swap with its
primary lender, which provides for an interest rate of 5.63% on $50.0 million of
FCC  Notes.  This  arrangement  is  subject  to the  scheduled  amortization  of
contracts receivable securing the FCC Notes and will expire on February 2, 2002.

        FCC is a wholly owned but separate  corporate entity of FAC with its own
separate  creditors.  In the event of a liquidation of FCC, such creditors would
be entitled to satisfy their claims from FCC prior to any distribution to FAC.

        Fairfield  Funding  Corporation  ("FFC") is a wholly owned subsidiary of
FAC, with outstanding  borrowings issued under private placement notes that bear
interest at a rate of 7.6% (the "FFC  Notes").  The FFC Notes are secured by and
payable from a pool of contracts  receivable  purchased from FAC pursuant to the
Receivables Purchase Agreement among Fairfield as originator,  FAC as seller and
FFC as purchaser.  At December 31, 1997,  contracts  receivable  totaling  $22.5
million collateralized the FFC Notes.

     At December  31, 1997 and 1996,  restricted  cash  accounts  totaling  $3.7
million  and $2.6  million,  respectively,  were  required to be  maintained  in
accordance  with the  terms  of the FCC and FFC  Notes.  Contractual  maturities
within the next five years of contracts receivable which serve as collateral for
and will be used to  reduce  the  notes  payable  are as  follows:  1998 - $21.8
million;  1999 - $19.4 million;  2000 - $18.6 million;  2001 - $17.7 million and
2002 - $15.3 million.

NOTE 8 - DEFERRED REVENUE - ESTIMATED COSTS TO DEVELOP LAND SOLD
------   -------------------------------------------------------

        At December 31, 1997,  estimated  cost to complete  development  work in
subdivisions from which lots had been sold totaled $14.2 million.  The estimated
costs to  complete  development  work within the next five years are as follows:
1998 - $.6 million;  1999 - $.4 million;  2000 - $.5 million; 2001 - $.3 million
and 2002 - $.5 million.

NOTE 9 - INCOME TAXES
------   ------------

     At December  31, 1997,  the Company had net  operating  loss  carryforwards
totaling  $96.0  million which  reflect the amount  available to offset  taxable
income in future periods.  Under  limitations  imposed by Internal  Revenue Code
Section 382  ("Section  382"),  certain  potential  changes in  ownership of the
Company,  which may be outside the Company's knowledge or control,  may restrict
future  utilization  of  these  carryforwards.  More  specifically,  changes  in
ownership   occurring   within  a  rolling   three-year   period,   taking  into
consideration  filings with the Securities and Exchange  Commission on Schedules
13D  and 13G by  holders  of 5% or more of  Fairfield's  Common  Stock,  whether
involving the acquisition or disposition of Fairfield's Common Stock, may impose
a  material  limitation  on the  Company's  use of  these  carryforwards.  If an
ownership  change triggers the Section 382  limitations,  the annual  limitation
imposed on the use of  pre-change  carryforwards  under present law is an amount
equal to the  value of the  Company  immediately  before  the  ownership  change
multiplied by the federally  prescribed long-term tax-exempt rate for the period
in which the change occurs. At December 31, 1997, available  carryovers,  if not
utilized,  expire as follows:  2005 - $12.6 million; 2006 - $8.0 million; 2007 -
$14.5 million;  2008 - $6.3 million;  2009 - $3.5 million; 2010 - $22.0 million;
2011 - $24.2 million and 2012 - $4.9 million.


                                       F-21
<PAGE>


        Components  of  the  provision  for  income  taxes  are as  follows  (In
thousands):

<TABLE>
                                                   Year Ended December 31,
                                               --------------------------------
                                                 1997         1996       1995
                                                 ----         ----       ----
        <S>                                    <C>          <C>          <C>
        Current:
          Federal                              $ 2,779      $   254      $  491
          State                                    164          426         542
                                               -------      -------      ------
                                                 2,943          680       1,033
        Deferred:
          Federal                               14,050       11,380       6,559
          State                                  2,734        1,280         742
                                               -------      -------      ------
                                                16,784       12,660       7,301
                                               -------      -------      ------
                                               $19,727      $13,340      $8,334
                                               =======      =======      ======
        Utilization of pre-confirmation
          income tax attributes                $  --        $19,108      $6,263
                                               =======      =======      ======
</TABLE>


        During 1997, the Company  recorded a tax benefit of  approximately  $1.4
million related to the extraordinary loss resulting from early extinguishment of
substantially all of Vacation Break's debt.

        Components  of the  variance  between  taxes  computed  at the  expected
federal  statutory  income tax rate and the  provision  for income  taxes are as
follows (In thousands):

<TABLE>
                                                    Year Ended December 31,
                                                 -----------------------------
                                                   1997        1996      1995
                                                   ----        ----      ----
<S>                                              <C>         <C>        <C>
Statutory tax provision                          $15,085     $12,405    $7,773
State income taxes, net of
 federal benefit                                   1,720       1,109       834
Non-deductible merger expenses                     2,294         -         -
Other                                                628        (174)     (273)
                                                 -------     -------    ------
Provision for income taxes                       $19,727     $13,340    $8,334
                                                 =======     =======    ======
</TABLE>

        Significant  components of the Company's deferred tax assets (deductible
temporary   differences)  and  deferred  tax  liabilities   (taxable   temporary
differences) consisted of the following (In thousands):

<TABLE>
                                                           December 31,
                                                     -----------------------
                                                       1997            1996
                                                       ----            ----
          <S>                                        <C>              <C>
          Deferred tax assets:
            Net operating loss carryforwards         $ 38,259         $34,176
            Loan and cancellation loss reserves         8,308           6,459
            Deferred revenue                            4,619           9,228
            Tax over book basis in inventory
             and fixed assets                             724           3,471
            Credit carryforwards                        4,338           1,459
            Other                                       3,271           4,022
                                                     --------         -------
                                                       59,519          58,815
                                                     --------         -------
          Deferred tax liabilities:
            Installment sales                          68,234          44,556
            Other                                       1,558           3,891
                                                     --------         -------
                                                       69,792          48,447
                                                     --------         -------
          Net deferred tax (liabilities) assets      $(10,273)        $10,368
                                                     ========         =======
</TABLE>

                                     F-22
<PAGE>



     The  Company  has  reported   operating   earnings   since   emerging  from
reorganization  in 1992 and management  believes that it is more likely than not
that future  taxable  earnings  will be  sufficient  to realize the tax benefits
associated with the future  deductible  temporary  differences and net operating
loss carryforwards prior to their expiration;  therefore, the Company eliminated
the remaining valuation allowance in 1996.

NOTE 10 - OTHER LIABILITIES
-------   -----------------

        Other liabilities consisted of the following (In thousands):
<TABLE>
                                                           December 31,
                                                      1997             1996
                                                      ----             ----
          <S>                                       <C>              <C>
          Employee compensation and benefits        $13,973          $10,605
          Deferred tax liability                     10,273              -
          Deposits associated with sales contracts    6,639            5,883
          Accrual for Discovery fulfillment           5,588            3,077
          Accrued merger costs                        2,028              -
          Accrued legal reserves                      1,645              382
          Accrued association subsidies               1,549              924
          Minority interests in joint ventures          -             10,100
          Other                                      14,807           11,524
                                                    -------          -------
                                                    $56,502          $42,495
                                                    =======          =======
</TABLE>

NOTE 11 - STOCKHOLDERS' EQUITY
-------   --------------------

     On December 19, 1997, Fairfield's  stockholders approved an increase in the
number of authorized  common shares from 25,000,000 to 100,000,000.  On December
11, 1997,  the Board of Directors  declared a two-for-one  common stock split in
the form of a stock  dividend  effective  January  30, 1998 to  shareholders  of
record  on  January  15,  1998.  Additionally,  on June 5,  1997,  the  Board of
Directors  declared a  three-for-two  common  stock split in the form of a stock
dividend  effective July 15, 1997 to  shareholders of record on July 1, 1997. In
connection with these stock splits,  Fairfield  reclassified  $304,000,  the par
value of the additional  shares resulting from the splits,  from paid-in capital
to common  stock.  All  references  to the  number of common  shares,  per share
amounts and average shares outstanding in the consolidated financial statements,
except for shares authorized at December 31, 1996, have been restated to reflect
the effect of these stock splits.

        In 1996,  the  Company  completed  an  underwritten  public  offering of
900,000  shares  (2,700,000  shares on a post split  basis) of Common Stock at a
price of  $21.63  per  share  ($7.21  per  share  on a post  split  basis)  (the
"Offering").  The net proceeds  from the Offering of $17.7  million were used to
repay certain indebtedness, totaling $9.1 million, issued in connection with the
Company's   reorganization   and  to  temporarily   pay  down  the   outstanding
indebtedness under the Company's revolving credit agreements.

        In 1996,  the Company  issued,  from  treasury,  60,000 shares  (180,000
shares on a post split  basis) of Common  Stock to the Chief  Executive  Officer
subject to restriction  and risk of forfeiture  (the  "Restricted  Stock").  The
Restricted  Stock  was  issued  at no cost to the Chief  Executive  Officer,  in
substitution  for  certain  other  compensation  arrangements,  and  vests as to
one-half of the shares on each of the first and second anniversaries of the date
of grant. At issuance of the Restricted Stock, unearned compensation  equivalent
to the market value at the date of grant was charged to stockholders' equity and
will be amortized over the restricted period.

                                    F-23
<PAGE>

        The Company is authorized to issue  5,000,000  shares of preferred stock
par value $.01 per share. One million shares of preferred stock, which have been
designated  as the  Series A Junior  Participating  Preferred  Stock,  have been
reserved for possible  issuance in connection with Fairfield's  Rights Agreement
as  discussed  below.  The rights and  preferences  of the  remaining  shares of
authorized  but unissued  Preferred  Stock are to be  established by Fairfield's
Board of Directors at the time of issuance.

     Fairfield has a Rights Agreement which provides for the issuance, on a post
split basis, of one-third of a right for each  outstanding  share of Fairfield's
Common Stock.  The rights,  which entitle the holder to purchase from  Fairfield
one one-hundredth of a share of Series A Junior Participating Preferred Stock at
$25 per share,  become  exercisable (i) ten business days after a person becomes
the  beneficial  holder of 20% or more of  Fairfield's  Common Stock or (ii) ten
business days  following the  commencement  of a tender or exchange offer for at
least 20% of Fairfield's  Common Stock.  Fairfield may redeem the rights at $.01
per right under certain circumstances. The rights expire on September 1, 2002.

        Certain of the  Company's  financing  arrangements  contain  restrictive
covenants  relating to the  maintenance  of certain  financial  ratios and other
financial  requirements.  Under the most restrictive  covenants,  the Company is
prohibited  from paying  dividends  or making other  distribution  on its Common
Stock.

NOTE 12 - EARNINGS PER SHARE
-------   ------------------

         The  following  table sets forth the  computation  of basic and diluted
earnings per share ("EPS") (In thousands, except per share data):

<TABLE>
                                                   1997      1996       1995
                                                   ----      ----       ----
 <S>                                             <C>       <C>        <C>
 Numerator:
   Net income before extraordinary loss          $23,372   $22,103    $13,874
   Extraordinary loss from early
    extinguishment of debt                         2,195       -          -
                                                 -------   -------    -------
   Numerator for basic and diluted EPS           $21,177   $22,103    $13,874
                                                 =======   =======    =======
 Denominator:
   Denominator for basic EPS-
     weighted-average shares                      44,200    40,558     37,691
   Effect of dilutive securities:
     Contingently issuable common stock               90       180        -
     Options and warrants                          1,626     1,600      1,270
     Increase in shares outstanding due to
      allowed claims exceeding $85 million (1)       -         561        561
     Common stock held in escrow                     366       366        366
                                                 -------   -------    -------
     Dilutive potential common shares              2,082     2,707      2,197
                                                 -------   -------    -------
     Denominator for diluted EPS-
      adjusted weighted-average shares
      and assumed conversions                     46,282    43,265     39,888
                                                  ======    ======     ======
Basic earnings per share                            $.48      $.54       $.37
                                                    ====      ====       ====
Diluted earnings per share                          $.46      $.51       $.35
                                                    ====      ====       ====
</TABLE>

(1)     On June 30, 1997, the Bankruptcy  Court approved a settlement  agreement
        between the Company and the county and the property owners'  association
        for its Pagosa Springs,  Colorado resort location. Based on the terms of
        the settlement,  the Company subsequently issued 280,500 shares (561,000
        shares on a post split basis) of its Common Stock.

                                     F-24
<PAGE>

NOTE 13 - FAIRFIELD ACCEPTANCE CORPORATION
-------   --------------------------------
        Condensed  consolidated  financial  information for FAC is summarized as
follows (In thousands):

                           CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
                                                      December 31,
                                             ------------------------------ 
                                                1997                 1996
                                                ----                 ----
  <S>                                        <C>                   <C>
  ASSETS
  Cash                                       $    494              $    462
  Loans receivable, net                       111,071                96,760
  Restricted cash                               3,749                 2,622
  Due from parent                               6,710                  --
  Other assets                                  2,390                 2,279
                                             --------              --------
                                             $124,414              $102,123
                                             ========              ========
  LIABILITIES AND EQUITY
  Financing arrangements                     $ 72,477              $ 54,314
  Accrued interest and other liabilities          703                   586
  Due to parent                                  --                   2,554
  Equity                                       51,234                44,669
                                             --------              --------
                                             $124,414              $102,123
                                             ========              ========
</TABLE>

                     CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
                                               Year Ended December 31,
                                            ----------------------------
                                              1997      1996      1995
                                              ----      ----      ----
<S>                                         <C>       <C>       <C>
Revenues                                    $17,634   $16,565   $15,009
Expenses                                      6,832     6,649     8,103
                                            -------   -------   -------
Earnings before provision
 for income taxes                            10,802     9,916     6,906
Provision for income taxes                    4,237     3,812     2,656
                                            -------   -------   -------
Net earnings                                $ 6,565   $ 6,104   $ 4,250
                                            =======   =======   =======
</TABLE>

        In accordance with the terms of the Third Amended and Restated Operating
Agreement (the  "Operating  Agreement"),  FAC is permitted to purchase  eligible
receivables  from  Fairfield  for a  price  equal  to  $.94  per  $1.00  of such
receivables.  Fairfield is required by the  Operating  Agreement  to  repurchase
defaulted  receivables from FAC at a price equal to $.94 per $1.00 or substitute
an  eligible  receivable  on the  basis of $.85 per  $1.00 of such  receivables.
During 1997 and 1996, FAC purchased  receivables from Fairfield with outstanding
principal balances of $60.8 million and $42.6 million, respectively.

NOTE 14 - NET LIABILITIES OF ASSETS HELD FOR SALE
-------   ---------------------------------------
        During the first quarter of 1997, the Company  transferred  $7.9 million
in cash and the assets collateralizing the 10% Senior Subordinated Secured Notes
(the "FCI  Notes"),  with an  appraised  market value of $7.2 million (the "Real
Estate  Collateral"),  in settlement of the FCI Notes. The indenture trustee, at
the direction of the majority noteholders, has filed suit, pending in the United
States  District  Court for the Southern  District of New York,  contesting  the
Company's  method of satisfying this obligation and claiming a default under the
indenture securing the FCI Notes (see Note 17).

                                    F-25

<PAGE>

        At December 31, 1996,  the Real Estate  Collateral  assets held for sale
totaled $6.5 million and consisted of those assets collateralizing the FCI Notes
which had an outstanding balance of $14.8 million.  During the fourth quarter of
1996,  the Company  recorded a valuation  adjustment  of $1.0  million  based on
current  information  that  indicated  the  carrying  value of the  Real  Estate
Collateral  was in excess  of the fair  value.  This  valuation  adjustment  was
included in "Other expenses" in the 1996 Consolidated Statement of Earnings.

NOTE 15 - EMPLOYEE BENEFIT PLANS
-------   ----------------------

        Savings/Profit Sharing Plan
        ---------------------------
        The  Savings/Profit  Sharing Plan (the "Plan") covers  substantially all
employees with one year or more of credited service,  and participants are fully
vested after seven years of credited service. The Plan includes a profit sharing
feature, with annual employer discretionary contributions, and a 401(k) feature,
which allows  employee  elected  salary  deferrals,  with the Company  currently
matching a portion of such  deferrals.  The amount charged to expense related to
the Plan totaled $2.0 million,  $1.2 million and $.6 million for 1997,  1996 and
1995, respectively.

        All full time employees of Vacation Break, who had completed one year of
service,  were eligible to  participate  in a 401(k) plan (the  "Vacation  Break
Plan") that allowed each participating employee to contribute up to 15% of their
earnings to the  Vacation  Break Plan.  Vacation  Break  matched 50% of employee
contributions up to 3% of employee earnings. In conjunction with the merger with
Fairfield,  the  Vacation  Break Plan was frozen as of December  31,  1997.  The
amount charged to expense  related to the Vacation Break Plan totaled  $104,000,
$72,000 and $25,000 for 1997, 1996 and 1995, respectively.

        Excess Benefit Plan
        -------------------

        The Excess Benefit Plan is a non-qualified, unfunded plan established to
provide qualifying employees with benefits to compensate for certain limitations
imposed by federal law on the amount of compensation  which may be considered in
determining   employer   contributions  to  participants'   accounts  under  the
Savings/Profit  Sharing Plan.  Participants'  accounts  under the Excess Benefit
Plan are  credited  with  amounts  that,  except for the limits of the  Internal
Revenue Code, would have been contributed to such  participants'  accounts under
the Savings/Profit Sharing Plan. Participants' accounts under the Excess Benefit
Plan vest in accordance  with the vesting  schedule for profit sharing  accounts
under the Savings/Profit Sharing Plan. Interest is credited to the participants'
accounts  annually.  The expense associated with the Excess Benefit Plan totaled
$0.3 million for 1997 and $0.1 million for each of 1996 and 1995.

        Retirement Plan
        ---------------

        The  Key  Employee   Retirement  Plan  (the  "Retirement   Plan")  is  a
non-qualified, unfunded plan established to provide certain senior executives of
the Company with retirement benefits.  Under the Retirement Plan,  participants'
accounts are credited on each  January 1 by a percentage  of each  participants'
preceding year's total cash compensation. In general, the benefit percentage can
range from 0% to 20%, depending on the Company's  three-year moving average rate
of return on stockholders' equity. Participants' accounts are fully vested after
seven  years of  service  or upon the  occurrence  of a change in control of the
Company,  death  of the  participant,  termination  of  employment  due to total
disability or retirement on or after the age 55, in each case while  employed by
the Company. Interest is credited to participants' accounts monthly. The expense
associated  with the Retirement Plan totaled $0.3 million for each of 1997, 1996
and 1995. Effective August 1, 1997, the Company suspended benefit accruals under
the Retirement Plan.

                                  F-26
<PAGE>

        Employee Stock Purchase Plan
        ----------------------------

        Effective  January 1, 1997, the Company  established  the Employee Stock
Purchase Plan (the "Stock  Plan"),  whereby all full time employees are eligible
to purchase shares of the Company's Common Stock at a 15% discount to the market
price on the date of purchase.  The Stock Plan is not  qualified  under  Section
401(a) of the Internal  Revenue Code of 1996, as amended,  and is not subject to
the provisions of the Employee Retirement Income Security Act of 1974.

        Option and Warrant Plans
        ------------------------

        The 1992 Warrant  Plan, as amended,  (the "1992 Plan")  provides for the
grant of  non-qualified  stock  warrants  to  purchase  up to  1,000,000  shares
(2,587,000 shares on a post split basis) of the Company's Common Stock at prices
not less than the fair  market  value of such  shares at the date of grant.  The
stock warrants generally become exercisable over one to five years from the date
of grant and must be exercised within ten years from the date of grant.

        During May 1997,  the  Company's  stockholders  approved  the 1997 Stock
Option Plan ("1997  Plan"). Under the terms of the 1997 Plan, nonqualified stock
options to  purchase a maximum of  550,000  shares  (1,650,000  shares on a post
split  basis) of the  Company's  Common  Stock may be granted at prices not less
than the fair  market  value of such  shares  at the date of  grant.  The  stock
options  generally  become  exercisable  over two to five years from the date of
grant and must be exercised within ten years from the date of grant.

     Vacation  Break's  1995 Stock Option Plan and the  Directors'  Stock Option
Plan (collectively,  the "Option  Plans")provided for the grant of incentive and
non-qualified stock options to purchase shares of Vacation Break common stock at
prices not less than the fair market  value of such shares at the date of grant.
In conjunction  with the merger,  all outstanding  options to purchase  Vacation
Break common stock  related to the Option  Plans became  immediately  vested and
were  converted  into  options to  purchase  the  Company's  Common  Stock at an
exchange  rate of .6075 on a pre split  basis.  The  Company  does not intend to
grant any additional options under the Option Plans.

        The following table  summarizes the activity under the Company's  option
and warrant plans:

<TABLE>
                                                              Weighted Average
                                      Shares                   Price Per Share
                          -------------------------------   --------------------
                            1997       1996       1995       1997   1996    1995
                            ----       ----       ----       ----   ----    ----
<S>                       <C>        <C>        <C>        <C>     <C>     <C>
Outstanding at beginning
  of period               3,103,000  3,028,000  2,454,000  $ 2.03  $1.52   $1.02
Granted                   2,299,000    674,000    617,000   10.78   3.83    3.58
Exercised                  (380,000)  (488,000)     -        3.51   1.28    N/A
Forfeited                  (220,000)  (111,000)   (43,000)   6.70   1.68    2.55
                          ---------  ---------  ---------
Outstanding at end
  of period               4,802,000  3,103,000  3,028,000    5.66   2.03    1.52
                          =========  =========  =========
Exercisable at end
  of period               2,739,000  1,779,000  1,629,000
                          =========  =========  =========
Reserved for future
 issuance                   360,000    107,000    396,000
                            =======    =======    =======
</TABLE>

                                    F-27
<PAGE>


     The following  table  summarizes  information  concerning  outstanding  and
exercisable  stock  options and  warrants as of  December  31, 1997  adjusted to
reflect the two-for-one stock split effective January 31, 1998:

<TABLE>
                  Outstanding                                Exercisable  
-----------------------------------------------------   ----------------------
                                 Weighted
                                  Average    Weighted                 Weighted
                                 Remaining    Average                  Average
    Range of         Number     Contractual   Exercise    Number      Exercise
 Exercise Prices  Outstanding      Life        Price    Exercisable     Price
 ---------------  -----------      ----        -----    -----------     -----
  <S>              <C>           <C>          <C>        <C>            <C>
  Less than $4     2,172,000     5.7 years    $ 1.25     1,689,000      $1.14
   $4 - $9         1,050,000     5.8 years      5.43     1,050,000       5.43
  $10 or more      1,580,000     9.5 years     11.88         -             -
                   ---------                             ---------
                   4,802,000                             2,739,000
                   =========                             =========
</TABLE>

        The Company has  elected to account  for stock  options and  warrants as
prescribed  by the  provisions  of  Accounting  Principles  Board Opinion No. 25
versus the  alternative  fair value  accounting  provided for under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No.  123").  Accordingly,  the Company  does not  recognize  compensation
expense on the  issuance of its stock  options and  warrants as the option terms
are fixed and the exercise price equals the market price of the underlying stock
on date of grant.

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options and warrants  under the fair value method.  The fair value
of these  options  and  warrants  was  estimated  at date of grant using a Black
Scholes option pricing model with the following weighted-average assumptions for
1997,  1996 and 1995,  respectively:  risk free interest rates of 6.6%, 6.5% and
5.6%;  dividend yields of 0% for each year presented;  volatility factors of the
expected market price of the Company's  Common Stock of 43.8, 44.5 and 45.5; and
the  weighted-average  expected life of the options and warrants of six years in
1997 and 1996 and five  years in 1995.  The  weighted-average  fair value of the
options and warrants granted in 1997, 1996, and 1995 was $4.90, $2.07 and $1.71,
respectively.

        For purposes of pro forma disclosures, the estimated fair value of stock
options and  warrants is  amortized  to expense  over their  respective  vesting
periods. The pro forma net earnings and earnings per share, assuming the Company
had elected to account for its stock  options and  warrants in  accordance  with
SFAS No. 123,  would have been $19.6  million or $.42 per diluted  share,  $21.5
million or $.50 per diluted share and $13.7  million or $.34 per diluted  share,
for  1997,  1996  and  1995,  respectively.  Such  pro  forma  effects  are  not
necessarily indicative of the effect on future years.

NOTE 16 - SUPPLEMENTAL INFORMATION
-------   ------------------------
        Other revenues consisted of the following (In thousands):

<TABLE>
                                          Year Ended December 31,
                                     ---------------------------------
                                       1997         1996        1995
                                       ----         ----        ----
<S>                                  <C>          <C>         <C>
Home sales                           $11,124      $ 8,752     $ 6,719
Lot sales                              8,060        8,735       7,817
Fairshare Plus conversion fees         2,069        1,076         931
Other                                  3,433        6,569      12,224
                                     -------      -------     -------
                                     $24,686      $25,132     $27,691
                                     =======      =======     =======
</TABLE>

                                   F-28
<PAGE>

        Other expenses consisted of the following (In thousands):

<TABLE>
                                              Year Ended December 31,
                                          -------------------------------
                                           1997        1996         1995
                                           ----        ----         ----
<S>                                      <C>         <C>          <C>
Home cost of sales                       $ 9,819     $ 8,162      $ 5,979
Lot cost of sales                          2,170       2,068        1,970
Fairshare Plus conversion commissions        706         462          587
Other                                      5,371       7,718        9,375
                                         -------     -------      -------
                                         $18,066     $18,410      $17,911
                                         =======     =======      =======
</TABLE>


        Included  in other  assets at  December  31, 1997 and 1996 are (i) other
receivables  of $4.6 million and $8.3 million,  respectively,  (ii)  unamortized
capitalized financing costs of $2.4 million and $2.3 million,  respectively, and
(iii) $2.0 million and $2.9 million, respectively,  related to the assets of the
Company's life insurance subsidiary.  Interest paid, net of amounts capitalized,
totaled $11.2 million,  $15.5 million and $10.8 million for 1997, 1996 and 1995,
respectively.  Interest  paid in 1996  included  $2.7 million paid in connection
with  the  retirement  of  obligations  issued  as a  result  of  the  Company's
reorganization.  Capitalized  interest  for  1997,  1996 and 1995  totaled  $3.0
million, $2.6 million and $1.6 million, respectively.

 NOTE 17 - CONTINGENCIES
 -------   -------------

     In July  1993  and  September  1993,  two  lawsuits  (the  "Recreation  Fee
Litigation") were filed by 29 individuals and a company against Fairfield in the
District Court of Archuleta  County,  Colorado.  The Recreation Fee  Litigation,
which seeks  certification  as class  actions,  alleges that  Fairfield  and its
predecessors in interest  wrongfully  imposed an annual recreation fee on owners
of  lots,  condominiums,  townhouses,  VOIs  and  single  family  residences  in
Fairfield's  Pagosa,  Colorado  development.  The amount of the recreation  fee,
which was adopted in August 1983,  is $180 per lot,  condominium,  townhouse and
single  family  residence  subject  to the fee and $360 per unit for  VOIs.  The
plaintiffs  have  asserted  in  court  appearances  that  the  actions  focus on
recreation  fees  collected  in Pagosa  for lots from  September  1, 1992 to the
present.  The Recreation Fee  Litigation  in  general  seeks  (a) a  declaratory
judgment that the recreation fee is invalid;  (b) the refund, with interest,  of
the recreation fees which were allegedly improperly collected by Fairfield;  (c)
damages  arising from  Fairfield's  allegedly  improper  attempts to collect the
recreation  fee (i) in an amount of not less than $1,000 per lot in one case and
(ii) in an unstated  amount in the other case;  (d)  punitive  damages;  and (e)
recovery of costs and expenses, including attorneys' fees. The court has not yet
ruled on whether or not the Recreation Fee Litigation will be allowed to proceed
as class actions.  Because of the nature of the litigation,  Fairfield is unable
to  determine  with  certainty  the  dollar  amount  sought by  plaintiffs,  but
estimates that is has collected approximately $570,000 in recreation fees during
the relevant  period for lots at Pagosa.  In November 1993,  Fairfield  filed an
adversary  proceeding in the Bankruptcy Court,  alleging that the Recreation Fee
Litigation  violates  the  discharge  granted  to  Fairfield  in its  Chapter 11
bankruptcy  reorganization  and the injunction  issued by the  Bankruptcy  Court
against prosecution of any claims discharged in the bankruptcy  proceedings.  By
orders and opinions  dated  September  29, 1994,  the  Bankruptcy  Court decided
motions filed by the plaintiffs in the Recreation Fee Litigation, in response to
Fairfield's  adversary  proceeding.  The Bankruptcy Court retained  jurisdiction
over one of the lawsuits (the Storm lawsuit) and  determined  that any purchaser
of a lot from Fairfield and its  predecessors  prior to August 14, 1992 would be
limited to a  pre-confirmation  cause of action. The Bankruptcy Court determined
that it did not have jurisdiction over the second lawsuit (the Daleske lawsuit),
involving  eight  individuals and one company,  due to prior  proceedings in the
case in Colorado Federal District Court, which ruled that the plaintiffs in this
lawsuit had post-confirmation causes of action, although all nine plaintiffs are

                                  F-29
<PAGE>

believed  to have  purchased  their  lots prior to August  14,  1992.  Fairfield
appealed  the  Bankruptcy  Court's  decision  in the  Daleske  lawsuit,  and the
plaintiffs in the Storm lawsuit appealed the Bankruptcy Court's decision in that
case, to the United States District Court, Eastern Division of Arkansas, Western
Division (the "District Court").  Two additional related lawsuits have also been
filed in the Archuleta County District Court, raising similar issues and demands
as the Storm and Daleske  cases.  The Fiedler case,  filed in October 1994,  was
filed individually, while the second of these cases, the Lobdell case, was filed
in November 1994, as a purported class action. In February 1995, Fairfield filed
an adversary  proceeding  in the  Bankruptcy  Court  against the Fiedler and the
Lobdell  plaintiffs,  seeking  relief similar to that requested in the Storm and
Daleske  adversary  proceeding.  The Colorado  District  Court  entered  summary
judgment against Fairfield in the Fiedler case,  holding that the individual lot
in question is not subject to the recreation fee, based upon facts unique to the
Fiedler case.  Fairfield  appealed the summary judgment  decision in the Fiedler
case. The Bankruptcy  Court  determined,  by decision dated  September 18, 1995,
that it does not have jurisdiction in the Fiedler case, but also determined that
it does have  jurisdiction in the Lobdell case, based upon similar  reasoning to
the Storm case.  Both the Fiedler  and the  Lobdell  cases were  appealed to the
District  Court.  By order dated March 27, 1997, the District Court ruled in the
Daleske, Storm and Lobdell appeals,  finding in favor of the plaintiffs that the
recreation fees arising after August 14, 1992 are  post-confirmation  claims and
that the  plaintiffs  may  pursue  actions  seeking  to  enjoin  Fairfield  from
continuing  to collect  such fees.  Fairfield  filed a notice of appeal from the
District Court's decision with the United States Court of Appeals for the Eighth
Circuit,  which held oral argument on January 16, 1998, but no decision has been
announced.  Motions and cross  motions for summary  judgment  have been filed in
Colorado state court in three of the cases and remain pending. Fairfield intends
to defend  vigorously the Recreation Fee Litigation,  and the two related cases,
including  any  attempt to certify a class in any of the  cases.  Fairfield  has
previously  implemented  recreation  fee charges at certain  other of its resort
sites which are not subject to the pending action.

         In December 1993, Charlotte T. Curry, who, with her husband,  purchased
a lot from Fairfield  under an installment  sale contract  subsequently  sold to
First Federal Savings and Loan Association of Charlotte ("First Federal"), filed
suit against First Federal,  currently  pending in Superior Court in Mecklenburg
County,  North Carolina,  alleging breach of contract,  breach of fiduciary duty
and unfair trade practices. In April 1994, the complaint was amended, (a) adding
Fairfield as a party,  (b) adding an additional count against both Fairfield and
First Federal alleging  violation of the North Carolina's  Racketeer  Influenced
and  Corrupt  Organizations  ("RICO")  Statute  and (c)  adding a count  against
Fairfield   alleging   fraud.   The   litigation,   which  seeks  class   action
certification, contests the method by which Fairfield calculated refunds for lot
purchasers  whose  installment  sale  contracts were cancelled due to failure to
complete  payment of the deferred sales price for the lot. Most  installment lot
sale contracts require Fairfield to refund to a defaulting  purchaser the amount
paid in principal,  after deducting the greater of (a) 15% of the purchase price
of the lot or (b) Fairfield's actual damages. The plaintiff disputes Fairfield's
method of calculating  damages,  which has historically  included certain sales,
marketing  and other  expenses.  In the case of Ms.  Curry's  lot, the amount of
refund claimed as having been improperly  retained is approximately  $3,600. The
Curry  lawsuit  seeks  damages,  punitive  damages,  treble  damages under North
Carolina  law for unfair  trade  practices  and RICO,  prejudgment  interest and
attorney's  fees and costs. By order dated July 6, 1994, the court dismissed Ms.
Curry's  claims for (a) breach of contract,  due to the statute of  limitations,
(b)  breach  of  fiduciary  duty,  due to the lack of a  fiduciary  duty and the
statute of limitations,  (c) fraud,  due to the statute of limitations,  and (d)
RICO,  due to failure to state a claim.  The court,  by order  dated  August 16,
1994,  dismissed Ms. Curry's only remaining claim against Fairfield,  for unfair
trade practices, subject to possible appeal rights. By order filed September 15,
1995,  the court  denied the  plaintiff's  motion for class  certification.  The
plaintiff appealed the denial of the motion for class certification to the North
Carolina Court of Appeals,  which dismissed the appeal by order dated January 8,
1997.  Subsequently,  the  plaintiff  requested  that the

                                  F-30
<PAGE>


Supreme  Court of North  Carolina  grant  discretionary  review of the  decision
denying class certification, which the Supreme Court of North Carolina declined.
Trial on this  litigation is scheduled  for April 1998. On January 7, 1998,  the
attorneys  representing  Ms. Curry filed another lawsuit (the Scarvey  lawsuit),
also pending in Superior  Court in  Mecklenburg  County,  North  Carolina,  as a
purported  class action,  against First  Federal,  alleging  breach of contract,
breach of fiduciary  duty and unfair  trade  practices,  and seeking  damages as
outlined above in the Curry case. The Scarvey case seeks to relitigate the North
Carolina courts' refusal to certify the Curry case as a class action and asserts
that the Curry case tolled the statute of limitations for Ms. Scarvey's  claims,
which are alleged to post-date  Ms.  Curry's  claims.  Under the Stock  Purchase
Agreement for the sale of First Federal, Fairfield agreed to indemnify the buyer
against any liability in the Curry  litigation.  Fairfield does not believe that
it is  obligated  to  indemnify  the  buyer of  First  Federal  for the  Scarvey
litigation,  but, based upon receipt of a request for  indemnification  from the
buyer,  this  interpretation  of the Stock Purchase  Agreement may be contested.
While  Fairfield  is no longer a  defendant  in the  litigation,  it  intends to
coordinate  the  defense of the Curry  lawsuit  with the  counsel  who have been
representing First Federal, to defend the Curry litigation vigorously. Fairfield
also has cancelled defaulted lot installment sales contracts owned by it and its
subsidiaries  (other than First  Federal),  using the same method of calculating
refunds as is at issue in the Curry litigation.

         During the first quarter of 1997, the Company  transferred $7.9 million
in cash and the assets collateralizing the 10% Senior Subordinated Secured Notes
(the "FCI  Notes"),  with an  appraised  market value of $7.2 million (the "Real
Estate  Collateral"),  in settlement of the FCI Notes. The indenture trustee, at
the direction of the majority noteholders, has filed suit, pending in the United
States  District  Court for the Southern  District of New York,  contesting  the
Company's  method of satisfying this obligation and claiming a default under the
indenture  securing the FCI Notes.  This action  alternatively  (a) disputes the
Company's  right to transfer the Real Estate  Collateral in  satisfaction of the
FCI Notes, seeking instead a cash payment of $7.2 million, plus penalty interest
and the fees and  expenses of the action,  or (b) disputes the $7.9 million cash
transfer,  seeking instead the issuance of 1,764,706 shares (after giving effect
to the 2-for-1 share stock split,  effective  January 30, 1998) of the Company's
Common Stock (the  "Contested  Shares"),  previously  reserved for issuance if a
deficiency resulted on the FCI Notes at maturity.  Pursuant to the indenture for
the FCI Notes,  the noteholders are entitled to retain,  as a premium,  up to $2
million from the proceeds of the collateral  transferred in  satisfaction of the
FCI Notes  (including,  if applicable,  shares of the Company's Common Stock) in
excess of the amount of principal  and accrued  interest  due at  maturity.  The
indenture  trustee  has  asserted  that  the $2  million  premium  limit  is not
applicable to the Contested Shares, has accordingly  claimed  entitlement to all
of the  Contested  Shares and on  September  24, 1997 filed a motion  seeking to
require  the  immediate  issuance  and sale of the  Contested  Shares,  with the
proceeds  to be held in  escrow,  pending  the  outcome of the  litigation.  The
Company has opposed the Indenture  Trustee's  motion and has  requested  summary
judgment,  asserting  that  the  noteholders  are  not  entitled  to  any of the
Contested  Shares.  The Company has been advised that the Real Estate Collateral
has been sold for approximately $4.4 million.  The Company intends to vigorously
defend this action and believes that it has substantive defenses.  The Contested
Shares are not  included in the number of shares  outstanding  for  earnings per
share or other purposes.

         On March 28, 1997, a lawsuit was filed  against  Vacation  Break in the
Circuit  Court for Pinellas  County,  Florida by Market  Response  Group & Laser
Company,  Inc.  ("MRG&L")  alleging that Vacation Break and others  conspired to
boycott MRG&L and fix prices for mailings in violation of the Florida  Antitrust
Act, and in concert with others,  engaged in various acts of unfair competition,
deceptive trade practices and common law conspiracy.  The complaint also alleges
that  Vacation  Break  breached its contract  with MRG&L,  that  Vacation  Break
misappropriated  proprietary  information  from  MRG&L and that  Vacation  Break
interfered  with,  and caused other  companies to breach their,  contracts  with
MRG&L.

                                   F-31
<PAGE>


The complaint  demands that Vacation Break indemnify MRG&L for costs incurred by
it to defend a 1996 Federal Trade  Commission  action.  While the Company cannot
calculate the total amount of damages  sought by MRG&L under its  complaint,  it
appears to be in excess of $50 million. The Company intends to vigorously defend
this action and assert counterclaims if and when appropriate. Under the terms of
the  Principal  Stockholders  Agreement,  entered  into in  connection  with the
acquisition of Vacation Break, Fairfield has been indemnified for (a) 75% of the
damages which may be incurred in connection  with the MRG&L  litigation  and (b)
25% of the expense incurred in defending the MRG&L litigation,  in excess of the
June 30, 1997  reserve on Vacation  Break's  books,  with the maximum  amount of
indemnification  to be $6  million.  Such  indemnification  agreement  has  been
collateralized by, and recourse under the indemnity agreement is limited to, the
pledge of shares of the Company's Common Stock,  valued as of December 18, 1997,
(adjusted  for stock splits and certain  other  similar  items) and the proceeds
thereof.

         The Company is involved in various  other or  threatened  lawsuits  and
contingencies  on an  ongoing  basis as a result of its  day-to-day  operations.
However,  the  Company  does not believe  that any of these other or  threatened
lawsuits or contingencies will have a materially adverse effect on the Company's
financial position or results of operations.

NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-------   -----------------------------------

        The fair value estimates  presented  herein are based on relevant market
information.   As  these   estimates  are   subjective  in  nature  and  involve
uncertainties and significant judgment,  they are not necessarily  indicative of
the amount that the Company could realize on a current market exchange. The fair
value disclosures for financial instruments are as follows:

          Cash  and cash  equivalents:  The  carrying  amounts  reported  in the
          consolidated  balance sheets approximate their fair values at December
          31, 1997 and 1996.

          Restricted  cash and escrow  accounts:  The  estimated  fair values of
          restricted cash and escrow accounts approximate their carrying amounts
          at December 31, 1997 and 1996.

          Loans  receivable:  The  carrying  amounts of loans  receivable  are a
          reasonable estimate of their fair values at December 31, 1997 and 1996
          based on  valuation  models  using risk  adjusted  interest  rates and
          historical  prepayment  experiences.

          Financing   arrangements:   The  carrying  amounts  of  the  Company's
          borrowings with variable interest rates approximated their fair values
          at December 31, 1997 and 1996.  The carrying  amounts of the Company's
          borrowings  with fixed  interest rates totaled $14.3 million and $26.8
          million at December 31, 1997 and 1996,  respectively.  The fair values
          of these  borrowings  totaled  $14.2  million  and  $26.2  million  at
          December 31, 1997 and 1996,  respectively,  and were  estimated  using
          discounted cash flow analyses based on the Company's current borrowing
          rates for similar types of borrowing arrangements.


                                   F-32
<PAGE>


NOTE 19 - UNAUDITED  CONSOLIDATED QUARTERLY FINANCIAL DATA
-------   ------------------------------------------------
Dollars in thousands, except per share data

<TABLE>
                                                 Year Ended December 31, 1997
                                               --------------------------------
                                                First   Second   Third  Fourth
                                               Quarter  Quarter Quarter Quarter
<S>                                            <C>      <C>     <C>     <C>
Total revenues                                 $68,784  $95,163 $99,274 $83,022
Total expenses                                  58,999   78,109  80,833  85,203
                                               -------  ------- ------- -------
Earnings (loss) before provision for
  income taxes and extraordinary loss            9,785   17,054  18,441  (2,181)
Provision for income taxes                       3,734    6,710   7,342   1,941
                                               -------  ------- ------- -------
Net earnings (loss) before extraordinary loss    6,051   10,344  11,099  (4,122)
Extraordinary loss from early extinguishment
 of debt, net of income tax benefit of $1,379      -        -       -     2,195
                                               -------  ------- ------- -------
Net earnings (loss)                            $ 6,051  $10,344 $11,099 $(6,317)
                                               =======  ======= ======= =======

Basic earnings (loss) per share:
  Earnings (loss) before extraordinary loss       $.14     $.24    $.25   $(.09)
  Extraordinary loss                                -        -       -     (.05)
                                                  ----     ----    ----   -----
  Net earnings (loss)                             $.14     $.24    $.25   $(.14)
                                                  ====     ====    ====   =====
Diluted earnings (loss) per share:
  Earnings (loss) before extraordinary loss       $.13     $.23    $.23   $(.09)
  Extraordinary loss                                -        -       -     (.05)
                                                  ----     ----    ----   -----
   Net earnings (loss)                            $.13     $.23    $.23   $(.14)
                                                  ====     ====    ====   =====

                                                 Year Ended December 31, 1996
                                               --------------------------------
                                                First    Second  Third  Fourth 
                                               Quarter  Quarter Quarter Quarter
                                               -------  ------- ------- -------
Total Revenues                                 $51,994  $87,546 $68,216 $67,626
Total expenses                                  46,706   71,685  60,267  61,281
                                               -------  ------- ------- -------
Earnings before provision for income taxes       5,288   15,861   7,949   6,345
Provision for income taxes                       1,907    5,983   3,218   2,232
                                               -------  ------- ------- -------
Net earnings                                   $ 3,381  $ 9,878 $ 4,731 $ 4,113
                                               =======  ======= ======= =======
Basic earnings per share                          $.08     $.24    $.12    $.10
                                                  ====     ====    ====    ====
Diluted earnings per share                        $.08     $.23    $.11    $.09
                                                  ====     ====    ====    ====
</TABLE>

     In  conjunction  with the closing of the Vacation  Break merger on December
19, 1997,  Fairfield recorded merger costs of $16.9 million ($12.8 million after
taxes),  of which  $3.6  million  ($2.2  million  after  taxes)  related  to the
extraordinary  loss resulting from early  extinguishment of substantially all of
Vacation Break's debt.

     Certain  amounts  in the  unaudited  consolidated  financial  data of prior
quarters for 1997 and 1996 have been  reclassified to conform to the 1997 fourth
quarter presentation.

                                     F-33