NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

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.

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.

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.

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.

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.

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

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 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 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.

The Company's contracts receivable are regionally diversified. Generally, VOIs are sold under installment contracts requiring a 10% - 15% down payment and monthly installments, including interest,

for periods of up to seven years. The Company 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

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.

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.

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 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.

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.

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.

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.

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.

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

                                             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.

                                            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.

                                                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).

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.

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.

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.

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.

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.

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)
                                          ========       ========

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

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.

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

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

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.

                                          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.

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.

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.

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.

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.

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.

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.

                                      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.

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.

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

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.

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.

-------   -----------------------------------------------
(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.