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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 001-13815



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SUNTERRA CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Maryland                                                       |  | 95-4582157                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



3865 West Cheyenne
Avenue

North Las Vegas, Nevada 89032

(Address of principal executive offices)



(702) 804-8600

Registrants telephone number, including area code



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Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  x    NO ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    YES ̈NO  x



The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 31, 2005 was $285.9 million, based upon the reported last sale prices of such equity on that date.



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    YES  x    NO ̈



Number of shares of the registrants common stock outstanding at December 9, 2005: 19,472,534



DOCUMENTS INCORPORATED BY REFERENCE



Certain information required by Part III of this report (Items 10, 11, 12, 13 and 14) is incorporated by reference from the registrants definitive
proxy statement to be filed pursuant to Regulation 14A with respect to the registrants fiscal 2006 annual meeting of stockholders, or if such proxy statement is not so filed on or before 120 days after the end of the fiscal year covered by
this Report, such information will be included in an amendment to this Report filed no later than the end of such 120-day period.



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SUNTERRA CORPORATION



ANNUAL REPORT ON
FORM 10-K

For the Fiscal Year Ended September 30, 2005



TABLE OF CONTENTS



|                      |  |                                                                                                              |  |   
|--------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|Safe Harbor Statement |  |                                                                                                             
|                      |  |                                                                                                             
|                      |  | PART I                                                                                                       |  |   
|ITEM 1.               |  | Business                                                                                                     |  | 3 
|ITEM 2.               |  | Properties                                                                                                   |  | 16
|ITEM 3.               |  | Legal Proceedings                                                                                            |  | 18
|ITEM 4.               |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18
|                      |  | Executive Officers of the Registrant                                                                         |  | 18
|                      |  |                                                                                                             
|                      |  | PART II                                                                                                      |  |   
|ITEM 5.               |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 19
|ITEM 6.               |  | Selected Financial Data                                                                                      |  | 20
|ITEM 7.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 22
|ITEM 7A.              |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 42
|ITEM 8.               |  | Financial Statements and Supplementary Data                                                                  |  | 44
|ITEM 9.               |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 84
|ITEM 9A.              |  | Controls and Procedures                                                                                      |  | 84
|ITEM 9B.              |  | Other Information                                                                                            |  | 84
|                      |  |                                                                                                             
|                      |  | PART III                                                                                                     |  |   
|ITEM 10.              |  | Directors and Executive Officers of the Registrant                                                           |  | 85
|ITEM 11.              |  | Executive Compensation                                                                                       |  | 85
|ITEM 12.              |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 85
|ITEM 13.              |  | Certain Relationships and Related Transactions                                                               |  | 85
|ITEM 14.              |  | Principal Accounting Fees and Services                                                                       |  | 85
|                      |  |                                                                                                             
|                      |  | PART IV                                                                                                      |  |   
|ITEM 15.              |  | Exhibits, Financial Statement Schedules                                                                      |  | 85



Forward-Looking Statements



This Annual Report on Form 10-K (Form 10-K)
contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including in particular,
statements about our plans, objectives, expectations and prospects under the headings Business and Managements Discussion and Analysis of Financial Condition and Results of Operations. You can identify these statements
by forward-looking words such as anticipate, believe, estimate, expect, intend, plan, seek and similar expressions. Although we believe that the plans, objectives,
expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations and prospects will be
achieved. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements are contained herein under Business-Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this report. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or
referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which
they are made.



References to Predecessor refer
to the Company through July 31, 2002. References to Successor refer to the Company on and after August 1, 2002.



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PART I



ITEM 1. BUSINESS



Unless the
context otherwise requires, throughout this report the words Sunterra, the Company, we, us, and our refer to Sunterra Corporation, a Maryland corporation, and its subsidiaries.
Sunterra®, Club Sunterra®, SunOptions®, and Sunterra Escapes® are trademarks of Sunterra.



Change in Fiscal Year End



Effective October 1, 2004, we changed our fiscal year end for financial reporting purposes from a calendar year end to the 12-month period commencing
October 1 and ending September 30.



Introduction



Sunterra Corporation develops, markets and operates a network of vacation
ownership (also known as timeshare) resorts, primarily in North America, Hawaii, the Caribbean, and Europe. With 97 owned or affiliated resorts in 14 countries, we are one of the largest companies in our industry. At September 30,
2005, we had more than 314,000 owner families. We also provide consumer financing to individual purchasers of Sunterras Vacation Interests; provide collection, rental and management services to certain timeshare homeowners associations;
and operate a vacation ownership membership and exchange program. We generally market our products to middle income homeowners. All of our operations are contained within and are in support of a single industry segment  the vacation ownership
industry  and we operate in two geographic segments, North America and Europe. Revenues from our North American segment totaled $330.8 million, $201.0 million, $201.9 million for the year ended September 30, 2005, the nine months ended
September 30, 2004 and the year ended December 31, 2003, respectively. Revenues from our European segment totaled $93.1 million, $86.1 million, $105.0 million for the year ended September 30, 2005, the nine months ended
September 30, 2004 and the year ended December 31, 2003, respectively.



Our goal is to deliver the global currency of relaxation, by expanding our channels of distribution in key leisure markets around the world; complementing our current product offerings with an active development
program, including strategic partnerships; increasing our brand name recognition; and providing consistently high levels of quality and reliability so that our current and prospective owner families can look forward to their vacations with trust and
pleasure.



Our operations consist of:



| |  |  | acquiring, developing and operating vacation ownership resorts;
| | - |  | ---------------------------------------------------------------



| |  |  | marketing and selling vacation ownership interests to the public at our resort locations and off-site sales centers by:
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | selling vacation points in Club Sunterra that may be redeemed for occupancy rights for varying lengths of stay at participating resort locations and for certain other travel
products and services, which we refer to as Vacation Points; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | selling vacation ownership interests that entitle the buyer to use a fully-furnished vacation residence, generally for a one-week period each year in perpetuity, which we refer to
as Vacation Intervals and together with Vacation Points, Vacation Interests;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | providing consumer financing to individual purchasers of Sunterras Vacation Interests;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | providing collection services and resort rental, management and maintenance services for which we receive fees paid by the resorts homeowners associations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | operating our membership and exchange program.
| | - |  | ----------------------------------------------



History and Description of Our Operations



Sunterra Corporation traces its roots in the timeshare resort acquisition and development business back to 1992, though many of the companies that we
acquired later were among the pioneers of the vacation ownership industry in the years prior to our founding. We were incorporated in May 1996 as KGK Resorts, Inc., changed our name later that year to Signature Resorts, Inc., and finally became
known as Sunterra Corporation in mid 1998. At the time of our initial public offering in August 1996, Signature Resorts, Inc. owned nine vacation ownership resorts spread out in the United States and the Caribbean and generated $75.0 million in
annual vacation ownership sales. In the ensuing period, we grew rapidly through a series of acquisitions, reaching 89 resorts around the globe and generating $423.0 million of vacation ownership sales in 1999.



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After this period of rapid expansion, we and certain wholly-owned subsidiaries filed voluntary petitions
for relief under Chapter 11 of the United States Bankruptcy Code in May 2000, from which we emerged in July 2002. See Managements Discussion and Analysis of Financial Condition and Results of OperationsReorganization and
Fresh-start Reporting for a further description of the nature and results of our reorganization.



We have grown significantly since that time, adding new Owned Resorts (vacation ownership resorts where Sunterra has acquired or developed and
sold a significant number of Vacation Interests associated with that resort, even if substantially all of the related Vacation Interests in the property have been sold to consumers) and Affiliated Resorts (vacation ownership resorts
where another developer owns or has developed a significant number of the related Vacation Interests and with which Club Sunterra holds an affiliation agreement). As of September 30, 2005, the Club Sunterra network was composed of 97 vacation
ownership resorts, including 59 Owned Resorts and 38 Affiliated Resorts. The existing units at the Owned Resorts totaled 7,030 at September 30, 2005. See Item 2. Properties for a further description of the Owned Resorts.



|                     |  |                   |  |           
|-------------------- |  | ----------------- |  | ----------
|                     |  | Number of Resorts
|Country              |  | Owned             |  | Affiliated
|United States:       |  |                   |  |           
|Arizona              |  | 7                 |  | 1         
|California           |  | 2                 |  | 2         
|Colorado             |  |                  |  | 1         
|Florida              |  | 4                 |  | 6         
|Hawaii               |  | 2                 |  | 9         
|Idaho                |  |                  |  | 1         
|Massachusetts        |  |                  |  | 2         
|Missouri             |  | 1                 |  |          
|Nevada               |  | 2                 |  | 1         
|New Hampshire        |  |                  |  | 1         
|New Mexico           |  | 1                 |  |          
|Oregon               |  |                  |  | 2         
|South Carolina       |  | 1                 |  | 2         
|Tennessee            |  | 1                 |  | 3         
|Texas                |  |                  |  | 1         
|Virginia             |  | 2                 |  |          
|Washington           |  |                  |  | 1         
|Austria              |  | 1                 |  |          
|Canada               |  |                  |  | 1         
|France               |  | 4                 |  |          
|Germany              |  | 1                 |  |          
|Italy                |  | 1                 |  |          
|Malta                |  | 1                 |  |          
|Mexico               |  |                  |  | 2         
|Netherlands Antilles |  | 2                 |  |          
|Norway               |  |                  |  | 1         
|Portugal             |  | 1                 |  |          
|Spain:               |  |                   |  |           
|Balearic Islands     |  | 4                 |  |          
|Canary Islands       |  | 9                 |  |          
|Costa del Sol        |  | 4                 |  |          
|United Kingdom:      |  |                   |  |           
|England              |  | 7                 |  | 1         
|Scotland             |  | 1                 |  |          
|                     |  |                   |  |           

Marketing and Selling of Vacation Interests



We market and sell Vacation Interests in two distinct forms: Vacation Points
and Vacation Intervals, which are described below under the caption The Vacation Ownership Industry.



Marketing is the process by which we attract potential customers to visit and tour an Owned Resort or attend a sales presentation. Selling is the process
by which we seek to sell a Vacation Interest to a potential customer after arrival for a sales presentation.



Marketing. We market Vacation Interests at our resort locations and through off-site sales centers. In Europe, this is supplemented by a network of
independent distributors. We employ a variety of marketing programs to generate prospects for these sales efforts, including targeted mailings, telemarketing, overnight mini-vacation packages, gift certificates, seminars, dinner parties and various
destination-specific local marketing efforts. Additionally, incentive premiums in the form of entertainment tickets, hotel stays, gift certificates or free meals are offered to guests and other potential customers to encourage them to attend sales
presentations or tours. On a limited basis, we retain outside vendors to arrange tours at our resorts. Although the principal goal of our marketing activities is the outright sale of Vacation Interests, in order to generate additional
revenue, we rent unoccupied units at some of our resorts through direct consumer marketing, travel agents, websites and vacation package wholesalers. We believe that our room rental operations, in addition to providing us with supplemental revenue,
provide us with a good source of potential customers for the purchase of Vacation Interests.



Sales. We sell our Vacation Interests primarily through on-site salespersons at certain Owned Resorts. In Europe, this is supplemented by a network of independent distributors. Upon arrival at a sales center
for a scheduled tour, the prospect is met by a member of our sales force who leads the prospect on a tour of the resort and its amenities. At the conclusion of the tour, the sales representative explains the benefits and costs of becoming a Club
Sunterra member. The presentation also includes a description of the financing alternatives that we offer. Prior to the closing of any sale, a verification officer interviews each prospect to ensure our



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compliance with sales policies and regulatory agency requirements. No sale becomes final until a statutory waiting period
has passed. In North America, this statutory period varies from 3 to 10 calendar days, and allows us to collect a deposit on the sale. In Europe, the statutory period is 14 calendar days, and we are prohibited from collecting any cash deposit until
the rescission period has elapsed.



Our sales representatives
are a critical component of our sales and marketing efforts. We continually strive to attract, train, and retain a dedicated sales force. We provide intensive sales instruction and training, which assists the sales representatives in acquainting
prospects with the benefits. Most of the sales representatives in our North American operations are our employees and receive certain employment benefits, while the sales representatives in our European operations are independent contractors. In
total, the average commission paid to sales representatives, managers and directors is approximately 18% of the sales price.



Sales to existing owners of Sunterra Vacation Interests are an integral part of our business plan. By continually increasing the number of resort
destinations in the Club Sunterra network as well as adding new member benefits for which Club Sunterra members may use their Vacation Points (such as airline tickets and miles, cruises, and other expenditures typical in leisure travel), we believe
that we can continue to make additional sales of Vacation Interests to existing owner families over many years.



Consumer Financing



To facilitate sales of Vacation Interests in North America and the Caribbean, we provide consumer financing exclusively for the purchase of Vacation
Interests at Owned Resorts. During the fiscal year ended September 30, 2005, approximately 14.6% of North American Vacation Interest revenues were cash sales and required no financing by us. Of the remaining 85.4%, we financed approximately
70.3% and the remaining 29.7% was either paid for in cash or by applying existing equity from another Vacation Interest.



As of September 30, 2005, our North American segment mortgages and contracts receivable included approximately 46,100 active loans with a stated
maturity typically of 7 to 10 years. Included in these active loans are approximately 27,400 loans accounted for as originated loans with a gross amount outstanding of $236.5 million and 18,700 of these loans are accounted for as purchased loans,
with a carrying amount of approximately $98.7 million. Mortgages receivable in excess of 60 days past due as of such date were 1.9% as a percentage of gross mortgages receivable. Our allowance for loan and contract losses was 11.6% as a percentage
of gross originated mortgages and contracts receivable at September 30, 2005.



Our European subsidiary generally originates the mortgages receivable for a third-party financial institution and receives a commission based upon the principal amount of eligible consumer loans on a non-recourse
basis. At September 30, 2005, our European subsidiary had approximately $8.0 million in gross notes and contracts receivable.



We benefit by retaining the positive cash flow spread that results from the difference between our borrowing rate on mortgages and contracts receivable,
which averaged approximately 5.49% per annum at September 30, 2005, and the rate charged to our owner families, which averaged 14.0% per annum as of the same date. This financing generally is made available to consumers who make a
down payment within established credit guidelines, bears interest at fixed rates and is collateralized by the underlying Vacation Interest.



Given the percentage of purchases that are financed, the availability of financing is essential to provide liquidity to generate ongoing sales of Vacation
Interests. In recent years, we have used our senior finance facility to finance our mortgages and contracts receivable. On September 30, 2004, we completed a $151.7 million private offering and sale of vacation ownership receivable-backed notes
collateralized by $171.4 million (including $17.0 million in aggregate principal of vacation ownership receivables sold during the ninety day period commencing September 30, 2004) in aggregate principal of vacation ownership receivables in an
on-balance sheet securitization. Prior to 2001, we monetized our mortgages receivable through the use of an off-balance sheet conduit that securitized mortgages receivable and, in turn, sold them in the mortgage-backed securities market. We have
also used on-balance sheet secured financing, whole mortgages receivable sales and other financing vehicles. During the fiscal year ended September 30, 2005, we purchased the mortgages receivable included in an off-balance sheet conduit and we
exercised the clean-up call provisions contained in the remaining off-balance sheet securitizations. See Note 4 to our consolidated financial statements in Item 8. Financial Statements and Supplementary Data for additional details on the
purchase transactions.



Underwriting. Unlike the
majority of our competitors in the vacation ownership industry, our North American operations underwrite and credit score each and every mortgage originated at the point of sale. After a purchaser of a Sunterra Vacation Interest indicates a desire
for financing, additional information is requested and input into a credit decision model. A full credit report is obtained, which includes relevant personal information such as FICO score, credit profile and open accounts,. The system will then
generate a final report and the field processors use this to determine if the customer qualifies and, if so, what financing terms can be offered.



These consumers are required to make a minimum down payment of 10 percent of the purchase price on the Vacation Interest. Generally, these mortgages have
original terms ranging from 5 to 10 years, with the weighted average original term at September 30, 2005 of 9.3 years.



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The majority of the underwriting procedures and controls were implemented in February 2001. Prior to this
point, we did not subject applicants to any significant loan underwriting criteria. At September 30, 2005, approximately 18 percent of the originated loans were originated prior to implementation of these underwriting guidelines and 56 percent
of the purchased mortgage pools were underwritten prior to February 2001. In the consumer finance industry, a FICO credit score is one of the most widely used metrics for determining the relative credit quality of the borrower and of representative
loan pools. As of September 30, 2005, the weighted average FICO score on consumer loans originated after February 2001, when our credit underwriting standards were implemented, was 667.



Servicing and Loss Mitigation



Servicing. Sunterra services the mortgages that it originates and
purchases. We have partnered with one of the largest providers of remittance processing (lockbox) services and utilize leading edge technology to provide efficient and accelerated payment collections. Optical character reading coupons
and bar-coded payment envelopes reduce errors, exceptions and float time. All lockbox payments and coupons are imaged and available for viewing with internet access to long-term archives.



Automated Clearing House (ACH) payments are processed on a daily basis. ACH transmittals are sent electronically
and are fully encrypted. We have the ability to accept loan payments by credit card or check via a secured web portal and by phone.



We have 189 employees in North Las Vegas that handle the origination, contracts, collections and servicing aspects of our business. There are 24 full-time
collection agents for inbound and outbound collection of delinquent mortgages, maintenance fees, and Club Sunterra dues. We employ multi-lingual, cross-functionally trained employees, and the servicing centers are staffed 13 hours per weekday. Many
of these employees handle customer inquiries relating to maintenance fees, Club Sunterra dues, reservations and other general Club Sunterra information, via the telephone or the internet.



We utilize sophisticated computer and telecommunications equipment to manage concurrent inbound and outbound customer calls.
This includes an automatic dialer within the North Las Vegas call center that places thousands of customer calls per day, as well as sufficient outbound channels (phone lines) so that the outbound dialer has enough channels available to keep every
agent busy handling connected calls.



Collections.
Collection efforts for mortgages receivable are usually performed by mail and telephone. These efforts start when a payment is 10 days past due, whereupon a past due notice is generated and mailed. Additional notices are sent at 30 days past due and
continue at 60 days past due. Collection phone calls are made as well. After an account is 60 days past due, the borrower is sent a notice of default and notified that they are subject to loss of their Vacation Interest. At 90 days past
due, the mortgage and non-deeded points are cancelled. With regard to deeded property, our loss mitigation team will attempt to use a process called deed-in-lieu, wherein the customer remits their deed to us and the foreclosure process
is bypassed, thus saving both time and money. Ultimately, any recovered Vacation Interests will then become available to be resold to a new purchaser.



Provision for Loan and Contract Losses. At the time we recognize revenue from the sale of a Vacation Interest financed by us, we record a provision
for loan and contract losses based upon historical and projected losses among similar loans.



When loans are determined to be uncollectible, the balance is written off against the loan loss allowance. Loans are typically deemed to be uncollectible at the earliest of (i) a first payment default,
(ii) the initiation of cancellation or foreclosure proceedings or (iii) when the customers account becomes 180 days delinquent. We also review our estimates of projected loan losses on a periodic basis and evaluate the sufficiency of
the overall loan loss provision to determine if projected loss rates have fluctuated from original estimates.



See Note 4 to our consolidated financial statements in Item 8. Financial Statements and Supplementary Data for additional details on the
mortgage portfolio and related allowance for loan and contract losses.



Management Services



We provide resort
rental, management, maintenance and collection services for which we receive fees paid by the resorts homeowners associations. Under such arrangements, we typically have primary responsibility for all activities necessary for the day-to-day
operations of the managed resort properties, including administrative services, procurement of inventory and supplies and promotion and marketing. Such management agreements typically provide that we are paid a monthly management fee equal to a
percentage of monthly maintenance fees and a reservation and accounting fee at certain resorts. The management agreements are usually for a three-year period and are automatically renewed, unless either party gives prior notice of non-renewal.



With respect to each managed resort location, we typically
obtain commercial general liability insurance, all-risk property insurance under a manuscript policy, business interruption insurance and other coverages customarily obtained for similar properties. We also provide the managerial and other employees
necessary for the managed resort locations, including those necessary for review of the operation and maintenance of the resorts, preparation of reports, budgets, projections and employee training.



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We have contracts with homeowners associations at 54 Owned Resorts and contracts to manage four
non-Sunterra resorts to provide resort rental, management, maintenance and collection services. Included in the above are two resorts located in St. Maarten, Netherlands Antilles where we serve in the capacity of the homeowners association as
well.



Third party management companies manage our remaining
resort locations.



The Vacation Ownership Industry



The resort component of the leisure industry is serviced primarily by two
separate alternatives for overnight accommodationscommercial lodging establishments and vacation ownership resorts. Commercial lodging consists generally of hotels and motels in which a room is rented on a nightly, weekly or monthly basis for
the duration of the visit and, to a lesser degree, includes rentals of privately owned condominium units or homes. For many vacationers, particularly those with families, the space provided in a rented hotel or motel room relative to the cost is not
economical. Room rates and availability at such establishments are also subject to periodic change. Consequently, vacation ownership is an attractive alternative to commercial lodging for many vacationers.



We operate solely in the vacation ownership industry, which first appeared in
Europe during the late 1960s, and spread to the United States shortly thereafter. The industry expanded slowly until the mid-1980s. Since that time, vacation ownership has grown at double-digit rates in the United States. Increased
governmental regulation, higher standards of quality and service, increased flexibility and the rapid entry of a number of well-organized lodging and entertainment companies, including Marriott International, The Walt Disney Company, Four Seasons
Hotels & Resorts, Hilton Hotels Corporation, Hyatt Corporation, Starwood Hotels and Resorts Worldwide, Inc. and Fairmont Hotels has also increased the attractiveness of vacation ownership for consumers. Recent estimates project the 2005
global volume to exceed $11 billion and total owner families of approximately 8.7 million.



We currently operate in North America, Hawaii, the Caribbean and Europe, the markets containing nearly two-thirds of the global inventory of existing vacation ownership resorts. Among these regions, the United States
is the largest and most concentrated market, with the highest number of vacation ownership resorts, owners and revenues in the world.



The American Resort Development Association (ARDA) recently published State of the Vacation Ownership Industry, 2005 United States Study (the
ARDA Study), which reported sales volume in the United States of $7.9 billion for 2004, compared to $3.7 billion in 1999 and $1.9 billion in 1995, equating to a 10-year compound annual growth rate exceeding 16 percent. The study
estimated that 3.9 million households owned one or more U.S. timeshare intervals or points equivalent at January 1, 2005, representing a 13.8 percent increase over the amount reported one year earlier. Despite this rapid growth,
penetration rates among income eligible households remain low.



Existing resorts report high satisfaction and occupancy rates. In November 2005, the ARDA Industry Fact Sheet on www.arda.org stated that nearly 85 percent of U.S. timeshare owners surveyed indicate satisfaction with their purchase, and
also reported that average annual occupancy rates for the U.S. timeshare resorts were approximately 86 percent.



Vacation Points Ownership



With the exception of certain resorts in Hawaii and California, we sell Vacation Interests on a float unit/float season structure conveyed as an undivided
interest commonly referred to as Vacation Points. We consider this product to be a leader in terms of flexibility and ease of administration and use by both the member families and us. The majority of the larger vacation ownership developers are
moving towards integrating a Vacation Points plan in their programs; however, according to the ARDA Study, 54 percent of Vacation Interests currently held by the public are structured as a fixed unit, fixed interval plan, with an additional 3.6
percent currently held on a fixed unit, float interval or season arrangement.



In general, under a points-based vacation ownership system, owners, who are more commonly referred to as members, purchase points which act as an annual currency exchangeable for occupancy rights at
participating resorts. We currently operate two separate points-based vacation ownership systems: our United States Club Sunterra program, with approximately 81,000 members and 61 resort locations in North America,
Hawaii and the Caribbean and Club Sunterra Europe (formerly known as Grand Vacation Club), with approximately 48,000 members and 36 resort locations in the United Kingdom, Portugal, Spain, the Canary Islands, Germany, France, Austria,
Norway, Malta and Italy. The former Club Sunterra Vacations II (formerly known as Epic Vacation Club) was merged with Club Sunterra in the quarter ended September 30, 2004, and as such, the resort and membership statistics are included in
the Club Sunterra figures above.



Members in our multi-site
club that is now implemented throughout most of North America, do not hold deeded fee simple interests, but rather own beneficial interests in a trust, which holds legal title to the deeded fee simple interests. Club Sunterra Europe (formerly known
as the Grand Vacation Club program) members also do not hold deeded fee simple interests, but rather have membership in a limited liability company, Club Sunterra Limited, plus a right to use the accommodations that are part of Club Sunterra Europe.
Club Sunterra Vacations II was also a right-to-use club, so its members similarly did not hold deeded interests. All members, irrespective of ownership of Vacation Points or Vacation Intervals, are permitted to exchange through Club Sunterra.



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The advantages of a points-based vacation ownership system relate to the flexibility given to members
with respect to the use of their Vacation Points versus the use of a traditional Vacation Interval. Because Vacation Points function as currency under a points-based vacation ownership system, owners, subject to availability and other factors, have
flexibility in choosing the location, season, duration and unit size of their Vacation Interest, based on their annual Vacation Points allocations. In a points-based vacation ownership system, owners can redeem their points for a stay in any one of
the resorts included in the club without having to exchange through an external exchange company and without having to pay any exchange fees. Moreover, under our Club Sunterra system, members are also able to effect exchanges through an external
exchange program for vacation stays at resorts outside the Club Sunterra resort network if they desire, as the annual Club Sunterra membership fee usually includes annual membership in Interval International, Inc. (II).



Each Vacation Points owner is required to pay the trust a share of the
overall cost of maintaining the trust. These assessments, which depend on the number of points owned, consist of an annual maintenance fee plus applicable real estate taxes, funding of replacement reserves and, when needed, special assessments. If
the owner does not pay such charges, the owners use rights may be suspended and the trust may cancel the owners Vacation Points, subject to the rights of the mortgagee.



A significant component of our business plan is our One World, One Club initiative to offer a single headline
product to the consumers throughout the world. This project is intended to result in the integration of our various regional points-based vacation products into a single global membership program. This initiative is being implemented through our
multi-site clubs. Sales for the first of our multi-site clubs began in Williamsburg, Virginia on March 1, 2004 and as of September 30, 2005 all of the other North American resorts with the exception of California and Hawaii were fully
converted to the sale of this product. When completed, management believes that the full One World, One Club initiative will provide the membership with significant flexibility and enhance its attractiveness to the consumer, and will also result in
numerous operational efficiencies being gained by the business.



Vacation
Interval Ownership



In traditional Vacation Interval
ownership, owners can either use their Vacation Interval for a one-week stay in a specific unit size at a specific resort or can attempt to exchange their weeks through an external exchange organization, such as II or Resort Condominium
International, LLC (RCI) for which an exchange fee is charged by the exchange company.



The purchase of a Vacation Interval typically entitles the buyer to use a fully furnished vacation residence, generally for a one-week period each year,
or in alternative years, usually in perpetuity. Typically, the buyer acquires an ownership interest in one or more vacation residences or the entire resort, which is generally held in fee simple interest. As of September 30, 2005, we market
Vacation Interval ownership only in California and Hawaii.



Our
Club Sunterra internal exchange system has operated as an exchange program allowing our current members that have a home resort and a deeded, fee simple interest in a particular unit or units at that home resort to exchange use-rights with any other
resort within the Club Sunterra system. Club Sunterra members assign their occupancy rights to their deeded Vacation Interval to Club Sunterra and then spend their points to acquire occupancy rights to a Vacation Interval that is available through
Club Sunterra.



The owners of Vacation Intervals at each resort
usually operate the property through a non-profit homeowners association, which is governed by a board consisting typically of representatives of the developer and owners of Vacation Intervals at the resort. The board hires a management company,
delegating many of the rights and responsibilities of the homeowners association, including reservations, check-in, grounds landscaping, security, housekeeping, operating supplies, garbage collection, utilities, insurance, laundry and facility
repair and maintenance.



Each Vacation Interval owner is
required to pay the homeowners association a share of the overall cost of maintaining the property. These assessments, which generally range from $150 to $1,100 per Vacation Interval per year, consist of an annual maintenance fee plus applicable
real estate taxes, funding of replacement reserves and, when needed, special assessments. If the owner does not pay such charges, the owners use rights may be suspended and the homeowners association may foreclose on the owners Vacation
Interval, subject to the rights of the mortgagee.



Seasonality



Historically, our fiscal quarter ended September 30
has produced the strongest operating results because this period coincides with the typical summer seasonality of the vacation ownership industry and the greater number of families vacationing. Our fiscal quarter ended March 31 has historically
produced the weakest operating results primarily due to the effects of reduced leisure travel.



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Competition



All of our vacation ownership and vacation ownership related products face competition for prospects, sales leads and personnel from established, highly
visible operators, as well as a fragmented array of smaller operators and owners. In developing, marketing and selling Vacation Interests, we compete against the vacation ownership divisions of several established and respected hospitality
companies. These include Marriott (which operates Marriott Vacation Club, the Ritz-Carlton Club, Horizons by Marriott and Marriott Grand Residence Club), Cendant (which operates Fairfield Resorts and Trendwest Resorts), Hilton (Hilton Grand
Vacations), Starwood (Starwood Vacation Ownership), and Disney (Disney Vacation Club). In addition, in certain markets, we also compete with many established companies focused primarily on vacation ownership, and it is possible that other potential
competitors may develop properties near our current resorts and compete with us in the future. The majority of the remaining worldwide vacation ownership resorts are owned and operated by smaller, regional companies. We believe that the vacation
ownership industry will continue to consolidate in the future.



In providing consumer financing to individual purchasers of Sunterras Vacation Interests, we compete with numerous channels of financial institutions, including mortgage companies, credit card issuers and other providers of
direct-to-consumer financing. These services permit purchasers to utilize a home equity line of credit, mortgage, lower rate credit card or other instrument to finance their purchase. We believe that we provide a convenient and competitive financing
package to customers.



Our resort rental, management,
maintenance and collection services for which we receive fees paid by the resorts homeowners associations face competition from established real estate entities, as well as similar operations in the companies noted above.



Insurance



We generally carry commercial general liability insurance and, with respect to resort locations that we manage and for
corporate offices, a manuscript all-risk property insurance policy with fire, flood, windstorm and earthquake coverage as well as additional coverage for business interruption arising from insured perils. We believe that the insurance policy
specifications, insured limits and deductibles are similar to those carried by other resort hotel operators and we believe them to be adequate. There are certain types of losses, such as losses arising from acts of war or terrorism that are not
generally insured because they are either uninsurable or not economically insurable.



Intellectual Property



We own and control a
number of trade secrets, trademarks, trade names, copyrights and other intellectual property rights, including, but not limited to the Sunterra®, Club Sunterra®, SunOptions®, and Sunterra Escapes® registered trademarks, which in the aggregate, are of material importance to our business. We are licensed to use technology
and other intellectual property rights owned and controlled by others, and we license other companies to use technology and other intellectual property rights owned and controlled by us.



Governmental Regulation



Our marketing and sales of Vacation Interests are subject to extensive and ever-changing regulations by the federal and state governments and foreign
jurisdictions in which our resort properties are located and in which Vacation Interests are marketed and sold. At the U.S. federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission
Act, which generally prohibits unfair or deceptive acts or competition in interstate commerce. Other significant U.S. federal legislation to which we are or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Credit
Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Americans With Disabilities Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Gramm-Leach-Bliley Act, the Real Estate Settlement Procedures Act, the Deceptive Mail Prevention and Enforcement Act, the Civil Rights Acts of 1964 and 1968, the U.S. Treasury
departments Office of Foreign Asset Control Compliance Program, the U.S. Patriot Act Section 326, the Sarbanes-Oxley Act of 2002 and federal and state securities laws.



Federal legislation has been passed that amended the Telemarketing Sales Rule, regulated by the Federal Trade Commission, to
include provisions for a nationwide telemarketing do-not-call registry. Generally, telemarketers are prohibited from calling anyone on that registry. Telemarketers must pay a fee to access the registry, and are required to do so on a quarterly
basis. Enforcement of the federal do-not-call provisions began in the fall of 2003, and the rule provides for fines of up to $11,000 per violation.



In addition, many states have adopted specific laws and regulations regarding the establishment of condominium and timeshare projects and the sale of
Vacation Interest ownership programs. As an example, in most states we are required to deliver a disclosure statement, sometimes referred to as a public offering statement or public report, to all prospective purchasers of Vacation Interests,



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together with certain additional information concerning the terms of the purchase. Laws in most states generally grant
the purchaser of a Vacation Interest the right to cancel a contract of purchase at any time within a period ranging from 3 to 10 calendar days following the later of the date the contract was signed or the date the purchaser received the last of the
documents which we are required to provide to the purchaser. Most states have other laws that regulate other activities such as those relating to real estate licensure, exchange program registration, seller of travel licensure, anti-fraud laws,
telemarketing and do-not-call laws, prize, gift and sweepstakes laws and labor laws. Any failure to comply with applicable laws or regulations could have a material adverse effect on our business, results of operations or financial condition.



Certain state and local laws may also impose liability on
property developers with respect to construction defects discovered by future owners of such property. Under these laws, future owners of Vacation Intervals may recover amounts in connection with repairs made to a resort as a consequence of defects
arising out of the development of the property.



In addition,
from time to time, potential buyers of Vacation Interests assert claims with applicable regulatory agencies against Vacation Interest salespersons for unlawful sales practices. These claims could have adverse implications for us in negative public
relations, potential litigation and regulatory sanctions.



A
number of U.S. federal, state and local laws, including the Fair Housing Amendments Act of 1988 and the Americans with Disabilities Act, impose requirements related to access to and use by disabled persons of a variety of public accommodations and
facilities. A determination that our resorts are public accommodations and that we are not in compliance with these accessibility laws could result in a judicial order requiring compliance, imposition of fines or an award of damages to private
litigants. Because some accessibility laws impose ongoing obligations, we are likely to incur additional costs to improve the accessibility of our resorts based upon our percentage ownership. These costs, however, are not expected to have a material
adverse effect on our business, results of operations or financial condition. Any new legislation may impose further burdens or restrictions on property owners with respect to access by disabled persons. If a homeowners association at a resort were
required to make significant improvements as a result of non-compliance with these accessibility laws, special assessments might be needed to fund such improvements, which additional costs might cause Vacation Interests owners to default on their
mortgages or cease making required homeowners association assessment payments. In addition, the homeowners association under these circumstances may pursue the resort developer to recover the cost of any corrective measures. We are not aware of any
non-compliance with accessibility laws that management believes would have a material adverse effect on our business, results of operations or financial condition.



We sell Vacation Interests at our resort locations through employees and independent sales agents. The independent sales
agents provide services to us under a contractual agreement, and we believe that they are independent contractors, not employees. Accordingly, we do not withhold payroll taxes from the amounts paid to such independent contractors. In the event the
Internal Revenue Service or any state or local taxing authority were to successfully classify such independent sales agents as our employees, rather than as independent contractors, and hold us liable for back payroll taxes, such reclassification
could have a material adverse effect on us.



The marketing and
sales of Sunterra Europes Club Sunterra Europe points-based vacation ownership system and our other operations are subject to national and European regulation and legislation. Within the European Community (which includes all the countries in
which we conduct our operations), the European Timeshare Directive of 1994 (the Directive) regulates vacation ownership activities. The terms of the Directive require us to issue a disclosure statement providing specific information
about our resorts, require a 10-day rescission period and prohibit the acceptance of payments prior to the expiration of that rescission period. Member states are permitted to introduce legislation that is more protective of the consumer when
implementing the Directive. Most of our purchasers are residents of the United Kingdom, where the Directive has been implemented by way of an amendment to the Timeshare Act 1992. In the United Kingdom, a 14-day rescission period is mandatory. There
are other United Kingdom laws which are applicable to us, including the Consumer Credit Act 1974, the Unfair Terms in Consumer Contracts Regulations 1994 and the Package Travel, Package Holidays and Package Tours Regulations 1992 and various
amending legislation. The Timeshare Act 1992 may have an extra-territorial effect in that United Kingdom resident purchasers buying timeshare interests where the accommodation is situated in other European Economic Area States may rely upon it. All
the countries in which we operate have consumer and other laws that regulate our activities in those countries.



Environmental Matters



Under various federal, state, local and foreign environmental, health, safety and land use laws, ordinances, regulations and similar requirements, a
current or previous owner or operator of real property may be required to investigate and clean up hazardous substances, wastes or releases of petroleum products at such property and may be held liable to a governmental entity or to third parties
for associated damages and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws may impose clean-up responsibility and liability without regard to whether the owner knew of or caused the
presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation or
removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may



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adversely affect the owners ability to sell or rent such property or to borrow using such property as collateral.
Any failure to comply with applicable environmental laws or regulations could have a material adverse effect on our business, results of operations or financial condition.



In connection with the acquisition and development of Embassy Vacation Resort Lake Tahoe and Sunterra Resorts San Luis Bay
Inn, several areas of environmental concern were identified. The areas of concern at Lake Tahoe related to possible soil and groundwater contamination that has migrated onto the resort site from an underground petroleum storage tank on an adjacent
upgradient property. We have been indemnified by the former owner of the upgradient property for certain costs and expenses in connection with the off-site contamination. California regulatory authorities are monitoring the off-site contamination
and the parties have taken action to comply with the remedial action plan put in place by the Lahontan Regional Water Quality Control Board. Residual contamination exists on the resort site as a result of leaking underground storage tanks that were
removed prior to our acquisition of the resort site. An in-situ groundwater remediation system was installed to enhance remediation effectiveness. This groundwater remediation system consists of three pumping wells and a carbon filtration system.
The groundwater is pumped from the aquifer under the property, treated by the carbon filtration system, and pumped back into the aquifer. We do not believe that we will be held liable for this contamination and do not anticipate incurring material
costs in connection with this site. There can be no assurance, however, that the party responsible for the clean up of this contamination will meet its obligations in a complete and timely manner.



San Luis Bay Inn is located in Avila Beach, California. This area has
experienced soil and groundwater contamination resulting from nearby oil storage facilities. California regulatory authorities have required the installation of groundwater monitoring wells on the beach near the resort site, among other locations.
Remediation has been completed at this site. We do not believe that we are liable for this contamination and do not anticipate incurring material costs in connection with this site. There can be no assurance, however, that claims will not be
asserted against us with respect to this matter.



Employees



As of September 30, 2005, we had approximately 5,100 full and
part-time employees. None of our employees are represented by a labor union except for 59 employees in Europe, 124 employees in St. Maarten and 254 employees in Hawaii. We are not aware of any union organizational efforts with respect to our
employees at any other locations.



Risk Factors



We are subject to various risks and uncertainties relating to or arising out
of the nature of our business and general business, economic, financing, legal and other factors or conditions that may affect us. These risks and uncertainties include but are not limited to those referred to under Managements
Discussion and Analysis of Financial Condition and Results of Operations and the following:



We are subject to intense industry competition



The vacation ownership industry is highly competitive. Among the many issues affecting all companies in this industry include competition from a broad range of lodging, hospitality and entertainment companies, changes
in consumer behavior and the cost, ease and attractiveness of domestic and international travel as well as seasonality.



We compete with both branded and non-branded hospitality and lodging companies, as well as other established vacation ownership companies. Although major
lodging and hospitality companies such as Marriott, Disney, Hilton and Starwood have established vacation ownership operations in the past decade, the industry remains largely unbranded and highly fragmented. We believe that the majority of the
vacation ownership resorts are owned and operated by smaller, regional companies.



Unfavorable general economic and industry conditions may affect our business and could decrease the demand for vacation ownership units, impair our ability to collect our mortgages and contracts receivable and increase our costs



Our business has been adversely affected in recent
years by unfavorable general economic and industry conditions, including the effects of weak domestic and world economies, rising unemployment and job insecurity, increased terrorist threats and security in the United States, instability in the
airline industry and geopolitical conflict in the Middle East, North Korea and other areas. Any additional downturn in economic conditions or any price increases related to the travel and tourism industry, such as higher airfares or increased
gasoline prices, could depress discretionary consumer spending and have a material adverse effect on our business. Any such economic conditions, including recession, may also adversely affect the future availability of attractive financing rates for
us or for our customers and may materially adversely affect our business. Furthermore, changes in general economic conditions may adversely affect our ability to collect our loans to Vacation Interest buyers. Because our operations are conducted
solely within the vacation ownership industry, any adverse changes affecting the industry, such as an oversupply of vacation ownership units, a reduction in demand for such units, changes in travel and vacation patterns, changes in governmental
regulation of the industry, increases in construction costs or taxes and negative publicity for the industry, could have a material adverse effect on our business.



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We will continue to be subject to extensive government regulation, which may result in additional costs



Our marketing and sales of Vacation Interests are
subject to extensive and ever-changing regulations by the federal and state governments and foreign jurisdictions in which our resort properties are located and in which Vacation Interests are marketed and sold. On the United States federal level,
the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which generally prohibits unfair or deceptive acts or competition in interstate commerce. Other significant federal legislation to which
we are or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer
Fraud and Abuse Prevention Act, the Fair Housing Act, the Americans With Disabilities Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Gramm-Leach-Bliley Act, the Real Estate Settlement Procedures Act, the Deceptive
Mail Prevention and Enforcement Act, the Civil Rights Acts of 1964 and 1968, the U.S. Treasury departments Office of Foreign Asset Control Compliance Program, the U.S. Patriot Act Section 326, the Sarbanes-Oxley Act of 2002 and federal
and state securities laws.



Federal legislation has been passed
that amended the Telemarketing Sales Rule, regulated by the Federal Trade Commission, to include provisions for a nationwide telemarketing do-not-call registry. Generally, we are prohibited from calling anyone on that registry. We are required to
pay a fee to access the registry on a quarterly basis as required by the rules. Enforcement of the federal do-not-call provisions began in the fall of 2003, and the rule provides for fines of up to $11,000 per violation. This legislation may
restrict our ability to market effectively our services to new customers. Furthermore, compliance with the new legislation may prove difficult and we may incur penalties under this legislation for conducting our marketing activities.



In addition, many states have adopted specific laws and regulations regarding
the establishment of condominium and timeshare projects and the sale of vacation interest ownership programs. As an example, in most states we are required to deliver a disclosure statement, sometimes referred to as a public offering statement or
public report, to all prospective purchasers of Vacation Interests, together with certain additional information concerning the terms of the purchase. Laws in most states generally grant the purchaser of a vacation interest the right to cancel a
contract of purchase at any time within a period ranging from 3 to 10 calendar days following the later of the date the contract was signed or the date the purchaser received the last of the documents which we are required to provide to the
purchaser. Most states have other laws that regulate other activities such as those relating to real estate licensure, exchange program registration, seller of travel licensure, anti-fraud laws, telemarketing and do-not-call laws, prize, gift and
sweepstakes laws and labor laws. Any failure to comply with applicable laws or regulations could have a material adverse effect on our business, results of operations or financial condition.



Our ability to succeed will be dependent upon our ability to continue to successfully
implement our business plan, as to which no assurance can be given



Our ability to execute our business plan must be considered in light of the inherent risks, expenses and difficulties typically encountered by companies, particularly companies with new and evolving business models.
Such unique difficulties include obtaining widespread consumer acceptance for our system wide points-based vacation system, and the potential development of comparable vacation ownership products by competitors.



We may not successfully integrate our acquisitions



Our growth strategy may continue to include acquisitions. Our ability to
successfully integrate acquisitions will depend on a number of factors, including our ability to market and sell Vacation Interests at the acquired resorts, our ability to manage acquired resorts in a manner that results in customer satisfaction and
our ability to integrate vacation club operations with Club Sunterra, as well as the need to achieve other back office efficiencies. There is no assurance that we will be successful with respect to any of these factors. During the start-up phase of
sales at a newly acquired resort we could experience lower operating margins at that resort until its sales operation matures. The lower margins could negatively impact our cash flow. We cannot provide assurance that we will maintain or improve our
operating margins at newly acquired resorts or that they will not reduce our overall operating margins.



The potential liability for any failure to comply with environmental laws or for any currently unknown environmental problems could be significant



Under various environmental laws and regulations, the owner or operator of
real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances or wastes located on or in, or emanating from, such property, as well as related costs of investigation and associated damages. We are not
aware of any environmental liability that could have a material adverse effect on our business, assets or results of operations, nor have we been notified by any governmental authority or any third party, and we are not otherwise aware, of any
material noncompliance or other claim relating to hazardous or toxic substances or petroleum products in connection with any of our present or former properties. No assurance, however, can be given that we will remain in compliance with all
environmental laws and regulations, or that the requirements of such laws and regulations will not change.



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Losses from hurricanes and earthquakes in excess of insured limits, as well as uninsured losses, could be
significant



Some of our resorts are located in areas
that are subject to hurricanes and tropical storms. We have suffered damages from hurricanes and tropical storms in the past and we may suffer damage from them in the future. Additionally, resorts may be subject to damage resulting from earthquakes
and other natural disasters. We carry commercial liability insurance and all-risk property insurance with coverage for fires, floods, windstorms and earthquakes with additional coverage for business interruption arising from insured perils for
resort locations that we manage and our corporate offices. However, there are certain types of losses, such as losses arising from acts of war, civil unrest and terrorism that are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in a resort, as well as the anticipated future revenues from the resort, and would continue to be obligated on any
mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on our business, properties or operations.



Changes in interest rates may increase our borrowing costs and otherwise adversely affect our business



The interest rates applicable to borrowings under our senior finance
facility are subject to change based on fluctuations in short-term interest rates. If these rates increase, our interest expense would increase and our results of operations would be adversely affected. Our business and our strategies for future
growth are dependent on our ability to obtain additional debt financing to fund our operations and to access the securitization markets to expand our portfolio of mortgages and contracts receivable. Increases in interest rates, changes in the
financial markets and other factors could increase our borrowing costs, prevent us from accessing the securitization markets and otherwise reduce our ability to obtain the funds required for our future operations. Our business and results of
operations are also dependent on the ability of our customers to finance their purchase of Vacation Interests. Limitations on the availability of financing to our customers or increases in the cost of such financing could reduce our sales of
Vacation Interests and adversely affect our operations.



Fluctuations in
foreign currency exchange rates may affect our reported results of operations



We receive a portion of our revenues from our European resorts, the operations of which are primarily conducted in euros and British pounds. Because our financial results are reported in U.S. dollars, fluctuations in
the value of the euro and British pound against the U.S. dollar have had and will continue to have a significant effect on our reported financial results. A decline in the value of the euro or British pound against the U.S. dollar will tend to
reduce our reported revenues and expenses, while an increase in the value of the euro or British pound will tend to increase our reported revenues and expenses. Variations in exchange rates can significantly affect the comparability of our financial
results between financial periods.



An increase in the delinquency rate
of our portfolio of mortgages and contracts receivable could adversely affect our financial condition and results of operations



We provide financing to consumers for the purchase of Vacation Interests in North America and the Caribbean. We benefit by retaining a positive cash flow
spread that results from the difference between our borrowing rate and the rate charged to our owner families. As of September 30, 2005, our mortgages and contracts receivable portfolio included approximately 46,100 active loans and contracts
totaling approximately $343.2 million in outstanding originated principal and purchased pool carrying amounts. In Europe, we generally originate mortgages receivable for a third party financial institution and receive a commission based on the
principal amount of eligible consumer loans we originate.



A
significant increase in the delinquency rate applicable to our portfolio of mortgages and contracts receivable could adversely affect our financial condition and results of operations. An increased level of delinquencies could result from changes in
economic or market conditions, increases in interest rates, adverse employment conditions and other factors beyond our control. Increased delinquencies could also result from our inability to evaluate accurately the credit-worthiness of the
customers to whom we extend financing.



We derive a portion of our
revenues through contracts to manage Affiliated Resorts and the trusts holding vacation property real estate out of which we will convey Vacation Points to our customers and the expiration or termination of these management contracts could adversely
affect our results of operations



We are a party to
management contracts under which we receive fees for providing management services to certain Affiliated Resorts. During the fiscal year ended September 30, 2005, we earned management fees of $30.4 million, representing approximately 7.2% of
our total consolidated revenues for this period. Our management contracts generally have three-year terms, except in Europe where the contracts generally run for the life of the association, and provide for early termination rights in certain
circumstances. If we fail to renew a significant number of our management contracts or the contracts are otherwise terminated, we will no longer be entitled to receive management fees under these contracts and our results of operations could be
adversely affected.



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We may be unable to attract, retain and motivate necessary management and other skilled personnel, which could have
a material adverse impact on our operations



We will
face intense competition for and may not be able to attract, motivate and retain personnel with the skills and experience needed to successfully manage our business and operations and successfully implement our business plan. Our inability to
attract, hire or retain the necessary executive, sales, finance, technical, marketing, information systems and other personnel, or the loss of the services of any member of our senior management team, could have a material adverse effect on our
business, financial condition or results of operations.



We are subject
to various restrictions under our senior finance facility which limit our ability to incur debt



Our senior finance facility contains various restrictions and limitations that may affect our business and affairs. These include restrictions and
limitations relating to our ability to incur indebtedness and other obligations, to make investments and acquisitions and to pay dividends. Our senior finance facility also requires that we maintain certain financial ratios and comply with other
financial covenants. Our failure to comply with any of these provisions, or to pay our obligations under our senior finance facility or other loan agreements, could result in foreclosure by the lenders of their security interests in certain of our
assets and could otherwise have a material adverse effect.



Our continued
liquidity depends on our ability to borrow against our notes receivable and inventory



In North America, we offer financing of up to 90% of the purchase price to purchasers of Vacation Interests. During the fiscal year ended September 30, 2005, approximately 14.6% of North American Vacation
Interest revenue required no financing. Of the remaining 85.4%, we financed approximately 70.3% and the remaining 29.7% down payment was either paid for in cash or by applying existing equity from another Vacation Interest. However, we incur
selling, marketing and administrative cash expenditures prior to and concurrent with the sale. Accordingly, our ability to borrow against the notes receivable we receive from our customers is a critical factor in our continued liquidity. As of
September 30, 2005, our borrowings secured by mortgages and contracts receivable under our senior finance facility were $164.7 million and the borrowings secured by Vacation Interests were $32.7 million. If this facility was to terminate or
expire and we were unable to replace it with a comparable facility, our liquidity and cash flow would be materially and adversely affected.



We may not be able to continue to access the securitization markets or otherwise raise additional capital in the future and our inability to do so could have an
adverse effect on our business



In the past, we
securitized a substantial portion of the mortgages and contracts receivable we generated by financing the purchase of Vacation Interests by our customers. On September 30, 2004 we completed a $151.7 million private offering and sale of vacation
ownership receivable-backed notes collateralized by $171.4 million (including $17.0 million in aggregate principal of vacation ownership receivables sold during the ninety day period commencing September 30, 2004) in aggregate principal of
vacation ownership receivables in an on-balance sheet securitization. However, there can be no assurance regarding our ability to continue to do so in the future. If we are unable to access the securitization markets in the future, we may be
required to obtain additional debt or equity financing to finance our operations. We cannot ensure that this additional financing will be available or, if it is available, that it can be obtained on terms and conditions we will deem acceptable. Any
additional financing derived from the sale of equity securities, including convertible debt securities, may result in significant dilution to our stockholders.



An active and liquid trading market for our common stock may not continue and our common stock price may experience volatility



Our common stock began trading on the Nasdaq National Market on
January 5, 2004, but we cannot assure that an active trading market for our common stock will continue in the future. If an active and liquid trading market does not continue, our stock price may be adversely affected and investors may have
difficulty in trading their shares. In addition, the market price of our common stock may be subject to significant fluctuations in response to numerous factors, including variations in our annual or quarterly financial results or those of our
competitors, changes by financial analysts in their estimates, if any, of our future earnings, unfavorable publicity or conditions in the economy in general or in the travel, vacation ownership and leisure industries in particular. The stock market
also has, from time to time, experienced significant price and volume fluctuations that have been unrelated to the operating performance of companies with publicly traded securities. In the past, securities class action litigation has often been
instituted following periods of volatility in the market price of a companys securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our managements attention
and resources.



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Future issuances of our shares could adversely affect our stock price



Future issuances of a substantial number of shares of our common stock in
the public market could cause the market price of our common stock to decline. The issuance of shares of our common stock as a result of the conversion of the Senior Subordinated Convertible Notes issued on March 29, 2004 as well as the stock
options and warrants outstanding may significantly increase the total number of shares outstanding. Resale of these shares, or the perception that resale could occur, could cause the market price of our common stock to decrease significantly.



We do not anticipate paying any dividends in the foreseeable future



We do not anticipate paying any dividends on our
common stock in the foreseeable future. In addition, covenants in certain debt instruments to which we are a party restrict our ability to pay dividends and make certain other payments. In particular, our senior finance facility prohibits the
payment of dividends and limits our ability to make other distributions to stockholders. Certain institutional investors may only invest in dividend-paying equity securities or may operate under other restrictions that may prohibit or limit their
ability to invest in our common stock.



We are subject to anti-takeover
provisions under Maryland law and our charter and bylaws that could delay or prevent a change in control and adversely affect the price of our common stock



Certain provisions of the Maryland General Corporation Law and of our charter and bylaws may have the effect of delaying or
preventing a change in control of Sunterra. These provisions may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to
launch other takeover attempts that stockholders might consider to be in their best interests. These provisions could limit the price that certain investors are willing to pay in the future for shares of our common stock.



Provisions in our charter and bylaws that may have the effect of delaying or
preventing a change in control include:



| |  |  | limits on the ability of stockholders to call special meetings of stockholders;
| | - |  | -------------------------------------------------------------------------------



| |  |  | advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the right of our board of directors, without stockholder approval, to reclassify any unissued shares of our common stock as shares of preferred stock and to fix the preferences,
conversion or other rights, voting powers, restrictions, qualifications, dividends and terms or conditions of redemption of those shares.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are subject to the Subtitle 6 of the Maryland General Corporation Law, which prohibits business combinations for a period of five years
with persons owning 10% or more of the voting shares of a corporations outstanding stock, unless the combination is approved by the board of directors prior to the person acquiring 10% or more of the stock or is approved by an extraordinary
stockholder vote. We are also subject to Subtitle 7 of the Maryland General Corporation Law, which limits the voting rights of control shares acquired in a controlled share acquisition except to the extent approved by
extraordinary stockholder vote.



Subtitle 8 of Maryland General
Corporation Law provides that a Maryland corporation that is subject to the Securities Exchange Act of 1934 and that has at least three outside directors (who are not affiliated with any potential acquirer of the company) under certain circumstances
may elect by resolution of its board of directors or by amendment of its charter or bylaws to be subject to statutory corporate governance provisions that may be inconsistent with the corporations charter and bylaws. Under these provisions, a
board of directors may divide itself into three separate classes without the vote of stockholders so that only one-third of the directors are elected each year. Directors serving on a board of directors classified in this manner may not be removed
from office without cause and the classified board arrangement may not be altered by amendment to the charter of the corporation.



Further, the board of directors may, by electing to be covered by the applicable statutory provisions and notwithstanding the corporations charter
or bylaws:



| |  |  | provide that special meetings of stockholders may be called only at the request of stockholders entitled to cast a majority of the votes entitled to be cast at a meeting of
stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reserve for itself the right to fix the number of directors constituting the board of directors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | provide that a director may be removed only by the vote of at least two-thirds of the votes entitled to be cast generally in the election of directors; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



15



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| |  |  | retain for itself sole authority to fill vacancies created by an increase in the size of the board or the death, removal or resignation of a director.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, a director elected to fill a vacancy under these provisions
serves for the balance of the unexpired term rather than until the next annual meeting of stockholders.



A board of directors may implement all or any of these provisions without amending the charter or bylaws and without stockholder approval. The Maryland
General Corporation Law further provides that an act of a director relating to or affecting an acquisition or potential acquisition of control of a corporation, including a decision by a director to implement the provisions of Subtitle 8, is not
subject to a higher duty or greater scrutiny than is applied to any other act of a director. Although a corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute,
Sunterra has not adopted such a prohibition. If our board of directors chooses in the future to implement these provisions, it could discourage offers to acquire our common stock and could delay or prevent a change in control of Sunterra.



Available Information



We file reports with the Securities and Exchange Commission
(SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of
1934. The general public may read and copy any materials that we file with the SEC at the SECs Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This site is located at
www.sec.gov.



Our Internet address is
www.sunterra.com. On our Internet website, we provide a link to the SECs website where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to
the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 can be viewed. Upon request, we will make available free of charge copies of the aforementioned reports, as well as copies of the charters of the three independent
committees of our board of directors and our Code of Business Conduct and Ethics. This information can be requested through our website or by written request to us at: Sunterra Corporation, Investor Relations Department, 3865 West Cheyenne Avenue,
North Las Vegas, Nevada 89032. The information contained on our website, or on other websites linked to our website, is not part of this report.



ITEM 2. PROPERTIES



Our
principal executive office is located in approximately 67,000 square feet of leased space in North Las Vegas, Nevada. This location also holds our consumer finance and property management operations as well as the majority of our North American
administrative, marketing, legal, construction management, accounting, finance and support operations. Similar functions for Sunterra Europe, our European subsidiary, are housed in approximately 40,000 square feet of leased space in Lancaster,
England. We also lease a number of smaller offices in Arizona, California, Florida, Virginia and Hawaii and have short-term lease agreements for multiple off-premises contact booths and sales centers at various locations.



16



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##### Table of Contents

As of September 30, 2005, the Company had a total of 59 Owned Resorts; 25 of which are located
in the North American segment and 34 of which are located in the European segment:



|                                |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|------------------------------- |  | -------------------------------------------- |  | ------------------------------------- |  | ---------------------------- |  | ------------------ |  | ------------ |  | --------------------------------- |  | -----
|Resort                          |  | A salescenteris locatedon or nearthis resort |  | Sunterramanagesthe HOA forthis resort |  | Location                     |  | YearResortAcquired |  | CurrentUnits |  | Units at ResortPotentialExpansion |  | Total
|North American Segment:         |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|Cypress Pointe Resort           |  | *                                            |  |                                       |  | Orlando, Florida             |  | 1992               |  | 372          |  | 388                               |  | 760  
|Plantation at Fall Creek        |  | *                                            |  | #                                     |  | Branson, Missouri            |  | 1993               |  | 194          |  | 250                               |  | 444  
|EVR Poipu Point                 |  | *                                            |  | #                                     |  | Kauai, Hawaii                |  | 1994               |  | 219          |  |                                  |  | 219  
|Royal Dunes at Port Royal       |  |                                              |  |                                       |  | Hilton Head, South Carolina  |  | 1994               |  | 55           |  |                                  |  | 55   
|Flamingo Beach Resort           |  | *                                            |  | #                                     |  | St. Maarten, N.A.            |  | 1995               |  | 206          |  | 48                                |  | 254  
|EVR Grand Beach Resort          |  | *                                            |  | #                                     |  | Orlando, Florida             |  | 1995               |  | 190          |  | 184                               |  | 374  
|Royal Palm Beach Resort         |  |                                              |  | #                                     |  | St. Maarten, N.A.            |  | 1995               |  | 140          |  |                                  |  | 140  
|EVR Lake Tahoe                  |  | *                                            |  |                                       |  | Lake Tahoe, California       |  | 1996               |  | 142          |  | 68                                |  | 210  
|San Luis Bay Inn                |  | *                                            |  |                                       |  | Avila Beach, California      |  | 1996               |  | 130          |  |                                  |  | 130  
|Scottsdale Villa Mirage         |  | *                                            |  | #                                     |  | Scottsdale, Arizona          |  | 1997               |  | 224          |  | 96                                |  | 320  
|Ridge on Sedona Golf            |  | *                                            |  | #                                     |  | Sedona, Arizona              |  | 1997               |  | 204          |  |                                  |  | 204  
|Sedona Springs                  |  |                                              |  |                                       |  | Sedona, Arizona              |  | 1997               |  | 40           |  |                                  |  | 40   
|Sedona Summit                   |  | *                                            |  | #                                     |  | Sedona, Arizona              |  | 1997               |  | 99           |  | 116                               |  | 215  
|Villas at Poco Diablo           |  |                                              |  |                                       |  | Sedona, Arizona              |  | 1997               |  | 33           |  |                                  |  | 33   
|Villas of Sedona                |  |                                              |  |                                       |  | Sedona, Arizona              |  | 1997               |  | 40           |  |                                  |  | 40   
|Greensprings Plantation         |  | *                                            |  | #                                     |  | Williamsburg, Virginia       |  | 1997               |  | 430          |  | 70                                |  | 500  
|Powhatan Plantation             |  |                                              |  | #                                     |  | Williamsburg, Virginia       |  | 1997               |  | 428          |  | 72                                |  | 500  
|EVR Kaanapali Beach            |  | *                                            |  | #                                     |  | Maui, Hawaii                 |  | 1997               |  | 413          |  | 60                                |  | 473  
|Bent Creek Golf Village         |  | *                                            |  | #                                     |  | Gatlinburg, Tennessee        |  | 1997               |  | 84           |  | 370                               |  | 454  
|Polynesian Isles                |  |                                              |  | #                                     |  | Orlando, Florida             |  | 1998               |  | 126          |  |                                  |  | 126  
|Ridge Pointe Resort             |  |                                              |  |                                       |  | Stateline, Nevada            |  | 1998               |  | 26           |  |                                  |  | 26   
|Villas de Santa Fe              |  |                                              |  | #                                     |  | Santa Fe, New Mexico         |  | 1998               |  | 105          |  |                                  |  | 105  
|Daytona Beach Regency           |  | *                                            |  | #                                     |  | Daytona, Florida             |  | 2003               |  | 81           |  | 6                                 |  | 87   
|Desert Paradise Resort          |  | *                                            |  | #                                     |  | Las Vegas, Nevada            |  | 2003               |  | 152          |  |                                  |  | 152  
|Scottsdale Links Resort         |  | *                                            |  | #                                     |  | Scottsdale, Arizona          |  | 2003               |  | 228          |  |                                  |  | 228  
|                                |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|                                |  |                                              |  |                                       |  |                              |  |                    |  | 4,361        |  | 1,728                             |  | 6,089
|European Segment:               |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|Alpine Club                     |  | *                                            |  | #                                     |  | Schladming, Austria          |  | 1997               |  | 69           |  |                                  |  | 69   
|Club del Carmen                 |  | *                                            |  | #                                     |  | Lanzarote, Canary Islands    |  | 1997               |  | 65           |  |                                  |  | 65   
|Kenmore Club                    |  | *                                            |  | #                                     |  | Perthshire, Scotland         |  | 1997               |  | 58           |  |                                  |  | 58   
|Los Amigos Beach Club           |  | *                                            |  | #                                     |  | Costa del Sol, Spain         |  | 1997               |  | 140          |  | 44                                |  | 184  
|Pine Lake Resort                |  | *                                            |  | #                                     |  | Lancashire, England          |  | 1997               |  | 125          |  |                                  |  | 125  
|Royal Oasis Club at Benal Beach |  |                                              |  | #                                     |  | Costa del Sol, Spain         |  | 1997               |  | 103          |  |                                  |  | 103  
|Royal Oasis Club at La Quinta   |  |                                              |  | #                                     |  | Costa del Sol, Spain         |  | 1997               |  | 56           |  |                                  |  | 56   
|Royal Sunset Beach Club         |  | *                                            |  | #                                     |  | Tenerife, Canary Islands     |  | 1997               |  | 126          |  |                                  |  | 126  
|Royal Tenerife Country Club     |  |                                              |  | #                                     |  | Tenerife, Canary Islands     |  | 1997               |  | 77           |  |                                  |  | 77   
|Sahara Sunset Club              |  | *                                            |  | #                                     |  | Costa del Sol, Spain         |  | 1997               |  | 150          |  |                                  |  | 150  
|Sunset Bay Club                 |  |                                              |  | #                                     |  | Tenerife, Canary Islands     |  | 1997               |  | 206          |  |                                  |  | 206  
|Sunset Harbor Club              |  |                                              |  | #                                     |  | Tenerife, Canary Islands     |  | 1997               |  | 124          |  |                                  |  | 124  
|White Sands Beach Club          |  | *                                            |  | #                                     |  | Menorca, Balearic Islands    |  | 1997               |  | 77           |  |                                  |  | 77   
|White Sands Country Club        |  |                                              |  | #                                     |  | Menorca, Balearic Islands    |  | 1997               |  | 50           |  |                                  |  | 50   
|Woodford Bridge Country Club    |  | *                                            |  | #                                     |  | North Devon, England         |  | 1997               |  | 103          |  |                                  |  | 103  
|Wynchnor Park Country Club      |  | *                                            |  | #                                     |  | Stratfordshire, England      |  | 1997               |  | 44           |  |                                  |  | 44   
|Carlton Court                   |  |                                              |  | #                                     |  | London, England              |  | 1998               |  | 20           |  |                                  |  | 20   
|Le Club Mougins                 |  | *                                            |  | #                                     |  | Mougins, France              |  | 1998               |  | 56           |  |                                  |  | 56   
|Le Manoir des Deux Amants       |  | *                                            |  | #                                     |  | Connelles, France            |  | 1999               |  | 35           |  |                                  |  | 35   
|La Residence Normande           |  |                                              |  | #                                     |  | Connelles, France            |  | 1997               |  | 14           |  |                                  |  | 14   
|Santa Barbara Golf & Ocean Club |  | *                                            |  | #                                     |  | Tenerife, Canary Islands     |  | 1998               |  | 279          |  |                                  |  | 279  
|Sunset View Club                |  |                                              |  | #                                     |  | Tenerife, Canary Islands     |  | 1998               |  | 52           |  |                                  |  | 52   
|Vilar do Golf                   |  | *                                            |  | #                                     |  | Algarve, Portugal            |  | 1998               |  | 61           |  |                                  |  | 61   
|Alpen Club Schliersee           |  | *                                            |  | #                                     |  | Schliersee, Germany          |  | 1999               |  | 52           |  |                                  |  | 52   
|Broome Park                     |  | *                                            |  | #                                     |  | Kent, England                |  | 1999               |  | 14           |  | 44                                |  | 58   
|Palazzo Catalani                |  | *                                            |  | #                                     |  | Rome, Italy                  |  | 1999               |  | 20           |  |                                  |  | 20   
|Cala Blanca                     |  | *                                            |  | #                                     |  | Gran Canaria, Canary Islands |  | 2002               |  | 93           |  |                                  |  | 93   
|Cala Del Mar                    |  | *                                            |  | #                                     |  | Majorca, Balearic Islands    |  | 2002               |  | 44           |  |                                  |  | 44   
|Garden Lago                     |  | *                                            |  | #                                     |  | Majorca, Balearic Islands    |  | 2002               |  | 81           |  |                                  |  | 81   
|Royal Regency                   |  | *                                            |  | #                                     |  | Paris-Vincennes, France      |  | 2002               |  | 48           |  |                                  |  | 48   
|Cromer Country Club             |  | *                                            |  | #                                     |  | Norfolk, England             |  | 2004               |  | 85           |  |                                  |  | 85   
|Jardines del Sol                |  | *                                            |  | #                                     |  | Lanzarote, Canary Islands    |  | 2004               |  | 46           |  |                                  |  | 46   
|Thurnham Hall                   |  | *                                            |  | #                                     |  | Lancaster, England           |  | 2004               |  | 50           |  |                                  |  | 50   
|Eden Bay Resort                 |  | *                                            |  | #                                     |  | St. Julians, Malta           |  | 2005               |  | 46           |  |                                  |  | 46   
|                                |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|                                |  |                                              |  |                                       |  |                              |  |                    |  | 2,669        |  | 88                                |  | 2,757
|                                |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      
|Total                           |  |                                              |  |                                       |  |                              |  |                    |  | 7,030        |  | 1,816                             |  | 8,846
|                                |  |                                              |  |                                       |  |                              |  |                    |  |              |  |                                   |  |      



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All of the units in our resorts are fully furnished and generally include telephones, televisions, VCRs
and stereos, and all but the studio units feature full kitchens. Most of the units contain a washer, dryer and microwave, and many units also include a private deck.



There is a first priority lien on unsold Vacation Interests at Owned Resorts securing our senior finance facility.



ITEM 3. LEGAL PROCEEDINGS



In
the normal course of business, we are subject to various legal claims and actions. In the opinion of management, taking into account the effect of the Plan of Reorganization and any reserves established for the Companys contingent liabilities,
any liability arising from or relating to these claims, or other claims under the Plan of Reorganization, should not materially and adversely affect us. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsReorganization and Fresh-start Reporting for a further description of the nature and results of our reorganization, and Note 15 to the accompanying consolidated financial statements for a general description of our commitments
and contingencies.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



During the quarter ended September 30, 2005, no matters were submitted to a vote of our security holders.



EXECUTIVE OFFICERS OF THE REGISTRANT



Nicholas J. Benson (age 44) has served as President and Chief Executive Officer of Sunterra Corporation since November 2001. Mr. Benson was the Chief Executive Officer of Sunterra Europe from January 2000 until assuming his
current position. He served as the Chief Operating Officer of Sunterra Europe from June 1997 until January 2000. Prior to joining Sunterra Corporation, Mr. Benson was a solicitor with the London law firm Rowe & Maw, where he
specialized in aviation and leisure industry law. Prior to joining Rowe & Maw, Mr. Benson served as a British Army officer for ten years.



Steven E. West (age 44) has served as Executive Vice President and Chief Financial Officer of Sunterra Corporation since June 2005. Mr. West was the
Senior Vice President and Chief Financial Officer of Sunterra Corporation from September 2002 until assuming his current position. Prior to joining Sunterra Corporation, Mr. West was the Vice President of Finance for Coast Asset Management from
2000 to August 2002, where he was responsible for obtaining financing for a variety of business units as well as managing accounting and administrative operations and investor reporting for the companys structured finance business and its
municipal tax lien investment funds. From 1993 to 2000, Mr. West was the First Vice President of Corporate Finance for IndyMac Bank, Federal Savings Bank.



David Lucas (age 46) has served as Executive Vice President and Chief Marketing Officer of Sunterra Corporation since June 2005. Prior to joining
Sunterra Corporation, Mr. Lucas was the President and CEO of Cruise411.com, a software developer and online cruise sales site operator, from March 2000 to June 2005. Before joining Cruise411.com, Mr. Lucas was employed by Polaroid
Corporation for nine years, most recently as the Vice President of North American MarketingConsumer Products division. Mr. Lucas began his career marketing consumer goods for Richardson-Vicks, Inc.



Andrew Gennuso (age 51) has served as Senior Vice President of Sunterra
Corporation and President of Resort Marketing International, Inc. (a subsidiary of Sunterra Corporation) and Chief Executive Officer, Sunterra-USA division, since October 2002. From May 2001 until October 2002, Mr. Gennuso served as our Senior
Vice President and Chief Operating Officer. Previously, Mr. Gennuso served as Sunterra Corporations Regional Vice President of sales and marketing for the Western/Pacific Region. Prior to joining Sunterra Corporation, Mr. Gennuso
served as Vice President of sales and marketing for Hilton Grand Vacation Club in Las Vegas, Nevada from 1995 to 1997.



David R. Harris (age 43) has served as Managing Director of Sunterra Europe Group Holdings plc, our European subsidiary since February 2004. Prior to
joining Sunterra Corporation, Mr. Harris was employed by MyTravel plc, a London Stock Exchange listed tour operator, where he had a number of positions, including managing director of their retail division and managing director of distribution
from December 2000 to December 2003. Prior to December 2000, Mr. Harris was managing director of United Cinemas International (UK & Ireland) Ltd.



Frederick C. Bauman (age 53) has served as Vice President, General Counsel and Secretary of Sunterra Corporation since February 2003. Prior to joining
Sunterra Corporation, Mr. Bauman was a partner specializing in securities and capital market transactions with Brown & Bain (now Perkins, Coie, Brown & Bain), a Phoenix-based law firm. Prior to joining Brown & Bain,
Mr. Bauman was Vice President and Associate General Counsel with Finova Capital from May 1994 to March 2000.



Robert A. Krawczyk (age 43) has served as Vice President and Corporate Controller of Sunterra Corporation since August 2004 and was named the
Chief Accounting Officer in May 2005. Prior to joining Sunterra Corporation, Mr. Krawczyk was employed by Deloitte & Touche LLP from 1995 to August 2004, most recently as a Senior Manager specializing in the timeshare industry. Prior
to joining Deloitte & Touche LLP, Mr. Krawczyk was a commercial lender in the Corporate Finance Department at Barnett Bank.



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##### Table of Contents

PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Market Information



Our common stock began trading on the Nasdaq National Market on January 5, 2004 under the symbol SNRR. For the period from
January 2, 2003 until January 2, 2004, our common stock was traded on the over-the-counter bulletin board system. The high and low closing prices for our common stock for each quarter during the 2005 fiscal year and the 2004 transition
period are set forth below, as reported in the transaction reporting system.



|                                 |  |      |       |     |   |      
|-------------------------------- |  | ---- | ----- | --- | - | -----
|Fiscal 2005                      |  | High |       | Low
|Quarter Ended December 31, 2004  |  | $    | 14.04 |     | $ | 9.81 
|Quarter Ended March 31, 2005     |  | $    | 16.72 |     | $ | 12.95
|Quarter Ended June 30, 2005      |  | $    | 16.70 |     | $ | 13.89
|Quarter Ended September 30, 2005 |  | $    | 16.67 |     | $ | 12.11



|                                 |  |      |       |     |   |      
|-------------------------------- |  | ---- | ----- | --- | - | -----
|Fiscal 2004                      |  | High |       | Low
|Quarter Ended March 31, 2004     |  | $    | 14.82 |     | $ | 10.55
|Quarter Ended June 30, 2004      |  | $    | 14.00 |     | $ | 10.05
|Quarter Ended September 30, 2004 |  | $    | 12.43 |     | $ | 8.79 



Holders



As of December 12, 2005, there were approximately
1,436 holders of record of our common stock. The number of beneficial owners may be substantially greater than the number of record holders, because a large portion of our common stock is held of record through brokerage firms in street
name.



Dividend Policy



We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain future earnings to finance our operations. Any payment of future dividends will be at the discretion of our Board of Directors and will depend upon,
among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect of the payment of dividends and other factors that the Board of Directors deems relevant. Pursuant to the terms
of our senior finance facility, our ability to pay dividends is restricted. See BusinessRisk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations.



Unregistered Sales of Equity Securities



The Company did not sell any of its equity securities during the quarter
ended September 30, 2005 that were not registered under the U.S. Securities Act of 1933, as amended.



Issuer Purchases of Equity Securities



The Company did not purchase any of its equity securities during the quarter ended September 30, 2005.



19



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



The following table sets forth selected financial data of Sunterra for the fiscal year ended September 30, 2005 and comparable data for the 12 months ended September 30, 2004, the nine months ended September 30, 2004 and
comparable data for the nine months ended September 30, 2003, as well as such data for the fiscal years 2003, 2002 and 2001, based on our previous fiscal year end of December 31. The selected financial data for the 12 months ended
September 30, 2004 and the nine months ended September 30, 2003 is derived from unaudited consolidated financial statements. For purposes of this presentation, the fiscal year ended September 30, 2005 (Successor) has been compared to
the 12 months ended September 30, 2004 (Successor), the nine months ended September 30, 2004 (Successor) has been compared to the nine months ended September 30, 2003 (Successor), and the year ended December 31, 2003 (Successor)
has been compared to the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor) and to the year ended December 31, 2001 (Predecessor). You should
read the following financial data in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related Notes contained elsewhere
in this report.



|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ------------------------------- | - | ------- | ----------------------- |  | - | --------- | - |  | --------- | ------- | - | -------------------------------- | - | ------- | ----------- |  | - | -------- | - |  | - | ------- | -
|                                                 |  | Successor                |         |   | Successor                       |   |         | Successor               |  |   | Successor |   |  | Successor |         |   | CombinedSuccessor andPredecessor |   |         | Predecessor | 
|                                                 |  | Year Ended September 30, |         |   | Nine Months Ended September 30, |   |         | Year Ended December 31, | 
|(Amounts in thousands, except per share amounts) |  | 2005                     |         |   | 2004                            |   |         | 2004                    |  |   | 2003      |   |  | 2003      |         |   | 2002                             |   |         | 2001        | 
|Statement of Operations Data:                    |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Revenues:                                        |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Vacation Interest                                |  | $                        | 283,812 |   |                                 | $ | 257,228 |                         |  | $ | 202,541   |   |  | $         | 158,278 |   |                                  | $ | 212,965 |             |  | $ | 183,467  |   |  | $ | 166,713 |  
|Resort rental                                    |  |                          | 37,701  |   |                                 |   | 19,078  |                         |  |   | 16,809    |   |  |           | 10,718  |   |                                  |   | 12,987  |             |  |   | 15,734   |   |  |   | 14,359  |  
|Management services                              |  |                          | 30,380  |   |                                 |   | 29,176  |                         |  |   | 21,988    |   |  |           | 23,245  |   |                                  |   | 30,433  |             |  |   | 29,167   |   |  |   | 31,540  |  
|Interest                                         |  |                          | 44,806  |   |                                 |   | 29,792  |                         |  |   | 23,314    |   |  |           | 19,943  |   |                                  |   | 26,421  |             |  |   | 30,581   |   |  |   | 31,573  |  
|Other                                            |  |                          | 27,231  |   |                                 |   | 28,612  |                         |  |   | 22,448    |   |  |           | 17,943  |   |                                  |   | 24,107  |             |  |   | 23,913   |   |  |   | 29,117  |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Total revenues                                   |  |                          | 423,930 |   |                                 |   | 363,886 |                         |  |   | 287,100   |   |  |           | 230,127 |   |                                  |   | 306,913 |             |  |   | 282,862  |   |  |   | 273,302 |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Costs and Operating Expenses:                    |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Vacation Interest cost of sales                  |  |                          | 44,228  |   |                                 |   | 51,100  |                         |  |   | 40,347    |   |  |           | 29,711  |   |                                  |   | 40,464  |             |  |   | 36,967   |   |  |   | 34,275  |  
|Advertising, sales and marketing                 |  |                          | 164,695 |   |                                 |   | 147,903 |                         |  |   | 117,636   |   |  |           | 87,402  |   |                                  |   | 117,669 |             |  |   | 109,486  |   |  |   | 98,954  |  
|Vacation Interest carrying cost                  |  |                          | 42,307  |   |                                 |   | 23,546  |                         |  |   | 20,668    |   |  |           | 14,603  |   |                                  |   | 17,481  |             |  |   | 18,848   |   |  |   | 20,508  |  
|Provision for doubtful accounts and loan losses  |  |                          | 12,316  |   |                                 |   | 8,482   |                         |  |   | 7,180     |   |  |           | 4,336   |   |                                  |   | 5,638   |             |  |   | 7,310    |   |  |   | 18,745  |  
|Loan portfolio                                   |  |                          | 6,269   |   |                                 |   | 6,896   |                         |  |   | 4,465     |   |  |           | 7,621   |   |                                  |   | 10,052  |             |  |   | 12,835   |   |  |   | 10,417  |  
|General and administrative                       |  |                          | 83,901  |   |                                 |   | 75,079  |                         |  |   | 57,444    |   |  |           | 53,696  |   |                                  |   | 71,331  |             |  |   | 75,624   |   |  |   | 73,264  |  
|Gain on sale of assets                           |  |                          | (480    | ) |                                 |   | (5,567  | )                       |  |   | (5,489    | ) |  |           | (610    | ) |                                  |   | (688    | )           |  |   | (209     | ) |  |   |        |  
|Depreciation and amortization                    |  |                          | 10,049  |   |                                 |   | 9,662   |                         |  |   | 6,518     |   |  |           | 8,405   |   |                                  |   | 11,549  |             |  |   | 12,971   |   |  |   | 18,515  |  
|Interest                                         |  |                          | 25,092  |   |                                 |   | 24,052  |                         |  |   | 16,272    |   |  |           | 18,529  |   |                                  |   | 26,309  |             |  |   | 19,036   |   |  |   | 20,477  |  
|Reorganization, net                              |  |                          |        |   |                                 |   | 45      |                         |  |   |          |   |  |           | (664    | ) |                                  |   | (619    | )           |  |   | (325,235 | ) |  |   | 50,350  |  
|Restructuring                                    |  |                          | 1,967   |   |                                 |   | 266     |                         |  |   |          |   |  |           | 1,008   |   |                                  |   | 1,274   |             |  |   | 6,099    |   |  |   |        |  
|Impairment of goodwill                           |  |                          | 55,030  |   |                                 |   | 91,586  |                         |  |   |          |   |  |           |        |   |                                  |   | 91,586  |             |  |   |         |   |  |   |        |  
|Impairment of assets                             |  |                          |        |   |                                 |   | 897     |                         |  |   |          |   |  |           | 1,400   |   |                                  |   | 2,297   |             |  |   |         |   |  |   |        |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Total costs and operating expenses               |  |                          | 445,374 |   |                                 |   | 433,947 |                         |  |   | 265,041   |   |  |           | 225,437 |   |                                  |   | 394,343 |             |  |   | (26,268  | ) |  |   | 345,505 |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|(Loss) income from operations                    |  |                          | (21,444 | ) |                                 |   | (70,061 | )                       |  |   | 22,059    |   |  |           | 4,690   |   |                                  |   | (87,430 | )           |  |   | 309,130  |   |  |   | (72,203 | )
|Income from investments in joint ventures        |  |                          | 538     |   |                                 |   | 2,416   |                         |  |   | 1,551     |   |  |           | 2,475   |   |                                  |   | 3,340   |             |  |   | 4,485    |   |  |   | 3,381   |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|(Loss) income before provision for income taxes  |  |                          | (20,906 | ) |                                 |   | (67,645 | )                       |  |   | 23,610    |   |  |           | 7,165   |   |                                  |   | (84,090 | )           |  |   | 313,615  |   |  |   | (68,822 | )
|Provision for income taxes                       |  |                          | 13,828  |   |                                 |   | 3,028   |                         |  |   | 2,302     |   |  |           | 4,383   |   |                                  |   | 5,109   |             |  |   | 5,953    |   |  |   | 2,717   |  
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Net (loss) income                                |  | $                        | (34,734 | ) |                                 | $ | (70,673 | )                       |  | $ | 21,308    |   |  | $         | 2,782   |   |                                  | $ | (89,199 | )           |  | $ | 307,662  |   |  | $ | (71,539 | )
|                                                 |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Basic:                                           |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Net (loss) income per share                      |  |                          | (1.74   | ) |                                 |   | (3.53   | )                       |  |   | 1.07      |   |  |           | 0.14    |   |                                  |   | (4.46   | )           |  |   |          |   |  |   |         |  
|Weighted average number of shares                |  |                          | 20,015  |   |                                 |   | 20,000  |                         |  |   | 20,000    |   |  |           | 20,000  |   |                                  |   | 20,000  |             |  |   |          |   |  |   |         |  
|                                                 |  |                          |         |   |                                 |   |        
|Diluted:                                         |  |                          |         |   |                                 |   |         |                         |  |   |           |   |  |           |         |   |                                  |   |         |             |  |   |          |   |  |   |         |  
|Net (loss) income per share                      |  |                          | (1.74   | ) |                                 |   | (3.53   | )                       |  |   | 0.97      |   |  |           | 0.14    |   |                                  |   | (4.46   | )           |  |   |          |   |  |   |         |  
|Weighted average number of shares                |  |                          | 20,015  |   |                                 |   | 20,000  |                         |  |   | 24,024    |   |  |           | 20,000  |   |                                  |   | 20,000  |             |  |   |          |   |  |   |         |  



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|                                           |  |                     |         |                    |   |         |  |      |         |      |   |         |  |   |          |  
|------------------------------------------ |  | ------------------- | ------- | ------------------ | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------- | -
|                                           |  | As of September 30, |         | As of December 31, |  
|                                           |  | 2005                |         | 2004               |   | 2003    |  | 2002 |         | 2001 |  
|Balance Sheet Data:                        |  |                     |         |                    |   |         |  |      |         |      |   |         |  |   |          |  
|Cash and cash equivalents                  |  | $                   | 14,698  |                    | $ | 26,842  |  | $    | 21,305  |      | $ | 22,960  |  | $ | 27,207   |  
|Total assets                               |  |                     | 796,508 |                    |   | 836,858 |  |      | 654,053 |      |   | 732,253 |  |   | 663,491  |  
|Borrowings under line of credit agreements |  |                     | 198,849 |                    |   | 171,737 |  |      | 245,725 |      |   | 240,065 |  |   | 68,311   |  
|Notes payable                              |  |                     | 210,112 |                    |   | 248,971 |  |      | 3,201   |      |   | 4,136   |  |   | 28,005   |  
|Total stockholders equity                 |  |                     | 195,555 |                    |   | 226,306 |  |      | 203,578 |      |   | 284,326 |  |   | (335,750 | )



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion of our financial condition and results of operations should be read in conjunction with Item 6, Selected Financial
Data, and our consolidated financial statements and related Notes in Item 8. Financial Statements and Supplementary Data. This discussion and analysis contains forward-looking statements. Please see Forward Looking
Statements and Risk Factors for discussions of the uncertainties, risks and assumptions associated with these statements.



Effective October 1, 2004, we changed our fiscal year end for financial reporting purposes from a calendar year end to the 12-month period commencing
October 1 and ending September 30. As a result of this change in fiscal year end, for purposes of discussion of results of operations, the following comparative periods are presented and discussed:



| |  |  | Fiscal year ended September 30, 2005 compared to 12 months ended September 30, 2004;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Nine months ended September 30, 2004 compared to the nine months ended September 30, 2003; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | 12 months ended September 30, 2004 compared to the fiscal year ended December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------



All financial information presented in this discussion has been derived from our audited consolidated financial statements
for the fiscal year ended September 30, 2005, the nine months ended September 30, 2004 and the fiscal year ended December 31, 2003 as well as our unaudited consolidated financial statements for the 12 months ended September 30,
2004 and the nine months ended September 30, 2003. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.



Overview



Sunterra Corporation, through its subsidiaries and Affiliated Resorts, is one of the largest companies in the vacation
ownership industry, our single reportable operating segment. Through a network of 97 Owned or Affiliated Resorts located around the globe, our operations consist of:



| |  |  | acquiring, developing and operating vacation ownership resorts;
| | - |  | ---------------------------------------------------------------



| |  |  | marketing and selling vacation ownership interests to the public at our resort locations and off-site sales centers by:
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | selling vacation points in Club Sunterra that may be redeemed for occupancy rights for varying lengths of stay at participating resort locations and for certain other travel
products and services, which we refer to as Vacation Points; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | selling vacation ownership interests that entitle the buyer to use a fully-furnished vacation residence, generally for a one-week period each year in perpetuity, which we refer to
as Vacation Intervals and together with Vacation Points, Vacation Interests;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | providing consumer financing to individual purchasers of Sunterras Vacation Interests;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | providing collection services and resort rental, management and maintenance services for which we receive fees paid by the resorts homeowners associations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | operating our membership and exchange program.
| | - |  | ----------------------------------------------



Reorganization and Fresh-start Reporting



As a result of defaults on our senior unsecured notes and our secured credit facilities, on May 31, 2000 we sought protection under Chapter 11 of the
Bankruptcy Code in order to restructure existing debt and maximize existing cash. Following a hearing on June 20, 2002, the Bankruptcy Court entered an order on June 21, 2002 confirming our Plan of Reorganization filed on January 31,
2002, as amended. We subsequently fulfilled the conditions to the effectiveness of the Plan of Reorganization and on July 29, 2002 emerged from Chapter 11. See Note 2 to the accompanying consolidated financial statements for a summary of
certain provisions of the plan.



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Upon emergence from our Chapter 11 proceedings, effective July 31, 2002, we adopted the principles
of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting By Entities in Reorganization Under the Bankruptcy Code (SOP 90-7),
under which all assets and liabilities were restated to reflect their respective fair values.



References to Predecessor refer to Sunterra and its subsidiaries through July 31, 2002. References to Successor refer to Sunterra and its subsidiaries on or after August 1, 2002,
after giving effect to the implementation of fresh-start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements.



Other Factors Affecting Comparability of Financial Information



We recorded a net loss of $89.2 million for the year ended December 31, 2003, including charges totaling $91.6 million
for the impairment of goodwill and $2.3 million for the impairment of other assets. For the year ended September 30, 2005, we recorded a net loss of $34.7 million, including a charge totaling $55.0 million for the further impairment of
goodwill.



Critical Accounting Policies and Significant Estimates



The preparation of financial statements and related
disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the following accounting policies fall within the Securities and Exchange
Commissions definition of critical accounting policies, or involve a critical accounting estimate because they are particularly dependent upon estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period, and
changes in the accounting estimates we used are reasonably likely to occur from period to period which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are determined to be necessary. We have reviewed our critical accounting policies with our audit committee.



Revenue Recognition



Vacation Interests



We follow the guidelines of Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate. In
accordance with SFAS No. 66, we recognize sales of Vacation Interests on an accrual basis after (i) a binding sales contract has been executed, (ii) a 10% minimum down payment has been received, (iii) the rescission period has
expired, (iv) collectibility of the receivable representing the remainder of the sales price is reasonably assured and (v) we have completed substantially all of our obligations with respect to any development related to the real estate
sold (i.e., construction is substantially complete and certain minimum project sales levels have been met). If all the criteria are met except that construction is not substantially complete, then revenues are recognized on the percentage of
completion (cost to cost) basis. For sales that do not qualify for either accrual or percentage of completion accounting, all revenue is deferred using the deposit method.



Prior to March 2004, transactions involving Vacation Interests in certain Caribbean locations were legally structured as
long-term lease arrangements for either 99 years or a term expiring in 2050. The Vacation Interests subject to such leases revert to us at the end of the lease terms. These transactions were accordingly accounted for as operating leases, with the
sales value of the intervals recorded as deferred revenue at the date of execution of the transactions. Revenue deferred under these arrangements is being recognized on a straight-line basis over the term of the lease agreements. The direct
marketing costs of the lease contracts were also deferred and are being amortized over the term of the leases concurrent with the related revenue. Beginning in April 2004, we market and sell Vacation Points at these Caribbean locations that are not
required to be accounted for as operating leases.



Resort
rental



We rent unsold Vacation Interests on a short-term
basis, and additionally, will sell one-week leases and mini-vacations that allow prospective owners to sample a resort property. The related revenue is deferred until the vacation is used by the customer or the expiration date of the mini-vacation
passes.



Management services



Property management fee revenues are accrued as earned in accordance with
the management contracts. In addition, in our capacity as the homeowners association for certain Caribbean resorts, we collect maintenance fees from the lessees on these properties, which are accrued as earned and included in management services
revenue.



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Interest revenue



Interest earned on originated mortgages and contracts receivable is accrued as earned based on the contractual provisions of
the mortgages and contracts. Interest accrual is suspended on mortgages and contracts receivable at the earliest of (i) a first payment default, (ii) the initiation of cancellation or foreclosure proceedings or (iii) when the
customers account becomes 180 days delinquent. We also purchase pools of mortgages that are recorded at fair value, which represents the sum of the projected cash payments, discounted at a market rate of return for similar loans. The
difference between the carrying amount of the loans and the projected cash flows is amortized to interest revenue over the life of the purchased pools of mortgages.



Other revenue



Included in other revenue is revenue on the upgrade of Vacation Interval ownership to Club Sunterra membership, which is deferred and recognized over ten
years. Club Sunterra membership annual dues are recognized monthly as earned. Other revenue also includes nonrefundable commissions earned by our European subsidiary on the origination of loans to customers by a third party to finance purchases of
Vacation Interests. The commission revenue is recorded upon recognition of the related Vacation Interest revenue.



Retained Interests in Mortgages and Contracts Receivable Sold



Retained interests in mortgages and contracts receivable sold are generated upon sale of mortgages receivable and represent the net present value of the
expected excess cash flow to us after repayment by the purchaser of principal and interest on the obligations secured by the sold mortgages and contracts receivable. The retained interests are classified as trading securities based on our intent and
the existence of prepayment options. Retained interests are marked to fair value at each reporting date based on certain assumptions and the adjustments, if any, are reported as a component of operating income (loss).



Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses



Mortgages and contracts receivable originated by us
are recorded at amortized cost, including deferred loan and contract origination costs, less the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation
Interests are capitalized and amortized over the term of the related mortgages or contracts receivable as an adjustment to interest revenue using the effective interest method. We recorded a premium in fresh-start accounting on mortgages and
contracts receivable of $10.3 million at July 31, 2002. This amount is being amortized over the life of the related mortgages and contract receivable portfolio as an adjustment to interest revenue, and had a balance of $3.0 million at
September 30, 2005.



We purchase mortgage receivable pools
both individually and as part of business combination transactions. These purchased mortgage receivable portfolios are accounted for separately as loan pools and typically are acquired at an amount less than the contractually required payments and
the outstanding principal balance. The pools are recorded at fair value, which represents the sum of the projected cash payments, discounted at a market rate of return for similar loans. The difference between the carrying amount of the loans and
the projected cash flows is amortized to interest revenue over the life of the loan pools.



The purchased loan pools are evaluated for impairment periodically to determine if the carrying amount of the pool is recoverable through discounted projected cash flows. The estimate of future cash payments is based
on various assumptions, principally the expected default and prepayment rates. Significant changes to these assumptions could have a material impact on the fair value of the purchased loan pools. If the carrying amount of the loan pool is in excess
of the discounted projected future cash flows, we will record a valuation allowance at that time. In the event that projected cash flows increase compared to original estimates, we will adjust the yield on the loan pool over the remaining life of
the loan pool.



We provide for estimated mortgages and
contracts receivable cancellations and defaults at the time the Vacation Interest revenues are recorded by a charge to the provision for doubtful accounts and loan losses and an increase to the allowance for loan and contract losses. We periodically
perform an analysis of factors such as economic conditions and industry trends, defaults, past due agings and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.



We charge off mortgages and contracts receivable upon the earliest of
(i) a first payment default, (ii) the initiation of cancellation or foreclosure proceedings or (iii) when the customers account becomes 180 days delinquent. Vacation Interests recovered on defaulted mortgages receivable are
recorded in unsold Vacation Interests, net, and as a reduction of loan charge-offs at the historical cost of Vacation Interests at the respective property. All collection and foreclosure costs are expensed as incurred.



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Unsold Vacation Interests



Unsold Vacation Interests are valued at the lower of cost or fair value. Development costs include acquisition costs, both
hard and soft construction costs and, together with real estate costs, are allocated to unsold Vacation Interests, net. Interest, real estate taxes and other carrying costs incurred during the construction period are capitalized and such costs
incurred on completed Vacation Interest inventory are expensed. Costs are allocated to Vacation Interest cost of sales under the relative sales value method. Unsold Vacation Interests, net also includes the value of Vacation Interests
collateralizing delinquent mortgages and contracts receivable that have been charged-off, but for which we do not yet hold title pending completion of the foreclosure process.



Goodwill and Intangible Assets



Upon emergence from our Chapter 11 proceedings, in accordance with SOP 90-7, we were required to adopt fresh-start accounting, under which all assets and
liabilities were restated to reflect their fair value. The reorganization value in excess of identifiable assets identified in the adoption of fresh-start accounting upon emergence from bankruptcy in July 2002 was recorded as goodwill. In addition,
the excess cost over fair value of net assets acquired in transactions completed during fiscal 2004 and 2005 was recorded as goodwill (see Note 5 to the consolidated financial statements).



SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142) requires that goodwill, along with other long-lived assets, be tested for impairment at least annually, or more frequently if circumstances exist to indicate potential impairment. In 2003, we elected to perform the required
testing in the fourth quarter. In 2004, due to the change in the fiscal year end to September 30, we elected to continue using a date within the last quarter of our new fiscal year as our measurement date. In addition to the 2005 annual test
performed during the last quarter of fiscal 2005, a decline in profitability in our European segment/reporting unit during the third quarter of fiscal year 2005 was deemed to be an indicator that a potential impairment existed and as such the
European segment was tested for impairment at that time.



Under
SFAS No. 142, the first step to test for impairment is the comparison of the fair value of the reporting unit with its carrying value (including goodwill). We identified our North American and European reporting units to be tested for
impairment. Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the second step of the impairment test, which is to compare the implied fair value of the goodwill to its carrying value.
Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on the measurement date. Impairment exists to the extent the carrying value of goodwill exceeds its implied fair value.



During the quarter ended June 30, 2005, we utilized a
market value approach in our estimate of the fair value of the European segment/reporting unit. The estimate indicated that an impairment might exist and the second step of the impairment test was performed. After comparing the implied fair value of
the goodwill to its carrying value, we concluded an impairment of $55.0 million existed and as a result, a charge of $55.0 million was recorded in the quarter ended June 30, 2005. For the annual impairment test completed in 2003, 2004 and 2005,
we utilized a discounted cash flow approach, as well as a market value approach, in our estimates of the fair value of the North American and European reporting units. After comparing the implied fair value of the goodwill to its carrying value, we
concluded no impairment existed in the fiscal year ended September 30, 2005 or the nine months ended September 30, 2004, with the exception of the $55.0 million charge already recorded. In 2003, both methods determined that the carrying
value of the North American segment/reporting unit exceeded its fair value and as a result a charge of $91.6 million was recorded in the quarter ended December 31, 2003.



The balance in Intangible Assets, net represents management contracts and the remaining unamortized cost relating to certain
intellectual property. These balances are being amortized monthly over the life of the contract or the estimated useful life of the property.



Valuation Allowance on Net Deferred Tax Assets



We account for income taxes in accordance with the liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets or liabilities are measured by applying enacted statutory tax rates applicable to the future years in
which the deferred tax assets or liabilities are expected to be realized or settled. Net deferred tax assets are evaluated for expected future realization, which is dependent on our ability to generate such future taxable income sufficient to
utilize these assets. A valuation allowance is recorded against net deferred tax assets to the extent they are estimated to be less than likely to be realized.



Revenue and Cost Relationships



The amounts and levels of certain cost items have varied direct and indirect relationships with certain balance sheet items and revenue components as
discussed below:



Vacation Interest Cost of Sales. We
develop or acquire Vacation Interests, the cost of which are recorded in unsold Vacation Interests. As these are sold to owner families, the allocated cost is expensed when the related revenue is recognized. In general, if the relative cost basis of
the unsold Vacation Interests remains stable, Vacation Interest cost of sales will fluctuate with the level of Vacation Interest revenues.



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Advertising, Sales and Marketing (ASM). ASM expenses represent the costs incurred by
us to generate prospects, compensate sales professionals and vendors for completed sales transactions, and promote the Sunterra brand name. A portion of this amount relates solely to the process of incentivizing and motivating prospective owners to
tour our resorts, with the goal of selling these prospects a Vacation Interest. These direct marketing expenditures vary with the level of tours. The primary compensation of most sales professionals are commissions paid on sales of Vacation
Interests, and thereby, direct selling expenses fluctuate with the level of recognized Vacation Interest revenues.



Vacation Interest carrying cost. Vacation ownership resorts typically have a related homeowners association (HOA) that has been
created to protect the interests of the owners. The HOA normally has responsibility for the long-term upkeep of the resort, as well as the day-to-day operating activities, including front desk operations, housekeeping, grounds maintenance and
accounting. Each owner of a Vacation Interest at each resort is assessed a portion of the operating expenses of the HOA, often referred to as a maintenance fee. Like all owners, we are assessed annual maintenance fees by the various
resort HOAs based upon the ownership of unsold Vacation Interests, which are recorded in Vacation Interest carrying cost. In addition, we are also assessed annual maintenance fees by the trust in which we own Vacation Points that in turn also has an
obligation to the various resort HOAs based upon its ownership of Vacation Interests. This amount is also recorded in Vacation Interest carrying cost. With the exception of periods in which certain HOAs charge a special assessment, the level of
Vacation Interest carrying cost will vary directly with the number of unsold Vacation Interests held by us.



Provision for Doubtful Accounts and Loan Losses. As noted above, at the time we recognize revenue from the sale of a Vacation Interest financed by
us, we record a provision for loan and contract losses, based upon historical and projected losses among similar loans. We also record a provision for bad debt in our capacity as the HOA for certain St. Maarten resorts, based upon historical and
projected losses. The overwhelming majority of the amounts charged to provision for doubtful accounts and loan losses is related to provisions related to mortgage loan and contract losses, and thereby will fluctuate with the level of Vacation
Interest sales that are financed by us during that period.



Loan Portfolio. We service the mortgages and contracts that we originate and purchase, and incur expenses related to the origination, contracts, collections and servicing aspects of our business. These expenses include the payroll,
administrative and occupancy costs of the finance operations as well as loan servicing fees paid to third parties where utilized, and varies directly with the level of mortgage loans and contracts that are serviced by us.



General and Administrative. General and administrative expenses
include all of our general expenses, such as administrative and executive payroll, insurance, legal and professional fees, occupancy and other expenses. It is also composed of the costs of our property management business and operating costs of our
Club Sunterra membership and exchange program, which will vary with the number of resort properties managed and the level of Club Sunterra members, respectively.



Results of Operations



Please refer to the information noted above in Item 6, Selected Financial Data. As a result of the change in fiscal year end, for purposes of
Managements Discussion and Analysis of Financial Condition and Results of Operations, the following periods of operations are presented, discussed and compared:



| |  |  | fiscal year ended September 30, 2005 to the 12 months ended September 30, 2004;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the nine months ended September 30, 2004 to the nine months ended September 30, 2003; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the 12 months ended September 30, 2004 to the fiscal year ended December 31, 2003.
| | - |  | ----------------------------------------------------------------------------------



We believe that comparing the periods as listed above provides the most meaningful analysis of our operating results and
enhances a readers understanding of our financial condition, changes in financial condition and results of operations. The discussion covers the three year period covered by the financial statements presented in Item 8. Financial
Statements and Supplementary Data and uses year-to-year comparisons where necessary to enhance a readers understanding, but does not compare audited period to audited period of unequal lengths due to the seasonality of our business
discussed in Item 1. BusinessSeasonality. Historically, our fiscal quarter ended September 30 has produced the strongest operating results because this period coincides with the typical summer seasonality of the vacation
ownership industry and the greater number of families vacationing. Our fiscal quarter ended March 31 has historically produced the weakest operating results primarily due to the effects of reduced leisure travel. As a result of this
seasonality,



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comparing periods that are not of the same length, or that do not have approximately the same starting and ending point,
does not provide any meaningful analysis, in the opinion of management. The following table sets forth additional operating information for the years ended September 30, 2005 and 2004 as well as December 31, 2003 and the nine months ended
September 30, 2004 and 2003:



|                                                |  |                          |   |  |                        |   |  |                                |   |  |       |   |  |       |  
|----------------------------------------------- |  | ------------------------ | - |  | ---------------------- | - |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                                |  | Year Ended September 30, |   |  | Year EndedDecember 31, |   |  | Nine Months EndedSeptember 30, |  
|                                                |  | 2005                     |   |  | 2004                   |   |  | 2003                           |   |  | 2004  |   |  | 2003  |  
|As a percentage of total revenues:              |  |                          |   |  |                        |   |  |                                |   |  |       |   |  |       |  
|Vacation Interest                               |  | 66.9                     | % |  | 70.7                   | % |  | 69.4                           | % |  | 70.5  | % |  | 68.8  | %
|Resort rental                                   |  | 8.9                      |   |  | 5.2                    |   |  | 4.2                            |   |  | 5.9   |   |  | 4.6   |  
|Management services                             |  | 7.2                      |   |  | 8.0                    |   |  | 9.9                            |   |  | 7.7   |   |  | 10.1  |  
|Interest                                        |  | 10.6                     |   |  | 8.2                    |   |  | 8.6                            |   |  | 8.1   |   |  | 8.7   |  
|Other                                           |  | 6.4                      |   |  | 7.9                    |   |  | 7.9                            |   |  | 7.8   |   |  | 7.8   |  
|                                                |  |                          |   |  |                        |   |  |                                |   |  |       |   |  |       |  
|Total revenues                                  |  | 100.0                    | % |  | 100.0                  | % |  | 100.0                          | % |  | 100.0 | % |  | 100.0 | %
|                                                |  |                          |   |  |                       
|As a percentage of Vacation Interest revenues:  |  |                          |   |  |                        |   |  |                                |   |  |       |   |  |       |  
|Vacation Interest cost of sales                 |  | 15.6                     | % |  | 19.9                   | % |  | 19.0                           | % |  | 19.9  | % |  | 18.8  | %
|Advertising, sales and marketing                |  | 58.0                     |   |  | 57.5                   |   |  | 55.3                           |   |  | 58.1  |   |  | 55.2  |  
|Vacation Interest carrying cost                 |  | 14.9                     |   |  | 9.2                    |   |  | 8.2                            |   |  | 10.2  |   |  | 9.2   |  
|Provision for doubtful accounts and loan losses |  | 4.3                      |   |  | 3.3                    |   |  | 2.6                            |   |  | 3.5   |   |  | 2.7   |  
|                                                |  |                          |   |  |                       
|As a percentage of total revenues:              |  |                          |   |  |                        |   |  |                                |   |  |       |   |  |       |  
|General and administrative                      |  | 19.8                     | % |  | 20.6                   | % |  | 23.2                           | % |  | 20.0  | % |  | 23.3  | %
|Gain on sales of assets                         |  | (0.1                     | ) |  | (1.5                   | ) |  | (0.2                           | ) |  | (1.9  | ) |  | (0.3  | )
|Loan portfolio                                  |  | 1.5                      |   |  | 1.9                    |   |  | 3.3                            |   |  | 1.6   |   |  | 3.3   |  
|Depreciation and amortization                   |  | 2.4                      |   |  | 2.7                    |   |  | 3.8                            |   |  | 2.3   |   |  | 3.7   |  
|Interest                                        |  | 5.9                      |   |  | 6.6                    |   |  | 8.6                            |   |  | 5.7   |   |  | 8.1   |  
|Reorganization, net                             |  |                         |   |  |                       |   |  | (0.2                           | ) |  |      |   |  | (0.3  | )
|Restructuring                                   |  | 0.5                      |   |  | 0.1                    |   |  | 0.4                            |   |  |      |   |  | 0.4   |  
|Impairment of goodwill                          |  | 13.0                     |   |  | 25.2                   |   |  | 29.7                           |   |  |      |   |  |      |  
|Impairment of assets                            |  |                         |   |  | 0.2                    |   |  | 0.7                            |   |  |      |   |  | 0.6   |  
|Total costs and operating expenses              |  | 105.1                    |   |  | 119.3                  |   |  | 128.5                          |   |  | 92.3  |   |  | 98.0  |  



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Comparison of the Fiscal Year Ended September 30, 2005 to the 12 Months Ended September 30, 2004:



|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|--------------------------------------------------------- |  | ---------------------- | ------- | - | -------- | - | ------- | ---- |  | - | ------- | - |  | - | -------
|                                                          |  | North American         |         |   | European
|                                                          |  | 2005                   |         |   | 2004     |   |         | 2005 |  |   | 2004   
|                                                          |  | (Amounts in thousands)
|Revenues:                                                 |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Vacation Interest                                         |  | $                      | 210,154 |   |          | $ | 169,359 |      |  | $ | 73,658  |   |  | $ | 87,869 
|Resort rental                                             |  |                        | 35,939  |   |          |   | 17,463  |      |  |   | 1,762   |   |  |   | 1,615  
|Management services                                       |  |                        | 20,427  |   |          |   | 18,630  |      |  |   | 9,953   |   |  |   | 10,546 
|Interest                                                  |  |                        | 42,179  |   |          |   | 27,369  |      |  |   | 2,627   |   |  |   | 2,423  
|Other                                                     |  |                        | 22,129  |   |          |   | 20,411  |      |  |   | 5,102   |   |  |   | 8,201  
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Total revenues                                            |  |                        | 330,828 |   |          |   | 253,232 |      |  |   | 93,102  |   |  |   | 110,654
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Costs and Operating Expenses:                             |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Vacation Interest cost of sales                           |  |                        | 34,633  |   |          |   | 38,468  |      |  |   | 9,595   |   |  |   | 12,632 
|Advertising, sales and marketing                          |  |                        | 113,254 |   |          |   | 95,833  |      |  |   | 51,441  |   |  |   | 52,070 
|Vacation Interest carrying cost                           |  |                        | 35,370  |   |          |   | 19,401  |      |  |   | 6,937   |   |  |   | 4,145  
|Provision for doubtful accounts and loan losses           |  |                        | 11,580  |   |          |   | 7,651   |      |  |   | 736     |   |  |   | 831    
|Loan portfolio                                            |  |                        | 6,157   |   |          |   | 6,699   |      |  |   | 112     |   |  |   | 197    
|General and administrative                                |  |                        | 65,920  |   |          |   | 52,339  |      |  |   | 17,981  |   |  |   | 22,740 
|Gain on sales of assets                                   |  |                        | (282    | ) |          |   | (5,567  | )    |  |   | (198    | ) |  |   |       
|Depreciation and amortization                             |  |                        | 5,888   |   |          |   | 5,614   |      |  |   | 4,161   |   |  |   | 4,048  
|Interest                                                  |  |                        | 21,409  |   |          |   | 22,357  |      |  |   | 3,683   |   |  |   | 1,695  
|Reorganization, net                                       |  |                        |        |   |          |   | 45      |      |  |   |        |   |  |   |       
|Restructuring                                             |  |                        |        |   |          |   | 266     |      |  |   | 1,967   |   |  |   |       
|Impairment of goodwill                                    |  |                        |        |   |          |   | 91,586  |      |  |   | 55,030  |   |  |   |       
|Impairment of assets                                      |  |                        |        |   |          |   | 897     |      |  |   |        |   |  |   |       
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Total costs and operating expenses                        |  |                        | 293,929 |   |          |   | 335,589 |      |  |   | 151,445 |   |  |   | 98,358 
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Income (loss) from operations                             |  |                        | 36,899  |   |          |   | (82,357 | )    |  |   | (58,343 | ) |  |   | 12,296 
|Income from investments in joint ventures                 |  |                        | 538     |   |          |   | 2,416   |      |  |   |        |   |  |   |       
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Income (loss) before provision (benefit) for income taxes |  |                        | 37,437  |   |          |   | (79,941 | )    |  |   | (58,343 | ) |  |   | 12,296 
|Provision (benefit) for income taxes                      |  |                        | 14,796  |   |          |   | 116     |      |  |   | (968    | ) |  |   | 2,912  
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        
|Net income (loss)                                         |  | $                      | 22,641  |   |          | $ | (80,057 | )    |  | $ | (57,375 | ) |  | $ | 9,384  
|                                                          |  |                        |         |   |          |   |         |      |  |   |         |   |  |   |        



We recorded total
revenues of $423.9 million for the year ended September 30, 2005, compared to $363.9 million for the 12 months ended September 30, 2004, an increase of $60.0 million, or 16.5%. This increase was driven by our North American operations
where total revenues increased $77.6 million, or 30.6%, to $330.8 million in 2005, compared to $253.2 million for the prior year, while total revenues from European operations decreased 15.9%, or $17.6 million, to $93.1 million for the year ended
September 30, 2005 from $110.7 million for the prior year. Excluding the effects of favorable foreign exchange rates, total revenues from our European operations for the year ended September 30, 2005 decreased $20.4 million, or 18.5%, when
compared to the prior year.



Consolidated Vacation Interest
revenues were $283.8 million for the year ended September 30, 2005, representing an increase of $26.6 million, or 10.3%, compared to $257.2 million for the 12 months ended September 30, 2004, driven by a $40.8 million, or 24.1%, increase
in North American Vacation Interest revenues to $210.2 million, compared to the 12 months ended September 30, 2004 total of $169.4 million. Our North American improvements are the result of the completion of the integration of the
Kaanapali resort and Epic Resorts Group locations during 2004 and the Poipu resort in August 2005 as well as the increase of revenues at existing locations, offset by a decrease in revenue at now closed Sunterra Pacific locations. Exclusive of
$2.3 million of favorable foreign exchange rate movements, our European Vacation Interest revenues fell from $87.9 million for the 12 months ended September 30, 2004 to $71.4 million for the year ended September 30, 2005, a decrease of
18.8%. The decrease is the result of lower tour conversion efficiency.



Resort rental revenue increased 97.6% to $37.7 million for the year ended September 30, 2005, compared to $19.1 million for the 12 months ended September 30, 2004, primarily as a result of the increased available space related to
the acquisitions of the Kaanapali resort in July 2004 and the Poipu resort in August 2005, and the recovery of Vacation Interests underlying defaulted



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receivables in purchased mortgage pools as well as increased utilization of available space for external rental and
internal marketing purposes (mini-vacation packages designed to give potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), offset by ongoing sales of Vacation Interests, which reduces the
number of Vacation Interests available for rental.



Management
services revenues of $30.4 million for the year ended September 30, 2005 increased by $1.2 million, or 4.1%, compared to $29.2 million for the 12 months ended September 30, 2004. The overall increase was primarily due to a $1.8 million, or
9.6%, increase in North American management services revenues to $20.4 million for the year ended September 30, 2005, compared to $18.6 million for the 12 months ended September 30, 2004. This increase is primarily due to the management
fees charged to the trusts holding vacation property real estate out of which we will convey Vacation Points to our customers. European management services revenues of $10.0 million for the year ended September 30, 2005 decreased by $0.6
million, or 5.6%, compared to $10.6 million for the 12 months ended September 30, 2004.



Interest revenues, the majority of which are generated from financing provided to purchasers and lessees of Vacation Interests in the United States and the Caribbean and the interest earned on purchased mortgage
pools, increased to $44.8 million for the year ended September 30, 2005, compared to $29.8 million for the 12 months ended September 30, 2004. The increase is due to an increase in the average originated mortgage balance from
September 30, 2004 to September 30, 2005 as a result of increased Vacation Interest revenue as well as the acquisition of several loan pools during the 12 month period ended September 30, 2004 and the fiscal year ended
September 30, 2005. The acquisitions in the 12 month period ended September 30, 2004 included the acquisition of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations in March 2004 and the mortgage
pool obtained in the purchase of Kaanapali resort in July 2004. In fiscal 2005, we acquired five separate loan pools, for a combined fair value of $67.6 million, which included (i) the purchase from Barton Capital Corporation of their
rights to a loan portfolio held by Blue Bison Funding Corporation in December 2004, (ii) the acquisition of two loan portfolios in the second quarter of fiscal 2005 held by qualified special-purpose entities created to hold a loan portfolio and
issue collateralized debt to third-party investors through the exercise of the clean up call provisions contained in the notes issued by the qualified special-purpose entities that allows the notes to be called and mortgages and
contracts receivable to be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value, (iii) the mortgage pool obtained in the purchase of the Poipu resort in August 2005 and (iv) the
purchase of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, acquired from the beneficial note holders of Epic Receivables 1999, LLC, a qualified special-purpose entity, in August 2005.



Other revenues, which include Club Sunterra fees, travel services revenue,
and finance commissions earned by our European subsidiaries, decreased by $1.4 million, or 4.8%, to $27.2 million for the year ended September 30, 2005, from $28.6 million for the 12 months ended September 30, 2004. This decrease is
concentrated in our European operations and is primarily the result of lower financing commissions, which is partially offset by an increase in Club Sunterra fees due to an increase in both membership and the annual fees charged to members in the
North American operations.



Consolidated Vacation Interest cost
of sales of $44.2 million for the year ended September 30, 2005 decreased $6.9 million, or 13.4%, from $51.1 million for the 12 months ended September 30, 2004, despite an increase in Vacation Interest revenue. On a geographic segment
basis, North American Vacation Interest cost of sales decreased by $3.9 million, from $38.5 million to $34.6 million, and Vacation Interest cost of sales for our European operations decreased to $9.6 million, down $3.0 million from $12.6 million in
2004. Our overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the years ended September 30, 2005 and 2004 were 15.6% and 19.9%, respectively. The cost-off rate for our North
American operations decreased from 22.7% in the 12 months ended September 30, 2004, to 16.5% in the current year. This is attributable to newly acquired properties and inventory recoveries where the inventory has a relatively lower cost than
the other Vacation Interests owned by us and the effect that adding such lower cost inventory has to the trust from which we sell our Vacation Points. As a percentage of European Vacation Interest revenues for the years ended September 30, 2005
and 2004, European Vacation Interest cost of sales was 13.0% and 14.4%, respectively. Our European operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the year ended September 30, 2005, consolidated advertising, sales
and marketing costs were $164.7 million compared to $147.9 million for the 12 months ended September 30, 2004, an 11.4% increase on 10.3% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to
58.0% in 2005 compared to 57.5% in the prior year. This increase was driven by our European operations, which experienced an increase in this ratio from 59.3% in 2004 to 69.8% for the year ended September 30, 2005. The unfavorable variance in
our European operations is attributable to additional marketing efforts employed to improve tour flow as a result of a challenging European market. Our North American operations advertising, sales and marketing costs as a percentage of
Vacation Interest revenues were 53.9% and 56.6% for the years ended September 30, 2005 and 2004, respectively, as a result of improved conversion efficiencies.



Vacation Interest carrying cost, which consists of annual maintenance fee, reserve and special assessments on unsold
Vacation Interests, as well as the cost associated with maintaining un-annexed units (owned units not declared or registered as part of the timeshare program) increased 79.7%, or $18.8 million, to $42.3 million for the year ended September 30,
2005 from $23.5 million for



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the 12 months ended September 30, 2004. The increase was primarily due to Vacation Interests acquired as a result of
the purchase of the remaining outstanding partnership interests in Kaanapali and Poipu, the Vacation Interests recovered upon the foreclosure on the collateral securing certain mortgage loans acquired in the various loan portfolio
acquisitions, and the Vacation Interests and the right to use Vacation Interests acquired as a result of the agreements with various HOAs to purchase current year delinquent maintenance fee receivables from them at par value, offset by ongoing sales
of Vacation Interests and the continued conversion to the trust-based product. As a percentage of resort rental revenues, Vacation Interest carrying cost was 112.2% for the year ended September 30, 2005 compared to 123.4% for the 12 months
ended September 30, 2004. This decrease is a result of improved utilization of available space for external rental and internal marketing purposes.



The provision for doubtful accounts and loan losses was $12.3 million for the year ended September 30, 2005, compared to $8.5 million for the 12
months ended September 30, 2004. Of these amounts, $12.2 million and $8.6 million for 2005 and 2004, respectively, related to mortgages and contracts receivable. The balance of the provision for doubtful accounts of $0.1 million and $(0.1)
million for the years ended September 30, 2005 and 2004, respectively, represent adjustments to provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees at certain Caribbean
resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributed to the higher levels of Vacation Interest revenues, as the provision is recorded as a
percentage of each financed sale, as well as an increase in such percentage of each financed sale.



Loan portfolio expenses decreased 9.1% to $6.3 million for the year ended September 30, 2005, from $6.9 million in the prior year. The decrease is
attributable to process improvement and restructuring initiatives implemented in late 2003, including standardizing and centralizing underwriting procedures, processes and loss mitigation. We have also brought in certain servicing processes formerly
outsourced. This was partially offset by an increase in the number of loans serviced due to the acquisition in March 2004 of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in
the purchase of the Kaanapali resort in July 2004 and the Poipu resort in August 2005, the purchase from Barton Capital Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation, the acquisition of two loan
portfolios held by qualified special-purpose entities created to hold a loan portfolio and issue collateralized debt to third-party investors through the exercise of the clean-up call provisions contained in the notes issued by the
qualified special-purpose entities that allows the notes to be called and mortgages and contracts receivable to be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value and the purchase of
a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, acquired from the beneficial note holders of the Epic Receivables 1999, LLC, a qualified special-purpose entity, in August 2005.



General and administrative expenses of $83.9 million for the year ended
September 30, 2005 increased by $8.8 million, or 11.8%, compared to $75.1 million for the 12 months ended September 30, 2004. As a percentage of total revenues, general and administrative expenses improved to 19.8% for 2005 from 20.6% in
2004. The increase in general and administrative expenses, which related to salary increases, increased professional fees, primarily related to our compliance with the Sarbanes-Oxley Act of 2002, and insurance expenses, was offset by the closure of
certain Sunterra Pacific operations in December of 2003. During the year ended September 30, 2005, we reevaluated the need for certain reserves for our contingent liabilities established in conjunction with the Plan of Reorganization and reduced
such reserves by $2.7 million. This reduction was partially offset by a $2.5 million expense recorded during the quarter ended September 30, 2005 in connection with certain litigation. This accrual became necessary due to our latest assessment of
the progress of various legal cases.



Gain on sales of assets
decreased to a gain of $0.5 million for the year ended September 30, 2005 from a gain of $5.6 million during the same period in 2004. The $0.5 million gain for 2005 represents a gain on the sale of certain non-core inventory recovered by us
upon the default of certain mortgage loans and a gain on the sale of an office building in Sedona, Arizona that previously housed administrative personnel now located in a rented facility, offset by a loss on the sale of certain non-core inventory.
The $5.6 million gain for the 12 months ended September 30, 2004 represents a gain on the sale of the Island Links Resort, a gain on the sale of certain assets of Sunterra Pacific, the recognition of deferred revenues in conjunction with the
sale of such assets of Sunterra Pacific, a gain on the extinguishment of certain fulfillment obligations and a gain recorded as a result of the sale of a note receivable that was previously written off.



Depreciation and amortization expense increased 4.0%, or $0.3 million, to
$10.0 million for the year ended September 30, 2005, from $9.7 million for the same period in 2004. The increase is attributable to the acquisition of a large number of North American and European assets, partially offset by a large number of
North American assets reaching full depreciation.



Interest
expense for the year ended September 30, 2005 was $25.1 million, compared to $24.1 million for the 12 months ended September 30, 2004. The increase was primarily due to higher average borrowings in 2005, offset by reduced borrowing costs,
reduced amortization of debt issuance costs, the renegotiation of certain borrowing terms in February 2004 and July 2005, and the favorable interest rate on the 33/4% Senior Subordinated Convertible Notes due 2024.



Reorganization costs, net were $0.01 million in the 12 months ended September 30, 2004 and represent the fee paid to the bankruptcy trustee. No such
amounts were incurred during the year ended September 30, 2005.



Restructuring costs were $2.0 million in the year ended September 30, 2005 and related to the restructuring of our European operations, including a consolidation of United Kingdom telemarketing operations and reductions of management
and headcount levels in several areas. Restructuring costs were $0.3 million for the 12 months ended September 30, 2004, and primarily related to the rollout of our global points-based program.



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Impairment of goodwill totaled $55.0 million for the year ended September 30, 2005. We review our
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. SFAS No. 142 requires that goodwill, along with other long-lived assets, be tested for
impairment at least annually, or more frequently if circumstances exist to indicate potential impairment. Although our policy is to perform the required testing during our last fiscal quarter, a decline in profitability in the European
segment/reporting unit during the third quarter of fiscal year 2005 was deemed to be an indicator that a potential impairment existed and, as such, the European segment was tested for impairment at that time. Under SFAS No. 142, the first step
to test for impairment is the comparison of the fair value of the reporting unit with its carrying value (including goodwill). Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the
second step of the impairment test, which is to compare the implied fair value of the goodwill to its carrying value. Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on
the measurement date. Impairment exists to the extent the carrying value of goodwill exceeds its implied fair value. We utilized a market value approach in our estimate of the fair value of the European segment/reporting unit. The estimate indicated
that an impairment might exist and the second step of the impairment test was performed. After comparing the implied fair value of the goodwill to its carrying value, we concluded an impairment of $55.0 million existed and as a result, a charge of
$55.0 million was recorded in the year ended September 30, 2005. Impairment of assets totaled $92.5 million for the 12 months ended September 30, 2004. These charges included $91.6 million for the impairment of the North American
segments goodwill during the quarter ended December 31, 2003 as a result of performing the annual impairment test under SFAS No. 142, and $0.9 million relating to unsold Vacation Interests relating to a resort disposed of in 2003.



Income from investments in joint ventures decreased 77.7% to
$0.5 million for the year ended September 30, 2005 compared to $2.4 million for the 12 months ended September 30, 2004. In July 2004, we purchased the remaining outstanding 77% partnership interest in Kaanapali, resulting in the full
consolidation of its operating results beginning at that time. In August 2005, we purchased the remaining outstanding 70% partnership interest in Poipu, resulting in the full consolidation of its operating results beginning at that time.



The provision for income taxes for the year ended September 30, 2005
was $13.8 million, compared to $3.0 million for the 12 months ended September 30, 2004. The increase in income tax expense related to our North American operations, which reported a tax provision for the year ended September 30, 2005, in
contrast with the 12 months ended September 30, 2004, when the tax basis operating income of the North American operations was offset by operating losses from periods subsequent to the fresh-start date, July 29, 2002. Since such operating
losses were generated after the fresh-start date, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to the provision for income taxes. This resulted in a net provision for income
taxes of virtually zero. For the year ended September 30, 2005, the tax basis operating income of the North American operations was offset by operating losses from periods prior to the fresh-start date. As such, the reduction of the reserves
recorded against the deferred tax assets associated with the operating losses was credited to goodwill or additional paid-in capital. In addition, no tax benefit was recorded during the year ended September 30, 2005 in conjunction with the
European segment goodwill impairment charge of $55.0 million.



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Comparison of the Nine Months Ended September 30, 2004 to the Nine Months Ended September 30,
2003:



|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ------- | - | -------- | - | ------- | ---- |  | ---- | ------ |  | - | ------ | -
|                                                          |  | North American         |         |   | European |  
|                                                          |  | 2004                   |         |   | 2003     |   |         | 2004 |  | 2003 |       
|                                                          |  | (Amounts in thousands) |        
|Revenues:                                                 |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Vacation Interest                                         |  | $                      | 134,363 |   |          | $ | 92,971  |      |  | $    | 68,178 |  | $ | 65,307 |  
|Resort rental                                             |  |                        | 15,618  |   |          |   | 9,517   |      |  |      | 1,191  |  |   | 1,201  |  
|Management services                                       |  |                        | 13,607  |   |          |   | 17,384  |      |  |      | 8,381  |  |   | 5,861  |  
|Interest                                                  |  |                        | 21,285  |   |          |   | 18,102  |      |  |      | 2,029  |  |   | 1,841  |  
|Other                                                     |  |                        | 16,108  |   |          |   | 11,689  |      |  |      | 6,340  |  |   | 6,254  |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Total revenues                                            |  |                        | 200,981 |   |          |   | 149,663 |      |  |      | 86,119 |  |   | 80,464 |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Costs and Operating Expenses:                             |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Vacation Interest cost of sales                           |  |                        | 31,082  |   |          |   | 19,315  |      |  |      | 9,265  |  |   | 10,396 |  
|Advertising, sales and marketing                          |  |                        | 76,546  |   |          |   | 52,846  |      |  |      | 41,090 |  |   | 34,556 |  
|Vacation Interest carrying cost                           |  |                        | 17,038  |   |          |   | 10,899  |      |  |      | 3,630  |  |   | 3,704  |  
|Provision for doubtful accounts and loan losses           |  |                        | 6,440   |   |          |   | 3,745   |      |  |      | 740    |  |   | 591    |  
|Loan portfolio                                            |  |                        | 4,374   |   |          |   | 7,662   |      |  |      | 91     |  |   | (41    | )
|General and administrative                                |  |                        | 39,371  |   |          |   | 40,693  |      |  |      | 18,073 |  |   | 13,003 |  
|Gain on sales of assets                                   |  |                        | (5,489  | ) |          |   | (610    | )    |  |      |       |  |   |       |  
|Depreciation and amortization                             |  |                        | 3,629   |   |          |   | 5,893   |      |  |      | 2,889  |  |   | 2,512  |  
|Interest                                                  |  |                        | 14,223  |   |          |   | 18,153  |      |  |      | 2,049  |  |   | 376    |  
|Reorganization, net                                       |  |                        |        |   |          |   | (664    | )    |  |      |       |  |   |       |  
|Restructuring                                             |  |                        |        |   |          |   | 1,008   |      |  |      |       |  |   |       |  
|Impairment of assets                                      |  |                        |        |   |          |   | 1,400   |      |  |      |       |  |   |       |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Total costs and operating expenses                        |  |                        | 187,214 |   |          |   | 160,340 |      |  |      | 77,827 |  |   | 65,097 |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Income (loss) from operations                             |  |                        | 13,767  |   |          |   | (10,677 | )    |  |      | 8,292  |  |   | 15,367 |  
|Income from investments in joint ventures                 |  |                        | 1,551   |   |          |   | 2,475   |      |  |      |       |  |   |       |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Income (loss) before provision (benefit) for income taxes |  |                        | 15,318  |   |          |   | (8,202  | )    |  |      | 8,292  |  |   | 15,367 |  
|Provision (benefit) for income taxes                      |  |                        | 25      |   |          |   | (41     | )    |  |      | 2,277  |  |   | 4,424  |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  
|Net income (loss)                                         |  | $                      | 15,293  |   |          | $ | (8,161  | )    |  | $    | 6,015  |  | $ | 10,943 |  
|                                                          |  |                        |         |   |          |   |         |      |  |      |        |  |   |        |  



We recorded total
revenues of $287.1 million for the nine months ended September 30, 2004, compared to $230.1 million for the nine months ended September 30, 2003, an increase of $57.0 million, or 24.8%. This increase was driven primarily from our North
American operations where total revenues increased $51.3 million, or 34.3%, to $201.0 million in 2004, compared to $149.7 million for the prior year, while total revenues from European operations increased 7.0%, or $5.6 million, to $86.1 million for
the nine months ended September 30, 2004 from $80.5 million for the prior year. Excluding the effects of favorable foreign exchange rates, total revenues from our European operations decreased $4.3 million, or 5.3%, when compared to the prior
year.



Consolidated Vacation Interest revenues were $202.5
million for the nine months ended September 30, 2004, representing an increase of $44.2 million, or 28.0%, compared to $158.3 million for the nine months ended September 30, 2003, driven by a $41.4 million, or 44.5%, increase in North
American Vacation Interest revenues to $134.4 million, compared to the prior year total of $93.0 million. Our North American improvements are the result of additional sales centers, revitalized marketing collateral and tools, extensive professional
sales training at some of our larger sites, the rollout of standardized sales presentations and a stable management team, as well as the continuing maturity of the vacation ownership industry and improved awareness and understanding by the
purchasing public. Exclusive of $7.9 million of favorable foreign exchange rate movements, our European Vacation Interest revenues fell from $65.3 million for the nine months ended September 30, 2003 to $60.3 million for the nine months ended
September 30, 2004, a decrease of 7.6%. The decrease is the result of lower tour flow, partially offset by revenues resulting from the Thurnham Leisure Group acquisition.



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Resort rental revenue increased 56.8% to $16.8 million for the nine months ended September 30, 2004
compared to $10.7 million for the nine months ended September 30, 2003, primarily as a result of acquisitions and increased utilization of available space for internal marketing purposes (mini-vacation packages designed to give
potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), offset by on-going sales of Vacation Interests, which reduces the number of Vacation Interests available for rental.



Management services revenues of $22.0 million for the nine months ended
September 30, 2004 decreased by $1.2 million, or 5.4%, compared to $23.2 million for the nine months ended September 30, 2003. The overall decrease was driven by a $3.8 million, or 21.7%, decrease in North American management services
revenues to $13.6 million for the nine months ended September 30, 2004 compared to $17.4 million for the nine months ended September 30, 2003. This decrease is directly linked to the loss of the management contract associated with the
Vacation Timeshare Owners Association (VTSOA) sponsored program, which governs Vacation Intervals at approximately 20 resorts and the third quarter 2003 sale of management agreements on three Affiliated Resorts in Florida. These
decreases were offset in part by management contracts for three of the Epic Resorts Group properties acquired in the fourth quarter of 2003. European management services revenues of $8.4 million for the nine months ended September 30, 2004
increased by $2.5 million, or 43.0%, compared to $5.9 million for the nine months ended September 30, 2003, as a result of acquisitions and $1.0 million due to favorable exchange rate movements.



Interest revenues, the majority of which are generated from financing
provided to purchasers and lessees of Vacation Interests in the United States and the Caribbean, increased to $23.3 million for the nine months ended September 30, 2004, compared to $19.9 million for the nine months ended September 30,
2003, primarily due to the acquisition in March 2004 of a $44 million portfolio of performing mortgages backed by Vacation Interests at former Epic Resorts Group locations, offset by prepayments of existing mortgages. As a result of the higher
prepayments, the period ended September 30, 2004 included an additional $1.1 million amortization of the premium recorded as part of the fresh-start adjustments.



Other revenues, which include Club Sunterra fees, travel services revenue and finance commissions earned by our European
subsidiaries, increased by $4.5 million, or 25.1%, to $22.4 million for the nine months ended September 30, 2004 from $17.9 million for the same period in the prior year. This increase is concentrated in our North American operations and is
primarily the result of a $2.6 million gain recorded due to the improved performance and information on certain off-balance sheet securitized obligations as well as increased Club Sunterra fees earned as a result of the growth of the Club Sunterra
product.



Consolidated Vacation Interest cost of sales of $40.3
million for the nine months ended September 30, 2004 increased $10.6 million, or 35.8%, from $29.7 million for the nine months ended September 30, 2003, on 28.0% higher Vacation Interest volume. On a geographic segment basis, North
American Vacation Interest cost of sales increased by $11.8 million, from $19.3 million to $31.1 million, and Vacation Interest cost of sales for our European operations decreased to $9.3 million, down $1.1 million from $10.4 million in 2003. Our
overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the nine months ended September 30, 2004 and 2003, were 19.9% and 18.8%, respectively. The 5.9% increase in this ratio relates
to the larger portion of consolidated Vacation Interest revenues represented by our North American business, from 58.7% in 2003 to 66.3% of consolidated Vacation Interest revenues in 2004. The cost-off rate for our North American operations
increased from 20.8% in the nine months ended September 30, 2003 to 23.1% in the current year. This is attributable to selling a higher proportion of Vacation Interests in newly constructed phases at existing properties. The North American
increase was partially offset by a 10.9% decrease in gross Vacation Interest cost of sales for our European operations. As a percentage of European Vacation Interest revenues for the nine months ended September 30, 2004 and 2003, European
Vacation Interest cost of sales was 13.6% and 15.9%, respectively. Our European operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the nine months ended September 30, 2004, consolidated advertising, sales and marketing costs were $117.6 million
compared to $87.4 million for the nine months ended September 30, 2003, a 34.6% increase on 28.0% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to 58.1% in 2004 compared to 55.2% in the
prior year. This increase was driven by our European operations, which experienced an increase in this ratio from 52.9% to 60.3% for the nine months ended September 30, 2004. The unfavorable variance at our European operations is attributable
to additional marketing efforts employed to improve tour flow as a result of a difficult European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation Interest revenues were 57.0% and 56.8%
for the nine months ended September 30, 2004 and 2003, respectively.



Vacation Interest carrying cost, which consists of annual maintenance fees, reserve and special assessments on unsold Vacation Interests, as well as the cost associated with maintaining un-annexed units (owned units
not declared or registered as part of the timeshare program) increased 41.5%, or $6.1 million, to $20.7 million for the nine months ended September 30, 2004 from $14.6 million for the nine months ended September 30, 2003. The increase was
primarily the result of the increased Vacation Interests as a result of the purchase of the remaining outstanding partnership interests in Kaanapali, additional North American Vacation Interest carrying cost due to Vacation Interests acquired
through the Epic Resorts Group acquisition offset by ongoing sales of Vacation Interests. As a percentage of resort rental revenues, Vacation Interest carrying cost was 123.0% for the nine months ended September 30, 2004 compared to 136.2% for
the nine months ended September 30, 2003. This decrease is the result of improved utilization of available space.



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The provision for doubtful accounts and loan losses was $7.2 million for the nine months ended
September 30, 2004 compared to $4.3 million for the nine months ended September 30, 2003. Of these amounts, $7.1 million and $4.0 million for 2004 and 2003, respectively, related to mortgages and contracts receivable. The balance of the
provision for doubtful accounts of $0.1 million and $0.3 million for the nine months ended September 30, 2004 and 2003, respectively, represented provisions for estimated uncollectible amounts due from homeowner associations, assessments to
owners for maintenance fees at certain Caribbean resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributable to the higher levels of Vacation
Interest revenues, as the provision is recorded as a percentage of each financed sale, as well as an increase in such percentage of each financed sale.



Loan portfolio expenses decreased 41.4% to $4.5 million for the nine months ended September 30, 2004 from $7.6 million in the prior year. The
decrease is attributable to process improvement and restructuring initiatives implemented in late 2003, including refining underwriting procedures, processes and loss mitigation. We have also brought in certain servicing processes formerly
outsourced.



General and administrative expenses increased $3.7
million to $57.4 million for the nine months ended September 30, 2004 as compared to $53.7 million for the nine months ended September 30, 2003. As a percentage of total revenues, general and administrative expenses improved to 20.0% in
2004 from 23.3% in 2003. The improvement as a percentage of total revenues during the nine months ended September 30, 2004 is partially due to a $1.0 million benefit recorded as a result of a tax settlement with the State of Hawaii during the
second quarter of 2004. We had accrued $3.5 million for outstanding tax liabilities payable to the State of Hawaii for general excise taxes due in arrears. Shortly after June 30, 2004, we accepted the State of Hawaiis counter-offer to
settle the entire tax liability for a lump sum payment of $2.5 million. Additionally, we settled a payroll tax matter in another jurisdiction that resulted in $0.5 million benefit recorded. Lastly, we reduced general and administrative expenses due
to the closure of certain Sunterra Pacific operations in December of 2003, and an overall reduction in payroll and office related expenses as a result of back office restructuring initiatives. These reductions were partially offset by a $0.5 million
expense recorded during the second quarter of 2004 in connection with certain litigation. This accrual became necessary during the second quarter of 2004 due to our latest assessment of the progress of the case and related settlement discussions.



Gain on sales of assets increased to $5.5 million for the nine
months ended September 30, 2004 from $0.6 million during the same period in 2003. The $5.5 million gain for 2004 represents a gain on the sale of the Island Links Resort, a gain on the sale of certain assets of Sunterra Pacific to VTSOA and a
gain on the extinguishment of certain fulfillment obligations, the recognition of deferred revenue in conjunction with the sale of such assets of Sunterra Pacific to VTSOA and a gain recorded as a result of the sale of a note receivable that was
previously written off.



Depreciation and amortization expense
decreased 22.5%, or $1.9 million, to $6.5 million for the nine months ended September 30, 2004 from $8.4 million for the same period in 2003. This decrease is attributable to a large number of North American assets reaching full depreciation.



Interest expense for the nine months ended September 30,
2004 was $16.3 million, compared to $18.5 million for the nine months ended September 30, 2003. The decrease was primarily due to reduced borrowing costs, reduced amortization of deferred financing charges and the favorable interest rate on the
33/4% Senior Subordinated Convertible Notes due 2024, partially offset by increased average borrowing in 2004.



There were no reorganization costs, net, in the nine
months ended September 30, 2004, as we completed most of our reorganization activities by the end of 2002. For the nine months ended September 30, 2003, reorganization costs were a benefit of $0.7 million, relating primarily to a $0.6
million gain on settlement of certain bankruptcy-related litigation in the third quarter of 2003.



There were no restructuring costs in the nine months ended September 30, 2004, as the components of our restructuring were complete by the end of
2003. Restructuring costs were $1.0 million for the nine months ended September 30, 2003 and primarily related to the rollout of our global points-based program.



Impairment of assets totaled $1.4 million for the nine months ended September 30, 2003. These charges related to our
write down of the carrying value of the building that was our former headquarters in Orlando in conjunction with a pending sale. Additionally, we completed our development of our enterprise software (known as ATLAS), and as such, the former software
utilized by us was deemed to have little or no continuing value and was written off in the third quarter of 2003. There were no charges for impairment of assets in 2004.



Income from investments in joint ventures decreased 37.3% to $1.6 million for the nine months ended September 30, 2004,
compared to $2.5 million for the nine months ended September 30, 2003. In July 2004, we purchased the remaining outstanding 77% partnership interest in Kaanapali, and in conjunction with this acquisition, all unamortized debt issuance
costs of the joint venture were expensed in the third quarter of 2004.



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Our provision for income taxes for the nine months ended September 30, 2004 was $2.3 million,
compared to $4.4 million for the nine months ended September 30, 2003. The reduction in income tax expense related to our European operations, which recorded much less taxable income for the nine months ended September 30, 2004 versus the
nine months ended September 30, 2003. The tax basis operating income of the North American operations was offset by operating losses for prior years.



Comparison of the 12 Months Ended September 30, 2004 to the Fiscal Year Ended December 31, 2003:



|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|----------------------------------------------- |  | ------------------------------- | ------- | - | -------------------------- | - | -------- | ------------------------------- |  | -------------------------- | ------- |  | - | -------
|                                                |  | North American                  |         |   | European                  
|                                                |  | 12 MonthsEndedSeptember 30,2004 |         |   | Year EndedDecember 31,2003 |   |          | 12 MonthsEndedSeptember 30,2004 |  | Year EndedDecember 31,2003
|                                                |  | (Amounts in thousands)         
|Revenues:                                       |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Vacation Interest                               |  | $                               | 169,359 |   |                            | $ | 127,967  |                                 |  | $                          | 87,869  |  | $ | 84,998 
|Resort rental                                   |  |                                 | 17,463  |   |                            |   | 11,362   |                                 |  |                            | 1,615   |  |   | 1,625  
|Management services                             |  |                                 | 18,630  |   |                            |   | 22,407   |                                 |  |                            | 10,546  |  |   | 8,026  
|Interest                                        |  |                                 | 27,369  |   |                            |   | 24,186   |                                 |  |                            | 2,423   |  |   | 2,235  
|Other                                           |  |                                 | 20,411  |   |                            |   | 15,992   |                                 |  |                            | 8,201   |  |   | 8,115  
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Total revenues                                  |  |                                 | 253,232 |   |                            |   | 201,914  |                                 |  |                            | 110,654 |  |   | 104,999
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Costs and Operating Expenses:                   |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Vacation Interest cost of sales                 |  |                                 | 38,468  |   |                            |   | 26,701   |                                 |  |                            | 12,632  |  |   | 13,763 
|Advertising, sales and marketing                |  |                                 | 95,833  |   |                            |   | 72,133   |                                 |  |                            | 52,070  |  |   | 45,536 
|Vacation Interest carrying cost                 |  |                                 | 19,401  |   |                            |   | 13,262   |                                 |  |                            | 4,145   |  |   | 4,219  
|Provision for doubtful accounts and loan losses |  |                                 | 7,651   |   |                            |   | 4,956    |                                 |  |                            | 831     |  |   | 682    
|Loan portfolio                                  |  |                                 | 6,699   |   |                            |   | 9,987    |                                 |  |                            | 197     |  |   | 65     
|General and administrative                      |  |                                 | 52,339  |   |                            |   | 53,661   |                                 |  |                            | 22,740  |  |   | 17,670 
|Gain on sales of assets                         |  |                                 | (5,567  | ) |                            |   | (688     | )                               |  |                            |        |  |   |       
|Depreciation and amortization                   |  |                                 | 5,614   |   |                            |   | 7,878    |                                 |  |                            | 4,048   |  |   | 3,671  
|Interest                                        |  |                                 | 22,357  |   |                            |   | 26,287   |                                 |  |                            | 1,695   |  |   | 22     
|Reorganization, net                             |  |                                 | 45      |   |                            |   | (619     | )                               |  |                            |        |  |   |       
|Restructuring                                   |  |                                 | 266     |   |                            |   | 1,274    |                                 |  |                            |        |  |   |       
|Impairment of goodwill                          |  |                                 | 91,586  |   |                            |   | 91,586   |                                 |  |                            |        |  |   |       
|Impairment of assets                            |  |                                 | 897     |   |                            |   | 2,297    |                                 |  |                            |        |  |   |       
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Total costs and operating expenses              |  |                                 | 335,589 |   |                            |   | 308,715  |                                 |  |                            | 98,358  |  |   | 85,628 
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|(Loss) income from operations                   |  |                                 | (82,357 | ) |                            |   | (106,801 | )                               |  |                            | 12,296  |  |   | 19,371 
|Income from investments in joint ventures       |  |                                 | 2,416   |   |                            |   | 3,340    |                                 |  |                            |        |  |   |       
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|(Loss) income before provision for income taxes |  |                                 | (79,941 | ) |                            |   | (103,461 | )                               |  |                            | 12,296  |  |   | 19,371 
|Provision for income taxes                      |  |                                 | 116     |   |                            |   | 50       |                                 |  |                            | 2,912   |  |   | 5,059  
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        
|Net (loss) income                               |  | $                               | (80,057 | ) |                            | $ | (103,511 | )                               |  | $                          | 9,384   |  | $ | 14,312 
|                                                |  |                                 |         |   |                            |   |          |                                 |  |                            |         |  |   |        



We recorded total
revenues of $363.9 million for the 12 months ended September 30, 2004, compared to $306.9 million for the year ended December 31, 2003, an increase of $57.0 million, or 18.6%. This increase was driven primarily from our North American
operations where total revenues increased $51.3 million, or 25.4%, to $253.2 million for the 12 months ended September 30, 2004 compared to $201.9 million for the year ended December 31, 2003, while total revenues from our European
operations increased 5.4%, or $5.7 million, to $110.7 million for the 12 months ended September 30, 2004 from $105.0 million for the year ended December 31, 2003. Excluding the effects of favorable foreign exchange rates, total revenues
from our European operations decreased $4.2 million, or 4.0%, period over period.



Consolidated Vacation Interest revenues were $257.2 million for the 12 months ended September 30, 2004, representing an increase of $44.2 million, or 20.8%, compared to $213.0 million for
the year ended December 31, 2003, driven by a $41.4 million, or 32.4%, increase in North American Vacation Interest revenues to $169.4 million from $128.0 million. Our North American improvements are the result of additional sales centers,
revitalized marketing collateral and tools, extensive professional sales training at some of our larger sites, the rollout of standardized sales presentations and a stable management team, as well as the continuing maturity of the vacation ownership
industry and improved awareness and understanding by the purchasing public. Exclusive of $7.8



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million of favorable foreign exchange rate movements, our European Vacation Interest revenues decreased from $85.0
million for the year ended December 31, 2003 to $80.1 million for the year ended September 30, 2004, a decrease of 5.8%. The decrease is the result of lower tour flow, partially offset by revenues resulting from the Thurnham Leisure Group
acquisition during 2004.



Resort rental revenue increased 46.9%
to $19.1 million for the 12 months ended September 30, 2004 compared to $13.0 million for the year ended December 31, 2003, primarily as a result of acquisitions and increased utilization of available space for internal marketing purposes
(mini-vacation packages designed to give potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), offset by on-going sales of Vacation Interests, which reduces the number of Vacation
Interests available for rental.



Management services revenues
of $29.2 million for the 12 months ended September 30, 2004 decreased by $1.2 million, or 4.1%, compared to $30.4 million for the year ended December 31, 2003. The overall decrease was driven by a $3.8 million, or 16.9%, decrease in North
American management services revenues to $18.6 million for the 12 months ended September 30, 2004 compared to $22.4 million for the year ended December 31, 2003. This decrease is directly linked to the loss of the management contract
associated with the VTSOA sponsored program, which governs Vacation Intervals at approximately 20 resorts and the third quarter 2003 sale of management agreements on three Affiliated Resorts in Florida. These decreases were offset in part by
management contracts for three of the Epic Resorts Group properties acquired in the fourth quarter of 2003. European management services revenues of $10.5 million for the 12 months ended September 30, 2004 increased by $2.5 million, or 31.4%,
compared to $8.0 million for the year ended December 31, 2003, as a result of acquisitions and $1.0 million due to favorable exchange rate movements.



Interest revenues, the majority of which are generated from financing provided to purchasers and lessees of Vacation Interests in the United States and
the Caribbean, increased to $29.8 million for the 12 months ended September 30, 2004, compared to $26.4 million for the year ended December 31, 2003, primarily due to the acquisition in March 2004 of a $44 million portfolio of performing
mortgages backed by Vacation Interests at former Epic Resorts Group locations, offset by prepayments of existing mortgages.



Other revenues, which include Club Sunterra fees, travel services revenue and finance commissions earned by our European subsidiaries, increased by $4.5
million, or 18.7%, to $28.6 million for the 12 months ended September 30, 2004 from $24.1 million for the year ended December 31, 2003. This increase is concentrated in our North American operations and is primarily the result of a $2.6
million gain recorded due to the improved performance and information on certain off-balance sheet securitized obligations as well as increased Club Sunterra fees earned as a result of the growth of the Club Sunterra product during the 12 months
ended September 30, 2004.



Consolidated Vacation Interest
cost of sales of $51.1 million for the 12 months ended September 30, 2004 increased $10.6 million, or 26.3%, from $40.5 million for the year ended December 31, 2003, on 20.8% higher Vacation Interest volume. On a geographic segment basis,
North American Vacation Interest cost of sales increased by $11.8 million, from $26.7 million to $38.5 million, and Vacation Interest cost of sales for our European operations decreased to $12.6 million, down $1.2 million from $13.8 million in 2003.
Our overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the 12 months ended September 30, 2004 and the year ended December 31, 2003 were 19.9% and 19.0%, respectively. The
increase in this ratio relates to the larger portion of consolidated Vacation Interest revenues represented by our North American business, from 60.1% in 2003 to 65.8% of consolidated Vacation Interest revenues in 2004. The cost-off rate for our
North American operations increased from 20.9% in the year ended December 31, 2003 to 22.7% in the year ended September 30 2004. This is attributable to selling a higher proportion of Vacation Interests in newly constructed phases at
existing properties. The North American increase was partially offset by an 8.2% decrease in gross Vacation Interest cost of sales for our European operations. As a percentage of European Vacation Interest revenues for the 12 months ended
September 30, 2004 and the year ended December 31, 2003, European Vacation Interest cost of sales was 14.4% and 16.2%, respectively. Our European operations improved their cost-off rate as a result of lower cost inventory acquisitions and
recoveries.



For the 12 months ended September 30, 2004,
consolidated advertising, sales and marketing costs were $147.9 million compared to $117.7 million for the year ended December 31, 2003, a 25.7% increase on 20.8% higher Vacation Interest volume. As a percentage of Vacation Interest revenues,
these costs increased to 57.5% during the 12 months ended September 30, 2004 compared to 55.3% during the year ended December 31, 2003. This increase was driven by our European operations, which experienced an increase in this ratio from
53.6% to 59.3% for the 12 months ended September 30, 2004 and the year ended December 31, 2003, respectively. The unfavorable variance at our European operations is attributable to additional marketing efforts employed to improve tour flow
as a result of a difficult European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation Interest revenues were 56.6% and 56.4% for the 12 months ended September 30, 2004 and the year
ended December 31, 2003, respectively.



Vacation Interest
carrying cost, which consists of annual maintenance fees, reserve and special assessments on unsold Vacation Interests, as well as the cost associated with maintaining un-annexed units (owned units not declared or registered as part of the timeshare
program) increased 34.7%, or $6.0 million, to $23.5 million for the 12 months ended September 30, 2004 from $17.5 million for the year ended December 31, 2003. The increase was primarily the result of the increased Vacation Interests as a
result of



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the purchase of the remaining outstanding partnership interests in Kaanapali, additional North American Vacation
Interest carrying cost due to Vacation Interests acquired through the Epic Resorts Group acquisition offset by ongoing sales of Vacation Interests. As a percentage of resort rental revenues, Vacation Interest carrying cost was 123.4% for the 12
months ended September 30, 2004 compared to 134.6% for the year ended December 31, 2003. This decrease is the result of improved utilization of available space.



The provision for doubtful accounts and loan losses was $8.5 million for the 12 months ended September 30, 2004
compared to $5.6 million for the year ended December 31, 2003. Of these amounts, $8.6 million and $5.5 million for 2004 and 2003, respectively, related to mortgages and contracts receivable. The balance of the provision for doubtful accounts of
$(0.1) million and $0.1 million for the 12 months ended September 30, 2004 and the year ended December 31, 2003, respectively, represented provisions for estimated uncollectible amounts due from homeowner associations, assessments to
owners for maintenance fees at certain Caribbean resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributable to the higher levels of Vacation
Interest revenues, as the provision is recorded as a percentage of each financed sale, as well as an increase in such percentage of each financed sale.



Loan portfolio expenses decreased 31.4% to $6.9 million for the 12 months ended September 30, 2004 from $10.1 million in the prior year. The decrease
is attributable to significant process improvement and restructuring initiatives implemented in late 2003, including refining underwriting procedures and processes, best practices in loss mitigation (including increased and timely correspondence
with customers whose mortgages and contracts are perceived to be in danger of becoming delinquent) and cross training allowing us to service higher loan volumes with fewer personnel. We have also implemented new technology that allows us to service
more loans more efficiently, and have brought in certain servicing processes formerly outsourced.



General and administrative expenses increased $3.8 million to $75.1 million for the 12 months ended September 30, 2004 as compared to $71.3 million
for the year ended December 31, 2003. As a percentage of total revenues, general and administrative expenses improved to 20.6% in 2004 from 23.2% in 2003. The improvement as a percentage of total revenues during the 12 months ended
September 30, 2004 is partially due to a $1.0 million benefit recorded as a result of a tax settlement with the State of Hawaii during 2004. We had accrued $3.5 million for outstanding tax liabilities payable to the State of Hawaii for general
excise taxes due in arrears. Shortly after June 30, 2004, the Company accepted the State of Hawaiis counter-offer to settle the entire tax liability for a lump sum payment of $2.5 million. Additionally, we settled a payroll tax matter in
another jurisdiction that resulted in $0.5 million benefit recorded in 2004. Lastly, we have reduced general and administrative expenses due to the closure of certain Sunterra Pacific operations in December of 2003, and an overall reduction in
payroll and office related expenses as a result of back office restructuring initiatives. These reductions were partially offset by a $0.5 million expense recorded during 2004 in connection with certain litigation.



Gain on sales of assets increased to $5.6 million for the 12 months ended
September 30, 2004 from $0.7 million during the year ended December 31, 2003. The $5.6 million gain for 2004 primarily represents a gain on the sale of the Island Links Resort, a gain on the sale of certain assets of Sunterra Pacific to
VTSOA and a gain on the extinguishment of certain fulfillment obligations, the recognition of deferred revenue in conjunction with the sale of such assets of Sunterra Pacific to VTSOA and a gain recorded as a result of the sale of a note receivable
that was previously written off.



Depreciation and amortization
expense decreased 16.3%, or $1.8 million, to $9.7 million for the 12 months ended September 30, 2004 from $11.5 million for the year ended December 31, 2003. This decrease is attributable to a large number of North American assets reaching
full depreciation.



Interest expense for the 12 months ended
September 30, 2004 was $24.1 million, compared to $26.3 million for the year ended December 31, 2003. The decrease was primarily due to reduced borrowing costs, reduced amortization of deferred financing charges and the favorable interest
rate on the 33/4% Senior Subordinated Convertible Notes due 2024, partially offset by increased average
borrowing in 2004.



For the year ended December 31,
2003, reorganization costs were a gain of $0.6 million, relating primarily to a gain on settlement of certain bankruptcy-related litigation. For the year ended September 30, 2004, reorganization costs were $0.1 million, which was incurred
during the quarter ended December 31, 2003, and accordingly, is included in both periods presented.



Restructuring costs totaled $1.3 million for the year ended December 31, 2003, and primarily related to the rollout of our global points-based
program. For the year ended September 30, 2004, reorganization costs totaled $0.3 million, of which the entire amount was recorded in the quarter ended December 31, 2003, and accordingly, is included in both periods presented. There were
no other restructuring costs during the 12 months ended September 30, 2004.



Impairment of goodwill totaled $91.6 million for the 12 months ended September 30, 2004 and the year ended December 31, 2003, which represented the impairment of the goodwill for the North American segment.
The entire $91.6 million was recorded in the quarter ended December 31, 2003, and accordingly, is included in both periods presented.



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Impairment of assets totaled $2.3 million for the year ended December 31, 2003. These charges
include $0.9 million related to our former headquarters in Orlando in conjunction with a pending sale, $0.9 million relating to unsold Vacation Interests relating to the disposal of a resort, and $0.5 million representing the undepreciated cost of
our former (SWORD) enterprise software. Additionally, we completed our development of the ATLAS enterprise software, and as such, the SWORD software was deemed to have no continuing value and was written off. The aforementioned $0.9
million impairment related to the resort disposal was recorded in the quarter ended December 31, 2003, and accordingly, is included in both periods presented. There was no other impairment of assets during the 12 months ended September 30,
2004.



Income from investments in joint ventures decreased
27.7% to $2.4 million for the 12 months ended September 30, 2004, compared to $3.3 million for the year ended December 31, 2003. In July 2004, the Company purchased the remaining outstanding 77% partnership interest in Kaanapali, and
in conjunction with this acquisition, all unamortized debt issuance costs of the joint venture were expensed.



Our provision for income taxes for the 12 months ended September 30, 2004 was $3.0 million, compared to $5.1 million for the year ended
December 31, 2003. The reduction in income tax expense primarily related to our European operations, which recorded less taxable income in the 12 months ended September 30, 2004 compared to the year ended December 31, 2003. The
reduction of the tax basis operating loss of the North American operations from the year ended December 31, 2003 to the 12 months ended September 30, 2004 was offset by operating losses for prior years.



Liquidity and Capital Resources



We generate cash principally from cash sales of Vacation Interests,
principal and interest payments on mortgages and contracts receivable, down payments on financed Vacation Interest sales and collection of Club Sunterra membership fees, resort rentals and management fees.



During the year ended September 30, 2005, net cash provided by operating
activities was $89.5 million, primarily the result of the net loss of $34.7 million offset by non-cash expenses totaling $100.2 million (notably $55.0 million for the impairment of goodwill) less other non-cash gains of $1.7 million and increases in
retained interests on mortgages and contracts receivable sold of $0.5 million and deferred taxes of $2.3 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities of $28.5 million, including
reductions in cash in escrow and restricted cash of $17.9 million, mortgages and contracts receivable of $8.2 million, unsold Vacation Interests of $4.7 million, other receivables of $2.1 million and prepaid expenses and other assets of $3.6 million
plus increases in accrued liabilities of $5.3 million offset by increases in due from related parties of $10.7 million, and decreases in accounts payable of $0.3 million, income taxes payable of $1.3 million and deferred revenues of $0.8 million.



During the year ended September 30, 2005, net cash used
in investing activities was $87.7 million, primarily due to the purchase of several mortgage portfolios for $34.4 million, the acquisition of the remaining outstanding 70% partnership interest in Poipu for $27.8 million, the purchase of businesses
for $10.1 million, the acquisition of Eden Bay Resort units for $7.9 million and capital expenditures of $11.5 million, partially offset by proceeds from the sales of assets of $1.4 million and cash distributions from joint ventures of $2.7 million.



During the year ended September 30, 2005, net cash used
in financing activities was $14.6 million. Payments on the senior secured working capital credit facility (Senior Finance Facility) with Merrill Lynch Mortgage Capital, Inc. totaled $72.5 million and payments on the securitization and
other notes payable totaled $39.0 million. These payments were funded primarily through borrowings on the Senior Finance Facility totaling $99.6 million and the issuance of notes payable of $0.1 million.



We currently anticipate spending approximately $82.0 million to $86.0 million
for unsold Vacation Interests at existing resort locations during fiscal 2006. Also in fiscal 2006, we plan to invest $8.0 million to $10.0 million in capital expenditures related to property and equipment. We plan to fund these expenditures with
cash generated from operations and borrowings under the Senior Finance Facility. We believe that, with respect to our current operations, cash generated from operations and future borrowings will be sufficient to meet our working capital and capital
expenditure needs through the end of fiscal 2006. If these are not sufficient, we have the ability to adjust our spending on unsold Vacation Interests.



The allowance for mortgage and contract loan losses at September 30, 2005 was $28.4 million, or approximately 11.6%, of the loan and contract
originations (excluding purchased loan pools) outstanding at that date. Management believes the allowance is adequate. However, if the amounts of the mortgages and contracts receivable that are ultimately written off materially exceed the related
allowances, our business, results of operations and financial condition could be adversely affected.



Our plan for meeting our liquidity needs may be affected by, but not limited to, the following: demand for our product, our ability to borrow funds under
our current financing arrangements, an increase in prepayment speeds and default rates on our mortgages and contracts receivable, the threat and/or effects on the travel and leisure industry of future terrorist attacks and limitations on our ability
to conduct marketing activities, and other factors, including those discussed under BusinessRisk Factors.



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Completed units at various resort properties are acquired or developed in advance, and we finance a
significant portion of the purchase price of Vacation Interests. Thus, we continually need funds to acquire and develop property, to carry mortgages and contracts receivable and to provide working capital. We anticipate being able to borrow against
our mortgages and contracts receivable at terms favorable to us. If we are unable to borrow against or sell our mortgages and contracts receivable in the future, particularly if we suffer any significant decline in the credit quality of our
mortgages and contracts receivable, our ability to acquire or develop additional resort units will be adversely affected and our profitability from sales of Vacation Interests may be reduced or eliminated.



Corporate Finance



Overview



On average, approximately 85.4% of our North American Vacation Interest revenue is derived through transactions where we provide the financing.
Approximately 29.7% of the value of these transactions is realized in cash at the time of the transaction or through the application of existing equity from another Vacation Interest, with the remaining 70.3% financed by us. Accordingly, we do not
generate sufficient cash from sales to provide the necessary capital to pay the costs of developing or acquiring additional resorts and to replenish working capital. We believe that, with respect to our current operations, cash generated from
operations and future borrowings will be sufficient to meet our working capital and capital expenditure needs for the next 12 months.



On July 29, 2002, we entered into a two-year agreement for a $300.0 million Senior Finance Facility with Merrill Lynch Mortgage Capital, Inc. The
proceeds of the Senior Finance Facility were used to pay amounts payable under certain creditor agreements, provide mortgage receivable and other working capital financing to us and to pay fees and expenses related to the Senior Finance Facility. A
portion of the proceeds from the initial funding drawn on the Senior Finance Facility was used to pay off amounts outstanding under our previous senior finance facility.



On July 28, 2005, we entered into a fourth amendment (the Amendment) with Merrill Lynch Mortgage Capital,
Inc. to amend our Senior Finance Facility,. The Amendment reduced the interest rates charged on the portion of the facility secured by eligible mortgages and contracts receivable from one-month LIBOR plus 2.25% to one-month LIBOR plus 1.5% for
mortgages and contracts secured by Vacation Interests at all eligible Sunterra properties except the former Epic Resorts Group properties, for which the interest rate was reduced to one-month LIBOR plus 2.0%. The advance rate under loans secured by
such mortgages and contracts receivable was increased from 85% to 92% for mortgages and contracts secured by Vacation Interests at all eligible Sunterra properties, except the former Epic Resorts Group properties, for which the advance rate was set
at 70%. The Amendment also added in-transit mortgages and contracts receivable to the borrowing base, at an advance rate of 50%, subject to a maximum of $5 million of borrowings. Advance rates on unsold Vacation Interests remained at
90%. The Amendment also added Poipu as a borrower on our Senior Finance Facility as of August 20, 2005 and provides for borrowings secured by Poipus eligible mortgages receivable and eligible unsold Vacation Interests. In addition, the
general liens and certain operational covenants were removed, the annual facility fees were reduced to $2.0 million per year, the commission equal to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic Resorts Group was
settled for a lump sum payment of $0.8 million, the unused line fees were reduced to 0.20% per annum and the term of the Senior Finance Facility was extended to July 31, 2007.



From February 2004 until July 2005, the interest rate on the portion of the line secured by our eligible mortgages and
contracts receivable was the one-month LIBOR rate plus 2.25%, and, for the portion of the line secured by our eligible unsold Vacation Interests, the rate was the one-month LIBOR rate plus 4.0%. Prior to February 2004, borrowings under the Senior
Finance Facility bore interest at an annual rate equal to one-month LIBOR plus 3%, 5% or 7%, depending on the amounts outstanding and on the type of asset collateralizing various advances.



In conjunction with the July 7, 2004 acquisition of the remaining
outstanding 77% partnership interests in Kaanapali, we entered into a third amendment to the Senior Finance Facility with Merrill Lynch Mortgage Capital, Inc. This amendment added Kaanapali as a borrower on our Senior Finance Facility
and provides for borrowings secured by Kaanapalis eligible mortgages receivable and eligible unsold Vacation Interests.



In addition to the facility fee (2.5% of $300.0 million) paid in connection with the commitment and the closing of the Senior Finance Facility and an
anniversary fee of 1.5% due on the anniversary of the initial borrowing, we issued a warrant exercisable for 1,190,148 shares of common stock at an exercise price of $15.25 per share (the deemed value of the shares), subject to adjustment under
certain anti-dilution provisions of the warrant and agreed to pay an unused commitment fee of 0.25% per annum on the excess availability under the Senior Finance Facility. The $8.7 million value of the warrants issued to the Senior Finance
Facility lender was determined using a Black-Scholes model based on a risk free interest rate of 3.81%, expected volatility of 50% and an expected life of five years. The February 2004 amendment reduced the exercise price of warrants to purchase
1,190,148 shares of our common stock from $15.25 per share to $14.00 per share and also required us to pay Merrill Lynch Mortgage Capital, Inc. a commission equal to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic
Resorts Group. As a result of the February 2004



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amendment, an additional $0.4 million was recorded to reflect the decrease in exercise price. The value of the warrants
was recorded as a capitalized financing cost that is amortized over the term of the financing agreement. The February 2004 amendment also stipulated that facility fees equal to 0.75% of $300.0 million were due and payable on July 29, 2004 and
July 29, 2005, with the latter fee being prorated through the then termination date of February 28, 2006.



For the year ended September 30, 2005, the nine months ended September 30, 2004, and the year ended December 31, 2003, amortization of $4.2
million, $5.5 million and $10.8 million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. The Senior Finance Facility also requires
us to pay an additional cash interest amount monthly when certain conditions are not met. The total amount of such additional cash interest payments made during the year ended September 30, 2005, the nine months ended September 30, 2004,
and the year ended December 31, 2003 was $0.0 million, $0.3 million and $2.2 million, respectively.



At September 30, 2005, the maximum capacity to borrow, amounts outstanding and remaining availability under the Senior Finance Facility were $300.0
million, $198.8 million and $101.2 million, respectively. The capacity and availability of borrowings under the Senior Finance Facility are based on the value of eligible mortgages and contracts receivable and the value of eligible unsold Vacation
Interests. The Senior Finance Facility is secured by a first priority lien on our mortgages and contracts receivable and unsold Vacation Interests. The weighted average interest rate of these borrowings at September 30, 2005 was 5.8% per
annum.



Senior Subordinated Convertible Notes



On March 29, 2004, we issued $95.0 million in 33/4% Senior Subordinated Convertible Notes due 2024 (Notes). The Notes were issued at a price of $1,000
per Note and pay interest semi-annually on March 29 and September 29 of each year, beginning on September 29, 2004, at the rate of 3.75% per annum. The Notes will mature on March 29, 2024. Under the terms of the indenture,
we were required to use a portion of the proceeds from the offering to purchase a portfolio of U.S. government securities that are pledged to secure the first six scheduled interest payments on the Notes. This $10.4 million was recorded in Prepaid
expenses and other assets, net, and the balance on the accompanying balance sheets was $5.3 million and $8.7 million as of September 30, 2005 and 2004, respectively. Other than this pledge, the Notes are unsecured obligations.



The Notes are convertible, at the option of the holder,
into shares of our common stock at a conversion rate of 62.5027 shares per $1,000 principal amount of the Notes once: the price of our common stock is more than 110% of such implied conversion price of $16.00 per common share for more than 20
trading days during the last 30 trading days of a calendar quarter; the Notes are called for redemption; or specified corporate transactions or significant distributions to holders of our common stock have occurred. In addition, the Notes are
convertible during the five business day period after any five consecutive trading day period ending on or prior to March 29, 2019 in which the trading price per note for each day of that five trading day period was less than 98% of the product
of the sale price of our common stock and the conversion rate on each such day.



Holders of the Notes may require us to purchase for cash all or a portion of their Notes on March 29, 2011, March 29, 2014 and on March 29, 2019 at a price equal to $1,000 per $1,000 principal
amount of the Notes, plus accrued and unpaid interest, if any, to the date of the purchase. In addition, if we experience a change in control, each holder may require us to purchase all or a portion of such holders Notes at the same amount,
plus, in certain circumstances, a make-whole premium.



We may
redeem some or all of the Notes for cash at any time on or after March 29, 2007 if the closing price of our common stock has exceeded 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive
trading days ending on the trading day before the mailing date of the corresponding redemption notice. On or after March 29, 2011, we may redeem some or all of the Notes for cash at any time at a price of $1,000 per $1,000 principal amount of
the Notes, plus accrued and unpaid interest, if any, to the redemption date.



For the year ended September 30, 2005 and the nine months ended September 30, 2004, amortization of $0.5 million and $0.3 million, respectively, of debt issuance costs related to the Notes is included in
interest expense in the accompanying consolidated statements of operations.



Securitization Notes



On
September 30, 2004, we completed a $151.7 million private offering and sale of vacation ownership receivable-backed notes (the 2004 Securitization). The $171.4 million (including $17.0 million in aggregate principal of vacation
ownership receivables sold during the ninety day period commencing September 30, 2004) in aggregate principal of vacation ownership receivables that collateralize the notes were initially sold to Sunterra SPE 2004-1 LLC (SPE
2004-1), a wholly-owned, special-purpose entity that deposited the vacation ownership receivables into the Sunterra Owner Trust 2004-1, which issued the notes and is included within Sunterra Corporations consolidated financial
statements, without recourse to us or to SPE 2004-1, except for breaches of certain representations and warranties at the time of sale. The 2004 Securitization is secured by a first priority lien on the mortgages and contracts receivable sold to
Sunterra Owner Trust 2004-1.



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On October 27, 2004 and December 1, 2004, we completed pre-funding transactions with the
Sunterra Owner Trust 2004-1. On October 27, 2004, $11.1 million in vacation ownership receivables were sold to Sunterra Owner Trust 2004-1 and on December 1, 2004, $5.9 million of vacation ownership receivables were sold to Sunterra Owner
Trust 2004-1. As a result of these two transactions, the $17.0 million classified as restricted cash as of September 30, 2004 was released ratably on these two dates and transferred to us in exchange for these vacation ownership receivables.



The $151.7 million private offering consists of: $66.0 million
class A notes AAA, $18.4 million class B notes AA, $17.6 million class C notes A and $49.7 million class D notes BBB. The notes carry various fixed interest rates ranging from 3.6% to 4.9% and have
legal stated maturities of October 2020. The actual maturity of the notes could be significantly earlier than the stated maturity, and the average life of the notes could be significantly shorter than anticipated, in the event of certain
occurrences. Interest and principal payments are due monthly. In addition, the notes contain a clean up call provision that allows the notes to be called and mortgages receivable to be transferred back to us when the remaining principal
value of the notes reaches 10% of the original principal value.



Under the terms of the indenture, Sunterra Financial Services, Inc. a direct wholly-owned subsidiary of ours, in exchange for a monthly fee, services and administers the vacation ownership receivables in Sunterra Owner Trust 2004-1. All
monthly fees are eliminated as part of our consolidation of the Sunterra Owner Trust 2004-1.



The proceeds were used to pay down balances due under our Senior Finance Facility, pay fees associated with the transaction to third parties and deposit initial amounts in a required cash reserve account. We also
retained a subordinated interest in the future cash flows from the 2004 Securitization.



For the year ended September 30, 2005, amortization of $0.7 million of debt issuance costs related to the 2004 Securitization is included in interest expense in the accompanying consolidated statement of
operations.



Derivatives



In the past, we have utilized derivative financial instruments from time to
time, which included interest rate cap agreements to manage well-defined interest rate exposure and foreign currency forward contracts to manage our exposure to fluctuations in foreign exchange rates and to meet our future Euro currency
requirements. It is our policy that derivative financial instruments are not used for trading or speculative purposes. Counter parties to our derivative financial instruments generally have been major financial institutions. At September 30,
2004, no such agreements were in effect. In June 2005, we entered into four forward contracts in connection with the management of our exposure to fluctuations in foreign exchange rates and to meet our future Euro currency requirements. The
contracts had a total notional value of £4.0 million for the future purchase of Euros and matured in or prior to September 2005. In September 2005, we entered into five new forward contracts for the same purpose. The contracts have a total
notional value of £5.0 million for the future purchase of Euros and mature within one year. These contracts are marked to fair value at each reporting period and recorded on the accompanying consolidated balance sheet until they are settled
and are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Unrealized gains and losses on such contracts are recognized currently in earnings. For the year ended
September 30, 2005, a gain of $0.1 million was recognized in the accompanying consolidated statement of operations as a result of these contracts.



Off-Balance Sheet Financing Arrangements



In the past, we have used certain off-balance sheet financing arrangements to provide liquidity and improve our cash flows. We established a qualifying
entity, Blue Bison Funding Corporation, through which we transferred mortgages and contracts receivable to Barton Capital Corporation (Barton) and related entities as part of a $100.0 million Mortgages Receivable Conduit Facility (the
Conduit Facility). The Conduit Facility expired on December 17, 2001, leaving a substantial quantity of mortgages and contracts receivable still held by Barton. On December 17, 2004, we completed the purchase from Barton of its
rights to the mortgages and contracts receivable remaining in the loan portfolio at that date for approximately $16.4 million.



We established certain qualifying entities, TerraSun, LLC and Dutch Elm, LLC, to issue fixed rate notes payable collateralized by an undivided interest in
transferred mortgages receivable. On January 25, 2005, we completed a transaction resulting in the acquisition of a loan portfolio held by TerraSun, LLC for approximately $4.5 million in cash. This transaction was the result of the exercise of
the clean up call provision contained in the notes issued by TerraSun, LLC. On February 25, 2005, we completed a transaction resulting in the acquisition of a loan portfolio held by Dutch Elm, LLC for approximately $5.6 million in
cash. This transaction was the result of the exercise of the clean up call provision contained in the notes issued by Dutch Elm, LLC.



Retained interests were marked to fair value at each reporting date based on certain assumptions and the adjustments were reported as a component of
operating income (loss). During the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003, such adjustments were $0.5 million, $3.7 million (including a $2.6 million gain due to
the improved performance and information obtained during this period), and $1.5 million, respectively.



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As of September 30, 2005, there were no remaining off-balance sheet financing arrangements.



Contractual Obligations



The following table summarizes the payments due for specific contractual
obligations. These amounts, in thousands, are as of September 30, 2005.



|                                      |  |       |         |                 |   |           |  |          |         |                  |   |       |  |   |        
|------------------------------------- |  | ----- | ------- | --------------- | - | --------- |  | -------- | ------- | ---------------- | - | ----- |  | - | -------
|Contractual Obligations               |  | Total |         | Less than1 year |   | 1-3 years |  | 3-5years |         | More than5 years
|Line of credit facilities (a)         |  | $     | 198,849 |                 | $ |          |  | $        | 198,849 |                  | $ |      |  | $ |       
|Securitization notes payable          |  |       | 113,671 |                 |   |          |  |          |        |                  |   |      |  |   | 113,671
|Senior subordinated convertible notes |  |       | 95,000  |                 |   |          |  |          |        |                  |   |      |  |   | 95,000 
|Notes payable                         |  |       | 1,292   |                 |   | 282       |  |          | 606     |                  |   | 404   |  |   |       
|Capital lease obligations             |  |       | 149     |                 |   | 97        |  |          | 49      |                  |   | 3     |  |   |       
|Operating lease obligations           |  |       | 18,460  |                 |   | 6,060     |  |          | 7,588   |                  |   | 2,532 |  |   | 2,280  
|Purchase obligations (b)              |  |       | 30,189  |                 |   | 29,469    |  |          | 720     |                  |   |      |  |   |       
|Other long-term liabilities           |  |       |        |                 |   |          |  |          |        |                  |   |      |  |   |       
|                                      |  |       |         |                 |   |           |  |          |         |                  |   |       |  |   |        
|Total                                 |  | $     | 457,610 |                 | $ | 35,908    |  | $        | 207,812 |                  | $ | 2,939 |  | $ | 210,951
|                                      |  |       |         |                 |   |           |  |          |         |                  |   |       |  |   |        

---

|(a) | Facility fees of approximately $2.0 million are due in July 2006 related to the Senior Finance Facility.
|--- | --------------------------------------------------------------------------------------------------------

|(b) | Primarily related to construction commitments and information technology related items.
|--- | ---------------------------------------------------------------------------------------



Inflation



Inflation and changing prices have not had a material impact on the Companys revenues, (loss) income from operations, and net (loss) income during
any of the Companys three most recent fiscal years. However, 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
mortgage and contract receivables.



New Accounting Pronouncements



New accounting pronouncements are discussed in Note 3 to
the consolidated financial statements included in this report in Item 8. Financial Statements and Supplementary Data, including those pronouncements that will have a material impact on financial information that will be reported in the
future.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Credit Risk



We are
exposed to on-balance sheet credit risk related to our mortgages and contracts receivable. We offer financing to the buyers and lessees of Vacation Interests at our resorts. We bear the risk of defaults on promissory notes delivered to us by buyers
of Vacation Interests. If a buyer of a Vacation Interval defaults, we generally must foreclose on the Vacation Interval (or, in the case of Vacation Points, by exercise of a Power of Sale) and attempt to resell it. The associated marketing, selling
and administrative costs from the original sale are not recovered and such costs must be incurred again to resell the Vacation Interests. Although in many cases we may have recourse against a Vacation Interval buyer for the unpaid price, certain
states have laws that limit our ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, we have generally not pursued this remedy. If a lessee of a Vacation Interval defaults, the lessee forfeits
contract rights previously held to use the Vacation Interval, and we are able to transfer title of the Vacation Interval to a trust out of which we will convey Vacation Points representing beneficial interests in such trust without further recovery
efforts.



42



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##### Table of Contents

Availability of Funding Sources



We have historically funded mortgages and contracts receivable and unsold Vacation Interests with borrowings through our
financing facilities, sales of mortgages and contracts receivable, internally generated funds and proceeds from public debt and equity offerings. Borrowings are in turn repaid with the proceeds received by us from repayments of such mortgages and
contracts receivable. To the extent that we are not successful in maintaining or replacing existing financings, we would have to curtail our operations or sell assets, thereby resulting in a material adverse effect on our results of operations, cash
flows and financial condition.



Geographic Concentration



Our owned and serviced loan portfolio borrowers are geographically
diversified within the United States and internationally. At September 30, 2005, borrowers residing in the United States accounted for approximately 96.5% of our loan portfolio. With the exception of California, Arizona and Florida, which
represented 21.1%, 11.7% and 5.3%, respectively, no state or foreign country concentration accounted for in excess of 5.0% of the serviced portfolios. At September 30, 2004, borrowers residing in the United States accounted for approximately
91.5% of our loan portfolio. With the exception of Arizona and California, which represented 11.9% and 17.4%, respectively, no state or foreign country concentration accounted for in excess of 5.0% of the serviced portfolios. The credit risk
inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial well being of the borrowers.



Foreign Currency Risk



For the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003, total revenues
denominated in a currency other than U.S. dollars, primarily revenues derived from the United Kingdom, were approximately 22.0%, 30.0% and 34.2%, respectively, of total revenues. Our net assets maintained in a functional currency other than U.S.
dollars at September 30, 2005 and 2004, primarily assets located in Western Europe, were approximately 28.9% and 48.6%, respectively, of total net assets. The effects of changes in foreign currency exchange rates have not historically been
significant to our operations or net assets. At September 30, 2005 and 2004, our subsidiary in the United Kingdom, whose functional currency is the British Pound Sterling, held approximately 4.6 million and 5.7 million Euros,
respectively. That subsidiary expects to utilize approximately 2.5 million Euros per month for operating purposes. To the extent it holds Euros at any point in time, it is subject to gains and losses as the exchange rate between British
Pound Sterling and Euros fluctuates.



In June 2005, we
entered into four forward contracts in connection with the management of our exposure to fluctuations in foreign exchange rates and to meet our future Euro currency requirements. The contracts had a total notional value of £4.0 million for the
future purchase of Euros and matured in or prior to September 2005. In September 2005, we entered into five new forward contracts for the same purpose. The contracts have a total notional value of £5.0 million for the future purchase of Euros
and mature within one year. These contracts are marked to fair value at each reporting period and recorded on the accompanying consolidated balance sheet and are not designated as hedging instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. Unrealized gains and losses on such contracts are recognized currently in earnings. For the year ended September 30, 2005, a gain of $0.1 million was recognized in the accompanying consolidated
statement of operations as a result of these contracts.



Interest Rate Risk



As of September 30, 2005 and 2004, we had floating
interest rate debt of approximately $198.8 million and $171.7 million, respectively, comprised of amounts outstanding under the Senior Finance Facility. The floating interest rate on the Senior Finance Facility is based upon the prevailing LIBOR
rate and interest rate changes can impact earnings and operating cash flows. A change in interest rates of one percent on the balance outstanding at September 30, 2005 and 2004 would cause a change in total annual interest costs of $2.0 million
and $1.7 million, respectively.



43



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##### Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                                                                                                                                      |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                                                                                      |  | Page
|Sunterra Corporation and Subsidiaries                                                                                                                                                                                                                                 |  |     
|                                                                                                                                                                                                                                                                      | 
|Managements Report on Internal Control Over Financial Reporting as of September 30, 2005                                                                                                                                                                             |  | 45  
|                                                                                                                                                                                                                                                                      | 
|Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting as of September 30, 2005                                                                                                                                         |  | 46  
|                                                                                                                                                                                                                                                                      | 
|Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements as of September 30, 2005 and September 30, 2004 and for the year ended September 30, 2005, the nine months ended
September 30, 2004 and the year ended December 31, 2003 |  | 47  
|                                                                                                                                                                                                                                                                      | 
|Consolidated Statements of Operations for the year ended September 30, 2005, the nine months ended September 30, 2004, the year ended December 31, 2003 and the nine months ended September 30, 2003
(Unaudited)                                                      |  | 48  
|                                                                                                                                                                                                                                                                      | 
|Consolidated Balance Sheets as of September 30, 2005 and September 30, 2004                                                                                                                                                                                           |  | 49  
|                                                                                                                                                                                                                                                                      | 
|Consolidated Statements of Cash Flows for the year ended September 30, 2005, the nine months ended September 30, 2004, the year ended December 31, 2003 and the nine months ended September 30, 2003
(Unaudited)                                                      |  | 50  
|                                                                                                                                                                                                                                                                      | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31,
2003                                                                  |  | 52  
|                                                                                                                                                                                                                                                                      | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                                                            |  | 53  



44



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##### Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Management of Sunterra Corporation and subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or supervised by, the
Companys principal executive and principal financial officers, and effected by the Companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America.



The Companys internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the Companys assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Companys management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.



In connection with the preparation of the
Companys annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Companys internal control over financial reporting as of September 30, 2005 based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment included an evaluation of the design of the Companys internal control over financial
reporting and testing of the operational effectiveness of the Companys internal control over financial reporting.



Based on this assessment, management did not identify any material weakness in the Companys internal control, and management has concluded that the Companys
internal control over financial reporting was effective as of September 30, 2005.



Grant Thornton LLP, the independent registered public accounting firm that audited the Companys financial statements included in this report, have issued an attestation report on managements assessment of internal control over
financial reporting, a copy of which is included in this Annual Report on Form 10-K.



|                                     
|-------------------------------------
|/s/ NICHOLAS J. BENSON               
|Nicholas J. Benson                   
|President and Chief Executive Officer
|December 12, 2005                    
|                                     



|                                                    
|----------------------------------------------------
|/s/ STEVEN E. WEST                                  
|Steven E. West                                      
|Executive Vice President and Chief Financial Officer
|December 12, 2005                                   



45



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING



To the Board of Directors and Stockholders of Sunterra Corporation:



We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial
Reporting, that Sunterra Corporation and subsidiaries (the Company) maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on
our audit.



We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.



In our opinion, managements
assessment that the Company maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as
of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and comprehensive income (loss), and cash flows for the year ended September 30, 2005, for the nine months ended
September 30, 2004 and the year ended December 31, 2003 and our report dated December 12, 2005 expressed an unqualified opinion on those consolidated financial statements.



|                       
|-----------------------
|/s/ GRANT THORNTON LLP 
|                       
|Los Angeles, California
|December 12, 2005      



46



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders Sunterra Corporation:



We have audited the accompanying consolidated balance sheets of Sunterra Corporation and subsidiaries (the Company) as of
September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and comprehensive income (loss), and cash flows for the year ended September 30, 2005, for the nine months ended
September 30, 2004 and the year ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of
September 30, 2005 and 2004 and the consolidated results of its operations and its consolidated cash flows for the year ended September 30, 2005, for the nine months ended September 30, 2004 and the year ended December 31, 2003
in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of
September 30, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 12, 2005 expressed an
unqualified opinion thereon.



|                       
|-----------------------
|/s/ GRANT THORNTON LLP 
|                       
|Los Angeles, California
|December 12, 2005      



47



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended September 30, 2005, Nine Months Ended September 30, 2004,

Year Ended December 31, 2003 and Nine Months Ended September 30, 2003

(In thousands, except per share amounts)



|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------- | ------- | - | ---------------------------------- | - | ------- | -------------------------- |  | - | ----------------------------------- | - |  | - | ------- | -
|                                                      |  | Year EndedSeptember 30,2005 |         |   | Nine Months EndedSeptember 30,2004 |   |         | Year EndedDecember 31,2003 |  |   | Nine MonthsEnded September 30, 2003 |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   | (Unaudited)                         |  
|Revenues:                                             |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Vacation Interest                                     |  | $                           | 283,812 |   |                                    | $ | 202,541 |                            |  | $ | 212,965                             |   |  | $ | 158,278 |  
|Resort rental                                         |  |                             | 37,701  |   |                                    |   | 16,809  |                            |  |   | 12,987                              |   |  |   | 10,718  |  
|Management services                                   |  |                             | 30,380  |   |                                    |   | 21,988  |                            |  |   | 30,433                              |   |  |   | 23,245  |  
|Interest                                              |  |                             | 44,806  |   |                                    |   | 23,314  |                            |  |   | 26,421                              |   |  |   | 19,943  |  
|Other                                                 |  |                             | 27,231  |   |                                    |   | 22,448  |                            |  |   | 24,107                              |   |  |   | 17,943  |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Total revenues                                        |  |                             | 423,930 |   |                                    |   | 287,100 |                            |  |   | 306,913                             |   |  |   | 230,127 |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Costs and Operating Expenses:                         |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Vacation Interest cost of sales                       |  |                             | 44,228  |   |                                    |   | 40,347  |                            |  |   | 40,464                              |   |  |   | 29,711  |  
|Advertising, sales and marketing                      |  |                             | 164,695 |   |                                    |   | 117,636 |                            |  |   | 117,669                             |   |  |   | 87,402  |  
|Vacation Interest carrying cost                       |  |                             | 42,307  |   |                                    |   | 20,668  |                            |  |   | 17,481                              |   |  |   | 14,603  |  
|Provision for doubtful accounts and loan losses       |  |                             | 12,316  |   |                                    |   | 7,180   |                            |  |   | 5,638                               |   |  |   | 4,336   |  
|Loan portfolio                                        |  |                             | 6,269   |   |                                    |   | 4,465   |                            |  |   | 10,052                              |   |  |   | 7,621   |  
|General and administrative                            |  |                             | 83,901  |   |                                    |   | 57,444  |                            |  |   | 71,331                              |   |  |   | 53,696  |  
|Gain on sales of assets                               |  |                             | (480    | ) |                                    |   | (5,489  | )                          |  |   | (688                                | ) |  |   | (610    | )
|Depreciation and amortization                         |  |                             | 10,049  |   |                                    |   | 6,518   |                            |  |   | 11,549                              |   |  |   | 8,405   |  
|Interest                                              |  |                             | 25,092  |   |                                    |   | 16,272  |                            |  |   | 26,309                              |   |  |   | 18,529  |  
|Reorganization, net                                   |  |                             |        |   |                                    |   |        |                            |  |   | (619                                | ) |  |   | (664    | )
|Restructuring                                         |  |                             | 1,967   |   |                                    |   |        |                            |  |   | 1,274                               |   |  |   | 1,008   |  
|Impairment of goodwill                                |  |                             | 55,030  |   |                                    |   |        |                            |  |   | 91,586                              |   |  |   |        |  
|Impairment of assets                                  |  |                             |        |   |                                    |   |        |                            |  |   | 2,297                               |   |  |   | 1,400   |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Total costs and operating expenses                    |  |                             | 445,374 |   |                                    |   | 265,041 |                            |  |   | 394,343                             |   |  |   | 225,437 |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|(Loss) income from operations                         |  |                             | (21,444 | ) |                                    |   | 22,059  |                            |  |   | (87,430                             | ) |  |   | 4,690   |  
|Income from investments in joint ventures             |  |                             | 538     |   |                                    |   | 1,551   |                            |  |   | 3,340                               |   |  |   | 2,475   |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|(Loss) income before provision for income taxes       |  |                             | (20,906 | ) |                                    |   | 23,610  |                            |  |   | (84,090                             | ) |  |   | 7,165   |  
|Provision for income taxes                            |  |                             | 13,828  |   |                                    |   | 2,302   |                            |  |   | 5,109                               |   |  |   | 4,383   |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Net (loss) income                                     |  | $                           | (34,734 | ) |                                    | $ | 21,308  |                            |  | $ | (89,199                             | ) |  | $ | 2,782   |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Net (loss) income per share:                          |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Basic                                                 |  | $                           | (1.74   | ) |                                    | $ | 1.07    |                            |  | $ | (4.46                               | ) |  | $ | 0.14    |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Diluted                                               |  | $                           | (1.74   | ) |                                    | $ | 0.97    |                            |  | $ | (4.46                               | ) |  | $ | 0.14    |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Weighted average number of common shares outstanding: |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Basic                                                 |  |                             | 20,015  |   |                                    |   | 20,000  |                            |  |   | 20,000                              |   |  |   | 20,000  |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  
|Diluted                                               |  |                             | 20,015  |   |                                    |   | 24,024  |                            |  |   | 20,000                              |   |  |   | 20,000  |  
|                                                      |  |                             |         |   |                                    |   |         |                            |  |   |                                     |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



48



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2005 and 2004

(In
thousands, except per share amounts)



|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                      |  | September 30,2005 |          |   | September 30,2004 |  
|ASSETS                                                                                                                                                                                |  |                   |          |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                             |  | $                 | 14,698   |   |                   | $ | 26,842  |  
|Cash in escrow and restricted cash                                                                                                                                                    |  |                   | 70,523   |   |                   |   | 88,663  |  
|Mortgages and contracts receivable, net of allowances of $28,435 and $26,530 at September 30, 2005 and 2004, respectively                                                             |  |                   | 323,747  |   |                   |   | 278,569 |  
|Retained interests in mortgages and contracts receivable sold                                                                                                                         |  |                   |         |   |                   |   | 23,319  |  
|Due from related parties, net                                                                                                                                                         |  |                   | 17,261   |   |                   |   | 6,279   |  
|Other receivables, net                                                                                                                                                                |  |                   | 25,082   |   |                   |   | 26,608  |  
|Deferred tax asset                                                                                                                                                                    |  |                   | 2,346    |   |                   |   |        |  
|Prepaid expenses and other assets, net                                                                                                                                                |  |                   | 42,602   |   |                   |   | 47,944  |  
|Assets held for sale                                                                                                                                                                  |  |                   | 2,726    |   |                   |   | 551     |  
|Investment in joint venture                                                                                                                                                           |  |                   |         |   |                   |   | 7,187   |  
|Unsold Vacation Interests, net                                                                                                                                                        |  |                   | 184,432  |   |                   |   | 168,858 |  
|Property and equipment, net                                                                                                                                                           |  |                   | 84,122   |   |                   |   | 77,996  |  
|Goodwill, net                                                                                                                                                                         |  |                   | 26,619   |   |                   |   | 82,759  |  
|Intangible and other assets, net                                                                                                                                                      |  |                   | 2,350    |   |                   |   | 1,283   |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|Total assets                                                                                                                                                                          |  | $                 | 796,508  |   |                   | $ | 836,858 |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                  |  |                   |          |   |                   |   |         |  
|Borrowings under line of credit agreements                                                                                                                                            |  | $                 | 198,849  |   |                   | $ | 171,737 |  
|Accounts payable                                                                                                                                                                      |  |                   | 10,712   |   |                   |   | 10,401  |  
|Accrued liabilities                                                                                                                                                                   |  |                   | 83,986   |   |                   |   | 80,895  |  
|Income taxes payable                                                                                                                                                                  |  |                   | 2,119    |   |                   |   | 3,421   |  
|Deferred revenues                                                                                                                                                                     |  |                   | 95,175   |   |                   |   | 95,127  |  
|Securitization notes                                                                                                                                                                  |  |                   | 113,671  |   |                   |   | 151,710 |  
|Senior subordinated convertible notes                                                                                                                                                 |  |                   | 95,000   |   |                   |   | 95,000  |  
|Notes payable                                                                                                                                                                         |  |                   | 1,441    |   |                   |   | 2,261   |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|Total liabilities                                                                                                                                                                     |  |                   | 600,953  |   |                   |   | 610,552 |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                                         |  |                   |          |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                                 |  |                   |          |   |                   |   |         |  
|Common stock ($0.01 par value, 75,000 shares authorized at September 30, 2005 and 2004: 19,441 and 18,891 shares issued and outstanding
at September 30, 2005 and 2004, respectively) |  |                   | 194      |   |                   |   | 189     |  
|Additional paid-in capital                                                                                                                                                            |  |                   | 303,233  |   |                   |   | 297,145 |  
|Accumulated deficit                                                                                                                                                                   |  |                   | (116,948 | ) |                   |   | (82,214 | )
|Accumulated other comprehensive income                                                                                                                                                |  |                   | 9,076    |   |                   |   | 11,186  |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                            |  |                   | 195,555  |   |                   |   | 226,306 |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                            |  | $                 | 796,508  |   |                   | $ | 836,858 |  
|                                                                                                                                                                                      |  |                   |          |   |                   |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



49



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended September 30, 2005, Nine Months Ended September 30, 2004,

Year Ended December 31, 2003 and Nine Months Ended September 30, 2003

(In thousands)



|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------- | - | -------- | -------------------------- |  | - | ---------------------------------- | - |  | - | ------ | -
|                                                                                                    |  | Year EndedSeptember 30,2005 |         |   | Nine MonthsEndedSeptember 30,2004 |   |          | Year EndedDecember 31,2003 |  |   | Nine Months EndedSeptember 30,2003 |  
|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   | (Unaudited)                        |  
|Operating activities:                                                                               |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Net (loss) income                                                                                   |  | $                           | (34,734 | ) |                                   | $ | 21,308   |                            |  | $ | (89,199                            | ) |  | $ | 2,782  |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:  |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Depreciation and amortization                                                                       |  |                             | 10,049  |   |                                   |   | 6,518    |                            |  |   | 11,549                             |   |  |   | 8,405  |  
|Provision for doubtful accounts and loan losses                                                     |  |                             | 12,316  |   |                                   |   | 7,180    |                            |  |   | 5,638                              |   |  |   | 4,336  |  
|Amortization of capitalized financing costs, deferred loan and contract origination costs and other |  |                             | 8,601   |   |                                   |   | 9,971    |                            |  |   | 13,648                             |   |  |   | 9,283  |  
|Income from investments in joint ventures                                                           |  |                             | (538    | ) |                                   |   | (1,551   | )                          |  |   | (3,340                             | ) |  |   | (2,475 | )
|Gain on sales of assets                                                                             |  |                             | (480    | ) |                                   |   | (5,489   | )                          |  |   | (760                               | ) |  |   | (681   | )
|(Gain) loss on foreign currency                                                                     |  |                             | (658    | ) |                                   |   | 985      |                            |  |   |                                   |   |  |   |       |  
|Impairment of goodwill                                                                              |  |                             | 55,030  |   |                                   |   |         |                            |  |   | 91,586                             |   |  |   |       |  
|Impairment of assets                                                                                |  |                             |        |   |                                   |   |         |                            |  |   | 2,297                              |   |  |   | 1,400  |  
|Provision for income taxes recorded as a reduction to goodwill                                      |  |                             | 8,227   |   |                                   |   |         |                            |  |   |                                   |   |  |   |       |  
|Provision for income taxes recorded as an increase to additional paid-in capital                    |  |                             | 5,676   |   |                                   |   |         |                            |  |   |                                   |   |  |   |       |  
|Deferred income taxes                                                                               |  |                             | (2,346  | ) |                                   |   |         |                            |  |   |                                   |   |  |   | (22    | )
|Stock-based compensation grant                                                                      |  |                             | 347     |   |                                   |   |         |                            |  |   |                                   |   |  |   |       |  
|Changes in retained interests in mortgages and contracts receivable sold                            |  |                             | (522    | ) |                                   |   | (3,682   | )                          |  |   | (1,548                             | ) |  |   | (974   | )
|Changes in operating assets and liabilities:                                                        |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Cash in escrow and restricted cash                                                                  |  |                             | 17,925  |   |                                   |   | (23,549  | )                          |  |   | (7,650                             | ) |  |   | 5,304  |  
|Mortgages and contracts receivable                                                                  |  |                             | 8,153   |   |                                   |   | (17,495  | )                          |  |   | (6,485                             | ) |  |   | (2,256 | )
|Due from related parties, net                                                                       |  |                             | (10,703 | ) |                                   |   | (1,016   | )                          |  |   | (2,671                             | ) |  |   | (3,907 | )
|Other receivables, net                                                                              |  |                             | 2,118   |   |                                   |   | 629      |                            |  |   | 2,691                              |   |  |   | (4,357 | )
|Prepaid expenses and other assets, net                                                              |  |                             | 3,571   |   |                                   |   | 2,273    |                            |  |   | (7,801                             | ) |  |   | (7,801 | )
|Unsold Vacation Interests, net                                                                      |  |                             | 4,650   |   |                                   |   | 22,756   |                            |  |   | 18,313                             |   |  |   | 15,539 |  
|Accounts payable                                                                                    |  |                             | (314    | ) |                                   |   | 1,695    |                            |  |   | (5,743                             | ) |  |   | (4,217 | )
|Accrued liabilities                                                                                 |  |                             | 5,258   |   |                                   |   | (21,830  | )                          |  |   | 1,919                              |   |  |   | (3,441 | )
|Income taxes payable                                                                                |  |                             | (1,328  | ) |                                   |   | (342     | )                          |  |   | 174                                |   |  |   | (1,909 | )
|Deferred revenues                                                                                   |  |                             | (823    | ) |                                   |   | (1,416   | )                          |  |   | (4,711                             | ) |  |   | (2,703 | )
|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Net cash provided by (used in) operating activities                                                 |  |                             | 89,475  |   |                                   |   | (3,055   | )                          |  |   | 17,907                             |   |  |   | 12,306 |  
|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Investing activities:                                                                               |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Proceeds from sales of assets                                                                       |  |                             | 1,364   |   |                                   |   | 14,223   |                            |  |   | 270                                |   |  |   | 270    |  
|Capital expenditures                                                                                |  |                             | (11,472 | ) |                                   |   | (6,813   | )                          |  |   | (8,492                             | ) |  |   | (5,723 | )
|Purchase of remaining 77% partnership interest in West Maui Resort Partners, L.P.                   |  |                             |        |   |                                   |   | (105,883 | )                          |  |   |                                   |   |  |   |       |  
|Purchase of remaining 70% partnership interest in Poipu Resort Partners, L.P.                       |  |                             | (27,773 | ) |                                   |   |         |                            |  |   |                                   |   |  |   |       |  
|Purchase of mortgages pools and recoverable inventory                                               |  |                             | (34,399 | ) |                                   |   | (43,915  | )                          |  |   |                                   |   |  |   |       |  
|Purchase of businesses, net of cash acquired                                                        |  |                             | (10,061 | ) |                                   |   | (3,835   | )                          |  |   | (26,316                            | ) |  |   |       |  
|Acquisition of Eden Bay Resort units                                                                |  |                             | (7,917  | ) |                                   |   |         |                            |  |   |                                   |   |  |   |       |  
|Purchase of U.S. government securities pledged under bond indenture                                 |  |                             |        |   |                                   |   | (10,426  | )                          |  |   |                                   |   |  |   |       |  
|Decrease (increase) in intangible and other assets, net                                             |  |                             | (206    | ) |                                   |   | (563     | )                          |  |   | (433                               | ) |  |   | (1,061 | )
|Distributions from investments in joint ventures                                                    |  |                             | 2,739   |   |                                   |   | 3,683    |                            |  |   | 13,141                             |   |  |   | 12,028 |  
|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  
|Net cash (used in) provided by investing activities                                                 |  |                             | (87,725 | ) |                                   |   | (153,529 | )                          |  |   | (21,830                            | ) |  |   | 5,514  |  
|                                                                                                    |  |                             |         |   |                                   |   |          |                            |  |   |                                    |   |  |   |        |  



(Continued)



50



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued

Year Ended
September 30, 2005, Nine Months Ended September 30, 2004,

Year Ended December 31, 2003 and Nine Months Ended
September 30, 2003

(In thousands)



|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | --------------------------------- | - | -------- | -------------------------- |  | - | --------------------------------- | - |  | - | ------- | -
|                                                                                                                                                             |  | Year EndedSeptember 30,2005 |         |   | Nine MonthsEndedSeptember 30,2004 |   |          | Year EndedDecember 31,2003 |  |   | Nine MonthsEndedSeptember 30,2003 |  
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   | (Unaudited)                       |  
|Financing activities:                                                                                                                                        |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Borrowings under line of credit agreements                                                                                                                   |  | $                           | 99,601  |   |                                   | $ | 161,216  |                            |  | $ | 37,254                            |   |  | $ | 11,004  |  
|Proceeds from issuance of senior subordinated convertible notes                                                                                              |  |                             |        |   |                                   |   | 95,000   |                            |  |   |                                  |   |  |   |        |  
|Proceeds from issuance of securitization notes                                                                                                               |  |                             |        |   |                                   |   | 151,710  |                            |  |   |                                  |   |  |   |        |  
|Payments of debt issuance costs                                                                                                                              |  |                             | (2,912  | ) |                                   |   | (8,822   | )                          |  |   | (4,500                            | ) |  |   | (4,500  | )
|Proceeds from issuance of notes payable                                                                                                                      |  |                             | 100     |   |                                   |   | 921      |                            |  |   | 7,409                             |   |  |   | 7,189   |  
|Payments on notes payable and mortgage-backed securities                                                                                                     |  |                             | (38,959 | ) |                                   |   | (1,861   | )                          |  |   | (7,618                            | ) |  |   | (5,959  | )
|Payments on line of credit agreements                                                                                                                        |  |                             | (72,489 | ) |                                   |   | (235,204 | )                          |  |   | (31,594                           | ) |  |   | (24,059 | )
|Proceeds from exercise of stock options                                                                                                                      |  |                             | 70      |   |                                   |   |         |                            |  |   |                                  |   |  |   |        |  
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Net cash (used in) provided by financing activities                                                                                                          |  |                             | (14,589 | ) |                                   |   | 162,960  |                            |  |   | 951                               |   |  |   | (16,325 | )
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Effect of changes in exchange rates on cash and cash equivalents                                                                                             |  |                             | 695     |   |                                   |   | (839     | )                          |  |   | 1,317                             |   |  |   | 794     |  
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                                                                         |  |                             | (12,144 | ) |                                   |   | 5,537    |                            |  |   | (1,655                            | ) |  |   | 2,289   |  
|Cash and cash equivalents, beginning of period                                                                                                               |  |                             | 26,842  |   |                                   |   | 21,305   |                            |  |   | 22,960                            |   |  |   | 22,960  |  
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                                                                                                     |  | $                           | 14,698  |   |                                   | $ | 26,842   |                            |  | $ | 21,305                            |   |  | $ | 25,249  |  
|                                                                                                                                                             |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                                                           |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Cash paid for interest                                                                                                                                       |  | $                           | 20,239  |   |                                   | $ | 10,496   |                            |  | $ | 15,588                            |   |  | $ | 11,277  |  
|Cash paid for taxes, net of tax refunds                                                                                                                      |  | $                           | 3,061   |   |                                   | $ | 2,662    |                            |  | $ | 4,901                             |   |  | $ | 6,209   |  
|                                                                                                                                                             |  |                             |         |  
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                                                        |  |                             |         |   |                                   |   |          |                            |  |   |                                   |   |  |   |         |  
|Unsold Vacation Interests transferred to Assets held for sale                                                                                                |  | $                           | 3,007   |   |                                   | $ |         |                            |  | $ |                                  |   |  | $ |        |  
|Retained interests in mortgages and contracts receivable sold reclassified to mortgages and contracts receivable upon exercise of
clean-up call provisions |  | $                           | 23,842  |   |                                   | $ |         |                            |  | $ |                                  |   |  | $ |        |  
|Assets Held for Sale reclassified to unsold Vacation Interests                                                                                               |  | $                           |        |   |                                   | $ |         |                            |  | $ | 7,956                             |   |  | $ | 7,620   |  
|Assets Held for Sale reclassified to Property and Equipment                                                                                                  |  | $                           |        |   |                                   | $ |         |                            |  | $ | 3,146                             |   |  | $ | 3,146   |  
|Property and Equipment transferred to Goodwill                                                                                                               |  | $                           | 460     |   |                                   | $ |         |                            |  | $ |                                  |   |  | $ |        |  
|Property and Equipment transferred to unsold Vacation Interests, net                                                                                         |  | $                           | 3,432   |   |                                   | $ | 3,878    |                            |  | $ |                                  |   |  | $ |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



51



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME (LOSS)

Year Ended September 30, 2005, Nine Months Ended September 30, 2004,

and Year Ended December 31, 2003

(In thousands)



|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ----------------- |  | ------------------------ | --- |  | ------------------------------------ | ------- | - | ------------------------------------------ | - | -------- | ------------------------ |  | - | -------------------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | Common Stock      |  | AdditionalPaid-inCapital |     |  | RetainedEarnings(AccumulatedDeficit) |         |   | AccumulatedOtherComprehensiveIncome (Loss) |   |          | TotalStockholdersEquity |  |   | ComprehensiveIncome (Loss) |  
|                                                                                 |  | SharesOutstanding |  | Amount                   |     |  |                                      |         |  
|BALANCE AT JANUARY 1, 2003                                                       |  | 18,045            |  | $                        | 180 |  | $                                    | 296,714 |   |                                            | $ | (14,323  | )                        |  | $ | 1,755                      |   |  | $ | 284,326 |   |  |   |         |  
|Issuance of common stock to Class 9 Creditors                                    |  | 450               |  |                          | 5   |  |                                      | (5      | ) |                                            |   |         |                          |  |   |                           |   |  |   |        |   |  |   |         |  
|Net loss for the year ended December 31, 2003                                    |  |                  |  |                          |    |  |                                      |        |   |                                            |   | (89,199  | )                        |  |   |                           |   |  |   | (89,199 | ) |  | $ | (89,199 | )
|Other comprehensive income:                                                      |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Currency translation adjustments, net of tax of $0                               |  |                  |  |                          |    |  |                                      |        |   |                                            |   |         |                          |  |   | 8,451                      |   |  |   | 8,451   |   |  |   | 8,451   |  
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2003                                                     |  | 18,495            |  |                          | 185 |  |                                      | 296,709 |   |                                            |   | (103,522 | )                        |  |   | 10,206                     |   |  |   | 203,578 |   |  |   |         |  
|Comprehensive loss for the year ended December 31, 2003                          |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  | $ | (80,748 | )
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Adjustment to warrant exercise price                                             |  |                  |  |                          |    |  |                                      | 440     |   |                                            |   |         |                          |  |   |                           |   |  |   | 440     |   |  |   |         |  
|Issuance of common stock to Class 9 Creditors                                    |  | 396               |  |                          | 4   |  |                                      | (4      | ) |                                            |   |         |                          |  |   |                           |   |  |   |        |   |  |   |         |  
|Net income for the nine months ended September 30, 2004                          |  |                  |  |                          |    |  |                                      |        |   |                                            |   | 21,308   |                          |  |   |                           |   |  |   | 21,308  |   |  | $ | 21,308  |  
|Other comprehensive income:                                                      |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Currency translation adjustments, net of tax of $0                               |  |                  |  |                          |    |  |                                      |        |   |                                            |   |         |                          |  |   | 980                        |   |  |   | 980     |   |  |   | 980     |  
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|BALANCE AT SEPTEMBER 30, 2004                                                    |  | 18,891            |  |                          | 189 |  |                                      | 297,145 |   |                                            |   | (82,214  | )                        |  |   | 11,186                     |   |  |   | 226,306 |   |  |   |         |  
|Comprehensive income for the nine months ended September 30, 2004                |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  | $ | 22,288  |  
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Provision for income taxes recorded as an increase to additional paid-in capital |  |                  |  |                          |    |  |                                      | 5,676   |   |                                            |   |         |                          |  |   |                           |   |  |   | 5,676   |   |  |   |         |  
|Stock-based compensation grant                                                   |  | 21                |  |                          |    |  |                                      | 347     |   |                                            |   |         |                          |  |   |                           |   |  |   | 347     |   |  |   |         |  
|Stock options exercised                                                          |  | 5                 |  |                          |    |  |                                      | 70      |   |                                            |   |         |                          |  |   |                           |   |  |   | 70      |   |  |   |         |  
|Issuance of common stock to Class 9 Creditors                                    |  | 524               |  |                          | 5   |  |                                      | (5      | ) |                                            |   |         |                          |  |   |                           |   |  |   |        |   |  |   |         |  
|Net loss for the year ended September 30, 2005                                   |  |                  |  |                          |    |  |                                      |        |   |                                            |   | (34,734  | )                        |  |   |                           |   |  |   | (34,734 | ) |  | $ | (34,734 | )
|Other comprehensive loss:                                                        |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Currency translation adjustments, net of tax of $0                               |  |                  |  |                          |    |  |                                      |        |   |                                            |   |         |                          |  |   | (2,110                     | ) |  |   | (2,110  | ) |  |   | (2,110  | )
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|                                                                                 |  |                   |  |                          |     |  |                                     
|BALANCE AT SEPTEMBER 30, 2005                                                    |  | 19,441            |  | $                        | 194 |  | $                                    | 303,233 |   |                                            | $ | (116,948 | )                        |  | $ | 9,076                      |   |  | $ | 195,555 |   |  |   |         |  
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended September 30, 2005                         |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  | $ | (36,844 | )
|                                                                                 |  |                   |  |                          |     |  |                                      |         |   |                                            |   |          |                          |  |   |                            |   |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Year Ended September 30, 2005, Nine Months Ended September 30, 2004 and Year Ended December 31, 2003

(Amounts in thousands, except where stated and per share data)



Note 1Background, Business and Basis of Presentation



Business and Background



Sunterra Corporation, a Maryland corporation (Sunterra or the Company), was incorporated in May 1996 as KGK Resorts, Inc., and was
later known as Signature Resorts, Inc. At the time of its August 1996 initial public offering, the Company owned nine vacation ownership resorts in Hawaii, Florida, South Carolina, Missouri, California and in the Caribbean. The Company became known
as Sunterra Corporation in the second quarter of 1998. Sunterra has grown to become one of the worlds largest vacation ownership companies, as measured by the number of individual resort locations and owner families. At September 30,
2005, the Company had more than 314,000 owner families vacationing at 97 resorts in 14 countries located in North America, Europe and the Caribbean. See Note 11 for detailed geographic segment information.



The operations of Sunterra include (i) acquiring, developing, and
operating vacation ownership resorts, (ii) marketing and selling vacation ownership interests to the public in the form of both vacation points, representing a beneficial interest in a trust which holds title to vacation property real estate
for the benefit of purchasers of those points which may be redeemed for occupancy rights for varying lengths of stay at participating resort locations and for certain other travel products and services (Vacation Points), and vacation
ownership interests, entitling the buyer to use a fully-furnished vacation residence, generally for a one-week period each year in perpetuity (Vacation Intervals), and together with Vacation Points, (Vacation Interests),
(iii) providing consumer financing to individual purchasers of Sunterras Vacation Interests, (iv) providing collection services and resort rental, management and maintenance services to vacation ownership resorts, for which the
Company receives fees paid by the resorts homeowners associations, and (v) operating the Companys membership and exchange program.



Change in Fiscal Year End



Effective October 1, 2004, the Company changed its fiscal year end for financial reporting purposes from a calendar year end to the 12-month period
commencing October 1 and ending September 30. The change in fiscal year end was made to more meaningfully indicate the Companys strategic, operational and financial performance based upon the seasonality of its business and better
manage its operating costs. As such, unaudited financial information for the nine months ended September 30, 2003 has been included for comparative purposes.



Reclassifications



Reclassifications were made to the 2004 and 2003 consolidated financial statements to conform to the 2005 presentation.



Note 2Reorganization of the Business Under Chapter 11, Fresh-Start Accounting and
Restructuring



Reorganization of the Business Under Chapter 11 and
Fresh-Start Accounting



As a result of the defaults on its
senior unsecured notes and its secured credit facilities, on May 31, 2000, the Company sought protection under Chapter 11 of the Bankruptcy Code in order to restructure existing debt and maximize existing cash. Upon emergence from the Chapter
11 proceedings, effective July 31, 2002, the Company adopted the principles of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code. Accordingly, all assets and liabilities were restated to reflect their respective fair values.



In conjunction with and as a result of the bankruptcy reorganization under Chapter 11, the Company incurred certain expenses and losses offset by income
and gains during the year ended December 31, 2003, primarily relating to the gain on the settlement of certain bankruptcy-related litigation. The Company made cash payments for reorganization expenses of approximately $0.8 million for the year
ended December 31, 2003. No such items were incurred during the nine months ended September 30, 2004 or the fiscal year ended September 30, 2005. No cash payments for reorganization expenses have been made subsequent to 2003.



Restructuring Costs



In 2002, the Company initiated and implemented a new strategic plan that
included streamlining of the legal structure, and relocation of the Companys headquarters and expenditures related to its unified global club. As a result, during the year ended December 31, 2003, the Company recorded restructuring
charges of $1.3 million. The Company made cash payments of approximately $1.2 million and $0.1 million during the year ended December 31, 2003 and the nine months ended September 30, 2004, respectively, representing primarily legal and
relocation costs. All efforts related to this restructuring were completed during December 2003.



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No other such restructuring activities occurred during the nine months ended September 30, 2004.



In 2005, the Company initiated and implemented a restructuring
of the Companys European operations, including a consolidation of its United Kingdom telemarketing operations and reductions of management and headcount levels in several areas. As a result, during the year ended September 30, 2005, the
Company recorded restructuring charges of $2.0 million and made cash payments of approximately $1.6 million, representing primarily employee termination costs. The Company does not expect to record any further expense in the future and all efforts
related to this restructuring are expected to be completed during the year ending September 30, 2006.



Note 3Summary of Significant Accounting Policies



Principles of ConsolidationThe accompanying consolidated financial statements include all majority-owned subsidiaries in which the Company exercises control. Investments in which the Company exercises
significant influence, but which it does not control (generally a 20% to 50% ownership interest), are accounted for under the equity method of accounting. The Company does not have any interests in any entity considered to be a variable interest
entity for which the Company is considered the primary beneficiary under Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, as
amended in December 2003 by Interpretation 46R. Under the equity method, original investments are recorded at cost and adjusted by the Companys share of undistributed earnings or losses of these entities. As discussed in Note 5, in August 2005
the Company purchased the remaining 70% partnership interest in Poipu Resort Partners, L.P. (Poipu), and in July 2004 purchased the remaining 77% partnership interest in West Maui Resort Partners, L.P. (Kaanapali) and,
as such, the Company is no longer a minority partner in any joint venture. All significant intercompany transactions and balances have been eliminated from the consolidated financial statements.



Use of EstimatesThe preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company in preparation of its financial statements include: (i) mortgages and
contracts receivable allowance for loan and contract losses, (ii) valuation of retained interests in mortgages and contracts receivable sold, (iii) expected future cash flows from pools of mortgages and contracts receivable acquired,
(iv) estimated net realizable value of assets held for sale, (v) future sales plans used to allocate certain unsold Vacation Interests to Vacation Interest cost of sales under the relative sales value method, (vi) impairment of
long-lived assets including goodwill, and (vii) the valuation allowance recorded against deferred tax assets. It is at least reasonably possible that a material change in one of these estimates may occur in the near term and cause actual
results to differ materially.



Net (Loss) Income Per
ShareBasic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock.



A reconciliation of net (loss) income available to common shareholders assuming dilution follows:



|                                                                 |  |                             |         |   |                                   |   |                            |  |   |                                              |   |  |   |      
|---------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------- | - | -------------------------- |  | - | -------------------------------------------- | - |  | - | -----
|                                                                 |  | Year endedSeptember 30,2005 |         |   | Nine monthsendedSeptember 30,2004 |   | Year endedDecember 31,2003 |  |   | Nine monthsendedSeptember 30,2003(Unaudited)
|Net (loss) income available to common shares outstanding         |  | $                           | (34,734 | ) |                                   | $ | 21,308                     |  | $ | (89,199                                      | ) |  | $ | 2,782
|Effect of dilutive securities:                                   |  |                             |         |   |                                   |   |                            |  |   |                                              |   |  |   |      
|33/4%
Senior Subordinated Convertible Notes due 2024             |  |                             |        |   |                                   |   | 2,085                      |  |   |                                             |   |  |   |     
|                                                                 |  |                             |         |   |                                   |   |                            |  |   |                                              |   |  |   |      
|Net (loss) income available to diluted common shares outstanding |  | $                           | (34,734 | ) |                                   | $ | 23,393                     |  | $ | (89,199                                      | ) |  | $ | 2,782
|                                                                 |  |                             |         |   |                                   |   |                            |  |   |                                              |   |  |   |      



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A reconciliation of weighted average common shares outstanding to weighted average common shares
outstanding assuming dilution follows:



|                                                                          |  |                             |  |                                   |  |                            |  |                                             
|------------------------------------------------------------------------- |  | --------------------------- |  | --------------------------------- |  | -------------------------- |  | --------------------------------------------
|                                                                          |  | Year endedSeptember 30,2005 |  | Nine monthsendedSeptember 30,2004 |  | Year endedDecember 31,2003 |  | Nine monthsendedSeptember 30,2003(Unaudited)
|Basic weighted average common shares outstanding                          |  | 20,015,339                  |  | 20,000,000                        |  | 20,000,000                 |  | 20,000,000                                  
|Effect of dilutive securities:                                            |  |                             |  |                                   |  |                            |  |                                             
|Deemed conversion of 33/4% Senior Subordinated Convertible Notes due 2024 |  |                            |  | 4,023,754                         |  |                           |  |                                            
|                                                                          |  |                             |  |                                   |  |                            |  |                                             
|Diluted weighted average common shares outstanding                        |  | 20,015,339                  |  | 24,023,754                        |  | 20,000,000                 |  | 20,000,000                                  
|                                                                          |  |                             |  |                                   |  |                            |  |                                             



For all periods
presented in the table above, 1,790,148 shares attributable to the exercise of outstanding warrants were excluded from the calculation of diluted loss (income) per share because the exercise price of the warrants exceeded the average price of the
Companys common stock.



For the year ended
September 30, 2005, the nine months ended September 30, 2004, the year ended December 31, 2003, and the nine months ended September 30, 2003, a total of 1,534,188, 1,688,062, 1,391,821 and 1,391,821 shares, respectively, of the
Companys common stock attributable to the potential exercise of outstanding options under the Sunterra Corporation 2002 Stock Option Plan were excluded from the calculation of diluted loss (income) per share because the exercise price of the
options exceeded the average price of the Companys common stock.



For the year ended September 30, 2005, the following securities or other contracts to issue common stock, for which the exercise or conversion price was less than the average market price of the common shares, were excluded from the
diluted loss per share calculation because the effect was anti-dilutive: 3,987 shares attributable to the exercise of outstanding options under the Sunterra Corporation 2002 Stock Option Plan and 5,937,757 shares attributable to the potential
conversion of 33/4% Senior Subordinated Convertible Notes due 2024.



During the year ended September 30, 2005, the nine months ended
September 30, 2004 and the year ended December 31, 2003, respectively, distributions of 523,779 shares, 395,986 shares, and 449,813 shares of common stock were issued to certain creditors in connection with the Companys Plan of
Reorganization, bringing the cumulative total to 1,369,578 shares. An additional distribution of 585,345 shares of the Companys common stock will be made to certain former creditors on a pro rata basis for no cash consideration upon the
completion of certain claims processes in connection with the Companys Plan of Reorganization. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 128,Earnings per Share, these
shares of common stock to be issued are considered to be outstanding and included in the computation of net (loss) income per share of the Company.



Revenue RecognitionThe Company recognizes sales of Vacation Interests on an accrual basis after a binding sales contract has been executed, a
10% minimum down payment has been received, the rescission period has expired, construction is substantially complete and certain minimum project sales levels have been met. If all the criteria are met except that construction is not substantially
complete, then revenues are recognized on the percentage of completion (cost to cost) basis. For sales that do not qualify for either accrual or percentage of completion accounting, all revenue is deferred using the deposit method.



Prior to March 2004, transactions involving Vacation Interests in certain
Caribbean locations were legally structured as long-term lease arrangements for either 99 years or a term expiring in 2050. The Vacation Interests subject to such leases revert to the Company at the end of the lease terms. Such transactions are
accordingly accounted for as operating leases, with the sales value of the intervals recorded as deferred revenue at the date of execution of the transactions. Revenue deferred under these arrangements is amortized straight-line over the term of the
lease agreements and is included in Vacation Interest revenue. In addition, the Company collects maintenance fees from the lessees on these properties, which are accrued as earned and included in management services revenue. The direct marketing
costs of the lease contracts are also deferred and amortized over the term of the leases. The leased assets consist of buildings and improvements and furniture and fixtures and are depreciated over terms of 40 years and 7 years, respectively. During
the quarter ended March 31, 2004, the Company began to convey Vacation Points representing beneficial interests in a trust that holds title to the underlying resorts. See Note 7 for further details.



The Company rents unsold Vacation Interests on a short-term basis. Such
resort rental revenue is accrued as earned. Also included in rental revenues are revenue on sales of one-week leases and mini-vacations which allow prospective owners to sample a resort property, which is deferred until the vacation is used by the
customer or the expiration date of the one year lease or mini-vacation passes. Property management fee revenues are accrued as earned in accordance with the management contracts.



Revenue on the upgrade of Vacation Interests ownership to club membership that allows owners to exchange an annual Vacation
Interval at their home resort for time at another resort is deferred and amortized over ten years. Club membership annual dues are accrued as earned.



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Other revenue also includes nonrefundable commissions earned by the European subsidiary on the
origination of loans to customers by a third party to finance purchases of Vacation Interests. The commission revenue is recorded upon recognition of the related Vacation Interest revenue.



Interest earned on mortgages and contracts receivable is accrued as earned
based on the contractual provisions of the mortgages and contracts. Interest accrual is suspended on mortgages and contracts receivable at the earliest of (i) a first payment default, (ii) the initiation of cancellation or foreclosure
proceedings or (iii) when the customers account becomes 180 days delinquent.



Advertising, Sales and Marketing CostsAdvertising, sales and marketing costs are expensed as incurred, except for costs directly related to sales and leases associated with contracts not eligible for
revenue recognition as described above. Such deferred costs principally consist of sales commissions and are charged to operations as the related revenue is recognized. Deferred selling costs are classified as prepaid expenses in the accompanying
consolidated balance sheets.



Vacation Interest carrying
costThe Company incurs a portion of operating expenses of the homeowners associations based on ownership of the unsold Vacation Interests at each of the respective properties. In addition, the Company may enter into a subsidy
guarantee to fund negative cash flows. All such costs are expensed as incurred.



Loan Portfolio ExpensesLoan portfolio expenses include payroll, administrative and occupancy costs of the finance operations as well as loan servicing fees paid to third parties. These costs are expensed
as incurred.



Stock-Based CompensationThe Company
has adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123 (SFAS No. 148). This pronouncement requires
prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock compensation awards
under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which requires compensation cost to be recognized based on the excess, if any, between the quoted
market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under the Companys plan are granted with an exercise price equal to or greater than the fair market value on the date
of the grant.



In December 2004, the FASB issued SFAS
No. 123 (revised), Share-Based Payment (SFAS No. 123(R)). This standard replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued
toEmployees. SFAS No. 123(R) requires all companies to recognize compensation expense for all share-based payments, including stock options, at fair value. The Company is required to adopt SFAS No. 123(R) beginning in the first
quarter of fiscal year 2006. The Company estimates that the adoption of SFAS No. 123(R) will result in pre-tax charges totaling approximately $1.4 million to $1.8 million during the year ending September 30, 2006.



At September 30, 2004, the Company had one primary stock option plan,
the Sunterra Corporation 2002 Stock Option Plan. At the 2005 Annual Meeting held on February 25, 2005, stockholders approved the Sunterra Corporation 2005 Incentive Plan, which is described more fully in Note 9, as a replacement for the
Companys 2002 Stock Option Plan. No further awards will be granted under the 2002 Stock Option Plan.



Under the 2005 Incentive Plan, each non-employee member of the Companys Board of Directors is entitled to an annual grant of stock-based
compensation equivalent to $0.04 million to be issued in advance on the first day of the fiscal year. During the quarter ended March 31, 2005, each non-employee director was granted 4,275 shares of the Companys common stock under this
plan (based on the Companys common stock price on September 30, 2004) as their fiscal 2005 stock-based compensation. Additionally, the Board of Directors approved restricted stock grants to certain employees for fiscal 2005 services in an
amount of approximately $1.0 million, which has been expensed in general and administrative expenses in the accompanying statement of operations for the year ended September 30, 2005.



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No stock-based employee compensation cost is reflected in the net (loss) income in the accompanying
consolidated statements of operations, as all options granted under the Companys stock option plans had exercise prices equal to or above the quoted or estimated market price of the underlying common stock on the date of the grant. The
following table presents the Companys pro forma net (loss) income and the pro forma net (loss) income per share had the Company adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148:



|                                                                                                                                    |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------- | - | ------ | -------------------------- |  | - | ------- | -
|                                                                                                                                    |  | Year endedSeptember 30,2005 |         |   | Nine monthsendedSeptember 30,2004 |   |        | Year endedDecember 31,2003 | 
|Net (loss) income, as reported                                                                                                      |  | $                           | (34,734 | ) |                                   | $ | 21,308 |                            |  | $ | (89,199 | )
|Deduct:                                                                                                                             |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                             | (1,348  | ) |                                   |   | (2,638 | )                          |  |   | (2,911  | )
|                                                                                                                                    |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|Pro forma net (loss) income                                                                                                         |  | $                           | (36,082 | ) |                                   | $ | 18,670 |                            |  | $ | (92,110 | )
|                                                                                                                                    |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|Basic net (loss) income per share, as reported                                                                                      |  | $                           | (1.74   | ) |                                   | $ | 1.07   |                            |  | $ | (4.46   | )
|Diluted net (loss) income per share, as reported                                                                                    |  | $                           | (1.74   | ) |                                   | $ | 0.97   |                            |  | $ | (4.46   | )
|Basic pro forma net (loss) income per share                                                                                         |  | $                           | (1.80   | ) |                                   | $ | 0.93   |                            |  | $ | (4.61   | )
|Diluted pro forma net (loss) income per share                                                                                       |  | $                           | (1.80   | ) |                                   | $ | 0.86   |                            |  | $ | (4.61   | )



The fair value of
stock options used to compute pro forma net (loss) income and pro forma net (loss) income per share disclosures is estimated using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, this model requires the input of subjective assumptions, including the expected price volatility of the underlying stock. Projected data related to the expected volatility
and expected life of stock options is based upon historical and other information. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise
measure of the fair value of the Companys employee stock options. The following table summarizes the Black-Scholes option-pricing model assumptions used to compute the weighted average fair value of stock options granted during the periods.



|                                               |  |                             |   |  |                                   |       |   |                            |   |       |  
|---------------------------------------------- |  | --------------------------- | - |  | --------------------------------- | ----- | - | -------------------------- | - | ----- | -
|                                               |  | Year endedSeptember 30,2005 |   |  | Nine monthsendedSeptember 30,2004 |       |   | Year endedDecember 31,2003 |  
|Dividend yield                                 |  | N/A                         | * |  |                                   | 0.0   | % |                            |   | 0.0   | %
|Expected volatility                            |  | N/A                         | * |  |                                   | 58.53 | % |                            |   | 69.17 | %
|Risk-free interest rate                        |  | N/A                         | * |  |                                   | 2.76  | % |                            |   | 2.46  | %
|Expected holding period (in years)             |  | N/A                         | * |  |                                   | 5.0   |   |                            |   | 5.0   |  
|Weighted average fair value of options granted |  | N/A                         | * |  | $                                 | 4.88  |   |                            | $ | 4.80  |  

|* | Not applicable as there were no options granted during the period.
|- | ------------------------------------------------------------------



As noted in the Net (Loss) Income Per Shareparagraph above, the Company has also issued warrants for the purchase of 1,790,148 of the
Companys common shares to non-employee creditors. The Company accounts for these issuances under SFAS No. 123, as amended by SFAS No. 148, and related interpretations, which utilizes a fair-value method of accounting. The Company
used the following assumptions in estimating the fair value of these warrants: expected holding period5 years; risk-free interest rate3.81%; dividend yield0%; expected volatility50%. As discussed in Note 10, the Company
amended the exercise price of 1,190,148 of these warrants in February 2004.



Income TaxesThe Company accounts for income taxes in accordance with the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Companys financial statements or tax returns. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which the deferred tax assets or
liabilities are expected to be realized or settled. Income tax expense consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities. For the year ended December 31, 2003 and the
nine months ended September 30, 2004, the tax basis operating income of the North American operations was offset by operating losses from periods subsequent to the fresh-start date, July 29, 2002. For the year ended September 30,
2005, such tax basis operating income of the North American operations was offset by operating losses from periods prior to the fresh-start date. As such, the tax benefits first reduced goodwill, and once goodwill was exhausted, increased additional
paid-in capital.



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Foreign Currency TranslationAssets and liabilities in foreign locations are translated into
U.S. dollars using rates of exchange in effect at the end of the reporting period. Income and expense accounts are translated into U.S. dollars using average rates of exchange. The net gain or loss is shown as a translation adjustment and is
included in other comprehensive income (loss) in stockholders equity. Holding gains and losses from foreign currency transactions are included in the consolidated statements of operations. The Companys European operations experienced a
gain of $0.7 million and a loss of $1.0 million related to holding Euros for the year ended September 30, 2005 and nine months ended September 30, 2004, respectively. There were no significant gains or losses on foreign currency
transactions during the year ended December 31, 2003.



Undesignated Derivative Instruments In June 2005, the Company entered into four forward contracts in connection with the management of its exposure to fluctuations in foreign exchange rates and to meet its future Euro currency
requirements. The contracts had a total notional value of £4.0 million for the future purchase of Euros and matured in or prior to September 2005. In September 2005, the Company entered into five new forward contracts for the same purpose. The
contracts have a total notional value of £5.0 million for the future purchase of Euros and mature within one year. These contracts are marked to fair value at each reporting period and recorded on the accompanying consolidated balance sheet
and are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Unrealized gains and losses on such contracts are recognized currently in earnings. For the year ended
September 30, 2005, a gain of $0.1 million was recognized in the accompanying consolidated statement of operations as a result of these contracts. During the nine months ended September 30, 2004 and the year ended December 31, 2003,
no such agreements were in effect and no amounts were due by or owed to the Company.



Other Comprehensive Income (Loss)Other comprehensive income (loss) includes all changes in equity (net assets) from non-owner sources such as foreign currency translation adjustments. The Company accounts
for other comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income.



Cash and Cash EquivalentsCash and cash equivalents consist of cash, money market funds, and all highly liquid investments purchased with an
original maturity date of three months or less.



Cash in
Escrow and Restricted CashCash in escrow consists of deposits received on sales and leases of Vacation Interests that are held in escrow until a certificate of occupancy is obtained, the legal rescission period has expired and, for sales
of Vacation Interests, the deed of trust has been recorded in governmental or trustee property ownership records. Restricted cash consists primarily of cash collections on certain mortgages receivable that secure collateralized notes, cash held on
behalf of homeowner associations in Europe, and proceeds from the disposition of assets that collateralize other secured borrowings.



The Company collects cash billed on behalf of homeowners associations in Europe, which is recorded as restricted cash, with a corresponding
liability until disbursed. The Company also receives deposits at signing of sales of Vacation Interests, which are restricted until the sale closes escrow and has been recorded in governmental or trustee property ownership records, which are
characterized as escrow cash below. Additionally, in its capacity as resort manager, the Company collects cash on overnight rental operations on behalf of owners and homeowners associations, which are captioned Rental
trust below. On September 30, 2004, the Company completed a $151.7 million private offering and sale of vacation ownership receivable-backed notes (the 2004 Securitization). Approximately $171.4 million (including $17.0
million in aggregate principal of vacation ownership receivables sold during the 90-day period commencing September 30, 2004) in aggregate principal of vacation ownership receivables collateralized the notes. Upon transferring the $17.0 million
in aggregate principal of vacation ownership receivables sold during the 90-day period commencing September 30, 2004, such amounts were effectively released from Restricted Cash. The balance of approximately $12.1 million remains restricted as
of September 30, 2005.



Cash in Escrow and Restricted Cash
consists of the following as of the dates on the accompanying consolidated balance sheets:



|                                                        |  |                   |        |                   |   |       
|------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                                        |  | September 30,2005 |        | September 30,2004
|Collected on behalf of homeowners associations         |  | $                 | 30,422 |                   | $ | 38,106
|Sunterra Owner Trust 2004-1 collection and reserve cash |  |                   | 16,678 |                   |   | 24,204
|Escrow                                                  |  |                   | 14,090 |                   |   | 10,744
|Bonds and deposits                                      |  |                   | 6,894  |                   |   | 12,781
|Rental trust                                            |  |                   | 1,482  |                   |   | 1,540 
|Other                                                   |  |                   | 957    |                   |   | 1,288 
|                                                        |  |                   |        |                   |   |       
|Total cash in escrow and restricted cash                |  | $                 | 70,523 |                   | $ | 88,663
|                                                        |  |                   |        |                   |   |       



Mortgages and
Contracts Receivable and Allowance for Loan and Contract LossesMortgages and contracts receivable originated by the Company are recorded at amortized cost, including deferred loan and contract origination costs, less the
related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation Interests are capitalized and amortized over the term of the related mortgages or contracts receivable
as an adjustment to interest revenue using the effective interest method.



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The Company purchases mortgage receivable pools both individually and as part of business combination
transactions. These purchased mortgage receivable portfolios are accounted for separately as loan pools and typically are acquired at an amount less than the contractually required payments and the outstanding principal balance. The pools are
recorded at fair value, which represents the sum of the projected cash payments, discounted at a market rate of return for similar loans. The difference between the carrying amount of the loans and the projected cash flows is amortized to interest
income over the life of the loan pools.



The purchased loan
pools are evaluated for impairment periodically to determine if the carrying amount of the pool is recoverable through discounted projected cash flows. The estimate of future cash payments is based on various assumptions, principally the expected
default and prepayment rates. Significant changes to these assumptions could have a material impact on the fair value of the purchased loan pools. The Company will record a valuation allowance when the carrying amount of the loan pool is in excess
of the discounted projected future cash flows. In the event that projected cash flows increase compared to original estimates, the Company will adjust the yield on the loan pool over the remaining life of the loan pool.



The Company provides for estimated mortgages and contracts receivable
cancellations and defaults at the time the Vacation Interest revenues are recorded by a charge to the provision for doubtful accounts and loan losses and an increase to the allowance for loan and contract losses. The Company periodically performs an
analysis of factors such as economic conditions and industry trends, defaults, past due agings and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.



The Company charges off mortgages and contracts receivable upon the earliest
of (i) a first payment default, (ii) the initiation of cancellation or foreclosure proceedings or (iii) when the customers account becomes 180 days delinquent. Vacation Interests recovered on defaulted mortgages receivable are
recorded in unsold Vacation Interests, net, and as a reduction of loan charge-offs at the historical cost of Vacation Interests at the respective property. All collection and foreclosure costs are expensed as incurred.



Retained Interests in Mortgages and Contracts Receivable
SoldRetained interests in mortgages and contracts receivable sold are generated upon sale of mortgages receivable and represent the net present value of the expected excess cash flow to the Company after repayment by the purchaser of
principal and interest on the obligations secured by the mortgages receivable sold. The retained interests are classified as trading securities under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, based on managements intent and the existence of prepayment options. Retained interests are marked to fair value at each reporting date based on certain assumptions and the adjustments are reported as a component of operating
income (loss). During the nine month period ended September 30, 2004, the Company recorded a $2.6 million gain due to the improved performance and information on certain off-balance sheet securitized obligations. Such amounts are included in
other revenue in the accompanying consolidated statement of operations. During the year ended September 30, 2005, the Company repurchased, through certain call provisions, the mortgages receivable that were included in the off-balance sheet
financing arrangements which originally generated the retained interest in mortgages and contracts receivable. As a result of these transactions, the Company no longer had a retained interest in mortgages and contracts receivable balance at
September 30, 2005.



The Company measured the fair value
of retained interests in mortgages receivable sold at each reporting date by estimating the expected future cash flows using updated economic assumptions for the weighted average life, prepayment speed and expected default rates based on historical
experience and then discounting the estimated cash flows at a current fair value interest rate. These assumptions were developed based on the static pool methodology whereby the prepayment speed and expected default rates were developed based on the
age and payment characteristics of the mortgages receivable.



Other Receivables, netIncluded in other receivables, net on the accompanying consolidated balance sheets are $2.9 million and $2.6 million at September 30, 2005 and 2004, respectively, of accrued interest receivable
related to mortgages and contracts receivable. Other receivables also include amounts due to the Company for other revenues.



Activity in the allowance for doubtful accounts included in other receivables is as follows:



|                                |  |                             |       |   |                                   |   |        |                            |  |   |        |  
|------------------------------- |  | --------------------------- | ----- | - | --------------------------------- | - | ------ | -------------------------- |  | - | ------ | -
|                                |  | Year endedSeptember 30,2005 |       |   | Nine monthsendedSeptember 30,2004 |   |        | Year endedDecember 31,2003 | 
|Balance, beginning of period    |  | $                           | 4,578 |   |                                   | $ | 5,484  |                            |  | $ | 12,278 |  
|Provision for doubtful accounts |  |                             | 74    |   |                                   |   | 98     |                            |  |   | 126    |  
|Receivables charged off         |  |                             | (352  | ) |                                   |   | (1,004 | )                          |  |   | (6,920 | )
|                                |  |                             |       |   |                                   |   |        |                            |  |   |        |  
|Balance, end of period          |  | $                           | 4,300 |   |                                   | $ | 4,578  |                            |  | $ | 5,484  |  
|                                |  |                             |       |   |                                   |   |        |                            |  |   |        |  



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Prepaid Expenses and Other AssetsPrepaid expenses are charged to expense as the underlying
assets are used or are amortized. Financing and debt issuance costs incurred in connection with obtaining funding for the Company have been capitalized and are being amortized over the lives of the related funding agreements as a component of
interest expense using a method which approximates the effective interest method. Amortization of capitalized financing costs included in interest expense was $5.4 million for the year ended September 30, 2005, $5.8 million for the nine months
ended September 30, 2004 and $10.8 million for the year ended December 31, 2003. Under the terms of the Companys Senior Subordinated Convertible Notes due 2024 (the Notes), a portion of the proceeds from the offering were
used to purchase a portfolio of U.S. government securities that are pledged to secure the first six scheduled interest payments on the Notes. This $10.4 million was recorded in Prepaid expenses and other assets, net, and the balance on the
accompanying balance sheets was $5.3 million and $8.7 million as of September 30, 2005 and 2004, respectively.



Prepaid expenses and other assets, net consist of the following as of the dates on the accompanying consolidated balance sheets:



|                                             |  |                   |        |                   |   |       
|-------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                             |  | September 30,2005 |        | September 30,2004
|Prepaid commissions                          |  | $                 | 14,254 |                   | $ | 13,999
|Prepaid interest                             |  |                   | 5,265  |                   |   | 8,714 
|Prepaid insurance                            |  |                   | 1,984  |                   |   | 2,917 
|Prepaid maintenance fees                     |  |                   | 1,954  |                   |   | 1,043 
|Other inventory/stocks                       |  |                   | 1,964  |                   |   | 2,102 
|Deposits and advances                        |  |                   | 1,092  |                   |   | 1,438 
|Debt issuance costs, net                     |  |                   | 8,625  |                   |   | 11,123
|Other                                        |  |                   | 7,464  |                   |   | 6,608 
|                                             |  |                   |        |                   |   |       
|Total prepaid expenses and other assets, net |  | $                 | 42,602 |                   | $ | 47,944
|                                             |  |                   |        |                   |   |       



Assets Held forSaleAssets held for sale are held at the lower of cost or their estimated fair value less costs to sell and are not subject to depreciation. Sale of the assets is probable, and transfer of the assets is expected to qualify for recognition
as a completed sale, within one year of the balance sheet date. As of September 30, 2005, assets held for sale consisted of resort properties that are being actively marketed. These properties were determined to be non-core operations and were
transferred from unsold Vacation Interests during the year ended September 30, 2005. As of September 30, 2004, assets held for sale consisted of a building that formerly housed certain administrative functions that was subsequently sold
for $0.8 million resulting in a gain of $0.3 million during the year ended September 30, 2005. During the nine month period ended September 30, 2004, the Company realized proceeds of $13.1 million for dispositions of assets held for sale
with an aggregate book value of $12.0 million, resulting in a gain of $1.1 million.



Assets held for sale consist of the following as of the dates on the accompanying consolidated balance sheets:



|                                   |  |                   |       |                   |   |    
|---------------------------------- |  | ----------------- | ----- | ----------------- | - | ---
|                                   |  | September 30,2005 |       | September 30,2004
|Non-core unsold Vacation Interests |  | $                 | 2,726 |                   | $ |   
|Property and equipment, net        |  |                   |      |                   |   | 551
|                                   |  |                   |       |                   |   |    
|Total assets held for sale         |  | $                 | 2,726 |                   | $ | 551
|                                   |  |                   |       |                   |   |    



Investment in Joint
VentureAs of September 30, 2005, the Company no longer owns any partnership interests in any joint ventures. On August 10, 2005, the Company completed the acquisition of the remaining 70% partnership interests in Poipu Resort
Partners, L.P., which owns and operates Embassy Vacation Resort Poipu on the Hawaiian island of Kauai. On July 7, 2004, the Company completed the acquisition of the remaining 77% partnership interests in West Maui Resort Partners, L.P., which
owns and operates Embassy Vacation Resort Kaanapali on the Hawaiian island of Maui. See Note 5 for further discussion on these transactions.



Unsold Vacation InterestsUnsold Vacation Interests are valued at the lower of cost or fair value. Development costs include acquisition
costs, both hard and soft construction costs and, together with real estate costs, are allocated to unsold Vacation Interests, net. Interest, real estate taxes and other carrying costs incurred during the construction period are capitalized and such
costs incurred on completed Vacation Interest inventory are expensed. Costs are allocated to Vacation Interest cost of sales under the relative sales value method. Unsold Vacation Interests, net also includes the value of Vacation Interests
collateralizing delinquent mortgages and contracts receivable that have been charged off, but for which the Company does not yet hold title pending completion of the foreclosure process. The Company records inventory recoverable under defaulted
mortgages at the fair value of the interval, which typically represents the carrying amount of similar intervals.



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Unsold Vacation Interests, net consist of the following as of the dates on the accompanying consolidated
balance sheets:



|                                                              |  |                   |         |                   |   |        
|------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------
|                                                              |  | September 30,2005 |         | September 30,2004
|Development costs of completed unsold Vacation Interests, net |  | $                 | 126,916 |                   | $ | 123,148
|Development costs of uncompleted Vacation Interest projects   |  |                   | 16,208  |                   |   | 10,856 
|Undeveloped land costs                                        |  |                   | 32,279  |                   |   | 30,059 
|Vacation Interests recoverable under defaulted mortgages      |  |                   | 9,029   |                   |   | 4,795  
|                                                              |  |                   |         |                   |   |        
|Unsold Vacation Interests, net                                |  | $                 | 184,432 |                   | $ | 168,858
|                                                              |  |                   |         |                   |   |        



Property and
EquipmentBuildings and leasehold improvements are depreciated using the straight-line method over the lesser of the estimated useful lives (40 years), or the remainder of the lease terms, respectively. Furniture, office equipment and
computer equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years.



Property and equipment consists of the following as of the dates on the accompanying consolidated balance sheets:



|                                               |  |                   |         |   |                   |   |         |  
|---------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                               |  | September 30,2005 |         |   | September 30,2004 |  
|Land and improvements                          |  | $                 | 10,077  |   |                   | $ | 9,902   |  
|Buildings and leasehold improvements           |  |                   | 67,955  |   |                   |   | 55,211  |  
|Furniture and office equipment                 |  |                   | 15,333  |   |                   |   | 17,484  |  
|Computer equipment                             |  |                   | 8,750   |   |                   |   | 8,218   |  
|Software                                       |  |                   | 10,164  |   |                   |   | 9,345   |  
|                                               |  |                   |         |   |                   |   |         |  
|                                               |  |                   | 112,279 |   |                   |   | 100,160 |  
|Less accumulated depreciation and amortization |  |                   | (28,157 | ) |                   |   | (22,164 | )
|                                               |  |                   |         |   |                   |   |         |  
|Property and equipment, net                    |  | $                 | 84,122  |   |                   | $ | 77,996  |  
|                                               |  |                   |         |   |                   |   |         |  



Depreciation and
amortization expense related to property and equipment was $9.4 million for the year ended September 30, 2005, $6.3 million for the nine months ended September 30, 2004 and $11.2 million for the year ended December 31, 2003.



Property and equipment includes $0.3 million and $1.0 million
of equipment under capital leases at September 30, 2005 and 2004, respectively. Accumulated amortization of assets acquired under capital leases at September 30, 2005 and 2004 was $0.1 million and $0.8 million, respectively. Amortization
expense for capital lease assets was $0.1 million for the year ended September 30, 2005, $0.1 million for the nine months ended September 30, 2004 and $0.3 million for the year ended December 31, 2003, and is included in depreciation
expense in the accompanying consolidated statements of operations. The related capital lease obligations of $0.1 million and $0.2 million are included in notes payable on the accompanying consolidated balance sheets at September 30, 2005 and
2004, respectively. See Note 15 for details regarding equipment under capital lease obligations.



Capitalized Software CostsThe Company capitalizes costs for internally developed software in accordance with American Institute of Certified
Public Accountants Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and amortizes the amounts over a period of three years.



GoodwillAs discussed in Note 2 above, the Company adopted
fresh-start accounting upon emergence from Chapter 11 and eliminated all existing goodwill. Under fresh-start accounting, all assets and liabilities were restated to reflect their reorganization value, which approximated fair value at the date of
reorganization. The Company determined that the reorganization value of the net assets exceeded the fair value of identifiable net assets at July 31, 2002 and recognized $153.2 million as reorganization value in excess of amounts allocable to
identifiable assetsgoodwill. Under SFAS No. 142, Goodwill and Other Intangible Assets, this asset is not amortized. However, the Company is required to perform an impairment test annually, or more frequently if there are triggering
events. In May 2005 and December 2003, the Company recorded charges totaling $55.0 million and $91.6 million, respectively, for the impairment of the reorganization value in excess of identifiable assetsgoodwill. See Note 8 for details of the
impairment tests performed in 2005, 2004 and 2003.



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The following table sets forth information concerning the Companys goodwill:



|                                                                          |  |                |         |   |          |   |         |       |  |   |         |  
|------------------------------------------------------------------------- |  | -------------- | ------- | - | -------- | - | ------- | ----- |  | - | ------- | -
|                                                                          |  | North American |         |   | European |   |         | Total | 
|Balance as of January 1, 2003                                             |  | $              | 99,908  |   |          | $ | 53,294  |       |  | $ | 153,202 |  
|Impairment losses                                                         |  |                | (91,586 | ) |          |   |        |       |  |   | (91,586 | )
|                                                                          |  |                |         |   |          |   |         |       |  |   |         |  
|Balance as of December 31, 2003                                           |  |                | 8,322   |   |          |   | 53,294  |       |  |   | 61,616  |  
|Goodwill acquired during the period                                       |  |                | 18,956  |   |          |   | 1,972   |       |  |   | 20,928  |  
|Other                                                                     |  |                | 51      |   |          |   | 164     |       |  |   | 215     |  
|                                                                          |  |                |         |   |          |   |         |       |  |   |         |  
|Balance as of September 30, 2004                                          |  |                | 27,329  |   |          |   | 55,430  |       |  |   | 82,759  |  
|Goodwill acquired during the period                                       |  |                | 7,030   |   |          |   |        |       |  |   | 7,030   |  
|Goodwill adjusted for final purchase price allocation                     |  |                | 487     |   |          |   | (400    | )     |  |   | 87      |  
|Impairment losses                                                         |  |                |        |   |          |   | (55,030 | )     |  |   | (55,030 | )
|Provision for income taxes recorded as a credit to goodwill (See Note 13) |  |                | (8,227  | ) |          |   |        |       |  |   | (8,227  | )
|                                                                          |  |                |         |   |          |   |         |       |  |   |         |  
|Balance as of September 30, 2005                                          |  | $              | 26,619  |   |          | $ |        |       |  | $ | 26,619  |  
|                                                                          |  |                |         |   |          |   |         |       |  |   |         |  



The purchase of
Thurnham Leisure Group for approximately $3.8 million during the quarter ended March 31, 2004 resulted in the recording of approximately $2.0 million of goodwill in the European segment. During the year ended September 30, 2005, the
goodwill was adjusted downward by $0.4 million related to the final purchase price allocation of the Thurnham Leisure Group acquisition. The purchase of the majority interest in West Maui Resort Partners, L.P. for approximately $105.9 million during
the quarter ended September 30, 2004 resulted in the recording of approximately $19.0 million of goodwill in the North American segment. In the final purchase price allocation, goodwill was increased by $0.5 million in the year ended
September 30, 2005. The purchase of the majority interest in Poipu Resort Partners, L.P. for approximately $27.8 million during the quarter ended September 30, 2005 resulted in the recording of approximately $7.0 million of goodwill (see
Note 5). Such goodwill has an indefinite life and was considered when the Company conducted its annual review of goodwill for impairment to determine if goodwill with an indefinite life was impaired.



Intangible and Other Assets, netConsisting of certain management
contracts with homeowners associations and the unamortized value of certain intellectual property, intangible and other assets with identifiable lives are amortized over such estimated useful lives, which range from 3 to 10 years.



Intangible and other assets, net consists of the following as of the dates
on the accompanying consolidated balance sheets:



|                                       |  |                   |        |   |                   |   |       |  
|-------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ----- | -
|                                       |  | September 30,2005 |        |   | September 30,2004 |  
|Management contracts                   |  | $                 | 2,117  |   |                   | $ | 1,237 |  
|Trademarks                             |  |                   | 376    |   |                   |   | 376   |  
|Other                                  |  |                   | 1,199  |   |                   |   | 348   |  
|                                       |  |                   |        |   |                   |   |       |  
|                                       |  |                   | 3,692  |   |                   |   | 1,961 |  
|Less accumulated amortization          |  |                   | (1,342 | ) |                   |   | (678  | )
|                                       |  |                   |        |   |                   |   |       |  
|Total intangible and other assets, net |  | $                 | 2,350  |   |                   | $ | 1,283 |  
|                                       |  |                   |        |   |                   |   |       |  



Amortization expense
relating to intangible and other assets was $0.7 million for the year ended September 30, 2005, $0.3 million for the nine months ended September 30, 2004 and $0.3 million for the year ended December 31, 2003.



Accrued LiabilitiesThe Company records estimated amounts for
certain accrued liabilities at each period end. Accrued liabilities are probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services to other entities in the future as a result of past
transactions or events. The nature of selected balances included in accrued liabilities of the Company includes:



Accrued marketing expensesconsists of expenses for third-party tour vendors who generate tours of prospective buyers for a fee, as well as
attraction tickets and travel vouchers related to providing initial incentives to prospective buyers.



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Accrued escrow liabilitydeposits in escrow received on Vacation Interests sold.



Accrued Vacation Interests carrying costsestimated
maintenance fees and the related property taxes specific to unsold Vacation Interests.



Amounts collected on behalf of or due to homeowners associationsfees billed and collected by the Companys European operations on behalf of homeowners associations. The funds are released
to the homeowners associations ratably over the year or, in some instances, upon demand.



Accrued liabilities consist of the following as of the dates on the accompanying consolidated balance sheets:



|                                                                  |  |                   |        |                   |   |       
|----------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                                                  |  | September 30,2005 |        | September 30,2004
|Accrued marketing                                                 |  | $                 | 18,131 |                   | $ | 19,812
|Amounts collected on behalf of or due to homeowners associations |  |                   | 13,236 |                   |   | 13,208
|Accrued Vacation Interests carrying costs                         |  |                   | 11,825 |                   |   | 8,074 
|Accrued escrow liability                                          |  |                   | 11,511 |                   |   | 7,285 
|Accrued other taxes                                               |  |                   | 1,082  |                   |   | 2,478 
|Accrued payroll and related                                       |  |                   | 10,017 |                   |   | 7,808 
|Accrued servicing liability                                       |  |                   |       |                   |   | 3,809 
|Accrued professional fees                                         |  |                   | 4,278  |                   |   | 2,211 
|Creditor claims payable                                           |  |                   | 200    |                   |   | 2,865 
|Accrued commissions                                               |  |                   | 3,565  |                   |   | 1,791 
|Other                                                             |  |                   | 10,141 |                   |   | 11,554
|                                                                  |  |                   |        |                   |   |       
|Total accrued liabilities                                         |  | $                 | 83,986 |                   | $ | 80,895
|                                                                  |  |                   |        |                   |   |       



Deferred
RevenuesThe Company records deferred revenues for payments received or billed but not earned for various activities, including those described herein and summarized below. The largest and primary component relates to leases of Vacation
Interests at the Companys two resorts in St. Maarten. See Note 7 for further discussion of this component.



Deferred Club Sunterra revenueannual Club Sunterra membership fees paid or billed to members and amortized ratably over a one-year period,
one-time conversion fees paid by fixed-interval owners to convert to Club Sunterra and amortized ratably over a 10-year period (the estimated life of the membership) and the remaining portion of an advance on renewal fees amortized ratably
commensurate with Club Sunterra members renewing memberships with an external exchange service.



Unearned mini-vacationssold but unused trial Vacation Interests, ranging from three days to one week. This revenue is recognized when the
purchaser completes their respective stay at one of the Companys resorts.



Unearned management services revenuemaintenance fees billed but unearned in the Companys capacity as the homeowners association for the two resorts in St. Maarten. See Note 7 for further
discussion.



Deferred revenues consist of the following as of
the dates on the accompanying consolidated balance sheets:



|                                                  |  |                   |        |                   |   |       
|------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                                  |  | September 30,2005 |        | September 30,2004
|Deferred Vacation Interest lease revenue (Note 7) |  | $                 | 73,623 |                   | $ | 75,877
|Deferred Club Sunterra revenue                    |  |                   | 5,918  |                   |   | 6,430 
|Unearned mini-vacations                           |  |                   | 9,291  |                   |   | 7,985 
|Unearned management services revenue (Note 7)     |  |                   | 2,558  |                   |   | 1,953 
|Other                                             |  |                   | 3,785  |                   |   | 2,882 
|                                                  |  |                   |        |                   |   |       
|Total deferred revenues                           |  | $                 | 95,175 |                   | $ | 95,127
|                                                  |  |                   |        |                   |   |       



Recently Issued
Accounting PronouncementsIn December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions(SFAS No. 152). SFAS No. 152 amends SFAS No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in American Institute of Certified Public Accountants Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing



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transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS No. 152 and
SOP 04-2 are effective for financial statements for fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 152 and SOP 04-2 on October 1, 2005.



This new standard provides guidance on evaluating revenue recognition with regard to timeshare transactions, evaluation of
uncollectibility of notes receivable, accounting for costs of vacation interval sales, operations during holding periods, and other accounting transactions specific to timeshare operations. SFAS No. 152 requires the impact of the adoption of
these provisions to be provided as a cumulative effect of a change in accounting principle. The Company is in the process of finalizing the impact of SFAS No. 152 on its statements of position, statement of operations and cash flows, but has
preliminarily concluded that the cumulative effect of a change in accounting principle will be a pre-tax charge in the range of approximately $8 million to $12 million. The major component of the cumulative effect of a change in accounting principle
is a deferral of Vacation Interest revenues that were valid sales at September 30, 2005 under prior accounting guidance, but upon the adoption of SFAS No. 152 will be deferred and recognized over the period in which the buyers
commitment (as defined in SFAS No. 152) reaches 10% of the sales value of the Vacation Interest. The related Vacation Interest cost of sales and direct selling costs will also be deferred. The Company expects that the significant portion of the
amounts deferred will be recognized in revenues and related cost of sales and selling costs in the first quarter of fiscal 2006.



In December 2004, the FASB issued SFAS No. 123(R). This standard replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires all companies to recognize compensation expense for all share-based payments, including stock options, at fair value. The Company is
required to adopt SFAS No. 123(R) beginning in the first quarter of fiscal year 2006. The Company estimates that the adoption of SFAS No. 123(R) will result in pre-tax charges totaling approximately $1.4 million to $1.8 million during the
year ending September 30, 2006.



Note 4Mortgages and Contracts
Receivable and Allowance for Loan and Contract Losses



The
Company provides financing to purchasers and lessees of Vacation Interests that are collateralized by their interest in such Vacation Interests. The mortgages and contracts generally bear interest at fixed rates between 12% and 18%. The term of the
mortgages and contracts typically average 7 to 10 years, and may be prepaid at any time without penalty. The contract weighted average interest rate of outstanding mortgages and contracts receivable was 13.9% and 14.2% at September 30, 2005 and
2004, respectively. Mortgages and contracts receivable in excess of 60 days past due at September 30, 2005 and 2004 were 1.9% and 3.2%, respectively, of gross mortgages and contracts receivable.



Mortgages and contracts receivable originated by the Company are recorded at
amortized cost, including deferred loan and contract origination costs, less the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation Interests have been
capitalized and are amortized over the term of the related mortgages or contracts receivable as an adjustment to interest revenue using the effective interest method. Amortization of deferred loan and contract origination costs charged to interest
revenue was $1.6 million for the year ended September 30, 2005, $1.5 million for the nine months ended September 30, 2004 and $0.7 million for the year ended December 31, 2003.



The Company recorded a $10.3 million premium at July 31, 2002 on
mortgages and contracts receivable, which is being amortized over the life of the related mortgages and contracts receivable portfolio. At September 30, 2005 and 2004, the net unamortized premium was $3.0 million and $4.5 million, respectively.
During the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003, amortization of $1.5 million, $2.5 million and $2.2 million, respectively, was recorded as an adjustment of
interest revenue.



On December 17, 2004, the Company
completed the purchase from Barton of its rights to the mortgages and contracts remaining in the Blue Bison Funding Corporation loan portfolio at that date for approximately $16.4 million in cash. Under the purchase method of accounting, the total
purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition and the operating results of the acquired portfolio are included in the consolidated statement of
operations from the date of acquisition. The tangible assets, intangible assets, liabilities and goodwill acquired totaled $15.4 million, $0.0 million, $(1.0) million and $0.0 million, respectively.



On January 25, 2005, the Company completed a transaction resulting in
the acquisition of a loan portfolio held by TerraSun, LLC, a qualified special-purpose entity created to hold a loan portfolio and issue collateralized debt to third-party investors, for approximately $4.5 million in cash. This transaction was the
result of the exercise of the clean up call provision contained in the notes issued by TerraSun, LLC that allows the notes to be called and mortgages and contracts receivable to be transferred back to the



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Company when the remaining principal value of the notes reached 10% of the original principal value. Under the purchase
method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition and the operating results of the acquired portfolio are included in
the consolidated statement of operations from the date of acquisition. The total purchase price of the loan portfolio was $19.5 million, which included net cash paid of $4.5 million plus net write-off of the retained interest in the TerraSun, LLC
loan pool of $15.0 million. The tangible assets, intangible assets, liabilities and goodwill acquired totaled $18.5 million, $0.0 million, $(1.0) million and $0.0 million, respectively.



On February 25, 2005, the Company completed a transaction resulting in the acquisition of a loan portfolio held by
Dutch Elm, LLC, a qualified special-purpose entity created to hold a loan portfolio and issue collateralized debt to third-party investors, for approximately $5.6 million in cash. This transaction was the result of the exercise of the clean
up call provision contained in the notes issued by Dutch Elm, LLC that allows the notes to be called and mortgages and contracts receivable to be transferred back to the Company when the remaining principal value of the notes reached 10% of
the original principal value. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition and the operating
results of the acquired portfolio are included in the consolidated statement of operations from the date of acquisition. The total purchase price of the loan portfolio was $14.5 million, which included net cash paid of $5.6 million plus net
write-off of the retained interest in the Dutch Elm, LLC loan pool of $8.9 million. The tangible assets, intangible assets, liabilities and goodwill acquired totaled $13.3 million, $0.0 million, $(1.2) million and $0.0 million, respectively.



On July 31, 2005, the Company completed the acquisition
of the 70% majority interest of Poipu Resort Partners, L.P. (Poipu) that it did not own (see Note 5 for further description). The Company allocated $20 million of the purchase price to mortgages and contracts receivable. The Company
accounts for the loans acquired in the acquisition as a purchased pool of loans and has recorded the value based on the projected future cash flows, discounted at a market rate of interest.



On August 23, 2005, the Company executed an agreement with each of the
beneficial note holders of Epic Receivables 1999, LLC, a Delaware Limited Liability Company (Epic Receivables), to purchase the outstanding principal balance of the mortgages underlying the Notes. Each of the mortgages acquired are
collateralized by timeshare inventory, including Vacation Points and deeded intervals in Sunterras locations and other non-Sunterra owned locations. In addition, the Company acquired the defaulted loans underlying the Epic Receivables, which
were also collateralized by timeshare interests in Sunterra and non-Sunterra locations. The total purchase price for the outstanding loan balance and inventory underlying the defaulted mortgages was approximately $7.9 million, of which approximately
$5.6 million was allocated to mortgages receivable and $2.3 million was allocated to inventory recoverable under defaulted mortgages.



These acquired mortgages and contracts receivable are each accounted for separately as pools of loans, and therefore, use a composite interest rate and
expectation of future cash flows that is estimated on the pool, rather than on a loan-by-loan basis. Loan pools acquired during each period for which it was probable at acquisition that all contractually required payments would not be collected are
as follows:



|                                                                                      |  |                             |        |                                   |   |                            |  |   |      
|------------------------------------------------------------------------------------- |  | --------------------------- | ------ | --------------------------------- | - | -------------------------- |  | - | -----
|                                                                                      |  | Year endedSeptember 30,2005 |        | Nine monthsendedSeptember 30,2004 |   | Year endedDecember 31,2003
|Contractually required payments of principal and interest receivable  at acquisition |  | $                           | 99,689 |                                   | $ | 137,512                    |  | $ | 8,845
|Cash flows expected to be collected  at acquisition                                  |  |                             | 87,149 |                                   |   | 116,173                    |  |   | 5,687
|Basis in acquired loans  at acquisition                                              |  |                             | 67,647 |                                   |   | 88,423                     |  |   | 3,533



|                                      |  |                   |         |                   |   |       
|------------------------------------- |  | ----------------- | ------- | ----------------- | - | ------
|                                      |  | September 30,2005 |         | September 30,2004
|Outstanding loan balance at par value |  | $                 | 109,657 |                   | $ | 81,426
|Carrying amount                       |  | $                 | 98,691  |                   | $ | 76,945



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In calculating the cash flows expected to be collected, the Company considers expected prepayments and
estimates the amount and timing of undiscounted expected principal, interest and other cash flows expected at acquisition for the aggregated loan pool. The Company determines the excess of the pools scheduled contractual principal and interest
payments over all cash flows expected at acquisition as non-accretable difference, which will not be accreted to interest revenue. The remaining amount that represents the excess of the pools cash flows expected to be collected over the amount
paid is accreted into interest revenue over the remaining life of the pool. Accretable yield related to the acquired pools is as follows:



|                                          |  |   |         |  
|----------------------------------------- |  | - | ------- | -
|Accretable yield as of January 1, 2003    |  | $ |        |  
|Portfolios acquired                       |  |   | 2,154   |  
|Accretion                                 |  |   | (106    | )
|                                          |  |   |         |  
|Accretable yield as of December 31, 2003  |  | $ | 2,048   |  
|Portfolios acquired                       |  |   | 27,750  |  
|Accretion                                 |  |   | (5,061  | )
|                                          |  |   |         |  
|Accretable yield as of September 30, 2004 |  | $ | 24,737  |  
|Portfolios acquired                       |  |   | 19,502  |  
|Accretion                                 |  |   | (14,694 | )
|                                          |  |   |         |  
|Accretable yield as of September 30, 2005 |  | $ | 29,545  |  
|                                          |  |   |         |  



Over the life of the
loan pools, the Company will continue to estimate cash flows expected to be collected. The Company will evaluate on the balance sheet date whether the present value of its loans, determined using the effective interest rates, has decreased and, if
so, will recognize a loss. The present value of any subsequent increase in the loan pools actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for the loan pool. Any remaining
increases in cash flows expected to be collected will adjust the amount of accretable yield recognized on a prospective basis over the loan pools remaining life. As of September 30, 2005, there were no valuation allowances relating to
these acquired loan pools.



Mortgages and contracts receivable,
net consist of the following as of the dates on the accompanying consolidated balance sheets:



|                                                                                      |  |                   |         |   |                   |   |         |  
|------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                      |  | September 30,2005 |         |   | September 30,2004 |  
|Mortgages and contracts receivable originated                                         |  | $                 | 244,525 |   |                   | $ | 218,871 |  
|Mortgages and contracts receivable  purchased pools                                  |  |                   | 98,691  |   |                   |   | 76,945  |  
|Deferred loan and contract origination costs, net of accumulated amortization         |  |                   | 5,986   |   |                   |   | 4,770   |  
|Premium on mortgages and contracts receivable, net of accumulated amortization        |  |                   | 2,980   |   |                   |   | 4,513   |  
|                                                                                      |  |                   |         |   |                   |   |         |  
|Mortgages and contracts receivable, gross                                             |  |                   | 352,182 |   |                   |   | 305,099 |  
|Allowance for loan and contract losses associated with loan and contract originations |  |                   | (28,435 | ) |                   |   | (26,530 | )
|                                                                                      |  |                   |         |   |                   |   |         |  
|Total Mortgages and contracts receivable, net                                         |  | $                 | 323,747 |   |                   | $ | 278,569 |  
|                                                                                      |  |                   |         |   |                   |   |         |  



The following reflects
the scheduled contractual principal maturities of originated mortgages and contracts receivable:



|                                              |  |   |        
|--------------------------------------------- |  | - | -------
|Year ending September 30:                     |  |  
|2006                                          |  | $ | 27,672 
|2007                                          |  |   | 23,447 
|2008                                          |  |   | 24,522 
|2009                                          |  |   | 26,045 
|2010                                          |  |   | 25,446 
|2011 and thereafter                           |  |   | 98,714 
|                                              |  |   |        
|                                              |  |   | 225,846
|Mortgages and contracts receivable in transit |  |   | 18,679 
|                                              |  |   |        
|                                              |  | $ | 244,525
|                                              |  |   |        



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The Company provides for estimated mortgages receivable defaults at the time the Vacation Interest
revenues are recorded by a charge to the provision for doubtful accounts and loan losses and an increase to the allowance for loan and contract losses. A similar loss allowance is provided for certain Vacation Interest transactions structured as
long-term operating lease arrangements by a charge to deferred lease revenue, which is included in deferred revenue on the consolidated balance sheets, and a credit to an allowance for loan and contract losses. The Company periodically performs an
analysis of factors such as economic conditions and industry trends, defaults, past due agings and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.



The Companys allowance for mortgages and contracts receivable includes
both an amount related to receivables that existed at July 31, 2002 (Predecessor portfolio), and an amount that relates to receivables generated subsequent to such date. The Companys evaluation of the adequacy of the allowance in periods
subsequent to such date will consider each of these portfolios separately. Future charge-offs and recoveries will be applied directly to each portfolios respective allowance.



The Company charges off mortgages and contracts receivable upon the earliest of (i) a first payment default,
(ii) the initiation of cancellation or foreclosure proceedings or (iii) when the customers account becomes 180 days delinquent. Vacation Interests recovered on defaulted mortgages receivable are recorded in unsold Vacation Interests,
net, and as a reduction of loan charge-offs at the historical cost of Vacation Interests at the respective property. All collection and foreclosure costs are expensed as incurred.



Activity in the allowance for loan and contract losses associated with mortgages and contracts receivable is as follows:



|                                       |  |                             |         |   |                                   |   |         |                            |  |   |         |  
|-------------------------------------- |  | --------------------------- | ------- | - | --------------------------------- | - | ------- | -------------------------- |  | - | ------- | -
|                                       |  | Year endedSeptember 30,2005 |         |   | Nine monthsendedSeptember 30,2004 |   |         | Year endedDecember 31,2003 | 
|Balance, beginning of period           |  | $                           | 26,530  |   |                                   | $ | 29,443  |                            |  | $ | 32,394  |  
|Provision for loan and contract losses |  |                             | 12,242  |   |                                   |   | 7,082   |                            |  |   | 6,193   |  
|Receivables charged off, net           |  |                             | (10,337 | ) |                                   |   | (10,616 | )                          |  |   | (10,344 | )
|Other                                  |  |                             |        |   |                                   |   | 621     |                            |  |   | 1,200   |  
|                                       |  |                             |         |   |                                   |   |         |                            |  |   |         |  
|Balance, end of period                 |  | $                           | 28,435  |   |                                   | $ | 26,530  |                            |  | $ | 29,443  |  
|                                       |  |                             |         |   |                                   |   |         |                            |  |   |         |  



Note 5Acquisitions



On October 7, 2003, the U.S. Bankruptcy court for
the District of Delaware approved the Companys bid to acquire certain assets of Epic Resorts Group, and on October 30, 2003, the Company completed this purchase. On January 28, 2004, the Company completed the purchase of certain
assets of Thurnham Leisure Group. On March 18, 2004, the Company completed the purchase of a loan portfolio from Prudential Securities Credit Corp. that included mortgages and contracts receivable secured by Vacation Interests in the Epic
Vacation Club (the Company had previously acquired substantial amounts of unsold Vacation Interests in the Epic Vacation Club as part of the October 30, 2003 acquisition.) These transactions were accounted for as purchases under SFAS
No. 141, Business Combinations (SFAS No. 141). Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of
the date of acquisition. The tangible assets, intangible assets, liabilities and goodwill acquired in these transactions totaled $73.3 million, $1.2 million, $2.4 million and $2.0 million, respectively.



West Maui Resort Partners, L.P. (Kaanapali) owns and
operates Embassy Vacation Resort Kaanapali on the Hawaiian island of Maui. On July 7, 2004, the Company completed the acquisition of the 77% majority interest of Kaanapali that it did not own. Prior to the transaction, the Company
owned 23% of Kaanapali and accounted for its interest under the equity method of accounting. For the periods prior to July 7, 2004, the Companys 23% share of the results of Kaanapali is included in Income from
investments in joint ventures on the accompanying consolidated statement of operations. Since July 7, 2004, 100% of the operations of Kaanapali are included in the consolidated results of the Company. The transaction was
accounted for as a purchase under SFAS No. 141. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the
acquisition. During the quarter ended December 31, 2004, the Company received the final independent third-party valuation of the net assets acquired and recorded an adjustment decreasing the property and equipment recorded by $0.5 million and
increasing goodwill recorded by a similar amount. As a result of such adjustment, the tangible assets, liabilities and goodwill acquired totaled $108.0 million, $10.1 million and $19.4 million, respectively. The net assets recorded of $117.3 million
were offset by the elimination of the existing investment in joint venture at the date of acquisition of $11.4 million and cash drawn against the Companys existing line of credit facility, as amended on July 7, 2004, of $105.9 million.
With this transaction, the Company acquired full ownership of unsold Vacation Interests with an estimated retail value in excess of $210.0 million and acquired $46.2 million of mortgages receivable.



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On October 21, 2004, the Company completed the purchase of Cluster G&A, S.A. consisting of a
resort called Jardines del Sol. The transaction was accounted for as a purchase under SFAS No. 141. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their
estimated fair market values as of the date of the acquisition and the operating results of the acquired entity are included in the consolidated statement of operations from the date of acquisition. The tangible assets, intangible assets,
liabilities and goodwill acquired totaled $9.3 million, $0.0 million, $0.0 million and $0.0 million, respectively.



On October 26, 2004, the Company completed the purchase of the assets of Activity Warehouse from Jusdoit, Inc. for $0.8 million. Activity Warehouse
engages in the sale of visitor activities, rental of recreation equipment and soliciting for timeshare prospects on the Hawaiian island of Maui. The transaction was accounted for as a purchase under SFAS No. 141 and the operating results of the
acquired entity are included in the consolidated statement of operations from the date of acquisition.



The Company previously established a qualifying entity, Blue Bison Funding Corporation, through which it transferred mortgages and contracts receivable to
Barton Capital Corporation (Barton) and related entities as part of a $100.0 million Mortgages Receivable Conduit Facility (the Conduit Facility). The Company sold undivided interests in mortgages and contracts receivable to
Blue Bison Funding Corporation at 95% of face value without recourse to it as to collectibility. Blue Bison Funding Corporation financed those purchases through transfers to Barton of an undivided interest in the transferred mortgages and contracts
receivable for cash consideration under the Conduit Facility. The Conduit Facility expired on December 17, 2001, leaving a substantial quantity of mortgages and contracts receivable still held by Barton. On December 17, 2004, the Company
completed the purchase from Barton of its rights to the mortgages and contracts receivable remaining in the loan portfolio at that date for approximately $16.4 million in cash (see Note 4).



On January 25, 2005, the Company completed a transaction resulting in
the acquisition of a loan portfolio held by TerraSun, LLC, a qualified special-purpose entity created to hold a loan portfolio and issue collateralized debt to third-party investors, for approximately $4.5 million in cash. This transaction was the
result of the exercise of the clean up call provision contained in the notes issued by TerraSun, LLC that allows the notes to be called and mortgages and contracts receivable to be transferred back to the Company when the remaining
principal value of the notes reaches 10% of the original principal value (see Note 4).



On February 25, 2005, the Company completed a transaction resulting in the acquisition of a loan portfolio held by Dutch Elm, LLC, a qualified special-purpose entity created to hold a loan portfolio and issue
collateralized debt to third-party investors, for approximately $5.6 million in cash. This transaction was the result of the exercise of the clean up call provision contained in the notes issued by Dutch Elm, LLC that allows the notes to
be called and mortgages and contracts receivable to be transferred back to the Company when the remaining principal value of the notes reaches 10% of the original principal value (see Note 4).



On July 22, 2005, the Company acquired 46 one and two bedroom apartments
at the Eden Bay Resort in Malta for approximately $7.9 million. Malta is located in the Mediterranean Sea between Italy and Tunisia and the five-star Eden Bay Resort is located within the InterContinental Hotel.



Poipu Resort Partners, L.P. (Poipu) owns and operates Embassy
Vacation Resort Poipu on the Hawaiian island of Kauai. On August 10, 2005, the Company completed the acquisition of the 70% majority interest of Poipu that it did not own. Prior to the transaction, the Company owned 30% of Poipu and accounted
for its interest under the equity method of accounting. For the periods prior to July 31, 2005, the Companys 30% share of the results of Poipu is included in Income from investments in joint ventures on the accompanying
consolidated statement of operations. Since July 31, 2005, 100% of the operations of Poipu are included in the consolidated results of the Company. The transaction was accounted for as a purchase under SFAS No. 141. Under the purchase
method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition. The allocation of the purchase price to goodwill and intangibles
is subject to change based on final valuation of net assets and is based upon managements assessments of independent third-party valuations and managements estimates.



With this transaction, the Company acquired full ownership of unsold Vacation Interests with an estimated retail value in
excess of $30.1 million and acquired $20.0 million of mortgages receivable.



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The following table summarizes the estimated fair values assigned to the assets acquired and liabilities
assumed at the date of acquisition:



|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Tangible Assets:                                          |  |   |        |  
|Cash in escrow and restricted cash                        |  | $ | 369    |  
|Mortgages and contracts receivable, net                   |  |   | 19,966 |  
|Other receivables                                         |  |   | 798    |  
|Unsold Vacation Interests                                 |  |   | 6,784  |  
|Property and equipment                                    |  |   | 820    |  
|Other assets                                              |  |   | 809    |  
|                                                          |  |   |        |  
|                                                          |  | $ | 29,546 |  
|                                                          |  |   |        |  
|Liabilities:                                              |  |   |        |  
|Accounts payable                                          |  | $ | 691    |  
|Accrued liabilities                                       |  |   | 2,943  |  
|Notes payable                                             |  |   | 183    |  
|                                                          |  |   |        |  
|                                                          |  |   | 3,817  |  
|                                                          |  |   |        |  
|Net tangible assets acquired                              |  |   | 25,729 |  
|Goodwill (a)                                              |  |   | 7,030  |  
|                                                          |  |   |        |  
|Net assets acquired                                       |  |   | 32,759 |  
|Less: Conversion of investment in joint venture to equity |  |   | (4,986 | )
|                                                          |  |   |        |  
|Total cash consideration paid                             |  | $ | 27,773 |  
|                                                          |  |   |        |  

---

|(a) | All goodwill may be non-deductible for tax purposes.
|--- | ----------------------------------------------------



The purchase price for Poipu consists of the following:



|                     |  |   |       
|-------------------- |  | - | ------
|Cash                 |  | $ | 27,773
|Liabilities assumed  |  |   | 3,817 
|                     |  |   |       
|Total purchase price |  | $ | 31,590
|                     |  |   |       



The goodwill from the
business combinations has an indefinite life and is considered when the Company conducts its annual review of goodwill for impairment. The Company has omitted pro-forma disclosures to reflect the above business combinations as the effects of such
business combinations were deemed insignificant.



Note 6Concentrations
of Risk



Credit RiskThe Company is exposed to
on-balance sheet credit risk related to its mortgages and contracts receivable. The Company offers financing to the buyers and lessees of Vacation Interests at the Companys resorts. The Company bears the risk of defaults on promissory notes
delivered to it by buyers of Vacation Interests. If a buyer of a Vacation Interval defaults, the Company generally must foreclose on the Vacation Interval (or, in the case of Vacation Points, by exercise of a power of sale) and attempt to resell it.
The associated marketing, selling, and administrative costs from the original sale are not recovered; and such costs must be incurred again to resell the Vacation Interests. Although in many cases the Company may have recourse against a Vacation
Interval buyer for the unpaid price, certain states have laws that limit the Companys ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, the Company has generally not pursued this remedy. If
a lessee of a Vacation Interval defaults, the lessee forfeits its contract rights previously held to use the Vacation Interval, and the Company is able to transfer title of the Vacation Interval to a trust out of which the Company will convey
Vacation Points representing beneficial interests in such trust without further recovery efforts.



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Availability of Funding SourcesThe Company has historically funded mortgages and contracts
receivable and unsold Vacation Interests with borrowings through its financing facilities, sales of mortgages and contracts receivable, internally generated funds, and proceeds from public debt and equity offerings. Borrowings are in turn repaid
with the proceeds received by the Company from repayments of such mortgages and contracts receivable. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its operations or sell
assets, thereby resulting in a material adverse effect on the Companys results of operations, cash flows, and financial condition.



Geographic ConcentrationThe Companys owned and serviced loan portfolio borrowers are geographically diversified within the United
States and internationally. At September 30, 2005, borrowers residing in the United States accounted for approximately 96.5% of the Companys loan portfolio. With the exception of California, Arizona and Florida, which represented 21.1%,
11.7% and 5.3%, respectively, no state or foreign country concentration accounted for in excess of 5.0% of the serviced portfolios. The credit risk inherent in such concentrations is dependent upon regional and general economic stability, which
affects property values and the financial well being of the borrowers.



Foreign Currency RiskFor the year ended September 30, 2005 and the nine months ended September 30, 2004, total revenues denominated in a currency other than U.S. dollars, primarily revenues derived from the United
Kingdom, were approximately 22.0% and 30.0%, respectively, of total revenues. The Companys net assets maintained in a functional currency other than U.S. dollars at September 30, 2005 and 2004, primarily assets located in Western Europe,
were approximately 28.9% and 48.6%, respectively, of total net assets. The effects of changes in foreign currency exchange rates have not historically been material to the Companys operations or net assets. At September 30, 2005, the
Companys subsidiary in the United Kingdom, whose functional currency is the British Pound Sterling, held approximately 4.6 million Euros. That subsidiary expects to utilize approximately 2.5 million Euros per month for operating
purposes. To the extent it holds Euros at any point in time, it is subject to gains and losses as the exchange rate between British Pound Sterling and Euros fluctuates.



In June 2005, the Company entered into four forward contracts in connection with the management of its exposure to
fluctuations in foreign exchange rates and to meet its future Euro currency requirements. The contracts had a total notional value of £4.0 million for the future purchase of Euros and matured in or prior to September 2005. In September 2005,
the Company entered into five new forward contracts for the same purpose. The contracts have a total notional value of £5.0 million for the future purchase of Euros and mature within one year. These contracts are marked to fair value at each
reporting period and recorded on the accompanying consolidated balance sheet and are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Unrealized gains and losses on
such contracts are recognized currently in earnings. For the year ended September 30, 2005, a gain of $0.1 million was recognized in the accompanying consolidated statement of operations as a result of these contracts. During the 12 months
ended September 30, 2004, no agreements were in effect and no amounts were due by or owed to the Company.



Interest Rate RiskThe Company has historically derived net interest income from its financing activities because the interest rates it
charges its customers who finance the purchase or lease of their Vacation Interests exceed the interest rates the Company pays to its lenders. Because the Companys indebtedness bears interest at variable rates and the Companys customer
receivables bear interest at fixed rates, increases in interest rates will erode the spread in interest rates that the Company has historically obtained and could cause the rate on the Companys borrowings to exceed the rate at which the
Company provides financing to its customers. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on the Companys results of operations, cash flows, and financial position.



Note 7St. Maarten Transactions



Leases of Vacation Interests



The Company owns and operates two resorts in St. Maarten, Netherlands
Antilles. Prior to March 2004, the Company conveyed Vacation Interests in these resorts under long-term leases for a period of 99 years at one resort, and at the other, a term expiring in 2050 and subject to extension for an aggregate term not to
exceed 99 years. During the quarter ended March 31, 2004, the Company began to convey Vacation Points representing beneficial interests in a trust that holds title to the underlying resorts.



The leases entered into prior to the change during the quarter ended
March 31, 2004 when the Company began to convey Vacation Points are deemed to be operating leases under current accounting pronouncements. As such, the sales value of the related Vacation Interests is recorded as deferred revenue at the date of
execution of each transaction and amortized on a straight-line basis over the term of the related lease agreement. The unamortized balance of the sales value is included within deferred revenues on the accompanying consolidated balance sheets. The
direct sales and marketing costs of these transactions are also deferred and amortized on a straight-line basis over the term of the related lease agreements. The unamortized balance of the direct sales and marketing costs is included within the
caption prepaid expenses and other assets, net on the accompanying consolidated balance sheets.



On a monthly basis, the Company recognizes a portion of the deferred revenue relating to these leases and includes this within the Vacation Interest
revenue on the accompanying consolidated statements of operations. Likewise, the Company recognizes a portion of the deferred sales and marketing costs on a monthly basis within advertising, sales and marketing expenses on the accompanying
consolidated statements of operations.



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Current accounting guidance requires the related hard and soft construction costs of the leased Vacation
Interests to be included within property and equipment, net on the accompanying consolidated balance sheets and depreciated following the Companys normal depreciation policies. At its other resorts, the Company capitalizes all of the hard and
soft construction costs within unsold Vacation Interests, net on the accompanying consolidated balance sheets and such costs are allocated to Vacation Interest cost of sales under the relative sales value method. During the quarter ended
March 31, 2004, in conjunction with the change from long-term leases to Vacation Points, approximately $3.9 million of the hard and soft construction costs of the unleased Vacation Interests were reclassified from property and equipment, net to
unsold Vacation Interests, net.



Similar to the mortgage
financing issued to purchasers of Vacation Interests at the Companys other resorts, the Company issued lease financing contracts to lessees of Vacation Interests at the St. Maarten resorts, subject to underwriting criteria. When a borrower
under such a contract defaults, the Company cancels the loan agreement and the difference between the cumulative cash payments made on the financing contract and the cumulative amount of Vacation Interest revenue recognized on the related lease
prior to such default is immediately recognized as Vacation Interest revenue. In addition, any deferred direct sales and marketing costs related to such defaulted contracts are expensed at the time of the contract cancellation.



The following table summarizes the amounts on the accompanying consolidated
balance sheets relating to the two St. Maarten resorts, as of the end of the reported periods:



|                                                                          |  |                   |        |   |                   |   |        |  
|------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                                          |  | September 30,2005 |        |   | September 30,2004 |  
|Prepaid expenses and other assets, net (direct sales and marketing costs) |  | $                 | 11,043 |   |                   | $ | 11,382 |  
|                                                                          |  |                   |        |   |                   |   |        |  
|Property and equipment                                                    |  | $                 | 11,526 |   |                   | $ | 11,855 |  
|Accumulated depreciation                                                  |  |                   | (1,433 | ) |                   |   | (1,040 | )
|                                                                          |  |                   |        |   |                   |   |        |  
|Property and equipment, net                                               |  | $                 | 10,093 |   |                   | $ | 10,815 |  
|                                                                          |  |                   |        |   |                   |   |        |  
|Deferred revenue                                                          |  | $                 | 73,623 |   |                   | $ | 75,877 |  
|                                                                          |  |                   |        |   |                   |   |        |  



The following table
summarizes the amounts recognized in the accompanying consolidated statements of operations relating to the leases discussed above, for the periods indicated:



|                                       |  |                             |       |                                   |   |                            |  |   |      
|-------------------------------------- |  | --------------------------- | ----- | --------------------------------- | - | -------------------------- |  | - | -----
|                                       |  | Year endedSeptember 30,2005 |       | Nine monthsendedSeptember 30,2004 |   | Year endedDecember 31,2003
|Vacation Interest revenue              |  | $                           | 1,567 |                                   | $ | 1,958                      |  | $ | 3,953
|Advertising, sales and marketing costs |  |                             | 234   |                                   |   | 294                        |  |   | 593  



Homeowners
Association Transactions



In the Companys capacity
as the homeowners association for these resorts, it collects maintenance fees from the lessees and the trust, which are accrued as earned, generally over a 12-month period. The homeowners association will also periodically bill the
lessees for capital projects assessments to repair and replace the amenities of these resorts, as well as special assessments to reserve the out-of-pocket deductibles for hurricanes and other natural disasters. These assessments are recognized as
income by the reserve funds of the homeowners association during the period in which they are assessed.



The revenues relating to the homeowners transactions are included within the management services revenue line item and totaled $7.6 million for the year
ended September 30, 2005, $5.9 million for the nine months ended September 30, 2004 and $9.3 million for the year ended December 31, 2003. Expenses, except for the provision for bad debt and depreciation expenses, are included in general and
administrative expenses in the accompanying statements of operations.



Note
8Impairment of Assets



The Company reviews its
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.



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As of September 30, 2005, the Companys goodwill consisted of the reorganization value in
excess of identifiable assets identified in the adoption of fresh-start accounting upon emergence from bankruptcy in July 2002 and the excess cost over fair value of net assets acquired in transactions completed during fiscal 2004 and 2005, net of
impairment of goodwill recorded in 2003 and in 2005. SFAS No. 142, Goodwill and Other Intangible Assets(SFAS No. 142), requires that goodwill be tested for impairment at least annually, or more frequently if
circumstances exist to indicate potential impairment. Although the Companys policy is to perform the required testing during its last fiscal quarter, a decline in profitability in the European segment/reporting unit during the third quarter of
fiscal 2005 was deemed to be an indicator that a potential impairment existed and, as such, the testing of the European segment was tested for impairment at that time. Under SFAS No. 142, goodwill is to be tested for impairment at the reporting
unit level. The Company identified its North American and European reporting units to be tested for impairment.



Under SFAS No. 142, the first step to test for impairment is the comparison of the fair value of the reporting unit with its carrying value
(including goodwill). Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the second step of the impairment test, which is to compare the implied fair value of the goodwill to its
carrying value. Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on the measurement date. Impairment exists to the extent the carrying value of goodwill exceeds its
implied fair value.



The Company utilized a market value
approach in its estimate of the fair value of the European segment/reporting unit. The estimate indicated that an impairment might exist and the second step of the impairment test was performed. After comparing the implied fair value of the goodwill
to its carrying value, the Company concluded an impairment of $55.0 million existed and, as a result, a charge of $55.0 million was recorded in the quarter ended June 30, 2005. See Note 2 for further discussion.



For the annual impairment tests in 2005, 2004 and 2003, the Company utilized
a discounted cash flow approach, as well as a market value approach, in its estimate of the fair value of the respective reporting units. After comparing the implied fair value of the goodwill to its carrying value, the Company concluded no
impairment existed in the fiscal year ended September 30, 2005 or the nine months ended September 30, 2004, with the exception of the $55.0 million charge already recorded. In 2003, both methods determined that the carrying value of the
North American reporting unit exceeded its fair value and as a result a charge of $91.6 million was recorded in the quarter ended December 31, 2003.



During the quarter ended September 30, 2003, after notable decreases in market conditions, the Company evaluated the recorded value of its former
headquarters building in Orlando, Florida, and determined that an impairment existed. The impairment was calculated to be $0.9 million. The asset and related charge were recorded in the Companys North American reporting unit.



In addition, during the quarter ended September 30, 2003, the Company
completed development and implementation of its new enterprise operating software, referred to within the Company as ATLAS. With the implementation of ATLAS, the Company no longer utilizes the software formerly used to facilitate and manage several
functions of the Companys business. Under the guidelines of SFAS No. 144, substantially all of the recorded value of this software was deemed to be of no value and an impairment charge of $0.5 million was recorded in the quarter ended
September 30, 2003. During the quarter ended December 31, 2003, the Company also evaluated certain Vacation Interests recovered from defaulted notes, and determined that an impairment existed and recorded a charge of $0.9 million. The
asset and related charge were recorded in the Companys North American reporting unit.



Note 9Stock Options



The Company accounts for stock options issued to employees under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized in the
accompanying consolidated statements of operations, as all options granted under the Companys stock option plans had exercise prices equal to or above the quoted or estimated market price of the underlying common stock on the date of the
grant.



At September 30, 2004, the Company had one primary
stock option plan, the Sunterra Corporation 2002 Stock Option Plan, under which certain employees could be granted options to purchase a total of 3,000,000 shares of the Companys common stock. At the 2005 Annual Meeting held on
February 25, 2005, stockholders approved the Sunterra Corporation 2005 Incentive Plan as a replacement for the Companys 2002 Stock Option Plan. Under the Companys 2005 Incentive Plan, effective for the fiscal year ended
September 30, 2005, certain employees may be granted various forms of equity compensation aggregating to 3,000,000 shares of the Companys common stock. The 3,000,000 share maximum is comprised of the sum of approximately 1,350,000 shares
of newly authorized common stock and not more than approximately 1,650,000 shares of common stock that are subject to options granted under the Companys 2002 Stock Option Plan, which expire, are forfeited or otherwise terminate without the
delivery of the shares of common stock.



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A summary of the Companys stock options (actual number of shares) for the year ended
September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003 is presented in the following table:



|                                         |  |                               |   |                                     |                              |                              |         |           |   |                              |   |         |  |           |                              |  |   |      
|---------------------------------------- |  | ----------------------------- | - | ----------------------------------- | ---------------------------- | ---------------------------- | ------- | --------- | - | ---------------------------- | - | ------- |  | --------- | ---------------------------- |  | - | -----
|                                         |  | Year Ended September 30, 2005 |   | Nine Months EndedSeptember 30, 2004 |                              | Year Ended December 31, 2003
|                                         |  | Options                       |   |                                     | WeightedAverageExercisePrice |                              | Options |           |   | WeightedAverageExercisePrice |   | Options |  |           | WeightedAverageExercisePrice
|Outstanding options, beginning of period |  | 1,688,062                     |   |                                     |                              |                             |         | 1,391,821 |   |                              |   |        |  |          |                              |  |   |     
|Granted                                  |  |                              |   |                                     |                              |                             |         | 443,750   |   |                              | $ | 15.07   |  | 1,395,321 |                              |  | $ | 15.25
|Exercised                                |  | (4,602                        | ) |                                     | $                            | 15.25                        |         |          |   |                              |   |        |  |          |                              |  |   |     
|Forfeited or cancelled                   |  | (130,522                      | ) |                                     | $                            | 15.25                        |         | (147,509  | ) |                              | $ | 15.25   |  | (3,500    | )                            |  | $ | 15.25
|                                         |  |                               |   |                                     |                              |                              |         |           |   |                              |   |         |  |           |                              |  |   |      
|Outstanding options, end of period       |  | 1,552,938                     |   |                                     | $                            | 15.20                        |         | 1,688,062 |   |                              | $ | 15.20   |  | 1,391,821 |                              |  | $ | 15.25
|                                         |  |                               |   |                                     |                              |                              |         |           |   |                              |   |         |  |           |                              |  |   |      
|Exercisable at end of period             |  | 1,266,974                     |   |                                     | $                            | 15.19                        |         | 927,118   |   |                              | $ | 15.16   |  | 414,723   |                              |  | $ | 15.25
|                                         |  |                               |   |                                     |                              |                              |         |           |   |                              |   |         |  |           |                              |  |   |      



All stock options
issued by the Company were issued to employees or members of the Board of Directors at an exercise price of $15.25 except for 18,750 options issued at an exercise price equal to the fair market value of the Companys common stock on the grant
date. The exercise price of such options is $12.74 for 9,375 stock options and $9.11 for 9,375 stock options.



Note 10Borrowings



Line of
Credit Agreements



On July 29, 2002, the Company
entered into a two-year agreement for a $300.0 million senior secured working capital credit facility (Senior Finance Facility) with Merrill Lynch Mortgage Capital, Inc. The proceeds of the Senior Finance Facility were used to pay
amounts payable under certain creditor agreements, provide mortgage receivable and other working capital financing to the Company and to pay fees and expenses related to the Senior Finance Facility. A portion of the proceeds from the initial funding
drawn on the Senior Finance Facility was used to pay off amounts outstanding under the Companys previous senior finance facility.



On July 28, 2005, the Company entered into a fourth amendment (the Amendment) with Merrill Lynch Mortgage Capital, Inc. to amend its
Senior Finance Facility. The Amendment reduced the interest rates charged on the portion of the facility secured by eligible mortgages and contracts receivable from one-month LIBOR plus 2.25% to one-month LIBOR plus 1.5% for mortgages and contracts
secured by Vacation Interests at all eligible Sunterra properties except the former Epic Resorts Group properties, for which the interest rate was reduced to one-month LIBOR plus 2.0%. The advance rate under loans secured by such mortgages and
contracts receivable was increased from 85% to 92% for mortgages and contracts secured by Vacation Interests at all eligible Sunterra properties, except the former Epic Resorts Group properties, for which the advance rate was set at 70%. The
Amendment also added in-transit mortgages and contracts receivable to the borrowing base, at an advance rate of 50%, subject to a maximum of $5 million of borrowings. Advance rates on unsold Vacation Interests remained at 90%. The
Amendment also added Poipu as a borrower on the Senior Finance Facility as of August 20, 2005 and provides for borrowings secured by Poipus eligible mortgages receivable and eligible unsold Vacation Interests. In addition, the general
liens and certain operational covenants were removed, the annual facility fees were reduced to $2.0 million per year, the commission equal to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic Resorts Group was settled for
a lump sum payment of $0.8 million, the unused line fees were reduced to 0.2% per annum and the term of the Senior Finance Facility was extended to July 31, 2007.



From February 2004 until July 2005, the interest rate on the portion of the line secured by eligible mortgages and contracts
receivable was the one-month LIBOR rate plus 2.25%, and, for the portion of the line secured by eligible unsold Vacation Interests, the rate was the one-month LIBOR rate plus 4.0%. Prior to February 2004, borrowings under the Senior Finance Facility
bore interest at an annual rate equal to one-month LIBOR plus 3%, 5% or 7%, depending on the amounts outstanding and on the type of asset collateralizing various advances.



In conjunction with the July 7, 2004 acquisition of the remaining outstanding 77% partnership interests in
Kaanapali, the Company and Merrill Lynch Mortgage Capital, Inc. entered into a third amendment to the Senior Finance Facility. The amendment added Kaanapali as a borrower on the Companys Senior Finance Facility and provides for
borrowings secured by Kaanapalis eligible mortgages receivable and eligible unsold Vacation Interests.



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In addition to the facility fee (2.5% of $300.0 million) paid in connection with the commitment and the
closing of the Senior Finance Facility and an anniversary fee of 1.5% due on the anniversary of the initial borrowing, the Company issued a warrant exercisable for 1,190,148 shares of the Companys common stock at an exercise price of $15.25
per share (the deemed value of the shares), subject to adjustment under certain anti-dilution provisions of the warrant and agreed to pay an unused commitment fee of 0.25% per annum on the excess availability under the Senior Finance Facility.
The $8.7 million value of the warrant issued to the Senior Finance Facility lender was determined using a Black-Scholes model based on a risk-free interest rate of 3.81%, expected volatility of 50% and an expected life of 5 years. The February 2004
amendment reduced the exercise price of warrants to purchase 1,190,148 shares of the Companys common stock from $15.25 per share to $14.00 per share and also required the Company to pay Merrill Lynch Mortgage Capital, Inc. a commission equal
to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic Resorts Group. As a result of the February 2004 amendment, an additional $0.4 million was recorded to reflect the decrease in exercise price. The value of the warrant
was recorded as a capitalized financing cost that is amortized over the term of the financing agreement. The February 2004 amendment also stipulated that facility fees equal to 0.75% of $300.0 million were due and payable on July 29, 2004 and
July 29, 2005, with the latter fee being prorated through the then termination date of February 28, 2006.



For the year ended September 30, 2005, the nine months ended September 30, 2004, and the year ended December 31, 2003, amortization of $4.2
million, $5.5 million and $10.8 million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. The Senior Finance Facility also requires
the Company to pay an additional cash interest amount monthly when certain conditions are not met. The total amount of such additional cash interest payments made during the year ended September 30, 2005, the nine months ended
September 30, 2004, and the year ended December 31, 2003 was $0.0 million, $0.3 million and $2.2 million, respectively.



At September 30, 2005, the maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior Finance Facility were $300.0
million, $198.8 million and $101.2 million, respectively. The capacity and availability of borrowings under the Senior Finance Facility are based on the value of eligible mortgages and contracts receivable and the value of eligible unsold Vacation
Interests. The Senior Finance Facility is secured by a first priority lien on the mortgages and contracts receivable and unsold Vacation Interests. The weighted average interest rate of these borrowings at September 30, 2005 was 5.8% per
annum.



The Companys Senior Finance Facility contains
various restrictions and limitations that may affect its business and affairs. These include restrictions and limitations relating to its ability to incur indebtedness and other obligations, to make investments and acquisitions and to pay dividends.
This facility also requires the Company to maintain certain financial ratios and comply with other financial covenants. The failure of the Company to comply with any of these provisions, or to pay its obligations under the Senior Finance Facility or
other loan agreements, could result in foreclosure by the lenders of their security interests in the Companys assets, and could otherwise have a material adverse effect on the Company.



The Company has capitalized interest related to ongoing construction projects
of $0.5 million for the year ended September 30, 2005, $0.2 million and for the nine months ended September 30, 2004, and $0.4 million for the year ended December 31, 2003.



Senior Subordinated Convertible Notes



On March 29, 2004, the Company issued $95.0 million in 33/4% Senior Subordinated Convertible Notes due 2024 (the Notes). The Notes were issued at a price of $1,000 per Note and pay interest
semi-annually on March 29 and September 29 of each year, beginning on September 29, 2004 at the rate of 3.75% per annum. The Notes will mature on March 29, 2024. Under the terms of the indenture, the Company was required to
use a portion of the proceeds from the offering to purchase a portfolio of U.S. government securities that are pledged to secure the first six scheduled interest payments on the Notes. This $10.4 million was recorded in Prepaid expenses and other
assets, net, and the balance on the accompanying balance sheets as of September 30, 2005 and 2004 was $5.3 million and $8.7 million, respectively. Other than this pledge, the Notes are unsecured obligations.



The Notes are convertible, at the option of the holder, into shares of the
Companys common stock at a conversion rate of 62.5027 shares per $1,000 principal amount of the Notes once: the price of the Companys common stock is more than 110% of such implied conversion price of $16.00 per common share for more
than 20 trading days during the last 30 trading days of a calendar quarter; the Notes are called for redemption; or specified corporate transactions or significant distributions to holders of the Companys common stock have occurred. In
addition, the Notes are convertible during the five business day period after any five consecutive trading day period ending on or prior to March 29, 2019 in which the trading price per note for each day of that five trading day period was less
than 98% of the product of the sale price of the Companys common stock and the conversion rate on each such day.



Holders of the Notes may require the Company to purchase for cash all or a portion of their Notes on March 29, 2011, March 29, 2014 and on
March 29, 2019 at a price equal to $1,000 per $1,000 principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of the purchase. In addition, if the Company experiences a change in control, each holder may require the
Company to purchase all or a portion of such holders Notes at the same amount, plus, in certain circumstances, a make-whole premium.



The Company may redeem some or all of the Notes for cash at any time on or after March 29, 2007, if the closing price of the Companys common
stock has exceeded 150% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the mailing date of the corresponding redemption notice. On or after
March 29, 2011, the Company may redeem some or all of the Notes for cash at any time at a price of $1,000 per $1,000 principal amount of the Notes, plus accrued and unpaid interest, if any, to the redemption date.



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For the year ended September 30, 2005 and the nine months ended September 30, 2004,
amortization of $0.5 million and $0.3 million, respectively, of debt issuance costs related to the Notes was recorded and is included in interest expense in the accompanying consolidated statements of operations.



Securitization Notes



On September 30, 2004, the Company completed a $151.7 million private
offering and sale of vacation ownership receivable-backed notes (the 2004 Securitization). The $171.4 million (including $17.0 million in aggregate principal of vacation ownership receivables sold during the ninety day period commencing
September 30, 2004) in aggregate principal of vacation ownership receivables that collateralize the notes were initially sold to Sunterra SPE 2004-1 LLC (SPE 2004-1), a wholly-owned, special-purpose entity that deposited the
vacation ownership receivables into the Sunterra Owner Trust 2004-1, which issued the notes and is included within Sunterra Corporations consolidated financial statements, without recourse to the Company or to SPE 2004-1, except for breaches
of certain representations and warranties at the time of sale. The 2004 Securitization is secured by a first priority lien on the mortgages and contracts receivable sold to Sunterra Owner Trust 2004-1.



On October 27, 2004 and December 1, 2004, the Company completed
pre-funding transactions with the Sunterra Owner Trust 2004-1. On October 27, 2004, $11.1 million in vacation ownership receivables were sold to Sunterra Owner Trust 2004-1 and on December 1, 2004, $5.9 million of vacation ownership
receivables were sold to Sunterra Owner Trust 2004-1. As a result of these two transactions, the $17.0 million classified as restricted cash as of September 30, 2004 was released ratably on these two dates and transferred to the Company in
exchange for these vacation ownership receivables.



The $151.7
million private offering consists of: $66.0 million class A notes AAA, $18.4 million class B notes AA, $17.6 million class C notes A and $49.7 million class D notes BBB. The notes carry various fixed
interest rates ranging from 3.6% to 4.9% and have legal stated maturities of October 2020. The actual maturity of the notes could be significantly earlier than the stated maturity, and the average life of the notes could be significantly shorter
than anticipated, in the event of certain occurrences. Interest and principal payments are due monthly. In addition, the notes contain a clean up call provision that allows the notes to be called and mortgages receivable to be
transferred back to the Company when the remaining principal value of the notes reaches 10% of the original principal value.



Under the terms of the indenture, Sunterra Financial Services, Inc., a direct wholly-owned subsidiary of the Company, in exchange for a monthly fee,
services and administers the vacation ownership receivables in Sunterra Owner Trust 2004-1. All monthly fees are eliminated as part of the Companys consolidation of the Sunterra Owner Trust 2004-1.



The proceeds were used to pay down balances due under the Companys
Senior Finance Facility, pay fees associated with the transaction to third parties and deposit initial amounts in a required cash reserve account. The Company also retained a subordinated interest in the future cash flows from the 2004
Securitization.



For the year ended September 30, 2005,
amortization of $0.7 million of debt issuance costs related to the 2004 Securitization was recorded and is included in interest expense in the accompanying consolidated statements of operations.



Notes Payable



Notes payable consist of the following as of the dates on the accompanying consolidated balance sheets:



|                          |  |                   |       |                   |   |      
|------------------------- |  | ----------------- | ----- | ----------------- | - | -----
|                          |  | September 30,2005 |       | September 30,2004
|Capital lease obligations |  | $                 | 149   |                   | $ | 218  
|Other notes payable       |  |                   | 1,292 |                   |   | 2,043
|                          |  |                   |       |                   |   |      
|Total notes payable       |  | $                 | 1,441 |                   | $ | 2,261
|                          |  |                   |       |                   |   |      



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The contractual maturities of borrowings excluding capital lease obligations (see Note 15 for maturities
of capital lease obligations) are as follows:



|                                     |  |   |        
|------------------------------------ |  | - | -------
|Due in the year ending September 30: |  |  
|2006                                 |  | $ | 282    
|2007                                 |  |   | 199,140
|2008                                 |  |   | 315    
|2009                                 |  |   | 404    
|2010                                 |  |   |       
|2011 and thereafter                  |  |   | 208,671
|                                     |  |   |        
|                                     |  | $ | 408,812
|                                     |  |   |        



Note 11Segment and Geographic
Information



The Company currently operates in two
geographic segments, the North American and European segments. Both of these segments operate in one industry segment that includes the development, marketing, sales, financing and management of vacation ownership resorts. The European segment
includes operations in the United Kingdom, Italy, Spain, Portugal, Austria, Norway, Malta, Germany and France. The Companys management evaluates performance of each segment based on profit or loss from operations before income taxes not
including extraordinary items and the cumulative effect of change in accounting principles. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). No single customer
accounts for a significant amount of the Companys revenues. Information about the Companys operations in different geographic locations is shown below:



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|                                                                                 |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------- | -------- | - | -------- | - | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | NorthAmerican |          |   | European |   |         | Eliminations |  |   | Total   |  
|Year ended September 30, 2005                                                    |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                                                 |  | $             | 330,828  |   |          | $ | 93,102  |              |  | $ |        |   |  | $ | 423,930 |  
|Interest expense                                                                 |  |               | 24,496   |   |          |   | 3,683   |              |  |   | (3,087  | ) |  |   | 25,092  |  
|Depreciation and amortization expense                                            |  |               | 5,888    |   |          |   | 4,161   |              |  |   |        |   |  |   | 10,049  |  
|Impairment of goodwill                                                           |  |               |         |   |          |   | 55,030  |              |  |   |        |   |  |   | 55,030  |  
|Income on investments in joint ventures                                          |  |               | 538      |   |          |   |        |              |  |   |        |   |  |   | 538     |  
|Income (loss) before income tax provision                                        |  |               | 40,524   |   |          |   | (58,343 | )            |  |   | (3,087  | ) |  |   | (20,906 | )
|Expenditures for additions to long-lived assets other than business combinations |  |               | 3,622    |   |          |   | 7,850   |              |  |   |        |   |  |   | 11,472  |  
|Other profit and loss items, including non-cash amounts:                         |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Restructuring costs                                                              |  |               |         |   |          |   | 1,967   |              |  |   |        |   |  |   | 1,967   |  
|                                                                                 |  |               |          |  
|Nine Months ended September 30, 2004                                             |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                                                 |  | $             | 200,981  |   |          | $ | 86,119  |              |  | $ |        |   |  | $ | 287,100 |  
|Interest expense                                                                 |  |               | 16,226   |   |          |   | 2,049   |              |  |   | (2,003  | ) |  |   | 16,272  |  
|Depreciation and amortization expense                                            |  |               | 3,629    |   |          |   | 2,889   |              |  |   |        |   |  |   | 6,518   |  
|Income on investments in joint ventures                                          |  |               | 1,551    |   |          |   |        |              |  |   |        |   |  |   | 1,551   |  
|Income before income tax provision                                               |  |               | 17,321   |   |          |   | 8,292   |              |  |   | (2,003  | ) |  |   | 23,610  |  
|Expenditures for additions to long-lived assets other than business combinations |  |               | 2,601    |   |          |   | 4,212   |              |  |   |        |   |  |   | 6,813   |  
|                                                                                 |  |               |          |  
|Year ended December 31, 2003                                                     |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                                                 |  | $             | 201,914  |   |          | $ | 104,999 |              |  | $ |        |   |  | $ | 306,913 |  
|Interest expense                                                                 |  |               | 26,287   |   |          |   | 2,442   |              |  |   | (2,420  | ) |  |   | 26,309  |  
|Depreciation and amortization expense                                            |  |               | 7,878    |   |          |   | 3,671   |              |  |   |        |   |  |   | 11,549  |  
|Impairment of goodwill                                                           |  |               | 91,586   |   |          |   |        |              |  |   |        |   |  |   | 91,586  |  
|Impairment of assets                                                             |  |               | 2,297    |   |          |   |        |              |  |   |        |   |  |   | 2,297   |  
|Income on investments in joint ventures                                          |  |               | 3,340    |   |          |   |        |              |  |   |        |   |  |   | 3,340   |  
|(Loss) income before income tax (benefit) provision                              |  |               | (103,461 | ) |          |   | 21,791  |              |  |   | (2,420  | ) |  |   | (84,090 | )
|Expenditures for additions to long-lived assets other than business combinations |  |               | 4,494    |   |          |   | 3,998   |              |  |   |        |   |  |   | 8,492   |  
|Other profit and loss items, including non-cash amounts:                         |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Restructuring costs                                                              |  |               | 1,274    |   |          |   |        |              |  |   |        |   |  |   | 1,274   |  
|Reorganization expenses, net                                                     |  |               | (619     | ) |          |   |        |              |  |   |        |   |  |   | (619    | )
|                                                                                 |  |               |          |  
|Nine Months ended September 30, 2003 (Unaudited)                                 |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                                                 |  | $             | 149,663  |   |          | $ | 80,464  |              |  | $ |        |   |  | $ | 230,127 |  
|Interest expense                                                                 |  |               | 18,153   |   |          |   | 376     |              |  |   |        |   |  |   | 18,529  |  
|Depreciation and amortization expense                                            |  |               | 5,893    |   |          |   | 2,512   |              |  |   |        |   |  |   | 8,405   |  
|Impairment of assets                                                             |  |               | 1,400    |   |          |   |        |              |  |   |        |   |  |   | 1,400   |  
|Income on investments in joint ventures                                          |  |               | 2,475    |   |          |   |        |              |  |   |        |   |  |   | 2,475   |  
|(Loss) income before income tax (benefit) provision                              |  |               | (8,202   | ) |          |   | 15,367  |              |  |   |        |   |  |   | 7,165   |  
|Expenditures for additions to long-lived assets other than business combinations |  |               | 3,591    |   |          |   | 2,132   |              |  |   |        |   |  |   | 5,723   |  
|Other profit and loss items, including non-cash amounts:                         |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Restructuring costs                                                              |  |               | 1,008    |   |          |   |        |              |  |   |        |   |  |   | 1,008   |  
|Reorganization expenses, net                                                     |  |               | (664     | ) |          |   |        |              |  |   |        |   |  |   | (664    | )
|                                                                                 |  |               |          |  
|Selected Balance Sheet Items                                                     |  |               |          |   |          |   |         |              |  |   |         |   |  |   |         |  
|Segment assets as of September 30, 2005                                          |  | $             | 696,654  |   |          | $ | 151,757 |              |  | $ | (51,903 | ) |  | $ | 796,508 |  
|Segment assets as of September 30, 2004                                          |  |               | 677,687  |   |          |   | 209,984 |              |  |   | (50,813 | ) |  |   | 836,858 |  
|Segment assets as of December 31, 2003                                           |  |               | 487,674  |   |          |   | 212,410 |              |  |   | (46,031 | ) |  |   | 654,053 |  
|Segment assets as of September 30, 2003                                          |  |               | 568,882  |   |          |   | 183,321 |              |  |   | (36,406 | ) |  |   | 715,797 |  
|Assets held for sale as of September 30, 2005                                    |  |               | 924      |   |          |   | 1,802   |              |  |   |        |   |  |   | 2,726   |  
|Assets held for sale as of September 30, 2004                                    |  |               | 551      |   |          |   |        |              |  |   |        |   |  |   | 551     |  
|Assets held for sale as of December 31, 2003                                     |  |               | 11,953   |   |          |   |        |              |  |   |        |   |  |   | 11,953  |  
|Assets held for sale as of September 30, 2003                                    |  |               | 2,289    |   |          |   |        |              |  |   |        |   |  |   | 2,289   |  
|Investment in joint ventures as of September 30, 2004                            |  |               | 7,187    |   |          |   |        |              |  |   |        |   |  |   | 7,187   |  
|Investment in joint ventures as of December 31, 2003                             |  |               | 20,702   |   |          |   |        |              |  |   |        |   |  |   | 20,702  |  
|Investment in joint ventures as of September 30, 2003                            |  |               | 20,950   |   |          |   |        |              |  |   |        |   |  |   | 20,950  |  



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Note 12Employee Benefit Plans



The Company has established a qualified retirement plan (the 401(k) Plan), with a salary deferral feature
designed to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. Subject to certain limitations, the 401(k) Plan allows participating employees to defer up to 15% of their eligible compensation on a pre-tax basis. The
401(k) Plan allows the Company to make discretionary matching contributions of up to 50% of employee contributions, though no such matching contributions were made during the nine months ended September 30, 2004 or the year ended
December 31, 2003. During the year ended September 30, 2005, the Company made matching contributions of $.06 million.



The Company has a self-insured health plan which covers substantially all of its full time employees in the United States. The health plan uses employee
and employer contributions to pay eligible claims. To supplement the plan, the Company has stop-loss insurance to cover individual claims in excess of $0.2 million. The Company has accrued for claims that have been incurred but not reported.



Effective October 11, 2000, the Company implemented an
employee retention plan for certain management and other key employees. The purpose of the plan was to encourage these employees to continue their employment with the Company during the Chapter 11 proceedings. The plan provided up to $3.0 million in
retention bonuses for employees covered by the plan, subject to continued employment and the plans eligibility and vesting requirements. Effective August 21, 2001, the Company amended its key employee retention plan. The Company paid $1.0
million in bonuses under the retention plan during the year ended December 31, 2003. No amounts have been paid under the retention plan subsequent to 2003.



Note 13Income Taxes



The components of the provision for income taxes are summarized as follows:



|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      
|--------------------------------------------------- |  | --------------------------- | ------ | - | --------------------------------- | - | ----- | -------------------------- |  | - | -----
|                                                    |  | Year endedSeptember 30,2005 |        |   | Nine monthsendedSeptember 30,2004 |   |       | Year endedDecember 31,2003
|Current:                                            |  |                             |        |   |                                   |   |       |                            |  |   |      
|Federal                                             |  | $                           | 734    |   |                                   | $ |      |                            |  | $ |     
|State                                               |  |                             | 50     |   |                                   |   | 25    |                            |  |   | 50   
|Foreign                                             |  |                             | (556   | ) |                                   |   | 2,465 |                            |  |   | 4,753
|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      
|Total current provision for income taxes            |  |                             | 228    |   |                                   |   | 2,490 |                            |  |   | 4,803
|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      
|Deferred:                                           |  |                             |        |   |                                   |   |       |                            |  |   |      
|Federal                                             |  |                             | 12,136 |   |                                   |   |      |                            |  |   |     
|State                                               |  |                             | 1,464  |   |                                   |   |      |                            |  |   |     
|Foreign                                             |  |                             |       |   |                                   |   | (188  | )                          |  |   | 306  
|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      
|Total deferred provision (benefit) for income taxes |  |                             | 13,600 |   |                                   |   | (188  | )                          |  |   | 306  
|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      
|Provision for income taxes                          |  | $                           | 13,828 |   |                                   | $ | 2,302 |                            |  | $ | 5,109
|                                                    |  |                             |        |   |                                   |   |       |                            |  |   |      



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The reconciliation between the statutory provision for income taxes and the actual provision for income
taxes is shown as follows:



|                                                |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|----------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------- | - | ------ | -------------------------- |  | - | ------- | -
|                                                |  | Year endedSeptember 30,2005 |         |   | Nine monthsendedSeptember 30,2004 |   |        | Year endedDecember 31,2003 | 
|Income tax at U.S. federal statutory rate       |  | $                           | 12,734  |   |                                   | $ | 5,606  |                            |  | $ | (35,069 | )
|State tax, net of federal benefit               |  |                             | 1,455   |   |                                   |   | 666    |                            |  |   | (4,008  | )
|Non-deductible goodwill                         |  |                             |        |   |                                   |   |       |                            |  |   | 36,614  |  
|Non-deductible goodwillforeign                 |  |                             | 16,509  |   |                                   |   |       |                            |  |   |        |  
|Reorganization expenses                         |  |                             |        |   |                                   |   |       |                            |  |   | 112     |  
|Foreign taxes                                   |  |                             | (17,065 | ) |                                   |   | 2,277  |                            |  |   | 5,059   |  
|Other nondeductible differences                 |  |                             | 195     |   |                                   |   | 249    |                            |  |   | (154    | )
|Change in valuation allowance                   |  |                             | (3,442  | ) |                                   |   | (6,496 | )                          |  |   | 2,555   |  
|Change in valuation allowance allocated to APIC |  |                             | 3,442   |   |                                   |   |       |                            |  |   |        |  
|                                                |  |                             |         |   |                                   |   |        |                            |  |   |         |  
|Provision for income taxes                      |  | $                           | 13,828  |   |                                   | $ | 2,302  |                            |  | $ | 5,109   |  
|                                                |  |                             |         |   |                                   |   |        |                            |  |   |         |  



Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the net deferred tax assets and
liabilities are as follows:



|                                      |  |                   |          |   |                   |   |          |  
|------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|                                      |  | September 30,2005 |          |   | September 30,2004 |  
|Deferred tax assets:                  |  |                   |          |   |                   |   |          |  
|Allowances for losses                 |  | $                 | 12,061   |   |                   | $ | 10,934   |  
|Unsold Vacation Interests adjustments |  |                   | 10,918   |   |                   |   | 6,406    |  
|Intangible assets                     |  |                   | 7,007    |   |                   |   | 10,680   |  
|Deferred profit                       |  |                   | 27,158   |   |                   |   | 26,852   |  
|Accrued liabilities                   |  |                   | 7,556    |   |                   |   | 9,301    |  
|Foreign deferrals                     |  |                   | 2,288    |   |                   |   |         |  
|Net operating loss carryover          |  |                   | 42,238   |   |                   |   | 45,515   |  
|State net operating loss carryover    |  |                   | 4,255    |   |                   |   | 4,744    |  
|Minimum tax credit carryover          |  |                   | 1,943    |   |                   |   | 1,269    |  
|                                      |  |                   |          |   |                   |   |          |  
|Total gross deferred tax assets       |  |                   | 115,424  |   |                   |   | 115,701  |  
|Valuation allowance                   |  |                   | (108,714 | ) |                   |   | (112,136 | )
|                                      |  |                   |          |   |                   |   |          |  
|Total net deferred tax assets         |  |                   | 6,710    |   |                   |   | 3,565    |  
|                                      |  |                   |          |   |                   |   |          |  
|Deferred tax liabilities:             |  |                   |          |   |                   |   |          |  
|Installment sales                     |  |                   | (3,407   | ) |                   |   | (539     | )
|Foreign deferrals                     |  |                   |         |   |                   |   | (534     | )
|Fixed Assets                          |  |                   | (957     | ) |                   |   | (2,492   | )
|                                      |  |                   |          |   |                   |   |          |  
|Total deferred tax liabilities        |  |                   | (4,364   | ) |                   |   | (3,565   | )
|                                      |  |                   |          |   |                   |   |          |  
|Net deferred tax asset                |  | $                 | 2,346    |   |                   | $ |         |  
|                                      |  |                   |          |   |                   |   |          |  



At September 30,
2005, the Company had available approximately $120.7 million of unused federal net operating loss carryforwards and $106.4 million of unused state net operating loss carryforwards (the NOLs) that may be applied against future taxable
income. These NOLs expire on various dates from 2006 through 2021.



As a result of the bankruptcy and a subsequent ownership change (as defined by Internal Revenue Code section 382) during 2003, the remaining NOL utilization will be limited by Internal Revenue Code section 382 to approximately $9.8 million
per year. In addition, various tax attributes of entities were reduced as of January 1, 2003.



As a result of uncertainties regarding the Companys ability to generate sufficient taxable income to utilize its net operating loss carryforwards,
the Company recorded a valuation allowance against the balance of its net deferred tax assets as of September 30, 2005. Pursuant to SFAS No. 109 and SOP 90-7, any reductions to the valuation allowance that existed as of the fresh
start-date will be adjusted to goodwill until it is exhausted, and then to additional paid in-capital.



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Provision has not been made for taxes on approximately $46.6 million and $48.9 million of undistributed
earnings of foreign subsidiaries as of September 30, 2005 and 2004, respectively. Those earnings have been and expect to be reinvested in the foreign subsidiaries. The American Jobs Creation Act of 2004 provides a special provision whereby
United States taxpayers could have foreign earnings repatriated and receive a dividends received deduction of 85%. As of the filing of the financial statements, the Company has not completed its evaluation to determine if any foreign earnings would
be repatriated, and expects to complete its evaluation before the end of the period in which repatriation of foreign earnings can take place. The Company is not in a position to provide an estimate of the amount that would be considered for
repatriation. In the event that the earnings are repatriated, the Company may have to provide additional tax expense, net of foreign tax credits. Further, these earnings could become subject to additional tax if the Company were to sell its stock in
the subsidiaries.



Note 14Related Party Transactions



Delinquent Maintenance Fee Receivables Agreements



Effective January 2005, the Company entered into agreements with various
homeowners associations to purchase current year delinquent maintenance fee receivables from them at par value in North America. Such agreements contain provisions for the Company to utilize the Vacation Interests associated with such
maintenance fees in the current year and to reclaim such Vacation Interests in the future. Each such agreement provides for an initial June 30 settlement date and adjustments thereafter. The Companys obligation under such agreements as of
the settlement date totaled approximately $5.4 million, including approximately $1.9 million related to current year use rights of the underlying Vacation Interests (expensed during calendar 2005 as a component of Vacation Interest carrying cost)
and approximately $3.5 million that will either be collected from the owners or remain on the Companys balance sheet as the cost basis of the reclaimed underlying Vacation Interests. In one of the homeowners association agreements, the
Company agreed to purchase other fees relating to special assessments. These special assessment fees are not yet delinquent, but the Company has the obligation to purchase any delinquent fees, which could range between $0.4 million and $0.9 million.
The amount of this obligation will be determined in the second quarter of fiscal 2006.



Joint Ventures



In August 2005, the
Company purchased the remaining 70% partnership interest in Poipu Resort Partners, L.P. (Poipu) and, in July 2004, purchased the remaining 77% partnership interest in West Maui Resort Partners, L.P. (Kaanapali) and, as
such, the Company is no longer a minority partner in any joint venture. For the year ended September 30, 2005 and the nine months ended September 30, 2004, the Company received $2.7 million and $3.2 million, respectively, in cash
distributions from Poipu. For the nine months ended September 30, 2004, the Company received $0.5 million in cash distributions from Kaanapali. The Company also receives fees from both Poipu and Kaanapali for providing property
management as well as oversight of the sales and marketing functions, which are included in the totals for management services revenue. See Management Services paragraph below.



Management Services



Included within the amounts reported as management services revenue are
revenues from property management services provided to the homeowners associations of the resorts wherein the Company owns either unsold Vacation Interests or is a minority owner, as well as fees earned for management of sales and marketing
functions at certain resorts. These amounts totaled $19.7 million for the year ended September 30, 2005, $15.5 million for the nine months ended September 30, 2004 and $21.1 million for the year ended December 31, 2003.



Under contracts approved by the Boards of Trustees of the homeowners
association for certain resorts, the Company serves as the property manager for these resorts. Additionally, the Company has contractual agreements with the homeowners associations of certain resorts to provide telephone services to the
property. Accounts receivable due from the homeowners associations generally are for management fees and other operating and maintenance expenses. Amounts payable to homeowners associations, consisting primarily of maintenance fees for
unsold Vacation Interests, are included in accrued liabilities. The Company also periodically advanced funds to the joint venture entity in which the Company was a minority partner (see Joint Ventures paragraph above). The following
table shows the balances outstanding from related parties on the accompanying consolidated balance sheets:



|                                         |  |                   |        |                   |   |      
|---------------------------------------- |  | ----------------- | ------ | ----------------- | - | -----
|                                         |  | September 30,2005 |        | September 30,2004
|Receivable from homeowners associations |  | $                 | 17,261 |                   | $ | 5,931
|Advances to joint venture                |  |                   |       |                   |   | 348  
|                                         |  |                   |        |                   |   |      
|Total                                    |  | $                 | 17,261 |                   | $ | 6,279
|                                         |  |                   |        |                   |   |      



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Included within the amount reported as management services revenue are revenues earned from managing the
off-balance sheet trusts which hold legal title to the vacation property real estate out of which the Company will convey Vacation Points to its customers. These amounts totaled $3.1 million for the year ended September 30, 2005 and $0.6
million for the nine months ended September 30, 2004. In addition, the trusts bill the Company annual dues related to unsold Vacation Interests which are recorded in Vacation Interest carrying cost. These amounts totaled $8.1 million for the
year ended September 30, 2005 and $2.7 million for the nine months ended September 30, 2004.



Note 15Commitments and Contingencies



Lease Agreements



The Company leases
certain computer and other equipment under capital lease agreements, the maturities of which are outlined in the table below. See Note 3 for further details regarding leased computers and other equipment.



The Company also leases office space, off-premises sales booths and certain
office equipment under operating leases. Total rental expense under operating leases was $6.3 million for the year ended September 30, 2005, $4.5 million for the nine months ended September 30, 2004 and $3.2 million for the year ended
December 31, 2003. Many of these agreements have renewal options, subject to inflationary adjustments, including the leases on the Companys primary offices in North Las Vegas, Nevada.



At September 30, 2005, future minimum lease payments on capital and
operating leases were as follows:



|                                            |  |               |     |   |                 |   |       
|------------------------------------------- |  | ------------- | --- | - | --------------- | - | ------
|                                            |  | CapitalLeases |     |   | OperatingLeases
|Year Ending September 30                    |  |               |     |   |                 |   |       
|2006                                        |  | $             | 107 |   |                 | $ | 6,060 
|2007                                        |  |               | 41  |   |                 |   | 4,389 
|2008                                        |  |               | 13  |   |                 |   | 3,198 
|2009                                        |  |               | 3   |   |                 |   | 1,944 
|2010                                        |  |               |    |   |                 |   | 589   
|2011 and thereafter                         |  |               |    |   |                 |   | 2,280 
|                                            |  |               |     |   |                 |   |       
|Total minimum lease payments                |  |               | 164 |   |                 | $ | 18,460
|                                            |  |               |     |   |                 |   |       
|Less: Amount representing interest          |  |               | (15 | ) |                 |   |       
|                                            |  |               |     |   |                 |   |       
|Present value of net minimum lease payments |  | $             | 149 |   |                 |   |       
|                                            |  |               |     |   |                 |   |       



Purchase Obligations



The Company has entered into various purchase
obligations totaling $30.2 million as of September 30, 2005 primarily relating to construction commitments and information technology related items for fiscal 2006.



Litigation and Other



In 1997 the Company purchased, for $3.5 million, a perpetual license to use certain computer software from RCI Technology Corp. (RCITC),
formerly known as Resort Computer Corporation. The RCITC software was later modified, and ultimately substantially re-written, to create the Companys former enterprise computer system (known as SWORD), which was used by the
Companys North American operations until, following the Companys emergence from bankruptcy, SWORD was replaced by the Companys present proprietary ATLAS computer system. In 2002, RCITC filed a motion in the Chapter 11 proceedings
alleging that the license agreement should be deemed rejected, which RCITC asserts would have the effect of terminating the license. The Company opposed the motion, and the Bankruptcy Court ruled in favor of Sunterra and denied RCITCs motion.
On January 10, 2003, the United States District Court of Maryland affirmed the order of the Bankruptcy Court, denying the motion of RCITC. RCITC further appealed that decision to the United States Court of Appeals, Fourth Circuit, which granted
RCITCs appeal on March 18, 2004. On remand, the Bankruptcy Court held on September 8, 2005 that the RCITC license was deemed rejected as of July 29, 2002, the date of the Companys emergence from bankruptcy. On
September 22, 2005 the Company commenced a declaratory judgment action against RCITC in the United States District Court for the District of Colorado (Denver) seeking a declaration that, having paid the $3.5 million fee for a perpetual license
to the RCITC software, the rejection of that license did not terminate the Companys right to use the software, and that Sunterras use of SWORD following July 29, 2002 until it was replaced by ATLAS was not an
infringement of RCITCs copyright to the RCITC software. RCITC has answered the complaint, denying the Companys allegations, and asserting a counterclaim against Sunterra seeking a second payment of the $3.5 million license fee, as well
as additional damages.



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The Company has answered RCITCs counterclaims, denying liability and asserting as a defense that the RCITC software
was defective. Discovery has not yet commenced in this litigation.



In 1997 and 1998 the Company entered into a series of agreements to acquire Vacation Internationale, a separate points-based vacation ownership club that was managed by the Company (under the name of Sunterra Pacific) until
December 31, 2003. Under the terms of these agreements, the Companys subsidiary, Sunterra Pacific Inc., was required to transfer certain remainder interests in Vacation Internationale apartments to entities controlled by the founders of
Vacation Internationale (VI Founders). Over the years, many of these remainders were either purchased by the Company from the VI Founders, or were transferred to them pursuant to the terms of these agreements. However, for a variety of
reasons, transfer of the remainders for a Mexican resort, as well as a resort located on Native American land in Palm Springs, California, was delayed. In 2003, the VI Founders sued the Company and Sunterra Pacific in Washington State Court, King
County (Seattle), asserting various claims arising from the alleged breach by the Company and Sunterra Pacific of these agreements. The Company was later dismissed as a defendant and, during 2004, the case against Sunterra Pacific was stayed in
order for the parties to pursue settlement negotiations. Unless the stay is continued, the case is scheduled for trial commencing in April 2006.



In addition, the Company is also currently subject to litigation and claims regarding employment, tort, contract, construction, sales taxes and commission
disputes, among others. Much of such litigation and claims were pre-petition and were treated as general unsecured creditors under the Companys Plan of Reorganization. Management believes that none of these actions, including the actions
described above, will have a material adverse effect on the consolidated financial position or results of operations of the Company.



In October 2004, a standby letter of credit in the amount of $1.5 million was issued on the Companys behalf to Citrus Insurance Company, a
wholly-owned subsidiary of the Company. In March 2005, Citrus Insurance Company issued $7.7 million of surety bonds on behalf of other subsidiaries of the Company.



In addition to the surety bonds issued by Citrus Insurance Company, third-party financial institutions have issued surety
bonds totaling $6.3 million as of September 30, 2005 on the Companys behalf to an affiliated homeowners association securing certain maintenance fee obligations due from the Company and for various other business purposes.



The Company has entered into employment contracts with certain
key management employees that specify severance payments upon termination of the contracts. The employment contracts all specify stock compensation to be granted. See Note 9 for information regarding stock compensation due under these contracts.



The Companys subsidiary in Europe has obtained a license
from the Civil Aviation Authority (the CAA) to operate as a tour operator through September 2006. Under the license with the CAA, the Company has agreed to limit repayment of advances between the Company and its subsidiary in Europe to
those amounts that have been outstanding less than one year, which approximates $6.4 million at September 30, 2005, unless prior approval is received.



Note 16Fair Value of Financial Instruments



SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its
financial instruments. The Company in estimating its fair value disclosures for financial instruments used the following methods and assumptions:



Cash and Cash Equivalents and Restricted CashThe carrying amount reported in the balance sheets approximates the fair value because of the
short maturity of these instruments.



Mortgages and
Contracts ReceivableThe carrying amount reported in the balance sheets for mortgages and contracts receivable approximates fair value.



Accounts Payable and Accrued ExpensesThe carrying amount reported in the balance sheets approximates the fair value because of the short
maturity of these instruments.



Notes PayableThe
carrying amounts reported in the balance sheets for notes payable approximates their fair value because the interest rates on these instruments approximate current interest rates charged on similar current borrowings.



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Note 17Quarterly Financial Information (Unaudited)



|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|---------------------------------------- |  | ------------------ | ------- | --- | -------- | - | ------- | -------- |  | - | -------- | - |  | - | ------- | -----
|                                         |  | Three Months Ended |        
|                                         |  | 09/30/05           |         |     | 06/30/05 |   |         | 03/31/05 |  |   | 12/31/04 |  
|Total Revenues                           |  | $                  | 123,760 |     |          | $ | 108,049 |          |  | $ | 95,411   |   |  | $ | 96,710  |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Income (loss) from operations            |  | $                  | 12,538  | (a) |          | $ | (46,530 | ) (b)    |  | $ | 3,584    |   |  | $ | 8,964   |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Net income (loss)                        |  | $                  | 7,169   | (a) |          | $ | (50,114 | ) (b)    |  | $ | 2,459    |   |  | $ | 5,752   |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Earnings (loss) per common sharebasic   |  | $                  | 0.36    |     |          | $ | (2.50   | )        |  | $ | 0.12     |   |  | $ | 0.29    |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Earnings (loss) per common sharediluted |  | $                  | 0.30    |     |          | $ | (2.50   | )        |  | $ | 0.12     |   |  | $ | 0.24    |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|                                         | 
|                                         |  | Three Months Ended |        
|                                         |  | 09/30/04           |         |     | 06/30/04 |   |         | 03/31/04 |  |   | 12/31/03 |  
|Total Revenues                           |  | $                  | 116,326 |     |          | $ | 94,885  |          |  | $ | 75,889   |   |  | $ | 76,786  |      
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Income (loss) from operations            |  | $                  | 15,033  |     |          | $ | 7,670   |          |  | $ | (644     | ) |  | $ | (92,120 | ) (c)
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Net income (loss)                        |  | $                  | 12,941  |     |          | $ | 7,670   |          |  | $ | 697      |   |  | $ | (91,981 | ) (c)
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Earnings (loss) per common sharebasic   |  | $                  | 0.65    |     |          | $ | 0.38    |          |  | $ | 0.03     |   |  |   | (4.60   | )    
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      
|Earnings (loss) per common sharediluted |  | $                  | 0.54    |     |          | $ | 0.33    |          |  | $ | 0.03     |   |  | $ | (4.60   | )    
|                                         |  |                    |         |     |          |   |         |          |  |   |          |   |  |   |         |      

---

|(a) | Amount includes a restructuring charge of $1.0 million.
|--- | -------------------------------------------------------

|(b) | Amount includes an impairment of goodwill and a restructuring charge of $55.0 million and $0.9 million, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(c) | Amount includes an impairment of goodwill, restructuring charge and an impairment of assets of $91.6 million, $0.3 million and $0.9 million, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



All adjustments that are, in the opinion of the Companys management,
necessary to fairly present the results of the quarterly financial information above, have been made.



Note 18Subsequent Events



On October 31, 2005, the Company sold a $35.0 million portfolio with a carrying value of approximately $32.5 million of mortgages receivable to Merrill Lynch Mortgage Lending, Inc., which resulted in a gain of approximately $3.0
million. Under the terms of the agreement, Merrill Lynch Mortgage Lending, Inc. paid $36.1 million in cash for a portfolio of $35 million of receivables secured by Vacation Interests at Sunterra properties. The sale was on a non-recourse basis and
the Company retained the right to service the receivables sold. The Company receives adequate compensation for providing the servicing functions. As such, no asset or liability will be recognized on the consolidated balance sheet for the servicing
rights retained. The pool of 5,250 receivables has a weighted-average seasoning of approximately four years and a weighted-average interest rate of 14.6%. Approximately 4,200 receivables representing $24 million of the receivables sold were either
originated by Epic Resort Group and subsequently purchased by Sunterra, or were included in Sunterras former off-balance sheet pools repurchased by the Company in fiscal 2005.



On December 5, 2005, the Company acquired the land adjacent to the Misiones del Cabo Hotel and Resort property in Cabo
San Lucas, Mexico. The Companys site plan calls for three building phases. The total cost of the project at full build out will be approximately $50.0 million, which includes initial consideration of nearly $11.0 million for oceanfront land,
the related resort hospitality management contract, and construction deposits.



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



None.



ITEM 9A. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures as of the end of the period covered by this
report were designed and were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely
decisions regarding disclosure. The Company believes that a system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



Managements Report on Internal Control over Financial Reporting



Our managements report on internal control over financial reporting is set forth in Item 8 of this Annual Report
on Form 10-K and is incorporated by reference herein.



Attestation Report
of the Independent Registered Public Accounting Firm



Our independent registered public accounting firms attestation report on managements assessment of our internal control over financial reporting is set forth in Item 8 of this Annual Report on Form 10-K and is incorporated by
reference herein.



Change in Internal Control over Financial Reporting



No change in our internal control over financial
reporting occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



ITEM 9B. OTHER INFORMATION



There is no information that was required to be disclosed by the Company in a report on Form 8-K during the quarter ended September 30, 2005, but that was not reported.



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PART III



ITEM 10. Directors and Executive Officers of the Registrant



The information required by this item (other than the information at the end of Part I with respect to executive officers) will be set forth in our definitive proxy statement in connection with our fiscal 2006 annual
meeting of stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report, which is incorporated by reference herein, or if such proxy
statement is not so filed on or before 120 days after the end of the fiscal year covered by this Report, such information will be included in an amendment to this Report filed no later than the end of such 120-day period.



ITEM 11. Executive Compensation



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2006 annual meeting of stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report, which is incorporated by reference herein, or if such proxy statement is not so filed on or before 120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than the end of such 120-day period.



ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2006 annual meeting of
stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report, which is incorporated by reference herein, or if such proxy statement is not
so filed on or before 120 days after the end of the fiscal year covered by this Report, such information will be included in an amendment to this Report filed no later than the end of such 120-day period.



ITEM 13. Certain Relationships and Related Transactions



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2006 annual meeting of stockholders to be filed with the Securities Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report, which is incorporated by reference herein, or if such proxy statement is not so filed on or before 120 days after the end of the fiscal year covered
by this Report, such information will be included in an amendment to this Report filed no later than the end of such 120-day period.



ITEM 14. Principal Accounting Fees and Services



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2006 annual meeting of stockholders to be filed with the Securities Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report, which is incorporated by reference herein, or if such proxy statement is not so filed on or before 120 days after the end of the fiscal year covered
by this Report, such information will be included in an amendment to this Report filed no later than the end of such 120-day period.



PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES



(a)(1) Financial Statements



See index to financial statements (Part IIItem 8).



(a)(2) Financial Statement Schedules



We have
omitted all schedules to our consolidated financial statements because they are not required under the related instructions or are inapplicable or because we have included the required information in our consolidated financial statements or related
notes.



85



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##### Table of Contents

(a)(3) Exhibits



The following exhibits either (a) are filed with this report or (b) have previously been filed with the SEC and
are incorporated herein by reference to those prior filings. We will furnish any exhibit upon request made to our General Counsel, 3865 W. Cheyenne Ave., North Las Vegas, NV 89032. We charge $.50 per page to cover expenses of copying and mailing.



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|3.1  |  | Articles of Amendment and Restatement of Sunterra Corporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (date of event: July 29,
2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 
|3.1a |  | Amendment to Articles of Amendment and Restatement of Sunterra Corporation (incorporated by reference to Exhibit 3.1a to the Companys Transition Report on Form 10-K for the transition
period ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|3.2  |  | Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2 to the Companys Transition Report on Form 10-K for the transition period ended September 30,
2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     | 
|3.2a |  | Amendment to Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2a to the Companys Transition Report on Form 10-K for the transition period ended
September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | 
|3.2b |  | Amendment to Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2b to the Companys Current Report on Form 8-K (date of event: December 23,
2004)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | 
|4.1  |  | Indenture dated as of March 29, 2004 between Sunterra Corporation and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 10.15 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|4.2  |  | Indenture dated as of September 1, 2004 between Sunterra Owner Trust 2004-1, as Issuer, Sunterra Financial Services, Inc., as Servicer and Wells Fargo Bank, National Association, as Indenture
Trustee, Custodian and Back-Up Servicer (incorporated by reference to Exhibit 4.2 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | 
|10.1 |  | Third Amended and Restated Joint Plan of Reorganization, dated May 9, 2002, of Sunterra Corporation and its debtor affiliates under Chapter 11 of the Bankruptcy Code (incorporated by reference
to Exhibit 2.1 to the Companys Current Report on Form 8-K (date of event: May 9, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|10.2 |  | Confirmation Order, dated June 20, 2002, of the Bankruptcy Court (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended December 31,
2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | 
|10.3 |  | Loan Agreement, dated as of July 29, 2002, (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)) as amended by Amendment No.
1 dated as of December 20, 2002 and further amended by Amendment No. 2 dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries
(incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003) and further amended by Amendment No. 3 dated July 7, 2004, by and between Merrill Lynch Mortgage Capital, Inc.,
as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2004).
|     | 
|10.4 |  | Amendment No. 2, dated February 13, 2004, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as
agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | 
|10.5 |  | Amendment No. 3, dated July 7, 2004, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as agent
for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries and Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra
Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).                                                                                                                                                                                                                                                                                                            



86



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6   |  | Amendment No. 4, dated July 28, 2005, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage
Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries, Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders
party thereto, and Sunterra Corporation and certain of its subsidiaries and Amendment No. 3, dated July 7, 2004 by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and
certain of its subsidiaries (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
|       | 
|10.7   |  | Warrant Agreement, dated as of July 29, 2002, (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)) as amended by Amendment
No. 1 dated February 13, 2004 (incorporated by reference to Exhibit 10.6 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003), by and between Sunterra Corporation and Merrill Lynch Mortgage Capital,
Inc.                                                                                                                                                                                                                                                                                                                                                                                        
|       | 
|10.8   |  | Amendment No. 1, dated February 13, 2004, to Warrant Agreement dated as of July 29, 2002, (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of
event: July 29, 2002)) by and between Sunterra Corporation and Merrill Lynch Mortgage Capital, Inc. (incorporated by reference to Exhibit 10.6 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003).                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|*10.9  |  | Sunterra Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Companys Transition Report on Form 10-K for the transition period ended September 30,
2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 
|*10.9a |  | Form of Stock Option Agreement Under the Sunterra Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event:
October 29, 2004)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 
|*10.10 |  | Sunterra Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed on February 25, 2005 (File number
333-123006)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 
|*10.11 |  | Sunterra Corporation Specifications for Annual Incentive Awards Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13,
2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 
|*10.12 |  | Sunterra Corporation Specifications for Performance Share Awards Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13,
2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|*10.13 |  | Form of Executive Retention Agreement (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13, 2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.14  |  | Warrant Agreement, dated as of July 29, 2002, by and between Sunterra Corporation and Mellon Investor Services, LLC, as warrant agent (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K (date of event: July 29, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 
|10.15  |  | Registration Rights Agreement, dated as of July 29, 2002, by and among Sunterra Corporation, Merrill Lynch Mortgage Capital, Inc. and certain initial holders (incorporated by reference to
Exhibit 10.5 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 
|10.16  |  | Registration Rights Agreement dated as of March 29, 2004 between Sunterra Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CRT Capital Group (incorporated by reference
to Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.17  |  | Pledge Agreement dated as of March 29, 2004 by and among Sunterra Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       | 
|10.18  |  | Standard Definitions dated as of September 1, 2004 to the Trust Agreement dated as of September 24, 2004 between Sunterra Ownership, LLC, as Owner and U.S. Bank Trust, National Association, as
Owner Trustee and the Indenture dated as of September 1, 2004 between Sunterra Owner Trust 2004-1, as Issuer, Sunterra Financial Services, Inc., as Servicer and Wells Fargo Bank, National Association, as Indenture Trustee, Custodian and Back-Up
Servicer (incorporated by reference to Exhibit 10.13 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).                                                                                                                                                                                                                     



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|        |  |                                                                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19   |  | Trust Agreement dated as of September 24, 2004 between Sunterra Ownership, LLC, as Owner and U.S. Bank Trust, National Association, as Owner Trustee (incorporated by reference to Exhibit
10.14 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).
|        | 
|*10.20  |  | Amended and Restated Employment Agreement dated as of November 19, 2001 between Sunterra Corporation and Nicholas Benson (incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K (date of event: January 25, 2002)).                                                  
|        | 
|*10.20a |  | Letter Agreement between the Company and Nicholas J. Benson, dated October 13, 2005 regarding extension of employment agreement (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K (date of event: October 13, 2005)).                                           
|        | 
|*10.21  |  | Employment Agreement dated as of September 9, 2002 between Sunterra Corporation and Steven E. West (incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).                                                             
|        | 
|*10.22  |  | Employment agreement between Sunterra Corporation and David Lucas dated May 24, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event:
June 27, 2005)).                                                                                         
|        | 
|*10.23  |  | Employment Agreement dated as of May 21, 2001 between Sunterra Corporation and Andrew Gennuso (incorporated by reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001).                                                                         
|        | 
|*10.24  |  | Employment Agreement dated as January 24, 2003 between Sunterra Corporation and Frederick C. Bauman (incorporated by reference to Exhibit 10.13 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2004).                                                                
|        | 
|*10.25  |  | Employment Agreement dated as June 25, 2004 between Sunterra Corporation and Robert A. Krawczyk (incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005).                                                                     
|        | 
|*10.26  |  | Employment Agreement dated as February 23, 2004 between Sunterra Corporation and David R. Harris (incorporated by reference to Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004).                                                                   
|        | 
|+*10.27 |  | Description of Compensation of Non-Employee Directors                                                                                                                                                                                                                                                
|        | 
|+*10.28 |  | Description of Certain Information Regarding Employment and Compensation Arrangements with Certain Executive Officers                                                                                                                                                                                
|        | 
|+21     |  | Subsidiaries of Sunterra Corporation                                                                                                                                                                                                                                                                 
|        | 
|+23.1   |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                             
|        | 
|+31.1   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+31.2   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+32.1   |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+32.2   |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              

---

|* | Compensatory management plan
|- | ----------------------------

|+ | Filed herewith
|- | --------------



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SIGNATURES



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



|                  |  |                      |  |                                      
|----------------- |  | -------------------- |  | -------------------------------------
|                  |  | SUNTERRA CORPORATION
|                  |  |                     
|December 12, 2005 |  | By:                  |  | /s/ NICHOLAS J. BENSON               
|                  |  | Name:                |  | Nicholas J. Benson                   
|                  |  | Title:               |  | President and Chief Executive Officer



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



|                                                   |  |                                                                                    |  |                  
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | -----------------
|Signature                                          |  | Title                                                                              |  | Date             
|/s/ NICHOLAS J. BENSONNicholas J. Benson           |  | President, Chief Executive Officer and Director (Principal Executive Officer)      |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ STEVEN E. WESTSteven E. West                   |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ ROBERT A. KRAWCZYKRobert A. Krawczyk           |  | Vice President and Corporate Controller (Principal Accounting Officer)             |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ DAVID GUBBAYDavid Gubbay                       |  | Chairman of the Board and Director                                                 |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ JAMES H. DICKERSON, JR.James H. Dickerson, Jr. |  | Director                                                                           |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ OLOF S. NELSONOlof S. Nelson                   |  | Director                                                                           |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ JAMES A. WEISSENBORNJames A. Weissenborn       |  | Director                                                                           |  | December 12, 2005
|                                                   |  |                                                                                   
|/s/ CHARLES F. WILLESCharles F. Willes             |  | Director                                                                           |  | December 12, 2005



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EXHIBITS INDEX



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|3.1  |  | Articles of Amendment and Restatement of Sunterra Corporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (date of event: July 29,
2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 
|3.1a |  | Amendment to Articles of Amendment and Restatement of Sunterra Corporation (incorporated by reference to Exhibit 3.1a to the Companys Transition Report on Form 10-K for the transition
period ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|3.2  |  | Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2 to the Companys Transition Report on Form 10-K for the transition period ended September 30,
2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     | 
|3.2a |  | Amendment to Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2a to the Companys Transition Report on Form 10-K for the transition period ended
September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | 
|3.2b |  | Amendment to Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2b to the Companys Current Report on Form 8-K (date of event: December 23,
2004)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | 
|4.1  |  | Indenture dated as of March 29, 2004 between Sunterra Corporation and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 10.15 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|4.2  |  | Indenture dated as of September 1, 2004 between Sunterra Owner Trust 2004-1, as Issuer, Sunterra Financial Services, Inc., as Servicer and Wells Fargo Bank, National Association, as Indenture
Trustee, Custodian and Back-Up Servicer (incorporated by reference to Exhibit 4.2 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | 
|10.1 |  | Third Amended and Restated Joint Plan of Reorganization, dated May 9, 2002, of Sunterra Corporation and its debtor affiliates under Chapter 11 of the Bankruptcy Code (incorporated by reference
to Exhibit 2.1 to the Companys Current Report on Form 8-K (date of event: May 9, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|10.2 |  | Confirmation Order, dated June 20, 2002, of the Bankruptcy Court (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended December 31,
2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | 
|10.3 |  | Loan Agreement, dated as of July 29, 2002, (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)) as amended by Amendment No.
1 dated as of December 20, 2002 and further amended by Amendment No. 2 dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries
(incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003) and further amended by Amendment No. 3 dated July 7, 2004, by and between Merrill Lynch Mortgage Capital, Inc.,
as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2004).
|     | 
|10.4 |  | Amendment No. 2, dated February 13, 2004, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as
agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | 
|10.5 |  | Amendment No. 3, dated July 7, 2004, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as agent
for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries and Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra
Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).                                                                                                                                                                                                                                                                                                            



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6   |  | Amendment No. 4, dated July 28, 2005, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage
Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries, Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders
party thereto, and Sunterra Corporation and certain of its subsidiaries and Amendment No. 3, dated July 7, 2004 by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and
certain of its subsidiaries (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
|       | 
|10.7   |  | Warrant Agreement, dated as of July 29, 2002, (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)) as amended by Amendment
No. 1 dated February 13, 2004 (incorporated by reference to Exhibit 10.6 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003), by and between Sunterra Corporation and Merrill Lynch Mortgage Capital,
Inc.                                                                                                                                                                                                                                                                                                                                                                                        
|       | 
|10.8   |  | Amendment No. 1, dated February 13, 2004, to Warrant Agreement dated as of July 29, 2002, (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of
event: July 29, 2002)) by and between Sunterra Corporation and Merrill Lynch Mortgage Capital, Inc. (incorporated by reference to Exhibit 10.6 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003).                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|*10.9  |  | Sunterra Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Companys Transition Report on Form 10-K for the transition period ended September 30,
2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 
|*10.9a |  | Form of Stock Option Agreement Under the Sunterra Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event:
October 29, 2004)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 
|*10.10 |  | Sunterra Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed on February 25, 2005 (File number
333-123006)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 
|*10.11 |  | Sunterra Corporation Specifications for Annual Incentive Awards Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13,
2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 
|*10.12 |  | Sunterra Corporation Specifications for Performance Share Awards Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13,
2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|*10.13 |  | Form of Executive Retention Agreement (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: October 13, 2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.14  |  | Warrant Agreement, dated as of July 29, 2002, by and between Sunterra Corporation and Mellon Investor Services, LLC, as warrant agent (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K (date of event: July 29, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 
|10.15  |  | Registration Rights Agreement, dated as of July 29, 2002, by and among Sunterra Corporation, Merrill Lynch Mortgage Capital, Inc. and certain initial holders (incorporated by reference to
Exhibit 10.5 to the Companys Current Report on Form 8-K (date of event: July 29, 2002)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 
|10.16  |  | Registration Rights Agreement dated as of March 29, 2004 between Sunterra Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CRT Capital Group (incorporated by reference
to Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.17  |  | Pledge Agreement dated as of March 29, 2004 by and among Sunterra Corporation and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.17 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       | 
|10.18  |  | Standard Definitions dated as of September 1, 2004 to the Trust Agreement dated as of September 24, 2004 between Sunterra Ownership, LLC, as Owner and U.S. Bank Trust, National Association, as
Owner Trustee and the Indenture dated as of September 1, 2004 between Sunterra Owner Trust 2004-1, as Issuer, Sunterra Financial Services, Inc., as Servicer and Wells Fargo Bank, National Association, as Indenture Trustee, Custodian and Back-Up
Servicer (incorporated by reference to Exhibit 10.13 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).                                                                                                                                                                                                                     



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19   |  | Trust Agreement dated as of September 24, 2004 between Sunterra Ownership, LLC, as Owner and U.S. Bank Trust, National Association, as Owner Trustee (incorporated by reference to Exhibit
10.14 to the Companys Transition Report on Form 10-K for the transition period ended September 30, 2004).
|        | 
|*10.20  |  | Amended and Restated Employment Agreement dated as of November 19, 2001 between Sunterra Corporation and Nicholas Benson (incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K (date of event: January 25, 2002)).                                                  
|        | 
|*10.20a |  | Letter Agreement between the Company and Nicholas J. Benson, dated October 13, 2005 regarding extension of employment agreement (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K (date of event: October 13, 2005)).                                           
|        | 
|*10.21  |  | Employment Agreement dated as of September 9, 2002 between Sunterra Corporation and Steven E. West (incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).                                                             
|        | 
|*10.22  |  | Employment agreement between Sunterra Corporation and David Lucas dated May 24, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event:
June 27, 2005)).                                                                                         
|        | 
|*10.23  |  | Employment Agreement dated as of May 21, 2001 between Sunterra Corporation and Andrew Gennuso (incorporated by reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001).                                                                         
|        | 
|*10.24  |  | Employment Agreement dated as January 24, 2003 between Sunterra Corporation and Frederick C. Bauman (incorporated by reference to Exhibit 10.13 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2004).                                                                
|        | 
|*10.25  |  | Employment Agreement dated as June 25, 2004 between Sunterra Corporation and Robert A. Krawczyk (incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005).                                                                     
|        | 
|*10.26  |  | Employment Agreement dated as February 23, 2004 between Sunterra Corporation and David R. Harris (incorporated by reference to Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004).                                                                   
|        | 
|+*10.27 |  | Description of Compensation of Non-Employee Directors                                                                                                                                                                                                                                                
|        | 
|+*10.28 |  | Description of Certain Information Regarding Employment and Compensation Arrangements with Certain Executive Officers                                                                                                                                                                                
|        | 
|+21     |  | Subsidiaries of Sunterra Corporation                                                                                                                                                                                                                                                                 
|        | 
|+23.1   |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                             
|        | 
|+31.1   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+31.2   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+32.1   |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              
|        | 
|+32.2   |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                              

---

|* | Compensatory management plan
|- | ----------------------------

|+ | Filed herewith
|- | --------------



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