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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(MARK ONE)

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



For the quarterly period ended March 31, 2005



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



For the transition period from  to



001-13815

Commission File Number



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SUNTERRA CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Maryland                                                       |  | 95-4582157                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification number)



3865 West Cheyenne
Avenue

North Las Vegas, Nevada 89032

(Address of principal executive offices, including zip code)



(702) 804-8600

(Registrants telephone number, including area code)



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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.    x  Yes ̈No



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



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



Number of shares outstanding of the registrants common stock, par value
$0.01 per share, at May 6, 2005: 19,440,819



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SUNTERRA CORPORATION AND SUBSIDIARIES



TABLE OF CONTENTS



|           |  |                                                                                       |  |           
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                       |  | PAGENUMBER
|           |  | PART I. FINANCIAL INFORMATION                                                         |  |           
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  | 3         
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 25        
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 36        
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 37        
|           |  |                                                                                      
|           |  | PART II. OTHER INFORMATION                                                            |  |           
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 38        
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38        
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 38        
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 38        
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 38        
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 39        
|           | 
|Signatures |  | 40                                                                                   



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SUNTERRA CORPORATION AND SUBSIDIARIES



PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



The accompanying
unaudited consolidated financial statements of Sunterra Corporation and its subsidiaries (the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance
with the accounting policies described in our Transition Report on Form 10-K for the nine-month period ended September 30, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The accompanying unaudited consolidated financial statements should be reviewed in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 of this report. Operating results for the six months ended March 31, 2005 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2005.



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SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Six Months Ended March 31, 2005 and 2004

(In thousands, except per
share amounts)

(Unaudited)



|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                |  | Three Months EndedMarch 31, |        |   | Six Months EndedMarch 31, |  
|                                                                                |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|Revenues:                                                                       |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Vacation Interest                                                               |  | $                           | 60,258 |   |                           | $ | 52,133 |      |  | $ | 127,681 |   |  | $ | 106,820 |  
|Resort rental                                                                   |  |                             | 9,617  |   |                           |   | 4,384  |      |  |   | 16,279  |   |  |   | 6,653   |  
|Management services                                                             |  |                             | 7,811  |   |                           |   | 8,175  |      |  |   | 14,574  |   |  |   | 15,363  |  
|Interest                                                                        |  |                             | 11,408 |   |                           |   | 6,920  |      |  |   | 21,530  |   |  |   | 13,398  |  
|Other                                                                           |  |                             | 6,317  |   |                           |   | 4,277  |      |  |   | 12,057  |   |  |   | 10,441  |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                                  |  |                             | 95,411 |   |                           |   | 75,889 |      |  |   | 192,121 |   |  |   | 152,675 |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Costs and Operating Expenses:                                                   |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Vacation Interest cost of sales                                                 |  |                             | 9,816  |   |                           |   | 10,745 |      |  |   | 20,010  |   |  |   | 21,498  |  
|Advertising, sales and marketing                                                |  |                             | 36,965 |   |                           |   | 31,631 |      |  |   | 75,832  |   |  |   | 61,898  |  
|Vacation Interest carrying cost                                                 |  |                             | 10,149 |   |                           |   | 5,920  |      |  |   | 18,933  |   |  |   | 8,798   |  
|Provision for doubtful accounts and loan losses                                 |  |                             | 2,868  |   |                           |   | 2,586  |      |  |   | 5,399   |   |  |   | 3,888   |  
|Loan portfolio                                                                  |  |                             | 1,549  |   |                           |   | 1,335  |      |  |   | 3,025   |   |  |   | 3,766   |  
|General and administrative                                                      |  |                             | 21,796 |   |                           |   | 19,058 |      |  |   | 39,374  |   |  |   | 36,693  |  
|Gain on sales of assets                                                         |  |                             | (496   | ) |                           |   | (3,144 | )    |  |   | (688    | ) |  |   | (3,222  | )
|Depreciation and amortization                                                   |  |                             | 2,620  |   |                           |   | 2,271  |      |  |   | 5,035   |   |  |   | 5,415   |  
|Interest, net of capitalized interest of $192, $29, $353 and $155, respectively |  |                             | 6,560  |   |                           |   | 6,131  |      |  |   | 12,653  |   |  |   | 13,911  |  
|Reorganization and restructuring, net                                           |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   | 311     |  
|Impairment of goodwill                                                          |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   | 91,586  |  
|Impairment of assets                                                            |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   | 897     |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total costs and operating expenses                                              |  |                             | 91,827 |   |                           |   | 76,533 |      |  |   | 179,573 |   |  |   | 245,439 |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from operations                                                   |  |                             | 3,584  |   |                           |   | (644   | )    |  |   | 12,548  |   |  |   | (92,764 | )
|                                                                                |  |                             |        |  
|Income from investments in joint ventures                                       |  |                             | 352    |   |                           |   | 1,121  |      |  |   | 610     |   |  |   | 1,986   |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes                       |  |                             | 3,936  |   |                           |   | 477    |      |  |   | 13,158  |   |  |   | (90,778 | )
|Provision (benefit) for income taxes                                            |  |                             | 1,477  |   |                           |   | (220   | )    |  |   | 4,947   |   |  |   | 506     |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                               |  | $                           | 2,459  |   |                           | $ | 697    |      |  | $ | 8,211   |   |  | $ | (91,284 | )
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss) per share:                                                    |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                           |  | $                           | 0.12   |   |                           | $ | 0.03   |      |  | $ | 0.41    |   |  | $ | (4.56   | )
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                         |  | $                           | 0.12   |   |                           | $ | 0.03   |      |  | $ | 0.36    |   |  | $ | (4.56   | )
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of common shares outstanding:                           |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                           |  |                             | 20,009 |   |                           |   | 20,000 |      |  |   | 20,005  |   |  |   | 20,000  |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                         |  |                             | 26,019 |   |                           |   | 20,000 |      |  |   | 25,946  |   |  |   | 20,000  |  
|                                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  



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



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SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

March 31, 2005 and September 30, 2004

(In thousands, except per share
amounts)



|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                 |  | March 31, 2005 |         |   | September 30,2004 |  
|                                                                                                                                                                 |  | (Unaudited)    |         |   |                   |  
|ASSETS                                                                                                                                                           |  |                |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                        |  | $              | 17,834  |   |                   | $ | 26,842  |  
|Cash in escrow and restricted cash                                                                                                                               |  |                | 103,008 |   |                   |   | 88,663  |  
|Mortgages and contracts receivable, net of allowances of $ 25,896 and $26,530 at March 31, 2005 and September 30, 2004,
respectively                             |  |                | 307,785 |   |                   |   | 278,569 |  
|Retained interests in mortgages and contracts receivable sold                                                                                                    |  |                |        |   |                   |   | 23,319  |  
|Due from related parties, net                                                                                                                                    |  |                | 6,528   |   |                   |   | 6,279   |  
|Other receivables, net                                                                                                                                           |  |                | 34,664  |   |                   |   | 25,986  |  
|Deferred tax asset                                                                                                                                               |  |                | 1,795   |   |                   |   | 622     |  
|Prepaid expenses and other assets, net                                                                                                                           |  |                | 46,860  |   |                   |   | 47,944  |  
|Assets held for sale                                                                                                                                             |  |                | 1,278   |   |                   |   | 551     |  
|Investment in joint venture                                                                                                                                      |  |                | 5,667   |   |                   |   | 7,187   |  
|Unsold Vacation Interests, net                                                                                                                                   |  |                | 179,477 |   |                   |   | 168,858 |  
|Property and equipment, net                                                                                                                                      |  |                | 83,269  |   |                   |   | 77,996  |  
|Goodwill, net                                                                                                                                                    |  |                | 78,043  |   |                   |   | 82,759  |  
|Intangible assets, net                                                                                                                                           |  |                | 780     |   |                   |   | 1,283   |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|Total assets                                                                                                                                                     |  | $              | 866,988 |   |                   | $ | 836,858 |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  |                |         |   |                   |   |         |  
|Borrowings under line of credit agreements                                                                                                                       |  | $              | 179,814 |   |                   | $ | 171,737 |  
|Accounts payable                                                                                                                                                 |  |                | 7,184   |   |                   |   | 10,401  |  
|Accrued liabilities                                                                                                                                              |  |                | 98,039  |   |                   |   | 80,895  |  
|Income taxes payable                                                                                                                                             |  |                | 3,562   |   |                   |   | 3,421   |  
|Deferred revenues                                                                                                                                                |  |                | 106,587 |   |                   |   | 95,127  |  
|Securitization notes                                                                                                                                             |  |                | 134,742 |   |                   |   | 151,710 |  
|Senior subordinated convertible notes                                                                                                                            |  |                | 95,000  |   |                   |   | 95,000  |  
|Notes payable                                                                                                                                                    |  |                | 1,667   |   |                   |   | 2,261   |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                |  |                | 626,595 |   |                   |   | 610,552 |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                    |  |                |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                            |  |                |         |   |                   |   |         |  
|Common stock ($0.01 par value, 75,000 shares authorized; 18,995 and 18,891 shares issued and outstanding at March 31, 2005 and September 30,
2004, respectively) |  |                | 190     |   |                   |   | 189     |  
|Additional paid-in capital                                                                                                                                       |  |                | 297,561 |   |                   |   | 297,145 |  
|Accumulated deficit                                                                                                                                              |  |                | (74,003 | ) |                   |   | (82,214 | )
|Accumulated other comprehensive income                                                                                                                           |  |                | 16,645  |   |                   |   | 11,186  |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                       |  |                | 240,393 |   |                   |   | 226,306 |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                       |  | $              | 866,988 |   |                   | $ | 836,858 |  
|                                                                                                                                                                 |  |                |         |   |                   |   |         |  



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



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SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended March 31, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                    |  | 2005 |         |   | 2004 |  
|Operating activities:                                                                               |  |      |         |   |      |   |         |  
|Net income (loss)                                                                                   |  | $    | 8,211   |   |      | $ | (91,284 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:            |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                       |  |      | 5,035   |   |      |   | 5,415   |  
|Provision for doubtful accounts and loan losses                                                     |  |      | 5,399   |   |      |   | 3,888   |  
|Amortization of capitalized financing costs, deferred loan and contract origination costs and other |  |      | 4,474   |   |      |   | 8,174   |  
|Income from investments in joint ventures                                                           |  |      | (610    | ) |      |   | (1,986  | )
|Gain on sales of assets                                                                             |  |      | (688    | ) |      |   | (3,222  | )
|(Gain) loss on foreign currency                                                                     |  |      | (377    | ) |      |   | 1,008   |  
|Impairment of goodwill                                                                              |  |      |        |   |      |   | 91,586  |  
|Impairment of assets                                                                                |  |      |        |   |      |   | 897     |  
|Provision for income taxes recorded as a reduction to goodwill                                      |  |      | 5,215   |   |      |   |        |  
|Deferred income taxes                                                                               |  |      | (1,173  | ) |      |   | 22      |  
|Stock-based compensation grant to Board of Directors                                                |  |      | 347     |   |      |   |        |  
|Changes in retained interests in mortgages and contracts receivable sold                            |  |      | (522    | ) |      |   | (784    | )
|Changes in operating assets and liabilities:                                                        |  |      |         |   |      |   |         |  
|Cash in escrow and restricted cash                                                                  |  |      | (12,701 | ) |      |   | (23,458 | )
|Mortgages and contracts receivable                                                                  |  |      | 6,827   |   |      |   | (11,820 | )
|Due from related parties, net                                                                       |  |      | (249    | ) |      |   | (2,317  | )
|Other receivables, net                                                                              |  |      | (7,744  | ) |      |   | 904     |  
|Prepaid expenses and other assets, net                                                              |  |      | (577    | ) |      |   | (1,949  | )
|Unsold Vacation Interests, net                                                                      |  |      | 1,524   |   |      |   | 9,008   |  
|Accounts payable                                                                                    |  |      | (3,412  | ) |      |   | 2,384   |  
|Accrued liabilities                                                                                 |  |      | 19,013  |   |      |   | 14,938  |  
|Income taxes payable                                                                                |  |      | (11     | ) |      |   | 1,242   |  
|Deferred revenues                                                                                   |  |      | 11,379  |   |      |   | 7,070   |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                           |  |      | 39,360  |   |      |   | 9,716   |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Investing activities:                                                                               |  |      |         |   |      |   |         |  
|Proceeds from sales of assets                                                                       |  |      | 1,319   |   |      |   |        |  
|Capital expenditures for property and equipment                                                     |  |      | (7,384  | ) |      |   | (5,284  | )
|Purchase of mortgages and contracts receivable portfolios                                           |  |      | (26,453 | ) |      |   | (43,915 | )
|Purchase of businesses, net of cash acquired                                                        |  |      | (10,120 | ) |      |   | (30,151 | )
|Purchase of U.S. government securities pledged under bond indenture                                 |  |      |        |   |      |   | (10,426 | )
|(Increase) decrease in intangible assets, net                                                       |  |      | (145    | ) |      |   | 628     |  
|Distributions from investments in joint ventures                                                    |  |      | 2,130   |   |      |   | 1,601   |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                               |  |      | (40,653 | ) |      |   | (87,547 | )
|                                                                                                    |  |      |         |   |      |   |         |  



(Continued)



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS Continued

Six Months Ended March 31, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                |  | 2005 |         |   | 2004 |  
|Financing activities:                                                                                                                                                                                           |  |      |         |   |      |   |         |  
|Borrowings under line of credit agreements                                                                                                                                                                      |  | $    | 55,566  |   |      | $ | 75,107  |  
|Proceeds from issuance of senior subordinated convertible notes                                                                                                                                                 |  |      |        |   |      |   | 95,000  |  
|Proceeds from issuance of notes payable                                                                                                                                                                         |  |      | 92      |   |      |   | 224     |  
|Payment of debt issuance costs                                                                                                                                                                                  |  |      |        |   |      |   | (3,337  | )
|Payments under line of credit agreements                                                                                                                                                                        |  |      | (47,489 | ) |      |   | (92,940 | )
|Payments on securitization notes                                                                                                                                                                                |  |      | (16,968 | ) |      |   |        |  
|Payments on notes payable                                                                                                                                                                                       |  |      | (686    | ) |      |   | (2,762  | )
|Proceeds from the exercise of stock options                                                                                                                                                                     |  |      | 70      |   |      |   |        |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                                                                                                                                             |  |      | (9,415  | ) |      |   | 71,292  |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|Effect of changes in exchange rates on cash and cash equivalents                                                                                                                                                |  |      | 1,700   |   |      |   | (245    | )
|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                                                                                                                                       |  |      | (9,008  | ) |      |   | (6,784  | )
|Cash and cash equivalents, beginning of period                                                                                                                                                                  |  |      | 26,842  |   |      |   | 25,249  |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                                                                                                                                        |  | $    | 17,834  |   |      | $ | 18,465  |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                                                                                                              |  |      |         |   |      |   |         |  
|Cash paid for interest                                                                                                                                                                                          |  | $    | 10,271  |   |      | $ | 7,956   |  
|Cash paid for (received from) taxes, net of tax refunds                                                                                                                                                         |  |      | 887     |   |      |   | (603    | )
|                                                                                                                                                                                                                |  |     
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                                                                                                                            |  |      |         |   |      |   |         |  
|Assets held for sale reclassified to Unsold Vacation Interests                                                                                                                                                  |  | $    |        |   |      | $ | 336     |  
|Unsold Vacation Interests transferred to Assets held for sale                                                                                                                                                   |  |      | 1,177   |   |      |   |        |  
|Retained interests in mortgages and contracts receivable sold reclassified to mortgages and contracts receivable upon exercise of clean-up
call provisions (See Note 4Mortgages and Contracts Receivable, Net) |  |      | 23,842  |   |      |   |        |  
|Property and equipment transferred to Goodwill (See Note 2Acquisitions)                                                                                                                                        |  |      | 460     |   |      |   |        |  
|Property and equipment transferred to Unsold Vacation Interests                                                                                                                                                 |  |      | 281     |   |      |   | 3,878   |  



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



(Unaudited)



Note 1Background and Business



Sunterra Corporation, a Maryland corporation (together with its wholly owned subsidiaries hereafter referred to as Sunterra or the Company) was
incorporated in May 1996 as KGK Resorts, Inc. and was later known as Signature Resorts, Inc. At the time of its August 1996 initial public offering, the Company owned nine vacation ownership resorts in Hawaii, Florida, South Carolina, Missouri 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 March 31, 2005, the Company had over 300,000 owner families vacationing at 95 resorts in 13 countries located in North America, Europe and the Caribbean. See Note 11 for detailed geographic segment
information.



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



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, unaudited financial information for the six-month period ended March 31, 2005 is presented herein compared to
unaudited financial information for the six-month period ended March 31, 2004.



Note 2Basis of Presentation and Summary of Significant Accounting Policies



Reference to Transition Report on Form 10-K for the Transition Period Ended September 30, 2004



These unaudited consolidated financial statements were prepared using the requirements outlined by the Securities and Exchange Commission (SEC) for
preparation of interim financial statements. It is presumed that users of the unaudited interim consolidated financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year and that the
adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnote disclosures that would substantially duplicate the disclosure contained in the
most recent annual report to security holders or latest audited consolidated financial statements, such as a statement of significant accounting policies and practices, details of accounts which have not changed significantly in amount or
composition since the end of the most recently completed fiscal year may be omitted. Please review the accompanying unaudited consolidated financial statements in conjunction with the accounting policies and detailed disclosures contained in our
Transition Report on Form 10-K for the Transition Period ended September 30, 2004, filed with the SEC on December 17, 2004, as well as all the financial information contained in interim and other reports filed with the SEC after that date.



Principles of Consolidation



The accompanying unaudited 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 FASB Interpretation No. 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, as discussed in Note 12, and in July 2004 purchased the remaining 77% interest in West Maui Resort
Partners, L.P. (Kaanapali), as discussed below under Acquisitions. All significant intercompany transactions and balances have been eliminated from the unaudited consolidated financial statements.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO 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 unaudited consolidated financial statements include: (i) mortgages and contracts receivable allowance for loan and contract losses, (ii) valuation of
retained interests in mortgages and contracts receivable sold, (iii) expected future cash flows from pools of mortgages and contracts receivable acquired, (iv) estimated net realizable value of assets held for sale, (v) future sales plans used to
allocate certain Unsold Vacation Interests to Vacation Interest cost of sales under the relative sales value method, (vi) impairment of long-lived assets including goodwill, and (vii) the valuation allowance recorded against deferred tax assets. It
is at least reasonably possible that a material change in one of these estimates may occur in the near term and cause actual results to differ materially.



Net 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 (in thousands):



|                                                                                                                                                       |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------- | -
|                                                                                                                                                       |  | Three months endedMarch 31, |        | Six months endedMarch 31, |  
|                                                                                                                                                       |  | 2005                        |        | 2004                      |   | 2005   |  | 2004 |       
|Net income (loss) available to common shares outstanding                                                                                               |  | $                           | 2,459  |                           | $ | 697    |  | $    | 8,211  |  | $ | (91,284 | )
|Effect of dilutive securities:                                                                                                                         |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|Deemed conversion of 33⁄4% Senior Subordinated Convertible Notes due 2024, net of tax                                                                    |  |                             | 622    |                           |   |       |  |      | 1,218  |  |   |        |  
|                                                                                                                                                       |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|Net income (loss) available to diluted common shares outstanding                                                                                       |  | $                           | 3,081  |                           | $ | 697    |  | $    | 9,429  |  | $ | (91,284 | )
|                                                                                                                                                       |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|                                                                                                                                                      
|A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows (in thousands): | 
|                                                                                                                                                       |  |                            
|                                                                                                                                                       |  | Three months endedMarch 31, |        | Six months endedMarch 31, |  
|                                                                                                                                                       |  | 2005                        |        | 2004                      |   | 2005   |  | 2004 |       
|Basic weighted average common shares outstanding                                                                                                       |  |                             | 20,009 |                           |   | 20,000 |  |      | 20,005 |  |   | 20,000  |  
|Effect of dilutive securities:                                                                                                                         |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|Stock options issued under the Sunterra Corporation 2002 Stock Option Plan                                                                             |  |                             | 5      |                           |   |       |  |      | 3      |  |   |        |  
|Warrants issued to Senior Finance Facility lender                                                                                                      |  |                             | 67     |                           |   |       |  |      |       |  |   |        |  
|Deemed conversion of 33⁄4% Senior Subordinated Convertible Notes due 2024                                                                                |  |                             | 5,938  |                           |   |       |  |      | 5,938  |  |   |        |  
|                                                                                                                                                       |  |                             |        |                           |   |        |  |      |        |  |   |         |  
|Diluted weighted average common shares outstanding                                                                                                     |  |                             | 26,019 |                           |   | 20,000 |  |      | 25,946 |  |   | 20,000  |  
|                                                                                                                                                       |  |                             |        |                           |   |        |  |      |        |  |   |         |  



For the three months ended March 31,
2005, a total of 600,000 shares attributable to the potential exercise of outstanding warrants and 1,582,312 shares of the Companys common stock attributable to the potential exercise of outstanding options under the Sunterra Corporation 2002
Stock Option Plan were excluded from the calculation of diluted income per share because the exercise price of the warrants and options exceeded the average price of the Companys common stock. For the six months ended March 31, 2005, a total
of 1,790,148 shares attributable to the potential exercise of outstanding warrants and 1,582,312 shares of the Companys common stock attributable to the potential exercise of outstanding options under the Sunterra Corporation 2002 Stock Option
Plan were excluded from the calculation of diluted income per share because the exercise price of the warrants and options exceeded the average price of the Companys common stock. For the three and six months ended March 31, 2004, a total of
1,790,148 shares attributable to



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



the potential exercise of outstanding warrants were excluded from the calculation of diluted income (loss) per share
because the exercise price of the warrants exceeded the average price of the Companys common stock. For the three and six months ended March 31, 2004, a total of 1,808,312 shares of the Companys common stock attributable to the potential
exercise of outstanding options under the Sunterra Corporation 2002 Stock Option Plan were excluded from the calculation of diluted income (loss) per share because the exercise price of the options exceeded the average price of the Companys
common stock.



During the six months ended March 31, 2005, 77,968 shares of
common stock were issued to certain creditors upon the completion of certain claims processes in connection with the Companys Plan of Reorganization, bringing the cumulative total to 923,767 shares. An additional distribution of 1,031,156
shares of the Companys common stock will be made to certain former creditors on a pro rata basis for no cash consideration, including 445,998 of such shares issued in April 2005. In accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128,Earnings per Share, these shares of common stock to be issued are considered to be outstanding and included in the computation of net income (loss) per share of the Company.



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.



The following table presents the Companys pro forma 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(SFAS No. 123), as amended by SFAS No. 148 (in thousands, except per share data):



|                                                                                                                                            |  |                             |       |   |                           |   |        |      |  |   |       |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------- | -
|                                                                                                                                            |  | Three months endedMarch 31, |       |   | Six months endedMarch 31, |  
|                                                                                                                                            |  | 2005                        |       |   | 2004                      |   |        | 2005 |  |   | 2004  |  
|Net income (loss), as reported                                                                                                              |  | $                           | 2,459 |   |                           | $ | 697    |      |  | $ | 8,211 |   |  | $ | (91,284 | )
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                             | (344  | ) |                           |   | (1,313 | )    |  |   | (711  | ) |  |   | (1,854  | )
|                                                                                                                                            |  |                             |       |   |                           |   |        |      |  |   |       |   |  |   |         |  
|Pro forma net income (loss)                                                                                                                 |  | $                           | 2,115 |   |                           |   | (616   | )    |  | $ | 7,500 |   |  | $ | (93,138 | )
|                                                                                                                                            |  |                             |       |   |                           |   |        |      |  |   |       |   |  |   |         |  
|Basic net income (loss) per share, as reported                                                                                              |  | $                           | 0.12  |   |                           | $ | 0.03   |      |  | $ | 0.41  |   |  | $ | (4.56   | )
|Diluted net income (loss) per share, as reported                                                                                            |  | $                           | 0.12  |   |                           | $ | 0.03   |      |  | $ | 0.36  |   |  | $ | (4.56   | )
|Basic pro forma net income (loss) per share                                                                                                 |  | $                           | 0.11  |   |                           | $ | (0.03  | )    |  | $ | 0.37  |   |  | $ | (4.66   | )
|Diluted pro forma net income (loss) per share                                                                                               |  | $                           | 0.11  |   |                           | $ | (0.03  | )    |  | $ | 0.34  |   |  | $ | (4.66   | )



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.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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:



|                                               |  |                             |   |  |                           |   |  |      |   |  |       |  
|---------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ----- | -
|                                               |  | Three months endedMarch 31, |   |  | Six months endedMarch 31, |  
|                                               |  | 2005                        |   |  | 2004                      |   |  | 2005 |   |  | 2004  |  
|Dividend yield                                 |  | N/A                         | * |  | 0.0                       | % |  | N/A  | * |  | 0.0   | %
|Expected volatility                            |  | N/A                         | * |  | 58.67                     | % |  | N/A  | * |  | 58.64 | %
|Risk-free interest rate                        |  | N/A                         | * |  | 2.72                      | % |  | N/A  | * |  | 2.74  | %
|Expected holding period (in years)             |  | N/A                         | * |  | 5.0                       |   |  | N/A  | * |  | 5.0   |  
|Weighted average fair value of options granted |  | N/A                         | * |  | 7.12                      |   |  | N/A  | * |  | 7.06  |  

---

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



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. The Company accounts for these issuances under SFAS No. 123, as amended by SFAS No. 148, and related interpretations, which utilizes a fair-value method of accounting. The Company used the following
assumptions in estimating the fair value of these warrants: expected life5 years; interest rate3.81%; expected dividends$0; volatility50%. As discussed in Note 7, the Company amended the exercise price of 1,190,148 of these
warrants in February 2004.



At the 2005 Annual Meeting held on February 25,
2005, stockholders approved the 2005 Incentive Plan. Effective for the fiscal year ending September 30, 2005, each non-employee member of the Companys Board of Directors is entitled to an annual grant of stock-based compensation equivalent to
$0.04 million to be issued in advance on the first day of the fiscal year. During the quarter ended March 31, 2005, each non-employee director was granted 4,275 shares of the Companys common stock under this plan (based on the Companys
common stock price on September 30, 2004) as their fiscal 2005 stock-based compensation.



Income Taxes



The Company
accounts for income taxes in accordance with the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Companys financial
statements or tax returns. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which the deferred tax assets or liabilities are expected to be realized or settled. Income tax
expense consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities. For the three and six months ended March 31, 2004, the tax basis operating income of the North American operations
was offset by operating losses for prior years. For the current fiscal year, such tax basis operating income of the North American operations will be 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. The result of this provision in the North American operations is a worldwide effective tax rate of approximately 37.5%, which is consistent with the
statutory rates enacted in the jurisdictions in which the Company operates.



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 in stockholders equity. Gains and losses from foreign currency transactions are included in the unaudited consolidated statements of operations. During the three and six
months ended March 31, 2005, the Companys European operations experienced a loss of $0.2 million and a gain of $0.4 million, respectively, related to holding Euros. The Companys European operations reported a loss of $1.0 million in the
three and six months ended March 31, 2004 related to holding Euros.



Acquisitions



On October 7, 2003, the U.S. Bankruptcy
Court for the District of Delaware approved the Companys bid to acquire certain assets of Epic Resorts Group, and on October 30, 2003, the Company completed this purchase. On January 28, 2004, the Company completed the purchase of certain
assets of Thurnham Leisure Group. On March 18, 2004, the Company completed the purchase of a loan portfolio from Prudential Securities Credit Corp. that included mortgages and contracts receivable secured by Vacation Interests in the Epic Vacation
Club (the Company had previously acquired substantial amounts of Unsold Vacation Interests in the Epic Vacation Club as part of the October 30, 2003 acquisition). These transactions were accounted for as purchases under SFAS No. 141, Business



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Combinations (SFAS No. 141). Under the purchase method of accounting, the total purchase price is allocated to the net tangible and
intangible assets based upon their estimated fair market values as of the date of the acquisition and the operating results of the acquired entity are included in the consolidated statement of operations from the date of acquisition. The tangible
assets, intangible assets, liabilities and goodwill acquired in these transactions totaled $73.3 million, $1.2 million, $2.4 million and $2.0 million, respectively.



West Maui Resort Partners, L.P. (Kaanapali) owns and operates Embassy Vacation Resort Kaanapali on the Hawaiian
island of Maui. On July 7, 2004, 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 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 unaudited consolidated
statement of operations. Since July 7, 2004, 100% of the operations of Kaanapali are included in the consolidated results of the Company. The transaction was accounted for as a purchase under SFAS No. 141. Under the purchase method of
accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition. During the quarter ended December 31, 2004, the Company received the final
independent third-party valuation of the net assets acquired and recorded an adjustment decreasing the Property and equipment recorded by $0.5 million and increasing the goodwill recorded by a similar amount. As a result of such adjustment, the
tangible assets, liabilities and goodwill acquired totaled $108.0 million, $10.1 million and $19.4 million, respectively. The net assets recorded of $117.3 million were offset by the elimination of the existing Investment in Joint Venture at the
date of acquisition of $11.4 million and cash drawn against the Companys existing line of credit facility, as amended on July 7, 2004, of $105.9 million. With this transaction the Company acquired full ownership of Unsold Vacation Interests
with an estimated retail value in excess of $210.0 million and acquired $46.2 million of mortgages receivable.



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



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



The Company previously established a qualifying entity, Blue Bison Funding Corporation, through which it transferred mortgages and contracts receivable to Barton Capital
Corporation (Barton) and related entities as part of a $100 million Mortgages Receivable Conduit Facility (the Conduit Facility). The Company sold undivided interests in mortgages and contracts receivable to Blue Bison
Funding Corporation at 95% of face value without recourse to it as to collectibility. Blue Bison Funding Corporation financed those purchases through transfers to Barton of an undivided interest in the transferred mortgages and contracts receivable
for cash consideration under the Conduit Facility. The Conduit Facility expired on December 17, 2001, leaving a substantial quantity of mortgages and contracts receivable still held by Barton. On December 17, 2004, the Company completed the purchase
from Barton of its rights to the mortgages and contracts remaining in the loan portfolio at that date for approximately $16.4 million in cash (See Note 4Mortgages and Contracts Receivable, Net).



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



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



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The goodwill from the 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.



Recently Issued Accounting Pronouncements



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



SFAS No.
152 and SOP 04-2 are effective for financial statements for fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 152 and SOP 04-2 on October 1, 2005. The Company has not yet completed its evaluation of the impact that the
adoptions of SFAS No. 152 and SOP 04-2 will have on its financial position and results of operations.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment-a revision to SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123(R)) that addresses the accounting for
share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may
be settled by the issuance of such equity instruments. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires
instead that such transactions be accounted for using a fair-value-based method.



SFAS No. 123(R) is effective as of the beginning of the annual reporting period that begins after June 15, 2005. SFAS 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled
after that date. The cumulative effect of initially applying SFAS No. 123(R), if any, is recognized as of the required effective date. As of the required effective date, all public entities that used the fair-value-based method for either
recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R) using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. For periods before the required effective
date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123.
The Company has not yet completed its evaluation of the impact SFAS No. 123(R) will have on its financial position and results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29(SFAS No. 153). SFAS No. 153
addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions,and replaces it with an exception for exchanges that do not have commercial substance. The provisions of SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No. 153 was issued. The provisions of SFAS No. 153 shall be applied prospectively. The Company has not yet completed its
evaluation of the impact SFAS No. 153 will have on its financial position and results of operations.



Reclassifications



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



Note 3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 quarter ended March 31, 2004, the Company began to
convey Vacation Points representing beneficial interests in a trust that holds title to the underlying resorts.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The leases entered into prior to the change during the quarter ended March 31, 2004 when the Company began to convey
Vacation Points are deemed to be operating leases under current accounting pronouncements. As such, the sales value of the related Vacation Interests 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 unaudited 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 unaudited 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 unaudited
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 unaudited 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 unaudited 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 Interest cost of sales on the relative sales value method. During the quarter ended March 31, 2004, in conjunction with the change from long-term leases to Vacation Points, approximately $3.9 million of the hard and soft
construction costs of the 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.



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



|                                                                          |  |               |        |   |                    |   |        |  
|------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------------ | - | ------ | -
|                                                                          |  | March 31,2005 |        |   | September 30, 2004 |  
|Prepaid expenses and other assets, net (direct sales and marketing costs) |  | $             | 11,194 |   |                    | $ | 11,382 |  
|                                                                          |  |               |        |   |                    |   |        |  
|Property and equipment (recorded cost)                                    |  | $             | 11,543 |   |                    | $ | 11,855 |  
|Accumulated depreciation                                                  |  |               | (1,237 | ) |                    |   | (1,040 | )
|                                                                          |  |               |        |   |                    |   |        |  
|Property and equipment, net                                               |  | $             | 10,306 |   |                    | $ | 10,815 |  
|                                                                          |  |               |        |   |                    |   |        |  
|Deferred revenue                                                          |  | $             | 74,628 |   |                    | $ | 75,877 |  
|                                                                          |  |               |        |   |                    |   |        |  



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



|                                       |  |                             |     |                           |   |      |  |      |     |  |   |      
|-------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | -----
|                                       |  | Three months endedMarch 31, |     | Six months endedMarch 31,
|                                       |  | 2005                        |     | 2004                      |   | 2005 |  | 2004
|Vacation Interest revenue              |  | $                           | 380 |                           | $ | 737  |  | $    | 822 |  | $ | 1,787
|Advertising, sales and marketing costs |  |                             | 85  |                           |   | 110  |  |      | 188 |  |   | 268  



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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 4Mortgages and Contracts Receivable, Net



Mortgages and contracts receivable originated by the Company are recorded at amortized cost,
including deferred loan and contract origination costs, less the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation Interests have been capitalized and are
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 $0.5 million and $0.5 million for the three months ended March 31, 2005 and 2004, respectively, and was $1.0 million and $1.0 million for the six months ended March 31, 2005 and 2004, respectively.



The Company recorded a $10.3 million premium at July 31, 2002 on mortgages and contracts
receivable, which is being amortized over the life of the mortgages and contracts receivable portfolio. At March 31, 2005 and September 30, 2004, the net unamortized premium was $3.7 million and $4.5 million, respectively. During the three months
ended March 31, 2005 and 2004, amortization of $0.5 million and $0.5 million, respectively, was recorded as an adjustment of interest revenue. During the six months ended March 31, 2005 and 2004, amortization of $0.8 million and $1.0 million,
respectively, was recorded as an adjustment of interest revenue.



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



On January 25, 2005, the Company completed a transaction resulting in the acquisition of a
loan portfolio held by TerraSun, LLC, a qualified special purpose entity created to hold a loan portfolio and issue collateralized debt to third-party investors, for approximately $4.5 million in cash. This transaction was the result of the exercise
of the clean up call provision contained in the notes issued by TerraSun, LLC that allows the notes to be called and mortgages and contracts receivable to be transferred back to the Company when the remaining principal value of the notes
reaches 10% of the original principal value. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisition and
the operating results of the acquired portfolio are included in the consolidated statement of operations from the date of acquisition. The total purchase price of the loan portfolio was $19.5 million, which included net cash paid of $4.5 million
plus net write-off of the retained interest in TerraSun, LLC loan pool of $15.0 million. The tangible assets, intangible assets, liabilities and goodwill acquired totaled $18.5 million, $0.0 million, $(1.0) million and $0.0 million, respectively.



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



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



These acquired mortgages and contracts receivable have each been accounted for separately as pools of loans and
therefore use a composite interest rate and expectation of future cash flows that is estimated on the pool, rather than on a loan-by-loan basis. Loan pools acquired are as follows (in thousands):



|                                                                                    |  |                        |         |                                |   |        |  |   |        
|----------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------------------------ | - | ------ |  | - | -------
|                                                                                    |  | Prior YearAcquisitions |         | CurrentFiscal YearAcquisitions |   | Total 
|Contractually required payments of principal and interest receivable-at acquisition |  | $                      | 146,357 |                                | $ | 64,532 |  | $ | 210,889
|Cash flows expected to be collected-at acquisition                                  |  |                        | 121,860 |                                |   | 56,223 |  |   | 178,083
|Basis in acquired loans-at acquisition                                              |  |                        | 91,956  |                                |   | 42,981 |  |   | 134,937
|                                                                                    |  |                        |        
|Carrying amount of pools as of September 30, 2004                                   |  |                        | 79,827  |                                |   |       |  |   | 79,827 
|                                                                                    |  |                        |        
|Carrying amount of pools as of March 31, 2005                                       |  |                        | 62,355  |                                |   | 38,015 |  |   | 100,370



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



|                                          |  |       |        |  
|----------------------------------------- |  | ----- | ------ | -
|                                          |  | Total |       
|Accretable yield as of September 30, 2004 |  | $     | 24,737 |  
|Portfolios acquired                       |  |       | 5,944  |  
|Accretion                                 |  |       | (3,007 | )
|                                          |  |       |        |  
|Accretable yield as of December 31, 2004  |  |       | 27,674 |  
|Portfolios acquired                       |  |       | 7,299  |  
|Accretion                                 |  |       | (4,123 | )
|                                          |  |       |        |  
|                                          | 
|Accretable yield as of March 31, 2005     |  | $     | 30,850 |  
|                                          |  |       |        |  



Over the life of the loan pools, the
Company will continue to estimate cash flows expected to be collected. The Company will evaluate on the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, will recognize a
loss. The present value of any subsequent increase in the loan pools actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for the loan pool. Any remaining increases in cash flows
expected to be collected will adjust the amount of accretable yield recognized on a prospective basis over the loan pools remaining life. As of March 31, 2005, there were no valuation allowances relating to these acquired loan pools.



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



|                                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                            |  | March 31,2005 |         |   | September 30,2004 |  
|Mortgages and contracts receivable principal (including purchased loan pools of $100,370 and $79,827, respectively)                                                                                                         |  | $             | 324,691 |   |                   | $ | 295,816 |  
|Deferred loan and contract origination costs, net of accumulated amortization                                                                                                                                               |  |               | 5,250   |   |                   |   | 4,770   |  
|Premium on mortgages and contracts receivable, net of accumulated amortization                                                                                                                                              |  |               | 3,740   |   |                   |   | 4,513   |  
|                                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Mortgages and contracts receivable, gross                                                                                                                                                                                   |  |               | 333,681 |   |                   |   | 305,099 |  
|Allowance for loan and contract losses associated with loan and contract originations (excluding purchased loan pools) with a gross balance of
$224,321 and $215,989 at March 31, 2005 and September 30, 2004, respectively |  |               | (25,896 | ) |                   |   | (26,530 | )
|                                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Mortgages and contracts receivable, net                                                                                                                                                                                     |  | $             | 307,785 |   |                   | $ | 278,569 |  
|                                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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. The Company periodically performs an analysis of factors such as economic conditions and industry
trends, defaults, past due agings and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.



The Company charges off mortgages and contracts receivable upon 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 costs are expensed as incurred.



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



|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Three months endedMarch 31, |        |   | Six months endedMarch 31, |  
|                                       |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|Balance, beginning of period           |  | $                           | 25,881 |   |                           | $ | 29,443 |      |  | $ | 26,530 |   |  | $ | 28,645 |  
|Provision for loan and contract losses |  |                             | 2,899  |   |                           |   | 2,340  |      |  |   | 5,464  |   |  |   | 4,161  |  
|Receivables charged off, net           |  |                             | (2,884 | ) |                           |   | (3,337 | )    |  |   | (6,098 | ) |  |   | (5,560 | )
|Other                                  |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   | 1,200  |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Balance, end of period                 |  | $                           | 25,896 |   |                           | $ | 28,446 |      |  | $ | 25,896 |   |  | $ | 28,446 |  
|                                       |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



Note 5Unsold Vacation
Interests, Net



Unsold Vacation Interests are valued at the lower of cost
or fair value. Development costs include acquisition costs, both hard and soft construction costs and, together with real estate costs, are allocated to Unsold Vacation Interests, net. Interest, real estate taxes and other carrying costs incurred
during the construction period are capitalized and such costs incurred on completed Vacation Interest inventory are expensed. Costs are allocated to Vacation Interest cost of sales 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.



Unsold Vacation Interests, net consists of the following as of the dates on
the accompanying unaudited consolidated balance sheets (in thousands):



|                                                              |  |                |         |                   |   |        
|------------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                                              |  | March 31, 2005 |         | September 30,2004
|Development costs of completed Unsold Vacation Interests, net |  | $              | 111,440 |                   | $ | 114,849
|Development costs of uncompleted Vacation Interests projects  |  |                | 29,626  |                   |   | 22,329 
|Undeveloped land costs                                        |  |                | 26,893  |                   |   | 26,885 
|Vacation Interests recoverable under defaulted mortgages      |  |                | 11,518  |                   |   | 4,795  
|                                                              |  |                |         |                   |   |        
|Unsold Vacation Interests, net                                |  | $              | 179,477 |                   | $ | 168,858
|                                                              |  |                |         |                   |   |        



Note 6Goodwill and Intangible
Assets, Net



The following table sets forth information concerning the
Companys goodwill (in thousands):



|                                                                                      |  |               |        |   |          |   |        |  |   |        |  
|------------------------------------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------ |  | - | ------ | -
|                                                                                      |  | NorthAmerican |        |   | European |   | Total  | 
|Balance as of October 1, 2004                                                         |  | $             | 27,329 |   |          | $ | 55,430 |  | $ | 82,759 |  
|Goodwill acquired during the period (See Note 2Acquisitions)                         |  |               | 487    |   |          |   | 12     |  |   | 499    |  
|Provision for income taxes recorded as a credit to goodwill (See Note 2Income Taxes) |  |               | (5,215 | ) |          |   |       |  |   | (5,215 | )
|                                                                                      |  |               |        |   |          |   |        |  |   |        |  
|Balance as of March 31, 2005                                                          |  | $             | 22,601 |   |          | $ | 55,442 |  | $ | 78,043 |  
|                                                                                      |  |               |        |   |          |   |        |  |   |        |  



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Such goodwill has an indefinite life and will be considered when the Company conducts its annual review of goodwill
for impairment during its fourth fiscal quarter to determine if goodwill with an indefinite life has been impaired.



Intangible and other assets, net consists of the following as of the dates on the accompanying unaudited consolidated balance sheets (in thousands):



|                              |  |                |       |   |                   |   |       |  
|----------------------------- |  | -------------- | ----- | - | ----------------- | - | ----- | -
|                              |  | March 31, 2005 |       |   | September 30,2004 |  
|Management contracts          |  | $              | 1,237 |   |                   | $ | 1,237 |  
|Trademarks                    |  |                | 376   |   |                   |   | 376   |  
|Other                         |  |                | 10    |   |                   |   | 348   |  
|                              |  |                |       |   |                   |   |       |  
|                              |  |                | 1,623 |   |                   |   | 1,961 |  
|Less accumulated amortization |  |                | (843  | ) |                   |   | (678  | )
|                              |  |                |       |   |                   |   |       |  
|Intangible assets, net        |  | $              | 780   |   |                   | $ | 1,283 |  
|                              |  |                |       |   |                   |   |       |  



Amortization expense relating to other
intangible assets was $0.1 million and $0.1 million for the three months ended March 31, 2005 and 2004, respectively, and was $0.2 million and $0.2 million for the six months ended March 31, 2005 and 2004, respectively.



Note 7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, Inc. The proceeds of the Senior Finance Facility were used to pay amounts payable under certain creditor agreements, provide mortgage receivable and other working capital financing to the Company and to pay fees
and expenses related to the Senior Finance Facility. A portion of the proceeds from the initial funding drawn on the Senior Finance Facility was used to pay off amounts outstanding under the Companys previous senior finance facility.



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%. Prior to the February 2004 amendment, 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 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 March 31, 2005, the maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior Finance Facility were $280.5 million, $179.8 million
and $100.7 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. The weighted average interest rate of these borrowings at March 31, 2005, was 5.69% per annum.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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.



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 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 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 to $14.00 per share. The value of the warrants was recorded as a capitalized financing cost that is amortized over the term of the financing agreement. The February 2004 amendment also
stipulated that facility fees equal to 0.75% of $300.0 million were due and payable on July 29, 2004 and are due and payable on July 29, 2005, with the latter fee being prorated through the termination date of February 28, 2006. For the three months
ended March 31, 2005 and 2004, amortization of $1.1 million and $2.8 million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. For
the six months ended March 31, 2005 and 2004, amortization of $2.2 million and $6.2 million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of
operations. 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 three months ended March 31, 2005 and 2004 were $0.0 million and $0.3 million, respectively, and the total amount of such additional cash interest payments made during the six months ended March 31, 2005 and 2004 were $0.0 million and
$1.0 million, respectively.



The Company has capitalized interest related to
ongoing construction projects of $0.2 million and $0.0 million for the three months ended March 31, 2005 and 2004, respectively, and such capitalized interest was $0.4 million and $0.2 million for the six months ended March 31, 2005 and 2004,
respectively.



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 unaudited consolidated balance sheets was $7.0 million and $8.7 million as of March 31, 2005 and
September 30, 2004, respectively. 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.



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 three months ended March 31, 2005 and 2004,
amortization of $0.1 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 unaudited consolidated statements of



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



operations. For the six months ended March 31, 2005 and 2004, amortization of $0.2 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 unaudited consolidated statements of operations.



Securitization Notes



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



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



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



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



The proceeds
were used to pay down balances due under the Companys Senior Finance Facility 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 future cash flows from the 2004 Securitization.



For the three and six months ended March 31, 2005, amortization of $0.1 million and $0.3 million, respectively, of debt issuance costs related to the 2004 Securitization was recorded and is included in interest
expense in the accompanying unaudited consolidated statements of operations.



Note 8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.



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SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The following table summarizes the balances in accrued liabilities as of the dates on the accompanying unaudited
consolidated balance sheets (in thousands):



|                                                                  |  |                |        |                   |   |       
|----------------------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                                                  |  | March 31, 2005 |        | September 30,2004
|Accrued marketing                                                 |  | $              | 22,519 |                   | $ | 19,812
|Amounts collected on behalf of or due to homeowners associations |  |                | 33,440 |                   |   | 13,208
|Accrued Vacation Interests carrying costs                         |  |                | 8,803  |                   |   | 8,074 
|Accrued escrow liability                                          |  |                | 8,541  |                   |   | 7,285 
|Accrued other taxes                                               |  |                | 2,885  |                   |   | 2,478 
|Accrued payroll and related                                       |  |                | 6,865  |                   |   | 7,808 
|Accrued servicing liability                                       |  |                | 214    |                   |   | 3,809 
|Accrued professional fees                                         |  |                | 1,016  |                   |   | 2,211 
|Creditor claims payable                                           |  |                | 2,865  |                   |   | 2,865 
|Accrued commissions                                               |  |                | 3,583  |                   |   | 1,791 
|Other                                                             |  |                | 7,308  |                   |   | 11,554
|                                                                  |  |                |        |                   |   |       
|Total accrued liabilities                                         |  | $              | 98,039 |                   | $ | 80,895
|                                                                  |  |                |        |                   |   |       



Note 9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 leases of Vacation Interests at the Companys two resorts in St. Maarten. See Note 3St. Maarten
Transactions for further discussion of this component.



Deferred Club Sunterra revenue- annual Club Sunterra membership fees paid or billed to members and amortized ratably over a one-year period, one-time conversion fees paid by 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 3 for further discussion.



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



|                                                  |  |                |         |                   |   |       
|------------------------------------------------- |  | -------------- | ------- | ----------------- | - | ------
|                                                  |  | March 31, 2005 |         | September 30,2004
|Deferred Vacation Interest lease revenue (Note 3) |  | $              | 74,628  |                   | $ | 75,877
|Deferred Club Sunterra revenue                    |  |                | 12,695  |                   |   | 6,430 
|Unearned mini-vacations                           |  |                | 9,568   |                   |   | 7,985 
|Unearned management services revenue (Note 3)     |  |                | 5,905   |                   |   | 1,953 
|Other                                             |  |                | 3,791   |                   |   | 2,882 
|                                                  |  |                |         |                   |   |       
|Total deferred revenues                           |  | $              | 106,587 |                   | $ | 95,127
|                                                  |  |                |         |                   |   |       



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Note 10Comprehensive Income (Loss)



Comprehensive income (loss) includes all changes in stockholders equity during a period from non-owner sources. The reconciliation of
net income (loss) to comprehensive income (loss) is as follows (in thousands):



|                                         |  |                             |        |                           |      |   |       |  |      |        |  |   |         |  
|---------------------------------------- |  | --------------------------- | ------ | ------------------------- | ---- | - | ----- |  | ---- | ------ |  | - | ------- | -
|                                         |  | Three months endedMarch 31, |        | Six months endedMarch 31, |     
|                                         |  | 2005                        |        |                           | 2004 |   | 2005  |  | 2004 |       
|Net income (loss)                        |  | $                           | 2,459  |                           |      | $ | 697   |  | $    | 8,211  |  | $ | (91,284 | )
|Foreign currency translation adjustments |  |                             | (3,344 | )                         |      |   | 2,290 |  |      | 5,459  |  |   | 7,767   |  
|                                         |  |                             |        |                           |      |   |       |  |      |        |  |   |         |  
|Total comprehensive income (loss)        |  | $                           | (885   | )                         |      | $ | 2,987 |  | $    | 13,670 |  | $ | (83,517 | )
|                                         |  |                             |        |                           |      |   |       |  |      |        |  |   |         |  



Note 11Segment and Geographic
Information



The Company currently operates in two geographic segments,
the North American and European segments. Both of these segments operate in one industry segment that includes the development, marketing, sales, financing and management of vacation ownership resorts. The European segment includes operations in the
United Kingdom, Italy, Spain, Portugal, Austria, 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 in Note 2 of this filing and further in Note 3 to the Companys transition
report on Form 10-K for the period ended September 30, 2004. 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 (in
thousands):



|                                                |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | -------- | - | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Three Months Ended March 31, 2005               |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|                                                |  |               |         |  
|Revenues from external customers                |  | $             | 75,668  |   |          | $ | 19,743  |              |  | $ |        |   |  | $ | 95,411  |  
|Income (loss) before provision for income taxes |  |               | 7,812   |   |          |   | (3,876  | )            |  |   |        |   |  |   | 3,936   |  
|                                                |  |               |         |  
|Three Months Ended March 31, 2004               |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                |  | $             | 54,196  |   |          | $ | 21,693  |              |  | $ |        |   |  | $ | 75,889  |  
|Income (loss) before provision for income taxes |  |               | 1,063   |   |          |   | (586    | )            |  |   |        |   |  |   | 477     |  
|                                                |  |               |         |  
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Six Months Ended March 31, 2005                 |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|                                                |  |               |         |  
|Revenues from external customers                |  | $             | 147,291 |   |          | $ | 44,830  |              |  | $ |        |   |  | $ | 192,121 |  
|Income (loss) before provision for income taxes |  |               | 15,454  |   |          |   | (2,296  | )            |  |   |        |   |  |   | 13,158  |  
|                                                |  |               |         |  
|Six Months Ended March 31, 2004                 |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                |  | $             | 106,447 |   |          | $ | 46,228  |              |  | $ |        |   |  | $ | 152,675 |  
|(Loss) income before provision for income taxes |  |               | (94,196 | ) |          |   | 3,418   |              |  |   |        |   |  |   | (90,778 | )
|                                                |  |               |         |  
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Segment Assets                                  |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|                                                |  |               |         |  
|As of March 31, 2005                            |  | $             | 680,585 |   |          | $ | 240,316 |              |  | $ | (53,913 | ) |  | $ | 866,988 |  
|As of September 30, 2004                        |  |               | 677,687 |   |          |   | 209,984 |              |  |   | (50,813 | ) |  |   | 836,858 |  



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Included in the eliminations column are the effects of transactions between segments. Currently, the European segment
has a note payable to the North American segment. The related interest income and expense is being eliminated as part of the profit and loss elimination entries, and the inter-segment note is being eliminated as part of the balance sheet elimination
entries.



Note 12Related Party Transactions



Joint Venture



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 interest in West Maui Resort Partners, L.P. (Kaanapali). For the six months ended March 31, 2005 and 2004,
the Company received $2.1 million and $0.2 million, respectively, in cash distributions from Poipu. For the six months ended March 31, 2004, the Company received $1.4 million in cash distributions from Kaanapali. The Company also receives fees
from both Poipu and Kaanapali for providing property management as well as oversight of the sales and marketing functions, which are included in the totals for management services revenue. See Management Services paragraph below.



Management Services



Included within the amounts reported as management services revenue are revenues from
property management services provided to the homeowners associations of the resorts wherein the Company owns either Unsold Vacation Interests or is a minority owner, as well as fees earned for management of sales and marketing functions at
certain resorts. These amounts totaled $5.3 million and $5.6 million for the three-month periods ended March 31, 2005 and 2004, respectively, and totaled $9.9 million and $10.5 million for the six-month periods ended March 31, 2005 and 2004,
respectively.



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 unaudited consolidated balance sheets (in thousands):



|                                         |  |                |       |                   |   |      
|---------------------------------------- |  | -------------- | ----- | ----------------- | - | -----
|                                         |  | March 31, 2005 |       | September 30,2004
|Receivable from homeowners associations |  | $              | 6,241 |                   | $ | 5,931
|Advances to joint venture                |  |                | 287   |                   |   | 348  
|                                         |  |                |       |                   |   |      
|Total                                    |  | $              | 6,528 |                   | $ | 6,279
|                                         |  |                |       |                   |   |      



Note 13Commitments and
Contingencies



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.



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##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



In January 2005, the Company entered into agreements with various homeowners associations to purchase current
year delinquent maintenance fee receivables from them at par value. Such agreements contain provisions for the Company to utilize the vacation interests associated with such maintenance fees in the current year and to reclaim such vacation interests
in the future. Each such agreement provides for an initial June 30 settlement date and adjustments thereafter. The Company currently expects the June 30 obligation to be between $4.0 million to $8.0 million, and has accrued for such obligations
based upon current estimations of the ultimate liability.



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 March 31, 2005,
the Company does not believe that the events requiring such purchase have occurred.



In February 2003, an irrevocable standby letter of credit in the amount of $0.3 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 and renews annually. Restricted cash of approximately the same amount secures such standby letter of credit. In April 2003, the standby letter of credit issued in February 2003
was amended to be in the amount of $0.8 million and the restricted cash on deposit was increased to $0.8 million.



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. All
standby letters of credit except for the one issued in October 2004 for $1.5 million were cancelled in March 2005 and replaced with surety bonds issued by Citrus Insurance Company, a wholly owned subsidiary of the Company.



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 March 31, 2005. 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 March 31, 2005 for
various other business purposes.



In March 2005, Citrus Insurance Company, a
wholly owned subsidiary of the Company, issued $7.7 million of surety bonds on behalf of other subsidiaries of the Company.



In addition, the Company is also currently subject to litigation and claims regarding employment, tort, contract, construction, sales taxes and commission disputes, among
others. Much of such litigation and claims were pre-petition and were treated as general unsecured creditors under the Companys plan of reorganization. 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.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward-Looking Statements



This Quarterly Report on Form 10-Q 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 heading 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 in
our Transition Report on Form 10-K for the nine months ended September 30, 2004 under the headings Business-Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in that report. These factors include, but are not limited to the following:



| |  |  | We are subject to intense industry competition.
| | - |  | -----------------------------------------------



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



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



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



| |  |  | We may not successfully integrate our acquisitions.
| | - |  | ---------------------------------------------------



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



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



| |  |  | Changes in interest rates may increase our borrowing costs and otherwise adversely affect our business.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Fluctuations in foreign currency exchange rates may affect our reported results of operations.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | 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 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 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 are subject to various restrictions under our senior finance facility, which limit our ability to incur debt.
| | - |  | ----------------------------------------------------------------------------------------------------------------



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



| |  |  | Our continued liquidity depends on our ability to borrow against our notes receivable and inventory.
| | - |  | ----------------------------------------------------------------------------------------------------



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



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



| |  |  | Future public sales of our shares could adversely affect our stock price.
| | - |  | -------------------------------------------------------------------------



| |  |  | Future issuances of our shares could adversely affect our stock price.
| | - |  | ----------------------------------------------------------------------



| |  |  | We do not anticipate paying any dividends in the foreseeable future.
| | - |  | --------------------------------------------------------------------



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



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.



The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and
related notes in Item 1 of this report. Unless the context otherwise requires, the terms Company, we, our, and us refer to Sunterra Corporation, a Maryland corporation, and its subsidiaries.



RESULTS OF OPERATIONS



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. As a result of this change, for purposes of discussion of results of operations, the six-month period ended March 31, 2005 is compared to the six-month
period ended March 31, 2004.



Overview



Sunterra Corporation, through its subsidiaries, joint venture and affiliated resorts, is one
of the largest companies in the vacation ownership industry, our single reportable operating segment. Through a network of ninety-five owned or affiliated resorts located around the globe, our operations consist of:



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



| |  |  | 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 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;
| | - |  | --------------------------------------------------------------------------------------



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



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



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



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



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##### Table of Contents

Comparison of the Three Months Ended March 31, 2005 to the Three Months Ended March 31, 2004:



(table in thousands)



|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                          |  | North American |        |   | European |  
|                                                          |  | 2005           |        |   | 2004     |   |        | 2005 |  |   | 2004   |  
|Revenues:                                                 |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Vacation Interest                                         |  | $              | 45,193 |   |          | $ | 35,609 |      |  | $ | 15,065 |   |  | $ | 16,524 |  
|Resort rental                                             |  |                | 9,153  |   |          |   | 3,998  |      |  |   | 464    |   |  |   | 386    |  
|Management services                                       |  |                | 5,280  |   |          |   | 5,130  |      |  |   | 2,531  |   |  |   | 3,045  |  
|Interest                                                  |  |                | 10,603 |   |          |   | 6,248  |      |  |   | 805    |   |  |   | 672    |  
|Other                                                     |  |                | 5,439  |   |          |   | 3,211  |      |  |   | 878    |   |  |   | 1,066  |  
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                            |  |                | 75,668 |   |          |   | 54,196 |      |  |   | 19,743 |   |  |   | 21,693 |  
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Costs and Operating Expenses:                             |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Vacation Interest cost of sales                           |  |                | 7,973  |   |          |   | 8,600  |      |  |   | 1,843  |   |  |   | 2,145  |  
|Advertising, sales and marketing                          |  |                | 25,391 |   |          |   | 21,076 |      |  |   | 11,574 |   |  |   | 10,555 |  
|Vacation Interest carrying costs                          |  |                | 8,197  |   |          |   | 4,623  |      |  |   | 1,952  |   |  |   | 1,297  |  
|Provision for doubtful accounts and loan losses           |  |                | 2,549  |   |          |   | 2,300  |      |  |   | 319    |   |  |   | 286    |  
|Loan portfolio                                            |  |                | 1,523  |   |          |   | 1,306  |      |  |   | 26     |   |  |   | 29     |  
|General and administrative                                |  |                | 16,248 |   |          |   | 12,720 |      |  |   | 5,548  |   |  |   | 6,338  |  
|Gain on sales of assets                                   |  |                | (496   | ) |          |   | (3,144 | )    |  |   |       |   |  |   |       |  
|Depreciation and amortization                             |  |                | 1,396  |   |          |   | 1,336  |      |  |   | 1,224  |   |  |   | 935    |  
|Interest, net                                             |  |                | 5,427  |   |          |   | 5,437  |      |  |   | 1,133  |   |  |   | 694    |  
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Total costs and operating expenses                        |  |                | 68,208 |   |          |   | 54,254 |      |  |   | 23,619 |   |  |   | 22,279 |  
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                             |  |                | 7,460  |   |          |   | (58    | )    |  |   | (3,876 | ) |  |   | (586   | )
|Income from investments in joint ventures                 |  |                | 352    |   |          |   | 1,121  |      |  |   |       |   |  |   |       |  
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before provision (benefit) for income taxes |  | $              | 7,812  |   |          | $ | 1,063  |      |  | $ | (3,876 | ) |  | $ | (586   | )
|                                                          |  |                |        |   |          |   |        |      |  |   |        |   |  |   |        |  



We recorded total revenues of $95.4
million for the three months ended March 31, 2005, compared to $75.9 million for the three months ended March 31, 2004, an increase of $19.5 million, or 25.7%. This increase was driven primarily from our North American operations where total
revenues increased $21.5 million, or 39.6%, to $75.7 million for the three months ended March 31, 2005, compared to $54.2 million for the prior year, while total revenues from European operations decreased 9.0%, or $2.0 million, to $19.7 million for
the three months ended March 31, 2005 from $21.7 million for the prior year. Excluding the effects of favorable foreign exchange rates, second quarter total revenues from our European operations decreased $2.5 million, or 11.6% when compared to the
prior year.



Consolidated Vacation Interest revenues were $60.3 million for the
three months ended March 31, 2005, representing an increase of $8.2 million, or 15.6%, compared to $52.1 million for the three months ended March 31, 2004, driven by a $9.6 million, or 26.9% increase in North American Vacation Interest revenues to
$45.2 million, compared to the prior year total of $35.6 million. Our North American improvements are the result of the completion of the integration of the Kaanapali resort and Epic Resorts Group locations increasing revenue and the increase
of revenues at existing locations, offset by a decrease in revenue at the now closed Sunterra Pacific sales locations. Exclusive of $0.5 million of favorable foreign exchange rate movements, our European Vacation Interests revenues fell from $16.5
million for the three months ended March 31, 2004 to $14.6 million for the three months ended March 31, 2005, a decrease of 11.4%. The decrease is the result of lower tour conversion efficiency.



Resort rental revenue increased 119.4% to $9.6 million for the three months ended March 31,
2005 compared to $4.4 million for the three months ended March 31, 2004, primarily as a result of the effects of the acquisition of the Kaanapali resort in July 2004 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 $7.8 million
for the three months ended March 31, 2005 decreased by $0.4 million, or 4.5% compared to $8.2 million for the three months ended March 31, 2004. The overall decrease was driven in part by a $0.5 million, or



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16.9%, decrease in European management services revenues to $2.5 million for the three months ended March 31, 2005 compared to $3.0 million for the three
months ended March 31, 2004. This decrease is directly linked to decreased management fees from the European Club Sunterra and a refurbishment contract that expired during 2004 combined with the lack of any similar contracts in 2005. North American
management services revenues of $5.3 million for the three months ended March 31, 2005 increased by $0.2 million, or 2.9%, compared to $5.1 million for the three months ended March 31, 2004.



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 $11.4 million for the three months ended March 31, 2005 compared to $6.9 million for the three months ended March 31, 2004. The increase is due to the acquisition
in the March 2004 quarter of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from Barton Capital
Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by special purpose entities created to hold a loan portfolio and issue collateralized debt to third-party
investors through the exercise of the clean up call provisions contained in the notes issued by the special purpose entities that allows the notes to be called and mortgages and contracts receivable to be transferred back to us when the
remaining principal value of the notes reaches 10% of the original principal value.



Other revenues, which includes Club Sunterra fees, travel services revenue and finance commissions earned by our European subsidiaries, increased by $2.0 million, or 47.7%, to $6.3 million for the three months ended March 31, 2005, from
$4.3 million for the same period in the prior year. This increase is concentrated in our North American operations and is primarily the result of increased Club Sunterra fees of approximately $1.8 million.



Consolidated Vacation Interest cost of sales of $9.8 million for the three months ended March
31, 2005 decreased $0.9 million, or 8.6%, from $10.7 million for the three months ended March 31, 2004, despite an increase in Vacation Interest volume. On a geographic segment basis, North American Vacation Interest cost of sales decreased by $0.6
million, from $8.6 million to $8.0 million, and Vacation Interest cost of sales for our European operations decreased to $1.8 million, down $0.3 million from $2.1 million in 2004. Our overall cost-off rates (defined as Vacation Interest cost of
sales as a percentage of Vacation Interest revenues) for the three months ended March 31, 2005 and 2004, were 16.3% and 20.6%, respectively. The cost-off rate for our North American operations decreased from 24.2% in the three month ended March 31,
2004 to 17.6% in the current year. This is attributable to newly acquired properties and inventory recoveries where the inventory has a relatively lower cost than the other Vacation Interests owned by us and the effect that adding such lower cost
inventory has to the trust from which we sell our Vacation Points. As a percentage of European Vacation Interest revenues for the three months ended March 31, 2005 and 2004, European Vacation Interest cost of sales was 12.2% and 13.0%, respectively.
Our European operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the three months ended March 31, 2005, consolidated advertising, sales and marketing costs were $37.0 million compared to $31.6 million for the three months ended
March 31, 2004, a 16.9% increase on 15.6% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to 61.3% in 2005 compared to 60.7% in the prior year. This increase was driven by our Europe operations,
which experienced an increase in this ratio from 63.9% in 2004 compared to 76.8% for the three months ended March 31, 2005. The unfavorable variance in our Europe operations is attributable to additional marketing efforts employed to improve tour
flow as a result of a challenging European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation Interest revenues were 56.2% and 59.2% for the three months ended March 31, 2005 and 2004,
respectively, as a result of efficiencies gained by maintaining a stable and more experienced sales team and additional sales training.



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 71.4%, or $4.2 million, to $10.1 million for the three months ended March 31, 2005 from $5.9 million for the three months ended
March 31, 2004. As a percentage of Vacation Interest revenues, inventory-carrying cost was 16.8% for the three months ended March 31, 2005 compared to 11.4% for the three months ended March 31, 2004. The increase was primarily due to Vacation
Interests acquired as a result of the purchase of the remaining outstanding partnership interests in Kaanapali and through the Epic Resorts Group acquisitions offset by ongoing sales of Vacation Interests.



The provision for doubtful accounts and loan losses was $2.9 million for the three months
ended March 31, 2005 compared to $2.6 million for the three months ended March 31, 2004. Of these amounts, $2.9 million and $2.3 million for 2005 and 2004, respectively, related to mortgages and contracts receivable. The resulting allowances for
mortgages and contracts receivable at March 31, 2005 and September 30, 2004 were $25.9 million and $26.5 million, respectively, representing approximately 11.5% and 12.3%, respectively, of the loan and contract originations (excluding purchased loan
pools) outstanding at those dates. The balance of the provision for doubtful accounts of $0.0 million and $0.3 million for the three months ended March 31, 2005 and 2004, respectively, represented



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adjustments to provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees at certain
Caribbean resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributable to the higher levels of Vacation Interests revenues, as the provision is
recorded as a percentage of each financed sale.



Loan portfolio expenses
increased 16.0% to $1.5 million for the three months ended March 31, 2005 from $1.3 million in the prior year. The increase is attributable to an increase in the number of loans serviced due to the acquisition in the first quarter 2004 of a
portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from Barton Capital Corporation of their rights to a loan
portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by special purpose entities created to hold a loan portfolio and issue collateralized debt to third-party investors through the exercise of the
clean up call provisions contained in the notes issued by the special purpose entities that allows the notes to be called and mortgages and contracts receivable to be transferred back to us when the remaining principal value of the notes
reaches 10% of the original principal value.



General and administrative
expenses of $21.8 million for the three months ended March 31, 2005 increased by $2.7 million, or 14.4% compared to $19.1 million for the three months ended March 31, 2004. As a percentage of total revenues, general and administrative expenses
improved to 22.8% in 2005 from 25.1% in 2004. The increase in general and administrative expenses, which related to salary increases and acquisitions recently completed, was offset by an overall reduction in office related expenses as the result of
back office restructuring initiatives.



Gain on sales of assets decreased to a
gain of approximately $0.5 million for the three months ended March 31, 2005 from a gain of approximately $3.1 million during the same period in 2004. The $0.5 million gain for 2005 represents a gain on the sale of certain non-core inventory
recovered by us upon the default of certain mortgage loans.



Depreciation and
amortization expense increased 15.4%, or $0.3 million, to $2.6 million for the three months ended March 31, 2005 from $2.3 million for the same period in 2004. This increase is attributable to the acquisition of a large number of European assets.



Interest expense for the three months ended March 31, 2005 was $6.6 million,
compared to $6.1 million for the three months ended March 31, 2004. The increase was primarily due to increased average borrowings in 2005, partially offset by reduced borrowing costs, reduced amortization of deferred financing charges, the
renegotiation of certain borrowing terms in February 2004, and the favorable interest on the 33/4% Senior
Subordinated Convertible Notes due 2024.



Income from investments in
joint ventures decreased 68.6% to $0.4 million for the three months ended March 31, 2005 compared to $1.1 million for the three months ended March 31, 2004. In July 2004, we purchased the remaining outstanding 77% partnership interest in
Kaanapali resulting in the full consolidation of their operating results beginning at that time.



Our provision for income taxes for the three months ended March 31, 2005 was $1.5 million, compared to a tax benefit of $0.2 million for the three months ended March 31, 2004. The increase in income tax expense
related to our North American operations, which reported a tax provision for the three months ended March 31, 2005 in contrast with the three months ended March 31, 2004, when the tax basis operating income of the North American operations was
offset by operating losses for prior years. Since such operating losses were generated after the fresh start date, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to the
provision for income taxes. This resulted in a net provision for income taxes of virtually zero. For the three months ended March 31, 2005 the tax basis operating income of the North American operations was partially offset by operating losses from
periods prior to the fresh start date. As such, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to goodwill. The result of this provision in the North American operations is a
worldwide effective tax rate of approximately 37.5%, which is consistent with the statutory rates enacted in the jurisdictions in which we operate.



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Comparison of the Six Months Ended March 31, 2005 to the Six Months Ended March 31, 2004:



(table in thousands)



|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|--------------------------------------------------------- |  | -------------- | ------- | - | -------- | - | ------- | ---- |  | - | ------ | - |  | - | ------
|                                                          |  | North American |         |   | European
|                                                          |  | 2005           |         |   | 2004     |   |         | 2005 |  |   | 2004  
|Revenues:                                                 |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Vacation Interest                                         |  | $              | 92,227  |   |          | $ | 70,605  |      |  | $ | 35,454 |   |  | $ | 36,215
|Resort rental                                             |  |                | 15,363  |   |          |   | 5,843   |      |  |   | 916    |   |  |   | 810   
|Management services                                       |  |                | 9,673   |   |          |   | 10,153  |      |  |   | 4,901  |   |  |   | 5,210 
|Interest                                                  |  |                | 20,241  |   |          |   | 12,332  |      |  |   | 1,289  |   |  |   | 1,066 
|Other                                                     |  |                | 9,787   |   |          |   | 7,514   |      |  |   | 2,270  |   |  |   | 2,927 
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Total revenues                                            |  |                | 147,291 |   |          |   | 106,447 |      |  |   | 44,830 |   |  |   | 46,228
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Costs and Operating Expenses:                             |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Vacation Interest cost of sales                           |  |                | 15,617  |   |          |   | 15,986  |      |  |   | 4,393  |   |  |   | 5,512 
|Advertising, sales and marketing                          |  |                | 50,939  |   |          |   | 40,363  |      |  |   | 24,893 |   |  |   | 21,535
|Vacation Interest carrying costs                          |  |                | 15,578  |   |          |   | 6,986   |      |  |   | 3,355  |   |  |   | 1,812 
|Provision for doubtful accounts and loan losses           |  |                | 5,037   |   |          |   | 3,511   |      |  |   | 362    |   |  |   | 377   
|Loan portfolio                                            |  |                | 2,965   |   |          |   | 3,631   |      |  |   | 60     |   |  |   | 135   
|General and administrative                                |  |                | 29,196  |   |          |   | 25,688  |      |  |   | 10,178 |   |  |   | 11,005
|Gain on sales of assets                                   |  |                | (688    | ) |          |   | (3,222  | )    |  |   |       |   |  |   |      
|Depreciation and amortization                             |  |                | 2,780   |   |          |   | 3,321   |      |  |   | 2,255  |   |  |   | 2,094 
|Interest, net                                             |  |                | 11,023  |   |          |   | 13,571  |      |  |   | 1,630  |   |  |   | 340   
|Reorganization and restructuring, net                     |  |                |        |   |          |   | 311     |      |  |   |       |   |  |   |      
|Impairment of goodwill                                    |  |                |        |   |          |   | 91,586  |      |  |   |       |   |  |   |      
|Impairment of assets                                      |  |                |        |   |          |   | 897     |      |  |   |       |   |  |   |      
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Total costs and operating expenses                        |  |                | 132,447 |   |          |   | 202,629 |      |  |   | 47,126 |   |  |   | 42,810
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Income (loss) from operations                             |  |                | 14,844  |   |          |   | (96,182 | )    |  |   | (2,296 | ) |  |   | 3,418 
|Income from investments in joint ventures                 |  |                | 610     |   |          |   | 1,986   |      |  |   |       |   |  |   |      
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       
|Income (loss) before provision (benefit) for income taxes |  | $              | 15,454  |   |          | $ | (94,196 | )    |  | $ | (2,296 | ) |  | $ | 3,418 
|                                                          |  |                |         |   |          |   |         |      |  |   |        |   |  |   |       



We recorded total revenues of $192.1
million for the six months ended March 31, 2005, compared to $152.7 million for the six months ended March 31, 2004, an increase of $39.4 million, or 25.8%. This increase was driven primarily from our North American operations where total revenues
increased $40.8 million, or 38.4%, to $147.3 million in 2005, compared to $106.5 million for the prior year, while total revenues from European operations decreased 3.0%, or $1.4 million, to $44.8 million for the six months ended March 31, 2005 from
$46.2 million for the prior year. Excluding the effects of favorable foreign exchange rates, total revenues from our European operations for the six months ended March 31, 2005 decreased $2.7 million, or 5.7%, when compared to the prior year.



Consolidated Vacation Interest revenues were $127.7 million for the six months
ended March 31, 2005, representing an increase of $20.9 million, or 19.5%, compared to $106.8 million for the six months ended March 31, 2004, driven by a $21.6 million, or 30.6%, increase in North American Vacation Interest revenues to $92.2
million, compared to the prior year total of $70.6 million. Our North American improvements are the result of the completion of the integration of the Kaanapali resort and Epic Resorts Group locations increasing revenue and the increase of
revenues at existing locations, offset by a decrease in revenue at the now closed Sunterra Pacific locations. Exclusive of $1.0 million of favorable foreign exchange rate movements, our European Vacation Interests revenues fell from $36.2 million
for the six months ended March 31, 2004 to $34.5 million for the six months ended March 31, 2005, a decrease of 4.9%. The decrease is the result of lower tour conversion efficiency, partially offset by revenues resulting from the Thurnham Leisure
Group acquisition.



Resort rental revenue increased 144.7% to $16.3 million for
the six months ended March 31, 2005 compared to $6.7 million for the six months ended March 31, 2004, primarily as a result of the effects of the acquisitions of Epic resorts in October 2003 and of Kaanapali resort in July 2004 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.



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Management services revenues of $14.6 million for the six months ended March 31, 2005 decreased by $0.8 million, or 5.1%,
compared to $15.4 million for the six months ended March 31, 2004. The overall decrease was driven in part by a $0.5 million, or 4.7%, decrease in North American management services revenues to $9.7 million for the six months ended March 31, 2005
compared to $10.2 million for the six months ended March 31, 2004. This decrease is directly linked to the December 2003 termination of the management contract associated with the Vacation Timeshare Owners Association (VTSOA) sponsored
program, which governed Vacation Intervals at approximately 20 resorts. This decrease was offset in part by management contracts for six of the Epic Resorts Group properties acquired in the fourth quarter of 2003. Europe management services revenues
of $4.9 million for the six months ended March 31, 2005 decreased by $0.3 million, or 5.9%, compared to $5.2 million for the six months ended March 31, 2004, as a result of decreased management fees from the European Club Sunterra and a
refurbishment contract that expired during 2004 combined with the lack of any similar contracts in 2005.



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 $21.5 million for the six months ended
March 31, 2005 compared to $13.4 million for the six months ended March 31, 2004. The increase is due to the acquisition in the March 2004 quarter of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the
mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from Barton Capital Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios
held by special purpose entities created to hold a loan portfolio and issue collateralized debt to third-party investors through the exercise of the clean up call provisions contained in the notes issued by the special purpose entities
that allows the notes to be called and mortgages and contracts receivable to be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value.



Other revenues, which includes Club Sunterra fees, travel services revenue and finance
commissions earned by our European subsidiaries, increased by $1.7 million, or 15.5%, to $12.1 million for the six months ended March 31, 2005, from $10.4 million for the same period in the prior year. This increase is concentrated in our North
American operations and is primarily the result of increased Club Sunterra fees of approximately $1.8 million.



Consolidated Vacation Interest cost of sales of $20.0 million for the six months ended March 31, 2005 decreased $1.5 million, or 6.9%, from $21.5 million for the six months ended March 31, 2004, despite an increase in
Vacation Interest volume. On a geographic segment basis, North American Vacation Interest cost of sales decreased by $0.4 million, from $16.0 million to $15.6 million, and Vacation Interest cost of sales for our European operations decreased to $4.4
million, down $1.1 million from $5.5 million in 2004. Our overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the six months ended March 31, 2005 and 2004, were 15.7% and 20.1%,
respectively. The cost-off rate for our North American operations decreased from 22.6% in the six month ended March 31, 2004 to 16.9% in the current year. This is attributable to newly acquired properties and inventory recoveries where the inventory
has a relatively lower cost than the other Vacation Interests owned by us and the effect that adding such lower cost inventory has to the trust from which we sell our Vacation Points. As a percentage of Europe Vacation Interests revenues for the six
months ended March 31, 2005 and 2004, European Vacation Interest cost of sales was 12.4% and 15.2%, respectively. Our Europe operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the six months ended March 31, 2005, consolidated advertising, sales and marketing costs
were $75.8 million compared to $61.9 million for the six months ended March 31, 2004, a 22.5% increase on 19.5% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to 59.4% in 2005 compared to 57.9%
in the prior year. This increase was driven by our Europe operations, which experienced an increase in this ratio from 59.5% in 2004 compared to 70.2% for the six months ended March 31, 2005. The unfavorable variance in our European operations is
attributable to additional marketing efforts employed to improve tour flow as a result of a challenging European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation Interest revenues were
55.2% and 57.2% for the six months ended March 31, 2005 and 2004, respectively, as a result of efficiencies gained by maintaining a stable and more experienced sales team and additional sales training.



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 115.2%, or $10.1 million, to $18.9 million for the
six months ended March 31, 2005 from $8.8 million for the six months ended March 31, 2004. As a percentage of Vacation Interest revenues, inventory-carrying cost was 14.8% for the six months ended March 31, 2005 compared to 8.2% for the six months
ended March 31, 2004. The increase was primarily due to Vacation Interests acquired as a result of the purchase of the remaining outstanding partnership interests in Kaanapali and through the Epic Resorts Group acquisitions offset by ongoing
sales of Vacation Interests.



The provision for doubtful accounts and loan
losses was $5.4 million for the six months ended March 31, 2005 compared to $3.9 million for the six months ended March 31, 2004. Of these amounts, $5.5 million and $4.2 million for 2005 and 2004, respectively, related to mortgages and contracts
receivable. The resulting allowances for mortgages and contracts receivable at March 31, 2005 and



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September 30, 2004 were $25.9 million and $26.5 million, respectively, representing approximately 11.5% and 12.3%, respectively, of the loan and contract
originations (excluding purchased loan pools) outstanding at those dates. The balance of the provision for doubtful accounts of $0.0 million and ($0.3) million for the six months ended March 31, 2005 and 2004, respectively, represented adjustments
to provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees at certain Caribbean resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses
related to mortgages and contracts receivable is 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 19.7% to $3.0 million for the six months
ended March 31, 2005 from $3.8 million in the prior year. The decrease is attributable to significant process improvement and restructuring initiatives implemented in late 2003, including standardizing and centralizing underwriting procedures and
processes, best practices in loss mitigation (including increased and timely correspondence with customers whose mortgages and contracts are perceived to be in danger of becoming delinquent) and cross training allowing us to service higher loan
volumes with fewer personnel. We have also implemented new technology that allows us to service more loans more efficiently, and have brought in certain servicing processes formerly outsourced. This was partially offset by an increase in the number
of loans serviced due to the acquisition in the first quarter 2004 of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in the purchase of the Kaanapali resort in July
2004, the purchase from Barton Capital Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by special purpose entities created to hold a loan portfolio and issue
collateralized debt to third-party investors through the exercise of the clean up call provisions contained in the notes issued by the special purpose entities that allows the notes to be called and mortgages and contracts receivable to
be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value.



General and administrative expenses of $39.4 million for the six months ended March 31, 2005 increased by $2.7 million, or 7.3% compared to $36.7 million for the six
months ended March 31, 2004. As a percentage of total revenues, general and administrative expenses improved to 20.5% in 2005 from 24.0% in 2004. The increase in general and administrative expenses, which related to salary increases and acquisitions
recently completed, was offset by the shut down of certain Sunterra Pacific operations in December of 2003, and an overall reduction in office related expenses as the result of back office restructuring initiatives.



Gain on sales of assets decreased to a gain of approximately $0.7 million for the three
months ended March 31, 2005 from a gain of approximately $3.2 million during the same period in 2004. The $0.7 million gain for 2005 represents a gain on the sale of certain non-core inventory recovered by us upon the default of certain mortgage
loans and a gain on the sale of an office building in Sedona, Arizona that previously housed administrative personnel now located in a rented facility.



Depreciation and amortization expense decreased 7.0%, or $0.4 million, to $5.0 million for the six months ended March 31, 2005 from $5.4 million for the same period in
2004. This decrease is attributable to a large number of North American assets reaching full depreciation, partially offset by the acquisition of a large number of Europe assets.



Interest expense for the six months ended March 31, 2005 was $12.7 million, compared to $13.9 million for the six months ended March 31,
2004. The decrease was primarily due to reduced borrowing costs, reduced amortization of deferred financing charges, the renegotiation of certain borrowing terms in February 2004, and the favorable interest on the 33/4% Senior Subordinated Convertible Notes due 2024, partially offset by increased average borrowing in 2005.



There were no reorganization and restructuring costs, net in the six
months ended March 31, 2005, as we completed most of our reorganization activities by the end of 2002, and the components of our restructuring were complete by the end of 2003. Reorganization and restructuring costs were $0.3 million for the six
months ended March 31, 2004, and primarily related to the rollout of our global points-based program.



There were no charges for impairment of assets in the six months ended March 31, 2005. Impairment of assets totaled $92.5 million for the six months ended March 31, 2004. These charges included $91.6 million for the
impairment of the reorganization value in excess of identifiable assets and $0.9 million relating to Unsold Vacation Interests relating to a resort disposed of in 2003.



Income from investments in joint ventures decreased 69.3% to $0.6 million for the six months ended March 31, 2005 compared to $2.0 million
for the six months ended March 31, 2004. In July 2004, we purchased the remaining outstanding 77% partnership interest in Kaanapali resulting in the full consolidation of their operating results beginning at that time.



Our provision for income taxes for the six months ended March 31, 2005 was $4.9 million,
compared to $0.5 million for the six months ended March 31, 2004. The increase in income tax expense related to our North American operations, which reported a tax



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provision for the six months ended March 31, 2005 in contrast with the six months ended March 31, 2004, when the tax basis operating income of the North
American operations was offset by operating losses for prior years. Since such operating losses were generated after the fresh start date, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses
was credited to the provision for income taxes. This resulted in a net provision for income taxes of virtually zero. For the six months ended March 31, 2005 the tax basis operating income of the North American operations was partially offset by
operating losses from periods prior to the fresh start date. As such, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to goodwill. The result of this provision in the North
American operations is a worldwide effective tax rate of approximately 37.6%, which is consistent with the statutory rates enacted in the jurisdictions in which we operate.



LIQUIDITY AND CAPITAL RESOURCES



We generate cash principally from down payments on financed Vacation Interest sales, 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 six months ended March 31, 2005, net cash provided by operating activities was $39.4 million and was primarily the result of the net income of $8.2 million plus non-cash expenses totaling $20.5 million,
offset by other non-cash gains of $2.8 million and increases in retained interests in mortgages and contracts receivable sold of $0.5 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities of
$14.0 million, including reductions in mortgages and contracts receivable of $6.8 million and unsold Vacation Interests of $1.5 million plus increases in accrued liabilities of $19.0 million and deferred revenues of $11.4 million offset by an
increases in cash in escrow and restricted cash of $12.7 million, due from related parties of $0.3 million, other receivables of $7.7 million and prepaid expenses of $0.6 million and a decrease in accounts payable of $3.4 million.



During the six months ended March 31, 2005, net cash used in investing activities was $40.7
million, primarily due to the purchase of the mortgage portfolios for $26.5 million, the purchase of businesses for $10.1 million and capital expenditures of $7.4 million, partially offset by proceeds from the sale of assets of $1.3 million and cash
distributions from joint ventures of $2.1 million.



During the six months ended
March 31, 2005, net cash used in financing activities was $9.4 million. Payments on the Senior Finance Facility totaled $47.5 million and payments on the Securitization and other notes payable totaled $17.7 million. These payments were funded
primarily through borrowings on the Senior Finance Facility totaling $55.6 million.



We currently anticipate spending approximately $37.7 million for unsold Vacation Interests at existing and anticipated resort locations during the remainder of fiscal 2005. Also in the remainder of fiscal 2005, we plan to invest $7.5
million in capital expenditures related to property and equipment. We plan to fund these expenditures with cash generated from operations and borrowings under the Senior Finance Facility. We believe that, with respect to our current operations, cash
generated from operations and future borrowings will be sufficient to meet our working capital and capital expenditure needs through the end of fiscal 2005. If these are not sufficient, we have the ability to adjust our spending on Unsold Vacation
Interests.



The allowance for mortgage and contract loan losses at March 31,
2005 was $25.9 million, or approximately 11.5%, respectively, of the loan and contract originations (excluding purchased loan pools) outstanding at that date. Management believes the allowance is adequate. However, if the amounts of the mortgages
and contracts receivable that are ultimately written off materially exceed the related allowances, our business, results of operations and financial condition could be adversely affected.



Our plan for meeting our liquidity needs may be affected by, but not limited to, the following: demand for our product, our ability to
borrow funds under our current financing arrangements, an increase in prepayment speeds and default rates on our mortgages and contracts receivable, the threat and/or effects on the travel and leisure industry of future terrorist attacks and
limitations on our ability to conduct marketing activities, and other factors, including those discussed under BusinessRisk Factors in our Transition Report on Form 10-K for the nine month period ended September 30, 2004.



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.



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Corporate Finance



On average, approximately 82% of our North American Vacation Interest revenue is through transactions where we provide the financing. Approximately 31% of the value of
these transactions is realized in cash at the time of the transaction or through the application of existing equity from another Vacation Interest with the remaining 69% financed by us. Accordingly, we do not generate sufficient cash from sales to
provide the necessary capital to pay the costs of developing or acquiring additional resorts and to replenish working capital. We believe that, with respect to our current operations, cash generated from operations and future borrowings will be
sufficient to meet our working capital and capital expenditure needs through the end of fiscal 2005.



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. The clean up call provisions on the 1999-A Securitization (TerraSun, LLC) was exercised in January 2005 and the 1999-B Securitization (Dutch Elm, LLC) was
exercised in February 2005. Such exercises resulted 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.



On July 29, 2002, we entered into a two-year agreement for a $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 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 4.0%. Prior to the 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 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 July 2004, in conjunction with the July 7, 2004 acquisition of the remaining outstanding 77% partnership interests in Kaanapali, we entered into a third
amendment to the Senior Finance Facility with Merrill Lynch Mortgage Capital, Inc. This amendment added Kaanapali as a borrower on our Senior Finance Facility and provides for borrowings secured by Kaanapalis eligible mortgages
receivable and eligible Unsold Vacation Interests.



At March 31, 2005, the
maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior Finance Facility were $280.5 million, $179.8 million and $100.7 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. The weighted average interest rate of these borrowings at March 31, 2005, was
5.69% per annum.



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 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 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 to $14.00 per share. The value of the warrants was recorded as a capitalized financing cost that is amortized over the term of
the financing



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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. For the three months ended March 31, 2005 and 2004, amortization of $1.1 million and $2.8 million, respectively, of debt issuance
costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. For the six months ended March 31, 2005 and 2004, amortization of $2.2 million and $6.2 million, respectively, of
debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. 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 three months ended March 31, 2005 and 2004 were $0.0 million and $0.3 million, respectively, and the total amount
of such additional cash interest payments made during the six months ended March 31, 2005 and 2004 were $0.0 million and $1.0 million, respectively.



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 unaudited consolidated balance sheets was $7.0 million and $8.7 million as of March 31, 2005 and September 31, 2004. 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 three months ended March 31, 2005 and
2004, amortization of $0.1 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 unaudited consolidated statements of operations. For the six months
ended March 31, 2005 and 2004, amortization of $0.2 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 unaudited consolidated statements of
operations.



Securitization Notes



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



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



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



Under the terms of the indenture, Sunterra Financial Services, Inc., a direct
wholly owned subsidiary of ours, in exchange for a monthly fee, 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 future cash flows from
the 2004 Securitization.



For the three and six months ended March 31, 2005,
amortization of $0.1 million and $0.3 million, respectively, of debt issuance costs related to the 2004 Securitization was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations.



Off-Balance Sheet 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, Blue Bison Funding Corporation, through which we transferred mortgages and contracts receivable to Barton Capital Corporation
(Barton) and related entities as part of a $100 million Mortgages Receivable Conduit Facility (the Conduit Facility). We sold undivided interests in mortgages and contracts receivable to Blue Bison Funding Corporation at 95%
of face value without recourse to us as to collectibility. Blue Bison Funding Corporation financed those purchases through transfers to Barton of an undivided interest in the transferred mortgages and contracts receivable for cash consideration
under the Conduit Facility. 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,
leaving a substantial quantity of mortgages and contracts receivable still held by Barton. On December 17, 2004, we completed the purchase from Barton of its rights to the mortgages and contracts receivable remaining in the loan portfolio at that
date for approximately $16.4 million.



Securitization
Transactions



We established certain qualifying entities, TerraSun, LLC
and Dutch Elm, LLC, to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages receivable. 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



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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. On January 25, 2005, we completed a transaction resulting in the acquisition of a
loan portfolio held by TerraSun, LLC for approximately $4.5 million in cash. This transaction was the result of the exercise of the clean up call provision contained in the notes issued by TerraSun, LLC. On February 25, 2005, we
completed a transaction resulting in the acquisition of a loan portfolio held by Dutch Elm, LLC for approximately $5.6 million in cash. This transaction was the result of the exercise of the clean up call provision contained in the notes
issued by Dutch Elm, LLC.



Contractual Obligations



Certain contractual obligations are summarized in our Transition Report on Form 10-K for the
nine months ended September 30, 2004 under Managements Discussion and Analysis of Financial Condition and Results of OperationsCorporate FinanceContractual Obligations. As of March 31, 2005, there had been no material
changes outside the ordinary course of our business in such contractual obligations from September 30, 2004.



ITEM 3. 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 contract
rights previously held to use the Vacation Interval, and we are able to transfer title of the Vacation Interval to a trust out of which we will convey Vacation Points representing beneficial interests in such trust without further recovery efforts.



Availability of Funding Source



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



Geographic Concentration



Our owned and serviced loan
portfolio borrowers are geographically diversified within the United States and internationally. At March 31, 2005, borrowers residing in the United States accounted for approximately 92.8% of our loan portfolio. With the exception of Arizona and
California, which represented 12.0% and 18.7%, respectively, no state or foreign country concentration accounted for in excess of 5.0% of the serviced portfolios. The credit risk inherent in such concentrations is dependent upon regional and general
economic stability, which affects property values and the financial well being of the borrowers.



Foreign Currency Risk



For the six
months ended March 31, 2005 and 2004, total revenues denominated in a currency other than U.S. dollars, primarily revenues derived from the United Kingdom, were approximately 23.3% and 30.3%, respectively, of total revenues. Our net assets
maintained in a functional currency other than U.S. dollars at March 31, 2005 and September 30, 2004, primarily assets located in Western Europe, were approximately 21.5% and 19.0%, respectively, of total net assets. The effects of changes in
foreign currency exchange rates have not historically been material to our operations or net assets. At March 31, 2005, our subsidiary in the United Kingdom, whose functional currency is the British Pound Sterling, held approximately 4.2 million
Euros. That subsidiary expects to utilize approximately 2.5 million Euros per month for operating purposes. To the extent it holds Euros at any point in time, it is subject to gains and losses as the exchange rate between British Pound Sterling and
Euros fluctuates.



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Interest Rate Risk



As of March 31, 2005, we had floating interest rate debt of approximately $179.8 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 March 31, 2005 would
cause a change in total annual interest costs of $1.8 million.



ITEM 4. 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) of 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 March 31, 2005.



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
March 31, 2005 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 its 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 U.S. 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. 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.



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##### Table of Contents

PART IIOTHER INFORMATION



ITEM 1. 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 in our Transition Report on Form 10-K for the nine months
ended September 30, 2004 for a further description of the nature and results of our reorganization, and Note 13 to the accompanying unaudited, consolidated financial statements for a general description of our commitments and contingencies.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



On February 25, 2005, the Company held its Annual Meeting of Stockholders. The matters on which the stockholders voted, in person or by proxy, were:



| | i. | The election of six directors for terms expiring on the date of the 2006 Annual Stockholders Meeting; and
| | -- | ---------------------------------------------------------------------------------------------------------



| | ii. | The approval of the Sunterra Corporation 2005 Incentive Plan.
| | --- | -------------------------------------------------------------



The six nominees for director were elected and the Sunterra Corporation 2005 Incentive Plan was approved. The results of the voting were as follows:



Election of Directors:



|                        |  |            |  |               
|----------------------- |  | ---------- |  | --------------
|Director Nominee        |  | Votes For  |  | Votes Withheld
|Nicholas J. Benson      |  | 16,942,730 |  | 677,341       
|Olof S. Nelson          |  | 16,627,250 |  | 992,821       
|James A. Weissenborn    |  | 16,943,418 |  | 676,653       
|David Gubbay            |  | 16,853,160 |  | 766,911       
|James H. Dickerson, Jr. |  | 16,544,140 |  | 1,075,931     
|Charles F. Willes       |  | 16,627,250 |  | 992,821       



Approval of the
Sunterra Corporation 2005 Incentive Plan:



|           |  |               |  |         |  |                
|---------- |  | ------------- |  | ------- |  | ---------------
|Votes
For  |  | Votes Against |  | Abstain |  | Broker Non Vote
|10,271,580 |  | 988,188       |  | 165,347 |  | 6,194,956      



ITEM 5. OTHER INFORMATION



As permitted pursuant
to Frequently Asked Question (FAQ) No. 1 of the FAQs regarding Current Report on Form 8-K issued by the Division of Corporation Finance of the U.S. Securities and Exchange Commission (dated November 23, 2004), in lieu of filing a
separate Form 8-K, Sunterra Corporation is providing the following information in response to Items 1.01 and 5.02 of Form 8-K:



On May 6, 2005, the Board of Directors of Sunterra Corporation elected Robert A. Krawczyk to serve as Vice President, Corporate Controller and Chief Accounting Officer,
replacing Steven E. West as Chief Accounting Officer. Mr. West continues as Senior Vice President and Chief Financial Officer.



Mr. Krawczyk (age 42) has served as Vice President and Corporate Controller of Sunterra Corporation since August 2004. For the nine years prior to joining Sunterra, Mr.
Krawczyk was with Deloitte & Touche, most recently as a Senior Manager specializing in the timeshare industry. He has provided audit, merger and acquisition, and securitization services to many of the largest timeshare companies in the country.
He began his career in 1988 as a commercial lender in the Corporate Finance Department at Barnett Bank.



The terms of Mr. Krawczyks employment with Sunterra Corporation are outlined in a letter dated June 25, 2004 and include a base salary of $200,000 per year, an annual discretionary bonus of up to 20% of such
base salary, an option to purchase 40,000 shares of Sunterra common stock pursuant to the Companys 2002 Stock Option Plan and eligibility in all of Sunterra Corporations other employee benefit programs. Mr. Krawczyk was also reimbursed
during calendar 2004 for reasonable relocation expenses to Las Vegas, Nevada. In the event Mr. Krawczyk is terminated without cause or for a good reason, he is entitled to a continuation of his salary at the rate in effect as of his termination for
a period of six months following the date of termination. Mr. Krawczyks employment letter is attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.



Mr. Krawczyk has no other transactions or family relationships with Sunterra Corporation.



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##### Table of Contents

ITEM 6. EXHIBITS



|      |  |                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.   |  | Description                                                                                                                                                                                                                                  
|*10.1 |  | Sunterra Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 (SEC file number 333-123006) filed with the
Securities and Exchange Commission on February 25, 2005).
|      | 
|*10.2 |  | Employment Agreement dated June 25, 2004 between Sunterra Corporation and Robert A. Krawczyk.                                                                                                                                                
|      | 
|*10.3 |  | Description of Compensation of Non-Employee Directors.                                                                                                                                                                                       
|      | 
|*10.4 |  | Description of Certain Information Regarding Employment and Compensation Arrangements with Certain Executive Officers.                                                                                                                       
|      | 
|31.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(a)                                                                                                                                                                      
|      | 
|31.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(a)                                                                                                                                                                      
|      | 
|32.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                      
|      | 
|32.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                      

---

|* | Management contract or compensatory plan or arrangement
|- | -------------------------------------------------------



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##### Table of Contents

SIGNATURES



Pursuant to the requirements 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 CORPORATIONBy:

/s/ NICHOLAS J. BENSONNicholas J. Benson President and Chief Executive Officer (Principal Executive Officer)By:

/s/ STEVEN E. WESTSteven E. West Senior Vice President and Chief Financial Officer (Principal Financial
Officer)




Dated: May 10, 2005



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##### Table of Contents

EXHIBIT INDEX



|      |  |                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.   |  | Description                                                                                                                                                                                                                                  
|*10.1 |  | Sunterra Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 (SEC file number 333-123006) filed with the
Securities and Exchange Commission on February 25, 2005).
|      | 
|*10.2 |  | Employment Agreement dated June 25, 2004 between Sunterra Corporation and Robert A. Krawczyk.                                                                                                                                                
|      | 
|*10.3 |  | Description of Compensation of Non-Employee Directors.                                                                                                                                                                                       
|      | 
|*10.4 |  | Description of Certain Information Regarding Employment and Compensation Arrangements with Certain Executive Officers.                                                                                                                       
|      | 
|31.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(a)                                                                                                                                                                      
|      | 
|31.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(a)                                                                                                                                                                      
|      | 
|32.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                      
|      | 
|32.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                      

---

|* | Management contract or compensatory plan or arrangement
|- | -------------------------------------------------------





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