##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



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 June 30, 2005



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



For the transition period from  to



001-13815

Commission File Number



---



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)



---



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



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



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



Number of shares outstanding of the registrants common stock, par value
$0.01 per share, at August 1, 2005: 19,440,632



---



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



TABLE OF CONTENTS



|           |  |                                                                                       |  |           
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                       |  | PAGENUMBER
|           |  | PART I. FINANCIAL INFORMATION                                                         |  |           
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  | 3         
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 26        
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 39        
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 40        
|           |  |                                                                                      
|           |  | PART II. OTHER INFORMATION                                                            |  |           
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 41        
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 41        
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 41        
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 41        
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 41        
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 42        
|           | 
|Signatures |  | 43                                                                                   



Page 2



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



PART I.
FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



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



Page 3



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Nine Months Ended June 30, 2005 and 2004

(In thousands, except per
share amounts)

(Unaudited)



|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | Three Months EndedJune 30, |         |   | Nine Months EndedJune 30, |  
|                                                                               |  | 2005                       |         |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|Revenues:                                                                      |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Vacation Interest                                                              |  | $                          | 71,080  |   |                           | $ | 69,859 |      |  | $ | 198,761 |   |  | $ | 176,679 |  
|Resort rental                                                                  |  |                            | 10,527  |   |                           |   | 4,594  |      |  |   | 26,806  |   |  |   | 11,247  |  
|Management services                                                            |  |                            | 7,655   |   |                           |   | 6,196  |      |  |   | 22,229  |   |  |   | 21,559  |  
|Interest                                                                       |  |                            | 11,192  |   |                           |   | 7,104  |      |  |   | 32,722  |   |  |   | 20,502  |  
|Other                                                                          |  |                            | 7,595   |   |                           |   | 7,132  |      |  |   | 19,652  |   |  |   | 17,573  |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                                 |  |                            | 108,049 |   |                           |   | 94,885 |      |  |   | 300,170 |   |  |   | 247,560 |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Costs and Operating Expenses:                                                  |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Vacation Interest cost of sales                                                |  |                            | 10,913  |   |                           |   | 13,650 |      |  |   | 30,923  |   |  |   | 35,148  |  
|Advertising, sales and marketing                                               |  |                            | 42,159  |   |                           |   | 40,503 |      |  |   | 117,991 |   |  |   | 102,401 |  
|Vacation Interest carrying costs                                               |  |                            | 10,515  |   |                           |   | 5,612  |      |  |   | 29,448  |   |  |   | 14,410  |  
|Provision for doubtful accounts and loan losses                                |  |                            | 3,146   |   |                           |   | 2,847  |      |  |   | 8,545   |   |  |   | 6,735   |  
|Loan portfolio                                                                 |  |                            | 1,807   |   |                           |   | 1,514  |      |  |   | 4,832   |   |  |   | 5,280   |  
|General and administrative                                                     |  |                            | 21,452  |   |                           |   | 17,922 |      |  |   | 60,826  |   |  |   | 54,615  |  
|Gain on sales of assets                                                        |  |                            | (45     | ) |                           |   | (1,358 | )    |  |   | (733    | ) |  |   | (4,580  | )
|Depreciation and amortization                                                  |  |                            | 2,465   |   |                           |   | 1,957  |      |  |   | 7,500   |   |  |   | 7,372   |  
|Interest, net of capitalized interest of $44, $38, $397 and $193, respectively |  |                            | 6,219   |   |                           |   | 4,568  |      |  |   | 18,872  |   |  |   | 18,479  |  
|Reorganization and restructuring, net                                          |  |                            | 918     |   |                           |   |       |      |  |   | 918     |   |  |   | 311     |  
|Impairment of goodwill                                                         |  |                            | 55,030  |   |                           |   |       |      |  |   | 55,030  |   |  |   | 91,586  |  
|Impairment of assets                                                           |  |                            |        |   |                           |   |       |      |  |   |        |   |  |   | 897     |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total costs and operating expenses                                             |  |                            | 154,579 |   |                           |   | 87,215 |      |  |   | 334,152 |   |  |   | 332,654 |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|(Loss) income from operations                                                  |  |                            | (46,530 | ) |                           |   | 7,670  |      |  |   | (33,982 | ) |  |   | (85,094 | )
|                                                                               |  |                            |         |  
|Income from investments in joint ventures                                      |  |                            | 54      |   |                           |   | 1,057  |      |  |   | 664     |   |  |   | 3,043   |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|(Loss) income before provision for income taxes                                |  |                            | (46,476 | ) |                           |   | 8,727  |      |  |   | (33,318 | ) |  |   | (82,051 | )
|Provision for income taxes                                                     |  |                            | 3,638   |   |                           |   | 1,057  |      |  |   | 8,585   |   |  |   | 1,563   |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                              |  | $                          | (50,114 | ) |                           | $ | 7,670  |      |  | $ | (41,903 | ) |  | $ | (83,614 | )
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net (loss) income per share:                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                          |  | $                          | (2.50   | ) |                           | $ | 0.38   |      |  | $ | (2.09   | ) |  | $ | (4.18   | )
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                        |  | $                          | (2.50   | ) |                           | $ | 0.33   |      |  | $ | (2.09   | ) |  | $ | (4.18   | )
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of common shares outstanding:                          |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                          |  |                            | 20,026  |   |                           |   | 20,000 |      |  |   | 20,012  |   |  |   | 20,000  |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                        |  |                            | 20,026  |   |                           |   | 25,938 |      |  |   | 20,012  |   |  |   | 20,000  |  
|                                                                               |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  



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



Page 4



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

June 30, 2005 and September 30, 2004

(In thousands, except per share amounts)



|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                |  | June 30, 2005 |          |   | September 30,2004 |  
|                                                                                                                                                                |  | (Unaudited)   |          |   |                   |  
|ASSETS                                                                                                                                                          |  |               |          |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                       |  | $             | 18,362   |   |                   | $ | 26,842  |  
|Cash in escrow and restricted cash                                                                                                                              |  |               | 87,926   |   |                   |   | 88,663  |  
|Mortgages and contracts receivable, net of allowances of $26,900 and $26,530 at June 30, 2005 and September 30, 2004,
respectively                              |  |               | 297,108  |   |                   |   | 278,569 |  
|Retained interests in mortgages and contracts receivable sold                                                                                                   |  |               |         |   |                   |   | 23,319  |  
|Due from related parties, net                                                                                                                                   |  |               | 12,127   |   |                   |   | 6,279   |  
|Other receivables, net                                                                                                                                          |  |               | 30,306   |   |                   |   | 25,986  |  
|Deferred tax asset                                                                                                                                              |  |               | 2,469    |   |                   |   | 622     |  
|Prepaid expenses and other assets, net                                                                                                                          |  |               | 43,959   |   |                   |   | 47,944  |  
|Assets held for sale                                                                                                                                            |  |               | 221      |   |                   |   | 551     |  
|Investment in joint venture                                                                                                                                     |  |               | 5,112    |   |                   |   | 7,187   |  
|Unsold Vacation Interests, net                                                                                                                                  |  |               | 173,209  |   |                   |   | 168,858 |  
|Property and equipment, net                                                                                                                                     |  |               | 81,388   |   |                   |   | 77,996  |  
|Goodwill, net                                                                                                                                                   |  |               | 19,589   |   |                   |   | 82,759  |  
|Intangible assets, net                                                                                                                                          |  |               | 697      |   |                   |   | 1,283   |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|Total assets                                                                                                                                                    |  | $             | 772,473  |   |                   | $ | 836,858 |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                            |  |               |          |   |                   |   |         |  
|Borrowings under line of credit agreements                                                                                                                      |  | $             | 160,814  |   |                   | $ | 171,737 |  
|Accounts payable                                                                                                                                                |  |               | 8,665    |   |                   |   | 10,401  |  
|Accrued liabilities                                                                                                                                             |  |               | 95,091   |   |                   |   | 80,895  |  
|Income taxes payable                                                                                                                                            |  |               | 1,973    |   |                   |   | 3,421   |  
|Deferred revenues                                                                                                                                               |  |               | 100,970  |   |                   |   | 95,127  |  
|Securitization notes                                                                                                                                            |  |               | 122,687  |   |                   |   | 151,710 |  
|Senior subordinated convertible notes                                                                                                                           |  |               | 95,000   |   |                   |   | 95,000  |  
|Notes payable                                                                                                                                                   |  |               | 1,537    |   |                   |   | 2,261   |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|Total liabilities                                                                                                                                               |  |               | 586,737  |   |                   |   | 610,552 |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                   |  |               |          |   |                   |   |         |  
|Stockholders equity:                                                                                                                                           |  |               |          |   |                   |   |         |  
|Common stock ($0.01 par value, 75,000 shares authorized; 19,441 and 18,891 shares issued and outstanding at June 30, 2005 and September 30,
2004, respectively) |  |               | 194      |   |                   |   | 189     |  
|Additional paid-in capital                                                                                                                                      |  |               | 298,328  |   |                   |   | 297,145 |  
|Accumulated deficit                                                                                                                                             |  |               | (124,117 | ) |                   |   | (82,214 | )
|Accumulated other comprehensive income                                                                                                                          |  |               | 11,331   |   |                   |   | 11,186  |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|Total stockholders equity                                                                                                                                      |  |               | 185,736  |   |                   |   | 226,306 |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                      |  | $             | 772,473  |   |                   | $ | 836,858 |  
|                                                                                                                                                                |  |               |          |   |                   |   |         |  



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



Page 5



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended June 30, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                    |  | 2005 |         |   | 2004 |  
|Operating activities:                                                                               |  |      |         |   |      |   |         |  
|Net loss                                                                                            |  | $    | (41,903 | ) |      | $ | (83,614 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                     |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                       |  |      | 7,500   |   |      |   | 7,372   |  
|Provision for doubtful accounts and loan losses                                                     |  |      | 8,545   |   |      |   | 6,735   |  
|Amortization of capitalized financing costs, deferred loan and contract origination costs and other |  |      | 6,751   |   |      |   | 10,927  |  
|Income from investments in joint ventures                                                           |  |      | (664    | ) |      |   | (3,043  | )
|Gain on sales of assets                                                                             |  |      | (733    | ) |      |   | (4,580  | )
|(Gain) loss on foreign currency                                                                     |  |      | (438    | ) |      |   | 1,211   |  
|Impairment of goodwill                                                                              |  |      | 55,030  |   |      |   | 91,586  |  
|Impairment of assets                                                                                |  |      |        |   |      |   | 897     |  
|Provision for income taxes recorded as a reduction to goodwill                                      |  |      | 8,227   |   |      |   |        |  
|Provision for income taxes recorded as an increase to additional paid-in capital                    |  |      | 771     |   |      |   |        |  
|Deferred income taxes                                                                               |  |      | (1,847  | ) |      |   | 22      |  
|Stock-based compensation grant                                                                      |  |      | 347     |   |      |   |        |  
|Changes in retained interests in mortgages and contracts receivable sold                            |  |      | (522    | ) |      |   | (799    | )
|Changes in operating assets and liabilities:                                                        |  |      |         |   |      |   |         |  
|Cash in escrow and restricted cash                                                                  |  |      | 383     |   |      |   | (17,762 | )
|Mortgages and contracts receivable                                                                  |  |      | 13,339  |   |      |   | (15,471 | )
|Due from related parties, net                                                                       |  |      | (5,848  | ) |      |   | 29      |  
|Other receivables, net                                                                              |  |      | (3,883  | ) |      |   | 6,816   |  
|Prepaid expenses and other assets, net                                                              |  |      | 597     |   |      |   | (7,034  | )
|Unsold Vacation Interests, net                                                                      |  |      | 7,434   |   |      |   | 20,144  |  
|Accounts payable                                                                                    |  |      | (1,779  | ) |      |   | (1,732  | )
|Accrued liabilities                                                                                 |  |      | 18,053  |   |      |   | (3,232  | )
|Income taxes payable                                                                                |  |      | (1,528  | ) |      |   | 1,092   |  
|Deferred revenues                                                                                   |  |      | 5,835   |   |      |   | 1,669   |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                           |  |      | 73,667  |   |      |   | 11,233  |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Investing activities:                                                                               |  |      |         |   |      |   |         |  
|Proceeds from sales of assets                                                                       |  |      | 1,364   |   |      |   | 14,223  |  
|Capital expenditures for property and equipment                                                     |  |      | (9,888  | ) |      |   | (6,890  | )
|Purchase of mortgages and contracts receivable portfolios                                           |  |      | (26,453 | ) |      |   | (43,915 | )
|Purchase of businesses, net of cash acquired                                                        |  |      | (10,042 | ) |      |   | (30,151 | )
|Purchase of U.S. government securities pledged under bond indenture                                 |  |      |        |   |      |   | (10,426 | )
|(Increase) decrease in intangible assets, net                                                       |  |      | (44     | ) |      |   | 438     |  
|Distributions from investments in joint ventures                                                    |  |      | 2,739   |   |      |   | 1,555   |  
|                                                                                                    |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                               |  |      | (42,324 | ) |      |   | (75,166 | )
|                                                                                                    |  |      |         |   |      |   |         |  



(Continued)



Page 6



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS Continued

Nine Months Ended June 30, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                |  | 2005 |         |   | 2004 |  
|Financing activities:                                                                                                                                                                                           |  |      |         |   |      |   |          |  
|Borrowings under line of credit agreements                                                                                                                                                                      |  | $    | 55,566  |   |      | $ | 81,757   |  
|Proceeds from issuance of senior subordinated convertible notes                                                                                                                                                 |  |      |        |   |      |   | 95,000   |  
|Proceeds from issuance of notes payable                                                                                                                                                                         |  |      | 100     |   |      |   | 792      |  
|Payment of debt issuance costs                                                                                                                                                                                  |  |      |        |   |      |   | (3,497   | )
|Payments under line of credit agreements                                                                                                                                                                        |  |      | (66,489 | ) |      |   | (108,940 | )
|Payments on securitization notes                                                                                                                                                                                |  |      | (29,023 | ) |      |   |         |  
|Payments on notes payable                                                                                                                                                                                       |  |      | (824    | ) |      |   | (3,228   | )
|Proceeds from the exercise of stock options                                                                                                                                                                     |  |      | 70      |   |      |   |         |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|Net cash (used in) provided by financing activities                                                                                                                                                             |  |      | (40,600 | ) |      |   | 61,884   |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|Effect of changes in exchange rates on cash and cash equivalents                                                                                                                                                |  |      | 777     |   |      |   | (630     | )
|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|Net decrease in cash and cash equivalents                                                                                                                                                                       |  |      | (8,480  | ) |      |   | (2,679   | )
|Cash and cash equivalents, beginning of period                                                                                                                                                                  |  |      | 26,842  |   |      |   | 25,249   |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                                                                                                                                                        |  | $    | 18,362  |   |      | $ | 22,570   |  
|                                                                                                                                                                                                                |  |      |         |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                                                                                                              |  |      |         |   |      |   |          |  
|Cash paid for interest                                                                                                                                                                                          |  | $    | 14,289  |   |      | $ | 9,942    |  
|Cash paid for taxes, net of tax refunds                                                                                                                                                                         |  |      | 3,007   |   |      |   | 529      |  
|                                                                                                                                                                                                                |  |     
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                                                                                                                            |  |      |         |   |      |   |          |  
|Assets held for sale reclassified to Unsold Vacation Interests                                                                                                                                                  |  | $    |        |   |      | $ | 336      |  
|Unsold Vacation Interests transferred to Assets held for sale                                                                                                                                                   |  |      | 1,234   |   |      |   |         |  
|Retained interests in mortgages and contracts receivable sold reclassified to mortgages and contracts receivable upon exercise of clean-up
call provisions (See Note 4Mortgages and Contracts Receivable, Net) |  |      | 23,842  |   |      |   |         |  
|Property and equipment transferred to Goodwill (See Note 2Acquisitions)                                                                                                                                        |  |      | 460     |   |      |   |         |  
|Property and equipment transferred to Unsold Vacation Interests                                                                                                                                                 |  |      | 284     |   |      |   | 3,878    |  



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



Page 7



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



Note 1Background and Business



Sunterra Corporation, a
Maryland corporation (together with its wholly-owned subsidiaries hereafter referred to as Sunterra or the Company) was incorporated in May 1996 as KGK Resorts, Inc. and was later known as Signature Resorts, Inc. At the time
of its August 1996 initial public offering, the Company owned nine vacation ownership resorts in Hawaii, Florida, South Carolina, Missouri, California and in the Caribbean. The Company became known as Sunterra Corporation in the second quarter of
1998. Sunterra has grown to become one of the worlds largest vacation ownership companies, as measured by the number of individual resort locations and owner families. At June 30, 2005, the Company had more than 300,000 owner families
vacationing at 96 resorts in 13 countries located in North America, Europe and the Caribbean. See Note 11 for detailed geographic segment information.



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



Effective October 1, 2004, the Company
changed its fiscal year end for financial reporting purposes from a calendar year-end to the 12-month period commencing October 1 and ending September 30 and as such, unaudited financial information for the nine-month period ended June 30, 2005 is
presented herein compared to unaudited financial information for the nine-month period ended June 30, 2004.



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



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



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



Principles
of Consolidation



The accompanying unaudited consolidated financial
statements include all majority-owned subsidiaries in which the Company exercises control. Investments in which the Company exercises significant influence, but which it does not control (generally a 20% to 50% ownership interest), are accounted for
under the equity method of accounting. The Company does not have any interests in any entity considered to be a variable interest entity for which the Company is considered the primary beneficiary under Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, as amended in December 2003 by FASB Interpretation No. 46R. Under the equity method, original investments are recorded at
cost and adjusted by the Companys share of undistributed earnings or losses of these entities. The Company currently is a minority partner in one joint venture, as discussed in Note 12, and in July 2004 purchased the remaining 77% interest in
West Maui Resort Partners, L.P. (Kaanapali), as discussed below under Acquisitions. See Note 14Subsequent Events for discussion of the Companys July 12, 2005 announcement of an agreement to purchase the
remaining 70% interest in Poipu Resort Partners, L.P. (Poipu). All significant intercompany transactions and balances have been eliminated from the unaudited consolidated financial statements.



Page 8



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Use of Estimates



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



Net (Loss) Income Per
Share



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



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



|                                                                                      |  |                             |         |                            |      |   |       |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | --------------------------- | ------- | -------------------------- | ---- | - | ----- |  | - | ------- | - |  | - | ------- | -
|                                                                                      |  | Three months ended June 30, |         | Nine months ended June 30, |     
|                                                                                      |  | 2005                        |         |                            | 2004 |   | 2005  |  |   | 2004    |  
|Net (loss) income available to common shares outstanding                              |  | $                           | (50,114 | )                          |      | $ | 7,670 |  | $ | (41,903 | ) |  | $ | (83,614 | )
|Effect of dilutive securities:                                                        |  |                             |         |                            |      |   |       |  |   |         |   |  |   |         |  
|Deemed conversion of 33/4% Senior Subordinated Convertible Notes due 2024, net of tax |  |                             |        |                            |      |   | 900   |  |   |        |   |  |   |        |  
|                                                                                      |  |                             |         |                            |      |   |       |  |   |         |   |  |   |         |  
|Net (loss) income available to diluted common shares outstanding                      |  | $                           | (50,114 | )                          |      | $ | 8,570 |  | $ | (41,903 | ) |  | $ | (83,614 | )
|                                                                                      |  |                             |         |                            |      |   |       |  |   |         |   |  |   |         |  



A reconciliation of weighted average
common shares outstanding to weighted average common shares outstanding assuming dilution follows (in thousands):



|                                                                           |  |                             |  |                            |  |        |  |       
|-------------------------------------------------------------------------- |  | --------------------------- |  | -------------------------- |  | ------ |  | ------
|                                                                           |  | Three months ended June 30, |  | Nine months ended June 30,
|                                                                           |  | 2005                        |  | 2004                       |  | 2005   |  | 2004  
|Basic weighted average common shares outstanding                           |  | 20,026                      |  | 20,000                     |  | 20,012 |  | 20,000
|Effect of dilutive securities:                                             |  |                             |  |                            |  |        |  |       
|Stock options issued under the Sunterra Corporation 2002 Stock Option Plan |  |                            |  |                           |  |       |  |      
|Warrants issued to Senior Finance Facility lender                          |  |                            |  |                           |  |       |  |      
|Deemed conversion of 33/4% Senior Subordinated Convertible Notes due 2024  |  |                            |  | 5,938                      |  |       |  |      
|                                                                           |  |                             |  |                            |  |        |  |       
|Diluted weighted average common shares outstanding                         |  | 20,026                      |  | 25,938                     |  | 20,012 |  | 20,000
|                                                                           |  |                             |  |                            |  |        |  |       



For the three months ended June 30,
2005, a total of 600,000 shares attributable to the potential exercise of outstanding warrants were excluded from the calculation of diluted loss per share because the exercise price of the warrants exceeded the average price of the Companys
common stock. For the nine months ended June 30, 2005, a total of 1,790,148 shares attributable to the potential exercise of outstanding warrants and 1,561,312 shares of the Companys common stock attributable to the potential exercise of
outstanding options under the Sunterra Corporation 2002 Stock Option Plan were excluded from the calculation of diluted loss per share because the exercise price of the warrants and options exceeded the average price of the Companys common
stock. For the three and nine



Page 9



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



months ended June 30, 2004, a total of 1,790,148 shares attributable to the potential exercise of outstanding warrants were excluded from the calculation of diluted income (loss) per share because the exercise price
of the warrants exceeded the average price of the Companys common stock. For the three and nine months ended June 30, 2004, a total of 1,829,687 shares of the Companys common stock attributable to the potential exercise of outstanding
options under the Sunterra Corporation 2002 Stock Option Plan were excluded from the calculation of diluted income (loss) per share because the exercise price of the options exceeded the average price of the Companys common stock.



For the three months ended June 30, 2005, the following securities or other contracts to
issue common stock, for which the exercise or conversion price was less than the average market price of the common shares, were excluded from the diluted loss per share calculation because the effect was anti-dilutive: 116,701 shares attributable
to the exercise of outstanding warrants; 32,916 shares attributable to the exercise of outstanding options under the Sunterra Corporation 2002 Stock Option Plan; and 5,937,757 shares attributable to the potential conversion of 33/4% Senior Subordinated Convertible Notes due 2024.



For the nine months ended June 30, 2005, the following securities or other contracts to issue
common stock, for which the exercise or conversion price was less than the average market price of the common shares, were excluded from the diluted loss per share calculation because the effect was anti-dilutive: 4,042 shares attributable to the
exercise of outstanding options under the Sunterra Corporation 2002 Stock Option Plan and 5,937,757 shares attributable to the potential conversion of 33/4% Senior Subordinated Convertible Notes due 2024.



For the nine months ended June 30, 2004, the following securities or other contracts to issue common stock, for which the exercise or conversion price was less than the average market price of the common shares, were
excluded from the diluted loss per share calculation because the effect was anti-dilutive: 2,022,752 shares attributable to the potential conversion of 33/4% Senior Subordinated Convertible Notes due 2024.



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



Stock-Based Compensation



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



The following table presents the Companys pro forma net (loss) income and the pro forma
net (loss) income per share had the Company adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), as amended by SFAS No. 148 (in
thousands, except per share data):



|                                                                                                                                            |  |                             |         |   |                            |   |       |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                            |  | Three months ended June 30, |         |   | Nine months ended June 30, |  
|                                                                                                                                            |  | 2005                        |         |   | 2004                       |   |       | 2005 |  |   | 2004    |  
|Net (loss) income, as reported                                                                                                              |  | $                           | (50,114 | ) |                            | $ | 7,670 |      |  | $ | (41,903 | ) |  | $ | (83,614 | )
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                             | (333    | ) |                            |   | (675  | )    |  |   | (1,044  | ) |  |   | (2,529  | )
|                                                                                                                                            |  |                             |         |   |                            |   |       |      |  |   |         |   |  |   |         |  
|Pro forma net (loss) income                                                                                                                 |  | $                           | (50,447 | ) |                            | $ | 6,995 |      |  | $ | (42,947 | ) |  | $ | (86,143 | )
|                                                                                                                                            |  |                             |         |   |                            |   |       |      |  |   |         |   |  |   |         |  
|Basic net (loss) income per share, as reported                                                                                              |  | $                           | (2.50   | ) |                            | $ | 0.38  |      |  | $ | (2.09   | ) |  | $ | (4.18   | )
|Diluted net (loss) income per share, as reported                                                                                            |  | $                           | (2.50   | ) |                            | $ | 0.33  |      |  | $ | (2.09   | ) |  | $ | (4.18   | )
|Basic pro forma net (loss) income per share                                                                                                 |  | $                           | (2.52   | ) |                            | $ | 0.35  |      |  | $ | (2.15   | ) |  | $ | (4.31   | )
|Diluted pro forma net (loss) income per share                                                                                               |  | $                           | (2.52   | ) |                            | $ | 0.30  |      |  | $ | (2.15   | ) |  | $ | (4.31   | )



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



Page 10



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The following table summarizes the Black-Scholes option-pricing model assumptions used to compute the weighted average fair value of stock options granted during the periods:



|                                               |  |                            |   |  |                           |   |  |      |   |  |       |  
|---------------------------------------------- |  | -------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ----- | -
|                                               |  | Three months endedJune 30, |   |  | Nine months endedJune 30, |  
|                                               |  | 2005                       |   |  | 2004                      |   |  | 2005 |   |  | 2004  |  
|Dividend yield                                 |  | N/A                        | * |  | 0.0                       | % |  | N/A  | * |  | 0.0   | %
|Expected volatility                            |  | N/A                        | * |  | 56.53                     | % |  | N/A  | * |  | 58.59 | %
|Risk-free interest rate                        |  | N/A                        | * |  | 3.81                      | % |  | N/A  | * |  | 2.76  | %
|Expected holding period (in years)             |  | N/A                        | * |  | 5.0                       |   |  | N/A  | * |  | 5.0   |  
|Weighted average fair value of options granted |  | N/A                        | * |  | 6.66                      |   |  | N/A  | * |  | 7.05  |  

---

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



As noted in the Net (Loss) Income Per Share paragraph above, the Company has also issued warrants for the purchase of 1,790,148 of the Companys
common shares to non-employee creditors. The Company accounts for these issuances under SFAS No. 123, as amended by SFAS No. 148, and related interpretations, which utilizes a fair-value method of accounting. The Company used the following
assumptions in estimating the fair value of these warrants: expected holding period5 years; risk-free interest rate3.81%; dividend yield0%; expected volatility50%. As discussed in Note 7, the Company amended the exercise
price of 1,190,148 of these warrants in February 2004.



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



Income Taxes



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



Foreign Currency Translation



Assets and liabilities in foreign locations are translated into U.S. dollars using rates of
exchange in effect at the end of the reporting period. Income and expense accounts are translated into U.S. dollars using average rates of exchange. The net gain or loss is shown as a translation adjustment and is included in other comprehensive
income in stockholders equity. Holding gains and losses from foreign currency transactions are included in the unaudited consolidated statements of operations. During the three and nine months ended June 30, 2005, the Companys European
operations experienced gains of $0.1 million and $0.4 million, respectively, related to holding Euros. The Companys European operations reported losses of $0.2 million and $1.2 million, respectively, in the three and nine months ended June 30,
2004 related to holding Euros.



Undesignated Derivative Instruments



In June 2005, the Company entered into three forward contracts in
connection with the management of its exposure to fluctuations in foreign exchange rates. The contracts have a total notional value of £3.0 million for the future purchase of Euros and mature within



Page 11



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



one year. These contracts are recorded at fair value on the accompanying consolidated balance sheets and are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. Unrealized gains and losses on such contracts are recognized currently in earnings. For the three months ended June 30, 2005, a loss of $0.03 million was recognized in the accompanying consolidated statements of operations as
a result of these contracts.



Restructuring



Restructuring costs were $0.9 million for the three months ended June 30, 2005, and were
related to the restructuring of the Companys European operations, including a consolidation of its UK telemarketing operations and reductions of management and headcount levels in several areas. For the three months ended June 30, 2005, $0.8
million of the $0.9 million charge was paid out, all of which represented employee termination costs.



An additional $0.5 million is expected to be incurred during the three months ended September 30, 2005, for an estimated cumulative total of $1.4 million, related to the restructuring of the Companys European
operations. All efforts related to this restructuring are expected to be completed by September 30, 2005.



Acquisitions



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



Kaanapali owns and operates Embassy Vacation Resort Kaanapali on the Hawaiian island of Maui. On July 7, 2004, Sunterra completed the acquisition of the 76.7% majority interest of Kaanapali that it
did not own. Prior to the transaction, the Company owned 23.3% of Kaanapali and accounted for its interest under the equity method of accounting. For periods prior to July 7, 2004, the Companys 23.3% share of the results of
Kaanapali is included in Income from investments in joint ventures on the accompanying unaudited consolidated statement of operations. Since July 7, 2004, 100% of the operations of Kaanapali are included in the consolidated
results of the Company. The transaction was accounted for as a purchase under SFAS No. 141. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair
market values as of the date of the acquisition. During the quarter ended December 31, 2004, the Company received the final independent third-party valuation of the net assets acquired and recorded an adjustment decreasing the Property and equipment
recorded by $0.5 million and increasing the goodwill recorded by a similar amount. As a result of such adjustment, the tangible assets, liabilities and goodwill acquired totaled $108.0 million, $10.1 million and $19.4 million, respectively. The net
assets recorded of $117.3 million were offset by the elimination of the existing Investment in Joint Venture at the date of acquisition of $11.4 million and cash drawn against the Companys existing line of credit facility, as amended on July
7, 2004, of $105.9 million. With this transaction, the Company acquired full ownership of Unsold Vacation Interests with an estimated retail value in excess of $210.0 million and acquired $46.2 million of mortgages receivable.



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



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



Page 12



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



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



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



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



Recently Issued
Accounting Pronouncements



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



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



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



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



Page 13



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among
other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154
also provides that the correction of an error in previously issued financial statements should be termed a restatement. SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a material effect on its financial position or results of operations.



Reclassifications



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



Note 3St. Maarten Transactions



Leases of Vacation Interests



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



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



On a monthly basis, the Company recognizes a portion of the deferred revenue relating to these leases within the amounts captioned Vacation Interest revenue
on the accompanying unaudited consolidated statements of operations. Likewise, the Company recognizes a portion of the deferred sales and marketing costs on a monthly basis within the amounts captioned Advertising, Sales and Marketing
expenses on the accompanying unaudited consolidated statements of operations.



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



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





Page 14



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                                          |  |              |        |   |                    |   |        |  
|------------------------------------------------------------------------- |  | ------------ | ------ | - | ------------------ | - | ------ | -
|                                                                          |  | June 30,2005 |        |   | September 30, 2004 |  
|Prepaid expenses and other assets, net (direct sales and marketing costs) |  | $            | 11,128 |   |                    | $ | 11,382 |  
|                                                                          |  |              |        |   |                    |   |        |  
|Property and equipment (recorded cost)                                    |  | $            | 11,540 |   |                    | $ | 11,855 |  
|Accumulated depreciation                                                  |  |              | (1,347 | ) |                    |   | (1,040 | )
|                                                                          |  |              |        |   |                    |   |        |  
|Property and equipment, net                                               |  | $            | 10,193 |   |                    | $ | 10,815 |  
|                                                                          |  |              |        |   |                    |   |        |  
|Deferred revenue                                                          |  | $            | 74,186 |   |                    | $ | 75,877 |  
|                                                                          |  |              |        |   |                    |   |        |  



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



|                                       |  |                             |     |                            |   |      |  |      |       |  |   |      
|-------------------------------------- |  | --------------------------- | --- | -------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                                       |  | Three months ended June 30, |     | Nine months ended June 30,
|                                       |  | 2005                        |     | 2004                       |   | 2005 |  | 2004
|Vacation Interest revenue              |  | $                           | 360 |                            | $ | 647  |  | $    | 1,182 |  | $ | 2,434
|Advertising, sales and marketing costs |  |                             | 46  |                            |   | 97   |  |      | 234   |  |   | 365  



Homeowners Association
Transactions



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



The revenues relating to the homeowners transactions are included within the caption Management services revenue and the expenses, except for the provision for bad debt and depreciation expenses, are included in General and
Administrative expenses.



Note 4Mortgages and Contracts Receivable,
Net



Mortgages and contracts receivable originated by the Company are
recorded at amortized cost, including deferred loan and contract origination costs, less the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation Interests
have been capitalized and are amortized over the term of the related mortgages or contracts receivable as an adjustment to interest revenue using the effective interest method. Amortization of deferred loan and contract origination costs charged to
interest revenue was $0.5 million and $0.5 million for the three months ended June 30, 2005 and 2004, respectively, and was $1.5 million and $1.5 million for the nine months ended June 30, 2005 and 2004, respectively.



The Company recorded a $10.3 million premium at July 31, 2002 on mortgages and contracts
receivable, which is being amortized over the life of the related mortgages and contracts receivable portfolio. At June 30, 2005 and September 30, 2004, the net unamortized premium was $3.3 million and $4.5 million, respectively. During the three
months ended June 30, 2005 and 2004, amortization of $0.4 million and $0.4 million, respectively, was recorded as an adjustment of interest revenue. During the nine months ended June 30, 2005 and 2004, amortization of $1.2 million and $1.4 million,
respectively, was recorded as an adjustment of interest revenue.



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



On January 25, 2005, the Company completed a transaction resulting in the acquisition of a
loan portfolio held by TerraSun, LLC, a qualified special-purpose entity created to hold a loan portfolio and issue collateralized debt to third-party investors, for approximately



Page 15



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



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



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



|                                                                                    |  |                        |         |                                |   |        |  |   |        
|----------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------------------------ | - | ------ |  | - | -------
|                                                                                    |  | Prior YearAcquisitions |         | CurrentFiscal YearAcquisitions |   | Total 
|Contractually required payments of principal and interest receivable-at acquisition |  | $                      | 146,357 |                                | $ | 64,532 |  | $ | 210,889
|Cash flows expected to be collected-at acquisition                                  |  |                        | 121,860 |                                |   | 56,223 |  |   | 178,083
|Basis in acquired loans-at acquisition                                              |  |                        | 91,956  |                                |   | 42,981 |  |   | 134,937
|                                                                                    |  |                        |        
|Carrying amount of pools as of September 30, 2004                                   |  |                        | 79,827  |                                |   |       |  |   | 79,827 
|                                                                                    |  |                        |        
|Carrying amount of pools as of June 30, 2005                                        |  |                        | 55,460  |                                |   | 32,610 |  |   | 88,070 



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



|                                          |  |       |         |  
|----------------------------------------- |  | ----- | ------- | -
|                                          |  | Total |        
|Accretable yield as of September 30, 2004 |  | $     | 24,737  |  
|Portfolios acquired                       |  |       | 13,243  |  
|Accretion                                 |  |       | (10,989 | )
|                                          |  |       |         |  
|Accretable yield as of June 30, 2005      |  | $     | 26,991  |  
|                                          |  |       |         |  



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



Page 16



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                                                                                                                                                                                            |  |              |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                            |  | June 30,2005 |         |   | September 30,2004 |  
|Mortgages and contracts receivable principal (including purchased loan pools of $88,070 and $79,827, respectively)                                                                                                          |  | $            | 315,125 |   |                   | $ | 295,816 |  
|Deferred loan and contract origination costs, net of accumulated amortization                                                                                                                                               |  |              | 5,536   |   |                   |   | 4,770   |  
|Premium on mortgages and contracts receivable, net of accumulated amortization                                                                                                                                              |  |              | 3,347   |   |                   |   | 4,513   |  
|                                                                                                                                                                                                                            |  |              |         |   |                   |   |         |  
|Mortgages and contracts receivable, gross                                                                                                                                                                                   |  |              | 324,008 |   |                   |   | 305,099 |  
|Allowance for loan and contract losses associated with loan and contract originations (excluding purchased loan pools) with a gross balance of
$227,055 and $215,989 at June 30, 2005, and September 30, 2004, respectively |  |              | (26,900 | ) |                   |   | (26,530 | )
|                                                                                                                                                                                                                            |  |              |         |   |                   |   |         |  
|Mortgages and contracts receivable, net                                                                                                                                                                                     |  | $            | 297,108 |   |                   | $ | 278,569 |  
|                                                                                                                                                                                                                            |  |              |         |   |                   |   |         |  



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



The Company charges off mortgages and contracts receivable upon default on the first
scheduled principal and interest payment (first payment defaults) or after 180 days of contractual delinquency. Vacation Interests recovered on defaulted mortgages receivable are recorded in Unsold Vacation Interests, net, and as a reduction of loan
charge-offs at the historical cost of Vacation Interests at the respective property. All collection costs are expensed as incurred.



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



|                                       |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Three months ended June 30, |        |   | Nine months ended June 30, |  
|                                       |  | 2005                        |        |   | 2004                       |   |        | 2005 |  |   | 2004   |  
|Balance, beginning of period           |  | $                           | 25,896 |   |                            | $ | 28,446 |      |  | $ | 26,530 |   |  | $ | 28,645 |  
|Provision for loan and contract losses |  |                             | 3,061  |   |                            |   | 2,579  |      |  |   | 8,525  |   |  |   | 6,740  |  
|Receivables charged off, net           |  |                             | (2,057 | ) |                            |   | (2,672 | )    |  |   | (8,155 | ) |  |   | (8,232 | )
|Other                                  |  |                             |       |   |                            |   |       |      |  |   |       |   |  |   | 1,200  |  
|                                       |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Balance, end of period                 |  | $                           | 26,900 |   |                            | $ | 28,353 |      |  | $ | 26,900 |   |  | $ | 28,353 |  
|                                       |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  



Note 5Unsold Vacation
Interests, Net



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



17



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                              |  |              |         |                   |   |        
|------------------------------------------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                                                              |  | June 30,2005 |         | September 30,2004
|Development costs of completed Unsold Vacation Interests, net |  | $            | 109,114 |                   | $ | 114,849
|Development costs of uncompleted Vacation Interests projects  |  |              | 30,024  |                   |   | 22,329 
|Undeveloped land costs                                        |  |              | 27,347  |                   |   | 26,885 
|Vacation Interests recoverable under defaulted mortgages      |  |              | 6,724   |                   |   | 4,795  
|                                                              |  |              |         |                   |   |        
|Unsold Vacation Interests, net                                |  | $            | 173,209 |                   | $ | 168,858
|                                                              |  |              |         |                   |   |        



Note 6Goodwill and Intangible
Assets, Net



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



|                                                                                      |  |               |        |   |          |   |         |       |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------- | ----- |  | - | ------- | -
|                                                                                      |  | NorthAmerican |        |   | European |   |         | Total | 
|Balance as of October 1, 2004                                                         |  | $             | 27,329 |   |          | $ | 55,430  |       |  | $ | 82,759  |  
|Goodwill acquired during the period (See Note 2Acquisitions)                         |  |               | 487    |   |          |   | (400    | )     |  |   | 87      |  
|Impairment losses                                                                     |  |               |       |   |          |   | (55,030 | )     |  |   | (55,030 | )
|Provision for income taxes recorded as a credit to goodwill (See Note 2Income Taxes) |  |               | (8,227 | ) |          |   |        |       |  |   | (8,227  | )
|                                                                                      |  |               |        |   |          |   |         |       |  |   |         |  
|Balance as of June 30, 2005                                                           |  | $             | 19,589 |   |          | $ |        |       |  | $ | 19,589  |  
|                                                                                      |  |               |        |   |          |   |         |       |  |   |         |  



The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. As of October 1, 2004, the Companys goodwill consisted of the reorganization value in excess of
identifiable assets identified in the adoption of fresh start accounting upon emergence from bankruptcy in July 2002 and the excess cost over fair value of net assets acquired in transactions completed during fiscal 2004, net of impairment of
goodwill recorded in fiscal 2004. SFAS No. 142, Goodwill and Other Intangible Assets(SFAS No. 142) requires that goodwill be tested at least annually for impairment, or more frequently if circumstances exist to indicate potential
impairment. Although the Companys policy is to perform the required testing during its last fiscal quarter, a decline in profitability in the European segment/reporting unit during the current quarter as discussed in the July 11, 2005 Form 8-K
filed by the Company was deemed to be an indicator that a potential impairment existed and as such the testing of the European segment was accelerated to May 31, 2005. Under SFAS No. 142, goodwill is to be tested for impairment at the reporting unit
level.



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



The Company utilized a market value approach in its estimate of the fair value of the European segment/reporting unit. The estimate indicated that an impairment might exist and the second step of the impairment test
was performed. After comparing the implied fair value of the goodwill to its carrying value, the Company concluded an impairment of $55.0 million existed and as a result, a charge of $55.0 million was recorded in the three-month period ended June
30, 2005. In addition, a restructuring charge of $0.9 million was recorded during the three-month period ended June 30, 2005. See Note 2Basis of Presentation and Summary of Significant Accounting Policies-Restructuring for further
discussion.



As of June 30, 2005, the remaining goodwill has an indefinite life
and will be considered when the Company conducts its annual review of goodwill for impairment during its fourth fiscal quarter to determine if goodwill with an indefinite life has been impaired.



Page 18



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



|                              |  |              |       |   |                   |   |       |  
|----------------------------- |  | ------------ | ----- | - | ----------------- | - | ----- | -
|                              |  | June 30,2005 |       |   | September 30,2004 |  
|Management contracts          |  | $            | 1,237 |   |                   | $ | 1,237 |  
|Trademarks                    |  |              | 376   |   |                   |   | 376   |  
|Other                         |  |              | 10    |   |                   |   | 348   |  
|                              |  |              |       |   |                   |   |       |  
|                              |  |              | 1,623 |   |                   |   | 1,961 |  
|Less accumulated amortization |  |              | (926  | ) |                   |   | (678  | )
|                              |  |              |       |   |                   |   |       |  
|Intangible assets, net        |  | $            | 697   |   |                   | $ | 1,283 |  
|                              |  |              |       |   |                   |   |       |  



Amortization expense relating to other
intangible assets was $0.1 million and $0.1 million for the three months ended June 30, 2005 and 2004, respectively, and was $0.2 million and $0.3 million for the nine months ended June 30, 2005 and 2004, respectively.



Note 7Borrowings



Line of Credit Agreements



On July 29, 2002, the Company entered into a two-year agreement for a $300 million senior secured working capital credit facility (Senior Finance Facility)
with Merrill Lynch Mortgage Capital, Inc. The proceeds of the Senior Finance Facility were used to pay amounts payable under certain creditor agreements, provide mortgage receivable and other working capital financing to the Company and to pay fees
and expenses related to the Senior Finance Facility. A portion of the proceeds from the initial funding drawn on the Senior Finance Facility was used to pay off amounts outstanding under the Companys previous senior finance facility.



In February 2004, the Senior Finance Facility was amended, raising the maximum
aggregate borrowing and extending the term to February 28, 2006. The interest rate on the portion of the line secured by the Companys eligible mortgages and contracts receivable was reduced to the one-month LIBOR rate plus 2.25%, and, for the
portion of the line secured by the Companys eligible Unsold Vacation Interests, the rate was reduced to the one-month LIBOR rate plus 4.0%. Prior to the February 2004 amendment, borrowings under the Senior Finance Facility bore interest at an
annual rate equal to one month LIBOR plus 3%, 5% or 7%, depending on the amounts outstanding and on the type of asset collateralizing various advances. The amendment reduced the exercise price of warrants to purchase 1,190,148 shares of the
Companys common stock from $15.25 per share to $14.00 per share. Additionally, the advance rate under loans secured by eligible mortgages and contracts receivable was increased to 85% from 80%. The amendment also expanded the ability of the
Company to borrow against Vacation Points and contracts receivable collateralized by Vacation Points, including both assets acquired by the Company as part of the purchase of certain assets of Epic Resorts Group, as well as assets associated with
the Companys new multi-site clubs. The Company also agreed to pay Merrill Lynch Mortgage Capital, Inc. a commission equal to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic Resorts Group.



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



See Note 14Subsequent Events for discussion of the fourth amendment (the Amendment) entered into on July 28, 2005 between the Company and Merrill Lynch
Mortgage Capital, Inc. to amend the Companys Senior Finance Facility, effective July 28, 2005.



At June 30, 2005, the maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior Finance Facility were $285.9 million, $160.8 million and $125.1 million, respectively. The capacity
and availability of borrowings under the Senior Finance Facility are based on the value of eligible mortgages and contracts receivable, the value of eligible Unsold Vacation Interests and the value of certain real property and other assets. The
Senior Finance Facility is secured by a first priority lien on the mortgages and contracts receivable and Unsold Vacation Interests, as well as certain real property and other assets of the Company, subject to certain exceptions. The weighted
average interest rate of these borrowings at June 30, 2005, was 5.94% per annum.



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



Page 19



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



In addition to the facility fee (2.5% of $300 million) paid in connection with the commitment and the closing of the Senior Finance Facility and an anniversary fee of 1.5% due on the anniversary of the initial
borrowing, the Company issued a warrant exercisable for 1,190,148 shares of common stock at an exercise price of $15.25 per share (the deemed value of the shares), subject to adjustment under certain anti-dilution provisions of the warrant and will
pay an unused commitment fee of 0.25% per annum on the excess availability under the Senior Finance Facility. The $8.7 million value of the warrants issued to the Senior Finance Facility lender was determined using a Black-Scholes model based on a
risk-free interest rate of 3.81%, expected volatility of 50% and an expected life of 5 years and, as a result of the February 2004 amendment, an additional $0.4 million was recorded to reflect the decrease in exercise price to $14.00 per share. The
value of the warrants was recorded as a capitalized financing cost that is amortized over the term of the financing agreement. The February 2004 amendment also stipulated that facility fees equal to 0.75% of $300.0 million were due and payable on
July 29, 2004 and July 29, 2005, with the latter fee being prorated through the termination date of February 28, 2006. For the three months ended June 30, 2005 and 2004, amortization of $1.1 million and $1.7 million, respectively, of debt issuance
costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. For the nine months ended June 30, 2005 and 2004, amortization of $3.3 million and $7.9 million, respectively, of
debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. Beginning in February 2003, the Senior Finance Facility also requires the Company to pay an
additional cash interest amount monthly when certain conditions are not met. The total amount of such additional cash interest payments made during the three months ended June 30, 2005 and 2004 were $0.0 million and $0.0 million, respectively, and
the total amount of such additional cash interest payments made during the nine months ended June 30, 2005 and 2004 were $0.0 million and $1.0 million, respectively.



The Company has capitalized interest related to ongoing construction projects of $0.0 million and $0.0 million for the three months ended
June 30, 2005 and 2004, respectively, and such capitalized interest was $0.4 million and $0.2 million for the nine months ended June 30, 2005 and 2004, respectively.



Senior Subordinated Convertible Notes



On March 29, 2004, the Company issued $95.0 million in 33/4% Senior Subordinated Convertible Notes due 2024 (the Notes). The Notes were issued at a price of $1,000 per Note and pay interest semi-annually on March 29 and
September 29 of each year, beginning on September 29, 2004, at the rate of 3.75% per annum. The Notes will mature on March 29, 2024. Under the terms of the indenture, the Company was required to use a portion of the proceeds from the offering to
purchase a portfolio of U.S. government securities that are pledged to secure the first six scheduled interest payments on the Notes. This $10.4 million was recorded in Prepaid expenses and other assets, net and the balance on the accompanying
unaudited consolidated balance sheets was $7.0 million and $8.7 million as of June 30, 2005 and September 30, 2004, respectively. Other than this pledge, the Notes are unsecured obligations.



The Notes are initially convertible, at the option of the holder, into shares of the
Companys common stock at a conversion rate of 62.5027 shares per $1,000 principal amount of the Notes upon the price of the Companys common stock reaching 110% of such implied conversion price of $16.00 per common share, if the Notes are
called for redemption or if specified corporate transactions or significant distributions to holders of the Companys common stock have occurred.



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



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



For the three months ended June 30, 2005 and 2004, amortization of $0.1 million and $0.1 million, respectively, of debt issuance costs related to the Notes was recorded
and is included in interest expense in the accompanying unaudited consolidated statements of operations. For the nine months ended June 30, 2005 and 2004, amortization of $0.3 million and $0.1 million, respectively, of debt issuance costs related to
the Notes was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations.



Securitization Notes



On September 30, 2004, the Company completed a $151.7 million private offering and sale of vacation ownership receivable-backed notes (the 2004
Securitization). The $171.4 million (including $17.0 million in aggregate principal of vacation ownership



Page 20



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



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



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



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



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



For the three and nine months ended June 30, 2005, amortization of $0.1 million and $0.4 million, respectively, of debt issuance costs related to the 2004 Securitization
was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations.



Note 8Accrued Liabilities



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



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



|                                                                  |  |              |        |                   |   |       
|----------------------------------------------------------------- |  | ------------ | ------ | ----------------- | - | ------
|                                                                  |  | June 30,2005 |        | September 30,2004
|Accrued marketing                                                 |  | $            | 20,262 |                   | $ | 19,812
|Amounts collected on behalf of or due to homeowners associations |  |              | 21,720 |                   |   | 13,208
|Accrued Vacation Interests carrying costs                         |  |              | 14,434 |                   |   | 8,074 
|Accrued escrow liability                                          |  |              | 9,889  |                   |   | 7,285 
|Accrued other taxes                                               |  |              | 2,724  |                   |   | 2,478 
|Accrued payroll and related                                       |  |              | 7,499  |                   |   | 7,808 
|Accrued servicing liability                                       |  |              | 119    |                   |   | 3,809 
|Accrued professional fees                                         |  |              | 1,027  |                   |   | 2,211 
|Creditor claims payable                                           |  |              | 2,865  |                   |   | 2,865 
|Accrued commissions                                               |  |              | 3,802  |                   |   | 1,791 
|Other                                                             |  |              | 10,750 |                   |   | 11,554
|                                                                  |  |              |        |                   |   |       
|Total accrued liabilities                                         |  | $            | 95,091 |                   | $ | 80,895
|                                                                  |  |              |        |                   |   |       



Page 21



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Note 9 Deferred Revenues



The
Company records deferred revenues for payments received or billed but not earned for various activities, including those described herein and summarized below. The largest and primary component relates to leases of Vacation Interests at the
Companys two resorts in St. Maarten. See Note 3St. Maarten Transactions for further discussion of this component.



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



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



Unearned management services revenuemaintenance fees billed but unearned in the Companys capacity as the homeowners association for the two resorts in St. Maarten. See Note 3 for further
discussion.



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



|                                                  |  |              |         |                   |   |       
|------------------------------------------------- |  | ------------ | ------- | ----------------- | - | ------
|                                                  |  | June 30,2005 |         | September 30,2004
|Deferred Vacation Interest lease revenue (Note 3) |  | $            | 74,186  |                   | $ | 75,877
|Deferred Club Sunterra revenue                    |  |              | 9,194   |                   |   | 6,430 
|Unearned mini-vacations                           |  |              | 9,852   |                   |   | 7,985 
|Unearned management services revenue (Note 3)     |  |              | 4,380   |                   |   | 1,953 
|Other                                             |  |              | 3,358   |                   |   | 2,882 
|                                                  |  |              |         |                   |   |       
|Total deferred revenues                           |  | $            | 100,970 |                   | $ | 95,127
|                                                  |  |              |         |                   |   |       



Note 10Comprehensive (Loss)
Income



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



|                                         |  |                            |         |   |                            |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                         |  | Three months endedJune 30, |         |   | Nine months ended June 30, |  
|                                         |  | 2005                       |         |   | 2004                       |   |        | 2005 |  |   | 2004    |  
|Net (loss) income                        |  | $                          | (50,114 | ) |                            | $ | 7,670  |      |  | $ | (41,903 | ) |  | $ | (83,614 | )
|Foreign currency translation adjustments |  |                            | (5,314  | ) |                            |   | (1,025 | )    |  |   | 145     |   |  |   | 6,742   |  
|                                         |  |                            |         |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive (loss) income        |  | $                          | (55,428 | ) |                            | $ | 6,645  |      |  | $ | (41,758 | ) |  | $ | (76,872 | )
|                                         |  |                            |         |   |                            |   |        |      |  |   |         |   |  |   |         |  



Note 11Segment and Geographic
Information



The Company currently operates in two geographic segments,
the North American and European segments. Both of these segments operate in one industry segment that includes the development, marketing, sales, financing and management of vacation ownership resorts. The European segment includes operations in the
United Kingdom, Italy, Spain, Portugal, Austria, Germany and France. The Companys management evaluates performance of each segment based on profit or loss from operations before income taxes not including extraordinary items and the cumulative
effect of change in accounting principles. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 of this filing and further in Note 3 to the



Page 22



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Companys transition report on Form 10-K for the period ended September 30, 2004. No single customer accounts for a significant amount of the Companys revenues. Information about the Companys
operations in different geographic locations is shown below (in thousands):



|                                                |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | -------- | - | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Three Months Ended June 30, 2005                |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|                                                |  |               |         |  
|Revenues from external customers                |  | $             | 83,351  |   |          | $ | 24,698  |              |  | $ |        |   |  | $ | 108,049 |  
|Income (loss) before provision for income taxes |  |               | 8,826   |   |          |   | (55,302 | )            |  |   |        |   |  |   | (46,476 | )
|                                                |  |               |         |  
|Three Months Ended June 30, 2004                |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                |  | $             | 62,828  |   |          | $ | 32,057  |              |  | $ |        |   |  | $ | 94,885  |  
|Income before provision for income taxes        |  |               | 4,951   |   |          |   | 3,776   |              |  |   |        |   |  |   | 8,727   |  
|                                                |  |               |         |  
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Nine Months Ended June 30, 2005                 |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|                                                |  |               |         |  
|Revenues from external customers                |  | $             | 230,642 |   |          | $ | 69,528  |              |  | $ |        |   |  | $ | 300,170 |  
|Income (loss) before provision for income taxes |  |               | 24,280  |   |          |   | (57,598 | )            |  |   |        |   |  |   | (33,318 | )
|                                                |  |               |         |  
|Nine Months Ended June 30, 2004                 |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|Revenues from external customers                |  | $             | 169,275 |   |          | $ | 78,285  |              |  | $ |        |   |  | $ | 247,560 |  
|(Loss) income before provision for income taxes |  |               | (89,245 | ) |          |   | 7,194   |              |  |   |        |   |  |   | (82,051 | )
|                                                |  |               |         |  
|                                                |  | NorthAmerican |         |   | European |   |         | Eliminations |  |   | Total   |  
|Segment Assets                                  |  |               |         |   |          |   |         |              |  |   |         |   |  |   |         |  
|As of June 30, 2005                             |  | $             | 660,717 |   |          | $ | 163,867 |              |  | $ | (52,111 | ) |  | $ | 772,473 |  
|                                                |  |               |         |  
|As of September 30, 2004                        |  |               | 677,687 |   |          |   | 209,984 |              |  |   | (50,813 | ) |  |   | 836,858 |  



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



Note 12Related Party Transactions



Joint Venture



The Company owns a 30% interest in Poipu and
accounts for its investment in the joint venture under the equity method. On July 7, 2004, the Company completed the acquisition of the remaining outstanding 77% partnership interest in Kaanapali. See Note 14Subsequent Events for
discussion of the Companys July 12, 2005, announcement of an agreement to purchase the remaining 70% interest in Poipu. For the nine months ended June 30, 2005, and 2004, the Company received $2.7 million and $0.2 million, respectively, in
cash distributions from Poipu. For the nine months ended June 30, 2004, the Company received $1.4 million in cash distributions from Kaanapali. The Company also receives fees from both Poipu and Kaanapali for providing property
management as well as oversight of the sales and marketing functions, which are included in the totals for management services revenue. See Management Services paragraph below.



Management Services



Included within the amounts reported as management services revenue are revenues from property management services provided to the
homeowners associations of the resorts wherein the Company owns either Unsold Vacation Interests or is a minority owner, as well as fees earned for management of sales and marketing functions at certain resorts. These amounts totaled $6.0
million and $4.4 million for the three-month periods ended June 30, 2005 and 2004, respectively, and totaled $15.8 million and $14.9 million for the nine-month periods ended June 30, 2005 and 2004, respectively.



Page 23



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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



|                                         |  |              |        |                   |   |      
|---------------------------------------- |  | ------------ | ------ | ----------------- | - | -----
|                                         |  | June 30,2005 |        | September 30,2004
|Receivable from homeowners associations |  | $            | 11,983 |                   | $ | 5,931
|Advances to joint venture                |  |              | 144    |                   |   | 348  
|                                         |  |              |        |                   |   |      
|Total                                    |  | $            | 12,127 |                   | $ | 6,279
|                                         |  |              |        |                   |   |      



Delinquent Maintenance Fee
Receivables Agreements



Effective January 2005, the Company entered into
agreements with various homeowners associations to purchase current year delinquent maintenance fee receivables from them at par value. Such agreements contain provisions for the Company to utilize the Vacation Interests associated with such
maintenance fees in the current year and to reclaim such Vacation Interests in the future. Each such agreement provides for an initial June 30 settlement date and adjustments thereafter. The Companys obligation under such agreements as of June
30, 2005, was included in Accrued liabilities and totaled approximately $5.4 million, including approximately $1.5 million related to current year use rights of the underlying Vacation Interests (expensed during calendar 2005 as a component of
Vacation Interest carrying costs) and approximately $3.9 million that will either be collected from the owners or remain on the Companys balance sheet as the cost basis of the reclaimed underlying Vacation Interests.



Note 13Commitments and Contingencies



The Company licensed certain computer software under a software license granted by RCI
Technology Corp. (RCITC), formerly known as Resort Computer Corporation. That software was the foundation for the Companys former integrated computer system (known as SWORD), which until recently managed a wide range of
hospitality functions, such as reservations, inventory control, sales commissions, Club Sunterra operations, housekeeping and marketing. RCITC filed a motion in the Chapter 11 proceedings alleging that the license agreement should be deemed
rejected, which RCITC asserts would have the effect of terminating the license. Sunterra opposed the motion, and the Bankruptcy Court ruled in favor of Sunterra and denied RCITCs motion. On June 14, 2002, RCITC filed a notice of appeal of the
Courts decision. On January 10, 2003, the United States District Court of Maryland affirmed the order of the Bankruptcy Court, denying the motion of RCITC. RCITC further appealed that decision to the United States Court of Appeals, Fourth
Circuit, which granted RCITCs appeal on March 18, 2004. The case has been remanded to the Bankruptcy Court, which has set a hearing on the form of order for September 2005. The Companys new ATLAS computer system fully
replaces the SWORD software, which was based on the RCITC system, and therefore the Company does not believe that RCITCs successful appeal in this litigation will have a material adverse effect on the Company, even if RCITC were to formally
assert a claim for illegitimate use of SWORD for the period between the date of emergence and the conversion to ATLAS.



On April 29, 2004, an irrevocable standby letter of credit in the amount of $6.6 million was issued on the Companys behalf to an affiliated homeowners
association securing certain maintenance fee obligations due from the Company. This standby letter of credit expires one year from the date of issuance. Restricted cash of approximately the same amount secures such standby letter of credit. During
July 2004, two additional standby letters of credit in the combined amount of approximately $1.6 million were issued on behalf of the Company for similar purposes and on similar terms. During August 2004, one of the two additional standby letters of
credit issued on behalf of the Company in July 2004 in the amount of $0.6 million was cancelled as it was replaced with a surety bond issued in July 2004 as described in the next paragraph. Also, in August 2004 the standby letter of credit issued in
April 2004 on behalf of the Company for $6.6 million was cancelled and replaced with a new one for $7.8 million. In October 2004, an additional standby letter of credit in the amount of $1.5 million was issued on the Companys behalf. All
standby letters of credit except for the one issued in October 2004 for $1.5 million were cancelled in March 2005 and replaced with surety bonds issued by Citrus Insurance Company, a wholly-owned subsidiary of the Company.



On February 25, 2003, a surety bond in the amount of $0.6 million was issued on the
Companys behalf to an affiliated homeowners association securing certain maintenance fee obligations due from the Company. This surety bond has been amended several times and amounted to $1.5 million as of April 2005. Restricted cash of
approximately fifty percent of this amount secures such surety bond. During July 2004, an additional surety bond in the amount of $0.6 million was issued on behalf of the Company for similar purposes with no restricted cash required as security and
replaced an irrevocable standby letter of credit of $0.6 million previously



Page 24



---

##### Table of Contents

SUNTERRA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



issued as discussed in the preceding paragraph. In April 2005, both of these surety bonds were replaced with a new surety bond in the amount of $2.3 million, which required no collateral deposit. The $0.8 million
securing the original surety bond is to be released in the near term. The Company has approximately $3.4 million of additional surety bonds issued on its behalf as of June 30, 2005, for various other business purposes.



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



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



Note 14Subsequent Events



On July 12, 2005, the Company agreed to purchase the remaining outstanding 70% partnership
interests in Poipu, which owns and operates the Embassy Vacation Resort Poipu on the Hawaiian island of Kauai. The transaction values Poipu at approximately $38.0 million, and the Company intends to finance the purchase through additional borrowings
under the Senior Finance Facility, which will replace the prior Poipu financing. With this transaction, Sunterra will acquire full ownership of Unsold Vacation Interests with an estimated retail value in excess of $34.0 million and will acquire
approximately $22.0 million of mortgage receivables that the Company currently services.



On July 22, 2005, the Company acquired 46 one and two bedroom apartments at the Eden Bay Resort in Malta for approximately $7.0 million. Malta is located in the Mediterranean Sea between Italy and Tunisia and the
five-star Eden Bay Resort is located within the InterContinental Hotel.



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



Page 25



---

##### Table of Contents

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



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including in particular, statements about our plans, objectives, expectations and prospects under the heading Managements Discussion and Analysis of
Financial Condition and Results of Operations. You can identify these statements by forward-looking words such as anticipate, believe, estimate, expect, intend, plan,
seek and similar expressions. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we
can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements are contained in
our Transition Report on Form 10-K for the nine months ended September 30, 2004, under the headings Business-Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in that report. These factors include, but are not limited to the following:



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



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



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



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



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



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



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



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



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



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



| |  |  | We derive a portion of our revenues through contracts to manage affiliated resorts and the expiration or termination of these management contracts could adversely affect our results
of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We are subject to various restrictions under our Senior Finance Facility, which limit our ability to incur debt.
| | - |  | ----------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



Page 26



---

##### Table of Contents

Any or all of these factors could cause our actual results and financial or legal status for future periods to differ
materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements
speak only as of the date on which they are made.



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



RESULTS OF OPERATIONS



Change in Fiscal Year End



Effective October 1, 2004, we changed our fiscal year end for financial reporting purposes from a calendar year-end to the 12-month period commencing October 1 and ending September 30. As a result of this change, for purposes of discussion
of results of operations, the nine-month period ended June 30, 2005 is compared to the nine-month period ended June 30, 2004.



Overview



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



| |  |  | marketing and selling vacation ownership interests to the public by:
| | - |  | --------------------------------------------------------------------



| |  |  | selling vacation points, representing a beneficial interest in a trust which holds title to vacation property real estate for the benefit of purchasers of those points which may be
redeemed for occupancy rights for varying lengths of stay at participating resort locations, which we refer to as Vacation Points;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



Page 27



---

##### Table of Contents

Comparison of the Three Months Ended June 30, 2005 to the Three Months Ended June 30, 2004:



(table in thousands)



|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|----------------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | ---- |  | - | ------- | - |  | - | ------
|                                                |  | North American |        |   | European
|                                                |  | 2005           |        |   | 2004     |   |        | 2005 |  |   | 2004   
|Revenues:                                       |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Vacation Interest                               |  | $              | 51,325 |   |          | $ | 43,282 |      |  | $ | 19,755  |   |  | $ | 26,577
|Resort rental                                   |  |                | 10,108 |   |          |   | 4,196  |      |  |   | 419     |   |  |   | 398   
|Management services                             |  |                | 5,310  |   |          |   | 4,150  |      |  |   | 2,345   |   |  |   | 2,046 
|Interest                                        |  |                | 10,442 |   |          |   | 6,348  |      |  |   | 750     |   |  |   | 756   
|Other                                           |  |                | 6,166  |   |          |   | 4,852  |      |  |   | 1,429   |   |  |   | 2,280 
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Total revenues                                  |  |                | 83,351 |   |          |   | 62,828 |      |  |   | 24,698  |   |  |   | 32,057
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Costs and Operating Expenses:                   |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Vacation Interest cost of sales                 |  |                | 8,152  |   |          |   | 9,673  |      |  |   | 2,761   |   |  |   | 3,977 
|Advertising, sales and marketing                |  |                | 28,801 |   |          |   | 25,240 |      |  |   | 13,358  |   |  |   | 15,263
|Vacation Interest carrying costs                |  |                | 8,648  |   |          |   | 4,370  |      |  |   | 1,867   |   |  |   | 1,242 
|Provision for doubtful accounts and loan losses |  |                | 3,026  |   |          |   | 2,592  |      |  |   | 120     |   |  |   | 255   
|Loan portfolio                                  |  |                | 1,785  |   |          |   | 1,486  |      |  |   | 22      |   |  |   | 28    
|General and administrative                      |  |                | 17,166 |   |          |   | 12,031 |      |  |   | 4,286   |   |  |   | 5,891 
|Gain on sales of assets                         |  |                | (45    | ) |          |   | (1,358 | )    |  |   |        |   |  |   |      
|Depreciation and amortization                   |  |                | 1,470  |   |          |   | 1,000  |      |  |   | 995     |   |  |   | 957   
|Interest, net                                   |  |                | 5,576  |   |          |   | 3,900  |      |  |   | 643     |   |  |   | 668   
|Restructuring                                   |  |                |       |   |          |   |       |      |  |   | 918     |   |  |   |      
|Impairment of goodwill                          |  |                |       |   |          |   |       |      |  |   | 55,030  |   |  |   |      
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Total costs and operating expenses              |  |                | 74,579 |   |          |   | 58,934 |      |  |   | 80,000  |   |  |   | 28,281
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Income (loss) from operations                   |  |                | 8,772  |   |          |   | 3,894  |      |  |   | (55,302 | ) |  |   | 3,776 
|Income from investments in joint ventures       |  |                | 54     |   |          |   | 1,057  |      |  |   |        |   |  |   |      
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       
|Income (loss) before provision for income taxes |  | $              | 8,826  |   |          | $ | 4,951  |      |  | $ | (55,302 | ) |  | $ | 3,776 
|                                                |  |                |        |   |          |   |        |      |  |   |         |   |  |   |       



We recorded total revenues of $108.1
million for the three months ended June 30, 2005, compared to $94.9 million for the three months ended June 30, 2004, an increase of $13.2 million, or 13.9%. This increase was driven primarily from our North American operations where total revenues
increased $20.6 million, or 32.7%, to $83.4 million for the three months ended June 30, 2005, compared to $62.8 million for the prior year, while total revenues from European operations decreased 23.0%, or $7.4 million, to $24.7 million for the
three months ended June 30, 2005 from $32.1 million for the prior year. Excluding the effects of favorable foreign exchange rates, third quarter total revenues from our European operations decreased $8.0 million, or 25.0%, when compared to the prior
year.



Consolidated Vacation Interest revenues were $71.1 million for the three
months ended June 30, 2005, representing an increase of $1.2 million, or 1.7%, compared to $69.9 million for the three months ended June 30, 2004, driven by an $8.0 million, or 18.6% increase in North American Vacation Interest revenues to $51.3
million, compared to the prior year total of $43.3 million. Our North American improvements are the result of the completion of the integration of the Kaanapali resort and Epic Resorts Group locations increasing revenue and the increase of
revenues at existing locations, offset by a decrease in revenue at the now closed Sunterra Pacific sales locations. Exclusive of $0.6 million of favorable foreign exchange rate movements, our European Vacation Interests revenues fell from $26.6
million for the three months ended June 30, 2004 to $19.2 million for the three months ended June 30, 2005, a decrease of 27.6%. The decrease is the result of lower tour conversion efficiency.



Resort rental revenue increased 129.1% to $10.5 million for the three months ended June 30,
2005, compared to $4.6 million for the three months ended June 30, 2004, primarily as a result of the effects of the acquisition of the Kaanapali resort in July 2004 and increased utilization of available space for internal marketing purposes
(mini-vacation packages designed to give potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), offset by on-going sales of Vacation Interests, which reduces the number of Vacation
Interests available for rental.



Page 28



---

##### Table of Contents

Management services revenues of $7.7 million for the three months ended June 30, 2005 increased by $1.5 million, or
23.5%, compared to $6.2 million for the three months ended June 30, 2004. North American management services revenues of $5.3 million for the three months ended June 30, 2005 increased by $1.2 million, or 28.0%, compared to $4.1 million for the
three months ended June 30, 2004 due to the management fees charged to the trusts holding vacation property real estate out of which we will convey Vacation Points to our customers. European management services revenues of $2.3 million for the three
months ended June 30, 2005 increased by $0.3 million compared to $2.0 million for the three months ended June 30, 2004.



Interest revenues, the majority of which is generated from financing provided to purchasers and lessees of Vacation Interests in the United States and the Caribbean,
increased to $11.2 million for the three months ended June 30, 2005, compared to $7.1 million for the three months ended June 30, 2004. The increase is due to the acquisition of the mortgage pool obtained in the purchase of the Kaanapali
resort in July 2004, the purchase from Barton Capital Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by qualified special-purpose entities created to hold a loan
portfolio and issue collateralized debt to third-party investors through the exercise of the clean up call provisions contained in the notes issued by the qualified special-purpose entities that allows the notes to be called and
mortgages and contracts receivable to be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value.



Other revenues, which includes Club Sunterra fees, travel services revenue, and finance commissions earned by our European subsidiaries, increased by $0.5 million, or
6.5%, to $7.6 million for the three months ended June 30, 2005, from $7.1 million for the same period in the prior year. This increase is concentrated in our North American operations and is primarily the result of increased Club Sunterra fees of
approximately $1.1 million, as a Club Sunterra membership is bundled in with each sale of Vacation Points.



Consolidated Vacation Interest cost of sales of $10.9 million for the three months ended June 30, 2005 decreased $2.7 million, or 20.1%, from $13.6 million for the three months ended June 30, 2004, despite an increase
in Vacation Interest revenue. On a geographic segment basis, North American Vacation Interest cost of sales decreased by $1.5 million, from $9.7 million to $8.2 million, and Vacation Interest cost of sales for our European operations decreased to
$2.8 million, down $1.2 million from $4.0 million in 2004. Our overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the three months ended June 30, 2005 and 2004, were 15.4% and 19.5%,
respectively. The cost-off rate for our North American operations decreased from 22.3% in the three months ended June 30, 2004, to 15.9% in the current year. This is attributable to newly acquired properties and inventory recoveries where the
inventory has a relatively lower cost than the other Vacation Interests owned by us and the effect that adding such lower cost inventory has to the trust from which we sell our Vacation Points. As a percentage of European Vacation Interest revenues
for the three months ended June 30, 2005 and 2004, European Vacation Interest cost of sales was 14.0% and 15.0%, respectively. Our European operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the three months ended June 30, 2005, consolidated advertising, sales and
marketing costs were $42.2 million compared to $40.5 million for the three months ended June 30, 2004, a 4.1% increase on 1.7% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to 59.3% in 2005
compared to 58.0% in the prior year. This increase was driven by our Europe operations, which experienced an increase in this ratio from 57.4% in 2004 compared to 67.6% for the three months ended June 30, 2005. The unfavorable variance in our Europe
operations is attributable to additional marketing efforts employed to improve tour flow as a result of a challenging European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation Interest
revenues were 56.1% and 58.3% for the three months ended June 30, 2005 and 2004, respectively, as a result of efficiencies gained by maintaining a stable and more experienced sales team and additional sales training.



Vacation Interest carrying costs, which consist of annual maintenance fees, reserve and
special assessments on Unsold Vacation Interests, as well as the cost associated with maintaining un-annexed units (owned units not declared or registered as part of the timeshare program) increased 87.4%, or $4.9 million, to $10.5 million for the
three months ended June 30, 2005, from $5.6 million for the three months ended June 30, 2004. As a percentage of Vacation Interest revenues, inventory-carrying cost was 14.8% for the three months ended June 30, 2005 compared to 8.0% for the three
months ended June 30, 2004. The increase was primarily due to Vacation Interests acquired as a result of the purchase of the remaining outstanding partnership interests in Kaanapali and through the Epic Resorts Group acquisitions, the Vacation
Interests recovered upon the foreclosure on the collateral securing certain mortgage loans acquired in the various loan portfolio acquisitions and the Vacation Interests and the right to use Vacation Interests acquired as a result of the agreements
with various homeowners associations to purchase current year delinquent maintenance fee receivables from them at par value, offset by ongoing sales of Vacation Interests.



The provision for doubtful accounts and loan losses was $3.1 million for the three months ended June 30, 2005, compared to $2.8 million for
the three months ended June 30, 2004. Of these amounts, $3.1 million and $2.6 million for 2005 and 2004, respectively, related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts receivable at June 30, 2005
and



Page 29



---

##### Table of Contents

September 30, 2004 were $26.9 million and $26.5 million, respectively, representing approximately 11.8% and 12.3%,
respectively, of the loan and contract originations (excluding purchased loan pools) outstanding at those dates. The balance of the provision for doubtful accounts of $0.0 million and $0.2 million for the three months ended June 30, 2005 and 2004,
respectively, represented adjustments to provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees at certain Caribbean resorts and for other receivables. The increase in the provision
for doubtful accounts and loan losses related to mortgages and contracts receivable is attributable to the higher levels of Vacation Interests revenues, as the provision is recorded as a percentage of each financed sale.



Loan portfolio expenses increased 19.4% to $1.8 million for the three months ended June 30,
2005, from $1.5 million in the prior year. The increase is attributable to an increase in the number of loans serviced due to the acquisition of the mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from
Barton Capital Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by qualified special-purpose entities created to hold a loan portfolio and issue collateralized
debt to third-party investors through the exercise of the clean up call provisions contained in the notes issued by the qualified special-purpose entities that allows the notes to be called and mortgages and contracts receivable to be
transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value.



General and administrative expenses of $21.5 million for the three months ended June 30, 2005 increased by $3.6 million, or 19.7% compared to $17.9 million for the three
months ended June 30, 2004. As a percentage of total revenues, general and administrative expenses increased to 19.9% in 2005 from 18.9% in 2004. The increase in general and administrative expenses, which related to salary increases, increased
professional fees and insurance expenses, was offset by an overall reduction in office related expenses as the result of back office restructuring initiatives.



Gain on sales of assets decreased to $0.0 million for the three months ended June 30, 2005, from approximately $1.4 million during the same period in 2004. The $1.4
million for 2004 represents a gain on the extinguishment of certain fulfillment obligations and the recognition of deferred revenue in conjunction with the sale of certain assets of Sunterra Pacific to the Vacation Timeshare Owners Association.



Depreciation and amortization expense increased 26.0%, or $0.5 million, to
$2.5 million for the three months ended June 30, 2005, from $2.0 million for the same period in 2004. This increase is attributable to the acquisition of a large number of North American assets in the acquisition at Kaanapali in July 2004.



Interest expense for the three months ended June 30, 2005 was $6.2 million,
compared to $4.6 million for the three months ended June 30, 2004. The increase was primarily due to increased average borrowings in 2005, partially offset by reduced borrowing costs and reduced amortization of debt issuance costs.



Reorganization and restructuring costs were $0.9 million for the three months ended June 30,
2005, related to the restructuring of the Companys European operations, including a consolidation of UK telemarketing operations and reductions of management and headcount levels in several areas. There were no reorganization and restructuring
costs, net in the three months ended June 30, 2004.



Impairment of goodwill
totaled $55.0 million for the three months ended June 30, 2005. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. SFAS No. 142,
Goodwill and Other Intangible Assets(SFAS No. 142) requires that goodwill be tested at least annually for impairment, or more frequently if circumstances exist to indicate potential impairment. Although our policy is to perform
the required testing during our last fiscal quarter, a decline in profitability in the European segment/reporting unit during the current quarter as discussed in the July 11, 2005 Form 8-K filed by us was deemed to be an indicator that a potential
impairment existed and as such the testing of the European segment was accelerated to May 31, 2005. Under SFAS No. 142, goodwill is to be tested for impairment at the reporting unit level. The first step to test for impairment is the comparison of
the fair value of the reporting unit with its carrying value (including goodwill). Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the second step of the impairment test, which is to
compare the implied fair value of the goodwill to its carrying value. Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on the measurement date. Impairment exists to the
extent the carrying value of goodwill exceeds its implied fair value. We utilized a market value approach in our estimate of the fair value of the European segment/reporting unit. The estimate indicated that an impairment might exist and the second
step of the impairment test was performed. After comparing the implied fair value of the goodwill to its carrying value, we concluded an impairment of $55.0 million existed and as a result, a charge of $55.0 million was recorded in the three month
period ended June 30, 2005. There were no charges for impairment of goodwill in the three months ended June 30, 2004.



Page 30



---

##### Table of Contents

Income from investments in joint ventures decreased 94.9% to $0.1 million for the three months ended June 30, 2005
compared to $1.1 million for the three months ended June 30, 2004. In July 2004, we purchased the remaining outstanding 77% partnership interest in Kaanapali, resulting in the full consolidation of its operating results beginning at that time.



The provision for income taxes for the three months ended June 30, 2005, was
$3.6 million, compared to $1.1 million for the three months ended June 30, 2004. The increase in income tax expense related to our North American operations, which reported a tax provision for the three months ended June 30, 2005, in contrast with
the three months ended June 30, 2004, when the tax basis operating income of the North American operations was offset by operating losses from periods subsequent to the fresh start date, July 29, 2002. Since such operating losses were generated
after the fresh start date, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to the provision for income taxes. This resulted in a net provision for income taxes of virtually
zero. For the three months ended June 30, 2005, the tax basis operating income of the North American operations was partially offset by operating losses from periods prior to the fresh start date. As such, the reduction of the reserves recorded
against the deferred tax assets associated with the operating losses was credited to goodwill or additional paid-in capital. In addition, no tax benefit was recorded during the three months ended June 30, 2005 in conjunction with the European
segment goodwill impairment charge of $55.0 million.



Page 31



---

##### Table of Contents

Comparison of the Nine Months Ended June 30, 2005 to the Nine Months Ended June 30, 2004:

(table in thousands)



|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|----------------------------------------------- |  | -------------- | ------- | - | -------- | - | ------- | ---- |  | - | ------- | - |  | - | ------
|                                                |  | North American |         |   | European
|                                                |  | 2005           |         |   | 2004     |   |         | 2005 |  |   | 2004   
|Revenues:                                       |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Vacation Interest                               |  | $              | 143,552 |   |          | $ | 113,887 |      |  | $ | 55,209  |   |  | $ | 62,792
|Resort rental                                   |  |                | 25,471  |   |          |   | 10,039  |      |  |   | 1,335   |   |  |   | 1,208 
|Management services                             |  |                | 14,983  |   |          |   | 14,303  |      |  |   | 7,246   |   |  |   | 7,256 
|Interest                                        |  |                | 30,683  |   |          |   | 18,680  |      |  |   | 2,039   |   |  |   | 1,822 
|Other                                           |  |                | 15,953  |   |          |   | 12,366  |      |  |   | 3,699   |   |  |   | 5,207 
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Total revenues                                  |  |                | 230,642 |   |          |   | 169,275 |      |  |   | 69,528  |   |  |   | 78,285
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Costs and Operating Expenses:                   |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Vacation Interest cost of sales                 |  |                | 23,769  |   |          |   | 25,659  |      |  |   | 7,154   |   |  |   | 9,489 
|Advertising, sales and marketing                |  |                | 79,740  |   |          |   | 65,603  |      |  |   | 38,251  |   |  |   | 36,798
|Vacation Interest carrying costs                |  |                | 24,226  |   |          |   | 11,356  |      |  |   | 5,222   |   |  |   | 3,054 
|Provision for doubtful accounts and loan losses |  |                | 8,063   |   |          |   | 6,103   |      |  |   | 482     |   |  |   | 632   
|Loan portfolio                                  |  |                | 4,750   |   |          |   | 5,117   |      |  |   | 82      |   |  |   | 163   
|General and administrative                      |  |                | 46,362  |   |          |   | 37,719  |      |  |   | 14,464  |   |  |   | 16,896
|Gain on sales of assets                         |  |                | (733    | ) |          |   | (4,580  | )    |  |   |        |   |  |   |      
|Depreciation and amortization                   |  |                | 4,250   |   |          |   | 4,321   |      |  |   | 3,250   |   |  |   | 3,051 
|Interest, net                                   |  |                | 16,599  |   |          |   | 17,471  |      |  |   | 2,273   |   |  |   | 1,008 
|Reorganization and restructuring, net           |  |                |        |   |          |   | 311     |      |  |   | 918     |   |  |   |      
|Impairment of goodwill                          |  |                |        |   |          |   | 91,586  |      |  |   | 55,030  |   |  |   |      
|Impairment of assets                            |  |                |        |   |          |   | 897     |      |  |   |        |   |  |   |      
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Total costs and operating expenses              |  |                | 207,026 |   |          |   | 261,563 |      |  |   | 127,126 |   |  |   | 71,091
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Income (loss) from operations                   |  |                | 23,616  |   |          |   | (92,288 | )    |  |   | (57,598 | ) |  |   | 7,194 
|Income from investments in joint ventures       |  |                | 664     |   |          |   | 3,043   |      |  |   |        |   |  |   |      
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       
|Income (loss) before provision for income taxes |  | $              | 24,280  |   |          | $ | (89,245 | )    |  | $ | (57,598 | ) |  | $ | 7,194 
|                                                |  |                |         |   |          |   |         |      |  |   |         |   |  |   |       



We recorded total revenues of $300.2
million for the nine months ended June 30, 2005, compared to $247.6 million for the nine months ended June 30, 2004, an increase of $52.6 million, or 21.3%. This increase was driven primarily from our North American operations where total revenues
increased $61.3 million, or 36.3%, to $230.6 million in 2005, compared to $169.3 million for the prior year, while total revenues from European operations decreased 11.2%, or $8.8 million, to $69.5 million for the nine months ended June 30, 2005
from $78.3 million for the prior year. Excluding the effects of favorable foreign exchange rates, total revenues from our European operations for the nine months ended June 30, 2005 decreased $12.0 million, or 15.4%, when compared to the prior year.



Consolidated Vacation Interest revenues were $198.8 million for the nine
months ended June 30, 2005, representing an increase of $22.1 million, or 12.5%, compared to $176.7 million for the nine months ended June 30, 2004, driven by a $29.7 million, or 26.0%, increase in North American Vacation Interest revenues to $143.6
million, compared to the prior year total of $113.9 million. Our North American improvements are the result of the completion of the integration of the Kaanapali resort and Epic Resorts Group locations increasing revenue and the increase of
revenues at existing locations, offset by a decrease in revenue at the now closed Sunterra Pacific locations. Exclusive of $2.6 million of favorable foreign exchange rate movements, our European Vacation Interests revenues fell from $62.8 million
for the nine months ended June 30, 2004 to $52.6 million for the nine months ended June 30, 2005, a decrease of 16.2%. The decrease is the result of lower tour conversion efficiency, partially offset by revenues resulting from the Thurnham Leisure
Group acquisition.



Resort rental revenue increased 138.3% to $26.8 million for
the nine months ended June 30, 2005, compared to $11.2 million for the nine months ended June 30, 2004, primarily as a result of the effects of the acquisitions of Epic resorts in October 2003 and of Kaanapali resort in July 2004 and increased
utilization of available space for internal marketing purposes (mini-vacation packages designed to give potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), offset by on-going sales of
Vacation Interests, which reduces the number of Vacation Interests available for rental.



Page 32



---

##### Table of Contents

Management services revenues of $22.2 million for the nine months ended June 30, 2005 increased by $0.6 million, or 3.1%,
compared to $21.6 million for the nine months ended June 30, 2004. The overall increase was primarily due to a $0.7 million, or 4.8%, increase in North American management services revenues to $15.0 million for the nine months ended June 30, 2005,
compared to $14.3 million for the nine months ended June 30, 2004. This increase is primarily due to the management fees charged to the trusts holding vacation property real estate out of which we will convey Vacation Points to our customers.
European management services revenues of $7.2 million for the nine months ended June 30, 2005 decreased by $0.1 million, or 0.1%, compared to $7.3 million for the nine months ended June 30, 2004.



Interest revenues, the majority of which is generated from financing provided to purchasers
and lessees of Vacation Interests in the United States and the Caribbean, increased to $32.7 million for the nine months ended June 30, 2005, compared to $20.5 million for the nine months ended June 30, 2004. The increase is due to the acquisition
in the March 2004 quarter of a portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from Barton Capital
Corporation of their rights to a loan portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by qualified special-purpose entities created to hold a loan portfolio and issue collateralized debt to
third-party investors through the exercise of the clean up call provisions contained in the notes issued by the qualified special-purpose entities that allows the notes to be called and mortgages and contracts receivable to be
transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value.



Other revenues, which includes Club Sunterra fees, travel services revenue, and finance commissions earned by our European subsidiaries, increased by $2.1 million, or
11.8%, to $19.7 million for the nine months ended June 30, 2005, from $17.6 million for the same period in the prior year. This increase is concentrated in our North American operations and is primarily the result of increased Club Sunterra fees of
approximately $2.9 million, as a Club Sunterra membership is bundled in with each sale of Vacation Points.



Consolidated Vacation Interest cost of sales of $30.9 million for the nine months ended June 30, 2005 decreased $4.2 million, or 12.0%, from $35.1 million for the nine months ended June 30, 2004, despite an increase
in Vacation Interest revenue. On a geographic segment basis, North American Vacation Interest cost of sales decreased by $1.9 million, from $25.7 million to $23.8 million, and Vacation Interest cost of sales for our European operations decreased to
$7.2 million, down $2.3 million from $9.5 million in 2004. Our overall cost-off rates (defined as Vacation Interest cost of sales as a percentage of Vacation Interest revenues) for the nine months ended June 30, 2005 and 2004, were 15.6% and 19.9%,
respectively. The cost-off rate for our North American operations decreased from 22.5% in the nine months ended June 30, 2004, to 16.6% in the current year. This is attributable to newly acquired properties and inventory recoveries where the
inventory has a relatively lower cost than the other Vacation Interests owned by us and the effect that adding such lower cost inventory has to the trust from which we sell our Vacation Points. As a percentage of Europe Vacation Interests revenues
for the nine months ended June 30, 2005 and 2004, European Vacation Interest cost of sales was 13.0% and 15.1%, respectively. Our Europe operations improved their cost-off rate as a result of lower cost inventory acquisitions and recoveries.



For the nine months ended June 30, 2005, consolidated advertising, sales and
marketing costs were $118.0 million compared to $102.4 million for the nine months ended June 30, 2004, a 15.2% increase on 12.5% higher Vacation Interest volume. As a percentage of Vacation Interest revenues, these costs increased to 59.4% in 2005
compared to 58.0% in the prior year. This increase was driven by our European operations, which experienced an increase in this ratio from 58.6% in 2004 compared to 69.3% for the nine months ended June 30, 2005. The unfavorable variance in our
European operations is attributable to additional marketing efforts employed to improve tour flow as a result of a challenging European market. Our North American operations advertising, sales and marketing costs as a percentage of Vacation
Interest revenues were 55.5% and 57.6% for the nine months ended June 30, 2005 and 2004, respectively, as a result of efficiencies gained by maintaining a stable and more experienced sales team and additional sales training.



Vacation Interest carrying costs, which consist of annual maintenance fees, reserve and
special assessments on Unsold Vacation Interests, as well as the cost associated with maintaining un-annexed units (owned units not declared or registered as part of the timeshare program) increased 104.4%, or $15.0 million, to $29.4 million for the
nine months ended June 30, 2005 from $14.4 million for the nine months ended June 30, 2004. As a percentage of Vacation Interest revenues, inventory-carrying cost was 14.8% for the nine months ended June 30, 2005 compared to 8.2% for the nine months
ended June 30, 2004. The increase was primarily due to Vacation Interests acquired as a result of the purchase of the remaining outstanding partnership interests in Kaanapali and through the Epic Resorts Group acquisitions, the Vacation
Interests recovered upon the foreclosure on the collateral securing certain mortgage loans acquired in the various loan portfolio acquisitions and the Vacation Interests and the right to use Vacation Interests acquired as a result of the agreements
with various homeowners associations to purchase current year delinquent maintenance fee receivables from them at par value, offset by ongoing sales of Vacation Interests.



The provision for doubtful accounts and loan losses was $8.5 million for the nine months ended June 30, 2005, compared to $6.7 million for
the nine months ended June 30, 2004. Of these amounts, $8.5 million and $6.7 million for 2005 and 2004, respectively,



Page 33



---

##### Table of Contents

related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts receivable at June
30, 2005 and September 30, 2004 were $26.9 million and $26.5 million, respectively, representing approximately 11.8% and 12.3%, respectively, of the loan and contract originations (excluding purchased loan pools) outstanding at those dates. The
balance of the provision for doubtful accounts of $0.0 million and $0.0 million for the nine months ended June 30, 2005 and 2004, respectively, represented adjustments to provisions for estimated uncollectible amounts due from homeowner
associations, assessments to owners for maintenance fees at certain Caribbean resorts and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributable to the
higher levels of Vacation Interests revenues, as the provision is recorded as a percentage of each financed sale, as well as an increase in such percentage of each financed sale.



Loan portfolio expenses decreased 8.5% to $4.8 million for the nine months ended June 30, 2005, from $5.3 million in the prior year. The
decrease is attributable to significant process improvement and restructuring initiatives implemented in late 2003, including standardizing and centralizing underwriting procedures and processes, best practices in loss mitigation (including
increased and timely correspondence with customers whose mortgages and contracts are perceived to be in danger of becoming delinquent) and cross training allowing us to service higher loan volumes with fewer personnel. We have also implemented new
technology that allows us to service more loans more efficiently, and have brought in certain servicing processes formerly outsourced. This was partially offset by an increase in the number of loans serviced due to the acquisition in March 2004 of a
portfolio of mortgages backed by Vacation Interests at former Epic Resorts Group locations, the mortgage pool obtained in the purchase of the Kaanapali resort in July 2004, the purchase from Barton Capital Corporation of their rights to a loan
portfolio held by Blue Bison Funding Corporation and the acquisition of two loan portfolios held by qualified special-purpose entities created to hold a loan portfolio and issue collateralized debt to third-party investors through the exercise of
the clean up call provisions contained in the notes issued by the qualified special-purpose entities that allows the notes to be called and mortgages and contracts receivable to be transferred back to us when the remaining principal
value of the notes reaches 10% of the original principal value.



General and
administrative expenses of $60.8 million for the nine months ended June 30, 2005 increased by $6.2 million, or 11.4% compared to $54.6 million for the nine months ended June 30, 2004. As a percentage of total revenues, general and administrative
expenses improved to 20.3% in 2005 from 22.1% in 2004. The increase in general and administrative expenses, which related to salary increases, increased professional fees and insurance expenses, was offset by the shut down of certain Sunterra
Pacific operations in December of 2003, and an overall reduction in office related expenses as the result of back office restructuring initiatives.



Gain on sales of assets decreased to a gain of approximately $0.7 million for the nine months ended June 30, 2005 from a gain of approximately $4.6 million during the
same period in 2004. The $0.7 million gain for 2005 represents a gain on the sale of certain non-core inventory recovered by us upon the default of certain mortgage loans and a gain on the sale of an office building in Sedona, Arizona that
previously housed administrative personnel now located in a rented facility. The $4.6 million for 2004 represents a gain on the sale of the Island Links Resort, a gain on the sale of certain assets of Sunterra Pacific to VTSOA and a gain on the
extinguishment of certain fulfillment obligations and the recognition of deferred revenue in conjunction with the sale of such assets of Sunterra Pacific to VTSOA.



Depreciation and amortization expense increased 1.7%, or $0.1 million, to $7.5 million for the nine months ended June 30, 2005, from $7.4
million for the same period in 2004. This increase is attributable to the acquisition of a large number of North American and European assets, partially offset by a large number of North American assets reaching full depreciation.



Interest expense for the nine months ended June 30, 2005 was $18.9 million, compared to $18.5
million for the nine months ended June 30, 2004. The increase was primarily due to increased average borrowings in 2005, offset by reduced borrowing costs, reduced amortization of debt issuance costs, the renegotiation of certain borrowing terms in
February 2004, and the favorable interest on the 33/4% Senior Subordinated Convertible Notes due 2024.



Reorganization and restructuring costs, net, were $0.9 million in the
nine months ended June 30, 2005, related to the restructuring of the Companys European operations, including a consolidation of UK telemarketing operations and reductions of management and headcount levels in several areas. Reorganization and
restructuring costs were $0.3 million for the nine months ended June 30, 2004, and primarily related to the rollout of our global points-based program.



Impairment of goodwill totaled $55.0 million in the nine months ended June 30, 2005. We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be fully recoverable. SFAS No. 142, requires that goodwill be tested at least annually for impairment, or more frequently if circumstances exist to indicate potential impairment.
Although our policy is to perform the required testing during our last fiscal quarter, a decline in profitability in the European segment/reporting unit during the current quarter as discussed in the July 11, 2005 Form 8-K filed by us was deemed to
be an indicator that a potential impairment existed and as such the testing of the European segment was accelerated to May 31, 2005. Under SFAS No.142, goodwill is to be tested for impairment at the



Page 34



---

##### Table of Contents

reporting unit level. The first step to test for impairment is the comparison of the fair value of the reporting unit
with its carrying value (including goodwill). Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the second step of the impairment test, which is to compare the implied fair value of
the goodwill to its carrying value. Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on the measurement date. Impairment exists to the extent the carrying value of
goodwill exceeds its implied fair value. We utilized a market value approach in our estimate of the fair value of the European segment/reporting unit. The estimate indicated that an impairment might exist and the second step of the impairment test
was performed. After comparing the implied fair value of the goodwill to its carrying value, we concluded an impairment of $55.0 million existed and as a result, a charge of $55.0 million was recorded in the nine month period ended June 30, 2005.
Impairment of assets totaled $92.5 million for the nine months ended June 30, 2004. These charges included $91.6 million for the impairment of the reorganization value in excess of identifiable assets for the North American segment and $0.9 million
relating to Unsold Vacation Interests relating to a resort disposed of in 2003.



Income from investments in joint ventures decreased 78.2% to $0.7 million for the nine months ended June 30, 2005 compared to $3.0 million for the nine months ended June 30, 2004. In July 2004, we purchased the remaining outstanding 77%
partnership interest in Kaanapali, resulting in the full consolidation of its operating results beginning at that time.



The provision for income taxes for the nine months ended June 30, 2005, was $8.6 million, compared to $1.6 million for the nine months ended June 30, 2004. The increase
in income tax expense related to our North American operations, which reported a tax provision for the nine months ended June 30, 2005, in contrast with the nine months ended June 30, 2004, when the tax basis operating income of the North American
operations was offset by operating losses from periods subsequent to the fresh start date, July 29, 2002. Since such operating losses were generated after the fresh start date, the reduction of the reserves recorded against the deferred tax assets
associated with the operating losses was credited to the provision for income taxes. This resulted in a net provision for income taxes of virtually zero. For the nine months ended June 30, 2005, the tax basis operating income of the North American
operations was partially offset by operating losses from periods prior to the fresh start date. As such, the reduction of the reserves recorded against the deferred tax assets associated with the operating losses was credited to goodwill or
additional paid-in capital. In addition, no tax benefit was recorded during the nine months ended June 30, 2005 in conjunction with the European segment goodwill impairment charge of $55.0 million.



LIQUIDITY AND CAPITAL RESOURCES



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



During the nine months ended June 30, 2005, net cash provided by operating activities was $73.7 million, primarily the result of the net
loss of $41.9 million offset by non-cash expenses totaling $87.2 million (notably $55.0 million for the impairment of goodwill) less other non-cash gains of $3.7 million and increases in retained interests in mortgages and contracts receivable sold
of $0.5 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities of $32.6 million, including reductions in mortgages and contracts receivable of $13.3 million, unsold Vacation Interests of $7.4
million, cash in escrow and restricted cash of $0.4 million, and prepaid expenses and other assets of $0.6 million plus increases in accrued liabilities of $18.1 million and deferred revenues of $5.8 million offset by increases in due from related
parties of $5.8 million and other receivables of $3.9 million and decreases in accounts payable of $1.8 million and income taxes payable of $1.5 million.



During the nine months ended June 30, 2005, net cash used in investing activities was $42.3 million, primarily due to the purchase of several mortgage portfolios for
$26.5 million, the purchase of businesses for $10.0 million and capital expenditures of $9.9 million, partially offset by proceeds from the sale of assets of $1.4 million and cash distributions from joint ventures of $2.7 million.



During the nine months ended June 30, 2005, net cash used in financing activities was $40.6
million. Payments on the Senior Finance Facility totaled $66.5 million and payments on the 2004 Securitization and other notes payable totaled $29.8 million. These payments were funded primarily through borrowings on the Senior Finance Facility
totaling $55.6 million and the issuance of notes payable of $0.1 million.



We
currently anticipate spending approximately $23.3 million for unsold Vacation Interests at existing and anticipated resort locations during the remainder of fiscal 2005. Also in the remainder of fiscal 2005, we plan to invest $3.8 million in capital
expenditures related to property and equipment. We plan to fund these expenditures with cash generated from operations and borrowings under the Senior Finance Facility. We believe that, with respect to our current operations, cash generated from
operations and future borrowings will be sufficient to meet our working capital and capital expenditure needs through the end of fiscal 2005. If these are not sufficient, we have the ability to adjust our spending on Unsold Vacation Interests.



Page 35



---

##### Table of Contents

The allowance for mortgage and contract loan losses at June 30, 2005 was $26.9 million, or approximately 11.8%, of the
loan and contract originations (excluding purchased loan pools) outstanding at that date. Management believes the allowance is adequate. However, if the amounts of the mortgages and contracts receivable that are ultimately written off materially
exceed the related allowances, our business, results of operations and financial condition could be adversely affected.



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



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



Corporate Finance



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



We established Qualifying Entities to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages
receivable. We retain 100% interest in the future cash flows generated by the sold mortgages receivable portfolios in excess of the cash required by the Qualifying Entities to fully repay principal and contractual interest on their obligations. Such
excess cash is principally generated by the excess of the weighted average contractual interest received on the mortgage loans over the interest rates on the Qualifying Entities notes. The notes contained a clean up call provision that allows
the notes to be called and mortgages receivable to be transferred back to us when the remaining principal value of the notes reaches 10% of the original principal value. The clean up call provisions on the 1999-A Securitization (TerraSun, LLC) and
the 1999-B Securitization (Dutch Elm, LLC) were exercised in January 2005 and February 2005, respectively. Such exercises resulted in the recognition of the full value of the mortgages receivable as an asset and a cash or debt requirement equal to
the remaining balance of the related notes.



On July 29, 2002, we entered into
a two-year agreement for a $300 million Senior Finance Facility with Merrill Lynch Mortgage Capital, Inc. The proceeds of the Senior Finance Facility were used to pay amounts payable under certain creditor agreements, provide mortgage receivable and
other working capital financing to us and to pay fees and expenses related to the Senior Finance Facility. A portion of the proceeds from the initial funding drawn on the Senior Finance Facility was used to pay off amounts outstanding under our
previous senior finance facility.



In February 2004, the Senior Finance
Facility was amended, raising the maximum aggregate borrowing and extending the term to February 28, 2006. The interest rate on the portion of the line secured by our eligible mortgages and contracts receivable was reduced to the one-month LIBOR
rate plus 2.25%, and, for the portion of the line secured by our eligible Unsold Vacation Interests, the rate was reduced to the one-month LIBOR rate plus 4.0%. Prior to the amendment discussed above, borrowings under the Senior Finance Facility
bore interest at an annual rate equal to one month LIBOR plus 3%, 5% or 7%, depending on the amounts outstanding and on the type of asset collateralizing various advances. The amendment reduced the exercise price of warrants to purchase 1,190,148
shares of our common stock from $15.25 per share to $14.00 per share. Additionally, the advance rate under loans secured by eligible mortgages and contracts receivable was increased to 85% from 80%. The amendment also expanded our ability to borrow
against Vacation Points and contracts receivable collateralized by Vacation Points, including both assets acquired by us as part of the purchase of certain assets of Epic Resorts Group, as well as assets associated with our new multi-site clubs. We
also agreed to pay Merrill Lynch Mortgage Capital, Inc. a commission equal to 1.5% of Vacation Interest revenue on the sale of inventory acquired from Epic Resorts Group.



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



Page 36



---

##### Table of Contents

See Note 14Subsequent Events for discussion of the fourth amendment (the Amendment) entered into on
July 28, 2005 between us and Merrill Lynch Mortgage Capital, Inc. to amend our Senior Finance Facility, effective July 28, 2005.



At June 30, 2005, the maximum capacity to borrow, amounts outstanding, and remaining availability under the Senior Finance Facility were $285.9 million, $160.8 million
and $125.1 million, respectively. The capacity and availability of borrowings under the Senior Finance Facility are based on the value of eligible mortgages and contracts receivable, the value of eligible Unsold Vacation Interests and the value of
certain real property and other assets. The Senior Finance Facility is secured by a first priority lien on the mortgages and contracts receivable and Unsold Vacation Interests, as well as certain real property and other of our assets, subject to
certain exceptions. The weighted average interest rate of these borrowings at June 30, 2005, was 5.94% per annum.



In addition to the facility fee (2.5% of $300 million) paid in connection with the commitment and the closing of the Senior Finance Facility and an anniversary fee of
1.5% due on the anniversary of the initial borrowing, we issued a warrant exercisable for 1,190,148 shares of common stock at an exercise price of $15.25 per share (the deemed value of the shares), subject to adjustment under certain anti-dilution
provisions of the warrant and will pay an unused commitment fee of 0.25% per annum on the excess availability under the Senior Finance Facility. The $8.7 million value of the warrants issued to the Senior Finance Facility lender was determined using
a Black-Scholes model based on a risk-free interest rate of 3.81%, expected volatility of 50% and an expected life of 5 years and, as a result of the February 2004 amendment, an additional $0.4 million was recorded to reflect the decrease in
exercise price to $14.00 per share. The value of the warrants was recorded as a capitalized financing cost that is amortized over the term of the financing agreement. The February 2004 amendment also stipulated that facility fees equal to 0.75% of
$300.0 million were due and payable on July 29, 2004 and July 29, 2005, with the latter fee being prorated through the termination date of February 28, 2006. For the three months ended June 30, 2005 and 2004, amortization of $1.1 million and $1.7
million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. For the nine months ended June 30, 2005 and 2004, amortization of $3.3
million and $7.9 million, respectively, of debt issuance costs related to the Senior Finance Facility is included in interest expense in the accompanying consolidated statements of operations. Beginning in February 2003, the Senior Finance Facility
also requires us to pay an additional cash interest amount monthly when certain conditions are not met. The total amount of such additional cash interest payments made during the three months ended June 30, 2005 and 2004 were $0.0 million and $0.0
million, respectively, and the total amount of such additional cash interest payments made during the nine months ended June 30, 2005 and 2004 were $0.0 million and $1.0 million, respectively.



Senior Subordinated Convertible Notes



On March 29, 2004, we issued $95.0 million in 33⁄4% Senior Subordinated Convertible Notes
due 2024 (Notes). The Notes were issued at a price of $1,000 per Note and pay interest semi-annually on March 29 and September 29 of each year, beginning on September 29, 2004, at the rate of 3.75% per annum. The Notes will mature on
March 29, 2024. Under the terms of the indenture, we were required to use a portion of the proceeds from the offering to purchase a portfolio of U.S. government securities that are pledged to secure the first six scheduled interest payments on the
Notes. This $10.4 million was recorded in Prepaid expenses and other assets, net and the balance on the accompanying unaudited consolidated balance sheets was $7.0 million and $8.7 million as of June 30, 2005 and September 30, 2004, respectively.
Other than this pledge, the Notes are unsecured obligations.



The Notes are
initially convertible, at the option of the holder, into shares of our common stock at a conversion rate of 62.5027 shares per $1,000 principal amount of the Notes upon the price of our common stock reaching 110% of such implied conversion price of
$16.00 per common share, if the Notes are called for redemption or if specified corporate transactions or significant distributions to holders of our common stock have occurred.



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



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



Page 37



---

##### Table of Contents

For the three months ended June 30, 2005 and 2004, amortization of $0.1 million and $0.1 million, respectively, of debt
issuance costs related to the Notes was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations. For the nine months ended June 30, 2005 and 2004, amortization of $0.3 million and $0.1
million, respectively, of debt issuance costs related to the Notes was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations.



Securitization Notes



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



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



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



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



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



For the three and nine months ended June 30, 2005, amortization of $0.1 million and $0.4 million, respectively, of debt issuance costs related to the 2004 Securitization
was recorded and is included in interest expense in the accompanying unaudited consolidated statements of operations.



Off-Balance Sheet Arrangements



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



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



Page 38



---

##### Table of Contents

Conduit Facility



We established a qualifying entity, Blue Bison Funding Corporation, through which we transferred mortgages and contracts receivable to
Barton Capital Corporation (Barton) and related entities as part of a $100 million Mortgages Receivable Conduit Facility (the Conduit Facility). We sold undivided interests in mortgages and contracts receivable to Blue Bison
Funding Corporation at 95% of face value without recourse to us as to collectibility. Blue Bison Funding Corporation financed those purchases through transfers to Barton of an undivided interest in the transferred mortgages and contracts receivable
for cash consideration under the Conduit Facility. Certain of the loans sold into the Conduit Facility were subsequently repurchased by us and sold into securitizations described below. Although there was no contractual requirement in the Conduit
Facility agreement, as certain mortgages and contracts receivable defaults occurred in 2000 we transferred into the Conduit Facility a total of $3.6 million in new mortgages and contracts receivable without consideration. The Conduit Facility
expired on December 17, 2001, leaving a substantial quantity of mortgages and contracts receivable still held by Barton. On December 17, 2004, we completed the purchase from Barton of its rights to the mortgages and contracts receivable remaining in
the loan portfolio at that date for approximately $16.4 million.



Securitization Transactions



We established certain qualifying
entities, TerraSun, LLC and Dutch Elm, LLC, to issue fixed rate notes payable collateralized by an undivided interest in transferred mortgages receivable. We retain 100% interest in the future cash flows generated by the sold mortgages receivable
portfolios in excess of the cash required by the qualifying entities to fully repay principal and contractual interest on their obligations. Such excess cash is principally generated by the excess of the weighted average contractual interest
received on the mortgage loans over the interest rates on the qualifying entities notes. The notes contain a clean up call provision that allows the notes to be called and mortgages receivable to be transferred back to us when the
remaining principal value of the notes reaches 10% of the original principal value. On January 25, 2005, we completed a transaction resulting in the acquisition of a loan portfolio held by TerraSun, LLC for approximately $4.5 million in cash. This
transaction was the result of the exercise of the clean up call provision contained in the notes issued by TerraSun, LLC. On February 25, 2005, we completed a transaction resulting in the acquisition of a loan portfolio held by Dutch
Elm, LLC for approximately $5.6 million in cash. This transaction was the result of the exercise of the clean up call provision contained in the notes issued by Dutch Elm, LLC.



Contractual Obligations



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Credit Risk



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



Availability of Funding Source



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



Page 39



---

##### Table of Contents

Geographic Concentration



Our owned and serviced loan portfolio borrowers are geographically diversified within the United States and internationally. At June 30, 2005, borrowers residing in
the United States accounted for approximately 96.0% of our loan portfolio. With the exception of California, Arizona and Florida, which represented 19.1%, 12.4% and 5.1%, respectively, no state or foreign country concentration accounted for in
excess of 5.0% of the serviced portfolios. The credit risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial well being of the borrowers.



Foreign Currency Risk



For the nine months ended June 30, 2005 and 2004, total revenues denominated in a currency other than U.S. dollars, primarily revenues
derived from the United Kingdom, were approximately 23.2% and 31.6%, respectively, of total revenues. Our net assets maintained in a functional currency other than U.S. dollars at June 30, 2005 and September 30, 2004, primarily assets located in
Western Europe, were approximately 31.1% and 48.6%, respectively, of total net assets. The effects of changes in foreign currency exchange rates have not historically been material to our operations or net assets. At June 30, 2005, our subsidiary in
the United Kingdom, whose functional currency is the British Pound Sterling, held approximately 4.2 million Euros. That subsidiary expects to utilize approximately 2.5 million Euros per month for operating purposes. To the extent it holds Euros at
any point in time, it is subject to gains and losses as the exchange rate between British Pound Sterling and Euros fluctuates. In June 2005, we entered into three forward contracts in connection with the management of our exposure to fluctuations in
foreign exchange rates and to meet our future Euro currency requirements. The contracts have a total notional value of £3.0 million for the future purchase of Euros and mature within one year. These contracts are recorded at fair value on the
accompanying consolidated balance sheets and are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Unrealized gains and losses on such contracts are recognized currently in
earnings. For the three and nine months ended June 30, 2005, a loss of $0.03 million was recognized in the accompanying consolidated statements of operations as a result of these contracts.



Interest Rate Risk



As of June 30, 2005, we had floating interest rate debt of approximately $160.8 million, comprised of amounts outstanding under the Senior
Finance Facility. The floating interest rate on the Senior Finance Facility is based upon the prevailing LIBOR rate and interest rate changes can impact earnings and operating cash flows. A change in interest rates of one percent on the balance
outstanding at June 30, 2005 would cause a change in total annual interest costs of $1.6 million.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation
of Disclosure Controls and Procedures



With the participation of our
Chief Executive Officer and Chief Financial Officer, management has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2005.



Changes in Internal Controls



There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended
June 30, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Sarbanes-Oxley Section 404 Compliance



The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002 (the Act) adopted rules requiring public companies to
include a report from management on its internal controls over financial reporting in Annual Reports on Form 10-K. This requirement will first apply to our Annual Report on Form 10-K for the year ending September 30, 2005 and in subsequent Annual
Reports thereafter. The report from management must include the following: (1) a statement of managements responsibility for establishing and maintaining adequate internal controls over financial reporting, (2) a statement identifying the



Page 40



---

##### Table of Contents

framework used by management to conduct the required evaluation of the effectiveness of our internal controls over
financial reporting, (3) managements assessment of the effectiveness of our internal controls over financial reporting as of September 30, 2005, including a statement as to whether or not internal controls over financial reporting is
effective, and (4) a statement that our independent auditors have issued an attestation report on managements assessment of internal controls over financial reporting.



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



We have prepared initial documentation of our controls over financial reporting and have recently commenced testing of those controls but
have not yet completed this testing. Because of our historical growth through acquisition prior to our July 2002 reorganization under the U.S. Bankruptcy Code and our decentralized organizational structure in general, our documentation and testing
to date have identified certain deficiencies in the documentation, design and effectiveness of internal controls over financial reporting that we are in the process of remediating. However, there can be no assurance that one or more deficiencies
will not constitute what we or our independent auditors conclude is a material weakness in internal control over financial reporting. Although we intend to diligently and vigorously review internal controls over financial reporting, we can provide
no assurance as to our conclusions at September 30, 2005 with respect to the effectiveness of our internal controls over financial reporting, or that we will be able to complete the required assessment in a timely manner.



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



PART IIOTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



In the normal course of
business, we are subject to various legal claims and actions. In the opinion of management, taking into account the effect of the plan of reorganization, any liability arising from or relating to these claims, or other claims under the plan of
reorganization, should not materially and adversely affect us. See Managements Discussion and Analysis of Financial Condition and Results of OperationsReorganization in our Transition Report on Form 10-K for the nine months
ended September 30, 2004 for a further description of the nature and results of our reorganization, and Note 13 to the accompanying unaudited, consolidated financial statements for a general description of our commitments and contingencies.



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



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



ITEM 5. OTHER INFORMATION



None.



Page 41



---

##### Table of Contents

ITEM 6. EXHIBITS



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1  |  | Amendment No. 4, dated July 28, 2005, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as
agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries, Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and
Sunterra Corporation and certain of its subsidiaries and Amendment No. 3, dated July 7, 2004 by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its
subsidiaries.
|      | 
|*10.2 |  | Employment agreement dated May 24, 2005 between Sunterra Corporation and David Lucas (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of
event: June 27, 2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      | 
|31.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|31.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|32.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|32.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

* Compensatory management plan



Page 42



---

##### Table of Contents

SIGNATURES



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



SUNTERRA CORPORATIONBy:

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

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




Dated: August 9, 2005



Page 43



---

##### Table of Contents

EXHIBIT INDEX



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1  |  | Amendment No. 4, dated July 28, 2005, to Loan Agreement dated July 29, 2002, as amended by Amendment No. 1 dated December 20, 2002, by and between Merrill Lynch Mortgage Capital, Inc., as
agent for certain lenders party thereto, and Sunterra Corporation and certain of its subsidiaries, Amendment No. 2, dated February 13, 2004, by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and
Sunterra Corporation and certain of its subsidiaries and Amendment No. 3, dated July 7, 2004 by and between Merrill Lynch Mortgage Capital, Inc., as agent for certain lenders party thereto, and Sunterra Corporation and certain of its
subsidiaries.
|      | 
|*10.2 |  | Employment agreement dated May 24, 2005 between Sunterra Corporation and David Lucas (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (date of
event: June 27, 2005)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      | 
|31.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|31.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|32.1  |  | Certification of Principal Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      | 
|32.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

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



Page 44