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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)

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



For the fiscal year ended



OR



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



For the transition period from January 1,
2004 to September 30, 2004



Commission File Number
001-13815



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SUNTERRA CORPORATION

(Exact name of
registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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. ̈



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 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 ̈



The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30,
2004 was $235.3 million, based upon the reported last sale prices of such equity on that date.



Number of shares of the registrants common stock outstanding at December 7, 2004: 18,898,362



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 proxy statement to be filed pursuant to Regulation 14A with respect to the registrants fiscal 2005 annual meeting of stockholders.



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SUNTERRA CORPORATION



TRANSITION REPORT ON FORM 10-K

For the Nine Months Ended September 30, 2004



TABLE OF CONTENTS



|                      |  |                                                                                                              |  |   
|--------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|Safe Harbor Statement |  |                                                                                                             
|                      |  | PART I                                                                                                       |  |   
|ITEM 1.               |  | Business                                                                                                     |  | 2 
|ITEM 2.               |  | Properties                                                                                                   |  | 16
|ITEM 3.               |  | Legal Proceedings                                                                                            |  | 17
|ITEM 4.               |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17
|                      |  | Executive Officers of the Registrant                                                                         |  | 17
|                      |  | 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                        |  | 21
|ITEM 7A.              |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 41
|ITEM 8.               |  | Financial Statements and Supplementary Data                                                                  |  | 42
|ITEM 9.               |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 43
|ITEM 9A.              |  | Controls and Procedures                                                                                      |  | 43
|ITEM 9B.              |  | Other Information                                                                                            |  | 44
|                      |  | PART III                                                                                                     |  |   
|ITEM 10.              |  | Directors and Executive Officers of the Registrant                                                           |  | 45
|ITEM 11.              |  | Executive Compensation                                                                                       |  | 45
|ITEM 12.              |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 45
|ITEM 13.              |  | Certain Relationships and Related Transactions                                                               |  | 45
|ITEM 14.              |  | Principal Accountant Fees and Services                                                                       |  | 45
|                      |  | PART IV                                                                                                      |  |   
|ITEM 15.              |  | Exhibits, Financial Statement Schedules                                                                      |  | 46



Forward-Looking Statements



This Transition Report on Form 10-K (Form
10-KT) 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, 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.



History of Sunterra



We were incorporated in May 1996 as KGK Resorts, Inc., and in June 1996 changed our corporate name to Signature Resorts,
Inc. At the time of our August 1996 initial public offering, we owned nine vacation ownership resorts in Hawaii, Florida, South Carolina, Missouri, California and in the Caribbean, and generated $75.0 million in annual vacation ownership sales. In
the following three years, the Company grew rapidly through a series of acquisitions, reaching eighty-nine resorts around the globe and generating $423.0 million of vacation ownership sales in fiscal 1999. We became known as Sunterra Corporation in
the second quarter of 1998.



In May 2000, we and certain of our
wholly owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. In July 2002, we emerged from Chapter 11 proceedings. See Managements Discussion and Analysis of Financial Condition
and Results of OperationsReorganization for a further description of the nature and results of our reorganization.



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.



Financial Information About Industry and
Geographic Segments



All of our operations are contained
within and are in support of a single industry segmentthe vacation ownership industry. Geographic segment information is presented in Note 12 to our consolidated financial statements included in this report.



Description of Our Business



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, 2004 we had over 300,000 owner families vacationing at 92 resorts in 12 countries located in North America, Europe and the Caribbean.



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 which may be redeemed for occupancy rights for varying lengths of stay at participating resort locations, which we refer to as Vacation Points;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | leasing Vacation Intervals and selling Vacation Points at certain Caribbean locations;
| | - | --------------------------------------------------------------------------------------



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



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| |  | 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 programs.
| | - | -----------------------------------------------



Marketing 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. We ceased originations of new leases of Vacation Interests during March 2004.



We market Vacation Interests at our resort locations, through off-site sales centers, and in Europe, through 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 resort tours. 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.



Receivables Financing



Predominantly in North America and the Caribbean, we provide consumer
financing to consumers exclusively for the purchase and lease of Vacation Interests. We benefit by retaining the positive cash flow spread that results from the difference between our borrowing rate on mortgage and contract receivables, which
averaged approximately 4.1% per annum at September 30, 2004 and the rate charged to our owner families, which averaged 14.2% 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. 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, 2004, our European subsidiary had approximately $8.4 million in gross mortgages receivable (on balance sheet).



During the nine months ended September 30, 2004, approximately 18.0% of North
American Vacation Interest revenue required no financing by us. Of the remaining 82.0%, we financed approximately 69.0% and the remaining 31.0% down payment was either paid for in cash or by applying existing equity from another Vacation Interest.
As of September 30, 2004, our on-balance sheet mortgages and contracts receivable portfolio included approximately 40,100 active loans and contracts with gross amounts outstanding totaling approximately $295.8 million, with a stated maturity
typically of seven to ten years. Mortgages and contracts receivable in excess of 60 days past due as of such date were 3.2% as a percentage of gross mortgages and contracts receivable principal. Our allowance for loan and contract losses was 8.7% as
a percentage of gross mortgages and contracts receivable at September 30, 2004.



Given the percentage of purchases that are financed, the availability of financing is essential to provide liquidity to generate ongoing sales of Vacation Interests. For the past few years, we 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 mortgage receivables and, in turn, sold them in the mortgage-backed



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securities market. We also used on-balance sheet secured financing, whole mortgages receivable sales and other financing vehicles. As of September 30, 2004,
we serviced approximately 20,300 loans with an outstanding balance of approximately $126.1 million relating to the conduit, securitizations and other facilities not included on our balance sheet.



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 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.



We have contracts with homeowners associations at fifty-three of our 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.



We previously managed seven Sunterra Pacific resorts and units at additional
resorts. The homeowners associations declined to renew our management agreement past its December 31, 2003 expiration date.



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.



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, Cendant Corporation, Starwood Hotels and Resorts Worldwide, Inc. and
Fairmont Hotels has also increased the attractiveness of vacation ownership for consumers.



According to Resort Timesharing in the United States, a study of timeshare developers and owners by Ragatz Associates, the U.S. vacation ownership industry reached sales levels of $5.5 billion in 2002. The U.S.
vacation ownership community was comprised of approximately 1,600 resorts and 132,000 timeshare units at the start of 2003, and an estimated 3.0 million households owned 4.9 million timeshare weeks or their equivalent. Ragatz Associates also
prepared a study on the global vacation ownership industry, Resort Timesharing



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Worldwide that reflected global sales of $9.4 billion in 2002 and just over 5,400 vacation ownership resorts in over 100 countries around the globe.
The global study noted 6.7 million households owned almost 11 million timeshare weeks. According to the Ragatz study the market penetration rate of households with incomes of $100,000 or more was 7.3%.



The study also noted that timeshare owners report using over 92% of the time
available. The Ragatz study reported that the top 2025 vacation ownership companies (representing 75%80% of the total U.S. sales) showed 17% sales volume growth in 2002.



Vacation Points Ownership



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 55,000 members and 57
resort locations in North America, Hawaii and the Caribbean and Club Sunterra Europe (formerly known as Grand Vacation Club), with approximately 47,000 members and 35 resort locations in the United Kingdom, Portugal, Spain, the Canary Islands,
Germany, France, Austria 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. Under our agreement with the VTS Owners Association, which ended on December 31, 2003, historically we operated Sunterra Pacifics VTS program, which had approximately 31,400 members and 23 resort
locations in the United States, Canada and Mexico at that date, including three that are also included in Club Sunterra. These resorts remain affiliated with Club Sunterra after the termination of the operating agreement with the VTS Owners
Association.



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 with an ability to exchange use-nights 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. Members
in our new, multi-site club that is now implemented in 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 the 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.



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. 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 Interval International, Inc. (II) or Resort Condominium International, LLC
(RCI) for which an exchange fee is charged by the exchange company. 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 one of the external exchange programs discussed previously.



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To consolidate our exchange company alliances, during 2002 Sunterra entered into an exclusive external
exchange affiliation agreement with II. This agreement replaced Sunterras previous agreements with RCI to provide exchange services for its Sunterra owners.



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, 2004 all of the other North American resorts with the exception of California and Hawaii had 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



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, 2004, Vacation Interval Ownership is marketed primarily in only California and Hawaii.



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 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 $300 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.



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, Equivest and Trendwest Resorts), Hilton (Hilton Grand Vacations), Starwood (Starwood Vacation Ownership), and Disney (Disney Vacation Club). In addition, in certain markets



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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 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 and maintenance services 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
and federal and state securities laws.



Last year federal
legislation 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



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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 three to ten 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 Sunterras 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



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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 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 have been identified. The areas of concern at Lake Tahoe relate 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. This remediation system will operate for approximately two
years. 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, 2004, we had approximately 5,000 full and part-time employees. None of our employees are represented by a labor union except for 47
employees in Europe, 128 employees in St. Maarten and 273 employees in Hawaii. We are not aware of any union organizational efforts with respect to our employees at any other locations.



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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.



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 and federal and state
securities laws.



Last year federal legislation 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



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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 three to
ten 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 (including the hurricanes which affected Florida in 2004), 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 significant 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 an 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 and lease 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, 2004, our mortgages and
contracts receivable portfolio included approximately 40,100 active loans and contracts totaling approximately $295.8 million in outstanding principal. 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



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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 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 nine months ended September 30, 2004, we earned management fees of $15.4 million, representing approximately 5.4% 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.



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 our assets, as
discussed in the following paragraph, and could otherwise have a material adverse effect.



Virtually all of our assets are subject to security interests and may be unavailable to us or certain of our creditors



Substantially all of our cash, receivables, inventory and other assets are subject to liens and security interests. If our
senior finance facility lender or any other holder of a security interest becomes entitled to exercise its rights as a secured party, it would have the right to foreclose upon and sell or otherwise transfer the collateral subject to their security
interest, and the collateral accordingly would be unavailable to us or to our other creditors, except to the extent that the value of the affected collateral exceeds the amount of indebtedness in respect of which such foreclosure rights are
exercised.



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 nine months ended September 30, 2004, approximately 18.0% of North American Vacation Interests revenue required no financing by us. Of the
remaining 82.0%, we financed approximately 69.0% and the remaining 31.0% 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



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critical factor in our continued liquidity. As of September 30, 2004, our borrowings secured by mortgages and contracts receivable under our senior finance
facility were $80.2 million and the borrowings secured by Vacation Interests were $82.7 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



Prior to our bankruptcy, 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.



Our common stock has a limited trading history on
the Nasdaq National Market and our common stock price may experience volatility



Our common stock began trading on the Nasdaq National Market on January 5, 2004. Prior to that date, our common stock was quoted on the OTC Bulletin Board. Because our common stock has a limited trading history on the
Nasdaq Stock Market, 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.



Future public sales of our shares could adversely affect
our stock price



Future sales 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 under our Plan of Reorganization was exempt from the registration requirements of the federal
and state securities laws. Persons who are not our affiliates and who acquired shares pursuant to our Plan of Reorganization may trade those shares. Our affiliates who acquired shares of our common stock pursuant to our Plan of Reorganization may
sell those shares in the public market subject to applicable volume and other limitations imposed under the federal securities laws or pursuant to a registration statement registering such shares for resale to the public. A total of 18,898,362
shares of common stock have been issued to date pursuant to our Plan of Reorganization. Pursuant to our Plan of Reorganization, the remaining 1,101,638 shares of common stock will be issued at the settlement of certain claims, the expected date of
which is uncertain at this time. Resale of these shares, or the perception that resale could occur, could cause the market price of our common stock to decrease significantly.



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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 or the making of 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 the 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.



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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
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 450 Fifth Street NW, 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 and Virginia, and have short-term lease agreements for multiple



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off-premises contact booths and sales centers at various locations. We own a 9,000 square foot building in Sedona, Arizona, where administrative functions
relating to our Sedona resorts were previously housed. This property is currently under contract to be sold.



As of September 30, 2004, resorts with which Club Sunterra holds an affiliation agreement totaled 92 resorts; 57 of which are located in the United
States, Canada, the Caribbean and Mexico, and 35 of which are located in Europe. The following table shows the number of resorts with which Club Sunterra holds an affiliation agreement as of September 30, 2004, by state and country of their
location:



|               |  |                     |  |  |  |                      |  |                    
|-------------- |  | ------------------- |  |  |  | -------------------- |  | -------------------
|State          |  | Number of Locations |  |  |  | Country/Region       |  | Number of Locations
|Arizona        |  | 8                   |  |  |  | Austria              |  | 1                  
|California     |  | 4                   |  |  |  | Canada               |  | 1                  
|Colorado       |  | 1                   |  |  |  | France               |  | 4                  
|Florida        |  | 8                   |  |  |  | Germany              |  | 1                  
|Hawaii         |  | 11                  |  |  |  | Italy                |  | 1                  
|Idaho          |  | 1                   |  |  |  | Mexico               |  | 2                  
|Massachusetts  |  | 1                   |  |  |  | Netherlands Antilles |  | 2                  
|Missouri       |  | 1                   |  |  |  | Portugal             |  | 1                  
|Nevada         |  | 3                   |  |  |  | Spain                |  | 17                 
|New Mexico     |  | 1                   |  |  |  | Balearic Islands     |  | 5                  
|Oregon         |  | 2                   |  |  |  | Canary Islands       |  | 8                  
|South Carolina |  | 3                   |  |  |  | Costa del Sol        |  | 4                  
|Tennessee      |  | 4                   |  |  |  | United Kingdom       |  | 10                 
|Texas          |  | 1                   |  |  |  | England              |  | 9                  
|Virginia       |  | 2                   |  |  |  | Scotland             |  | 1                  
|Washington     |  | 1                   |  |  |  |                      |  |                    



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.



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, 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 for a further description of the nature and
results of our reorganization, and Note 16 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, 2004, no matter was submitted to a vote of our security holders.



EXECUTIVE OFFICERS OF THE REGISTRANT:



Our executive officers consist of the following individuals:



Nicholas J. Benson (age 43) has served as President and Chief Executive Officer of Sunterra 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, 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.



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Steven E. West (age 43) has served as Senior Vice President and Chief Financial Officer since September
2002. Prior to joining Sunterra, 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.



Andrew Gennuso (age 50) has served as Senior
Vice President of Sunterra and President of Resort Marketing International, Inc. (a subsidiary of Sunterra) 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s Regional Vice President of sales and marketing for the Western/Pacific Region. Prior to joining Sunterra, 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 40) joined Sunterra in February 2004 as Managing Director of Sunterra Europe Group Holdings plc, our European subsidiary. From December 2000 to December 2003, 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. Prior to December 2000, Mr. Harris was managing director of United
Cinemas International (UK & Ireland) Ltd.



Geoff Bruce (age
46) has been with Sunterra Europe for the past nine years. Initially serving as Financial Controller, Mr. Bruce became Finance Director of Sunterra Europe in 1996. Mr. Bruce is a chartered accountant in the United Kingdom.



Frederick C. Bauman (age 52) joined Sunterra in 2003 as Vice President,
General Counsel and Secretary. Prior to joining Sunterra, Mr. Bauman was a partner specializing in securities and capital market transactions with 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.



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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. During the period from July 29, 2002 through December 31, 2002, there was no established public trading market for our common stock. The high and low
closing prices for our common stock for each quarter during the 2004 transition period and the 2003 fiscal year are set forth below, as reported in the transaction reporting system.



|                                 |  |      |       |     |   |      
|-------------------------------- |  | ---- | ----- | --- | - | -----
|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 
|                                 |  |     
|Fiscal 2003                      |  | High |       | Low
|Quarter Ended March 31, 2003     |  | $    | 6.00  |     | $ | 4.75 
|Quarter Ended June 30, 2003      |  | $    | 9.00  |     | $ | 5.06 
|Quarter Ended September 30, 2003 |  | $    | 12.00 |     | $ | 8.10 
|Quarter Ended December 31, 2003  |  | $    | 13.55 |     | $ | 9.85 



Holders



As of December 7, 2004, there were approximately
1,500 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.



See Item 12 for information about our equity compensation plans.



Issuer Purchases of Equity Securities



The Company did not purchase any of its equity securities during the three
months ended September 30, 2004.



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



The following table sets forth selected financial data of Sunterra for the nine months ended September 30, 2004 (our new fiscal year end) and comparable data for the nine months ended September 30, 2003, as well as such data for the fiscal
years 2003, 2002, 2001 and 2000, based on our previous fiscal year end of December 31. For purposes of this presentation, 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 years ended December
31, 2001 and 2000 (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 |  |   | Combined Successor andPredecessor |   |  | Predecessor |          |   | Predecessor |  
|                                                                    |  | Nine Months Ended September 30, |         |   | Year Ended December 31, |  
|(Amounts in thousands)                                              |  | 2004                            |         |   | 2003                    |   |         | 2003      |  |   | 2002                              |   |  | 2001        |          |   | 2000        |  
|Statement of Operations Data:                                       |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Revenues:                                                           |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Vacation Interest                                                   |  | $                               | 202,541 |   |                         | $ | 158,278 |           |  | $ | 212,965                           |   |  | $           | 183,467  |   |             | $ | 166,713  |   |  | $ | 187,933  |  
|Resort rental                                                       |  |                                 | 16,809  |   |                         |   | 10,718  |           |  |   | 12,987                            |   |  |             | 15,734   |   |             |   | 14,359   |   |  |   | 14,572   |  
|Management services                                                 |  |                                 | 21,988  |   |                         |   | 23,245  |           |  |   | 30,433                            |   |  |             | 29,167   |   |             |   | 31,540   |   |  |   | 25,745   |  
|Interest                                                            |  |                                 | 23,314  |   |                         |   | 19,943  |           |  |   | 26,421                            |   |  |             | 30,581   |   |             |   | 31,573   |   |  |   | 28,121   |  
|Other                                                               |  |                                 | 22,448  |   |                         |   | 17,943  |           |  |   | 24,107                            |   |  |             | 23,913   |   |             |   | 29,117   |   |  |   | 32,807   |  
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Total revenues                                                      |  |                                 | 287,100 |   |                         |   | 230,127 |           |  |   | 306,913                           |   |  |             | 282,862  |   |             |   | 273,302  |   |  |   | 289,178  |  
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Costs and Operating Expenses:                                       |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Vacation Interest cost of sales                                     |  |                                 | 40,347  |   |                         |   | 29,711  |           |  |   | 40,464                            |   |  |             | 36,967   |   |             |   | 34,275   |   |  |   | 85,319   |  
|Advertising, sales and marketing                                    |  |                                 | 117,636 |   |                         |   | 87,402  |           |  |   | 117,669                           |   |  |             | 109,486  |   |             |   | 98,954   |   |  |   | 146,870  |  
|Vacation Interest carrying costs                                    |  |                                 | 20,668  |   |                         |   | 14,603  |           |  |   | 17,481                            |   |  |             | 18,848   |   |             |   | 20,508   |   |  |   | 20,715   |  
|Provision for doubtful accounts and loan losses                     |  |                                 | 7,180   |   |                         |   | 4,336   |           |  |   | 5,638                             |   |  |             | 7,310    |   |             |   | 18,745   |   |  |   | 36,268   |  
|Loan portfolio                                                      |  |                                 | 4,465   |   |                         |   | 7,621   |           |  |   | 10,052                            |   |  |             | 12,835   |   |             |   | 10,417   |   |  |   | 8,105    |  
|General and administrative                                          |  |                                 | 57,444  |   |                         |   | 53,696  |           |  |   | 71,331                            |   |  |             | 75,624   |   |             |   | 73,264   |   |  |   | 128,251  |  
|Gain on sales of assets                                             |  |                                 | (5,489  | ) |                         |   | (610    | )         |  |   | (688                              | ) |  |             | (209     | ) |             |   |         |   |  |   |         |  
|Depreciation and amortization                                       |  |                                 | 6,518   |   |                         |   | 8,405   |           |  |   | 11,549                            |   |  |             | 12,971   |   |             |   | 18,515   |   |  |   | 27,634   |  
|Interest                                                            |  |                                 | 16,272  |   |                         |   | 18,529  |           |  |   | 26,309                            |   |  |             | 19,036   |   |             |   | 20,477   |   |  |   | 42,748   |  
|Reorganization, net                                                 |  |                                 |        |   |                         |   | (664    | )         |  |   | (619                              | ) |  |             | (325,235 | ) |             |   | 50,350   |   |  |   | 77,988   |  
|Restructuring                                                       |  |                                 |        |   |                         |   | 1,008   |           |  |   | 1,274                             |   |  |             | 6,099    |   |             |   |         |   |  |   | 6,040    |  
|Impairment of reorganization value in excess of identifiable assets |  |                                 |        |   |                         |   |        |           |  |   | 91,586                            |   |  |             |         |   |             |   |         |   |  |   |         |  
|Impairment of assets                                                |  |                                 |        |   |                         |   | 1,400   |           |  |   | 2,297                             |   |  |             |         |   |             |   |         |   |  |   | 68,404   |  
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Total costs and operating expenses                                  |  |                                 | 265,041 |   |                         |   | 225,437 |           |  |   | 394,343                           |   |  |             | (26,268  | ) |             |   | 345,505  |   |  |   | 648,342  |  
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Income (loss) from operations                                       |  |                                 | 22,059  |   |                         |   | 4,690   |           |  |   | (87,430                           | ) |  |             | 309,130  |   |             |   | (72,203  | ) |  |   | (359,164 | )
|Income from investments in joint ventures                           |  |                                 | 1,551   |   |                         |   | 2,475   |           |  |   | 3,340                             |   |  |             | 4,485    |   |             |   | 3,381    |   |  |   | 2,727    |  
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Income (loss) before provision for income taxes                     |  |                                 | 23,610  |   |                         |   | 7,165   |           |  |   | (84,090                           | ) |  |             | 313,615  |   |             |   | (68,822  | ) |  |   | (356,437 | )
|Provision for income taxes                                          |  |                                 | 2,302   |   |                         |   | 4,383   |           |  |   | 5,109                             |   |  |             | 5,953    |   |             |   | 2,717    |   |  |   | 522      |  
|Cumulative effect of change in accounting principle, net            |  |                                 |        |   |                         |   |        |           |  |   |                                  |   |  |             |         |   |             |   |         |   |  |   | (18,761  | )
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Net income (loss)                                                   |  | $                               | 21,308  |   |                         | $ | 2,782   |           |  | $ | (89,199                           | ) |  | $           | 307,662  |   |             | $ | (71,539  | ) |  | $ | (375,720 | )
|                                                                    |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|                                                                    |  |                                
|                                                                    |  | As of September 30,             |         |   | As of December 31,      |  
|                                                                    |  | 2004                            |         |   | 2003                    |   |         | 2003      |  |   | 2002                              |   |  | 2001        |          |   | 2000        |  
|Balance Sheet Data:                                                 |  |                                 |         |   |                         |   |         |           |  |   |                                   |   |  |             |          |   |             |   |          |   |  |   |          |  
|Cash and cash equivalents                                           |  | $                               | 26,842  |   |                         | $ | 25,249  |           |  | $ | 21,305                            |   |  | $           | 22,960   |   |             | $ | 27,207   |   |  | $ | 21,062   |  
|Total assets                                                        |  |                                 | 836,858 |   |                         |   | 715,797 |           |  |   | 654,053                           |   |  |             | 732,252  |   |             |   | 663,491  |   |  |   | 735,110  |  
|Borrowings under line of credit agreements                          |  |                                 | 171,737 |   |                         |   | 227,010 |           |  |   | 245,725                           |   |  |             | 240,065  |   |             |   | 68,311   |   |  |   | 44,750   |  
|Notes payable                                                       |  |                                 | 248,971 |   |                         |   | 4,640   |           |  |   | 3,201                             |   |  |             | 4,136    |   |             |   | 28,005   |   |  |   | 44,592   |  
|Total stockholders equity                                          |  |                                 | 226,306 |   |                         |   | 290,082 |           |  |   | 203,578                           |   |  |             | 284,326  |   |             |   | (335,750 | ) |  |   | (263,107 | )



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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. 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 the change in
fiscal year end, for purposes of discussion of results of operations, the following comparative periods are presented and discussed:



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



| |  | Year ended December 31, 2003 (Successor) 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).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All financial information
presented in this discussion has been derived from our audited consolidated financial statements for the nine months ended September 30, 2004 (Successor), the twelve months ended December 31, 2003 (Successor), the five months ended December 31, 2002
(Successor) and the seven months ended July 31, 2002 (Predecessor), as well as our unaudited consolidated financial statements for the nine months ended September 30, 2003 (Successor). 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 consolidated subsidiaries, joint venture and affiliated resorts, is one of the largest companies in the vacation ownership resort industry, our single reportable operating segment. Through a network of ninety-two owned or
affiliated resorts located around the globe, our operations consist of:



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



| |  | marketing and selling Vacation Interests to the public at our resort locations and off-site sales centers by:
| | - | -------------------------------------------------------------------------------------------------------------



| |  | selling vacation points which may be redeemed for occupancy rights for varying lengths of stay at participating resort locations, which we refer to as Vacation Points;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | leasing Vacation Intervals and selling Vacation Points at certain Caribbean locations;
| | - | --------------------------------------------------------------------------------------



| |  | providing consumer financing to individual purchasers of 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 programs.
| | - | -----------------------------------------------



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Reorganization



As a result of the 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.



Our Plan of Reorganization provided for the discharge of pre-petition claims
and equity interests and for distributions to our pre-petition creditors, which are briefly summarized below:



| |  | all of our old common stock and options and warrants exercisable for our old common stock were cancelled,
| | - | ---------------------------------------------------------------------------------------------------------



| |  | our former publicly held notes of approximately $478 million were discharged in exchange for approximately 18.0 million shares of our new common stock, and holders of our former
convertible subordinated notes received five year warrants to purchase up to 600,000 shares of our common stock at an exercise price of $20.00 per share,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | pre-petition general unsecured claims were extinguished in exchange for up to approximately 2 million shares of our new common stock to be distributed to holders of allowed claims
on a pro rata basis,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | former note holders and holders of pre-petition general unsecured claims also are entitled to receive certain non-transferable beneficial interests in a litigation trust formed
pursuant to the plan to which certain pre-petition claims were transferred pursuant to the plan and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | certain pre-petition secured creditors received new secured debt.
| | - | -----------------------------------------------------------------



Also, in connection with the effectiveness of our plan of reorganization we:



| |  | amended and restated our Bylaws and also filed Articles of Amendment and Restatement with the Maryland State Department of Assessments and Taxation authorizing an aggregate of
30,000,000 shares of new common stock, par value $0.01 per share (subsequently increased to 75,000,000),
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | entered into a senior finance facility with Merrill Lynch Mortgage Capital Inc. (Merrill Lynch), as agent and lender, with a maximum availability of $300.0 million to be
used to make cash payments required under the Plan and for general corporate and working capital purposes. As part of this loan agreement, Merrill Lynch was granted warrants exercisable for the purchase of 1,190,148 shares of new common stock at an
exercise price of $15.25 per share (the deemed value of the shares for purposes of the Plan or Reorganization), subject to adjustment under certain anti-dilution provisions of the warrant agreement. The loan and related warrant agreements were
subsequently amendedsee Note 9 to the accompanying consolidated financial statements,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | adopted the Sunterra Corporation 2002 Stock Option Plan, under which we may grant certain employees options to purchase shares of new common stock, and reserved 2,012,821 shares of
new common stock for issuance under this plan (subsequently increased to 3,000,000 shares) and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | entered into a Registration Rights Agreement with Merrill Lynch and certain holders of new common stock and filed registration statements under the Securities Act of 1933 to
register the resale of shares of new common stock by certain holders.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Further, on July 29, 2002, all existing members of our Board of Directors were deemed to have resigned and the new Board of Directors designated pursuant to the plan took office.



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Fresh-start Reporting and Factors Affecting Comparability of Financial Information



Upon emergence from our Chapter 11 proceedings, 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. For financial reporting
purposes, we adopted the provisions of fresh-start reporting effective July 31, 2002. Accordingly, all assets and liabilities were restated to reflect their respective fair values. See Note 2 to the consolidated financial statements included
elsewhere in this transition report for a discussion of the fresh-start adjustments.



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 reorganization value in excess of identifiable assets and $2.3 million for
the impairment of other assets. For the year ended December 31, 2002, we recorded net income totaling $307.7 million, including gains on cancellation and settlements of debt totaling $253.9 million and fresh-start adjustments of $112.7 million in
conjunction with our emergence from bankruptcy on July 29, 2002. The 2002 results of operations also included $51.9 million in charges relating to the bankruptcy and our restructuring efforts during the year, including movement of our headquarters
to North Las Vegas, Nevada. See the additional discussion below under Results of Operations. The results for the nine month period ended September 30, 2004 and the years ended December 31, 2003 and 2002 shown in the accompanying
consolidated statements of operations reflect the substantial efforts during our entering into, and emergence from, Chapter 11 bankruptcy (see Reorganization above).



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.



Reclassifications



Reclassifications were made to the 2003 and 2002 consolidated financial
statements to conform to the 2004 presentation.



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 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. 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



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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 straight-line 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. 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 and management services



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. 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.



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 that are at least 180 days
delinquent or are a first payment default.



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 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



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incurred in connection with providing financing for Vacation Interests are capitalized and amortized over the term of the mortgages or contracts receivable
as an adjustment to interest income on mortgages and contracts receivable using the effective interest method. We recorded a premium in fresh-start accounting on mortgages and contracts receivable of $10.3 million as of July 31, 2002. This amount is
being amortized over the estimated life of the related mortgages and contract receivable portfolio as an adjustment to interest income.



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 default on the first scheduled principal and interest payment (first payment defaults) or after 180
days of contractual delinquency. 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.



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 Interests cost of sales based upon 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.



Goodwill and Intangible
Assets



Our financial statements have been presented
in conformity with American Institute of Certified Public Accountants Statement of Position (SOP) 90-7, Financial Reporting By Entities In Reorganization Under the Bankruptcy Code, as amended. In accordance with SOP 90-7, we
were required to adopt fresh-start accounting, under which all assets and liabilities are restated to reflect their fair value. Intangible assets totaling $82.8 million at September 30, 2004 and $61.6 million at December 31, 2003 include
reorganization value in excess of identifiable assets-goodwill and goodwill recorded as a result of acquisitions during 2004. In accordance with SFAS No. 142, Goodwilland Other Intangible Assets, we will review goodwill,
along with other long-lived assets, for impairment periodically. Impairment exists when the carrying value of a reporting unit exceeds the fair value.



As of September 30, 2004, the Companys goodwill consists 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 in 2004. SFAS 142 requires that goodwill be tested at least annually for impairment, or more
frequently if circumstances exist to indicate potential impairment. In 2003 the Company had elected to perform the required testing in the fourth quarter. Due to the change in the fiscal year end to September 30, the Company has elected to use a
date within its last fiscal quarter as its measurement date for the current and future fiscal years. Under SFAS 142, goodwill is to be tested for impairment at the reporting unit level.



Under SFAS 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). The Company identified its North American and Europe reporting



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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.



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 2004. 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. Since emergence from Chapter 11 in 2002 through December 2003 the North American reporting unit had underperformed relative to the Companys
Plan of Reorganization, which gave rise to the impairment of goodwill. During the same period, the Europe reporting units results did not materially differ than those expected under the Plan of Reorganization.



The remainder of the balance in Intangible Assets 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. 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.



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Results of Operations



Please refer to the information noted above in Item 6, Selected Financial Data. The following table sets forth additional operating information for the
nine months ended September 30, 2004 and 2003 (Successor) and the years ended December 31, 2003 (Successor) and 2002 (combined Successor and Predecessor). For purposes of discussion of results of operations, the results of operations for the year
ended December 31, 2003 (Successor) have 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):



|                                                                    |  |                                |   |  |                         |   |  |       |   |  |        |  
|------------------------------------------------------------------- |  | ------------------------------ | - |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                                    |  | Nine Months EndedSeptember 30, |   |  | Year ended December 31, |  
|                                                                    |  | 2004                           |   |  | 2003                    |   |  | 2003  |   |  | 2002   |  
|As a percentage of total revenues:                                  |  |                                |   |  |                         |   |  |       |   |  |        |  
|Vacation Interest                                                   |  | 70.5                           | % |  | 68.8                    | % |  | 69.4  | % |  | 64.9   | %
|Resort rental                                                       |  | 5.9                            |   |  | 4.6                     |   |  | 4.2   |   |  | 5.6    |  
|Management services                                                 |  | 7.7                            |   |  | 10.1                    |   |  | 9.9   |   |  | 10.3   |  
|Interest                                                            |  | 8.1                            |   |  | 8.7                     |   |  | 8.6   |   |  | 10.8   |  
|Other                                                               |  | 7.8                            |   |  | 7.8                     |   |  | 7.9   |   |  | 8.4    |  
|                                                                    |  |                                |   |  |                         |   |  |       |   |  |        |  
|Total revenues                                                      |  | 100.0                          | % |  | 100.0                   | % |  | 100.0 | % |  | 100.0  | %
|                                                                    |  |                                |   | 
|As a percentage of Vacation Interest revenues:                      |  |                                |   |  |                         |   |  |       |   |  |        |  
|Vacation Interest cost of sales                                     |  | 19.9                           | % |  | 18.8                    | % |  | 19.0  | % |  | 20.1   | %
|Advertising, sales and marketing                                    |  | 58.1                           |   |  | 55.2                    |   |  | 55.3  |   |  | 59.7   |  
|Vacation Interest carrying cost                                     |  | 10.2                           |   |  | 9.2                     |   |  | 8.2   |   |  | 10.3   |  
|Provision for doubtful accounts and loan losses                     |  | 3.5                            |   |  | 2.7                     |   |  | 2.6   |   |  | 4.0    |  
|                                                                    |  |                                |   | 
|As a percentage of total revenues:                                  |  |                                |   |  |                         |   |  |       |   |  |        |  
|General and administrative                                          |  | 20.0                           | % |  | 23.3                    | % |  | 23.2  | % |  | 26.7   | %
|Gain on sales of assets                                             |  | (1.9                           | ) |  | (0.3                    | ) |  | (0.2  | ) |  | (0.1   | )
|Loan portfolio                                                      |  | 1.6                            |   |  | 3.3                     |   |  | 3.3   |   |  | 4.5    |  
|Depreciation and amortization                                       |  | 2.3                            |   |  | 3.7                     |   |  | 3.8   |   |  | 4.6    |  
|Interest                                                            |  | 5.7                            |   |  | 8.1                     |   |  | 8.6   |   |  | 6.7    |  
|Reorganization, net                                                 |  |                               |   |  | (0.3                    | ) |  | (0.2  | ) |  | (115.0 | )
|Restructuring                                                       |  |                               |   |  | 0.4                     |   |  | 0.4   |   |  | 2.2    |  
|Impairment of reorganization value in excess of identifiable assets |  |                               |   |  |                        |   |  | 29.7  |   |  |       |  
|Impairment of assets                                                |  |                               |   |  | 0.6                     |   |  | 0.7   |   |  |       |  
|Total costs and operating expenses                                  |  | 92.3                           |   |  | 98.0                    |   |  | 128.5 |   |  | (9.3   | )



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



|                                                |  |                        |         |   |        |   |         |      |  |      |        |  |   |        |  
|----------------------------------------------- |  | ---------------------- | ------- | - | ------ | - | ------- | ---- |  | ---- | ------ |  | - | ------ | -
|                                                |  | North America          |         |   | Europe |  
|                                                |  | 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 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 Europe 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 Europe 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 Europe Vacation Interests 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 VTSOA sponsored program,
which governs Vacation Intervals at approximately 20 resorts and the third quarter 2003 sale of management agreements on three affiliated but not owned 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. Europe 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 approximately $1.0 million due to favorable exchange rate movements.



Interest revenues, the majority of which is 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, due to the acquisition in the first quarter 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 includes 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 that the Company intends to call within the near term 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 Europe 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 Interests cost of sales for
our Europe operations. As a percentage of Europe Vacation Interests revenues for the nine months ended September 30, 2004 and 2003, Europe Vacation Interest cost of sales was 13.6% and 15.9%, respectively. Our Europe operations improved their
cost-off rate as a result of lower cost inventory acquisitions and recoveries.



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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 Europe 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 Europe 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 costs, which consist 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. As a percentage of Vacation Interest
revenues, inventory-carrying cost was 10.2% for the nine months ended September 30, 2004 compared to 9.2% 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 costs due to Vacation Interests acquired through the Epic Resorts Group acquisition offset by ongoing sales of
Vacation Interests.



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 resulting allowances for mortgages and contracts receivable at September 30, 2004 and December 31, 2003 were $26.5 million and $29.4 million, respectively, representing approximately 8.7% and 13.9%, respectively, of the
gross mortgages and contracts receivable outstanding at those dates. 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 Interests 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 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 have the potential to become delinquent) and cross training allowing us to service higher loan volumes
with fewer personnel. We have also implemented new technology (including new loan servicing software, scanning technology and on-line payment capability) that allows us to service more loans more efficiently, and have 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 approximately $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 the third quarter of the
current period. Lastly, we have reduced general and administrative expenses due to the shut down of certain Sunterra Pacific operations in December of 2003, and an overall reduction in payroll and



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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 approximately $5.5 million for the nine
months ended September 30, 2004 from approximately $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 33/4Senior Subordinated Convertible Notes due 2024, partially offset by increased average borrowing
in 2004.



There were no reorganization and restructuring
costs, net, in the nine months ended September 30, 2004, as the Company completed most of its reorganization activities by the end of 2002 and the components of the Companys restructuring were complete by the end of 2003. For the nine months
ended September 30, 2003, reorganization costs were a gain of $0.7 million, relating primarily to a $0.6 million gain on settlement of certain bankruptcy-related litigation in the third quarter 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 the Companys write down of the
carrying value of the building that was the Companys former headquarters in Orlando in conjunction with a pending sale. Additionally, the Company completed its development of the ATLAS enterprise software, and as such, the former software
utilized by the Company 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, 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 in the third quarter of 2004 prior to the acquisition.



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 Europe operations, which recorded much less taxable income in the current year than last year. The tax basis operating income of the North American operations was offset by operating
losses for prior years.



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Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002:



|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|------------------------------------------------------------------- |  | ---------------------- | -------- | - | ------ | - | -------- | ---- |  | ---- | ------- |  | - | ------
|                                                                    |  | North America          |          |   | Europe
|                                                                    |  | 2003                   |          |   | 2002   |   |          | 2003 |  | 2002
|                                                                    |  | (Amounts in thousands)
|Revenues:                                                           |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Vacation Interest                                                   |  | $                      | 127,967  |   |        | $ | 106,442  |      |  | $    | 84,998  |  | $ | 77,025
|Resort rental                                                       |  |                        | 11,362   |   |        |   | 13,543   |      |  |      | 1,625   |  |   | 2,191 
|Management services                                                 |  |                        | 22,407   |   |        |   | 24,232   |      |  |      | 8,026   |  |   | 4,935 
|Interest                                                            |  |                        | 24,186   |   |        |   | 27,909   |      |  |      | 2,235   |  |   | 2,672 
|Other                                                               |  |                        | 15,992   |   |        |   | 15,518   |      |  |      | 8,115   |  |   | 8,395 
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Total revenues                                                      |  |                        | 201,914  |   |        |   | 187,644  |      |  |      | 104,999 |  |   | 95,218
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Costs and Operating Expenses:                                       |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Vacation Interest cost of sales                                     |  |                        | 26,701   |   |        |   | 24,818   |      |  |      | 13,763  |  |   | 12,149
|Advertising, sales and marketing                                    |  |                        | 72,133   |   |        |   | 65,028   |      |  |      | 45,536  |  |   | 44,458
|Vacation Interest carrying cost                                     |  |                        | 13,262   |   |        |   | 14,885   |      |  |      | 4,219   |  |   | 3,963 
|Provision for doubtful accounts and loan losses                     |  |                        | 4,956    |   |        |   | 6,975    |      |  |      | 682     |  |   | 335   
|Loan portfolio                                                      |  |                        | 9,987    |   |        |   | 12,722   |      |  |      | 65      |  |   | 113   
|General and administrative                                          |  |                        | 53,661   |   |        |   | 59,918   |      |  |      | 17,670  |  |   | 15,706
|Gain on sales of assets                                             |  |                        | (688     | ) |        |   | (209     | )    |  |      |        |  |   |      
|Depreciation and amortization                                       |  |                        | 7,878    |   |        |   | 9,581    |      |  |      | 3,671   |  |   | 3,390 
|Interest                                                            |  |                        | 26,287   |   |        |   | 18,857   |      |  |      | 22      |  |   | 179   
|Reorganization, net                                                 |  |                        | (619     | ) |        |   | (325,235 | )    |  |      |        |  |   |      
|Restructuring                                                       |  |                        | 1,274    |   |        |   | 6,099    |      |  |      |        |  |   |      
|Impairment of reorganization value in excess of identifiable assets |  |                        | 91,586   |   |        |   |         |      |  |      |        |  |   |      
|Impairment of assets                                                |  |                        | 2,297    |   |        |   |         |      |  |      |        |  |   |      
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Total costs and operating expenses                                  |  |                        | 308,715  |   |        |   | (106,561 | )    |  |      | 85,628  |  |   | 80,293
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Income (loss) from operations                                       |  |                        | (106,801 | ) |        |   | 294,205  |      |  |      | 19,371  |  |   | 14,925
|Income from investments in joint ventures                           |  |                        | 3,340    |   |        |   | 4,485    |      |  |      |        |  |   |      
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Income (loss) before provision for income taxes                     |  |                        | (103,461 | ) |        |   | 298,690  |      |  |      | 19,371  |  |   | 14,925
|Provision (benefit) for income taxes                                |  |                        | 50       |   |        |   | 655      |      |  |      | 5,059   |  |   | 5,298 
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       
|Net income (loss)                                                   |  | $                      | (103,511 | ) |        | $ | 298,035  |      |  | $    | 14,312  |  | $ | 9,627 
|                                                                    |  |                        |          |   |        |   |          |      |  |      |         |  |   |       



We recorded total
revenues of $306.9 million for the year ended December 31, 2003, compared to $282.9 million for the year ended December 31, 2002, an increase of $24.0 million, or 8.5%. Overall revenues for North American operations increased $14.3 million, or 7.6%
to $201.9 million for the year ended December 31, 2003 compared to $187.6 million for the year ended December 31, 2002, while revenues from Europe operations increased 10.3%, or $9.8 million to $105.0 million for the year ended December 31, 2003
from $95.2 million for the prior year. Approximately $8.6 million of the increase in revenues from our Europe operations relates to favorable Europe exchange rates. The increased revenues levels were driven by higher volumes of Vacation Interest
transactions, as described below.



Vacation Interest revenues
of $213.0 million for the year ended December 31, 2003 increased by $29.5 million, or 16.1%, compared to revenues of $183.5 million for the year ended December 31, 2002, fueled by a $21.6 million increase in North American Vacation Interest revenues
to $128.0 million, compared to the prior year total of $106.4 million. The opening of multiple new sales centers, new marketing collateral and tools, extensive training and a stable management team contributed to this increase, as well as the
continuing maturity of the vacation ownership industry and improved awareness and understanding by the purchasing public of the industry. Inclusive of $7.0 million of favorable exchange rate movements, our Europe Vacation Interest revenues



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rose from $77.0 million for the year ended December 31, 2002 to $85.0 million for the year ended December 31, 2003, an increase of 10.4%. The increased
levels reflect acquisitions made in 2002, offset by lower revenues in certain marketing lines.



Resort rental revenue decreased 17.5% to $13.0 million for the year ended December 31, 2003 from $15.7 million for the year ended December 31, 2002, primarily as a result of the Companys on-going sales of
Vacation Interests (which reduces the number of Vacation Interests available for rental), 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), and the disposition of certain resort properties in 2002.



Management services revenues were $30.4 million in 2003, versus $29.2 million the prior year. The 4.3% increase relates to several contracts acquired in
Europe and increases in the annual maintenance fees at two Caribbean resorts where we act as the homeowners association, offset by the discontinuance of management contracts on several resorts sold in the prior year.



Interest revenues, the majority of which is generated from financing provided
to purchasers and lessees of Vacation Interests in the United States and the Caribbean, decreased $4.2 million, or 13.6% to $26.4 million for the year ended December 31, 2003 compared to $30.6 million for the year ended December 31, 2002 due
primarily to decreases in the overall levels of mortgages receivable, as well as changes in the yield mix as older, higher rate notes are paid down and replaced by newer mortgages with lower coupon rates. Additionally, as part of fresh start
accounting in July 2002, the Company recorded a $10.3 million premium on the existing portfolio, which is amortized as the related principal is repaid. The 2003 results include an entire fiscal year of such amortization, $2.2 million, compared to
five months of amortization, or $1.1 million, in 2002.



Other
revenues, which mainly consists of Club Sunterra revenues, travel service revenue and finance commissions earned by our European subsidiaries, increased by $0.2 million, or 0.8% to $24.1 million, for the year ended December 31, 2003 from $23.9
million for the year ended December 31, 2002. This increase is due to increased levels of membership in the U.S. Club Sunterra program, offset by the discontinuance of certain programs in Europe.



Vacation Interest cost of sales of $40.5 million for the year ended December
31, 2003 increased $3.5 million, or 9.5%, from $37.0 million for the year ended December 31, 2002, on 16.1% higher Vacation Interest volume. As a percentage of Vacation Interest revenues for the years ended December 31, 2003 and 2002, Vacation
Interest cost of sales was 19.0% and 20.1%, respectively. The improvement in this measure is attributable to the fresh start adjustments made in 2002 to Unsold Vacation Interests.



For the year ended December 31, 2003, advertising, sales and marketing costs were $117.7 million compared to $109.5 million
for the year ended December 31, 2002. As a percentage of Vacation Interest revenues, these costs declined to 55.3% in 2003 compared to 59.7% in the prior year. This decrease is due to effective direct marketing programs, improvements in closing
efficiencies as the sales staff stabilized, the resulting increased sales for the year ended 2003 versus 2002, allowing the costs to be spread over the larger Vacation Interest revenue pool in 2003 and increased use of in-house tours.



Vacation Interests carrying costs, which consist of annual maintenance fee,
reserve and special assessments on Unsold Vacation Interests, as well as the cost of un-annexed units (owned units not declared as part of the timeshare program) decreased 7.3%, or $1.3 million, to $17.5 million for the year ended December 31, 2003
from $18.8 million for the year ended December 31, 2002. As a percentage of Vacation Interest revenues, inventory-carrying cost was 8.2% for the year ended December 31, 2003 compared to 10.3% for the year ended December 31, 2002. The decrease was
primarily the result of higher charges and assessments for certain properties in 2002, as well as the sale of Vacation Interests to customers and the wholesale disposition of certain resorts in the prior year, offset by additional Vacation Interests
acquired in the current year through the Epic Resorts acquisition.



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The provision for doubtful accounts and loan losses was $5.6 million for the year ended December 31, 2003
compared to $7.3 million for the year ended December 31, 2002. Of these amounts, $5.5 million and $5.0 million for 2003 and 2002, respectively, related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts
receivable at December 31, 2003 and 2002 were $29.4 million and $32.4 million, respectively, representing approximately 14.6% and 16.3%, respectively, of the gross mortgages and contracts receivable outstanding at those dates. The balance of the
provision for doubtful accounts of $0.1 million for 2003 and $2.3 million for 2002 represents 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 Interests revenues, as the provision is recorded as a
percentage of each financed sale. The decrease in the provision for doubtful accounts for non-mortgage receivables is due to clean up and calling campaigns and other improvements to the collection process.



Loan portfolio expenses decreased 21.7% to $10.1 million for the year ended
December 31, 2003 from $12.8 million for the year ended December 31, 2002. This improvement is attributable to process improvement initiatives, including standardizing underwriting procedures, increased and timely correspondence with customers whose
mortgages and contracts are perceived to have the potential to become delinquent, and cross training of personnel allowing the team to service higher loan volumes with fewer personnel. We have also implemented new technology (including new loan
servicing software, scanning technology and on-line payment capability) that allows us to service more loans more efficiently, and have brought in certain servicing processes formerly outsourced.



General and administrative expenses decreased $4.3 million to $71.3 million
for the year ended December 31, 2003 from $75.6 million for the year ended December 31, 2002. As a percentage of total revenues, general and administrative expenses improved to 23.2% for 2003 from 26.7% for 2002. This decrease is attributable to the
effects of restructuring initiatives implemented in late 2002 and early 2003, the disposition of certain resorts and operations in the prior year, dependence in the prior year on contract and temporary labor, as well as duplication of certain costs
in 2002 associated with recruiting and moving permanent personnel to Las Vegas and maintaining dual headquarters.



Depreciation and amortization expense decreased 10.9%, or $1.4 million, to $11.6 million for the year ended December 31, 2003 from $13.0 million in 2002.
This decrease is directly attributable to the sale of certain resorts and operations in the prior year, the reclassification of certain depreciable assets as assets held for sale, and write-off of unamortized values of certain management contracts
in conjunction with implementation of fresh start accounting in 2002.



Interest expense for the year ended December 31, 2003, net of capitalized interest of $0.4 million, was $26.3 million, compared to $19.0 million, net of capitalized interest of $0.3 million, for the year ended December 31, 2002. The
increase was primarily due to amortization of debt issuance costs on our senior finance facility, which were higher than under the previous borrowing facility, and higher average borrowing in 2003. In addition, contractual interest of $23.6 million
on unsecured subordinated debt obligations was unaccrued in 2002 due to our bankruptcy filing.



Reorganization costs for the year ended December 31, 2003 showed a gain of $0.6 million, relating primarily to a $0.6 million gain on a settlement of certain bankruptcy-related litigation in the third quarter of 2003.
The prior year gain of $325.2 million included $232.7 million and $112.7 million in gains on cancellation of pre-petition liabilities and fresh start adjustments related to our emergence from Chapter 11, respectively, and $4.2 million and $21.2
million of net gains on asset sales and cancellation of debt, respectively. Excluding the effect of these adjustments, reorganization costs were $45.6 million. Theses charges were primarily professional fees, charges for employee retention programs
and other reorganization costs.



We incurred restructuring
costs of $1.3 million and $6.1 million for the years ended December 31, 2003 and 2002, respectively, related to the implementation of our 2002 strategic plan, which included streamlining of our



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legal structure, relocation of our headquarters to North Las Vegas, Nevada and expenditures related to the One World, One Club points-based program. The majority of our
restructuring processes and associated costs occurred in the third quarter of 2002.



Impairment of assets totaled $93.9 million in 2003. These charges included $91.6 million for the impairment of the reorganization value in excess of identifiable assets, $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 a resort disposed of, and $0.5 million representing the undepreciated cost of our former (SWORD) enterprise software. 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 in the third quarter of 2003. There were no charges for impairment of assets in 2002.



We recorded provisions for income taxes of $5.1 million and $6.0 million
for 2003 and 2002, respectively, primarily related to our European operations. The income tax benefits arising from the substantial operating losses for these years have been offset by a valuation allowance taken against the resulting deferred tax
assets, the future realization of which is currently considered less than likely.



Liquidity and Capital Resources



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



During the nine months ended
September 30, 2004, net cash used in operating activities was $3.1 million and was primarily the result of net income of $21.3 million plus non-cash expenses totaling $24.7 million and reduced by other non-cash gains of $7.0 million and increases in
retained interests on mortgages receivable sold of $3.7 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities, including a reduction in unsold Vacation Interests of $22.8 million and prepaid
expenses of $2.3 million offset by an increase in cash in escrow and restricted cash of $23.5 million, an increase in receivables of $17.9 million and decreases in operating liabilities of $21.9 million.



During the nine months ended September 30, 2004, net cash used in investing
activities was $153.5 million, primarily due to the purchase of the remaining 77% interest in Kaanapali for $105.9 million, the purchase of the Epic Resorts Group mortgages and contracts receivable of $43.9 million from Prudential, the
purchase of Thurnham Leisure Group for $3.8 million, the purchase of $10.4 million of U.S. government securities pledged under the bond indenture for the senior subordinated convertible notes and capital expenditures of $6.8 million, partially
offset by proceeds of $14.2 million from the sales of assets and cash distributions from joint ventures of $3.7 million.



During the nine months ended September 30, 2004, net cash provided by financing activities was $163.0 million. Payments on the senior finance facility and
notes payable totaled $237.1 million, with an additional outlay of $8.8 million in debt issuance costs related to our securitization notes and our senior subordinated convertible notes. These payments were funded primarily through borrowings on the
senior finance facility totaling $161.2 million, the issuance of senior subordinated convertible notes totaling $95.0 million, and the issuance of securitization notes of $151.7 million.



We currently anticipate spending $46 million for unsold Vacation Interests at existing and anticipated resort locations
during fiscal 2005, primarily in our European operations. Also in fiscal 2005, we plan to invest $12 million in capital expenditures related to property and equipment. We plan to fund these expenditures with cash generated from operations,
borrowings under the senior finance facility and anticipated securitization transactions. 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 2005. If these are not sufficient, we have the ability to adjust our spending on Unsold Vacation Interests.



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The allowance for mortgage and contract loan losses at September 30, 2004 was $26.5 million, or 8.7% of
the gross mortgages and contracts receivable 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 terrorists attacks, limitations on our
ability to conduct marketing activities, and other factors, including those discussed under BusinessRisk Factors.



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.



Recent economic forecasts suggest continued higher level of prepayments. To the extent that mortgages receivable are paid prior to their contractual
maturity at a rate more rapid than we have estimated, the fair value of our residual interests will be adversely impacted (see Note 3 to the consolidated financial statements).



Corporate Finance



Overview



During the nine months ended September 30, 2004, approximately 18.0% of North American Vacation Interests revenue required no financing by us. Of the
remaining 82.0%, we financed approximately 69.0% and the remaining 31.0% down payment was either paid for in cash or by applying existing equity from another Vacation Interest. 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 revenues together with amounts available under our senior finance facility and anticipated securitization
transactions will be sufficient to fund operations for the next twelve months.



We established Qualifying Entities to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages receivable. We retain 100% interest in the future cash flows generated by the sold
mortgages receivable portfolios in excess of the cash required by the Qualifying Entities to fully repay principal and contractual interest on their obligations. Such excess cash is principally generated by the excess of the weighted average
contractual interest received on the mortgage loans over the interest rates on the Qualifying Entities notes. 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. We currently estimate that the clean up call provisions on the 1999-A Securitization and 1999-B Securitization will be exercised by the middle of calendar
2005. Such exercises will result in the recognition of the full value of the mortgages receivable as an asset and a cash or debt requirement equal to the remaining balance of the related notes. We also anticipate purchasing the remaining mortgages
receivable in the Conduit Facility for approximately the same amount of the Conduit Facilitys remaining obligations during fiscal 2005 resulting in the full recognition of these mortgages receivable on our balance sheet.



On July 29, 2002, we entered into the two-year, $300 million senior finance
facility with Merrill Lynch Mortgage Capital, Inc. The proceeds of the senior finance facility were used to pay amounts payable under



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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.



In February 2004, the senior finance facility was amended, raising the maximum aggregate borrowing and extending the term to
February 28, 2006. The interest rate on the portion of the line secured by our eligible mortgages and contracts receivable was reduced to 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 reduced to the one-month LIBOR rate plus 4.00%. The 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. Additionally, the advance rate
under loans secured by eligible mortgages and contracts receivable was increased to 85% from 80%. The amendment also expanded our ability to borrow against Vacation Points and contracts receivable collateralized by Vacation Points, including both
assets acquired by us as part of the purchase of certain assets of Epic Resorts Group, as well as assets associated with our new multi-site clubs. We also agreed 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.



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 the Companys Senior Finance Facility and provides for borrowings secured by Kaanapalis eligible mortgages receivable and eligible Unsold Vacation Interests.



At September 30, 2004, the maximum capacity to borrow, amounts
outstanding and remaining availability under the senior finance facility were $244.2 million, $171.7 million and $72.5 million, respectively. The capacity and availability of borrowings under the senior finance facility are based on the value of
eligible mortgages and contracts receivable, the value of eligible Unsold Vacation Interests and the value of certain real property and other assets. The senior finance facility is secured by a first priority lien on our mortgages and contracts
receivable and Unsold Vacation Interests as well as certain of our real property and other assets, subject to certain exceptions. Prior to the February 2004 amendment discussed above, 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 assets collateralizing various advances. The weighted average interest rate of these borrowings at September 30, 2004 was 4.81% per
annum. Beginning in February 2003, 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 nine
months ended September 30, 2004 and 2003 were $0.3 million and $1.5 million respectively.



In addition to the facility fee (2.5% of $300 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 new 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 will 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 and, 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 warrants
was recorded as a capitalized financing cost 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 are due and payable on July 29, 2004 and July 29, 2005,
with the latter fee being prorated through the termination date of February 28, 2006. For the nine months ended September 30, 2004 and 2003, amortization of $5.5 million and $7.4 million, respectively, of debt issuance costs related to the senior
finance facility was recorded and is included in interest expense in the accompanying consolidated statements of operations.



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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 sheet as of
September 30, 2004 was $8.7 million. Other than this pledge, the Notes are unsecured obligations.



The Notes are initially 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 upon the price of our common stock reaching 110% of such implied conversion price of $16.00 per common share, if the Notes are called for redemption or if specified corporate transactions or significant distributions to
holders of our common stock have occurred.



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 nine months ended September 30, 2004 and 2003,
amortization of $0.3 million and $0.0 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, 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 finance subsidiary of ours. SPE 2004-1 then sold the
receivables to the Sunterra Owner Trust 2004-1, a special purpose entity that 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.



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 the vacation ownership receivables to be transferred back to us when the remaining principal value of
the notes reaches 10% of the original principal value.



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Under the terms of the indenture, Sunterra Financial Services, Inc. a direct wholly owned subsidiary of
ours, in exchange for a monthly fee, will service and administer 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 with Merrill Lynch Mortgage Capital, Inc., 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.



In the past, we have financed our
business principally from the sale of mortgages and contracts receivable and loans under various financing agreements. Mortgages and contracts receivable were sold to our conduit facility and through securitization transactions. See further
discussion on the conduit facility and securitization transactions below.



Off-Balance Sheet Financing Arrangements



We have used certain off-balance sheet financing arrangements to provide liquidity and improve our cash flows. In order to obtain liquidity from our mortgages and contracts receivable, we sold certain mortgages and contracts receivable from
1998 to 2000 through entities that are intended to meet the accounting criteria for qualifying special purpose entities. Among other criteria, a qualifying entitys activities must be restricted to passive investment in financial assets and
issuance of beneficial interests in those assets. At the time of closings of the transactions described below, we received true sale legal opinions that were relied upon in connection with determination of the qualified status of these
special purpose entities.



The qualifying entities raised cash
by issuing beneficial interests in the form of rights to cash flows from the mortgages and contracts receivable assets as collateral for borrowings under a line of credit or under promissory notes issued to third-party investors. We provide
servicing for the transferred assets and collect a fee for those services, as well as retaining 100% interest in the excess spread over the borrowing rate. Sales of mortgages and contracts receivable to the qualifying entities were made without
recourse to us as to collectibility. All of the qualifying entities assets serve as collateral for their obligations. We are not required to provide any guarantees or liquidity support for the qualifying entities. Certain of these qualifying
entities are not consolidated in our financial statements, nor are the transferred mortgages and contracts receivable and the obligations of the qualifying entities reflected on our consolidated balance sheets.



Conduit Facility



We established a Qualifying Entity that was the obligor on a $100 million
Mortgages Receivable Conduit Facility (the Conduit Facility). We sold undivided interests in mortgages and contracts receivable to the qualifying entity at 95% of face value without recourse to us as to collectibility. The qualifying
entity financed those purchases through advances on the Conduit Facility collateralized by an undivided interest in the transferred mortgages and contracts receivable. Certain of the loans sold into the Conduit Facility were subsequently repurchased
by us and sold into securitizations described below. Although there was no contractual requirement in the Conduit Facility agreement, as certain mortgages and contracts receivable defaults occurred in 2000 we transferred into the Conduit Facility a
total of $3.6 million in new mortgages and contracts receivable without consideration. The Conduit Facility expired on December 17, 2001.



Securitization Transactions



We established certain qualifying entities to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages receivable.
We retain 100% interest in the future cash flows generated by the sold mortgages receivable portfolios in excess of the cash required by the qualifying entities to fully repay principal and contractual interest on their obligations. Such excess cash
is principally generated by the excess of the weighted average contractual interest received on the mortgage loans over the interest rates on the qualifying



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entities notes. 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.



Other Debt



Finova Transaction



In January 2002, pursuant
to order of the Bankruptcy Court, we entered into a Payoff Agreement and Mutual Release with Finova Capital Corporation (the Finova Agreement). The Finova agreement provided for the payment by us and certain of our affiliates of various
loans from and financing facilities with Finova or its affiliates and the return by Finova of collateral securing the Finova loans. Pursuant to the Finova agreement, on January 28, 2002, we paid Finova, in cash and by application of other funds,
$100 million (determined after giving effect to a prior release to Finova of $5 million held by Finova as cash collateral). The payment to Finova, net of fees paid to our lender who brokered and financed the payoff, represented a discount of
approximately $13.6 million from the principal amount of the Finova loans, and we recorded that amount in 2002 as a gain on settlement of debts. Pursuant to the Finova agreement, we released each other from liabilities and obligations relating to
the Finova loans and certain other matters including those that were the subject of pending litigation between the parties.



Debt Settlement



In May 2002, we executed amendments to lease agreements relating to a 1999 sale-leaseback transaction, payments on which were suspended as a result of the
bankruptcy proceedings. As a result of the amendments, the minimum lease terms have been extended from November 2002 to April 2004, and our payment obligations have been reduced by $1.1 million, which is recorded as an offset to reorganization
expenses as a gain on settlement of debt.



Pursuant to our plan
of reorganization, we agreed with Bank of America, Societe Generale, OCM Real Estate Opportunities Fund II, L.P (as successor to Union Bank of California, N.A. and Bank of Hawaii), to adopt certain terms and conditions to govern the discharge and
complete satisfaction of all our obligations to these lenders.



All obligations owed to OCM Real Estate Opportunities Fund II, L.P. (approximately $18.2 million including accrued interest payable) were settled and satisfied in full effective July 26, 2002 for a cash payment of approximately $12.3
million. We recognized a gain on settlement of debt, net of fees and expenses, of approximately $5.6 million that is included as an offset to reorganization expenses.



We entered into an agreement with Bank of America and Societe Generale to amend and restate our existing credit agreement
with these lenders in its entirety and to set forth the terms of repayment for all outstanding obligations as of July 26, 2002 in the amount of approximately $18.4 million, including accrued interest payable. Pursuant to the terms of the agreement,
we agreed to a cash payment of approximately $7.2 million and the issuance of a 5-year note payable for approximately $11.2 million. The note bears interest at a rate of prime plus 2% and is collateralized by certain mortgages receivable. No gain or
loss was recognized on this transaction. All obligations owing to these lenders were satisfied in full on November 5, 2002.



We agreed with OCM Real Estate Opportunities Fund II, L.P. (a successor to Union Bank of California, N.A.) to settle all outstanding obligations under a
separate facility totaling approximately $11.1 million for a cash payment of $10.2 million. We recognized a gain on settlement of approximately $0.9 million, which is included as an offset to reorganization expenses.



In December 2002 we exercised a clean-up call provision relating
to certain securitized notes that were carried in the Companys balance sheet and included in notes payable as of December 31, 2001. The cash required to facilitate the call was borrowed under the senior finance facility in the amount of $13.6
million. No gain or loss was recognized on this transaction.



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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. 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 and December 31, 2003, no such agreements were in effect.



Contractual Obligations



The following
table summarizes the payments due for specific contractual obligations. These amounts, in thousands, are as of September 30, 2004.



|                                      |  |       |         |                 |   |           |  |          |         |                   |   |       |  |   |        
|------------------------------------- |  | ----- | ------- | --------------- | - | --------- |  | -------- | ------- | ----------------- | - | ----- |  | - | -------
|Contractual Obligations               |  | Total |         | Less than1 year |   | 1-3 years |  | 3-5years |         | More than 5 years
|Line of credit facilities (a)         |  | $     | 171,737 |                 | $ |          |  | $        | 171,737 |                   | $ |      |  | $ |       
|Securitization notes payable          |  |       | 151,710 |                 |   |          |  |          |        |                   |   |      |  |   | 151,710
|Senior subordinated convertible notes |  |       | 95,000  |                 |   |          |  |          |        |                   |   |      |  |   | 95,000 
|Notes payable                         |  |       | 2,043   |                 |   | 764       |  |          | 560     |                   |   | 719   |  |   |       
|Capital lease obligations             |  |       | 218     |                 |   | 143       |  |          | 75      |                   |   |      |  |   |       
|Operating lease obligations           |  |       | 15,539  |                 |   | 4,952     |  |          | 6,883   |                   |   | 2,586 |  |   | 1,118  
|Purchase obligations (b)              |  |       | 13,704  |                 |   | 11,904    |  |          | 1,800   |                   |   |      |  |   |       
|Other long-term liabilities           |  |       |        |                 |   |          |  |          |        |                   |   |      |  |   |       
|                                      |  |       |         |                 |   |           |  |          |         |                   |   |       |  |   |        
|Total                                 |  | $     | 449,951 |                 | $ | 17,763    |  | $        | 181,055 |                   | $ | 3,305 |  | $ | 247,828
|                                      |  |       |         |                 |   |           |  |          |         |                   |   |       |  |   |        

---

|(a) | Facility fees of approximately $1.3 million are due in July 2005 related to the senior finance facility.
|--- | --------------------------------------------------------------------------------------------------------

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



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 Intervals 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 its
contract rights previously held to use the Vacation Interval, and we are able to re-lease the Vacation Interest without further recovery efforts.



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



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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, 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 5.1% 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 nine months
ended September 30, 2004 and the years ended December 31, 2003 and 2002, total revenues denominated in a currency other than U.S. dollars, primarily revenues derived from the United Kingdom, were approximately 30%, 34% and 34% respectively, of total
revenues. Our net assets maintained in a functional currency other than U.S. dollars at September 30, 2004 and December 31, 2003, primarily assets located in Western Europe, were approximately 19% and 24%, 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, 2004, our subsidiary in the United Kingdom, whose functional currency is the British Pound Sterling, held
approximately 5.7 million Euros. That subsidiary expects to utilize approximately 2.5 million Euros per month for operating purposes. To the extent they hold Euros at any point in time they are subject to gains and losses as the exchange rate
between British Pound Sterling and Euros fluctuates.



Interest Rate Risk



As of September 30, 2004, we had floating interest rate
debt of approximately $171.7 million, 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, 2004 would cause a change in total annual interest costs of $1.7 million.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                                                                                                                                                                                                                                                          |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                                                                                                                                                                                                          |  | Page
|Sunterra Corporation and Subsidiaries                                                                                                                                                                                                                                                                                                                                                     |  |     
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements as of September 30, 2004 (Successor) and December 31, 2003 (Successor) and for the period ended September 30, 2004 (Successor), the
year ended December 31, 2003 (Successor), the five months ended December 31, 2002 (Successor) and for the seven months ended July 31, 2002 (Predecessor) |  | F-2 
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Consolidated Statements of Operations for the periods ended September 30, 2004 (Successor) and September 30, 2003 (Successor) (Unaudited), the year ended December 31, 2003 (Successor), the five months ended December 31, 2002
(Successor) and seven months ended July 31, 2002 (Predecessor)                                                                                           |  | F-3 
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Consolidated Balance Sheets as of September 30, 2004 (Successor) and December 31, 2003 (Successor)                                                                                                                                                                                                                                                                                        |  | F-4 
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Consolidated Statements of Cash Flows for the periods ended September 30, 2004 (Successor) and September 30, 2003 (Successor) (Unaudited), the year ended December 31, 2003 (Successor), the five months ended December 31, 2002
(Successor) and seven months ended July 31, 2002 (Predecessor)                                                                                           |  | F-5 
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Consolidated Statements of Stockholders Equity (Deficiency) and Comprehensive Income (Loss) for the period ended September 30, 2004 (Successor), the year ended December 31, 2003 (Successor), the five months ended December
31, 2002 (Successor) and seven months ended July 31, 2002 (Predecessor)                                                                                    |  | F-7 
|                                                                                                                                                                                                                                                                                                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                |  | F-8 



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Sunterra Corporation:



We have audited the accompanying consolidated balance sheets of Sunterra Corporation and subsidiaries (the Company) as of September 30, 2004 and December 31, 2003 and the related consolidated statements of operations,
stockholders equity (deficiency) and comprehensive income (loss), and cash flows for the nine months ended September 30, 2004, for the year ended December 31, 2003, for the five-month period ended December 31, 2002, and the seven-month period
ended July 31, 2002. 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 financial position of the Company as of September 30, 2004 and December 31, 2003, and the results
of its operations and its cash flows for the nine months ended September 30, 2004, for the year ended December 31, 2003, for the five-month period ended December 31, 2002 and the seven-month period ended July 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.



As more fully described in Note 2 to the consolidated financial statements, the consolidated financial statements reflect the application of fresh-start reporting as of July 31, 2002 and, therefore, consolidated financial statements for
periods after July 31, 2002 are not comparable in all respects to consolidated financial statements for periods prior to such date.



|                         
|-------------------------
|/s/    GRANT THORNTON LLP

|                       
|-----------------------
|                       
|Los Angeles, California
|December 13, 2004      



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Five Months Ended December 31, 2002 and

Seven Months Ended July 31, 2002

(In thousands, except per share amounts)



|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------------------------------- | - | ------- | ------------------------- |  | - | ---------------------------------- | - |  | ------------------------------- | ------- | - |  | - | -------- | -
|                                                                    |  | Successor                         |         |   | Predecessor                         |  
|                                                                    |  | Nine MonthsEndedSeptember 30,2004 |         |   | Nine MonthsEnded September 30, 2003 |   |         | YearEndedDecember 31,2003 |  |   | Five MonthsEnded December 31, 2002 |   |  | Seven MonthsEnded July 31, 2002 |        
|                                                                    |  |                                   |         |   | (Unaudited)                         |   |         |                           |  |   |                                    |   |  |                                 |        
|Revenues:                                                           |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Vacation Interest                                                   |  | $                                 | 202,541 |   |                                     | $ | 158,278 |                           |  | $ | 212,965                            |   |  | $                               | 83,801  |   |  | $ | 99,666   |  
|Resort rental                                                       |  |                                   | 16,809  |   |                                     |   | 10,718  |                           |  |   | 12,987                             |   |  |                                 | 5,258   |   |  |   | 10,476   |  
|Management services                                                 |  |                                   | 21,988  |   |                                     |   | 23,245  |                           |  |   | 30,433                             |   |  |                                 | 11,439  |   |  |   | 17,728   |  
|Interest                                                            |  |                                   | 23,314  |   |                                     |   | 19,943  |                           |  |   | 26,421                             |   |  |                                 | 13,088  |   |  |   | 17,493   |  
|Other                                                               |  |                                   | 22,448  |   |                                     |   | 17,943  |                           |  |   | 24,107                             |   |  |                                 | 10,096  |   |  |   | 13,817   |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Total revenues                                                      |  |                                   | 287,100 |   |                                     |   | 230,127 |                           |  |   | 306,913                            |   |  |                                 | 123,682 |   |  |   | 159,180  |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Costs and Operating Expenses:                                       |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Vacation Interest cost of sales                                     |  |                                   | 40,347  |   |                                     |   | 29,711  |                           |  |   | 40,464                             |   |  |                                 | 15,541  |   |  |   | 21,426   |  
|Advertising, sales and marketing                                    |  |                                   | 117,636 |   |                                     |   | 87,402  |                           |  |   | 117,669                            |   |  |                                 | 48,906  |   |  |   | 60,580   |  
|Vacation Interest carrying cost                                     |  |                                   | 20,668  |   |                                     |   | 14,603  |                           |  |   | 17,481                             |   |  |                                 | 6,503   |   |  |   | 12,345   |  
|Provision for doubtful accounts and loan losses                     |  |                                   | 7,180   |   |                                     |   | 4,336   |                           |  |   | 5,638                              |   |  |                                 | 2,459   |   |  |   | 4,851    |  
|Loan portfolio                                                      |  |                                   | 4,465   |   |                                     |   | 7,621   |                           |  |   | 10,052                             |   |  |                                 | 5,198   |   |  |   | 7,637    |  
|General and administrative                                          |  |                                   | 57,444  |   |                                     |   | 53,696  |                           |  |   | 71,331                             |   |  |                                 | 31,051  |   |  |   | 44,573   |  
|Gain on sales of assets                                             |  |                                   | (5,489  | ) |                                     |   | (610    | )                         |  |   | (688                               | ) |  |                                 | (100    | ) |  |   | (109     | )
|Depreciation and amortization                                       |  |                                   | 6,518   |   |                                     |   | 8,405   |                           |  |   | 11,549                             |   |  |                                 | 5,062   |   |  |   | 7,909    |  
|Interest                                                            |  |                                   | 16,272  |   |                                     |   | 18,529  |                           |  |   | 26,309                             |   |  |                                 | 9,873   |   |  |   | 9,163    |  
|Reorganization, net                                                 |  |                                   |        |   |                                     |   | (664    | )                         |  |   | (619                               | ) |  |                                 | 7,376   |   |  |   | (332,611 | )
|Restructuring                                                       |  |                                   |        |   |                                     |   | 1,008   |                           |  |   | 1,274                              |   |  |                                 | 5,054   |   |  |   | 1,045    |  
|Impairment of reorganization value in excess of identifiable assets |  |                                   |        |   |                                     |   |        |                           |  |   | 91,586                             |   |  |                                 |        |   |  |   |         |  
|Impairment of assets                                                |  |                                   |        |   |                                     |   | 1,400   |                           |  |   | 2,297                              |   |  |                                 |        |   |  |   |         |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Total costs and operating expenses                                  |  |                                   | 265,041 |   |                                     |   | 225,437 |                           |  |   | 394,343                            |   |  |                                 | 136,923 |   |  |   | (163,191 | )
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Income (loss) from operations                                       |  |                                   | 22,059  |   |                                     |   | 4,690   |                           |  |   | (87,430                            | ) |  |                                 | (13,241 | ) |  |   | 322,371  |  
|Income from investments in joint ventures                           |  |                                   | 1,551   |   |                                     |   | 2,475   |                           |  |   | 3,340                              |   |  |                                 | 1,845   |   |  |   | 2,640    |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Income (loss) before provision for income taxes                     |  |                                   | 23,610  |   |                                     |   | 7,165   |                           |  |   | (84,090                            | ) |  |                                 | (11,396 | ) |  |   | 325,011  |  
|Provision for income taxes                                          |  |                                   | 2,302   |   |                                     |   | 4,383   |                           |  |   | 5,109                              |   |  |                                 | 2,927   |   |  |   | 3,026    |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net income (loss)                                                   |  | $                                 | 21,308  |   |                                     | $ | 2,782   |                           |  | $ | (89,199                            | ) |  | $                               | (14,323 | ) |  | $ | 321,985  |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net income (loss) per share:                                        |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Basic                                                               |  | $                                 | 1.07    |   |                                     | $ | 0.14    |                           |  | $ | (4.46                              | ) |  | $                               | (0.72   | ) |  |   |          |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Diluted                                                             |  | $                                 | 0.97    |   |                                     | $ | 0.14    |                           |  | $ | (4.46                              | ) |  | $                               | (0.72   | ) |  |   |          |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Weighted average number of common shares outstanding:               |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Basic                                                               |  |                                   | 20,000  |   |                                     |   | 20,000  |                           |  |   | 20,000                             |   |  |                                 | 20,000  |   |  |   |          |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Diluted                                                             |  |                                   | 24,024  |   |                                     |   | 20,000  |                           |  |   | 20,000                             |   |  |                                 | 20,000  |   |  |   |          |  
|                                                                    |  |                                   |         |   |                                     |   |         |                           |  |   |                                    |   |  |                                 |         |   |  |   |          |  



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



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

September 30, 2004 and December 31, 2003

(In thousands, except per share amounts)



|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                                         |  | Successor         |        
|                                                                                                                                                                                                                                         |  | September 30,2004 |         |   | December 31,2003 |  
|ASSETS                                                                                                                                                                                                                                   |  |                   |         |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                |  | $                 | 26,842  |   |                  | $ | 21,305   |  
|Cash in escrow and restricted cash                                                                                                                                                                                                       |  |                   | 88,663  |   |                  |   | 63,266   |  
|Mortgages and contracts receivable, net of allowances of $26,530 and $29,443 at September 30, 2004 and December 31, 2003,
respectively                                                                                                   |  |                   | 278,569 |   |                  |   | 182,822  |  
|Retained interests in mortgages and contracts receivable sold                                                                                                                                                                            |  |                   | 23,319  |   |                  |   | 19,637   |  
|Due from related parties, net                                                                                                                                                                                                            |  |                   | 6,279   |   |                  |   | 4,514    |  
|Other receivables, net                                                                                                                                                                                                                   |  |                   | 26,608  |   |                  |   | 19,644   |  
|Prepaid expenses and other assets, net                                                                                                                                                                                                   |  |                   | 47,944  |   |                  |   | 37,660   |  
|Assets held for sale                                                                                                                                                                                                                     |  |                   | 551     |   |                  |   | 11,953   |  
|Investments in joint ventures                                                                                                                                                                                                            |  |                   | 7,187   |   |                  |   | 20,702   |  
|Unsold Vacation Interests, net                                                                                                                                                                                                           |  |                   | 168,858 |   |                  |   | 136,599  |  
|Property and equipment, net                                                                                                                                                                                                              |  |                   | 77,996  |   |                  |   | 73,140   |  
|Goodwill, net                                                                                                                                                                                                                            |  |                   | 82,759  |   |                  |   | 61,616   |  
|Intangible and other assets, net                                                                                                                                                                                                         |  |                   | 1,283   |   |                  |   | 1,195    |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|Total assets                                                                                                                                                                                                                             |  | $                 | 836,858 |   |                  | $ | 654,053  |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                     |  |                   |         |   |                  |   |          |  
|Borrowings under line of credit agreements                                                                                                                                                                                               |  | $                 | 171,737 |   |                  | $ | 245,725  |  
|Accounts payable                                                                                                                                                                                                                         |  |                   | 10,401  |   |                  |   | 7,056    |  
|Accrued liabilities                                                                                                                                                                                                                      |  |                   | 80,895  |   |                  |   | 95,955   |  
|Income taxes payable                                                                                                                                                                                                                     |  |                   | 3,421   |   |                  |   | 3,716    |  
|Deferred revenues                                                                                                                                                                                                                        |  |                   | 95,127  |   |                  |   | 94,822   |  
|Securitization notes                                                                                                                                                                                                                     |  |                   | 151,710 |   |                  |   |         |  
|Senior subordinated convertible notes                                                                                                                                                                                                    |  |                   | 95,000  |   |                  |   |         |  
|Notes payable                                                                                                                                                                                                                            |  |                   | 2,261   |   |                  |   | 3,201    |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|Total liabilities                                                                                                                                                                                                                        |  |                   | 610,552 |   |                  |   | 450,475  |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|Commitments and contingencies                                                                                                                                                                                                            |  |                   |         |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                                                    |  |                   |         |   |                  |   |          |  
|Common stock ($0.01 par value, 75,000 and 30,000 shares authorized at September 30, 2004 and December 31, 2003, respectively: 18,891 and
18,495 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively) |  |                   | 189     |   |                  |   | 185      |  
|Additional paid-in-capital                                                                                                                                                                                                               |  |                   | 297,145 |   |                  |   | 296,709  |  
|Accumulated deficit                                                                                                                                                                                                                      |  |                   | (82,214 | ) |                  |   | (103,522 | )
|Accumulated other comprehensive income                                                                                                                                                                                                   |  |                   | 11,186  |   |                  |   | 10,206   |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                                               |  |                   | 226,306 |   |                  |   | 203,578  |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                               |  | $                 | 836,858 |   |                  | $ | 654,053  |  
|                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |          |  



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



F-4



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Five Months Ended December 31, 2002 and

Seven Months Ended July 31, 2002

(In thousands)



|                                                                                                    |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | ---------------------------------- | - | ------ | -------------------------- |  | - | ---------------------------------- | - |  | ------------------------------- | ------- | - |  | - | -------- | -
|                                                                                                    |  | Successor                           |          |   | Predecessor                        |  
|                                                                                                    |  | Nine MonthsEnded September 30, 2004 |          |   | NineMonths EndedSeptember 30, 2003 |   |        | YearEndedDecember 31, 2003 |  |   | Five MonthsEnded December 31, 2002 |   |  | Seven MonthsEnded July 31, 2002 |        
|                                                                                                    |  |                                     |          |   | (Unaudited)                        |   |        |                            |  |   |                                    |   |  |                                 |        
|Operating activities:                                                                               |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net income (loss)                                                                                   |  | $                                   | 21,308   |   |                                    | $ | 2,782  |                            |  | $ | (89,199                            | ) |  | $                               | (14,323 | ) |  | $ | 321,985  |  
|Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:  |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Depreciation and amortization                                                                       |  |                                     | 6,518    |   |                                    |   | 8,405  |                            |  |   | 11,549                             |   |  |                                 | 5,062   |   |  |   | 7,909    |  
|Provision for doubtful accounts and loan losses                                                     |  |                                     | 7,180    |   |                                    |   | 4,336  |                            |  |   | 5,638                              |   |  |                                 | 2,459   |   |  |   | 4,851    |  
|Amortization of capitalized financing costs, deferred loan and contract origination costs and other |  |                                     | 9,971    |   |                                    |   | 9,283  |                            |  |   | 13,648                             |   |  |                                 | 4,018   |   |  |   | 1,915    |  
|Income from investments in joint ventures                                                           |  |                                     | (1,551   | ) |                                    |   | (2,475 | )                          |  |   | (3,340                             | ) |  |                                 | (1,845  | ) |  |   | (2,640   | )
|Gain on sales of assets                                                                             |  |                                     | (5,489   | ) |                                    |   | (681   | )                          |  |   | (760                               | ) |  |                                 | (56     | ) |  |   | (4,165   | )
|Gain on settlement of debt                                                                          |  |                                     |         |   |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   | (34,563  | )
|Gain on cancellation of debt                                                                        |  |                                     |         |   |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   | (232,696 | )
|Fresh-start adjustments                                                                             |  |                                     |         |   |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   | (112,742 | )
|Impairment of reorganization value in excess of identifiable assets                                 |  |                                     |         |   |                                    |   |       |                            |  |   | 91,586                             |   |  |                                 |        |   |  |   |         |  
|Loss on foreign currency                                                                            |  |                                     | 985      |   |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Asset impairments                                                                                   |  |                                     |         |   |                                    |   | 1,400  |                            |  |   | 2,297                              |   |  |                                 |        |   |  |   |         |  
|Deferred income taxes                                                                               |  |                                     |         |   |                                    |   | (22    | )                          |  |   |                                   |   |  |                                 |        |   |  |   | (522     | )
|Changes in retained interests in mortgages and contracts receivable sold                            |  |                                     | (3,682   | ) |                                    |   | (974   | )                          |  |   | (1,548                             | ) |  |                                 | (1,300  | ) |  |   | (980     | )
|Changes in operating assets and liabilities:                                                        |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Cash in escrow and restricted cash                                                                  |  |                                     | (23,549  | ) |                                    |   | 5,304  |                            |  |   | (7,650                             | ) |  |                                 | 1,638   |   |  |   | 48,934   |  
|Mortgages and contracts receivable                                                                  |  |                                     | (17,495  | ) |                                    |   | (2,256 | )                          |  |   | (6,485                             | ) |  |                                 | (1,505  | ) |  |   | 2,197    |  
|Due from related parties, net                                                                       |  |                                     | (1,016   | ) |                                    |   | (3,907 | )                          |  |   | (2,671                             | ) |  |                                 | 2,247   |   |  |   | 5,858    |  
|Other receivables, net                                                                              |  |                                     | 629      |   |                                    |   | (4,357 | )                          |  |   | 2,691                              |   |  |                                 | (6,433  | ) |  |   | 989      |  
|Prepaid expenses and other assets, net                                                              |  |                                     | 2,273    |   |                                    |   | (7,801 | )                          |  |   | (7,801                             | ) |  |                                 | 1,422   |   |  |   | (6,997   | )
|Unsold Vacation Interests, net                                                                      |  |                                     | 22,756   |   |                                    |   | 15,539 |                            |  |   | 18,313                             |   |  |                                 | 12,972  |   |  |   | 6,128    |  
|Liabilities not subject to compromise:                                                              |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Accounts payable                                                                                    |  |                                     | 1,695    |   |                                    |   | (4,217 | )                          |  |   | (5,743                             | ) |  |                                 | (5,940  | ) |  |   | 4,053    |  
|Accrued liabilities                                                                                 |  |                                     | (21,830  | ) |                                    |   | (3,441 | )                          |  |   | 1,919                              |   |  |                                 | (23,279 | ) |  |   | 10,699   |  
|Income taxes payable                                                                                |  |                                     | (342     | ) |                                    |   | (1,909 | )                          |  |   | 174                                |   |  |                                 | 3,646   |   |  |   | 850      |  
|Deferred revenues                                                                                   |  |                                     | (1,416   | ) |                                    |   | (2,703 | )                          |  |   | (4,711                             | ) |  |                                 | 2,402   |   |  |   | 9,946    |  
|Liabilities subject to compromise                                                                   |  |                                     |         |   |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   | (2,043   | )
|                                                                                                    |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net cash (used in) provided by operating activities                                                 |  |                                     | (3,055   | ) |                                    |   | 12,306 |                            |  |   | 17,907                             |   |  |                                 | (18,815 | ) |  |   | 28,966   |  
|                                                                                                    |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Investing activities:                                                                               |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Proceeds from sales of assets                                                                       |  |                                     | 14,223   |   |                                    |   | 270    |                            |  |   | 270                                |   |  |                                 | 7,322   |   |  |   | (10      | )
|Capital expenditures                                                                                |  |                                     | (6,813   | ) |                                    |   | (5,723 | )                          |  |   | (8,492                             | ) |  |                                 | (9,862  | ) |  |   | (7,380   | )
|Purchase of remaining 77% partnership interest in West Maui Resort Partners, L.P.                   |  |                                     | (105,883 | ) |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Purchase of Epic mortgages and contracts receivable                                                 |  |                                     | (43,915  | ) |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Purchase of Thurnham Leisure Group                                                                  |  |                                     | (3,835   | ) |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Purchase of certain assets of Epic Resorts Group                                                    |  |                                     |         |   |                                    |   |       |                            |  |   | (26,316                            | ) |  |                                 |        |   |  |   |         |  
|Purchase of U.S. government securities pledged under bond indenture                                 |  |                                     | (10,426  | ) |                                    |   |       |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Increase in intangible and other assets, net                                                        |  |                                     | (563     | ) |                                    |   | (1,061 | )                          |  |   | (433                               | ) |  |                                 | (1      | ) |  |   | (5,713   | )
|Distributions from investments in joint ventures                                                    |  |                                     | 3,683    |   |                                    |   | 12,028 |                            |  |   | 13,141                             |   |  |                                 | 7       |   |  |   | 1,240    |  
|                                                                                                    |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net cash (used in) provided by investing activities                                                 |  |                                     | (153,529 | ) |                                    |   | 5,514  |                            |  |   | (21,830                            | ) |  |                                 | (2,534  | ) |  |   | (11,863  | )
|                                                                                                    |  |                                     |          |   |                                    |   |        |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  



(Continued)



F-5



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Five Months Ended December 31, 2002 and

Seven
Months Ended July 31, 2002

(In thousands)



|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|-------------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | ----------------------------------- | - | ------- | -------------------------- |  | - | ---------------------------------- | - |  | ------------------------------- | ------- | - |  | - | -------- | -
|                                                                                       |  | Successor                           |          |   | Predecessor                         |  
|                                                                                       |  | Nine MonthsEnded September 30, 2004 |          |   | Nine Months EndedSeptember 30, 2003 |   |         | YearEndedDecember 31, 2003 |  |   | Five MonthsEnded December 31, 2002 |   |  | Seven MonthsEnded July 31, 2002 |        
|                                                                                       |  |                                     |          |   | (Unaudited)                         |   |         |                            |  |   |                                    |   |  |                                 |        
|Financing activities:                                                                  |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Borrowings under debtor-in possession financing agreements, net of debt issuance costs |  | $                                   |         |   |                                     | $ |        |                            |  | $ |                                   |   |  | $                               |        |   |  | $ | 101,895  |  
|Borrowings under line of credit agreements                                             |  |                                     | 161,216  |   |                                     |   | 11,004  |                            |  |   | 37,254                             |   |  |                                 | 46,188  |   |  |   | 193,877  |  
|Proceeds from issuance of senior subordinated convertible notes                        |  |                                     | 95,000   |   |                                     |   |        |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Proceeds from issuance of securitization notes                                         |  |                                     | 151,710  |   |                                     |   |        |                            |  |   |                                   |   |  |                                 |        |   |  |   |         |  
|Payments of debt issuance costs                                                        |  |                                     | (8,822   | ) |                                     |   | (4,500  | )                          |  |   | (4,500                             | ) |  |                                 | (176    | ) |  |   | (8,936   | )
|Proceeds from issuance of notes payable                                                |  |                                     | 921      |   |                                     |   | 7,189   |                            |  |   | 7,409                              |   |  |                                 | 2,962   |   |  |   | 2,847    |  
|Payments of accrued interest on settlement of debt                                     |  |                                     |         |   |                                     |   |        |                            |  |   |                                   |   |  |                                 |        |   |  |   | (15,058  | )
|Payments on debtor-in-possession financing agreements                                  |  |                                     |         |   |                                     |   |        |                            |  |   |                                   |   |  |                                 |        |   |  |   | (170,206 | )
|Payments on notes payable and mortgage-backed securities                               |  |                                     | (1,861   | ) |                                     |   | (5,959  | )                          |  |   | (7,618                             | ) |  |                                 | (22,287 | ) |  |   | (11,351  | )
|Payments on line of credit agreements                                                  |  |                                     | (235,204 | ) |                                     |   | (24,059 | )                          |  |   | (31,594                            | ) |  |                                 | (10,986 | ) |  |   | (110,924 | )
|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net cash provided by (used in) financing activities                                    |  |                                     | 162,960  |   |                                     |   | (16,325 | )                          |  |   | 951                                |   |  |                                 | 15,701  |   |  |   | (17,856  | )
|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Effect of changes in exchange rates on cash and cash equivalents                       |  |                                     | (839     | ) |                                     |   | 794     |                            |  |   | 1,317                              |   |  |                                 | 608     |   |  |   | 1,546    |  
|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                                     | 5,537    |   |                                     |   | 2,289   |                            |  |   | (1,655                             | ) |  |                                 | (5,040  | ) |  |   | 793      |  
|Cash and cash equivalents, beginning of period                                         |  |                                     | 21,305   |   |                                     |   | 22,960  |                            |  |   | 22,960                             |   |  |                                 | 28,000  |   |  |   | 27,207   |  
|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Cash and cash equivalents, end of period                                               |  | $                                   | 26,842   |   |                                     | $ | 25,249  |                            |  | $ | 21,305                             |   |  | $                               | 22,960  |   |  | $ | 28,000   |  
|                                                                                       |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                     |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Cash paid for interest, net of capitalized interest                                    |  | $                                   | 10,496   |   |                                     | $ | 11,277  |                            |  | $ | 15,588                             |   |  | $                               | 16,141  |   |  | $ | 13,602   |  
|Cash paid for taxes, net of tax refunds                                                |  | $                                   | 2,662    |   |                                     | $ | 6,209   |                            |  | $ | 4,901                              |   |  | $                               | (1,997  | ) |  | $ | 3,091    |  
|                                                                                       |  |                                     |          |   |                                    
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                  |  |                                     |          |   |                                     |   |         |                            |  |   |                                    |   |  |                                 |         |   |  |   |          |  
|Assets Held for Sale reclassified to Unsold Vacation Interests                         |  | $                                   |         |   |                                     | $ | 7,620   |                            |  | $ | 7,956                              |   |  | $                               |        |   |  | $ |         |  
|Assets Held for Sale reclassified to Property and Equipment                            |  | $                                   |         |   |                                     | $ | 3,146   |                            |  | $ | 3,146                              |   |  | $                               |        |   |  | $ |         |  
|Property and Equipment transferred to Unsold Vacation Interests, net                   |  | $                                   | 3,878    |   |                                     | $ |        |                            |  | $ |                                   |   |  | $                               |        |   |  | $ |         |  



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



F-6



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(DEFICIENCY) AND COMPREHENSIVE INCOME (LOSS)

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

Five Months Ended December 31, 2002 and Seven Months Ended July 31, 2002



|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------- |  | ----------------- | - |  | ------------------------ | ---- | - | ------------------------------------ | - | -------- | ------------------------------------------ |  | - | ------------------------------------ | - |  | -------------------------- | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                 |  | Common Stock      |   |  | AdditionalPaid-inCapital |      |   | RetainedEarnings(AccumulatedDeficit) |   |          | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalStockholdersEquity(Deficiency) |   |  | ComprehensiveIncome (Loss) |       
|                                                                                 |  | SharesOutstanding |   |  | Amount                   |      |   |                                      |   |          |                                           
|PREDECESSOR                                                                      |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|BALANCE AT JANUARY 1, 2002                                                       |  | 36,025            |   |  | $                        | 360  |   |                                      | $ | 164,607  |                                            |  | $ | (491,281                             | ) |  | $                          | (9,436 | ) |  | $ | (335,750 | ) |  |   |          |  
|Net loss, excluding plan of reorganization and fresh-start adjustments           |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   | (23,454                              | ) |  |                            |       |   |  |   | (23,454  | ) |  | $ | (23,454  | )
|Other comprehensive income (loss):                                               |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|Unrealized loss on securities classified as available-for-sale, net of tax of $0 |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   |                                     |   |  |                            | (164   | ) |  |   | (164     | ) |  |   | (164     | )
|Currency translation adjustments, net of tax of $0                               |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   |                                     |   |  |                            | 5,238  |   |  |   | 5,238    |   |  |   | 5,238    |  
|Effect of plan of reorganization and fresh-start adjustments:                    |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|Cancellation of old common stock                                                 |  | (36,025           | ) |  |                          | (360 | ) |                                      |   | (164,607 | )                                          |  |   |                                     |   |  |                            |       |   |  |   | (164,967 | ) |  |   | (164,967 | )
|Issuance of new common stock and warrants                                        |  | 18,045            |   |  |                          | 180  |   |                                      |   | 305,405  |                                            |  |   |                                     |   |  |                            |       |   |  |   | 305,585  |   |  |   |          |  
|Gain on cancellation of debt                                                     |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   | 232,697                              |   |  |                            |       |   |  |   | 232,697  |   |  |   | 232,697  |  
|Other fresh-start adjustments                                                    |  |                  |   |  |                          |     |   |                                      |   | (8,691   | )                                          |  |   | 282,038                              |   |  |                            | 4,362  |   |  |   | 277,709  |   |  |   | 277,709  |  
|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|BALANCE AT JULY 31, 2002                                                         |  | 18,045            |   |  |                          | 180  |   |                                      |   | 296,714  |                                            |  |   |                                     |   |  |                            |       |   |  |   | 296,894  |   |  |   |          |  
|Comprehensive income for the seven months ended July 31, 2002                    |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  | $ | 327,059  |  
|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|SUCCESSOR                                                                        |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|Net loss                                                                         |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   | (14,323                              | ) |  |                            |       |   |  |   | (14,323  | ) |  | $ | (14,323  | )
|Other comprehensive income (loss):                                               |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|Currency translation adjustments, net of tax of $0                               |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   |                                     |   |  |                            | 1,755  |   |  |   | 1,755    |   |  |   | 1,755    |  
|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|BALANCE AT DECEMBER 31, 2002                                                     |  | 18,045            |   |  |                          | 180  |   |                                      |   | 296,714  |                                            |  |   | (14,323                              | ) |  |                            | 1,755  |   |  |   | 284,326  |   |  |   |          |  
|Comprehensive loss for the five months ended December 31, 2002                   |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  | $ | (12,568  | )
|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|Issuance of common stock to Class 9 Creditors                                    |  | 450               |   |  |                          | 5    |   |                                      |   | (5       | )                                          |  |   |                                     |   |  |                            |       |   |  |   |         |   |  |   |          |  
|Net loss                                                                         |  |                  |   |  |                          |     |   |                                      |   |         |                                            |  |   | (89,199                              | ) |  |                            |        |   |  |   | (89,199  | ) |  | $ | (89,199  | )
|Other comprehensive income (loss):                                               |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  
|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 month period ended September 30, 2004          |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  | $ | 22,288   |  
|                                                                                 |  |                   |   |  |                          |      |   |                                      |   |          |                                            |  |   |                                      |   |  |                            |        |   |  |   |          |   |  |   |          |  



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

Nine Months Ended September 30, 2004, Nine Months Ended September 30,
2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

(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, 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, and 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, 2004 the Company had over 300,000 owner families vacationing at 92 resorts in 12 countries located in North America, Europe and the Caribbean. See Note 12 for detailed geographic segment information.



The operations of Sunterra include (i) marketing and selling vacation
ownership interests at its locations and off-site sales centers, which entitle the buyer to use a fully-furnished vacation residence, generally for a one-week period each year in perpetuity (Vacation Intervals), and vacation points which
may be redeemed for occupancy rights, for varying lengths of stay, at participating resort locations (Vacation Points, and together with Vacation Intervals, Vacation Interests), both of which generally include a deeded,
fee-simple interest in a particular unit, (ii) marketing and selling 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, (iii) leasing
Vacation Intervals at certain Caribbean locations, (iv) acquiring, developing, and operating vacation ownership resorts, (v) providing consumer financing to individual purchasers for the purchase of Vacation Interests at its resort locations and
off-site sales centers, and (vi) providing resort rental management and maintenance services to vacation ownership resorts, for which the Company receives fees paid by the resorts homeowners associations.



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 and as such, financial information for the nine-month transition period ended September 30, 2004 is presented herein compared
to unaudited financial information for the nine-month period ended September 30, 2003. Certain information required to present complete financial statements for the nine month period ended September 30, 2003 has been omitted.



Fresh-Start Basis of Presentation



The accompanying consolidated financial statements have been presented in
accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, as amended. From May
31, 2000 to July 29, 2002, the Company and certain of its subsidiaries (the Debtor Entities) operated as debtors-in-possession, having filed a petition for relief under Chapter 11 of the Bankruptcy Code on May 31, 2000. See Note 2 for
further details.



As a result of adopting fresh-start reporting
upon emerging from Chapter 11 status, the Companys financial statements for periods after July 31, 2002 (the date of emergence for accounting purposes) are not comparable in



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



all respects with those prepared for periods prior to and including July 31, 2002, including the historical consolidated financial statements included
herein, and as such, share amounts and data are not presented for periods prior to August 1, 2002.



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



Reclassifications



Reclassifications were made to the 2003 and 2002 consolidated financial
statements to conform to the 2004 presentation.



Note 2Reorganization
of the Business Under Chapter 11, Fresh Start Accounting, Reorganization and Restructuring Costs and Gains on Settlement of Debt



Reorganization



On May 31, 2000 (the Petition Date), Sunterra Corporation and 36 of its wholly owned subsidiaries each filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (Chapter 11) in the United States Bankruptcy Court for the District of Maryland (Baltimore Division) (the Bankruptcy Court). Two additional subsidiaries subsequently filed
voluntary petitions under Chapter 11 of the Bankruptcy Code. The bankruptcy cases of Sunterra Corporation and its subsidiaries that filed for relief under the Bankruptcy Code were jointly administered. These entities were operated as
debtors-in-possession (the Debtor Entities) in accordance with the provisions of the Bankruptcy Code. Sunterra Corporations subsidiaries that did not file voluntary petitions for relief under Chapter 11 (the Non-Debtor
Entities, and collectively with the Debtor Entities, the Company) continued to operate their respective businesses outside the protection of the Bankruptcy Code.



A disclosure statement for a proposed plan of reorganization (the Plan of Reorganization or Plan)
was approved by order of the Bankruptcy Court entered on April 25, 2002, and the Plan of Reorganization and disclosure statement were mailed to creditors on or about May 14, 2002. The Plan received the requisite votes of creditor interests, and the
Bankruptcy Court confirmed the Plan by an order entered on June 21, 2002. According to the terms of the Plan, it became effective when certain conditions, as set forth in the Plan, were either satisfied or waived by the Official Committee of
Unsecured Creditors. The conditions to the effectiveness of the Plan were fulfilled on July 29, 2002 (the Effective Date) and the Debtor Entities emerged from their Chapter 11 proceedings on that date.



The Plan provides for (i) payment in full of allowed administrative and fee
claims (which include, among other things, assumed contracts, professional fees and indenture trustee fees and expenses), debtor-in-possession lender claims and priority taxes; and (ii) settlement and resolution of all other claims against the
Debtor Entities as of the Petition Date. The Plan provides for distributions to creditors of: (i) cash, (ii) new debt securities, (iii) new common stock of the reorganized Company (New Sunterra Stock), and (iv) warrants for the
purchase of New Sunterra Stock. Certain of the unsecured creditors also received non-transferable beneficial interests in a trust to be established for purposes of pursuing certain claims against third parties. Pursuant to the terms of the



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Plan, the Debtor Entities are deemed substantively consolidated and treated as a single entity to eliminate: (i) cross-corporate guaranties by one
Debtor Entity of another Debtor Entity, (ii) duplicate claims against more than one debtor entity, and (iii) intercompany claims among the substantively consolidated Debtor Entities. As a result of the substantive consolidation, each claim filed
against one of the Debtor Entities will be deemed to be filed against all of the debtors as a single entity. The consolidated assets create a single fund from which all claims against the consolidated Debtor Entities are satisfied.



Under the Bankruptcy Code, pre-petition liabilities must be satisfied before
stockholders may receive any distribution. The Plan provided for no distributions to the holders of the Predecessor Companys common stock, and all then outstanding shares of such common stock were cancelled as of the Effective Date.



Pursuant to the Plan, the following transactions were
completed on or about the Effective Date:



| |  | The Company amended and restated its Bylaws and also filed Articles of Amendment and Restatement with the Maryland State Department of Assessments and Taxation authorizing an
aggregate of 30,000,000 shares of new common stock, par value $0.01 per share (subsequently increased to 75,000,000);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a loan agreement (the senior finance facility) with Merrill Lynch Mortgage Capital Inc. (Merrill Lynch), as agent and lender with a maximum
availability of $300 million to be used to make cash payments required under the Plan and for general corporate and working capital purposes. As part of this loan agreement, Merrill Lynch was granted warrants exercisable for 1,190,148 shares of
Successor 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 agreement. The loan and related warrant agreements were subsequently
amended. See Note 9;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company adopted the Sunterra Corporation 2002 Stock Option Plan, under which the Company may grant certain employees options to purchase shares of new common stock and reserved
2,012,821 shares of new common stock for issuance under the Plan (later increased to 3,000,000) ;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Warrant Agreement with Mellon Investor Services LLC, as warrant agent, which provides for the issuance of warrants to purchase up to 600,000 shares of new
common stock at an exercise price of $20.00 per share to former holders of certain subordinated notes as set forth in the Plan; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company entered into a Registration Rights Agreement with Merrill Lynch and certain holders of new common stock and filed registration statements under the Securities Act of
1933 to register the resale of shares of new common stock by certain holders.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Fresh Start Accounting



In accordance with SOP 90-7, the Company was required to adopt fresh-start reporting because the holders of the existing voting shares immediately prior to filing and confirmation of the Plan received less than 50% of the voting shares of
the emerging entity, and its reorganization value was less than the total of its post-petition liabilities and allowed claims. For accounting purposes, the Company assumed that the Plan was consummated on July 31, 2002. Under fresh-start accounting,
all assets and liabilities are restated to reflect their reorganization value, which approximates fair value at the date of reorganization. The fresh-start adjustments were based upon the work of outside appraisers and financial consultants, as well
as internal valuation estimates including discounted cash flow analyses, to determine the fair values of the assets and liabilities of the Company.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



After extensive negotiations between the Company and its creditors, the Companys enterprise
value was determined to be $525.0 million. The enterprise value was based on, among other things, a calculation of discounted projected cash flows for the reorganized Company, an analysis of comparable public company trading valuations, and an
analysis of comparable company transaction values. The discounted cash flow analysis was based on 5-year cash flow projections prepared by management. Cash flows were discounted at 19.4% representing the after-tax weighted average cost of capital.
The terminal value calculation was based on a multiple of EBITDA. The cash flow projections were based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject
to significant economic and competitive uncertainties and contingencies beyond the control of the Company, including, but not limited to, those with respect to the future revenues and costs of developing Vacation Interests. Accordingly, differences
are expected between the projections and the actual results because events and circumstances frequently do not occur as expected, and those differences may be material.



The liabilities of reorganized Sunterra consisted primarily of post-petition current liabilities, notes payable in
settlement of certain pre-petition claims, certain outstanding pre-petition allowed claims, and amounts outstanding under the senior finance facility. In accordance with fresh-start accounting, a gain on forgiveness of pre-petition liabilities of
$232.7 million resulting from the implementation of the Plan is included in the Predecessor Companys consolidated statement of operations for the seven months ended July 31, 2002. In addition, the accumulated deficit of the Predecessor company
as of July 31, 2002 totaling $282.0 million (after the effect of the gain on cancellation of pre-petition liabilities) was eliminated, and, at August 1, 2002, the reorganized Successor companys financial statements showed no beginning retained
earnings or deficit. In addition, all accumulated depreciation and amortization were reduced to $0 at July 31, 2002.



The Company determined that the reorganization value of the assets, net exceeded the fair value of identifiable assets, net at July 31, 2002 and
recognized $153.2 million as reorganization value in excess of amounts allocable to identifiable assetsgoodwill. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the
excess reorganization value is assumed to have an indefinite useful life and will not be amortized. The excess reorganization value will be tested for impairment at least annually as specified in SFAS No. 142. As a result of adopting fresh-start
reporting upon emerging from Chapter 11 status, the Companys financial statements are not comparable with those prepared before the Plan was confirmed, including the historical consolidated financial statements included herein.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The effect of the Plan and implementation of fresh-start accounting on the consolidated balance sheet
as of July 31, 2002 is as follows:



|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | - | -------- | ------------------------------ |  | - | -------------------------- | ---- |  | ------------ | ------- | ---- |  | - | -------
|                                                        |  | Predecessor   |          |   | Fresh-start       |   |          | Successor pro forma           
|                                                        |  | July 31, 2002 |          |   | DebtRestructuring |   |          | Adjustments as of July 31,2002 |  |   | Additional Adjustments (a) |      |  | July 31,2002
|ASSETS                                                  |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Cash and cash equivalents                               |  | $             | 28,000   |   |                   | $ |         |                                |  | $ |                           |      |  | $            |        |      |  | $ | 28,000 
|Cash in escrow and restricted cash                      |  |               | 51,914   |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   | 51,914 
|Mortgages and contracts receivable, net                 |  |               | 170,801  |   |                   |   |          |                                |  |   | 193                        | (e)  |  |              | 10,301  | (e)  |  |   | 181,295
|Retained interests in mortgages receivable sold         |  |               | 16,790   |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   | 16,790 
|Due from related parties, net                           |  |               | 3,399    |   |                   |   |          |                                |  |   | (5                         | )(e) |  |              | 693     | (e)  |  |   | 4,087  
|Other receivables, net                                  |  |               | 14,674   |   |                   |   |          |                                |  |   | (143                       | )(e) |  |              | (58     | )(e) |  |   | 14,473 
|Prepaid expenses and other assets                       |  |               | 34,538   |   |                   |   | 8,691    | (b)                            |  |   | (1,979                     | )(e) |  |              |         |      |  |   | 41,250 
|Assets held for sale                                    |  |               | 24,748   |   |                   |   |          |                                |  |   | (4,377                     | )(e) |  |              | 987     | (e)  |  |   | 21,358 
|Investments in joint ventures                           |  |               | 21,098   |   |                   |   |          |                                |  |   | 7,817                      | (e)  |  |              | (250    | )(e) |  |   | 28,665 
|Unsold Vacation Interests, net                          |  |               | 168,115  |   |                   |   |          |                                |  |   | 960                        | (e)  |  |              | (23,866 | )(e) |  |   | 145,209
|Property and equipment, net                             |  |               | 65,158   |   |                   |   |          |                                |  |   | (631                       | )(e) |  |              | (1,131  | )(e) |  |   | 63,396 
|Intangible assets, net                                  |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Goodwill and other intangible assets                    |  |               | 27,882   |   |                   |   |          |                                |  |   | (27,506                    | )(f) |  |              |         |      |  |   | 376    
|Reorganization value in excess of identifiable assets   |  |               |          |   |                   |   |          |                                |  |   | 138,844                    | (g)  |  |              | 14,358  |      |  |   | 153,202
|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Total assets                                            |  | $             | 627,117  |   |                   | $ | 8,691    |                                |  | $ | 113,173                    |      |  | $            | 1,034   |      |  | $ | 750,015
|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)       |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Borrowings under senior finance agreement               |  | $             | 193,877  |   |                   | $ |         |                                |  |   |                            |      |  | $            |        |      |  | $ | 193,877
|Accounts payable                                        |  |               | 15,589   |   |                   |   | 2,000    | (c)                            |  |   | (229                       | )(e) |  |              | (17     | )(e) |  |   | 17,343 
|Accrued liabilities                                     |  |               | 102,880  |   |                   |   | 3,698    | (c)                            |  |   | (199                       | )(e) |  |              | 1,094   | (e)  |  |   | 107,473
|Deferred revenue                                        |  |               | 96,391   |   |                   |   |          |                                |  |   | 859                        | (e)  |  |              |         |      |  |   | 97,250 
|Income taxes payable                                    |  |               | 2,731    |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   | 2,731  
|Notes payable                                           |  |               | 19,501   |   |                   |   | 14,989   | (c)                            |  |   |                            |      |  |              | (43     | )(e) |  |   | 34,447 
|Liabilities subject to compromise                       |  |               | 550,278  |   |                   |   | (550,278 | )(c)                           |  |   |                            |      |  |              |         |      |  |   |       
|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Total liabilities                                       |  |               | 981,247  |   |                   |   | (529,591 | )                              |  |   | 431                        |      |  |              | 1,034   |      |  |   | 453,121
|Total stockholders equity (deficiency)                 |  |               | (354,130 | ) |                   |   | 538,282  | (d)                            |  |   | 112,742                    | (h)  |  |              |        |      |  |   | 296,894
|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        
|Total liabilities and stockholders equity (deficiency) |  | $             | 627,117  |   |                   | $ | $8,691   |                                |  | $ | 113,173                    |      |  | $            | 1,034   |      |  | $ | 750,015
|                                                        |  |               |          |   |                   |   |          |                                |  |   |                            |      |  |              |         |      |  |   |        

---

|(a) | As of September 30, 2002, the Company was still in the process of evaluating the fair value of certain assets and liabilities for allocation of the reorganization value, and the
additional adjustments shown in the table were recorded as of October 1, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | To record the issuance of warrants for the Successor companys common stock to Merrill Lynch.
|--- | ---------------------------------------------------------------------------------------------



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



|(c) | To record certain pre-petition accounts payable and accrued liabilities to be settled in cash or services and to reinstate certain pre-petition notes payable at settlement amounts
which approximate fair value.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | To record the issuance of common stock ($296.9 million) and warrants ($8.7 million) of the Successor company and the gain on cancellation of pre-petition liabilities ($232.7
million).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | To adjust assets and liabilities to fair value.
|--- | -----------------------------------------------

|(f) | To write off predecessor goodwill.
|--- | ----------------------------------

|(g) | To record reorganization value in excess of identifiable assetsgoodwill.
|--- | -------------------------------------------------------------------------

|(h) | To write off the equity and accumulated deficit of the Predecessor company upon emergence from Chapter 11 in accordance with SOP 90-7, as amended.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



Reorganization and Restructuring Costs



In conjunction with and as a result of the bankruptcy reorganization under
Chapter 11, the Company has incurred certain expenses and losses offset by income and gains. These items have been segregated from normal operating costs and consist of the following:



|                                                 |  |                                      |   |                             |             |      |                                     |  |   |                                  |   |  |   |          |  
|------------------------------------------------ |  | ------------------------------------ | - | --------------------------- | ----------- | ---- | ----------------------------------- |  | - | -------------------------------- | - |  | - | -------- | -
|                                                 |  | Successor                            |   |                             | Predecessor |     
|                                                 |  | Nine months ended September 30, 2004 |   | Yearended December 31, 2003 |             |      | Five months ended December 31, 2002 |  |   | Seven months ended July 31, 2002 |  
|Professional fees                                |  | $                                    |  |                             | $           | 747  |                                     |  | $ | 5,840                            |   |  | $ | 23,278   |  
|Employee retention and severance programs        |  |                                      |  |                             |             | (109 | )                                   |  |   | 40                               |   |  |   | 1,733    |  
|Provision for rejected executory contracts       |  |                                      |  |                             |             |     |                                     |  |   |                                 |   |  |   |         |  
|Net gains on asset sales                         |  |                                      |  |                             |             | (72  | )                                   |  |   | (53                              | ) |  |   | (4,165   | )
|Gains on settlement of debt                      |  |                                      |  |                             |             | (634 | )                                   |  |   |                                 |   |  |   | (21,236  | )
|Gain on cancellation of pre-petition liabilities |  |                                      |  |                             |             |     |                                     |  |   |                                 |   |  |   | (232,697 | )
|Fresh-start adjustments                          |  |                                      |  |                             |             |     |                                     |  |   |                                 |   |  |   | (112,742 | )
|Other                                            |  |                                      |  |                             |             | (551 | )                                   |  |   | 1,549                            |   |  |   | 13,327   |  
|Interest income                                  |  |                                      |  |                             |             |     |                                     |  |   |                                 |   |  |   | (109     | )
|                                                 |  |                                      |   |                             |             |      |                                     |  |   |                                  |   |  |   |          |  
|                                                 |  | $                                    |  |                             | $           | (619 | )                                   |  | $ | 7,376                            |   |  | $ | (332,611 | )
|                                                 |  |                                      |   |                             |             |      |                                     |  |   |                                  |   |  |   |          |  



The Company made cash
payments for reorganization expenses of approximately $0.0 million for the nine months ended September 30, 2004, $0.8 million for the year ended December 31, 2003, $27.9 million for the five months ended December 31, 2002 and $28.9 million for the
seven months ended July 31, 2002.



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. During the nine months ended September 30, 2004,
the year ended December 31, 2003, the five months ended December 31, 2002, and the seven months ended July 31, 2002, the Company recorded restructuring charges of $0.0 million, $1.3 million, $5.1 million and $1.0 million, respectively.



Gains on Settlement of Debt



In January 2002, pursuant to an order of the Bankruptcy Court, the Company
entered into an agreement (the Finova Agreement) with Finova Capital Corporation (Finova) that provided for payment by the Company of



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



various loans and financing facilities (Finova Loans) from Finova or its affiliates. Pursuant to the Finova Agreement, the Company paid, in cash
and by application of other funds, $100 million (determined after giving effect to a prior release to Finova of $5 million held by Finova as cash collateral) and Finova returned collateral securing the Finova Loans. The payment to Finova represented
a discount of $27.0 million from the principal amount of the Finova Loans.



Pursuant to the Finova Agreement, the Company and Finova each released the other parties from liabilities and obligations relating to the Finova Loans and certain other matters, including those that were the subject
of pending litigation between the parties. The Company obtained a portion of the funds to pay the Finova Loans from term loans under its debtor-in-possession (DIP) financing facility and paid a brokerage fee of $13.4 million to its DIP
lender for negotiating the settlement with Finova. The Company recorded a net gain on settlement of debt of $13.6 million, which is included as an offset to reorganization costs.



In May 2002, the Company executed amendments to lease agreements relating to a 1999 sale-leaseback transaction, payments on
which were suspended as a result of the bankruptcy proceedings. As a result of the amendments, the minimum lease terms have been extended from November 2002 to April 2004, and the Companys payment obligations have been reduced by $1.1 million,
which was recorded as an offset to reorganization expenses as a gain on settlement of debt.



Pursuant to the Plan and the confirmation order of the Bankruptcy Court (the Confirmation Order), Bank of America, Societe Generale, OCM Real Estate Opportunities Fund II, L.P. (as successor to Union Bank
of California, N.A. and Bank of Hawaii), (the Bank Group) and the Debtor Entities agreed to adopt certain terms and conditions to govern the discharge and complete satisfaction of all obligations of the Debtor Entities to the Bank Group.



Pursuant to the Confirmation Order, all obligations owing by
the borrower to OCM Real Estate Opportunities Fund II, L.P. (approximately $18.2 million including accrued interest payable) were settled and satisfied in full effective July 26, 2002 for a cash payment of approximately $12.3 million. The Company
recognized a gain on settlement of debt, net of fees and expenses, of approximately $5.6 million that is included as an offset to reorganization costs.



The Debtor Entities, Bank of America and Societe Generale (Lenders) entered into an agreement to amend and restate the existing credit
agreement in its entirety and to set forth the terms of repayment for all outstanding obligations owing by the Debtor Entities to the Lenders as of July 26, 2002 in the amount of approximately $18.4 million, including accrued interest payable.
Pursuant to the terms of the agreement, the Debtor Entities agreed to a cash payment of approximately $7.2 million and the issuance of a 5-year note payable for approximately $11.2 million. The note bears interest at a rate of prime plus 2% and is
collateralized by certain mortgages receivable. No gain or loss was recognized on this transaction. All obligations owing to the Lenders were satisfied in full on November 5, 2002.



Pursuant to the Plan and the Confirmation Order, OCM Real Estate Opportunities Fund II, L.P. (as successor to Union Bank of
California, N.A.) and the Debtor Entities agreed to settle all outstanding obligations totaling approximately $11.1 million for a cash payment of $10.2 million. The Company recognized a gain on settlement of approximately $0.9 million, which is
included as an offset to reorganization costs.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



In December 2002, the Company exercised a clean-up call provision relating to certain
securitized notes that were carried in the Companys balance sheet and included in notes payable as of December 31, 2001. The cash required to facilitate the call was borrowed under the senior finance facility in the amount of $13.6 million. No
gain or loss was recognized on this transaction.



There were no
gains on settlement of debt in the nine months ended September 30, 2004 or in the year ended December 31, 2003.



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. The Company currently is a minority partner in one joint venture, and in July 2004 purchased the remaining 77% interest in West Maui Resort Partners, L.P. (Kaanapali), both of which are discussed in Note
15. 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) estimated net realizable value of assets held for sale, (iv) future sales plans used to allocate certain Unsold Vacation Interests to cost of Vacation Interest cost of sales under the
relative sales value method, (v) impairment of long-lived assets including goodwill, and (vi) 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.



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 (deficiency).



Gains and losses from foreign currency transactions are included in the
consolidated statements of operations. For the nine months ended September 30, 2004, the Companys European operations experienced a loss of $1.0 million related to holding Euros. There were no significant gains or losses on foreign currency
transactions in 2003 or 2002.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Derivative InstrumentsThe Company uses interest rate cap agreements from time to time to
manage interest rate exposure. At September 30, 2004 and December 31, 2003, no agreements were in effect and no amounts were due by or owed to the Company under these agreements.



Net Income (Loss) Per ShareBasic net income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 income (loss) available
to common shareholders assuming dilution follows:



|                                                                 |  |                                      |        |                                      |   |                             |  |   |                                     |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | - | --------------------------- |  | - | ----------------------------------- | - |  | - | ------- | -
|                                                                 |  | Nine months ended September 30, 2004 |        | Nine months ended September 30, 2003 |   | Yearended December 31, 2003 |  |   | Five months ended December 31, 2002 |  
|Net income (loss) available to common shares outstanding         |  | $                                    | 21,308 |                                      | $ | 2,782                       |  | $ | (89,199                             | ) |  | $ | (14,323 | )
|Effect of dilutive securities:                                   |  |                                      |        |                                      |   |                             |  |   |                                     |   |  |   |         |  
|33/4%
Senior Subordinated Convertible Notes due 2024             |  | $                                    | 2,085  |                                      |   |                            |  |   |                                    |   |  |   |        |  
|                                                                 |  |                                      |        |                                      |   |                             |  |   |                                     |   |  |   |         |  
|Net income (loss) available to diluted common shares outstanding |  | $                                    | 23,393 |                                      | $ | 2,782                       |  | $ | (89,199                             | ) |  | $ | (14,323 | )
|                                                                 |  |                                      |        |                                      |   |                             |  |   |                                     |   |  |   |         |  



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



|                                                     |  |                                      |  |                                      |  |                             |  |                                    
|---------------------------------------------------- |  | ------------------------------------ |  | ------------------------------------ |  | --------------------------- |  | -----------------------------------
|                                                     |  | Nine months ended September 30, 2004 |  | Nine months ended September 30, 2003 |  | Yearended December 31, 2003 |  | Five months ended December 31, 2002
|Basic weighted average common shares outstanding     |  | 20,000,000                           |  | 20,000,000                           |  | 20,000,000                  |  | 20,000,000                         
|Effect of dilutive securities:                       |  |                                      |  |                                      |  |                             |  |                                    
|33/4%
Senior Subordinated Convertible Notes due 2024 |  | 4,023,754                            |  |                                     |  |                            |  |                                   
|                                                     |  |                                      |  |                                      |  |                             |  |                                    
|Diluted weighted average common shares outstanding   |  | 24,023,754                           |  | 20,000,000                           |  | 20,000,000                  |  | 20,000,000                         
|                                                     |  |                                      |  |                                      |  |                             |  |                                    



For the nine months
ended September 30, 2004, a total of 1,790,148 shares attributable to the exercise of outstanding warrants and 1,688,062 shares of the Companys common stock attributable to the exercise of outstanding options under the Sunterra Corporation
2002 Stock Option Plan were excluded from the calculation of diluted income per share because the exercise price of the warrants and options exceeded the average price of the Companys common stock. For the nine months ended September 30, 2003
as well as for the year ended December 31, 2003, a total of 1,790,148 shares attributable to the exercise of outstanding warrants and 1,391,821 shares of the Successor entitys common stock attributable to the exercise of outstanding options
under the Sunterra Corporation 2002 Stock Option Plan were excluded from the calculation of diluted income per share because the exercise price of the warrants and options exceeded the average price of the Companys common



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



stock. For the five months ended December 31, 2002, a total of 1,790,148 shares attributable to the exercise of outstanding warrants were excluded from the
calculation of diluted loss per share because the effect was anti-dilutive. As of July 31, 2002, the effective date of the Plan for accounting purposes, all previously outstanding equity securities of the Company were cancelled.



In connection with implementation of the Plan, 18,045,077 shares of the
Companys common stock were issued during 2002. During the fourth quarter of 2003 and the nine months ended September 30, 2004, respectively, additional distributions of 449,813 shares and 395,986 shares of common stock were issued to certain
creditors. An additional distribution of 1,109,124 shares of the Companys common stock will be made to certain former creditors on a pro rata basis for no cash consideration. In accordance with the provisions of 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 income (loss) per share of the Company.



No earnings per share calculations are shown for periods prior to the distribution of the Successor Companys common
stock, since the information is not comparable with the Successor 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 recognized straight-line over the term of the lease agreements and is included in Vacation
Interests 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 were also deferred
and are being 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 first quarter of 2004, the
Company began to convey Vacation Points representing beneficial interests in a trust that holds title to the underlying resorts. See Note 6 St. Maarten transactions for 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 and 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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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 that are at least 180 days delinquent or are a first payment default.



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 Interests 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.



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. The tax basis operating income of the North American operations was offset by operating losses for prior years. In future periods, such tax basis operating income of the North American operations will be partially offset by
operating losses from periods prior to the fresh start date. As such, the tax benefits will first reduce goodwill and once goodwill is exhausted, increase additional paid in capital.



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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



At September 30, 2004 and December 31, 2003, the Company had one primary stock option plan, the
Sunterra Corporation 2002 Stock Option Plan, which is described more fully in Note 18, and was instituted upon the Effective Date. All outstanding options to purchase the common stock of the Predecessor Company were cancelled on the Effective Date.
No stock-based employee compensation cost is reflected in the net income (loss) 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 net income (loss) and the pro forma net income (loss) 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(in thousands, except per share data):



|                                                                                                                                    |  |                                     |        |   |                                     |   |        |                             |  |   |                                    |   |  |                                 |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------------- | - | ------ | --------------------------- |  | - | ---------------------------------- | - |  | ------------------------------- | ------- | - |  | - | ------- | -
|                                                                                                                                    |  | Successor                           |        |   | Predecessor                         |  
|                                                                                                                                    |  | Nine months ended September 30,2004 |        |   | Ninemonths ended September 30, 2003 |   |        | Yearended December 31, 2003 |  |   | Five months endedDecember 31, 2002 |   |  | Seven monthsended July 31, 2002 |        
|Net income (loss), as reported                                                                                                      |  | $                                   | 21,308 |   |                                     | $ | 2,782  |                             |  | $ | (89,199                            | ) |  | $                               | (14,323 | ) |  | $ | 321,985 |  
|Deduct:                                                                                                                             |  |                                     |        |   |                                     |   |        |                             |  |   |                                    |   |  |                                 |         |   |  |   |         |  
|Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                                     | (2,638 | ) |                                     |   | (2,214 | )                           |  |   | (2,911                             | ) |  |                                 |        |   |  |   | (629    | )
|                                                                                                                                    |  |                                     |        |   |                                     |   |        |                             |  |   |                                    |   |  |                                 |         |   |  |   |         |  
|Pro forma net income (loss)                                                                                                         |  | $                                   | 18,670 |   |                                     | $ | 568    |                             |  | $ | (92,110                            | ) |  | $                               | (14,323 | ) |  | $ | 321,356 |  
|                                                                                                                                    |  |                                     |        |   |                                     |   |        |                             |  |   |                                    |   |  |                                 |         |   |  |   |         |  
|Basic net income (loss) per share, as reported                                                                                      |  | $                                   | 1.07   |   |                                     | $ | 0.14   |                             |  | $ | (4.46                              | ) |  | $                               | (0.72   | ) |  |   |         |  
|Diluted net income (loss) per share, as reported                                                                                    |  | $                                   | 0.97   |   |                                     | $ | 0.14   |                             |  | $ | (4.46                              | ) |  | $                               | (0.72   | ) |  |   |         |  
|Basic pro forma net income (loss) per share                                                                                         |  | $                                   | 0.93   |   |                                     | $ | 0.03   |                             |  | $ | (4.61                              | ) |  | $                               | (0.72   | ) |  |   |         |  
|Diluted pro forma net income (loss) per share                                                                                       |  | $                                   | 0.86   |   |                                     | $ | 0.03   |                             |  | $ | (4.61                              | ) |  | $                               | (0.72   | ) |  |   |         |  



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The fair value of stock options used to compute pro forma net income (loss) and pro forma net income
(loss) 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, and
notably, the Companys common stock has limited trading history. 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.



|                                               |  |                                     |       |             |                             |   |       |                                    |  |                                  |  |  
|---------------------------------------------- |  | ----------------------------------- | ----- | ----------- | --------------------------- | - | ----- | ---------------------------------- |  | -------------------------------- |  | -
|                                               |  | Successor                           |       | Predecessor
|                                               |  | Nine months endedSeptember 30, 2004 |       |             | Yearended December 31, 2003 |   |       | Five months endedDecember 31, 2002 |  | Seven months ended July 31, 2002
|Dividend yield                                 |  |                                     | 0.0   | %           |                             |   | 0.0   | %                                  |  |                                 |  | 
|Expected volatility                            |  |                                     | 58.53 | %           |                             |   | 69.17 | %                                  |  |                                 |  | 
|Risk-free interest rate                        |  |                                     | 2.76  | %           |                             |   | 2.46  | %                                  |  |                                 |  | 
|Expected holding period (in years)             |  |                                     | 5.0   |             |                             |   | 5.0   |                                    |  |                                 |  | 
|Weighted average fair value of options granted |  | $                                   | 4.88  |             |                             | $ | 4.80  |                                    |  |                                 |  | 



As noted in the
Net Income (Loss) 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 in connection with the Plan (see Note 2). The Company
accounts for these issuances under SFAS No. 123, Accounting for Stock-Based Compensation, 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 life-5 years; interest rate3.81%; expected dividends$0; volatility50%. As discussed in Note 9, the Company amended the exercise price of these warrants.



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 and unrealized gains or losses on available for sale marketable securities. 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 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



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



sales and leases of Vacation Interests, which are restricted until the sale closes escrow and has been recorded in governmental property ownership records,
which are characterized as escrow cash below. Additionally, in its capacity as servicer of mortgages and contracts, 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 ninety 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 ninety-day period commencing September 30, 2004, such amounts were effectively released from Restricted Cash. The balance of approximately $7.2 million
remains restricted (see Note 20).



The balances within Cash in
Escrow and Restricted Cash on the accompanying consolidated balance sheets are comprised of:



|                                                |  |                    |        |                   |   |       
|----------------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                                                |  | September 30, 2004 |        | December 31, 2003
|Collected on behalf of homeowners associations |  | $                  | 38,106 |                   | $ | 52,483
|Escrow                                          |  |                    | 10,744 |                   |   | 7,255 
|Bonds and deposits                              |  |                    | 12,781 |                   |   | 1,695 
|Rental trust                                    |  |                    | 1,540  |                   |   | 1,563 
|Sunterra Owner Trust 2004-1 cash                |  |                    | 24,204 |                   |   |      
|Other                                           |  |                    | 1,288  |                   |   | 270   
|                                                |  |                    |        |                   |   |       
|Total cash in escrow and restricted cash        |  | $                  | 88,663 |                   | $ | 63,266
|                                                |  |                    |        |                   |   |       



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 17%. The term of the mortgages and contracts typically average seven to ten years, and may be prepaid at any time without penalty. The contract weighted average interest rate of outstanding
mortgages and contracts receivable was 14.2% and 14.5% at September 30, 2004 and December 31, 2003, respectively. Mortgages and contracts receivable in excess of 60 days past due at September 30, 2004 and December 31, 2003 were 3.2% and 4.3%,
respectively, of gross mortgages and contracts receivable principal.



Mortgages and contracts receivable 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 being amortized over the term of the mortgages or contracts receivable as an adjustment to interest revenue on mortgages and contracts receivable using the effective
interest method. Amortization of deferred loan and contract origination costs charged to interest revenue was $1.5 million for the nine months ended September 30, 2004, $0.7 million for the year ended December 31, 2003, $0.4 million for the five
months ended December 31, 2002 and $0.3 million for the seven months ended July 31, 2002.



The Company recorded a $10.3 million premium at July 31, 2002 on mortgages and contracts receivable, which will be amortized over the life of the mortgages and contracts receivable portfolio. At September 30, 2004



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



and December 31, 2003, the net unamortized premium was $4.5 million and $7.0 million, respectively. During the nine months ended September 30, 2004, the year
ended December 31, 2003 and the five months ended December 31, 2002, amortization of $2.5 million, $2.2 million and $1.1 million, respectively, was recorded as an adjustment of interest revenue.



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



|                                              |  |   |        
|--------------------------------------------- |  | - | -------
|Year ending September 30:                     |  |  
|2005                                          |  | $ | 47,792 
|2006                                          |  |   | 42,012 
|2007                                          |  |   | 39,922 
|2008                                          |  |   | 36,108 
|2009                                          |  |   | 31,304 
|2010 and thereafter                           |  |   | 82,687 
|                                              |  |   |        
|                                              |  |   | 279,825
|Mortgages and contracts receivable in transit |  |   | 15,991 
|                                              |  |   |        
|                                              |  | $ | 295,816
|                                              |  |   |        



The following
summarizes the Companys total mortgages and contracts receivable, net as of the dates on the accompanying consolidated balance sheets:



|                                                                               |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                               |  | September 30, 2004 |         |   | December 31, 2003 |  
|Mortgages and contracts receivable principal                                   |  | $                  | 295,816 |   |                   | $ | 200,983 |  
|Deferred loan and contract origination costs, net of accumulated amortization  |  |                    | 4,770   |   |                   |   | 4,258   |  
|Premium on mortgages and contracts receivable, net of accumulated amortization |  |                    | 4,513   |   |                   |   | 7,024   |  
|                                                                               |  |                    |         |   |                   |   |         |  
|Mortgages and contracts receivable, gross                                      |  |                    | 305,099 |   |                   |   | 212,265 |  
|Less allowance for loan and contract losses                                    |  |                    | (26,530 | ) |                   |   | (29,443 | )
|                                                                               |  |                    |         |   |                   |   |         |  
|Mortgages and contracts receivable, net                                        |  | $                  | 278,569 |   |                   | $ | 182,822 |  
|                                                                               |  |                    |         |   |                   |   |         |  



The Company provides
for estimated mortgages 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. 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



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 default on the first scheduled principal and interest payment (first payment defaults) or
after 180 days of contractual delinquency. 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:



|                                       |  |                                     |         |   |                             |   |         |                                  |  |   |                                 |   |  |   |        |  
|-------------------------------------- |  | ----------------------------------- | ------- | - | --------------------------- | - | ------- | -------------------------------- |  | - | ------------------------------- | - |  | - | ------ | -
|                                       |  | Successor                           |         |   | Predecessor                 |  
|                                       |  | Nine monthsended September 30, 2004 |         |   | Yearended December 31, 2003 |   |         | Five monthsendedDecember 31,2002 |  |   | Seven monthsended July 31, 2002 |  
|Balance, beginning of period           |  | $                                   | 29,443  |   |                             | $ | 32,394  |                                  |  | $ | 32,526                          |   |  | $ | 36,206 |  
|Provision for loan and contract losses |  |                                     | 7,082   |   |                             |   | 6,193   |                                  |  |   | 1,925                           |   |  |   | 3,137  |  
|Receivables charged off, net           |  |                                     | (10,616 | ) |                             |   | (10,344 | )                                |  |   | (2,057                          | ) |  |   | (6,817 | )
|Other                                  |  |                                     | 621     |   |                             |   | 1,200   |                                  |  |   |                                |   |  |   |       |  
|                                       |  |                                     |         |   |                             |   |         |                                  |  |   |                                 |   |  |   |        |  
|Balance, end of period                 |  | $                                   | 26,530  |   |                             | $ | 29,443  |                                  |  | $ | 32,394                          |   |  | $ | 32,526 |  
|                                       |  |                                     |         |   |                             |   |         |                                  |  |   |                                 |   |  |   |        |  



Other Receivables,
netIncluded in other receivables on the accompanying consolidated balance sheets are $2.6 million and $1.7 million at September 30, 2004 and December 31, 2003, 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:



|                                |  |                                   |        |   |                           |   |        |                                   |  |   |                                 |   |  |   |        |  
|------------------------------- |  | --------------------------------- | ------ | - | ------------------------- | - | ------ | --------------------------------- |  | - | ------------------------------- | - |  | - | ------ | -
|                                |  | Successor                         |        |   | Predecessor               |  
|                                |  | Nine monthsendedSeptember 30,2004 |        |   | YearendedDecember 31,2003 |   |        | Five monthsended December 31,2002 |  |   | Seven monthsended July 31, 2002 |  
|Balance, beginning of period    |  | $                                 | 5,146  |   |                           | $ | 12,278 |                                   |  | $ | 14,272                          |   |  | $ | 17,547 |  
|Provision for doubtful accounts |  |                                   | 98     |   |                           |   | 126    |                                   |  |   |                                |   |  |   | 108    |  
|Receivables charged off         |  |                                   | (2,406 | ) |                           |   | (7,258 | )                                 |  |   | (1,994                          | ) |  |   | (3,383 | )
|                                |  |                                   |        |   |                           |   |        |                                   |  |   |                                 |   |  |   |        |  
|Balance, end of period          |  | $                                 | 2,838  |   |                           | $ | 5,146  |                                   |  | $ | 12,278                          |   |  | $ | 14,272 |  
|                                |  |                                   |        |   |                           |   |        |                                   |  |   |                                 |   |  |   |        |  



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 and contracts receivable sold. The retained interests are classified as trading securities



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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, if any, 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.



The Company measures 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 are developed based on the static pool methodology whereby the prepayment speed and expected default rates are developed based on the age and
payment characteristics of the mortgages receivable. At September 30, 2004, the key economic assumptions and the sensitivity of the current fair value of retained interests in mortgages receivable sold to an immediate 10% or 20% adverse change in
those assumptions are as follows:



|                                                 |  |   |             |  
|------------------------------------------------ |  | - | ----------- | -
|Carrying amount/fair value of retained interests |  | $ | 23,319      |  
|Weighted average remaining term (in years)       |  |   | 3.3 - 3.99  |  
|Prepayment speed assumption (annual rate)        |  |   | 1.7% - 28.1 | %
|Impact on fair value of 10% adverse change       |  | $ | 2.6         |  
|Impact on fair value of 20% adverse change       |  | $ | 4.8         |  
|Expected gross defaults (annual rate)            |  |   | 0.2% - 10.4 | %
|Impact on fair value of 10% adverse change       |  | $ | (134        | )
|Impact on fair value of 20% adverse change       |  | $ | (268        | )
|Residual cash flows discount rate (annual)       |  |   | 16.0        | %
|Impact on fair value of 10% adverse change       |  | $ | (1,010      | )
|Impact on fair value of 20% adverse change       |  | $ | (1,958      | )



These sensitivities
are hypothetical. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in
this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.



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 $5.8 million for the nine months ended September 30, 2004, $10.8 million for the year ended December 31, 2003, $3.7 million for the five months
ended December 31, 2002 and $1.5 million for the seven months ended July 31, 2002. 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



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



payments on the Notes. This $10.4 million was initially recorded in Prepaid expenses and other assets, net, and the balance on the accompanying balance sheet
as of September 30, 2004 was $8.7 million.



Assets Held for
SaleAssets held for sale, which consisted of resort properties determined to be non-core operations and the former corporate offices, were held at the lower of cost or their estimated fair value less costs to sell and were not subject to
depreciation. A building that formerly housed certain administrative functions was held for sale at September 30, 2004.



Assets held for sale consist of the following at September 30, 2004 and December 31, 2003:



|                                                      |  |                   |     |                  |   |       
|----------------------------------------------------- |  | ----------------- | --- | ---------------- | - | ------
|                                                      |  | September 30,2004 |     | December 31,2003
|Unsold Vacation Interests, including undeveloped land |  | $                 |    |                  | $ | 10,000
|Property and equipment, net                           |  |                   | 551 |                  |   | 1,953 
|                                                      |  |                   |     |                  |   |       
|                                                      |  | $                 | 551 |                  | $ | 11,953
|                                                      |  |                   |     |                  |   |       



In 2003, the Company
reclassified certain unsold Vacation Interests, including undeveloped land intended for use as Vacation Interest property, and certain other property and equipment as the related assets were no longer being actively marketed. The Company transferred
a total of $8.0 million and $3.1 million, respectively from Assets held for sale to Unsold Vacation Interests and Property and equipment, net. In 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 at December 31, 2003. In 2002, the Company realized proceeds of $10.5 million for dispositions of assets held for sale with an aggregate book value of $9.3 million at December 31, 2001.



Investments in Joint VenturesAs of September 30, 2004, the
Company owns a 30% interest in Poipu Resort Partners, L.P. and accounts for its investment in this joint venture under the equity method. The excess of fair value (recorded in connection with application of fresh-start accounting) over the
Companys pro-rata share of its equity in the joint venture is amortized as Vacation Interests are sold. On July 7, 2004, the Company completed the acquisition of the remaining 77% partnership interests in West Maui Resort Partners, LP, which
owns and operates Embassy Vacation Resort Kaanapali on the Hawaiian island of Maui. See Note 15 for further discussion on this transaction.



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 Interests cost of sales based upon 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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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



|                                                         |  |                   |         |                  |   |        
|-------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                         |  | September 30,2004 |         | December 31,2003
|Development costs of Unsold Vacation Interests, net      |  | $                 | 164,063 |                  | $ | 133,424
|Vacation Interests recoverable under defaulted mortgages |  |                   | 4,795   |                  |   | 3,175  
|                                                         |  |                   |         |                  |   |        
|Unsold Vacation Interests, net                           |  | $                 | 168,858 |                  | $ | 136,599
|                                                         |  |                   |         |                  |   |        



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 30,2004 |         |   | December 31,2003 |  
|Land and improvements                          |  | $                 | 15,112  |   |                  | $ | 5,358   |  
|Buildings and leasehold improvements           |  |                   | 50,001  |   |                  |   | 61,421  |  
|Furniture and office equipment                 |  |                   | 17,484  |   |                  |   | 10,335  |  
|Computer equipment                             |  |                   | 8,218   |   |                  |   | 6,409   |  
|Software                                       |  |                   | 9,345   |   |                  |   | 8,327   |  
|                                               |  |                   |         |   |                  |   |         |  
|                                               |  |                   | 100,160 |   |                  |   | 91,850  |  
|Less accumulated depreciation and amortization |  |                   | (22,164 | ) |                  |   | (18,710 | )
|                                               |  |                   |         |   |                  |   |         |  
|Property and equipment, net                    |  | $                 | 77,996  |   |                  | $ | 73,140  |  
|                                               |  |                   |         |   |                  |   |         |  



Depreciation and
amortization expense related to property and equipment was $6.3 million for the nine months ended September 30, 2004, $11.2 million for the year ended December 31, 2003, $4.9 million for the five months ended December 31, 2002 and $6.8 million for
the seven months ended July 31, 2002. As part of fresh-start accounting, historical accumulated depreciation was netted against historical cost as of July 31, 2002.



Property and equipment includes $1.0 million and $1.2 million of equipment under capital leases at September 30, 2004 and
December 31, 2003, respectively. Accumulated amortization of assets acquired under capital leases at September 30, 2004 and December 31, 2003 was $0.8 million and $0.8 million, respectively. Amortization expense for capital lease assets was $0.1
million for the nine months ended September 30, 2004, $0.3 million for the year ended December 31, 2003, $0.6 million for the five months ended December 31, 2002 and $1.3 million for the seven months ended July 31, 2002, and is included in
depreciation expense in the accompanying consolidated statements of operations. The related capital lease obligations of $0.2 million and $0.6 million are included in notes payable on the accompanying consolidated balance sheets at September 30,
2004 and December 31, 2003, respectively. See Note 16 for details regarding equipment under capital lease obligations.



Capitalized Software CostsThe Company capitalizes costs for internally developed software in accordance with 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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 are restated to reflect their reorganization value, which approximates 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 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 2003, the Company recorded an
impairment of the reorganization value in excess of identifiable assetsgoodwill. See Note 7, Impairment of Assets for details of the impairment tests performed in 2004 and 2003.



Prior to the adoption of SFAS 142, goodwill recorded in connection with the
acquisition of subsidiaries was amortized over the estimated useful life of ten years. In connection with the adoption of SFAS 142, no amortization has been taken on a recurring basis.



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



|                                    |  |               |         |   |        |   |        |  |   |         |  
|----------------------------------- |  | ------------- | ------- | - | ------ | - | ------ |  | - | ------- | -
|                                    |  | North America |         |   | Europe |   | Total  | 
|Balance as of August 1, 2002        |  | $             | 99,908  |   |        | $ | 53,294 |  | $ | 153,202 |  
|Goodwill acquired during the period |  |               |        |   |        |   |       |  |   |        |  
|Impairment losses                   |  |               |        |   |        |   |       |  |   |        |  
|                                    |  |               |         |   |        |   |        |  |   |         |  
|                                    |  |               |        
|Balance as of December 31, 2002     |  |               | 99,908  |   |        |   | 53,294 |  |   | 153,202 |  
|Goodwill acquired during the period |  |               |        |   |        |   |       |  |   |        |  
|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  |  
|Impairment losses                   |  |               |        |   |        |   |       |  |   |        |  
|Other                               |  |               | 51      |   |        |   | 164    |  |   | 215     |  
|                                    |  |               |         |   |        |   |        |  |   |         |  
|Balance as of September 30, 2004    |  | $             | 27,329  |   |        | $ | 55,430 |  | $ | 82,759  |  
|                                    |  |               |         |   |        |   |        |  |   |         |  



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 Europe segment. 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 America segment (see Note 4 Business Combinations). Such
goodwill has an indefinite life and has been considered when the Company conducts its annual review of goodwill for impairment to determine if goodwill with an indefinite life has been impaired.



Intangible and Other Assets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 three to ten years.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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



|                                 |  |                   |       |   |                  |   |       |  
|-------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                                 |  | September 30,2004 |       |   | December 31,2003 |  
|Management contracts             |  | $                 | 1,237 |   |                  | $ | 1,237 |  
|Trademarks                       |  |                   | 376   |   |                  |   | 376   |  
|Other                            |  |                   | 348   |   |                  |   |      |  
|                                 |  |                   |       |   |                  |   |       |  
|                                 |  |                   | 1,961 |   |                  |   | 1,613 |  
|Less accumulated amortization    |  |                   | (678  | ) |                  |   | (418  | )
|                                 |  |                   |       |   |                  |   |       |  
|Intangible and other assets, net |  | $                 | 1,283 |   |                  | $ | 1,195 |  
|                                 |  |                   |       |   |                  |   |       |  



Amortization expense
relating to other intangible assets was $0.3 million for the nine months ended September 30, 2004, $0.3 million for the year ended December 31, 2003, $0.1 million for the five months ended December 31, 2002 and $1.0 million for the seven months
ended July 31, 2002.



Note 4Business Combinations



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, Sunterra completed the acquisition of the 76.7% majority interest of Kaanapali that it did not own. Prior to the transaction, the Company owned
23.3% 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 23.3% 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, Business Combinations. 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 $210.0 million and acquired $46.4 million of mortgages receivable.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The following table summarizes the estimated fair values assigned to the assets acquired and
liabilities assumed at the date of acquisition based upon the estimated fair market values at the date of the acquisition after adjustment to reflect the 23.3% the Company already owned:



|                                                          |  |   |         |  
|--------------------------------------------------------- |  | - | ------- | -
|Tangible Assets:                                          |  |   |         |  
|Cash in escrow and restricted cash                        |  | $ | 1,128   |  
|Mortgages and contracts receivable, net                   |  |   | 46,245  |  
|Other receivables                                         |  |   | 4,982   |  
|Unsold vacation interests                                 |  |   | 46,400  |  
|Property, plant and equipment                             |  |   | 7,556   |  
|Other assets                                              |  |   | 2,135   |  
|                                                          |  |   |         |  
|                                                          |  |   | 108,446 |  
|                                                          |  |   |         |  
|Liabilities:                                              |  |   |         |  
|Accounts payable                                          |  |   | 1,611   |  
|Accrued liabilities                                       |  |   | 4,870   |  
|Deferred revenue                                          |  |   | 3,655   |  
|                                                          |  |   |         |  
|                                                          |  |   | 10,136  |  
|                                                          |  |   |         |  
|Net Tangible Assets acquired:                             |  |   | 98,310  |  
|Goodwill (a)                                              |  |   | 18,956  |  
|                                                          |  |   |         |  
|Net assets acquired                                       |  |   | 117,266 |  
|Less: Conversion of Investment in Joint Venture to Equity |  |   | (11,383 | )
|                                                          |  |   |         |  
|Total cash consideration paid                             |  | $ | 105,883 |  
|                                                          |  |   |         |  

---

|(a) | Substantially all goodwill is non-deductible for tax purposes.
|--- | --------------------------------------------------------------



The purchase price for Kaanapali consists of the following:



|                     |  |   |        
|-------------------- |  | - | -------
|Cash                 |  | $ | 105,883
|Liabilities assumed  |  |   | 10,136 
|                     |  |   |        
|Total purchase price |  | $ | 116,019
|                     |  |   |        



The cash portion of
the purchase price was financed by borrowings under the Companys existing line of credit facility as amended on July 7, 2004.



The purchase of Thurnham Leisure Group for approximately $3.8 million during the period ended September 30, 2004 resulted in the recording of
approximately $2.0 million of goodwill in the Europe segment.



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



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Note 5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. These buyers generally make a down payment of at least 10% of the purchase price and deliver a promissory note to the Company for the balance. The promissory notes generally bear interest
at a fixed rate, and are payable typically over a seven-year to ten-year period, and the notes on sold Vacation Interests are secured by a first mortgage on the Vacation Interests. The Company bears the risk of defaults on these promissory notes.



If a buyer of a Vacation Interest defaults, the Company
generally must foreclose on the Vacation Interests 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 Interest.
Although the Company in many cases may have recourse against a Vacation Interests 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 Interest defaults, the lessee forfeits its contract rights previously held to use the Vacation Interest and the Company is able to re-lease the Vacation
Interest without further recovery efforts.



Availability of
Funding SourcesThe Company has historically funded substantially all of the 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.



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.



Geographic ConcentrationThe Companys owned and serviced loan portfolio borrowers are geographically diversified within the United States and internationally. At September 30, 2004, borrowers
residing in the United States accounted for approximately 91% of serviced (both on and off balance sheet) loans. With the exception of California and Arizona, which represented 17.4% and 11.7%, respectively, no state or foreign country concentration
accounted for in excess of 5.1% 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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Note 6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 ninety-nine years at one resort, and at the other, a term expiring in 2050 and subject to extension for an aggregate term not to exceed ninety-nine years. During the first
quarter of 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 in the first quarter of 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 are 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 the caption 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 agreement. The unamortized balance of the direct sales and marketing costs are 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 amounts captioned Vacation Interest revenue on the accompanying consolidated statements of operations. Likewise, the Company
recognizes a portion of the deferred marketing and leasing expenses on a monthly basis and includes this expense within the amounts captioned Advertising, sales and marketing expenses on the accompanying consolidated statements of
operations.



Current accounting guidance requires the related
hard and soft construction costs of these Vacation Interests to be included within the caption 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 the caption Unsold Vacation Interests, net and such costs are allocated to Vacation Interests cost of sales on the relative sales
value method. During the first quarter of 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 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 issues 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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 30,2004 |        |   | December 31,2003 |  
|Prepaid expenses and other assets, net (direct sales and marketing costs) |  | $                 | 11,382 |   |                  | $ | 11,678 |  
|                                                                          |  |                  
|Property and equipment (recorded cost)                                    |  | $                 | 11,855 |   |                  | $ | 16,439 |  
|Accumulated depreciation                                                  |  |                   | (1,040 | ) |                  |   | (1,007 | )
|                                                                          |  |                   |        |   |                  |   |        |  
|Property and equipment, net                                               |  | $                 | 10,815 |   |                  | $ | 15,432 |  
|                                                                          |  |                   |        |   |                  |   |        |  
|                                                                          |  |                  
|Deferred revenue                                                          |  | $                 | 75,877 |   |                  | $ | 77,853 |  



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



|                                          |  |                                   |       |                           |   |                                  |  |                               |     |  |   |      
|----------------------------------------- |  | --------------------------------- | ----- | ------------------------- | - | -------------------------------- |  | ----------------------------- | --- |  | - | -----
|                                          |  | Successor                         |       | Predecessor              
|                                          |  | Nine monthsendedSeptember 30,2004 |       | YearendedDecember 31,2003 |   | Five monthsendedDecember 31,2002 |  | Seven monthsendedJuly 31,2002
|Vacation Interest revenue                 |  | $                                 | 1,958 |                           | $ | 3,953                            |  | $                             | 718 |  | $ | 1,217
|Advertising, sales and marketing expenses |  |                                   | 294   |                           |   | 593                              |  |                               | 108 |  |   | 183  



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 twelve-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 caption Management services revenue and the expenses, except for
the provision for bad debt and depreciation expenses, are included in General and Administrative expenses.



Note 7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.



As of September 30, 2004, the Companys goodwill consists 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 in 2004, net
of impairment of goodwill recorded in 2003. SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested at least annually for impairment, or more frequently if circumstances exist to indicate potential



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



impairment. In 2003 the Company had elected to perform the required testing in the fourth quarter. Due to the change in the fiscal year end to September 30,
the Company has elected to continue to use a date within its last fiscal quarter as its measurement date for the current and future fiscal years. Under SFAS 142, goodwill is to be tested for impairment at the reporting unit level.



Under SFAS 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). The Company identified its North American and Europe 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.



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 2004. 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. Since emergence from Chapter 11 in 2002 through December 2003 the North American reporting unit had under performed
relative to the Companys Plan of Reorganization, which gave rise to the impairment of goodwill. During the same period, the Europe reporting units results did not materially differ from those expected under the Plan of Reorganization.



After notable decreases in market conditions, the Company
evaluated the recorded value of its former headquarters building in Orlando, Florida during the quarter ended September 30, 2003, and determined that impairment existed. The impairment was calculated to be $0.9 million. The remaining value of this
asset is included in Assets Held for Sale on the accompanying consolidated balance sheet as of December 31, 2003. The asset and related charge were recorded in the Companys North American reporting unit.



In addition, during the third quarter 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 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 third quarter of 2003. During the fourth
quarter 2003, the Company also evaluated certain Vacation Interests recovered from defaulted notes, and determined that 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.



There were no impairment charges for
goodwill or other assets in fiscal 2002.



Note 8Off-Balance Sheet
Financing Arrangements



The Company retains the servicing
rights to its securitized mortgages receivable portfolios and contracts with a third-party to provide the servicing functions. The Company receives adequate compensation for providing the servicing functions. As such, no asset or liability has been
recognized on the consolidated balance sheets for the servicing rights retained.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The Company recognized servicing fees related to off-balance sheet conduit and securitization
transactions of $0.6 million during the nine months ended September 30, 2004 and $0.9 million and $1.0 million for the years ended December 31, 2003 and 2002, respectively.



Off-balance sheet financing arrangements have been used to provide liquidity and improve cash flows for the Company. The
discussion below describes qualifying special purpose entities and related financing transactions.



In order to obtain liquidity from its mortgages and contracts receivable, the Company securitized certain of those assets through entities that are
intended to meet the accounting criteria for Qualifying Special Purpose Entities (Qualifying Entities). Among other criteria, a qualifying entitys activities must be restricted to passive investment in financial assets and issuance
of beneficial interests in those assets. Under accounting principles generally accepted in the United States of America, entities meeting these criteria are not consolidated in the sponsors financial statements. The Company sold selected
financial assets to Qualifying Entities as described below. At the time of the closings of the transactions the Company received true sale legal opinions that were relied upon in connection with determinations of the qualified status of
these special purpose entities.



In 1999 and 2000, the Company
sold mortgages receivable to Qualifying Entities. The Qualifying Entities raised cash by issuing beneficial interests in the form of rights to cash flows from the mortgage receivable assets as collateral for borrowings under a line of credit or
under promissory notes issued to third-party investors. The Company provides servicing for the transferred assets and collects a fee for those services as well as retaining 100% interest in the excess spread over the borrowing rate. Sales of
mortgages receivable to the Qualifying Entities are made without recourse to the Company as to collectibility. All of the Qualifying Entities assets serve as collateral for the obligations. The Company is not required to provide any guarantees
or liquidity support for the Qualifying Entities. These Qualifying Entities are not consolidated in the accompanying financial statements. The transferred mortgages receivable and the obligations of the Qualifying Entities are not reflected on the
consolidated balance sheets of the Company.



Conduit
FacilityThe Company established a Qualifying Entity that was the obligor on a $100 million Mortgages Receivable Conduit Facility. The Company sold undivided interests in mortgages receivable to the Qualifying Entity at 95% of face value
without recourse to the Company as to collectibility. The Qualifying Entity financed those purchases through advances on the Conduit Facility collateralized by an undivided interest in the transferred mortgages receivable. A majority of the loans
sold into the Conduit Facility were subsequently repurchased by the Company and sold into securitizations described below. The Companys retained interests in the mortgage loans transferred to the Qualifying Entity to secure its borrowings
under the Conduit Facility were estimated to have a fair value of $0 as of December 31, 2001. It is estimated that the cash flow from the transferred mortgages receivable collateralizing advances under the Conduit Facility may be insufficient to
enable the Qualifying Entity to repay principal and contractual interest on its obligations. As such, the Company currently expects no future cash flow from those mortgages receivable. Although there was no contractual requirement in the Conduit
Facility agreement, as certain mortgages receivable defaults occurred, the Company transferred in 2000 a total of $3.6 million in new mortgages receivable without consideration. The Conduit Facility expired on December 17, 2001.



Securitization TransactionsThe Company established Qualifying
Entities to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages receivable. The Company retains 100% interest



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



in the future cash flows generated by the sold mortgages receivable portfolios in excess of the cash required by the Qualifying Entities to fully repay
principal and contractual interest on their obligations. Such excess cash is principally generated by the excess of the weighted average contractual interest received on the mortgage loans over the interest rates on the Qualifying Entities
notes. 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.



The following summarizes the off-balance sheet mortgages
receivable, net of mortgages considered delinquent, held by special purpose entities:



|                              |  |                   |        |                  |   |       
|----------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                              |  | September 30,2004 |        | December 31,2003
|                              |  | (Unaudited)      
|Conduit Obligor               |  | $                 | 18,237 |                  | $ | 23,877
|1999-A Securitization Obligor |  |                   | 19,963 |                  |   | 27,273
|1999-B Securitization Obligor |  |                   | 15,638 |                  |   | 20,681
|                              |  |                   |        |                  |   |       
|                              |  | $                 | 53,838 |                  | $ | 71,831
|                              |  |                   |        |                  |   |       



The following
summarizes the criteria for when mortgages are considered delinquent and the related percentages of delinquency:



|                              |  |                      |  |                   |   |  |                  |  
|----------------------------- |  | -------------------- |  | ----------------- | - |  | ---------------- | -
|                              |  | Delinquency Criteria | 
|                              |  | Days                 |  | September 30,2004 |   |  | December 31,2003 |  
|                              |  | (Unaudited)          | 
|Conduit Obligor               |  | 120                  |  | 50                | % |  | 43               | %
|1999-A Securitization Obligor |  | 180                  |  | 45                | % |  | 36               | %
|1999-B Securitization Obligor |  | 180                  |  | 43                | % |  | 35               | %



The following
summarizes the outstanding off-balance sheet obligations collateralized by the mortgages receivable held by special purpose entities:



|                              |  |                   |        |                  |   |       
|----------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                              |  | September 30,2004 |        | December 31,2003
|                              |  | (Unaudited)      
|Conduit Obligor               |  | $                 | 16,861 |                  | $ | 21,576
|1999-A Securitization Obligor |  |                   | 9,996  |                  |   | 17,643
|1999-B Securitization Obligor |  |                   | 7,790  |                  |   | 12,856
|                              |  |                   |        |                  |   |       
|                              |  | $                 | 34,647 |                  | $ | 52,075
|                              |  |                   |        |                  |   |       



Note 9Borrowings



Line of Credit Agreements



On July 29, 2002, the Company entered into a two-year agreement for a $300
million senior secured working capital credit facility (Senior Finance Facility) with Merrill Lynch Mortgage Capital. The proceeds of



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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.



In February 2004, the Senior
Finance Facility was amended, raising the maximum aggregate borrowing and extending the term to February 28, 2006. The interest rate on the portion of the line secured by the Companys eligible mortgages and contracts receivable was reduced to
the one-month LIBOR rate plus 2.25%, and, for the portion of the line secured by the Companys eligible Unsold Vacation Interests, the rate was reduced to the one-month LIBOR rate plus 4.0%. The 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. Additionally, the advance rate under loans secured by eligible mortgages and contracts receivable was increased to 85% from 80%. The amendment
also expanded the ability of the Company to borrow against Vacation Points and contracts receivable collateralized by Vacation Points, including both assets acquired by the Company as part of the purchase of certain assets of Epic Resorts Group, as
well as assets associated with the Companys new multi-site clubs. The Company also agreed 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.



In July 2004, 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.



At September 30, 2004, the maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior
Finance Facility were $244.2 million, $171.7 million and $72.5 million, respectively. The capacity and availability of borrowings under the Senior Finance Facility are based on the value of eligible mortgages and contracts receivable, the value of
eligible Unsold Vacation Interests and the value of certain real property and other assets. The Senior Finance Facility is secured by a first priority lien on the mortgages and contracts receivable and Unsold Vacation Interests, as well as certain
real property and other assets of the Company, subject to certain exceptions. Prior to the February 2004 amendment discussed above, 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. The weighted average interest rate of these borrowings at September 30, 2004 was 4.81% per annum. Beginning in February 2003, 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 nine months ended September 30, 2004 and 2003 were
$0.3 million and $1.5 million respectively. During the year ended December 31, 2003, the Company paid $2.2 million of such additional cash interest payments.



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, as discussed in the following paragraph, and could otherwise have a material adverse effect on the Company.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



In addition to the facility fee (2.5% of $300 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 will 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 and, 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 are due and payable on July 29, 2005, with the latter fee being prorated through the termination date of February
28, 2006. Amortization of debt issuance costs related to the senior finance facility included in interest expense in the accompanying consolidated statements of operations was $5.5 million for the nine months ended September 30, 2004, $10.8 million
for the year ended December 31, 2003 and $3.7 million for the five months ended December 31, 2002. The Company also amortized a total of $1.5 million of debtor-in-possession facility debt issuance costs in the seven months ended July 31, 2002.



The Company has capitalized interest related to ongoing
construction projects of $0.2 million for the nine months ended September 30, 2004, $0.3 million for the nine months ended September 30, 2003, $0.4 million for the year ended December 31, 2003, $0.0 million for the five months ended December 31,
2002 and $0.3 million for the seven months ended July 31, 2002.



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 sheet as of September 30, 2004 was $8.7 million. Other than this pledge, the Notes are unsecured obligations.



The Notes are initially 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 upon the price of the Companys common stock reaching 110% of such implied conversion price of $16.00 per common share, if the
Notes are called for redemption or if specified corporate transactions or significant distributions to holders of the Companys common stock have occurred.



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.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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.



For the nine months ended September 30, 2004
and 2003, amortization of $0.3 million and $0.0 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 finance subsidiary of the Company. SPE
2004-1 then sold the receivables to the Sunterra Owner Trust 2004-1, a special purpose entity that 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.



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 the vacation ownership receivables 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, will service and administer 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 the Companys Senior Finance Facility with Merrill Lynch Mortgage Capital, Inc., 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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Notes Payable



Notes payable on the accompanying consolidated balance sheets consists of the following:



|                          |  |                   |       |                   |   |      
|------------------------- |  | ----------------- | ----- | ----------------- | - | -----
|                          |  | September 30,2004 |       | December 31, 2003
|Capital lease obligations |  | $                 | 218   |                   | $ | 631  
|Other notes payable       |  |                   | 2,043 |                   |   | 2,570
|                          |  |                   |       |                   |   |      
|Total notes payable       |  | $                 | 2,261 |                   | $ | 3,201
|                          |  |                   |       |                   |   |      



The contractual
maturities of borrowings excluding capital lease obligations (see Note 16 for maturities of capital lease obligations) are as follows:



|                                     |  |   |        
|------------------------------------ |  | - | -------
|Due in the year ending September 30: |  |   |        
|2005                                 |  | $ | 764    
|2006                                 |  |   | 172,006
|2007                                 |  |   | 291    
|2008                                 |  |   | 315    
|2009                                 |  |   | 404    
|2010 and thereafter                  |  |   | 246,710
|                                     |  |   |        
|                                     |  | $ | 420,490
|                                     |  |   |        



Note 10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 include:



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, and commissions due sales personnel on pending sales.



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
HOAs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.



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The following table summarizes the balances in accrued liabilities on the accompanying consolidated
balance sheets:



|                                                                  |  |                   |        |                  |   |       
|----------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                                  |  | September 30,2004 |        | December 31,2003
|Accrued marketing                                                 |  | $                 | 19,812 |                  | $ | 24,090
|Amounts collected on behalf of or due to homeowners associations |  |                   | 13,208 |                  |   | 20,521
|Accrued Vacation Interests carrying costs                         |  |                   | 8,074  |                  |   | 10,975
|Accrued escrow liability                                          |  |                   | 7,285  |                  |   | 7,100 
|Accrued other taxes                                               |  |                   | 2,478  |                  |   | 6,667 
|Accrued payroll and related                                       |  |                   | 7,808  |                  |   | 5,834 
|Accrued servicing liability                                       |  |                   | 3,809  |                  |   | 4,711 
|Accrued professional fees                                         |  |                   | 2,211  |                  |   | 3,501 
|Creditor claims payable                                           |  |                   | 2,865  |                  |   | 3,048 
|Accrued commissions                                               |  |                   | 1,791  |                  |   | 1,369 
|Other                                                             |  |                   | 11,554 |                  |   | 8,139 
|                                                                  |  |                   |        |                  |   |       
|Total accrued liabilities                                         |  | $                 | 80,895 |                  | $ | 95,955
|                                                                  |  |                   |        |                  |   |       



Note 11Deferred Revenues



The Company records deferred revenues for payments
received or billed but not earned for various activities, including those described here in and summarized below. The largest and primary component relates to operating leases of Vacation Interests at the Companys two resorts in St. Maarten.
See Note 6St. Maarten Transactions for full 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 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 6 for further discussion.



The following table summarizes the balances in deferred revenues as of the dates on the accompanying consolidated balance sheets:



|                                                  |  |                   |        |                  |   |       
|------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                  |  | September 30,2004 |        | December 31,2003
|Deferred Vacation Interest lease revenue (Note 6) |  | $                 | 75,877 |                  | $ | 77,853
|Deferred Club Sunterra revenue                    |  |                   | 6,430  |                  |   | 8,265 
|Unearned mini-vacations                           |  |                   | 7,985  |                  |   | 4,517 
|Unearned management services revenue (Note 6)     |  |                   | 1,953  |                  |   |      
|Other                                             |  |                   | 2,882  |                  |   | 4,187 
|                                                  |  |                   |        |                  |   |       
|Total deferred revenues                           |  | $                 | 95,127 |                  | $ | 94,822
|                                                  |  |                   |        |                  |   |       



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Note 12Segment and Geographic Information



The Company currently operates in two geographic segments, the North America and Europe segments. During the Chapter 11
proceedings, the Company operated in three geographic segments, North American Debtor Entities, North American Non-Debtor Entities and Europe entities. All of these segments operate in one industry segment that includes the development, marketing,
sales, financing and management of vacation ownership resorts. The Companys areas of operation outside of North America include the United Kingdom, Italy, Spain, Portugal, Austria, 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:



|                                                                                 |  |               |         |   |        |   |              |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------ | - | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | North America |         |   | Europe |   | Eliminations |  |   | Total   |  
|Nine Months ended September 30, 2004 (Successor)                                 |  |               |         |   |        |   |              |  |   |         |   |  |   |         |  
|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                                               |  |               | 15,318  |   |        |   | 8,292        |  |   |        |   |  |   | 23,610  |  
|Segment assets                                                                   |  |               | 677,687 |   |        |   | 209,984      |  |   | (50,813 | ) |  |   | 836,858 |  
|Assets held for sale                                                             |  |               | 551     |   |        |   |             |  |   |        |   |  |   | 551     |  
|Investment in joint ventures                                                     |  |               | 7,187   |   |        |   |             |  |   |        |   |  |   | 7,187   |  
|Expenditures for additions to long-lived assets other than business combinations |  |               | 2,601   |   |        |   | 4,212        |  |   |        |   |  |   | 6,813   |  
|                                                                                 |  |               |         |  
|Nine Months ended September 30, 2003 (Successor) (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   |  
|Segment assets                                                                   |  |               | 568,882 |   |        |   | 183,321      |  |   | (36,406 | ) |  |   | 715,797 |  
|Assets held for sale                                                             |  |               | 2,289   |   |        |   |             |  |   |        |   |  |   | 2,289   |  
|Investment in joint ventures                                                     |  |               | 20,950  |   |        |   |             |  |   |        |   |  |   | 20,950  |  
|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    | )



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



|                                                                                 |  |               |          |   |        |   |              |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------ | - | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | North America |          |   | Europe |   | Eliminations |  |   | Total   |  
|                                                                                 |  |               |          |  
|Year ended December 31, 2003 (Successor)                                         |  |               |          |   |        |   |              |  |   |         |   |  |   |         |  
|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 reorganization value in excess of identifiable assets              |  |               | 91,586   |   |        |   |             |  |   |        |   |  |   | 91,586  |  
|Income on investments in joint ventures                                          |  |               | 3,340    |   |        |   |             |  |   |        |   |  |   | 3,340   |  
|(Loss) income before income tax (benefit) provision                              |  |               | (103,461 | ) |        |   | 19,371       |  |   |        |   |  |   | (84,090 | )
|Segment assets                                                                   |  |               | 487,674  |   |        |   | 212,410      |  |   | (46,031 | ) |  |   | 654,053 |  
|Assets held for sale                                                             |  |               | 11,953   |   |        |   |             |  |   |        |   |  |   | 11,953  |  
|Investment in joint ventures                                                     |  |               | 20,702   |   |        |   |             |  |   |        |   |  |   | 20,702  |  
|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    | )
|                                                                                 |  |               |          |  
|Five Months ended December 31, 2002 (Successor)                                  |  |               |          |   |        |   |              |  |   |         |   |  |   |         |  
|Revenues from external customers                                                 |  | $             | 80,432   |   |        | $ | 43,250       |  | $ |        |   |  | $ | 123,682 |  
|Interest expense                                                                 |  |               | 9,940    |   |        |   | 2,858        |  |   | (2,925  | ) |  |   | 9,873   |  
|Depreciation and amortization expense                                            |  |               | 3,375    |   |        |   | 1,687        |  |   |        |   |  |   | 5,062   |  
|Income on investments in joint ventures                                          |  |               | 1,845    |   |        |   |             |  |   |        |   |  |   | 1,845   |  
|(Loss) income before income tax (benefit) provision                              |  |               | (17,883  | ) |        |   | 6,487        |  |   |         |   |  |   | (11,396 | )
|Segment assets                                                                   |  |               | 667,842  |   |        |   | 124,986      |  |   | (60,575 | ) |  |   | 732,253 |  
|Assets held for sale                                                             |  |               | 14,038   |   |        |   |             |  |   |        |   |  |   | 14,038  |  
|Investment in joint ventures                                                     |  |               | 30,503   |   |        |   |             |  |   |        |   |  |   | 30,503  |  
|Expenditures for additions to long-lived assets other than business combinations |  |               | 3,095    |   |        |   | 6,767        |  |   |        |   |  |   | 9,862   |  
|Other profit and loss items, including non-cash amounts:                         |  |               |          |   |        |   |              |  |   |         |   |  |   |         |  
|Restructuring costs                                                              |  |               | 5,054    |   |        |   |             |  |   |        |   |  |   | 5,054   |  
|Reorganization expenses, net                                                     |  |               | 7,376    |   |        |   |             |  |   |        |   |  |   | 7,376   |  



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Information about the Companys operations in different geographic locations during the seven
months ended July 31, 2002 (Predecessor) is shown below:



|                                                                                 |  |                       |          |   |                           |   |        |  |                   |        |              |   |        |  |   |   |  |   |          |  
|-------------------------------------------------------------------------------- |  | --------------------- | -------- | - | ------------------------- | - | ------ |  | ----------------- | ------ | ------------ | - | ------ |  | - | - |  | - | -------- | -
|                                                                                 |  | North America Debtors |          |   | North America Non-Debtors |   | Europe |  | Total Non-Debtors |        | Eliminations |   | Total  | 
|Seven months ended July 31, 2002                                                 |  |                       |          |   |                           |   |        |  |                   |        |              |   |        |  |   |   |  |   |          |  
|Revenues from external customers                                                 |  | $                     | 80,229   |   |                           | $ | 26,983 |  | $                 | 51,968 |              | $ | 78,951 |  | $ |  |  | $ | 159,180  |  
|Interest expense.                                                                |  |                       | 8,918    |   |                           |   |       |  |                   | 245    |              |   | 245    |  |   |  |  |   | 9,163    |  
|Depreciation and amortization expense                                            |  |                       | 4,644    |   |                           |   | 1,562  |  |                   | 1,703  |              |   | 3,265  |  |   |  |  |   | 7,909    |  
|Income on investments in joint ventures                                          |  |                       |         |   |                           |   | 2,640  |  |                   |       |              |   | 2,640  |  |   |  |  |   | 2,640    |  
|Income before provision for income taxes                                         |  |                       | 310,511  |   |                           |   | 6,062  |  |                   | 8,438  |              |   | 14,500 |  |   |  |  |   | 325,011  |  
|Expenditures for additions to long-lived assets other than business combinations |  |                       | 3,266    |   |                           |   |       |  |                   | 4,114  |              |   | 4,114  |  |   |  |  |   | 7,380    |  
|Other profit and loss items, including non-cash amounts:                         |  |                       |          |   |                           |   |        |  |                   |        |              |   |        |  |   |   |  |   |          |  
|Restructuring costs                                                              |  |                       | 889      |   |                           |   | 156    |  |                   |       |              |   | 156    |  |   |  |  |   | 1,045    |  
|Reorganization expenses, net                                                     |  |                       | (332,611 | ) |                           |   |       |  |                   |       |              |   |       |  |   |  |  |   | (332,611 | )



Note 13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 years ended December 31, 2003 or 2002. During 2001, the Company received notification from the Department of Labor (DOL) that the Plan may have failed certain requirements under the applicable sections of the
Internal Revenue Code. The Company performed all corrective actions required by the DOL in 2002.



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 $150,000. 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.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



The Company paid $0.0 million, $1.0 million, $1.3 million and $0.2 million in bonuses under the retention plan during the nine months ended September 30,
2004, the year ended December 31, 2003, the five months ended December 31, 2002 and the seven months ended July 31, 2002, respectively.



Note 14Income Taxes



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



|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|--------------------------------------------------- |  | ------------------------------------ | ----- | ----------- | --------------------------- | - | --------------------------------- |  | ------------------------------- | ----- |  | - | ----- | -
|                                                    |  | Successor                            |       | Predecessor |                            
|                                                    |  | Nine months Ended September 30, 2004 |       |             | YearEnded December 31, 2003 |   | Five MonthsEndedDecember 31, 2002 |  | Seven Months EndedJuly 31, 2002 |      
|Current:                                            |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|Federal                                             |  | $                                    |      |             |                             | $ |                                  |  | $                               |      |  | $ |      |  
|State                                               |  |                                      | 25    |             |                             |   | 50                                |  |                                 |      |  |   | 849   |  
|Foreign                                             |  |                                      | 2,465 |             |                             |   | 4,753                             |  |                                 | 2,927 |  |   | 2,468 |  
|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|Total current provision for income taxes            |  |                                      | 2,490 |             |                             |   | 4,803                             |  |                                 | 2,927 |  |   | 3,317 |  
|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|Deferred:                                           |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|Federal                                             |  |                                      |      |             |                             |   |                                  |  |                                 |      |  |   | (291  | )
|State                                               |  |                                      |      |             |                             |   |                                  |  |                                 |      |  |   |      |  
|Foreign                                             |  |                                      | (188  | )           |                             |   | 306                               |  |                                 |      |  |   |      |  
|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|Total deferred provision (benefit) for income taxes |  |                                      | (188  | )           |                             |   | 306                               |  |                                 |      |  |   | (291  | )
|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  
|                                                    |  | $                                    | 2,302 |             |                             | $ | 5,109                             |  | $                               | 2,927 |  | $ | 3,026 |  
|                                                    |  |                                      |       |             |                             |   |                                   |  |                                 |       |  |   |       |  



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



|                                                                                            |  |                                   |        |   |                            |   |         |                                    |  |   |                                  |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | -------------------------- | - | ------- | ---------------------------------- |  | - | -------------------------------- | - |  | - | ------- | -
|                                                                                            |  | Successor                         |        |   | Predecessor                |  
|                                                                                            |  | Nine MonthsEndedSeptember 30,2004 |        |   | YearEnded December 31,2003 |   |         | Five MonthsEnded December 31, 2002 |  |   | Seven Months Ended July 31, 2002 |  
|Income tax at U.S. federal statutory rate                                                   |  | $                                 | 5,606  |   |                            | $ | (35,069 | )                                  |  | $ | (3,989                           | ) |  | $ | 113,754 |  
|State tax, net of federal benefit                                                           |  |                                   | 666    |   |                            |   | (4,008  | )                                  |  |   | (456                             | ) |  |   | 13,850  |  
|Non-deductible goodwill                                                                     |  |                                   |       |   |                            |   | 36,614  |                                    |  |   |                                 |   |  |   |        |  
|Reorganization expenses                                                                     |  |                                   |       |   |                            |   | 112     |                                    |  |   | 2,877                            |   |  |   | 9,105   |  
|Foreign taxes                                                                               |  |                                   | 2,277  |   |                            |   | 5,059   |                                    |  |   | 2,927                            |   |  |   | 2,468   |  
|Other nondeductible differences                                                             |  |                                   | 249    |   |                            |   | (154    | )                                  |  |   | 50                               |   |  |   | (30     | )
|Tax effects of fresh start adjustments                                                      |  |                                   |       |   |                            |   |        |                                    |  |   |                                 |   |  |   | (43,969 | )
|Reduction in tax basis of assets due to effects of income from cancellation of indebtedness |  |                                   |       |   |                            |   |        |                                    |  |   |                                 |   |  |   | (55,898 | )
|Changes in deferred tax asset balances to reflect the filing of tax returns                 |  |                                   |       |   |                            |   |        |                                    |  |   |                                 |   |  |   | (15,861 | )
|Change in valuation allowance                                                               |  |                                   | (6,496 | ) |                            |   | 2,555   |                                    |  |   | 1,518                            |   |  |   | (20,393 | )
|                                                                                            |  |                                   |        |   |                            |   |         |                                    |  |   |                                  |   |  |   |         |  
|Provision for income taxes                                                                  |  | $                                 | 2,302  |   |                            | $ | 5,109   |                                    |  | $ | 2,927                            |   |  | $ | 3,026   |  
|                                                                                            |  |                                   |        |   |                            |   |         |                                    |  |   |                                  |   |  |   |         |  



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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, 2004 |          |   | December 31, 2003 |  
|Deferred tax assets:                  |  |                    |          |   |                   |   |          |  
|Allowances for losses                 |  | $                  | 10,934   |   |                   | $ | 11,640   |  
|Unsold Vacation Interests adjustments |  |                    | 6,406    |   |                   |   | 6,427    |  
|Intangible assets                     |  |                    | 10,680   |   |                   |   | 8,540    |  
|Deferred profit                       |  |                    | 26,852   |   |                   |   | 26,648   |  
|Accrued liabilities                   |  |                    | 9,301    |   |                   |   | 8,911    |  
|Net operating loss carryover          |  |                    | 45,515   |   |                   |   | 48,135   |  
|Foreign net operating loss carryover  |  |                    |         |   |                   |   | 3,027    |  
|State net operating loss carryover    |  |                    | 4,744    |   |                   |   | 5,148    |  
|Minimum tax credit carryover          |  |                    | 1,269    |   |                   |   | 1,269    |  
|Other                                 |  |                    |         |   |                   |   | 11       |  
|                                      |  |                    |          |   |                   |   |          |  
|Total gross deferred tax assets       |  |                    | 115,701  |   |                   |   | 119,756  |  
|Valuation allowance                   |  |                    | (112,136 | ) |                   |   | (111,073 | )
|                                      |  |                    |          |   |                   |   |          |  
|Total net deferred tax assets         |  |                    | 3,565    |   |                   |   | 8,683    |  
|                                      |  |                    |          |   |                   |   |          |  
|Deferred tax liabilities:             |  |                    |          |   |                   |   |          |  
|Installment sales                     |  |                    | (539     | ) |                   |   | (6,159   | )
|Foreign deferrals                     |  |                    | (534     | ) |                   |   | (311     | )
|Fixed Assets                          |  |                    | (2,492   | ) |                   |   | (2,213   | )
|                                      |  |                    |          |   |                   |   |          |  
|Total deferred tax liabilities        |  |                    | (3,565   | ) |                   |   | (8,683   | )
|                                      |  |                    |          |   |                   |   |          |  
|Net deferred tax liability            |  | $                  |         |   |                   | $ |         |  
|                                      |  |                    |          |   |                   |   |          |  



At September 30, 2004,
the Company had available approximately $130.0 million of unused federal net operating loss carryforwards and $118.6 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 2005 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, 2004. 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 into goodwill until it is exhausted and then
additional paid-in-capital.



Provision has not been made for
taxes on approximately $58.0 million and $52.0 million of undistributed earnings of foreign subsidiaries as of September 30, 2004 and December 31, 2003, respectively. Those earnings have been and expect to be reinvested in the foreign subsidiaries.
The American Jobs Creation Act of 2004 provides



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 if any foreign earnings would be repatriated, and expect to have its evaluation completed 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 15Related Party Transactions



Joint Venture



As of September 30, 2004, the Company owns a 30% interest in Poipu Resort Partners, L.P. (Poipu) and accounts for its investment in the joint
venture under the equity method. On July 7, 2004, the Company completed the acquisition of the remaining outstanding 77% partnership interests in West Maui Resort Partners, L.P. (Kaanapali). Through the date of acquisition on July
7, 2004 the Company received $0.5 million in cash distributions from Kaanapali. During the nine months ended September 30, 2004 the Company received $3.2 million in cash distributions from Poipu. In 2003, the Company received $11.5 million in
cash distributions from Kaanapali and $1.6 million in cash distributions from Poipu. At December 31, 2002 the Company had a note receivable bearing interest at 12% of $0.9 million due from Poipu, which was paid in full in February 2003. 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 $22.0 million for the nine months ended September 30, 2004, $20.1 million for the year ended December 31, 2003, $6.8 million for the five months ended December 31, 2002 and
$12.1 million for the seven months ended July 31, 2002.



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 for management fees and other operating and maintenance expenses, are reported net of amounts
payable to homeowners associations, consisting primarily of maintenance fees for unsold Vacation Interests. The Company also periodically advances funds to the joint venture entity in which the Company maintains minority interest (see
Joint Venture above). The following table shows the balances outstanding from related parties on the accompanying consolidated balance sheets:



|                                         |  |                    |       |                   |   |      
|---------------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                         |  | September 30, 2004 |       | December 31, 2003
|Receivable from homeowners associations |  | $                  | 5,931 |                   | $ | 4,149
|Advances to joint venture                |  |                    | 348   |                   |   | 365  
|                                         |  |                    |       |                   |   |      
|Total                                    |  | $                  | 6,279 |                   | $ | 4,514
|                                         |  |                    |       |                   |   |      



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Westpac



From October 2001 to September 30, 2003, the Company had a contract with Westpac Resort Group LLC (Westpac), an
entity owned during that period by the current President of Resort Marketing International, Inc. Westpac arranges mini-vacation packages designed to give potential customers a sample of the vacations they could enjoy if a Vacation
Interest is purchased and tours of Sunterra properties for potentials. Total payments to Westpac under this agreement were $1.7 million for the year ended December 31, 2003, $0.7 million during the five months ended December 31, 2002 and $0.6
million during the seven months ended July 31, 2002.



On
September 30, 2003, the Company entered into an agreement to purchase the assets of Westpac, and the Company is now operating it through its wholly owned subsidiary, Resort Marketing International, Inc. The purchase price of the acquisition is
contingent upon completed tours by a group of potential customers. The maximum total purchase price is approximately $0.6 million. During the nine month period ended September 30, 2004, approximately $0.2 million was paid to Westpac under this
agreement. All remaining amounts due will be paid during fiscal 2005.



Note
16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 the subject 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 $4.5 million for the nine months ended September 30, 2004, $3.2 million for the year ended December 31, 2003, $1.5 million for the five months ended December 31, 2002 and $3.0 million for the seven months
ended July 31, 2002. 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, 2004, future minimum lease payments on capital and operating
leases were as follows:



|                                            |  |               |     |   |                 |   |       
|------------------------------------------- |  | ------------- | --- | - | --------------- | - | ------
|                                            |  | CapitalLeases |     |   | OperatingLeases
|Year Ending September 30                    |  |               |     |   |                 |   |       
|2005                                        |  | $             | 143 |   |                 | $ | 4,952 
|2006                                        |  |               | 62  |   |                 |   | 4,346 
|2007                                        |  |               | 13  |   |                 |   | 2,537 
|2008                                        |  |               |    |   |                 |   | 1,744 
|2009                                        |  |               |    |   |                 |   | 842   
|Thereafter                                  |  |               |    |   |                 |   | 1,118 
|                                            |  |               |     |   |                 |   |       
|Total minimum lease payments                |  |               | 218 |   |                 | $ | 15,539
|                                            |  |               |     |   |                 |   |       
|Less: Amount representing interest          |  |               | (22 | ) |                 |   |       
|                                            |  |               |     |   |                 |   |       
|                                            |  |               |     |   |                 |   |       
|Present value of net minimum lease payments |  | $             | 196 |   |                 |   |       
|                                            |  |               |     |   |                 |   |       



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Litigation and Other



The Company licensed certain computer software under a software license granted by RCI Technology Corp. (RCITC), formerly known as Resort
Computer Corporation. That software was the foundation for the Companys former integrated computer system (known as SWORD), which until recently managed a wide range of hospitality functions, such as reservations, inventory
control, sales commissions, Club Sunterra operations, housekeeping and marketing. 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. Sunterra opposed the motion, and the Bankruptcy Court ruled in favor of Sunterra and denied RCITCs motion. On June 14, 2002, RCITC filed a notice of appeal of the Courts decision. 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. The Companys new ATLAS computer system fully replaces the SWORD software, which was based on the RCITC system, and therefore the Company does not believe that RCITCs successful appeal in this litigation will have a
material adverse effect on the Company, even if RCITC were to assert a claim for illegitimate use of SWORD for the period between the date of emergence and the conversion to ATLAS.



The Company owns a partnership interest in the Embassy Vacation Resort at Poipu Point, Koloa on the island of Kauai, Hawaii.
Under the terms of the partnership agreement, the Company could be required to purchase the other partners interest. At September 30, 2004, the Company does not believe that the events requiring such purchase are likely to occur.



On April 29, 2004, an irrevocable standby letter of credit in the amount
of $6.6 million was issued on the Companys behalf to an affiliated homeowners association securing certain maintenance fee obligations due from the Company. This standby letter of credit expires one year from the date of issuance.
Restricted cash of approximately the same amount secures such standby letter of credit. During July 2004, two additional standby letters of credit in the combined amount of approximately $1.6 million were issued on behalf of the Company for similar
purposes and on similar terms. During August 2004, one of the two additional standby letters of credit issued on behalf of the Company in July 2004 in the amount of $0.6 million was cancelled as it was replaced with a surety bond issued in July 2004
as described in the next paragraph. Also, in August 2004 the standby letter of credit issued in April 2004 on behalf of the Company for $6.6 million was cancelled and replaced with a new one for $7.8 million. In October 2004, an additional standby
letter of credit in the amount of $1.5 million was issued on the Companys behalf.



On February 25, 2003, a surety bond in the amount of $0.6 million was issued on the Companys behalf to an affiliated homeowners association securing certain maintenance fee obligations due from the
Company. This surety bond has been amended several times and amounted to $1.5 million as of September 30, 2004. Restricted cash of approximately fifty percent of this amount secures such surety bond. During July 2004, an additional surety bond in
the amount of $0.6 million was issued on behalf of the Company for similar purposes with no restricted cash required as security and replaced an irrevocable standby letter of credit of $0.6 million previously issued as discussed in the preceding
paragraph. The Company has approximately $1.8 million of additional surety bonds issued on its behalf as of September 30, 2004 for various other business purposes.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



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 options to be granted. See Note 18 for information regarding stock options 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 2005. 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 $8.1 million at September 30, 2004, unless prior approval is received.



In addition, the Company is 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 Plan of Reorganization. In the judgment of management, none of such litigation or claims against the Company is
likely to have a material adverse effect on the Companys financial statements.



Note 17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.



Retained Interests in Mortgages Receivable SoldThe carrying
amount reported in the balance sheets for retained interests approximates fair value based on the assumptions disclosed in Note 3.



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.



Note 18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. All
outstanding shares of the Predecessor Companys common stock and options granted to purchase such stock were cancelled as of the Effective Date of the Plan. In connection with the consummation of the Plan, the Company established the Sunterra
Corporation 2002 Stock Option Plan, under which certain employees may



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SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



be granted options to purchase a total of 3,000,000 shares of the Successor Companys common stock as amended during the 2004 Annual Meeting of
Stockholders, increased from the 2,012,821 shares of the Successor Companys common stock originally authorized.



A summary of the Companys stock options (actual number of shares) for the periods ended September 30, 2004, December 31, 2003 and 2002 and July 31,
2002 is presented in the following table:



|                                         |  |                                      |   |                              |                                 |                                     |         |                                  |   |                                 |   |         |  |                                 |  |         |   |  |                                 |   |  |   |      
|---------------------------------------- |  | ------------------------------------ | - | ---------------------------- | ------------------------------- | ----------------------------------- | ------- | -------------------------------- | - | ------------------------------- | - | ------- |  | ------------------------------- |  | ------- | - |  | ------------------------------- | - |  | - | -----
|                                         |  | Successor                            |   | Predecessor                 
|                                         |  | Nine Months Ended September 30, 2004 |   | Year Ended December 31, 2003 |                                 | Five Months Ended December 31, 2002 |         | Seven Months Ended July 31, 2002
|                                         |  | Options                              |   |                              | Weighted Average Exercise Price |                                     | Options |                                  |   | Weighted Average Exercise Price |   | Options |  | Weighted Average Exercise Price |  | Options |   |  | Weighted Average Exercise Price
|Outstanding options, beginning of period |  | 1,391,821                            |   |                              |                                 |                                    |         |                                 |   |                                 |   |        |  |                                |  | $       |  |  | 2,548,029                       |   |  | $ | 10.93
|Granted                                  |  | 443,750                              |   |                              | $                               | 15.07                               |         | 1,395,321                        |   |                                 | $ | 15.25   |  |                                |  |         |  |  |                                |   |  |   |     
|Exercised                                |  |                                     |   |                              |                                 |                                    |         |                                 |   |                                 |   |        |  |                                |  |         |  |  |                                |   |  |   |     
|Forfeited or cancelled                   |  | (147,509                             | ) |                              | $                               | 15.25                               |         | (3,500                           | ) |                                 | $ | 15.25   |  |                                |  | $       |  |  | (2,548,029                      | ) |  | $ | 10.93
|                                         |  |                                      |   |                              |                                 |                                     |         |                                  |   |                                 |   |         |  |                                 |  |         |   |  |                                 |   |  |   |      
|Outstanding options, end of period       |  | 1,688,062                            |   |                              | $                               | 15.20                               |         | 1,391,821                        |   |                                 | $ | 15.25   |  |                                |  | $       |  |  |                                |   |  | $ |     
|                                         |  |                                      |   |                              |                                 |                                     |         |                                  |   |                                 |   |         |  |                                 |  |         |   |  |                                 |   |  |   |      
|Exercisable at end of period             |  | 927,118                              |   |                              | $                               | 15.16                               |         | 414,723                          |   |                                 | $ | 15.25   |  |                                |  | $       |  |  |                                |   |  | $ |     
|                                         |  |                                      |   |                              |                                 |                                     |         |                                  |   |                                 |   |         |  |                                 |  |         |   |  |                                 |   |  |   |      



All stock options
issued by the Successor 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 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.



All stock options issued by the Predecessor Company were issued to employees at exercise prices equal to fair market value of the Companys common
stock on the grant date. The options ranged from three to five years for full maturity and the exercise prices ranged from $8.875 to $25.667.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Nine Months Ended September 30, 2004, Nine Months Ended September 30, 2003,

Year Ended December 31, 2003, Seven Months Ended July 31, 2002 and

Five Months Ended December 31, 2002

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



Note 19Quarterly Financial Information (Unaudited)



As discussed in Note 2 above, the Company reclassified certain revenue and
expense items in the consolidated statements of operations. The quarterly amounts below have been reclassified to conform to the 2004 Annual Report on Form 10-K consolidated presentation.



|                                  |  |                    |         |          |   |          |  |   |        |  
|--------------------------------- |  | ------------------ | ------- | -------- | - | -------- |  | - | ------ | -
|                                  |  | Successor          |        
|                                  |  | Three Months Ended |        
|                                  |  | 09/30/04           |         | 06/30/04 |   | 03/31/04 | 
|Total Revenues                    |  | $                  | 116,326 |          | $ | 94,885   |  | $ | 75,889 |  
|                                  |  |                    |         |          |   |          |  |   |        |  
|Income (loss) from operations     |  | $                  | 15,033  |          | $ | 7,670    |  | $ | (644   | )
|                                  |  |                    |         |          |   |          |  |   |        |  
|Net income                        |  | $                  | 12,941  |          | $ | 7,670    |  | $ | 697    |  
|                                  |  |                    |         |          |   |          |  |   |        |  
|Earnings per common sharebasic   |  | $                  | 0.65    |          | $ | 0.38     |  | $ | 0.03   |  
|                                  |  |                    |         |          |   |          |  |   |        |  
|Earnings per common sharediluted |  | $                  | 0.54    |          | $ | 0.33     |  | $ | 0.03   |  
|                                  |  |                    |         |          |   |          |  |   |        |  



|                                                   |  |                    |         |   |          |   |          |  |          |        |  |   |        |  
|-------------------------------------------------- |  | ------------------ | ------- | - | -------- | - | -------- |  | -------- | ------ |  | - | ------ | -
|                                                   |  | Successor          |        
|                                                   |  | Three Months Ended |        
|                                                   |  | 12/31/03           |         |   | 09/30/03 |   | 06/30/03 |  | 03/31/03 |       
|Total Revenues                                     |  | $                  | 76,786  |   |          | $ | 87,091   |  | $        | 79,485 |  | $ | 63,551 |  
|                                                   |  |                    |         |   |          |   |          |  |          |        |  |   |        |  
|Income (loss) from operations                      |  | $                  | (92,120 | ) |          | $ | 5,201    |  | $        | 6,319  |  | $ | (6,830 | )
|                                                   |  |                    |         |   |          |   |          |  |          |        |  |   |        |  
|Net income (loss)                                  |  | $                  | (91,981 | ) |          | $ | 4,278    |  | $        | 5,184  |  | $ | (6,680 | )
|                                                   |  |                    |         |   |          |   |          |  |          |        |  |   |        |  
|Earnings (loss) per common sharebasic and diluted |  | $                  | (4.60   | ) |          | $ | 0.21     |  | $        | 0.26   |  | $ | (0.33  | )
|                                                   |  |                    |         |   |          |   |          |  |          |        |  |   |        |  



Note 20Subsequent Events



Purchase of Jardines del SolOn October 25,
2004, the Company acquired the Jardines del Sol resort at Playa Blanca in Lanzarote, Spain. The business combination included unsold Vacation Interests and fixed assets only that were purchased for an undisclosed sum.



Pre-funding of 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 effectively released ratably on these two dates
and transferred to the Company in exchange for these vacation ownership receivables.



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##### Table of Contents

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



With the participation
of our Chief Executive Officer and Chief Financial Officer, management has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2004.



Changes in Internal Controls



There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended September 30, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Sarbanes-Oxley Section 404 Compliance



The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002 (the Act) adopted rules requiring public
companies to include a report from management on our internal controls over financial reporting in Annual Reports on Form 10-K. This requirement will first apply to our Annual Report on Form 10-K for the year ending September 30, 2005 and in
subsequent Annual Reports thereafter. The report from management must include the following: (1) a statement of managements responsibility for establishing and maintaining adequate internal controls over financial reporting, (2) a statement
identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal controls over financial reporting, (3) managements assessment of the effectiveness of our internal controls over financial
reporting as of September 30, 2005, including a statement as to whether or not internal controls over financial reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on managements
assessment of internal controls over financial reporting.



Management acknowledges its responsibility for establishing and maintaining internal controls over financial reporting and seeks to continually improve those controls. In order to achieve compliance with Section 404 of the Act within the
required timeframe, we have been conducting a process to document and evaluate our internal controls over financial reporting in recent months. In this regard, we have dedicated internal and external resources, engaged temporary employees and
adopted a detailed work plan to: (i) assess and document the adequacy of our internal controls over financial reporting; (ii) take steps to improve internal control processes where required; (iii) validate through testing that our internal controls
are functioning as documented; and (iv) implement a continuous reporting and improvement process for our internal controls over financial reporting. We believe our process for documenting, evaluating and monitoring our internal controls over
financial reporting is consistent with the objectives of Section 404 of the Act.



We have prepared initial documentation of our controls over financial reporting and have recently commenced testing of those controls but have not yet completed this testing. Because of our historical growth through
acquisition prior to our July 2002 reorganization under the US Bankruptcy Code and our decentralized organizational structure in general, our documentation and testing to date have identified certain deficiencies in the documentation, design and
effectiveness of internal controls over financial reporting that we are in the process of remediating. However, there can be no assurance that one or more deficiencies will not constitute what we or our independent auditors conclude is a material
weakness in internal control over financial reporting.



43



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##### Table of Contents

Although we intend to diligently and vigorously review internal controls over financial reporting, we can provide no assurance as to our conclusions at
September 30, 2005 with respect to the effectiveness of our internal controls over financial reporting, or that we will be able to complete the required assessment in a timely manner.



It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the control system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of
control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



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, 2004, but that was not reported.



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##### Table of Contents

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 2005 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 2005 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



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2005 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 2005 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 Accountant Fees and Services



The information required by this item will be set forth in our definitive proxy statement in connection with our fiscal 2005 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.



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##### Table of Contents

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.



(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      | 
|+3.2  |  | Amended and Restated Bylaws of Sunterra Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|      | 
|+3.2a |  | Amendment to Amended and Restated Bylaws of Sunterra Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|      | 
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      | 
|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).



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.    |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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).
|       | 
|10.6   |  | 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.                                                                                                                                                                                        
|       | 
|10.7   |  | 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).                                                                                                                                                                                                  
|       | 
|+10.8  |  | Sunterra Corporation Amended and Restated 2002 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.8a  |  | Form of Stock Option Agreement Under the Sunterra Corporation Amended and Restated 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 25, 2004)).                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.9   |  | 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)).                                                                                                                                                                                                                                                                                                                                                                       
|       | 
|10.10  |  | 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)).                                                                                                                                                                                                                                                                                                                                               
|       | 
|10.11  |  | 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).                                                                                                                                                                                                                                                                                                                                
|       | 
|10.12  |  | 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).                                                                                                                                                                                                                                                                                                                                                                          
|       | 
|+10.13 |  | 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.                                                                                                                                                                     



47



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.    |  | Description                                                                                                                                                                                                                                        
|       | 
|+10.14 |  | Trust Agreement dated as of September 24, 2004 between Sunterra Ownership, LLC, as Owner and U.S. Bank Trust, National Association, as Owner Trustee.                                                                                              
|       | 
|*10.15 |  | 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)).
|       | 
|*10.16 |  | 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).           
|       | 
|*10.17 |  | 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).                       
|       | 
|*10.18 |  | 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).              
|       | 
|*10.19 |  | Employment Agreement dated as January 1, 1998 between Sunterra Corporation and Geoff Bruce (incorporated by reference to Exhibit 10.14 to the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004).                       
|       | 
|*10.20 |  | 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).                 
|       | 
|+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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##### Table of Contents

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 14, 2004 |  | By:                  |  | /s/    NICHOLAS J.
BENSON                               
|                  |  | Name: Title:         |  | Nicholas J. Benson 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 14, 2004
|                                                      |  |                                                                                       
|/S/    STEVEN E.
WESTSteven E.
West                   |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | December 14, 2004
|                                                      |  |                                                                                       
|/S/    DAVID
GUBBAYDavid
Gubbay                       |  | Chairman of the Board and Director                                                     |  | December 14, 2004
|                                                      |  |                                                                                       
|/S/    JAMES H. DICKERSON,
JR.James H. Dickerson,
Jr. |  | Director                                                                               |  | December 14, 2004
|                                                      |  |                                                                                       
|/S/    OLOF S.
NELSONOlof S.
Nelson                   |  | Director                                                                               |  | December 14, 2004
|                                                      |  |                                                                                       
|/S/    JAMES A.
WEISSENBORNJames A.
Weissenborn       |  | Director                                                                               |  | December 14, 2004
|                                                      |  |                                                                                       
|/S/    CHARLES F.
WILLESCharles F.
Willes             |  | Director                                                                               |  | December 14, 2004