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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|(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, 2003                                           
|          
| ̈          |  | 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



SUNTERRA CORPORATION

(Exact name of registrant as specified in its charter)



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



3865
West Cheyenne Avenue

North Las Vegas, Nevada 89032

(Address of principal executive offices, including zip code)



(702) 804-8600

(Registrants telephone number, including area code)



|WWW.SUNTERRA.COM              
|------------------------------
|(Registrants Website Address)



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. xYes ̈No



Number of shares of the registrants common stock, par value $0.01 per share outstanding at May 8, 2003: 18,045,077.



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SUNTERRA CORPORATION



INDEX



|ITEM           |  |                                                                                                                                          |  | PAGE NUMBER
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|               |  | Safe Harbor StatementCautionary Notice Regarding Forward-Looking Statements                                                             |  | 3          
|              
|               |  | PART I. FINANCIAL INFORMATION                                                                                                            |  |            
|              
|Item 1.        |  | Financial Statements                                                                                                                     |  |            
|               |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 (Successor) and 2002 (Predecessor) (Unaudited) |  | 4          
|               |  | Condensed Consolidated Balance Sheets as of March 31, 2003 (Successor) and December 31, 2002 (Successor) (Unaudited)                     |  | 5          
|               |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 (Successor) and 2002 (Predecessor) (Unaudited) |  | 6          
|               |  | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                                                     |  | 8          
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                    |  | 12         
|Item 3.        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                               |  | 15         
|Item 4.        |  | Controls and Procedures                                                                                                                  |  | 15         
|              
|               |  | PART II. OTHER INFORMATION                                                                                                               |  |            
|              
|Item 1.        |  | Legal Proceedings                                                                                                                        |  | 16         
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                                                |  | 16         
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                                         |  | 16         
|Signatures     |  | 17                                                                                                                                      
|Certifications |  | 18                                                                                                                                      



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Safe Harbor StatementCautionary Notice Regarding 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, 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 Annual Report on Form 10-K for the year ended December 31, 2002 under the headings Business-Risk
Factors, and elsewhere in that report, and relate, without limitation, to matters arising from our emergence from proceedings under Chapter 11 of the Bankruptcy Code. Any or all of these factors could cause our actual results and financial or
legal status 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.



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PART I. FINANCIAL INFORMATION



ITEM
1. FINANCIAL STATEMENTS



SUNTERRA
CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2003 (Successor) and 2002 (Predecessor)

(Amounts in thousands except per share data)

(Unaudited)



|                                                                                                                                                                                                                    |  | Successor 2003 |        |   | Predecessor 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | -
|Revenues:                                                                                                                                                                                                           |  |                |        |   |                  |  
|Vacation Interest sales                                                                                                                                                                                             |  | $              | 40,107 |   |                  | $
|Vacation Interest lease revenue                                                                                                                                                                                     |  |                | 3,760  |   |                  |  
|Club Sunterra revenues                                                                                                                                                                                              |  |                | 2,199  |   |                  |  
|Resort rental revenues                                                                                                                                                                                              |  |                | 2,765  |   |                  |  
|Management services revenues                                                                                                                                                                                        |  |                | 4,361  |   |                  |  
|Interest revenues                                                                                                                                                                                                   |  |                | 6,060  |   |                  |  
|Other revenues                                                                                                                                                                                                      |  |                | 4,056  |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Total revenues                                                                                                                                                                                                      |  |                | 63,308 |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|                                                                                                                                                                                                                   
|Costs and Operating Expenses:                                                                                                                                                                                       |  |                |        |   |                  |  
|Vacation Interest cost of sales                                                                                                                                                                                     |  |                | 7,703  |   |                  |  
|Advertising, sales and marketing                                                                                                                                                                                    |  |                | 26,418 |   |                  |  
|Maintenance fee and subsidy expense                                                                                                                                                                                 |  |                | 2,727  |   |                  |  
|Provision for doubtful accounts and loan losses                                                                                                                                                                     |  |                | 634    |   |                  |  
|Loan portfolio expenses                                                                                                                                                                                             |  |                | 2,967  |   |                  |  
|General and administrative                                                                                                                                                                                          |  |                | 19,040 |   |                  |  
|Depreciation and amortization                                                                                                                                                                                       |  |                | 2,972  |   |                  |  
|Interest expense (contractual interest of $5,960 and $14,968, net of unaccrued interest
of $0 and $10,100 and capitalized interest of $0 and $117 for the three months ended March 31, 2003 and 2002, respectively) |  |                | 5,960  |   |                  |  
|Reorganization expenses, net                                                                                                                                                                                        |  |                | 344    |   |                  |  
|Restructuring expenses                                                                                                                                                                                              |  |                | 855    |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Total costs and operating expenses                                                                                                                                                                                  |  |                | 69,620 |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Income (loss) from operations                                                                                                                                                                                       |  |                | (6,312 | ) |                  |  
|Income on investment in joint ventures                                                                                                                                                                              |  |                | 814    |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Income (loss) before provision for income taxes                                                                                                                                                                     |  |                | (5,498 | ) |                  |  
|Provision (benefit) for income taxes                                                                                                                                                                                |  |                | 664    |   |                  |  
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Net income (loss)                                                                                                                                                                                                   |  | $              | (6,162 | ) |                  | $
|                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Income (loss) per share:                                                                                                                                                                                            |  |                |        |   |                  |  
|Basic and diluted:                                                                                                                                                                                                  |  | $              | (0.31  | ) |                  |  
|Weighted average number of common shares outstanding (see Note 1)                                                                                                                                                   |  |                | 20,000 |   |                  |  



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



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SUNTERRA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except per share data)

(Unaudited)



|                                                                                                                                    |  | SuccessorMarch 31,2003 |         |   | SuccessorDecember 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------------------- | -
|ASSETS                                                                                                                              |  |                        |         |   |                           |  
|Cash and cash equivalents                                                                                                           |  | $                      | 15,465  |   |                           | $
|Cash in escrow and restricted cash                                                                                                  |  |                        | 61,967  |   |                           |  
|Mortgages and contracts receivable, net of an allowance of $30,916and $32,394 at
March 31, 2003 and December 31, 2002, respectively |  |                        | 174,610 |   |                           |  
|Retained interests in mortgages receivable sold                                                                                     |  |                        | 18,420  |   |                           |  
|Due from related parties                                                                                                            |  |                        | 2,051   |   |                           |  
|Other receivables, net                                                                                                              |  |                        | 23,073  |   |                           |  
|Prepaid expenses and other assets                                                                                                   |  |                        | 34,668  |   |                           |  
|Assets held for sale                                                                                                                |  |                        | 8,438   |   |                           |  
|Investment in joint ventures                                                                                                        |  |                        | 20,688  |   |                           |  
|Real estate and development costs, net                                                                                              |  |                        | 131,902 |   |                           |  
|Property and equipment, net                                                                                                         |  |                        | 70,319  |   |                           |  
|Intangible and other assets, net                                                                                                    |  |                        | 154,091 |   |                           |  
|                                                                                                                                    |  |                        |         |   |                           |  
|Total assets                                                                                                                        |  | $                      | 715,692 |   |                           | $
|                                                                                                                                    |  |                        |         |   |                           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |  |                        |         |   |                           |  
|Borrowings under Merrill Lynch Financing Facility                                                                                   |  | $                      | 225,115 |   |                           | $
|Accounts payable                                                                                                                    |  |                        | 9,904   |   |                           |  
|Accrued liabilities                                                                                                                 |  |                        | 91,927  |   |                           |  
|Income taxes payable                                                                                                                |  |                        | 4,085   |   |                           |  
|Deferred revenues                                                                                                                   |  |                        | 104,184 |   |                           |  
|Notes payable                                                                                                                       |  |                        | 3,294   |   |                           |  
|                                                                                                                                    |  |                        |         |   |                           |  
|Total liabilities                                                                                                                   |  |                        | 438,509 |   |                           |  
|                                                                                                                                    |  |                        |         |   |                           |  
|                                                                                                                                   
|Commitments and contingencies                                                                                                       |  |                        |         |   |                           |  
|                                                                                                                                   
|Stockholders equity                                                                                                                |  |                        |         |   |                           |  
|Common stock ($0.01 par value, 30,000 shares authorized;18,045 outstanding at March
31, 2003 and December 31, 2002)                 |  |                        | 180     |   |                           |  
|Additional paid-in capital                                                                                                          |  |                        | 296,714 |   |                           |  
|Accumulated deficit                                                                                                                 |  |                        | (20,485 | ) |                           |  
|Accumulated other comprehensive income                                                                                              |  |                        | 774     |   |                           |  
|                                                                                                                                    |  |                        |         |   |                           |  
|Total stockholders equity                                                                                                          |  |                        | 277,183 |   |                           |  
|                                                                                                                                    |  |                        |         |   |                           |  
|Total liabilities and stockholders equity                                                                                          |  | $                      | 715,692 |   |                           | $
|                                                                                                                                    |  |                        |         |   |                           |  



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



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SUNTERRA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, 2003 (Successor) and 2002 (Predecessor)

(Amounts in thousands)

(Unaudited)



|                                                                                                   |  | Successor 2003 |         |   | Predecessor 2002 |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | -
|Operating activities:                                                                              |  |                |         |   |                  |  
|Net (loss) income                                                                                  |  | $              | (6,162  | ) |                  | $
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
activities: |  |                |         |   |                  |  
|Depreciation and amortization                                                                      |  |                | 2,972   |   |                  |  
|Provision for doubtful accounts and loan losses                                                    |  |                | 634     |   |                  |  
|Amortization of capitalized loan origination costs and portfolio premium                           |  |                | 820     |   |                  |  
|Amortization of capitalized financing costs                                                        |  |                | 2,233   |   |                  |  
|Discount on settlement of debt                                                                     |  |                |        |   |                  |  
|Income on investment in joint ventures                                                             |  |                | (814    | ) |                  |  
|Gain on sales of property and equipment                                                            |  |                | 106     |   |                  |  
|Deferred income taxes                                                                              |  |                |        |   |                  |  
|Change in retained interests in mortgages receivable sold                                          |  |                | (331    | ) |                  |  
|Changes in operating assets and liabilities:                                                       |  |                |         |   |                  |  
|Cash in escrow and restricted cash                                                                 |  |                | (11,790 | ) |                  |  
|Mortgages and contracts receivable                                                                 |  |                | 4,608   |   |                  |  
|Due from related parties                                                                           |  |                | (211    | ) |                  |  
|Other receivables, net                                                                             |  |                | (4,076  | ) |                  |  
|Prepaid expenses and other assets                                                                  |  |                | (599    | ) |                  |  
|Real estate and development costs                                                                  |  |                | 3,657   |   |                  |  
|Deferred revenue                                                                                   |  |                | 4,688   |   |                  |  
|Accounts payable                                                                                   |  |                | (2,528  | ) |                  |  
|Accrued liabilities                                                                                |  |                | 5,161   |   |                  |  
|Liabilities subject to compromise                                                                  |  |                |        |   |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Net cash (used in) provided by operating activities                                                |  |                | (1,632  | ) |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Investing activities:                                                                              |  |                |         |   |                  |  
|Proceeds from sale of assets                                                                       |  |                | 199     |   |                  |  
|Capital expenditures                                                                               |  |                | (1,218  | ) |                  |  
|Change in intangible and other assets                                                              |  |                | 157     |   |                  |  
|Investment in joint ventures                                                                       |  |                | 10,629  |   |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Net cash provided by (used in) investing activities                                                |  |                | 9,767   |   |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Financing activities:                                                                              |  |                |         |   |                  |  
|Borrowings under debtor-in-possession financing agreement                                          |  |                |        |   |                  |  
|Debt issuance costs                                                                                |  |                |        |   |                  |  
|Payments on debtor-in-possession financing agreement                                               |  |                |        |   |                  |  
|Payments on Merrill Lynch Financing Facility                                                       |  |                | (14,950 | ) |                  |  
|Payments on notes payable and mortgage-backed securities                                           |  |                | (391    | ) |                  |  
|Payment of accrued interest in settlement of pre-petition debt                                     |  |                |        |   |                  |  
|Payments on credit line facilities                                                                 |  |                |        |   |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Net cash used in financing activities                                                              |  |                | (15,341 | ) |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Effect of changes in exchange rates on cash and cash equivalents                                   |  |                | (289    | ) |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                | (7,495  | ) |                  |  
|Cash and cash equivalents, beginning of period                                                     |  |                | 22,960  |   |                  |  
|                                                                                                   |  |                |         |   |                  |  
|Cash and cash equivalents, end of period                                                           |  | $              | 15,465  |   |                  | $
|                                                                                                   |  |                |         |   |                  |  



(Continued)



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|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  |  |   |       |  |   |      
|--------------------------------------------------- |  | - | ----- |  | - | -----
|Cash paid for interest, net of capitalized interest |  | $ | 3,422 |  | $ | 2,535
|Cash paid for taxes, net of tax refunds             |  | $ | 2,425 |  | $ | 2,874



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



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SUNTERRA CORPORATION



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share
amounts)

(Unaudited)



Note 1Background and Basis of Presentation



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



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



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



The accompanying unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal
recurring nature. Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



These statements should be read in conjunction with the audited financial statements and footnotes included in the
Companys 2002 Annual Report on Form 10-K. Accounting policies used in preparing these financial statements are the same as those described in such Form 10-K, unless otherwise noted herein. As a result of adopting fresh-start reporting upon
emerging from Chapter 11, the Companys financial statements are not comparable with those prepared for the period before the Plan was confirmed, including the historical consolidated financial statements included herein. References to
Predecessor refer to the Company through July 31, 2002. References to Successor refer to the Company on and after August 1, 2002.



Income (Loss) per ShareBasic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three months ended March
31, 2003, 1,790 shares attributable to the exercise of outstanding warrants were excluded from the calculation of diluted loss per share because the effect was anti-dilutive. As of July 31, 2002, the effective date of the Plan for accounting
purposes, all previously outstanding equity securities of the Company were cancelled.



In connection with implementation of the Plan, approximately 18,045 shares of the Successor Companys common stock were issued during 2002. Additionally, a distribution of approximately 1,955 shares of the Successor
Companys common stock will be made to pre-petition general unsecured creditors on a pro rata basis for no cash consideration. In accordance with the provisions of SFAS No. 128, Earnings per Share, shares of common stock to be issued to
the pre-petition general unsecured creditors were considered to be outstanding as of the date of emergence from bankruptcy and included in the computation of income (loss) per share of the Successor Company. No earnings per share calculations are
shown for periods prior to the distribution of the Successor Companys common stock, since the information is not comparable with the Successor Company.



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Stock-Based CompensationThe Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123. The Statement 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 method of
Accounting Principles Board (APB) Opinion No. 25. Opinion No. 25 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 all of the Companys plans are granted with an exercise price equal to the fair market value on the date of the grant. The following table presents the effect on the Companys net (loss)
earnings and (loss) earnings 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 (in thousands, except for per share
amounts). No earnings per share calculations are shown for periods prior to the distribution of the Successor Companys common stock, since the information is not comparable with the Successor Company.



|                                                                                                                                  |  | Three Months Ended March 31, 2003 |        |   | Three Months Ended March 31, 2002
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | ---------------------------------
|Net (loss) income, as reported                                                                                                    |  | $                                 | (6,162 | ) |                                  
|Total stock-based employee compensation expense determined under the fair value method
for all awards, net of related tax effects |  |                                   |       |   |                                  
|Net (loss) income, pro forma                                                                                                      |  | $                                 | (6,162 | ) |                                  
|Basic and diluted net loss per share, as reported                                                                                 |  | $                                 | (0.31  | ) |                                  
|Basic and diluted net loss per share, pro forma                                                                                   |  | $                                 | (0.31  | ) |                                  



ReclassificationsCertain reclassifications were made to the 2002 condensed consolidated financial statements to conform to the 2003 presentation.



Note 2New Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses
consolidation by business enterprises of variable interest entities. Consolidation by a primary beneficiary of the assets, liabilities and results of activities of variable interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated company. The Interpretation also requires disclosures about variable interest entities that the Company is not required to consolidate but in which it has a significant variable
interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003 and apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted Interpretation No. 46 as of January 1, 2003. The adoption of
Interpretation No. 46 did not have a material impact on the accompanying condensed consolidated financial statements.



In February 2003, Proposed AICPA SOP, Accounting for Real Estate Time-Sharing Transactions, and proposed FASB SFAS, Accounting for Real Estate
Time-Sharing Transactionsan amendment of FASB Statements No. 66 and 67, were issued simultaneously for public comment. The proposed FASB Statement would amend other authoritative pronouncements should the proposed SOP be issued as final.
The proposed SOP would eliminate inconsistencies in existing authoritative literature and accepted practices and fill voids that have emerged in revenue recognition guidance in recent years by providing guidance on a sellers accounting for
real estate time-sharing transactions including criteria for and methods of revenue recognition, accounting for selling costs, accounting for credit losses, accounting for repossession of vacation ownership intervals, accounting for operations
during interval holding periods, accounting for developer subsidies to interval homeowners associations and accounting for upgrade transactions. The comment periods concluded on April 30, 2003. The provisions of this proposed SOP would be
effective for financial statements issued for fiscal years beginning after June 15, 2004. It is not possible to determine at this time the impact that the conclusions of the SOP, when and if it is finalized, may have on the condensed consolidated
financial statements of the Company.



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Note 3Mortgages and Contracts Receivable



The following summarizes the Companys total mortgages and contracts
receivable:



|                                                                                                                           |  | Successor March 31, 2003 |                     |   | Successor December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------------------- | - | --------------------------- | -
|Mortgages and contracts receivable Deferred loan origination costs, net Premium on mortgages and contracts receivable, net |  | $                        | 192,558 4,287 8,681 |   |                             | $
|                                                                                                                           |  |                          |                     |   |                             |  
|Mortgages and contracts receivable, gross                                                                                  |  |                          | 205,526             |   |                             |  
|Less allowance for loan and contract losses                                                                                |  |                          | (30,916             | ) |                             |  
|                                                                                                                           |  |                          |                     |   |                             |  
|Mortgages and contracts receivable, net                                                                                    |  | $                        | 174,610             |   |                             | $
|                                                                                                                           |  |                          |                     |   |                             |  



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



|                                       |  | Successor Three months ended March 31, 2003 |        |   | Predecessor Three months ended March 31, 2002 |  
|-------------------------------------- |  | ------------------------------------------- | ------ | - | --------------------------------------------- | -
|Balance, beginning of period           |  | $                                           | 32,394 |   |                                               | $
|Provision for loan and contract losses |  |                                             | 473    |   |                                               |  
|Receivables charged off, net           |  |                                             | (1,951 | ) |                                               |  
|                                       |  |                                             |        |   |                                               |  
|Balance, end of period                 |  | $                                           | 30,916 |   |                                               | $
|                                       |  |                                             |        |   |                                               |  



Note 4Real Estate
and Development Costs



Real estate and development costs consist
of the following:



|                                                |  | Successor March 31, 2003 |         | Successor December 31, 2002
|----------------------------------------------- |  | ------------------------ | ------- | ---------------------------
|Development costs of Vacation Interests, net    |  |                          | 125,271 |                            
|Interests recoverable under defaulted mortgages |  |                          | 6,631   |                            
|                                                |  |                          |         |                            
|Net real estate and development costs           |  | $                        | 131,902 |                            
|                                                |  |                          |         |                            



Note
5Reorganization Costs



Reorganization costs are comprised
of expenses and losses offset by income and gains that were realized or incurred by the Company as a result of reorganization under Chapter 11 and are expensed as incurred. These items have been segregated from normal operating costs and consist of
the following:



|                                          |  | Successor Three months ended March 31, 2003 |     | Predecessor Three months ended March 31, 2002 |  
|----------------------------------------- |  | ------------------------------------------- | --- | --------------------------------------------- | -
|Professional fees                         |  | $                                           | 328 |                                               | $
|Employee retention and severance programs |  |                                             |    |                                               |  
|Net gains on asset sales                  |  |                                             |    |                                               |  
|Other                                     |  |                                             | 16  |                                               |  
|Gain on settlement of debt                |  |                                             |    |                                               |  
|Interest income                           |  |                                             |    |                                               |  
|                                          |  |                                             |     |                                               |  
|                                          |  | $                                           | 344 |                                               | $
|                                          |  |                                             |     |                                               |  



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In January 2002, pursuant to
an order of the Bankruptcy Court, the Company entered into an agreement (the Finova Agreement) with Finova Capital Corporation (Finova) that provided for payment by the Company of various loans and financing facilities (Finova Loans) from Finova or
its affiliates. Pursuant to the Finova Agreement, the Company paid, in cash and by application of other funds, $100 million (determined after giving effect to a prior release to Finova of $5 million held by Finova as cash collateral) and Finova
returned collateral securing the Finova Loans. The payment to Finova represented a discount of $27.0 million from the principal amount of the Finova Loans. Pursuant to the Finova Agreement, the Company and Finova each released the other parties from
liabilities and obligations relating to the Finova Loans and certain other matters, including those that were the subject of pending litigation between the parties. The Company obtained a portion of the funds to pay the Finova Loans from term loans
under its debtor-in-possession (DIP) financing facility and paid a brokerage fee of $13.4 million to its DIP lender for negotiating the settlement with Finova. The Company recorded a net gain on settlement of debt of $13.6 million, which is included
as an offset to reorganization costs.



Note 6Comprehensive
Loss



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



|                                                 |  | Successor Three monthsended March 31, |        |   | Predecessor Three monthsended March 31, |  
|------------------------------------------------ |  | ------------------------------------- | ------ | - | --------------------------------------- | -
|                                                 |  | 2003                                  |        |   | 2002                                    |  
|Net (loss) income                                |  | $                                     | (6,162 | ) |                                         | $
|Unrealized loss on available for sale securities |  |                                       |       |   |                                         |  
|Foreign currency translation adjustments         |  |                                       | (981   | ) |                                         |  
|                                                 |  |                                       |        |   |                                         |  
|Total comprehensive loss                         |  | $                                     | (7,143 | ) |                                         | $
|                                                 |  |                                       |        |   |                                         |  



Note 7Segment and
Geographic Information



The Company currently operates in two
geographic segments, the North America and foreign segments. During the Chapter 11 proceedings, the Company operated in three segments, North American Debtor Entities, North American Non-Debtor Entities and foreign entities. All of these segments
operate in one industry segment that includes the development, marketing, sales, financing and management of vacation ownership resorts. The Companys areas of operation outside of North America include the United Kingdom, Italy, Spain,
Portugal, Austria, Germany and France. The Companys management evaluates performance of each segment based on profit or loss from operations before income taxes not including extraordinary items and the cumulative effect of change in
accounting principles. The accounting policies of the segments are the same as those described in the summary of accounting policies. No single customer accounts for a significant amount of the Companys revenues. Information about the
Companys operations in different geographic locations or segments is shown below:



|                                                    |  | North America |         |   | Foreign |   | Eliminations |  |   | Total   |  
|--------------------------------------------------- |  | ------------- | ------- | - | ------- | - | ------------ |  | - | ------- | -
|Three months ended March 31, 2003 (Successor)       |  |               |         |   |         |   |              |  |   |         |  
|Revenues from external customers                    |  | $             | 42,242  |   |         | $ | 21,066       |  | $ |        |  
|(Loss) income before income tax (benefit) provision |  |               | (7,922  | ) |         |   | 2,424        |  |   |        |  
|Segment assets                                      |  |               | 608,569 |   |         |   | 147,843      |  |   | (40,720 | )



|                                                    |  | NorthAmericaDebtors |         |   | North AmericaNon-Debtors |   | Foreign |  | TotalNon-Debtors |         | Eliminations |   |         | Total
|--------------------------------------------------- |  | ------------------- | ------- | - | ------------------------ | - | ------- |  | ---------------- | ------- | ------------ | - | ------- | -----
|Three months ended March 31, 2002 (Predecessor)     |  |                     |         |   |                          |   |         |  |                  |         |              |   |         |      
|Revenues from external customers                    |  | $                   | 29,422  |   |                          | $ | 10,519  |  | $                | 18,834  |              | $ | 29,353  |      
|(Loss) income before income tax (benefit) provision |  |                     | (2,086  | ) |                          |   | 1,720   |  |                  | 1,768   |              |   | 3,488   |      
|Segment assets                                      |  |                     | 526,298 |   |                          |   | 21,948  |  |                  | 127,093 |              |   | 149,041 |      



Note 8Commitments
and Contingencies



Sunterra Pacific, as Manager of the VTS
Program, filed an arbitration proceeding against the VTS Owners Association Board



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of Directors because it declined to renew the Management Agreement without reasonable cause. The Board
filed a counter petition alleging cause. The parties have agreed to an indefinite stay of the arbitration proceedings, which the Arbitrators confirmed February 26, 2003, so that the parties may pursue settlement negotiations. This action is in the
early stages of arbitration; however, management believes that the ultimate outcome of this matter will not have a material adverse impact on the Companys financial position or results of operations.



Sunterra licensed certain computer software under a software license granted
by RCI Technology Corp., formerly known as Resort Computer Corporation (RCC). That software was the foundation for Sunterras integrated computer system, which manages a wide range of hospitality functions, such as reservations, inventory
control, sales commissions, Club Sunterra operations, housekeeping and marketing. RCI Technology filed a motion in the Chapter 11 Cases alleging that the license agreement should be deemed rejected, which RCI Technology asserts would have the effect
of terminating the license. Sunterra opposed the motion, and the Bankruptcy Court ruled in favor of Sunterra and denied RCI Technologys motion. On June 14, 2002, RCI Technology 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 RCI Technology. RCI Technology has further appealed that decision to the United States Court of Appeals, 4thCircuit, and that appeal is expected to be heard in the 2ndor 3rdquarter of 2003.
Although Sunterras new ATLAS computer system, when fully implemented, is intended to fully replace any software based on the RCI Technology system, a victory by RCI Technology in this litigation prior to full implementation of
ATLAS could have a material adverse effect on the Company



The
Company holds a 23.3% interest in a limited partnership (the Joint Venture) that operates a vacation ownership resort in Hawaii. The Joint Venture refinanced existing debt in March 2003. In connection with the refinancing, the Company (as well as
its partners on a pro rata basis) provided limited guarantees in the event the lenders suffer losses for a number of specific reasons including fraud, misrepresentation, environmental conditions and certain zoning and property-specific matters.
These guarantees are limited to the specified items of risk, and do not generally guarantee repayment of the refinanced obligations, and expire with the repayment of the debt. The Company is unable to develop an estimate of the maximum potential
amount of future payments under guarantees for fraud or misrepresentation, and does not believe that it will be required to perform under the guarantee as it relates to environmental conditions, certain zoning and property-specific matters.
Accordingly, the Company has not recorded a liability for any potential obligations under the guaranties.



The Company is also currently subject to litigation and claims regarding employment, tort, contract, construction, sales taxes and commission disputes, among others. Many of such litigation and claims
were pre-petition and were treated as general unsecured creditors under the plan of reorganization. In managements judgment, none of such litigation or claims against the Company is likely to have a material adverse effect on the
Companys financial statements or its business.



Note
9Related Party Transactions



The Company has a contract
with Westpac Resort Group LLC (Westpac), a company majority owned by the Chief Executive Officer of Sunterra USA. Westpac arranges tours of vacation residences for potential customers. Management believes that the terms of the agreement are
comparable to that of an arms-length transaction. Total payments to Westpac under this agreement were $0.5 million and $0.1 million for the three months ended March 31, 2003 and 2002, respectively.



The Company sells Vacation Points under a franchising agreement with a company
that is 50% owned by the spouse of the former director of franchise operations for Sunterra Europe. The former director of franchise operations left the Company in May 2002, and the Company is still selling Vacation Points under the franchising
agreement. Management believes that terms of the franchising agreement are comparable to those of an agreement with an unrelated third party. Sales through March 2002 under the franchising agreement were approximately $0.2 million.



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



The accompanying unaudited condensed consolidated financial statements set forth certain data with respect to our financial position, results of
operation, and cash flows which should be read in conjunction with the following discussion and analysis. The terms Company, we, our, and us refer to Sunterra Corporation and its subsidiaries. The
following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including those contained in our Annual Report on Form 10-K for the year ended December 31, 2002 under the headings Business-Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in that report. See the Safe Harbor Statement at the beginning of this report.



Overview



We are a vacation ownership (timeshare) company with resort locations in North America, Europe, the Caribbean, and Latin America and approximately 315,000 owner families. Our operations consist of:



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



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



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



| | · |  | selling vacation ownership interests which 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | leasing Vacation Intervals at certain Caribbean locations;
| | - |  | ----------------------------------------------------------



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| | · |  | providing consumer financing to individual purchasers of vacation interests;
| | - |  | ----------------------------------------------------------------------------



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



| | · |  | operating our Club Sunterramembership program.
| | - |  | -----------------------------------------------



We refer to
Vacation Points and Vacation Intervals together as Vacation Interests.



RESULTS OF OPERATIONS



Comparison of the Three Months Ended March 31, 2003 to the Three Months Ended March 31, 2002



We achieved total revenues of $63.3 million for the three months ended March 31, 2003, compared to $58.8 million for the three months ended March 31,
2002, an increase of 7.7%. Overall revenues for domestic operations increased 5.8% to $42.2 million for the three months ended March 31, 2003 compared to $40.0 million for the three months ended March 31, 2002, and revenues from foreign operations
increased by $2.2 million, or 11.9%, to $21.1 million for the three months ended March 31, 2003.



Vacation Interest sales were $40.1 million for the three months ended March 31, 2003, an increase of $5.0 million or 14.4%, compared to $35.1 million for the three months ended March 31, 2002. This
increase is the result of continued higher investments in and focus on advertising, sales and marketing efforts.



Vacation Interest lease revenues increased $1.5 million, or 63.5%, to $3.8 million for the three months ended March 31, 2003 from $2.3 million for the three months ended March 31, 2002. The increase is
attributable to a larger owner base at certain Caribbean properties versus the prior years and resulting higher overall levels of maintenance fees in 2003, completion of additional units which became available for lease in the fourth quarter 2002,
and restructuring of the regional sales staff, offset by one-time maintenance fees billed to owners of certain Caribbean properties in 2002.



Club Sunterra revenues of $2.2 million for the three months ended March 31, 2003 were $0.4 million higher than the $1.8 million recognized in the three
months ended March 31, 2002, due to an increase in club memberships.



Resort rental revenues for the three months ended March 31, 2003 and 2002 were $2.8 million and $3.4 million, respectively. The $0.6 million or 19.6% decrease is attributable to the sale of the Carambola Beach Resort located in St.
Croix, U.S. Virgin Islands, in August 2002.



Management services
revenues fell by $0.8 million to $4.4 million for the three months ended March 31, 2003. This decrease from $5.2 million for the first quarter 2002 was driven by non-renewals of certain management contracts.



Interest revenues, primarily from financing provided to purchasers and lessees
of Vacation Interests, decreased 13.1% to $6.1 million for the three months ended March 31, 2003 from $7.0 million for the three months ended March 31, 2002. The decrease resulted from continued higher levels of prepayments, as well as amortization
of premium recorded in connection with the fair market value adjustment recorded upon our emergence from Chapter 11.



Other revenues, which mainly consists of sampler vacation program revenues, travel service revenue, resort amenity income and finance commissions,
remained steady at $4.1 million for the three months ended March 31, 2003 versus $4.0 million for the three months ended March 31, 2002.



Vacation Interest cost of sales of $7.7 million for the three months ended March 31, 2003 decreased $0.2 million, or 2.1%, from $7.9 million for the three
months ended March 31, 2002. As a percentage of Vacation Interest sales for the three months ended March 31, 2003 and 2002, Vacation Interest cost of sales was 19.2% and 22.4%, respectively. This decrease (as a percentage of Vacation Interest sales)
is due to our fresh start adjustments to real estate and development costs in the fourth quarter of 2002.



For the three months ended March 31, 2003, advertising, sales and marketing costs were $26.4 million or 65.9% of Vacation Interest sales compared to $23.5 million and 67.0%, respectively, for the three
months ended March 31, 2002. The $2.9 million increase is attributed to our decision to increase investments in advertising, sales and marketing to stimulate Vacation Interest sales.



The provision for doubtful accounts and loan losses was $0.6 million for the three months ended March 31, 2003 compared to
$1.3 million for the three months ended March 31, 2002. Of these amounts, $0.5 million and $1.1 million for the three months ended March 31, 2003 and 2002, respectively, related to mortgages and contracts receivable. The allowance for mortgages and
contracts receivable at March 31, 2003 was $30.9 million, representing approximately 15.0% of the total portfolio outstanding at that date, compared to $32.4 million and 15.2% at December 31, 2002. The decrease in the provision for



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doubtful accounts and loan losses reflect continuing improvements resulting from our various initiatives,
including standardization of underwriting procedures (including higher levels of purchasers overall creditworthiness), more timely correspondence with customers whose mortgages and contracts are delinquent, and higher down payments being
obtained upon initial sales and leases. We have also benefited from customers prepaying their receivables at higher rates than in the past. Additionally, we have placed more emphasis on timely foreclosures and writing-off delinquent receivables. The
remainder of the provision for doubtful accounts of $0.1 million for the three months ended March 31, 2003 and $0.2 million for the three months ended March 31, 2002 represents estimated uncollectible amounts due from homeowner associations and
other receivables.



Loan portfolio expenses decreased 9.7% to
$3.0 million for the three months ended March 31, 2003 from $3.3 million for the three months ended March 31, 2002. This improvement is attributable to stabilization of the collections and underwriting process as a result of our initiatives noted
above.



General and administrative expenses for the three months
ended March 31, 2003, held relatively steady at $19.0 million, a slight 2.6% increase from $18.6 million for the three months ended March 31, 2002. As a percentage of total revenues, general and administrative expenses were 30.1% and 31.6% for the
three months ended March 31, 2003 and 2002, respectively.



Depreciation and amortization expense decreased 12.4%, or $0.4 million, to $3.0 million for the three months ended March 31, 2003 from $3.4 million for the three months ended March 31, 2002, resulting from the disposition of certain
properties in 2002, as well as fresh start adjustments to property and equipment in third quarter 2002.



Interest expense for the three months ended March 31, 2003, net of capitalized interest of $0, was $6.0 million, compared to $4.5 million, net of capitalized interest of $0.1 million, for the three
months ended March 31, 2002. The increase was primarily attributable to increased borrowings under our financing facilities in first quarter 2003 ($225.1 million as of March 31, 2003) versus borrowings under our debtor-in-possession financing
facility during the prior year ($147.0 million at March 31, 2002).



Reorganization costs were $0.3 million in the first quarter 2003. Due to a gain on settlement of debt of $13.6 million offset against reorganization costs of $6.7 million, reorganization expenses were ($7.0 million) in the three
months ended March 31, 2002. Excluding the gain on settlement of debt in the first quarter 2002, reorganization costs decreased $6.4 million, or 94.3%, a direct result of our emergence from bankruptcy on July 29, 2002.



Restructuring expenses of $0.9 million for the three months ended March 31,
2003, related to the implementation of a new strategic plan, which included streamlining of our legal structure as well as relocation of our headquarters and the related personnel to Las Vegas, Nevada. No restructuring costs were recorded in the
first quarter 2002.



LIQUIDITY AND CAPITAL RESOURCES



We generate cash principally from down payments on Vacation
Interest sales and leases financed, 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 three months ended March 31, 2003, net cash used in operating
activities was $1.6 million. Our net loss of $6.2 million was offset by $6.0 million of non-cash transactions, including $3.0 million in depreciation and amortization and $2.2 million in amortization of capitalized financing costs, and a $1.1
million net decrease in working capital.



During the three months
ended March 31, 2003, net cash provided by investing activities was $9.8 million, with distributions from joint ventures of $10.6 million offset by capital expenditures of $1.2 million.



During the three months ended March 31, 2003, net cash used in financing activities was $15.3 million. Cash used in financing
activities was primarily the result of payments of $15.0 million on our financing facility with Merrill Lynch Mortgage Capital, Inc.



We currently anticipate spending approximately $7.5 million for real estate and development costs at existing resort locations during the remainder of
2003. We plan to fund these expenditures with cash generated from operations and borrowings under our financing 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 2003. If these are not sufficient, we have the ability to adjust our spending on real estate and development costs.



The allowance for loan losses at March 31, 2003 was $30.9 million, or 15.0% of
the gross mortgages and contracts receivable outstanding at that date. We believe the allowance is adequate. However, if the amount of mortgages and contracts receivable that is ultimately written off materially exceeds the related allowances, our
business, results of operations and financial condition could be adversely affected.



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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, deterioration of economic conditions, war on terrorist activities affecting the travel and tourism industry and limitations on our ability to conduct marketing activities.



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



Recent economic forecasts suggest continued higher level of prepayment rates versus that evidenced historically. Further, trends in our portfolio in the
past fifteen months indicate increased prepayment rates over historical amounts. To the extent that mortgages receivable are paid off prior to their contractual maturity at a rate more rapid than we have estimated, the fair value of our residual
interests will be impacted.



At March 31, 2003, our U.S.
operations has approximately 16,600 Vacation Intervals available for sale or lease, our Sunterra Pacific operations had approximately 66,200 points available, which are equivalent to approximately 343 Vacation Intervals, and our European operations
had approximately 472,000 points available, which are equivalent to approximately 10,100 Vacation Intervals. With the completion of current projects in progress, the acquisition of new resorts and the expansion of existing resorts, we believe we
will have an adequate supply of Vacation Intervals available to meet our planned growth through the early part of 2005.



Corporate Finance



On average, we finance approximately 62% of domestic Vacation Interest revenues. Accordingly, we do not generate sufficient cash from sales to provide the
necessary capital to pay the costs of developing additional resorts and to replenish working capital. We believe that revenues, together with amounts available under our financing facility will be sufficient to fund our operations.



Under the terms of our financing facility, we obtained a two-year senior
asset-based non-amortizing revolving credit facility in the amount of $300 million. The availability of borrowings under our financing facility is based on the amount of eligible mortgages receivable, the value of eligible vacation interests
inventory and the value of certain real property and other assets. Our financing facility is secured by a first priority lien on the mortgages receivable and vacation interests inventory, as well as certain real property and other of our assets,
subject to certain exceptions. Borrowings under our facility bear interest at an annual rate equal to one month LIBOR plus 3%, 5%, or 7%, depending on the type of assets collateralizing various advances. In addition to the facility fee (2.5% of $300
million) paid in connection with the commitment and the closing of tour financing facility, we issued a warrant exercisable for 1,190,148 shares of new common stock at an exercise price of $15.25 per share, subject to adjustment under certain
anti-dilution provisions of the warrant. Also, we will pay an unused commitment fee of 0.25% per annum on the excess availability under the credit facility. Availability under our financing facility at March 31, 2003 was $55.0 million.



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Foreign Currency Risk



Our total revenues denominated in a currency other than U.S. dollars for the three months ended March 31, 2003, primarily revenues derived from the United Kingdom, were approximately $21.1 million, or 33.3% of total revenues. Our net
assets maintained in a functional currency other than U.S. dollars at March 31, 2003, which were primarily assets located in Western Europe, were approximately 20.7% of total net assets. The effects of changes in foreign currency exchange rates have
not historically been significant to our operations or net assets.



Interest Rate Risk



As of March 31, 2003,
we had floating interest rate debt of approximately $225.1 million, comprised of amounts outstanding under the Merrill Lynch Financing Facility. The floating interest rate on our financing 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, 2003 would cause a change in quarterly interest expense of approximately $0.6 million.



ITEM 4.CONTROLS AND PROCEDURES



Within the 90-day period prior to the filing of this report, an evaluation was carried out by our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934. Based upon that



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evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls
and procedures are effective to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.



There have been no significant changes in internal control nor in factors that could significantly affect internal control, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their
evaluation.



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, should not materially and adversely affect us, with the possible exception of the matters described below.



In 1996, the State of Hawaii Department of Taxation began audits of Sunterra Pacific and the VTS Operating Fund, Inc. established by Sunterra Pacific as a
repository for pass through funds relating to obligations of Sunterra Pacific timeshare owners. On July 20, 2000, the Department of Taxation issued final assessments for general excise and use tax claimed to be owed by Sunterra Pacific for June 30,
1987 through June 30, 1999. The assessments for back taxes, penalties and interest total approximately $5.76 million. In a parallel audit of the VTS Operating Fund, the Department of Taxation issued proposed assessments for general excise and use
tax for the period June 30, 1994 through June 30, 1998. These assessments for back taxes, penalties and interest total approximately $1.35 million. Sunterra Pacific disputes many of the assessments described above and is currently attempting to
resolve the payment of the assessments. Sunterra representatives continue to work with representatives with the Department of Taxation to discuss the assessments and the possibility of settlement.



Sunterra Pacific, as Manager of the VTS Program, filed an arbitration
proceeding against the VTS Owners Association Board of Directors alleging it declined to renew its management agreement with Sunterra Pacific without reasonable cause. The Board filed a counter petition alleging cause. The parties have agreed to an
indefinite stay of the arbitration proceedings, which the arbitrators confirmed February 26, 2003, so that the parties may pursue settlement negotiations.



Sunterra licensed certain computer software under a software license granted by RCI Technology Corp., formerly known as Resort Computer Corporation. That
software was the foundation for our integrated computer system, which manages a wide range of hospitality functions, such as reservations, inventory control, sales commissions, Club Sunterra operations, housekeeping and marketing. RCI Technology
filed a motion in our bankruptcy proceedings alleging that the license agreement should be deemed rejected, which RCI Technology asserted would have the effect of terminating the license. We opposed the motion, and the Bankruptcy Court ruled in our
favor and denied RCI Technologys motion. On June 14, 2002, RCI Technology filed a notice of appeal of the Bankruptcy Courts decision. On January 10, 2003, the United States District Court of Maryland affirmed the order of the Bankruptcy
Court, denying RCI Technologys motion. RCI Technology has further appealed that decision to the United States Court of Appeals for the Fourth Circuit, and that appeal is expected to be heard in the second or third quarter of 2003. Although our
new ATLAS computer system, when fully implemented, is intended to fully replace any software based on the RCI Technology system, a victory by RCI Technology in this litigation prior to full implementation of ATLAS could have a material
adverse effect on us.



On November 13, 2000, a Consolidated
Amended Class Action Complaint was filed in the United States District Court for the Middle District of Florida (Orlando Division), relating to a putative securities fraud class action brought on behalf of purchasers of our common stock for the
period from October 8, 1998 through January 19, 2000. Shortly after the class period, fifteen cases were filed in the district court and were consolidated. Originally, Sunterra and several of its officers and directors were named as defendants in
the consolidated cases. Following our filing for bankruptcy protection, the consolidated cases were automatically stayed against us in accordance with the Bankruptcy Code Section 362. The complaint named former officers and two former directors of
Sunterra as defendants, as well as Arthur Andersen, LLP, our independent auditors during the class period. In or about the spring of 2001, all of the defendants moved to dismiss the complaint. On March 12, 2002, the district court entered an order
dismissing the complaint against each of the defendants without prejudice. A Second Consolidated Amended Class Action Complaint was filed in the district court on July 3, 2002. All defendants are prior directors or officers of Sunterra. None of the
defendants were with Sunterra in any capacity after the effective date of the plan of reorganization. Sunterras rights in connection with this lawsuit have been assigned to the litigation trust established under our plan of reorganization. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsReorganization.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



a. Exhibits



The following exhibits are filed as
part of this Form 10-Q or, where so indicated, have been previously filed and are incorporated hereby by reference.



|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|2.1            |  | Third Amended and Restated Joint Plan of Reorganization, dated May 9, 2002, of Sunterra Corporation and its debtor
affiliates under Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K (date of event: May 9, 2002))                                          
|              
|3.1            |  | Articles of Amendment and Restatement of Sunterra Corporation (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K (date of event: July 29, 2002))                                                                                                                                                
|              
|3.2            |  | Amended and Restated Bylaws of Sunterra Corporation (incorporated by reference to Exhibit 3.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)                                                                                                                                                  
|              
|10.1           |  | Second Amendment, dated as of May 9, 2002, to Financing Agreement dated as of April 20, 2001 among Sunterra
Corporation, certain affiliates of Sunterra Corporation and Greenwich Capital Markets, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event: May 9, 2002))       
|              
|10.2           |  | Third Amendment, dated as of September 6, 2002, to Financing Agreement dated as of April 20, 2001 among Sunterra
Corporation, certain affiliates of Sunterra Corporation and Greenwich Capital Markets, Inc. (incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K (date of event: June 12, 2002))
|              
|10.3           |  | Confirmation Order, dated June 20, 2002, of the Bankruptcy Court (incorporated by reference to Exhibit 10.22 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2001 filed June 28, 2002)                                                                                                                 
|              
|10.4           |  | Loan Agreement, dated as of July 29, 2002, by and between Merrill Lynch Capital Mortgage, Inc. as agent for certain
lenders parties thereto, and Sunterra Corporation and certain of its subsidiaries (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of event: July 29, 2002))       
|              
|10.5           |  | Warrant Agreement, dated as of July 29, 2002, by and between Sunterra Corporation and Merrill Lynch Capital Mortgage,
Inc. (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (date of event: July 29, 2002))                                                                                  
|              
|10.6           |  | Sunterra Corporation 2002 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K (date of event: July 29, 2002))                                                                                                                                                                 



16



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##### Table of Contents

|      
|------
|10.7  
|      
|10.8  
|      
|+10.9 
|      
|+10.10
|      
|+10.11
|      
|16.1  
|      
|21    
|      
|*99.1 
|      
|*99.2 

---

|+ |  | Compensatory management plan
|- |  | ----------------------------



|* |  | Filed herewith
|- |  | --------------



b. Reports on Form 8-K



Form 8-K filed on February 6, 2003, relating to the appointment of a General Counsel.



Form 8-K filed on March 7, 2003, relating to the commencement of further development at Sedona Summit and Plantation at Fall
Creek.





SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



SUNTERRA CORPORATIONBy:

/s/    JAMES F. ANDERSONJames F. Anderson Senior Vice President and Corporate Controller(Chief Accounting Officer)




Dated: May 14,
2003



17



---

##### Table of Contents



I, Nicholas J. Benson, President and Chief Executive Officer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Sunterra Corporation;
| | -- |  | ---------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                         
|-------------------------
|/s/    NICHOLAS J. BENSON
|                         



Dated: May 14, 2003





18



---

##### Table of Contents



I, Steven E. West, Senior Vice
President and Chief Financial Officer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Sunterra Corporation;
| | -- |  | ---------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     
|---------------------
|/s/    STEVEN E. WEST
|                     



Dated: May 14, 2003



19