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

                             
<TABLE>      
                                           Year Endeded December 31,
                               ------------------------------------------------ 
                                 1998       1997      1996     1995      1994
                                 ----       ----      ----     ----      ----
<S>                            <C>       <C>       <C>       <C>       <C>
OPERATING DATA: (1)(2)(3)(4)
Revenues:
  Vacation ownership 
   interests, net              $301,119  $256,141  $194,612  $125,751  $ 80,729
  Resort management              37,210    28,237    26,987    22,264    17,808
  Interest                       33,916    37,179    28,651    23,815    22,874
  Net interest income and 
   fees from qualifying 
   special purpose entities       9,739       -         -         -         -
  Other                          25,909    24,622    23,562    27,691    35,879
                               --------  --------  --------  --------  --------
                               $407,893  $346,179  $273,812  $199,521  $157,290
                               ========  ========  ========  ========  ========

Net earnings                    $43,628   $21,177   $22,103   $13,874   $20,034
                                =======   =======   =======   =======   =======

Earnings before merger costs 
 and extraordinary loss         $43,628   $34,009   $22,103   $13,874   $20,034
                                =======   =======   =======   =======   =======

Net earnings per share:
  Basic                            $.98      $.48      $.54      $.37      $.54
                                   ====      ====      ====      ====      ====
  Diluted                          $.93      $.46      $.51      $.35      $.51
                                   ====      ====      ====      ====      ====

Earnings per share before merger 
 costs and extraordinary loss:
  Basic                            $.98      $.77      $.54      $.37      $.54
                                   ====      ====      ====      ====      ====
  Diluted                          $.93      $.73      $.51      $.35      $.51
                                   ====      ====      ====      ====      ====

Weighted average shares outstanding:
  Basic                          44,544    44,200    40,558    37,691    37,432
                                 ======    ======    ======    ======    ======
  Diluted                        46,846    46,282    43,265    39,888    39,497
                                 ======    ======    ======    ======    ======

BALANCE SHEET DATA (AT PERIOD END): (1)(2)(3)
  Receivables, net             $202,849  $296,699  $227,627  $188,250  $165,378
  Total assets                  431,093   463,932   385,570   320,112   280,612
  Total financing arrangements   79,441   170,081   113,295   117,763   130,720
  Stockholders' equity          222,630   187,182   162,125   100,485    74,282

</TABLE>

(1)  During  1998,  the Company  incorporated  two  qualifying  special  purpose
     entities for the specific purpose of purchasing  contracts  receivable from
     the Company.  At December 31, 1998, the qualifying special purpose entities
     held  $172.1  million of  contracts  receivable,  with  related  borrowings
     totaling $142.9 million.

(2)  In  1997,  Fairfield  completed  the  merger  with  Vacation  Break U.S.A.,
     Inc. ("Vacation  Break")  which was 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 earliest
     period 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.

(3)  Prior to 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. In 1995,
     these   subsidiaries   terminated   their  S  Corporation   elections  and,
     accordingly, became subject to federal and state income taxes. Net earnings
     for 1994 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 that year.  The pro forma  amounts of federal and state taxes
     reduced 1994 net earnings and stockholders' equity by $4.5 million.

(4)  Other revenues for the year ended December 31, 1994 include a $5.2 million
     gain from the sale of the Company's savings and loan operations.
<PAGE>


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
------   --------------------------------------------------------------- 
         RESULTS OF OPERATIONS
         --------------------

RESULTS OF OPERATIONS

        During 1998, the Company's  operations  consisted of 26 resorts located
in 11 states and the Bahamas.  Of these  resorts,  16 are located in destination
areas with popular  vacation  attractions  and 10 are located in scenic regional
locations.   Additionally,  the  Company  has  five  destination  resorts  under
development,  located in Sedona,  Arizona;  Durango,  Colorado;  Daytona  Beach,
Florida; Las Vegas, Nevada and Gatlinburg, Tennessee.

         In 1997, the Company  acquired all of the  outstanding  common stock of
Vacation Break U.S.A.,  Inc.  ("Vacation  Break") in exchange for  approximately
10.6  million  shares of its common  stock.  The merger was  accounted  for as a
pooling of interests and,  accordingly,  all prior period financial  information
was restated as if the merger took place at the beginning of the earliest period
presented.  In conjunction with the merger, the Company 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  the  early
extinguishment of substantially all of Vacation Break's debt.  Additionally,  in
1997, Fairfield acquired the remaining 45% minority interest 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.

         The  following   table  sets  forth  certain   consolidated   operating
information for the years ended December 31, 1998, 1997 and 1996:

<TABLE>
                                                 Year Ended December 31,
                                                -------------------------
                                                  1998    1997    1996
                                                  ----    ----    ----
      <S>                                         <C>     <C>     <C> 
      As a percentage of total revenues:
        Vacation ownership interests, net         73.8%   74.0%   71.1%
        Resort management                          9.1     8.2     9.8
        Interest income                            8.3    10.7    10.5
        Net interest income and fees
         from qualifying special purpose                    
         entities                                  2.4      -       -
        Other revenue                              6.4     7.1     8.6
                                                 -----   -----   -----
                                                 100.0%  100.0%  100.0%
                                                 =====   =====   =====

      As a percentage of related revenues:
        Cost of sales - vacation
         ownership interests                      27.8%   26.5%   26.4%
        Resort management                         85.5%   87.1%   91.6%
        Sales and marketing                       46.9%   46.0%   48.9%
        Provision for loan losses                  4.7%    4.7%    4.0%

      As a percentage of interest revenues:
        Interest expense, net                     19.4%   27.8%   37.5%

      As a percentage of total revenues:
        General and administrative                 7.2%    8.7%    8.5%
        Depreciation                               1.7%    1.5%    1.5%
        Other expense                              4.5%    5.2%    6.1%
</TABLE>

<PAGE>

     Vacation Ownership
     ------------------

     The Company's growth strategy  continues to include the (i) acquisition and
development of properties in new destination locations, (ii) further development
at its existing  destination  resorts and (iii) expansion of sales and marketing
programs,  including the  establishment  of additional  off-site  sales offices.
Future sales growth should be realized as the Company expands its development of
destination  resort locations which have a higher and more consistent  stream of
potential customers generated by existing attractions.
     
     Gross revenues from vacation  ownership  interests  ("VOIs") totaled $304.1
million,   $250.8  million  and  $193.3   million  for  1998,   1997  and  1996,
respectively.  Gross VOI revenues at the Company's  destination resorts continue
to be the largest dollar  contributor to VOI sales,  accounting for 77.4%, 80.3%
and 82.4% of total VOI sales for the years ended  December  31,  1998,  1997 and
1996,  respectively.  During  1998,  gross  VOI  sales  increased  16.8%  at the
Company's  destination  locations,   24.4%  at  the  Company's  regional  resort
locations  and  75.9%  at  the  Company's  off-site  sales  offices.  Management
anticipates  revenue  growth will  improve in 1999 due to the addition of resort
locations in Sedona,  Arizona;  Durango,  Colorado;  Daytona Beach, Florida; Las
Vegas, Nevada and Gatlinburg,  Tennessee, as well as a full year of sales at the
Royal  Vista  resort  located in Pompano  Beach,  Florida  and at the  Company's
Alexandria, Virginia destination resort.

     Net VOI revenue increased to $301.1 million for the year ended December 31,
1998 from  $256.1  million in 1997 and $194.6  million in 1996.  Net VOI revenue
growth trends were affected by the same factors that impacted  gross VOI revenue
growth  trends,  as well as revenue  deferrals  resulting from the percentage of
completion accounting method.

     Revenue  relating  to  sales  of VOIs in  projects  under  construction  is
recognized  using the  percentage of completion  accounting  method.  Under this
method, the portion of revenues  attributable to costs incurred,  as compared to
total estimated acquisition, construction and selling expenses, is recognized in
the period of sale.  The  remaining  revenue is deferred and  recognized  as the
remaining costs are incurred.  As previously  noted, the Company is currently in
the development  stage at certain of its projects and it is anticipated that VOI
sales at these projects will generate  deferred revenue as the Company completes
sales at a more rapid pace than the  completion  of the  related  VOI units.  At
December 31, 1998, the Company had deferred  revenue totaling $8.2 million which
will be recognized upon completion of the respective VOI units.

         The  following  table  reconciles  VOI sales  recorded to VOI  revenues
recognized for the respective periods (In thousands):
<TABLE>
                                                  Year Ended December 31,
                                               ----------------------------
                                                 1998      1997      1996
                                                 ----      ----      ----
        <S>                                    <C>       <C>       <C>
        Vacation ownership interests           $304,119  $250,802  $193,335
        Add:  Deferred revenue at
               beginning of year                  5,225    10,564    11,841
        Less: Deferred revenue at
               end of year                       (8,225)   (5,225)  (10,564)
                                               --------  --------  --------
        Vacation ownership interests, net      $301,119  $256,141  $194,612
                                               ========  ========  ========
</TABLE>


         VOI cost of sales, as a percentage of related net revenues,  was 27.8%,
26.5%  and  26.4%  for the  years  ended  December  31,  1998,  1997  and  1996,
respectively.  The increase in 1998 was directly related to higher product costs
(including   beachfront  property  purchased  at  higher  prices  and  increased
construction costs) at certain of the Company's destination resorts. In February
1999, the Company initiated sales price increases to partially offset the higher
product costs.

<PAGE>

     Sales and marketing expenses, as a percentage of related net revenues, were
46.9%,  46.0% and 48.9%,  for the years ended December 31, 1998,  1997 and 1996,
respectively.  The  decrease  from 1996 to 1997 was  primarily  attributable  to
efficiencies  experienced at certain of the Company's  destination resorts which
began sales operations in 1996. New sales operations  typically experience lower
operating  margins in the "start-up" phase of operations as the Company develops
its property owner base and  establishes  sales and marketing  programs for each
new location.  Management  anticipates that sales and marketing  expenses,  as a
percentage  of related net  revenues,  will  decline  during 1999 as the Company
realizes the benefits of its new sales and  marketing  programs as well as sales
efficiencies  anticipated from the full integration of the marketing programs at
Vacation Break.

     The provision for loan losses, as a percentage of related net revenues, was
4.7% for each of the years  ended  December  31,  1998 and 1997 and 4.0% for the
year ended  December 31, 1996.  The Company  records a provision  for  estimated
losses on uncollectible contracts receivable by a charge against earnings at the
time of sale.  Such  provision is recorded at an amount based upon the Company's
historical cancellation  experience,  management's estimate of future losses and
current economic factors.  The allowance for contracts  receivable is maintained
at a level  believed  adequate by management  based on periodic  analysis of the
contracts receivable portfolio.

     Resort Management
     -----------------

     Resort management  revenues totaled $37.2 million,  $28.2 million and $27.0
million for 1998, 1997 and 1996, respectively. The increase in resort management
revenues in 1998 is  primarily  due to the  expansion  of the  Company's  resort
management  services,  including  the  sale  of  furnishings  for VOI  units  to
independent  resort  operators and property  owner  associations,  as well as an
increase in the number of operating resort locations.

     Resort management  expenses totaled $31.8 million,  $24.6 million and $24.7
million for 1998, 1997 and 1996, respectively.  Resort management expenses, as a
percentage of related  revenues were 85.5%,  87.1% and 91.6% for the years ended
December  31,  1998,  1997 and  1996,  respectively.  This  trend  is  primarily
reflective of certain  economies of scale  realized  causing  resort  management
expenses to increase at a lower rate than resort management revenues.

     Interest Income
     ---------------

     For purposes of management's discussion of results of operations,  interest
income includes (i) interest earned from the Company's  receivable portfolio and
(ii) net interest income and fees from the Qualifying  Special Purpose  Entities
("QSPEs").  During the year ended  December  31,  1998,  the Company sold $212.7
million of  contracts  receivable  to the QSPEs,  with  $172.1  million of these
contracts  receivable  outstanding  at  December  31,  1998.  The QSPEs  finance
purchases of contracts receivable through commercial paper credit facilities and
other  financial  conduits,  with $142.9  million of borrowings  outstanding  at
December 31, 1998.

     Interest  income totaled $43.7 million,  $37.2 million and $28.7 million in
1998,  1997  and  1996,  respectively.  These  increases  are due  primarily  to
corresponding  increases  in  the  average  balances  of  outstanding  contracts
receivable,  which totaled  $339.5  million at December 31, 1998, as compared to
$302.5 million and $230.2  million at December 31, 1997 and 1996,  respectively.
The  weighted  average  interest  rate  of the  Company's  contracts  receivable
portfolio  was  14.2%,  14.6% and 14.5% at  December  31,  1998,  1997 and 1996,
respectively.

     Interest Expense
     ----------------

     Interest expense, net of amounts capitalized,  totaled $8.5 million,  $10.4
million and $10.8 million in 1998, 1997 and 1996, respectively.  These decreases
are due  primarily to (i) the  
<PAGE>

refinancing   of  certain  of  the  Company's   credit   agreements,   including
substantially all of the secured  obligations of Vacation Break,  resulting in a
reduction in the Company's  weighted  average  interest rate on outstanding debt
(8.5%,  10.0% and 10.6% for the years ended  December 31,  1998,  1997 and 1996,
respectively)  and (ii) a reduction in borrowings under the Company's  revolving
credit  agreements,  which  resulted  from a shift in funding  sources  from the
Company's revolving credit agreements to the credit facilities of the QSPEs.

     The  Company  uses  interest  rate cap and swap  agreements  to manage  the
interest  rate   characteristics   of  certain  of  its  outstanding   financing
arrangements  to a more  desirable  fixed rate basis and to limit the  Company's
exposure to rising interest rates.  Interest rate differentials paid or received
under the terms of the interest rate swap and cap  agreements  are recognized as
adjustments   of  interest   expense   related  to  the   designated   financing
arrangements.

     General and Administrative
     --------------------------
     
     General and  administrative  expenses,  as a percentage of total  revenues,
were 7.2%, 8.7% and 8.5% for 1998, 1997 and 1996, respectively.  The decrease in
1998 was due primarily to benefits  realized from  integrating  Vacation Break's
operational  infrastructure with that of the Company, which more than offset the
cost  associated  with the  relocation  of the  Company's  executive  offices to
Orlando, Florida and the credit and collection functions to Las Vegas, Nevada.

     Other
     -----

     Other  revenues  for the  years  ended  December  31,  1998,  1997 and 1996
includes  home sales revenue of $12.3  million,  $11.1 million and $8.8 million,
respectively,  and lot sales  revenue of $8.2  million,  $8.1  million  and $8.7
million, respectively.

     Other  expenses  for the  years  ended  December  31,  1998,  1997 and 1996
includes costs of home sales, including selling expenses, of $10.8 million, $9.8
million and $8.1 million,  respectively,  and cost of lot sales of $2.3 million,
$2.2 million and $2.1 million, respectively.

PROVISION FOR INCOME TAXES

     The  Company  provides  for  income  taxes  under the  liability  method in
accordance with Statement of Financial Accounting Standards 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 of
$19.1 million in 1996.

     At December  31, 1998,  the Company had net  operating  loss  carryforwards
totaling  $108.4  million which reflect the amount  available to offset  regular
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 
<PAGE>


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, 1998,  net operating loss  carryforwards  which are available to
offset regular taxable income, 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 - $22.7 million;  2011 - $24.2 million;  2012 - $7.2 million
and 2018 - $9.4 million.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash  equivalents  of the  Company  increased  $1.9  million  from
December 31, 1997 to December 31, 1998.  Cash  provided by operating  activities
totaled $67.8 million,  $44.0 million and $33.8 million in 1998,  1997 and 1996,
respectively.  The single largest usage of operating  cash involves  acquisition
and development of real estate  inventories  which totaled $35.3 million,  $16.6
million and $7.2 million in 1998, 1997 and 1996, respectively.  During 1998, the
Company acquired real estate inventories in Sedona, Arizona; Durango,  Colorado;
Las Vegas, Nevada and Gatlinburg,  Tennessee,  as well as funded significant VOI
construction at several of its other resorts, including the Royal Vista and Palm
Aire  resorts in South  Florida,  and the resorts in  Alexandria,  Virginia  and
Branson, Missouri.

     During 1998, the Company incorporated the QSPEs for the specific purpose of
purchasing  contracts  receivable  from the Company.  The  Company's  cumulative
residual interests in the contracts  receivable sold to the QSPEs are classified
as net investment activities of qualifying special purpose entities.

     The  Company's  primary  investment  activity is the financing of VOI sales
through  originations of contracts  receivable.  Due to increasing levels of VOI
sales, originations of contracts receivable have historically exceeded principal
collections  resulting in the usage of $105.3  million and $53.9 million of cash
in 1997 and 1996, respectively. During 1998, the Company generated $24.5 million
of cash from its investing  activities through the sale of contracts  receivable
to its wholly owned qualifying special purpose entities.

     The  Company's  resort  development  plans in 1999 are  expected to require
approximately  $120.0 million for vacation  ownership  building  construction as
well as  infrastructure,  amenity and lot  development.  The Company  expects to
finance its resort  development  activities  through  cash flow  generated  from
operations,  sales of contracts  receivable  to the QSPEs and  supplemented,  as
necessary,  by the existing  revolving credit agreements or through other public
or private financing  sources.  The Company's  projection of resort  development
activity is based on a continuation of the Company's current growth projections.
The actual level of resort development may vary from current expectations in the
event of a change in the economy or the Company's  inability or  restrictions on
obtaining adequate credit availability.

     The Company has traditionally  engaged in financing  activities to fund its
resort development  activities and to support its loan receivable portfolio.  In
1998, the Company's financing activities used $90.4 million, primarily to reduce
outstanding  revolving  credit  facilities.  During 1997 and 1996, the Company's
financing activities provided $51.1 million and $22.8 million, respectively.

     In 1998,  Fairfield  repurchased  $20.0  million of its Common  Stock.  The
repurchased shares of Common Stock are accounted for as treasury shares and will
be used to meet the Company's  obligations under its employee stock option plans
or for other corporate purposes.
<PAGE>
      
     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,  (iv)sales of contracts
receivable  to the QSPEs and (v) 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 and the interest paid
on the related borrowings.

     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).  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,  (iii)  sales of  contracts  receivable  to the QSPEs and (iv)
future financings through public or private financing sources.

     Credit Facilities of the Company
     --------------------------------

     In 1998,  the Company  amended its  previously  existing  revolving  credit
agreements between Fairfield,  Fairfield Acceptance Corporation - Nevada ("FAC -
Nevada") and their primary  lender.  The Amended and Restated  Revolving  Credit
Agreements (the "Credit  Agreements")  provide  borrowing  availability of up to
$80.0  million  (including up to $11.0 million for letters of credit) and mature
in October 2001. At December 31, 1998,  borrowing  availability under the Credit
Agreements  totaled  $45.7  million  and will be used to finance  the  Company's
acquisition and development of additional  vacation  resorts and for the general
operations of the Company.  

     At December 31, 1998, Fairfield Capital Corporation ("FCC"), a wholly owned
subsidiary of FAC - Nevada,  had  outstanding  borrowings of $43.6 million under
the FCC Agreement,  which provides for the purchase of contracts receivable from
FAC -  Nevada.  There  are  no  additional  fundings  available  under  the  FCC
Agreement.  At December 31, 1998,  contracts  receivable  totaling $56.0 million
collateralized the FCC borrowings.

     Credit Facilities of Qualifying Special Purpose Entities
     --------------------------------------------------------

     In January 1998, Fairfield Receivables  Corporation ("FRC"), a wholly owned
qualifying  special  purpose  subsidiary  of FAC - Nevada,  entered into the FRC
Agreement which provides for borrowings of up to $150.0 million for the purchase
of contracts  receivable pursuant to a Receivables  Purchase Agreement,  between
Fairfield,  FAC - Nevada and FRC. At December 31, 1998,  FRC held $112.7 million
of contracts receivable, with $93.0 million of related borrowings. An additional
$57.0 million of fundings are available under the FRC Agreement.

     In August  1998,  Fairfield  Funding  Corporation,  II ("FFC II"), a wholly
owned  qualifying  special purpose  subsidiary of FAC - Nevada,  purchased $60.1
million of  contracts  from FRC.  The  purchase  was financed by the issuance of
$49.8 million of private placement notes. The borrowing arrangement provides for
a reinvestment  period whereby  collateral and related debt will remain constant
for an eighteen  month period ending the earlier of March 2000 or the occurrence
of an Early Amortization Event as defined in the Pledge and Servicing  Agreement
related to this transaction.  At December 31, 1998, FFC II held $59.4 million of
contracts receivable with $49.8 million of related borrowings.

<PAGE>

     Interest Rate Risk
     ------------------

     The Company has historically derived net interest income from its financing
activities  as the interest  rates it charges its  customers  who finance  their
purchases  of VOIs exceed the  interest  rates the Company  pays to its lenders.
Because  substantially  all of the  Company's  indebtedness  bears  interest  at
variable rates and the Company's  respective  receivables bear interest at fixed
rates,  increases in interest  rates will reduce net interest  margins and could
result  in the rate on  borrowings  exceeding  the rate at  which  financing  is
provided to customers. To mitigate the impact of fluctuations in market rates of
interest,  the  Company  has  entered  into  interest  rate swap  agreements  on
approximately  fifty  percent of its financing  arrangements.  The interest rate
swap agreements  effectively  convert certain of the Company's variable interest
rate financing arrangements to fixed interest rate financing agreements, thereby
reducing the interest rate exposure of the Company.  The Company's investment in
QSPEs is also subject to interest rate risk for the same reasons as the Company.

     If market  interest rates increased two hundred basis points during 1999 as
compared to 1998, the Company's interest expense,  after considering the effects
of its interest rate swap  agreements,  would increase,  net interest income and
fees from the QSPEs would  decrease and  earnings  before  provision  for income
taxes would decrease by $1.2 million.  Comparatively,  if market  interest rates
decreased  two  hundred  basis  points  during  1999 as  compared  to 1998,  the
Company's  interest expense,  after considering the effects of its interest rate
swap agreements, would decrease, and net interest income and fees from the QSPEs
would increase and earnings before  provision for income taxes would increase by
$1.2 million.  These amounts are  determined  by  considering  the impact of the
hypothetical  interest rates on the Company's  borrowing costs and interest rate
swap and cap  agreements.  These  analyses  do not  consider  the effects of the
reduced  level  of  overall  economic  activity  that  could  exist  in  such an
environment.  Further,  in the event of a change of such  magnitude,  management
would  likely  take  actions to further  mitigate  its  exposure  to the change.
However,  due to the uncertainty of the specific actions that would be taken and
their  possible  effects,  the  sensitivity  analysis  assumes no changes in the
Company's financial structure.

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

     The Company reports its sales of VOIs on the installment method for federal
income tax purposes.  Under this method,  the Company does not recognize taxable
income on VOI sales until the  installment  payments have been received from the
Company's  customers.  The Company's federal  alternative minimum tax ("AMT") is
impacted by the net deferral of income resulting from the Company's  election of
the installment  sales method.  Prior to 1997, the Company had AMT net operating
loss  carryforwards that could be used to offset the AMT. During 1997, these net
operating loss  carryforwards  were fully utilized;  resulting in an increase in
AMT paid  during  1998.  The  payment  of AMT  reduces  the future  regular  tax
liability and creates a deferred tax asset.  During the year ended  December 31,
1998,  the  Company  made  payments  totaling  $2.7  million  and $2.5  million
related to the 1997 and 1998 AMT, respectively.   In the first  quarter of 1999,
the  Company  made  additional  1998 AMT  payments  totaling  $8.3  million  and
anticipates  that it will  continue to make  significant  AMT payments in future
periods.

     Other
     -----

     In August 1998, the Company's Board of Directors  authorized the repurchase
of up to $20.0 million of the  Company's  Common  Stock.  Repurchased  shares of
common stock become treasury shares of the Company,  and may be used to meet the
Company's  obligations  under  its  employee  stock  option  plans or for  other
corporate purposes.  At December 31, 1998, the Company had repurchased 1,991,601
shares  of  common  stock  at  an  aggregate  cost,  including  commissions,  of
approximately $20.0 million.
<PAGE>

     The  Company  intends  to  continue  its   growth-oriented   strategy  and,
accordingly,  may  from  time  to time  acquire  additional  vacation  ownership
resorts,  additional land upon which vacation  ownership resorts may be expanded
or  developed  and  companies  operating  resorts or having  vacation  ownership
assets,  management,  or sales and  marketing  expertise  commensurate  with the
Company's  operations  in  the  vacation  ownership  industry.  The  Company  is
currently  evaluating the acquisition of certain additional land parcels for the
expansion of existing  resorts and the  development  of additional  resorts.  In
addition,  the Company is also  evaluating  certain VOI and property  management
acquisitions  to integrate  into or expand the  operations  of the Company.  The
Company  expects to  finance  its short- and  long-term  cash  needs,  including
potential acquisitions,  from (i) contract payments generated from its contracts
receivable  portfolio,  (ii) operating cash flows,  (iii)  borrowings  under its
credit  facilities,  (iv)  sales of  contracts  receivable  to the QSPEs and (v)
future financings, including additional securitizations of contracts receivable.

FINANCIAL CONDITION

     Consolidated  assets of the Company  decreased  $32.8 million from December
31, 1997 to December  31, 1998.  This  decrease is due to the  previously  noted
sales of contracts receivable to the QSPEs ($212.7 million during the year ended
December 31, 1998). Real estate inventories increased due to VOI construction at
several  of  the  Company's  resorts,  including  resorts  located  in  Branson,
Missouri; Pompano Beach, Florida and Alexandria, Virginia. Additionally,  during
1998,  the  Company  acquired  undeveloped  land  located in Las Vegas,  Nevada;
Gatlinburg,  Tennessee;  Sedona,  Arizona;  Durango,  Colorado and Williamsburg,
Virginia.

     Total  consolidated  liabilities of the Company  decreased $68.3 million in
1998 due to reductions  in the  outstanding  balance of the Company's  revolving
credit agreements,  which were funded by the proceeds received from the sales of
the contracts receivable to the QSPEs. Due to favorable interest rates available
through the credit  facilities of the QSPEs,  it is the  Company's  intention to
continue selling contracts receivable to the QSPEs until such time as the credit
facilities of the QSPEs are fully utilized.  The Company  anticipates  that this
activity will result in a reduction of  consolidated  assets and  liabilities in
1999.

     Total  stockholders'  equity  increased  by $35.4  million  in  1998.  This
increase  is due to the net effect of (i)  current  year net  earnings  of $43.6
million,  (ii)  issuance of Common  Stock  under the  Company's  employee  stock
benefit  plans and (iii) the  repurchase  of the  Company's  Common  Stock at an
aggregate cost of $20.0 million.

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 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. Additionally,
as the Company  opens new resorts and expands into new markets and  geographical
locations,  it  may  experience  increased  or  different  seasonality  dynamics
creating  fluctuations  in  operating  results  that are  different  from  those
experienced in the past.
<PAGE>

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

     With the addition of the five new destination  resorts  scheduled for 1999,
the Company will operate 31 resorts,  and anticipates  approximately  40% of its
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 in this  state.  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 and 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.

YEAR 2000 READINESS DISCLOSURE

     The Year 2000 issue is the result of computer  programs being written using
two digits rather than four to define the applicable  year. Any of the Company's
computer  programs or  hardware  that have  date-sensitive  software or embedded
chips may  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.

     Based  on  recent  assessments,  the  Company  determined  that  it will be
required to modify or replace  portions of its software and certain  hardware so
that those systems will properly  utilize  dates beyond  December 31, 1999.  The
Company presently  believes that with  modifications or replacements of existing
software and certain hardware, its Year 2000 issue can be mitigated. However, if
such  modifications  and replacements are not made, or are not completed timely,
the Year 2000  issue  could  have a  material  impact on the  operations  of the
Company.

     The  Company's  plan to resolve the Year 2000 issue  involves the following
four phases: assessment,  remediation, testing and implementation.  To date, the
Company has fully completed its assessment of all internal systems that could be
significantly  affected  by  the  Year  2000  issue.  The  completed  assessment
indicated that most of the Company's significant  information technology systems
could be affected,  particularly  the general  ledger,  billing,  and  inventory
systems. In addition,  the Company has gathered  information about the Year 2000
compliance  status of its  significant  vendors and  continues to monitor  their
compliance.

     State of Readiness
     ------------------

     For its information technology exposures,  the Company estimates that it is
approximately  70%  complete on the  internal  remediation  phase and expects to
complete  software  reprogramming  and  replacement  by August  31,  1999.  Once
software is  reprogrammed  or replaced for a system,  the 
<PAGE>

Company begins testing and  implementation.  These phases run  concurrently  for
different  systems.  To  date,  the  Company  estimates  that  it has  completed
approximately  80% of its testing  and has  completed  approximately  75% of its
implementation.  Completion  of the testing phase for all  significant  internal
systems is expected by June 30, 1999,  with all remediated  systems fully tested
and implemented by July 31, 1999,  with 100%  completion  targeted for September
30, 1999.

     The  remediation  of  non-information   technology   equipment  is  not  as
significant  to the on-going  operations  of the Company as the  remediation  of
information  technology systems.  Non-information  technology equipment includes
elevators at certain resort  locations,  heating and air  conditioning  systems,
alarm systems,  sprinkler systems and other miscellaneous equipment. The Company
is currently in the process of evaluating its non-information technology systems
and estimates that it will complete the remediation,  testing and implementation
phases by September 30, 1999. The Company  anticipates that the cost, if any, of
modifying non-information technology equipment will be the responsibility of the
respective  property owners'  association unless the resort is operating under a
developer  subsidy  agreement,  in which  case the  cost  will be the  Company's
responsibility.

     Third Parties
     -------------

     The Company's  most  significant  third party  relationship  is its banking
relationship  with its  primary  correspondent  bank,  due to the fact  that the
Company's cash  management  systems  interface  directly with the systems of the
bank.  The Company has  completed its review of the  interface  routine  between
itself  and the bank and has  determined  that the  interface  applications  are
currently Year 2000  compliant.  Additionally,  the Company has been informed by
the bank that its internal systems are currently Year 2000 compliant.  The other
vendors  queried by the Company  either  indicated that they were currently Year
2000  compliant or believed that their  computerized  systems would be Year 2000
compliant by the end of 1999.

     The  Company is not  currently  aware of any other  third party with a Year
2000 issue that would  materially  impact the Company's  results of  operations,
liquidity,  or capital resources.  However, the Company has no means of ensuring
that all third parties will be Year 2000 ready.  The inability of third parties
to  complete  their  Year 2000  resolution  process  in a timely  fashion  could
materially impact the Company.  The effect of non-compliance by third parties is
not determinable.

     Cost
     ----

     The Company will utilize both internal and external resources to reprogram,
or replace,  test,  and  implement  hardware and software  changes for Year 2000
modifications.  The total  cost of the Year 2000  project is  estimated  at $2.0
million and is being funded through  operating cash flows.  To date, the Company
has incurred  approximately $0.5 million ($0.3 million expensed and $0.2 million
capitalized  for new systems and  equipment),  related to all phases of the Year
2000 project.  Of the total remaining project costs,  approximately $1.3 million
is attributable to the purchase of new software and operating  equipment,  which
will be  capitalized.  The remaining $0.2 million  relates to repair of hardware
and  software  and will be expensed as  incurred.  All  internal  payroll  costs
relating to the evaluation,  remediation,  testing and  implementation  are also
expensed as incurred.  The Company has not deferred any significant  information
technology projects as a result of its Year 2000 compliance efforts.

     Contingency Plan
     ----------------

     The Company  currently  has no  contingency  plans in place in the event it
does not  complete  all phases of the Year 2000  program.  The Company  plans to
evaluate the status of completion in June 1999 and determine whether such a plan
is necessary.
<PAGE>

     Summary
     -------
 
     Management of the Company believes it has an effective  program in place to
resolve the Year 2000 issue in a timely manner.  As noted above, the Company has
not yet  completed  all  necessary  phases  of the Year 2000  program.  The most
reasonably  likely worst case  scenario,  in the event that the Company does not
complete certain critical phases, would be an inability to take customer orders,
invoice  customers or collect  payments.  In  addition,  as is the case for most
companies involved in Year 2000 system modifications, disruptions in the general
economy  resulting from Year 2000 issues could also materially  adversely affect
the Company's ability to market and sell its product.  The Company could also be
subject to litigation for computer  system  failure,  equipment  shutdown at its
resort  facilities or failure to properly date business  records.  The amount of
potential  liability  and lost revenue  cannot be  reasonably  estimated at this
time.

     The preceding Year 2000 discussion  contains  "forward-looking  statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements,  including  without  limitation,  anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates,  which were derived utilizing numerous assumptions about
future  events,  including  the  continued  availability  of certain  resources,
representations  received from third parties 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 ability to
identify and remediate all relevant  information  technology and non-information
technology  systems,  results of Year 2000 testing,  adequate resolution of Year
2000 issues by  businesses  and other third  parties who are service  providers,
suppliers or customers of the Company,  unanticipated system costs, the adequacy
of  and  ability  to  develop  and  implement   contingency  plans  and  similar
uncertainties.  The "forward-looking statements" made in the foregoing Year 2000
discussion  speak only as of the date on which such statements are made, and the
Company  undertakes  no obligation  to update any  forward-looking  statement to
reflect events or  circumstances  after the date on which such statement is made
or to reflect the occurrence of unanticipated events.

FORWARD-LOOKING INFORMATION

     Statements  in this  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations include 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, beliefs and
assumptions of management 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 Year 2000 considerations. Representative examples of
these  factors  include  (without  limitation)  general  industry  and  economic
conditions;  interest  rate trends;  regulatory  changes;  availability  of real
estate  properties;  competition from national  hospitality  companies and other
competitive  factors and pricing  pressures;  shifts in  customer  demands;  the
Company's success, or lack thereof,  to remediate,  test and implement necessary
hardware and 
<PAGE>

software  modifications  to become  Year 2000  compliant;  changes in  operating
expenses,  including employee wages, commission structures and related benefits;
economic  cycles;  the  Company's  lack of  experience in certain of the markets
where it has purchased land and is developing  vacation ownership  resorts;  the
Company's success in its ability to hire, train and retain qualified  employees;
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 the continued  integration of the Vacation
Break operations.
<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, 1998 and 1997,
and the related  consolidated  statements of earnings,  stockholders' equity and
cash flows for each of the three years in the period  ended  December  31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.  We did not audit the 1996 consolidated  financial  statements of
Vacation Break U.S.A., Inc., a wholly owned subsidiary, which statements reflect
total  revenues  constituting  37% 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, 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, 1998 and 1997, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1998,  in  conformity  with
generally accepted accounting principles.




                                         ERNST & YOUNG LLP


Little Rock, Arkansas
March 24, 1999

<PAGE>


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

<TABLE>

                                                         December 31,
                                                -----------------------------
                                                   1998               1997
                                                   ----               ----
<S>                                              <C>                <C>
ASSETS
  Cash and cash equivalents                      $  5,017           $  3,074
  Receivables, net                                202,849            296,699
  Real estate inventories                         128,397             93,139
  Investments in and net amounts due from
   qualifying special purpose entities             31,917                -
  Property and equipment, net                      30,062             24,370
  Restricted cash                                  11,154             25,607
  Other assets                                     21,697             21,043
                                                 --------           --------
                                                 $431,093           $463,932
                                                 ========           ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Financing arrangements                         $ 79,441           $170,081
  Deferred revenue                                 27,085             29,769
  Accounts payable                                 26,550             20,398
  Deferred income taxes                            19,470             10,273
  Other liabilities                                55,917             46,229
                                                 --------           --------
                                                  208,463            276,750
                                                 --------           --------
Stockholders' Equity:
  Common stock, $.01 par value, 
   100,000,000 shares authorized; 
   50,663,851 and 49,491,666 shares
   issued in 1998 and 1997, respectively             507                 495
  Paid-in capital                                120,403             107,920
  Retained earnings                              122,711              79,083
  Unamortized value of restricted stock              -                  (316)
  Treasury stock, at cost, 6,496,959 shares in
    1998 and 4,573,266 shares in 1997            (20,991)                -
                                                --------            --------
                                                 222,630             187,182
                                                --------            --------
                                                $431,093            $463,932
                                                ========            ========
</TABLE>



See notes to consolidated financial statements.
<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
                                                  Year Ended December 31,
                                             --------------------------------  
                                               1998       1997         1996
                                               ----       ----         ----
<S>                                          <C>        <C>          <C>
REVENUES
  Vacation ownership interests, net          $301,119   $256,141     $194,612
  Resort management                            37,210     28,237       26,987
  Interest                                     33,916     37,179       28,651
  Net interest income and fees from qualifying
    special purpose entities                    9,739        -            -
  Other                                        25,909     24,622       23,562
                                             --------   --------     --------
                                              407,893    346,179      273,812
                                             --------   --------     --------
EXPENSES
  Vacation ownership interests -
     cost of units sold                        83,743     67,846       51,385
  Sales and marketing                         144,996    121,638       99,437
  Provision for loan losses                    14,270     12,121        7,827
  Resort management                            31,820     24,595       24,724
  General and administrative                   29,517     30,079       23,340
  Interest, net                                 8,490     10,353       10,754
  Depreciation                                  7,072      5,157        4,079
  Other                                        18,448     17,983       16,823
  Costs associated with merger                    -       13,308          -
                                             --------   --------     --------
                                              338,356    303,080      238,369
                                             --------   --------     --------
Earnings before provision for income
   taxes and extraordinary loss                69,537     43,099       35,443
Provision for income taxes                     25,909     19,727       13,340
                                             --------   --------     --------
Earnings before extraordinary loss             43,628     23,372       22,103
Extraordinary loss from early extinguishment
 of debt, net of income tax benefit of $1,379     -        2,195          -
                                             --------   --------     --------
Net earnings                                 $ 43,628   $ 21,177     $ 22,103
                                             ========   ========     ========

BASIC EARNINGS PER SHARE:
  Earnings before extraordinary loss             $.98       $.53         $.54
  Extraordinary loss                               -         .05           -
                                                 ----       ----         ----
  Net earnings                                   $.98       $.48         $.54
                                                 ====       ====         ====

DILUTED EARNINGS PER SHARE:
 Earnings before extraordinary loss              $.93       $.51         $.51
 Extraordinary loss                                -         .05           -
                                                 ----       ----         ---- 
 Net earnings                                    $.93       $.46         $.51
                                                 ====       ====         ====

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic                                        44,544     44,200       40,558
                                               ======     ======       ======
  Diluted                                      46,846     46,282       43,265
                                               ======     ======       ======
</TABLE>

See notes to consolidated financial statements.


<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
                                                         Unamortized
                                                           Value of
                            Common Stock Paid-in Retained Restricted Treasury
                            ------------
                            Shares Amount Capital Earnings   Stock     Stock    Total
                            ------ ------ ------- --------   -----     -----    -----
<S>                         <C>    <C>   <C>      <C>      <C>       <C>      <C>  
Balance, January 1, 1996    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
 Net earnings                 -     -        -     43,628     -          -      43,628                                     -
 Amortization of unearned
  compensation - restricted 
  stock                       -     -        -        -       316        -         316
 Activity related to 
  employee stock
  benefit plans             1,172   12    11,678      -       -          -      11,690
 Acquisition of 
  treasury shares             -     -        -        -       -      (20,991)  (20,991)
  Other                       -     -        805      -       -          -         805
                           ------ ----  -------- -------- -------   --------  --------
Balance, December 31, 1998 50,664 $507  $120,403 $122,711 $   -     $(20,991) $222,630
                           ====== ====  ======== ======== =======   ========  ========
</TABLE>

See notes to consolidated financial statements.


<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
                                                    Year Ended December 31,
                                                --------------------------------
                                                  1998        1997       1996
                                                  ----        ----       ----
<S>                                             <C>        <C>        <C>
OPERATING ACTIVITIES:
  Net earnings                                  $ 43,628   $  21,177  $  22,103
  Adjustments to reconcile net earnings to
   net cash provided by operating activities:
   Depreciation                                    7,072       5,157      4,079
   Provision for loan losses                      14,270      12,121      7,827
   Net interest income and fees from 
    qualifying special purpose entities           (9,739)        -          -
   Deferred income taxes, net                     17,012      16,784     (7,860)
   Tax benefit from exercise of stock warrants     4,869         612        801
   Charges associated with merger                    -         5,869        -
   Utilization of pre-confirmation 
    income tax attributes                            -           -       19,108
   Changes in operating assets and liabilities, 
    net of acquisitions:
     Real estate inventories                     (35,258)    (16,647)    (7,240)
     Net investment activities of qualifying
      special purpose entities                    20,148         -          -
     Deferred revenue                             (2,684)    (13,558)    (6,231)
     Accrued income taxes                          6,394       6,331        655
     Other                                         2,098       6,139        599
                                               ---------   ---------  ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES         67,810      43,985     33,841
                                               ---------   ---------  ---------
INVESTING ACTIVITIES:
  Purchases of property and equipment, net       (12,764)     (7,019)   (11,187)
  Principal collections on receivables            94,372     105,197    104,302
  Originations of receivables                   (227,514)   (181,750)  (149,841)
  Sales of receivables to qualifying
   special purpose entities                      170,396        -           -
  Cash paid for acquisitions                         -       (13,500)       -
  Other                                              -       ( 8,242)     2,815
                                               ---------   ---------  ---------
Net cash provided by (used in) 
 investing activities                             24,490    (105,314)   (53,911)
                                               ---------   ---------  ---------
FINANCING ACTIVITIES:
  Proceeds from financing arrangements           236,952     356,199    357,026
  Repayments of financing arrangements          (327,592)   (299,413)  (360,662)
  Activity related to employee 
   stock benefit plans                             6,821       2,304        477
  Net decrease (increase) in restricted cash      14,453      (8,003)     5,386
  Acquisition of treasury stock                  (20,991)        -          -
  Net proceeds of stock offerings                    -           -       19,065
  Other                                              -           -        1,500
                                               ---------   ---------  ---------
NET CASH (USED IN) PROVIDED BY 
 FINANCING ACTIVITIES                            (90,357)     51,087     22,792
                                               ---------   ---------  ---------
Net increase (decrease) in cash 
 and cash equivalents                              1,943     (10,242)     2,722
Cash and cash equivalents, beginning of year       3,074      13,316     10,594
                                               ---------   ---------  ---------
Cash and cash equivalents, end of year         $   5,017   $   3,074  $  13,316
                                               =========   =========  =========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid, net of amounts capitalized    $   9,951   $  11,204  $  15,454
                                               =========   =========  =========
  Income taxes paid                            $   5,490   $     710  $     757
                                               =========   =========  =========
  Capitalized interest                         $   1,534   $   2,986  $   2,577
                                               =========   =========  =========
</TABLE>

See notes to consolidated financial statements.


<PAGE>


                  FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998


Note 1 - Organization and Summary of Significant Accounting Policies
------   -----------------------------------------------------------

Description of Business
-----------------------
 
     Fairfield   Communities,   Inc.   ("Fairfield",   and  together   with  its
consolidated  subsidiaries,  the  "Company")  is  one of  the  largest  vacation
ownership  companies in the United States. The Company's primary business is the
sale  of  vacation   ownership   interests   ("VOIs")   through  its  innovative
points-based  vacation  system,  FairShare Plus. The VOIs offered by the Company
consist  of either  individual  fee simple  interests  or  specified  fixed week
interval  ownership in fully furnished  vacation units.  The Company also offers
financing for VOI  purchasers,  which  results in the creation of  high-quality,
medium-term contracts receivable.

     In 1997, Fairfield acquired all of the outstanding common stock of Vacation
Break U.S.A., Inc. ("Vacation Break") in exchange for approximately 10.6 million
shares of its  common  stock.  The  merger  was  accounted  for as a pooling  of
interests and, accordingly,  all prior period financial information was restated
as if the merger took place at the beginning of the earliest  period  presented.
Additionally, in 1997, Fairfield acquired the remaining 45% minority interest 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.

Basis of Presentation
---------------------

     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.

     Fairfield Acceptance  Corporation - Nevada  ("FAC-Nevada") was incorporated
in December 1997 as a wholly owned  subsidiary of Fairfield.  All  operations of
Fairfield  Acceptance  Corporation ("FAC"), a wholly owned finance subsidiary of
Fairfield, were merged into FAC - Nevada on July 13, 1998.

Investments in and Net Amounts Due From Qualifying Special Purpose Entities
---------------------------------------------------------------------------

     Fairfield   Receivables   Corporation   ("FRC")   and   Fairfield   Funding
Corporation,  II ("FFC II" and together with FRC, the "QSPEs") were incorporated
in 1998 as wholly owned, qualifying special purpose subsidiaries of FAC - Nevada
for the specific  purpose of purchasing  contracts  receivable from the Company.
Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
requires that  qualifying  special purpose  entities,  which engage in qualified
purchases of financial assets with affiliated companies,  be accounted for on an
unconsolidated basis.

     Sales of  contracts  receivable  from the  Company to the QSPEs  occur on a
periodic  basis  and are  recorded  based  on the  relative  fair  value  of the
contracts  receivable  sold. Fair value is estimated using discounted cash flows
at an interest  rate which the Company  believes a purchaser  would require as a
rate of return.  The  Company's  assumptions  are based on  experience  with its
contracts receivable  portfolio,  available market data, estimated  prepayments,
the cost of servicing and net transaction costs.
<PAGE>

     The Company's  cumulative  residual  interests in the contracts  receivable
sold to the QSPEs are  classified  as  "Investments  in and net amounts due from
qualifying  special purpose  entities" in the Consolidated  Balance Sheet,  with
income from the residual  interests  reflected as "Net interest  income and fees
from  qualifying  special  purpose  entities" in the  Consolidated  Statement of
Earnings.

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. Such estimates include
the  allowance for loan losses on  receivables,  revenue  recognition  under the
percentage  of  completion  method on VOI sales,  depreciation  of property  and
equipment,  accrued  liabilities  and  deferred  revenue on the sale of vacation
packages.  Consequently,  actual  results could differ from these  estimates and
assumptions.

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.

Restricted Cash
---------------

     Restricted  cash  consists  primarily of (i) deposits  received on sales of
VOIs that are held in escrow until the applicable  statutory  rescission  period
has expired and the related customer  contract  receivable has been recorded and
(ii) amounts received prior to the attainment of the required 10% down payment.

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 furniture,  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.

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

     Real estate  inventories  are stated at the lower of cost or net realizable
value.  VOI  inventories  include  the  cost  of  land  and  land  improvements;
construction  materials;  direct  labor  and  overhead;  taxes  and  capitalized
interest  incurred during the construction of the VOI units and a portion of the
costs of amenities constructed for the use and benefit of property owners. These
costs are  capitalized  as inventory and are  allocated to individual  VOI units
based upon their  relative  sales values.  VOIs  reacquired are placed back into
inventory at the lower of their  original cost basis or estimated  market value.
Company management periodically reviews the carrying value of its inventories to
determine that the carrying value does not exceed market.

Receivables
-----------

     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, 

                                       1
<PAGE>


for periods of up to seven years.  The Company records a provision for estimated
losses on uncollectible contracts receivable by a charge against earnings at the
time of sale.  Such  provision is recorded at an amount based upon the Company's
historical cancellation  experience,  management's estimate of future losses and
current economic factors.  The allowance for contracts  receivable is maintained
at a level  believed  adequate by management  based on periodic  analysis 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.
The  Company  recognizes  VOI sales on an accrual  basis  after a binding  sales
contract has been executed,  a 10% minimum down payment (including interest) has
been received,  the statutory  rescission period has expired and construction is
substantially  complete. If all the criteria are met except that construction is
not    substantially    complete,    revenues   are    recognized    using   the
percentage-of-completion  method.  Under this  method,  the  portion of revenues
applicable  to costs  incurred,  as  compared  to total  estimated  acquisition,
construction  and direct 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.

<PAGE>

     The Company's  Discovery  Vacations  program allows purchasers to receive a
one-year trial membership in the FairShare Plus system.  Revenues  recognized in
conjunction  with the  Discovery  Vacations  program  are  recorded  in a manner
consistent with VOI sales. The net profit generated from the Discovery Vacations
program is reflected as a credit against "Sales and marketing" in the Statements
of Earnings.

     The Company sells vacation package certificates on a non-refundable  basis.
The customer typically has up to eighteen months to exercise the certificate, at
which time the certificate  expires, if not extended 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
------------------

     Earnings per share is based on the weighted average number of common shares
outstanding and includes both basic and diluted earnings per share computations.
The  computation of basic  earnings per share  excludes any dilutive  effects of
options,  warrants  and  convertible  securities.  The  computation  of  diluted
earnings per share  includes the dilutive  effects of the Company's  outstanding
options and warrants, along with contingently issuable shares and shares held in
escrow.

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

     The  Company  provides  for  income  taxes  under the  liability  method in
accordance  with SFAS No. 109,  "Accounting  for Income Taxes".  Deferred income
taxes are recorded for temporary  differences  between the  financial  statement
bases of assets and  liabilities and their  respective  income tax bases and net
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured  using enacted income tax rates expected to apply to taxable income
in the years in which those  temporary  differences are expected to be recovered
or settled.  The effect on deferred tax assets and liabilities  resulting from a
change in the  income  tax rate is  recognized  in income  during  the period of
change.

Business Segment of the Company
-------------------------------

     On December 31, 1998, the Company adopted SFAS No. 131,  "Disclosures about
Segments of an Enterprise  and Related  Information".  SFAS No. 131  establishes
standards for the manner in which 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.  The  adoption  of SFAS No. 131 did not affect the  results of
operations or the financial position of the Company.

     The  Company's   operations  involve  one  reportable  segment  -  Vacation
Ownership  operations.  This segment  derives its revenues from the sale of VOIs
and from the associated interest income on contracts receivable generated by the
Company's financing of VOI sales.

Derivative Financial Instruments
--------------------------------

     The Company uses  derivative  financial  instruments on a limited basis and
does not use them for trading purposes.  However, to manage risk associated with
the Company's  borrowings  bearing  interest at variable rates,  the Company may
from time to time purchase  interest  rate caps,  interest rate swaps or similar
instruments.  Interest rate  differentials to be paid or received as a result of
these instruments are recognized as an adjustment of interest expense related to
the designated debt.

<PAGE>

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging Activities",  which requires
the Company to recognize  all  derivatives  on the balance  sheet at fair value.
SFAS No. 133 is required to be adopted in years  beginning  after June 15, 1999.
However,  because of the Company's  limited use of derivatives,  management does
not anticipate that the adoption of SFAS No. 133 will have a significant  impact
on the Company's financial position or results of operations.

Note 2 - Receivables, net
------   ----------------

        Receivables consisted of the following (In thousands):

                                                      December 31,
                                                -----------------------
                                                  1998           1997
                                                  ----           ----
          Contracts                            $197,888        $302,519
          Mortgages and other                    17,966          15,028
                                               --------        --------
                                                215,854         317,547
          Less allowance for loan losses        (13,005)        (20,848)
                                               --------        --------
          Receivables, net                     $202,849        $296,699
                                               ========        ========

         During 1998, the Company sold $212.7 million of contracts receivable to
the Qualifying  Special Purpose  Entities.  In conjunction  with these sales the
Company received non-cash consideration, primarily in the form of a subordinated
note  receivable,  of $42.3 million.  At December 31, 1998,  these entities held
contracts receivable totaling $172.1 million,  with related borrowings of $142.9
million.  Except  for the  repurchase  of  contracts  that fail to meet  initial
eligibility  requirements,  the Company is not obligated to repurchase defaulted
or any other contracts sold to the Qualifying  Special Purpose  Entities.  It is
anticipated,  however,  that the Company will repurchase  defaulted contracts to
facilitate the remarketing of the underlying  collateral.  The Company maintains
an allowance  for loan losses in connection  with its option to  repurchase  the
defaulted  contracts  and, at December 31, 1998,  this  allowance  totaled $10.3
million  and  was  classified  in  "Investments  in and  net  amounts  due  from
qualifying special purpose entities" in the Consolidated Balance Sheet.

        The weighted average interest rate on the Company's contracts receivable
was 14.2% and 14.6% at December 31, 1998 and 1997,  respectively,  with interest
rates on these receivables  ranging generally from 13.3% to 17.9%. The Company's
contracts  receivable were 97.8% and 98.2% current on a 60 day basis at December
31, 1998 and 1997, respectively.

        Transactions  in the  allowance  for loan  losses  were as  follows  (In
thousands):

                                                      Year Ended December 31,
                                                   ---------------------------
                                                      1998     1997      1996
                                                      ----     ----      ----
        Balance at January 1                       $ 20,848  $16,528   $15,471
        Provision for loan losses                    14,270   12,121     7,827
        Reclassification of allowance pertaining
         to receivables sold to QSPEs               (10,326)     -         -
        Net charge-offs                             (11,787)  (7,801)   (6,770)
                                                   --------  -------   -------
        Balance at December 31                     $ 13,005  $20,848   $16,528
                                                   ========  =======   =======


<PAGE>

Note 3 - Real Estate Inventories
------   -----------------------

        Real estate inventories are summarized as follows (In thousands):

                                                       December 31,
                                                 -----------------------
                                                   1998          1997
                                                   ----          ----
          Land and improvements                  $ 39,814       $26,666
          Residential housing:
            Vacation ownership                     85,350        62,410
            Homes                                   3,233         4,063
                                                 --------       -------  
                                                   88,583        66,473
                                                 --------       -------
                                                 $128,397       $93,139
                                                 ========       =======

     During 1998, the Company acquired,  for $19.9 million,  certain undeveloped
land  located  in  Sedona,  Arizona;  Durango,   Colorado;  Las  Vegas,  Nevada;
Gatlinburg,  Tennessee;  and Williamsburg,  Virginia for future VOI development.
Additionally,  in 1998, the Company increased its investments in VOI residential
housing at certain of its destination resort properties, including those resorts
located in Pompano Beach, Florida, Branson, Missouri and Alexandria, Virginia.

Note 4 - Property and Equipment, Net
------   ---------------------------

         Property and equipment, net consisted of the following (In thousands):

                                                      December 31,
                                                 -----------------------
                                                   1998          1997
                                                   ----          ----
          Land, buildings and improvements       $ 30,663      $ 24,052
          Furniture, fixtures and equipment        19,014        18,273
                                                 --------      --------
                                                   49,677        42,325
          Accumulated depreciation                (19,615)      (17,955)
                                                 --------      --------
                                                 $ 30,062      $ 24,370
                                                 ========      ========

        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 $7.2 million
for 1998 and $4.8 million for 1997 and 1996.  Future  minimum lease  commitments
for non-cancelable operating leases with initial or remaining terms in excess of
one year are as follows:  1999 - $5.0 million;  2000 - $3.7 million; 2001 - $2.6
million; 2002 - $1.6 million; 2003 - $1.1 million and thereafter - $.7 million.
<PAGE>

Note 5 - Financing Arrangements
------   ----------------------

        Financing arrangements are summarized as follows (In thousands):

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

          Revolving credit agreements                $29,181       $ 94,101
          Notes payable collateralized by
           Contracts receivable:
            Fairfield Capital Corporation Notes       43,574         60,147
            Fairfield Funding Corporation Notes          -           12,330
            Notes payable - other                      6,686          3,503
                                                     -------       --------
                                                     $79,441       $170,081
                                                     =======       ========

        During  1998,  the Company  reduced  the  borrowings  outstanding  under
certain of its  financing  arrangements  as a result of  financing  arrangements
available to the Qualifying Special Purpose Entities (see Note 2).

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

     At December 31, 1998, the Company's  Amended and Restated  Revolving Credit
Agreements (the "Credit  Agreements")  provide  borrowing  availability of up to
$80.0 million  (including  up to $11.0  million for letters of credit,  of which
$4.6 million is outstanding at December 31, 1998) and mature in October 2001. At
December 31,  1998,  borrowings  under the Credit  Agreements  bear  interest at
variable rates ranging from the base rate minus .25% to the base rate minus .75%
(weighted average stated interest rate of 7.0% at December 31, 1998). Borrowings
under the Credit  Agreements  are  collateralized  by contracts  receivable  and
certain  construction  work-in-process,  with an  aggregate  book  value of $141
million at December 31, 1998.  At December 31,  1998,  the  Company's  borrowing
availability under its Credit Agreements totaled $45.7 million.

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

     Fairfield Capital Corporation  ("FCC"), is a wholly owned subsidiary of FAC
- Nevada. Borrowings under the FCC Credit Agreement mature principally within 47
months and bear interest at varying rates,  based on commercial paper rates. The
weighted average stated interest rate on the FCC Notes was 5.77% at December 31,
1998.  At  December  31,  1998,  contracts  receivable  totaling  $56.0  million
collateralized the FCC Notes.  Contractual maturities within the next five years
of contracts receivable which serve as collateral for and will be used to reduce
notes payable as follows: 1999 - $7.9 million; 2000 - $8.9 million; 2001 - $10.0
million; 2002 - $9.5 million and 2003 - $5.3 million.

     In February  1998, FAC - Nevada entered into an interest rate swap with its
primary lender, which provides for a fixed interest rate of 5.63% on up to $50.0
million of FCC Notes. This agreement is subject to the scheduled amortization of
a pool of contracts receivable and will expire in February 2002.

     Notes Payable - Other
     ---------------------

     At December 31, 1998,  notes payable - other consisted  primarily of a $5.2
million borrowing  secured by the Company's  corporate office building in Little
Rock,  Arkansas.  This borrowing  matures in December 2003 and bears interest at
6.9%. Scheduled principal repayments are as follows:  1999 - $.2 million; 2000 -
$.2 million; 2001 - $.2 million; 2002 - $.3 million and 2003 - $4.3 million.
                                       
<PAGE>


Note 6 - Deferred Revenue - Estimated Costs to Develop Land Sold
------   -------------------------------------------------------

     At  December  31,  1998,  estimated  cost to complete  development  work in
subdivisions from which lots had been sold totaled $13.5 million.  The estimated
cost to complete development work within the next five years is as follows: 1999
- $.3 million;  2000 - $.3 million;  2001 - $.4 million;  2002 - $.3 million and
2003 - $.5 million.

Note 7 - Income Taxes
------   ------------

     At December  31, 1998,  the Company had net  operating  loss  carryforwards
totaling  $108.4  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,  1998,  net  operating  loss
carryforwards  which are  available to offset  regular  taxable  income,  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 - $22.7 million;
2011 - $24.2 million; 2012 - $7.2 million and 2018 - $9.4 million.

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

                                            Year Ended December 31,
                                   ---------------------------------------
                                     1998            1997             1996
                                     ----            ----             ----
          Current:
            Federal                $ 8,356         $ 2,779           $   254
            State                      541             164               426
                                   -------         -------           -------
                                     8,897           2,943               680
                                   -------         -------           -------

          Deferred:
            Federal                 14,111          14,050            11,380
            State                    2,901           2,734             1,280
                                   -------         -------           -------
                                    17,012          16,784            12,660
                                   -------         -------           -------
                                   $25,909         $19,727           $13,340
                                   =======         =======           =======

     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. During 1996, the Company  recognized
the  utilization  of  pre-confirmation  income  tax  attributes  totaling  $19.1
million.


<PAGE>

        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):
                                                  Year Ended December 31,
                                            ----------------------------------
                                              1998          1997         1996
                                              ----          ----         ----

        Statutory tax provision             $24,338       $15,085      $12,405
        State income taxes, net of
         Federal benefit                      2,237         1,720        1,109
        Impact of merger expenses               -           2,294          -
        Other                                  (666)          628         (174)
                                            -------       -------      -------
          Provision for income taxes        $25,909       $19,727      $13,340
                                            =======       =======      =======

        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):

                                                         December 31,
                                                   ------------------------ 
                                                      1998           1997
                                                      ----           ----
          Deferred tax assets:
            Net operating loss carryforwards        $ 40,397       $ 38,259
            Loan and cancellation loss reserves        7,672          8,308
            Deferred revenue                           6,267          4,619
            Tax over book basis in inventory 
             and fixed assets                          2,975            724
            Credit carryforwards                      12,694          4,338
            Other                                      4,376          3,271
                                                    --------       --------
                                                      74,381         59,519
                                                    --------       --------
          Deferred tax liabilities:
            Installment sales                         90,234         68,234
            Other                                      3,617          1,558
                                                    --------       --------
                                                      93,851         69,792
                                                    --------       --------
          Net deferred tax liabilities              $(19,470)      $(10,273)
                                                    ========       ========
Note 8 - Other Liabilities
------   -----------------

        Other liabilities consisted of the following (In thousands):

                                                            December 31,
                                                        -------------------
                                                          1998       1997
                                                          ----       ----
          Accrued employee compensation and benefits    $17,592    $15,165
          Accrued income taxes                            8,687      2,293
          Accrual for Discovery fulfillment               6,299      5,588
          Deposits associated with sales contracts        3,302      6,639
          Accrued association subsidies                   3,154      1,549
          Other                                          16,883     14,995
                                                        -------    -------
                                                        $55,917    $46,229
                                                        =======    =======

<PAGE>

Note 9 - Stockholders' Equity
------   --------------------

   Fairfield is  authorized to issue 100 million  shares of Common Stock,  par
value of $.01 per share.  During 1997,  Fairfield's Board of Directors  declared
two-for-one  and  three-for-two  common stock splits.  In connection  with these
stock splits,  the par value of the additional shares resulting from the splits,
totaling $304,000, was reclassified from paid-in capital to common stock.
 
     In August 1998, Fairfield's Board of Directors authorized the repurchase of
up to $20.0  million of Common  Stock.  Repurchased  shares of Common  Stock are
accounted  for as treasury  shares of the  Company,  and may be used to meet the
Company's  obligations  under  its  employee  stock  option  plans or for  other
corporate purposes.  At December 31, 1998, the Company had repurchased 1,991,601
shares of Common Stock at an aggregate  cost,  including  commissions,  of $20.0
million.

     In 1996, the Company  issued from treasury,  180,000 shares 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 vested 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 amortized to compensation  expense over the
restricted period.  During 1998,  Fairfield acquired a total of 59,310 shares of
its Common  Stock  ("Surrendered  Shares")  in  settlement  of federal and state
withholding  taxes pursuant to the issuance of the Restricted Stock. The cost to
the Company related to the Surrendered  Shares is reflected in "Treasury  stock"
in the Consolidated  Balance Sheet and  Consolidated  Statement of Stockholders'
Equity.

     In 1996, the Company completed an underwritten public offering of 2,700,000
shares of Common Stock at a price of $7.21 per share. The net proceeds  totaling
$17.7 million were used to repay certain  indebtedness  and to  temporarily  pay
down  the  outstanding   indebtedness  under  the  Company's   revolving  credit
agreements.

     At December 31, 1998,  five  million  shares of Preferred  Stock with a par
value of $.01 per share were  authorized,  none of which have been  issued.  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  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  distributions  of its Common
Stock.

    
<PAGE>


Note 10 - Earnings per Share
-------   ------------------

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

                                                     Year Ended December 31,
                                                 -----------------------------
                                                   1998        1997      1996
                                                   ----        ----      ----
 Numerator:
   Net income before extraordinary loss          $43,628     $23,372   $22,103
   Extraordinary loss from early 
    extinguishment of debt                           -         2,195       -
                                                 -------     -------   -------
   Numerator for basic and diluted EPS           $43,628     $21,177   $22,103
                                                 =======     =======   =======
 Denominator:
   Denominator for basic EPS - 
    weighted average shares                       44,544      44,200    40,558
   Effect of dilutive securities:
     Options and warrants                          1,727       1,626     1,600
     Common stock held in escrow                     575         366       366
     Restricted common stock                         -            90       180 
     Other                                           -           -         561
                                                 -------     -------   -------
  Dilutive potential common shares                 2,302       2,082     2,707
                                                 -------     -------   -------
  Denominator for diluted EPS - adjusted
     weighted-average shares and 
     assumed conversions                          46,846      46,282    43,265
                                                 =======     =======   =======
Basic earnings per share                            $.98        $.48      $.54
                                                    ====        ====      ====
Diluted earnings per share                          $.93        $.46      $.51
                                                    ====        ====      ====

Note 11 - Segment Disclosures
-------   -------------------

         The Company, which is organized based on products and services offered,
operates one reportable  segment  Vacation  Ownership  operations.  This segment
derives  its  revenues  from the sale of VOIs and from the  associated  interest
income on  contracts  receivable  generated  by the  Company's  financing of VOI
sales.  The Company  evaluates  performance  and  allocates  resources  based on
operating profit before income taxes. This basis includes  depreciation expense;
however,  the related  property and  equipment  are not allocated to the segment
level.

         Segment assets include all contracts receivable.  In addition,  for the
consolidated financial statement  presentation,  portions of interest income and
interest  expense  allocated to the segment are included in "Net interest income
and fees from qualifying special purpose entities" in the Consolidated Statement
of Earnings.

         The following table summarizes VOI segment  information for the periods
indicated (In thousands):
                                             Year Ended December 31,
                                         ------------------------------
                                              1998            1997
                                              ----            ----
                
        VOI revenue, net                    $301,119        $256,141
        Interest income                       49,575          37,179
        Interest expense, net                 14,346          10,353
        Depreciation expense                   2,480           1,484

         The  difference  in interest  income and interest  expense for the year
ended December 31, 1998 reported by the segment and consolidated interest income
and expense of $33.9 million and $8.5 million,  respectively, is attributable to
interest  income and  interest  expense  recorded by the QSPEs.  The  
<PAGE>

difference between depreciation expense reported by the segment and consolidated
depreciation  expense for the same time period is  attributable  to depreciation
expense by non-reportable operating segments or business activities.

Reconciliation to consolidated totals (In thousands):
----------------------------------------------------

                                          Year Ended December 31,
                           -----------------------------------------------------
                                    1998                          1997
                           ------------------------  ---------------------------
                                        Earnings                     Earnings 
                           Revenues   Before Taxes   Revenues      Before Taxes
Total segment revenue
 and operating profit, 
 respectively              $356,188    $ 90,161      $290,050        $ 80,741
Other revenues and other 
 operating  profit, 
 respectively                57,625     (20,560)       56,129         (37,642)
Adjustment to interest income 
 and net interest and fees 
 from  QSPEs                 (5,920)        (64)          -               -
                           --------    --------      --------        --------
Consolidated revenues and 
 earnings before taxes and
 extraordinary loss, 
 respectively              $407,893    $ 69,537      $346,179        $ 43,099
                           ========    ========      ========        ========

         Other revenues consist primarily of resort management  revenue and home
sales for the year ended December 31, 1998. Other operating profits for the same
time  period  includes  general  and  administrative  expenses,  which  are  not
allocated on a segment basis.

                                                         December 31,
                                                 ---------------------------
                                                  1998                 1997
                                                  ----                 ----
Reportable segment total assets                $ 484,015             $398,663
Other assets                                     108,856               65,269
Adjustment to contracts receivable, 
 allowance for loan losses and
 investments in and net amounts 
 due from QSPEs                                 (161,778)                 -
                                               ---------             --------
Total consolidated assets                      $ 431,093             $463,932
                                               =========             ========

         Other assets consists primarily of property and equipment,  real estate
inventories - homes, and unamortized costs in excess of net assets acquired.

         All revenue and assets of Fairfield's reportable segment are attributed
to or located in the United  States.  The  Company  does not have any  customers
which represents ten percent or more of its consolidated revenues.

Note 12 - 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 $3.4 million,  $2.0 million and $1.2 million for 1998, 1997 and
1996, respectively.

<PAGE>

        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 was $0.3
million for each of 1998 and 1997 and $0.1 million for 1996.

        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  2,587,000  shares  of
Fairfield'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.

     In 1997,  the  Company's  stockholders  approved the 1997 Stock Option Plan
(the "1997 Plan"). Under the terms of the 1997 Plan, non-qualified stock options
to purchase a maximum of 1,650,000  shares 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. On May 21, 1998, the Company's  stockholders approved an amendment to the
1997 Plan to increase  the maximum  number of shares of Common Stock that may be
issued  pursuant  to the  exercise  of  options  granted  under the 1997 Plan by
1,000,000 shares.
<PAGE>

        The following table  summarizes the activity under the Company's  option
and warrant plans (shares in thousands):
                                                         Weighted Average
                                  Shares                 Price Per Share  
                           ------------------------ ---------------------------
                            1998    1997    1996      1998      1997     1996
                            ----    ----    ----      ----      ----     ----
Outstanding at beginning
 of year                   4,802   3,103   3,028     $ 5.66   $ 2.03    $1.52
Granted                      -     2,299     674       N/A     10.78     3.83
Exercised                 (1,179)   (380)   (488)      4.31     3.51     1.28
Forfeited                   (102)   (220)   (111)     14.48     6.70     1.68
                          ------   -----   -----     ------   ------    -----
Outstanding at end
 of year                   3,521   4,802   3,103       5.45     5.66     2.03
                          ======   =====   =====
Exercisable at end
 of year                   1,918   2,739   1,779
                          ======   =====   =====
Reserved for future
 issuance                  1,320     220     107
                          ======   =====   =====

        The following table summarizes  information  concerning  outstanding and
exercisable  stock  options  and  warrants as of  December  31, 1998  (shares in
thousands):

             Outstanding                                    Exercisable
-----------------------------------------------------  ------------------------
                                Weighted
                                 Average     Weighted                 Weighted
                    Number      Remaining    Average      Number      Average
   Range of       of Shares    Contractual   Exercise    of Shares    Exercise
Exercise Prices  Outstanding      Life        Price     Exercisable     Price
---------------  -----------      ----        -----     -----------     -----
 Less than $2       1,533       4.2 years    $ 1.01        1,533        $1.01
   $2 - $9            508       6.2 years      3.53          385         3.95
 $10 or more        1,480       8.5 years     10.71          -             -
                    -----                                  -----
                    3,521                                  1,918
                    =====                                  =====

     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 SFAS No. 123
"Accounting for  Stock-Based  Compensation".  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 and 1996, respectively: risk free interest rates of 6.6% and 6.5%; dividend
yields of 0% for each year presented;  volatility factors of the expected market
price of the Company's  Common Stock of 43.8 and 44.5; and the  weighted-average
expected  life of the  options and  warrants of six years in 1997 and 1996.  The
weighted-average fair value of the options and warrants granted in 1997 and 1996
was $4.90 and $2.07, respectively.
<PAGE>

        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 $42.3  million or $.91 per diluted  share,  $19.6
million or $.42 per diluted share and $21.5  million or $.50 per diluted  share,
for  1998,  1997  and  1996,  respectively.  Such  pro  forma  effects  are  not
necessarily indicative of the effect on future years.

Note 13 - Supplemental Information
-------   ------------------------

        Other revenues consisted of the following (In thousands):

                                                Year Ended December 31,
                                            -------------------------------
                                             1998        1997         1996
                                             ----        ----         ----
          Home sales                       $12,252     $11,124      $ 8,752
          Lot sales                          8,155       8,060        8,735
          FairShare Plus conversion fees     2,494       2,069        1,076   
          Other                              3,008       3,369        4,999
                                           -------     -------      -------
                                           $25,909     $24,622      $23,562
                                           =======     =======      =======

        Other expenses consisted of the following (In thousands):

                                               Year Ended December 31,
                                          --------------------------------
                                            1998        1997         1996
                                            ----        ----         ----
          Home cost of sales              $10,796     $ 9,800      $ 8,145
          Subsidies to property 
           owner associations               2,488         686          874
          Lot cost of sales                 2,335       2,170        2,068
          FairShare Plus conversion 
           commissions                      1,222         706          462
          Other                             1,607       4,621        5,274
                                          -------     -------      -------
                                          $18,448     $17,983      $16,823
                                          =======     =======      =======

        Included in other  assets at December 31, 1998 and 1997 are (i) costs in
excess of net assets  acquired of $4.9 million and $4.8  million,  respectively,
related primarily to the 1997 acquisition of the remaining minority interests in
certain of Vacation Break's joint ventures,  (ii) prepaid assets of $4.9 million
and $4.7 million,  respectively,  and (iii)  unamortized  capitalized  financing
costs of $3.0 million and $2.4 million, respectively.

Note 14 - Contingencies
-------   -------------

     During 1993,  two lawsuits (the  "Recreation  Fee  Litigation")  were filed
against  Fairfield in the  District  Court of Archuleta  County,  Colorado.  The
Recreation Fee Litigation,  which seeks certification as class actions,  alleges
that  Fairfield  wrongfully  imposed  an  annual  recreation  fee on  owners  in
Fairfield's Pagosa,  Colorado development.  The Recreation Fee Litigation seeks,
among other things,  refund,  with  interest,  of recreation  fees  collected by
Fairfield (estimated to total in excess of $600,000),  damages, punitive damages
and attorneys' fees. Two additional  related lawsuits were subsequently filed in
the Archuleta  County District Court:  the Fiedler case,  filed in October 1994,
concerns  two  lots,  while the  Lobdell  case,  filed in  November  1994,  is a
purported  class action.  By orders dated June 19, 1998,  the Colorado  District
Court generally  denied  plaintiffs'  motions for summary  judgments and granted
Fairfield's motions for summary judgments in all of the cases. Attorneys for the
plaintiffs  have filed motions to disqualify the state court judge and to vacate
the June 19, 1998 summary judgment orders.

<PAGE>

     In 1993,  Charlotte T. Curry,  who purchased a lot from Fairfield  under an
installment  sale contract  subsequently  sold to First Federal Savings and Loan
Association of Charlotte ("First Federal"), previously a wholly-owned subsidiary
of Fairfield,  filed suit against First Federal,  initially  alleging  breach of
contract,  breach of fiduciary duty and unfair trade  practices.  The litigation
contested  Fairfield's  method of calculating  refunds for lot purchasers  whose
installment  sale  contracts  were  cancelled due to their  defaults.  The Curry
lawsuit sought damages,  punitive  damages,  treble damages under North Carolina
law for unfair trade  practices,  prejudgment  interest and attorneys'  fees and
costs. By order dated July 6, 1994, the court  dismissed most claims,  primarily
based on statutes of limitations,  except for the claim  asserting  unfair trade
practices.  By order filed  September  15, 1995,  the court  denied  plaintiff's
motion for class certification,  which decision was upheld by the North Carolina
Court of Appeals,  with the Supreme Court of North  Carolina  declining to grant
discretionary review. In April 1998, Ms. Curry dismissed the lawsuit. On January
7, 1998, the plaintiff's  attorneys filed another lawsuit (the Scarvey lawsuit),
currently pending in Superior Court in Mecklenburg County, North Carolina,  as a
purported class action,  against First Federal,  alleging matters similar to the
original  complaint in the Curry case and seeking similar  damages.  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  under the Stock
Purchase  Agreement  to  indemnify  the buyer of First  Federal  for the Scarvey
litigation,  but the buyer  has filed a third  party  action  against  Fairfield
contesting  Fairfield's  interpretation  of the  Stock  Purchase  Agreement  and
asserting other common law and statutory grounds for indemnification.

     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,  filed suit 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) disputed 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) disputed the $7.9 million cash transfer,
seeking  instead the issuance of 1,764,706  shares of  Fairfield'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 $2.0 million
from the proceeds of the collateral transferred in satisfaction of the FCI Notes
(including, if applicable,  shares of Fairfield's Common Stock) in excess of the
amount of principal and accrued interest due at maturity.  The indenture trustee
has  asserted  that the $2.0  million  premium  limit is not  applicable  to the
Contested Shares, 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 opposed the indenture
trustee's motion and requested summary judgment,  asserting that the noteholders
were  not  entitled  to any of  the  Contested  Shares.  The  indenture  trustee
indicated  that the Real  Estate  Collateral  was  sold for  approximately  $4.4
million.  The court on April 24, 1998 entered an order denying the relief sought
by the indenture trustee and granting the Company's motion for summary judgment.
The indenture trustee appealed the court's order to the Court of Appeals for the
Second  Circuit,  which heard oral  argument on January 13, 1999.  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

<PAGE>


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. 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, it appears from the initial  complaint,  and subsequent
submissions by MRG&L's counsel, to be substantially in excess of $50.0 million.

     The  Company  intends  to  vigorously  defend  this  action and has filed a
separate action in federal District Court asserting  various antitrust tying and
other claims against MRG&L and related parties. 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 defense of 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 $6.0  million.  Such  indemnification  agreement has been
collateralized by, and recourse under the indemnity agreement is limited to, the
pledge of shares of  Fairfield's  Common  Stock,  valued as of December 18, 1997
(adjusted   for  stock  splits  and  certain  other   similar   items),   at  an
indemnification  value of $21.59375  per share,  and the proceeds  thereof.  Any
shares of Common Stock the Company receives under the indemnification  agreement
will  reduce the  number of shares  outstanding.  The amount of any  settlement,
adverse  judgement  or defense  costs,  in excess of amounts  accrued,  would be
charged to operations, notwithstanding the availability of indemnification under
the Principal Stockholders Agreement.

     The Company is involved in various other claims and lawsuits arising in the
ordinary course of business.  However,  management believes the outcome of these
matters will not have a materially  adverse  effect on the  Company's  financial
position or results of operations.

Note 15 - Fair Value of Financial Instruments
-------   -----------------------------------

     The estimated fair value amounts  presented  herein have been determined by
the  Company  using  relevant  market  information  and  appropriate   valuation
methodologies.  However, as these estimates are subjective in nature and involve
uncertainties and significant judgment,  they are not necessarily  indicative of
the amounts the Company could realize in a current market  exchange.  The use of
different  market  assumptions or estimation  methodologies  may have a material
effect on the estimated fair value amounts.

     The  carrying  value  of cash  and cash  equivalents,  restricted  cash and
accounts payable approximate fair value due to the relatively  short-term nature
of the financial  instruments.  The carrying amount of the investment in and net
amounts due from qualifying  special purpose  entities  approximates  fair value
based  on  valuation  models  using  risk  adjusted  interest  rates,  estimated
pre-payments,  the cost of servicing  and net  transaction  costs.  The carrying
amounts of receivables  approximates  fair value based on valuation models using
risk  adjusted  interest  rates and  historical  pre-payment  experiences  to be
received on similar  current  receivables.  The fair value of the interest  rate
swap agreements approximates carrying value based on valuation models using risk
adjusted  interest rates. 

     The carrying  amounts of the Company's  borrowings  with variable  interest
rates approximated their fair values at December 31, 1998 and 1997. The carrying
amounts of the  Company's  borrowings  with fixed  interest  rates  totaled $5.2
million and $14.3 million at December 31, 1998 and 1997, respectively.  The fair
values of these  borrowings  totaled $5.0 million and $14.2  million at December
31, 1998 and 1997,  respectively,  and were estimated using discounted cash flow
analyses based on the Company's  current  borrowing rates, or other  appropriate
market rates, for similar types of borrowing  arrangements.  

<PAGE>


Note 16 - Unaudited Consolidated Quarterly Financial Data 
-------   -----------------------------------------------
(Dollars in thousands, except per share data)

                                           Year Ended December 31, 1998
                                      --------------------------------------
                                       First    Second     Third     Fourth
                                      Quarter   Quarter   Quarter    Quarter
                                      -------   -------   -------    -------

Total revenues                        $85,939  $107,984  $112,737   $101,233
Total expenses                         72,287    86,647    93,522     85,900
                                      -------  --------  --------   --------
Earnings before provision 
 for income taxes                      13,652    21,337    19,215     15,333
Provision for income taxes              5,247     8,199     6,975      5,488
                                      -------  --------  --------   --------
Net earnings                          $ 8,405  $ 13,138  $ 12,240   $  9,845
                                      =======  ========  ========   ========
Basic earnings per share                 $.19      $.29      $.27       $.23
                                         ====      ====      ====       ====
Diluted earnings per share               $.18      $.28      $.26       $.22
                                         ====      ====      ====       ====


                                            Year Ended December 31, 1997
                                      ---------------------------------------
                                       First     Second    Third     Fourth
                                      Quarter    Quarter  Quarter    Quarter
                                      -------    -------  -------    -------

Total revenues                        $68,784    $95,110  $99,274    $83,011
Total expenses                         58,999     78,056   80,833     85,192
                                      -------    -------  -------    -------
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)
                                         ====       ====     ====      =====


        In  conjunction  with the closing of the  Vacation  Break  merger in the
fourth  quarter of 1997,  the Company  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  have  been   reclassified  to  conform  to  the  1998  fourth  quarter
presentation.