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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                      to                     

Commission File Number 001-13815

SUNTERRA CORPORATION

(Exact name of registrant as specified in its charter)

3865 West Cheyenne Avenue

North Las Vegas, Nevada 89032

“www.sunterra.com”

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(702) 804-8600

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

None

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

Common Stock, $.01 par value

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b2)    YES x    NO ¨

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

The aggregate market value of common equity held by non-affiliates of the registrant as of March 24, 2003 (based on the approximate book value of $15.76 per share of common stock of the registrant, as of December 31, 2002) was $135.2 million.

Number of shares of the registrant’s common stock outstanding at March 24, 2003: 18,045,077

DOCUMENTS INCORPORATED BY REFERENCE

The information contained in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2003 annual meeting of stockholders is incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form 10-K.

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SUNTERRA CORPORATION

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2002

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Safe Harbor Statement—Cautionary Notice Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particular statements about our plans, objectives, expectations and prospects under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can identify these statements by forward-looking words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and similar expressions. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements are contained herein under “Business-Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and relate, without limitation, to matters arising from our emergence from proceedings under Chapter 11 of the Bankruptcy Code. Any or all of these factors could cause our actual results and financial or legal status 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.

PART I

ITEM 1.     BUSINESS

Unless the context otherwise requires, throughout this report the words “Sunterra,” “we,” “us,” and “our” refer to Sunterra Corporation, a Maryland Corporation, and its subsidiaries.

General

Sunterra Corporation is one of the world’s largest vacation ownership companies, as measured by the number of individual resort locations and owner families. At December 31, 2002 we had approximately 315,000 vacation owner families and 78 club affiliated resort locations in the continental United States, Europe, the Caribbean, Hawaii and Mexico. In addition, there are four Embassy Vacation resorts of which two are joint ventures in partnership with third parties and two are wholly owned by Sunterra Corporation.

Our operations consist of:

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Our Internet address is www.sunterra.com. On our Internet website, we provide a link to the Securities and Exchange Commission’s website where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 can be viewed. The information contained on our website, or on other websites linked to our website, is not part of this report.

Segment and geographic information is presented in Note 21 to our consolidated financial statements included in this report.

Marketing of Vacation Interests

We market and sell Vacation Interests in two distinct forms: Vacation Points and Vacation Intervals which are described below under the caption “The Vacation Ownership Industry” and referred to in this report together as “Vacation Interests”.

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

Receivables Financing

We provide consumer financing to consumers for the purchase and lease of Vacation Interests in North America and the Caribbean. We benefit by retaining the positive cash flow spread that results from the difference between our borrowing rate, which averaged approximately 5.3% at December 31, 2002 and the rate charged to our owner families, which averaged 14.7% per annum as of the same date. This financing generally is made available to consumers who make a down payment within established credit guidelines, bears interest at fixed rates, and is collateralized by the underlying Vacation Interest. Our European subsidiary generally originates the mortgages receivable for a third party financial institution and receives a commission (averaging approximately 10%) of the principal amount of eligible consumer loans on a non-recourse basis. At December 31, 2002, our European subsidiary had approximately $7.4 million in mortgages receivable.

During fiscal year 2002, we provided mortgage financing for approximately 62% of domestic Vacation Interests sales and lease revenue. As of December 31, 2002, our mortgages and contracts receivable portfolio included approximately 28,000 active loans and contracts totaling approximately $199.2 million, with a stated maturity typically of seven to ten years. Mortgages and contracts receivable in excess of 60 days past due as of such date were 3.1% as a percentage of gross mortgages and contracts receivable. Our allowance for loan and contract losses was 16.3% as a percentage of gross mortgages and contracts receivable at December 31, 2002.

Given the percentage of purchases that are financed, the availability of financing is essential to provide liquidity to generate ongoing sales of Vacation Interests. We presently use our Merrill Lynch Finance Facility to finance our mortgages receivable. Prior to 2001, we monetized our mortgages receivable through the use of an off-balance sheet conduit that securitized these receivables and, in turn, sold them in the mortgage-backed securities market. We also used on-balance sheet secured financing, whole mortgages receivable sales and other financing vehicles. As of December 31, 2002, we serviced approximately 26,200 loans with an outstanding

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balance of approximately $216.4 million relating to the conduit, securitizations, joint venture properties and other facilities not included on our balance sheet. We anticipate resuming securitizations during 2003.

Management Services

Through our subsidiaries, RPM Management, Inc., Resort Management International, Inc., and Sunterra Pacific, Inc., we also provide resort rental, management, maintenance and collection services for which we receive fees paid by the resorts’ homeowners associations. Under such arrangements, we typically have primary responsibility for all activities necessary for the day-to-day operation of the managed resort properties, including administrative services, procurement of inventory and supplies and promotion and marketing. Such management agreements typically provide that we are paid a monthly management fee equal to a percentage of monthly maintenance fees and a reservation and accounting fee at certain resorts. The management agreements are usually for a three-year period and are automatically renewable annually, unless either party gives prior notice of non-renewal.

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

RPM has contracts with fourteen homeowners associations at our resorts and an additional eight contracts to manage non-Sunterra resorts. Sunterra Pacific presently manages seven Sunterra Pacific resorts and its units at additional resorts. The homeowners associations have declined to renew Sunterra Pacific’s management agreement past its December 2003 expiration date. This action led Sunterra Pacific to commence arbitration against the homeowners’ associations, as discussed in Item 3. Legal Proceedings in Part 1 of this report. Third party management companies manage our remaining resort locations.

The Vacation Ownership Industry

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

Increased governmental regulation, higher standards of quality and service, increased flexibility and the rapid entry of a number of well-organized lodging and entertainment companies, including Marriott International, The Walt Disney Company, Four Seasons Hotels & Resorts, Hilton Hotels Corporation, Hyatt Corporation, Cendant Corporation, Starwood Hotels and Resorts Worldwide, Inc. and Fairmont Hotels each have increased the attractiveness of vacation ownership for consumers.

The American Resort Development Association has received results from the first stage of its State of the U.S. Timeshare Industry 2002 research. This segment, representing one-third of the total scope of the study, explores timeshare owner demographics, attitudes and purchase motivations. The data also includes non-owners’ awareness levels and opinions of timeshare. According to the survey, timeshare owners continue to express a high level of satisfaction with the product. Nearly 85% of respondents called themselves either “somewhat” or “very satisfied”—a number mirroring the figure from 1999’s State of the U.S. Timeshare Industry report. The

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study also finds that owners rarely allow their intervals to go unused. Between exchanges, home resort vacations and use by owner friends and family, more than 93% of timeshare weeks were used in 2000.

Given these satisfaction levels and high utilization rates, it is not surprising that in the past year and a half the timeshare segment has held up surprisingly well despite the impact of the September 11, 2001 terrorists attacks and the recession in the U.S., both of which had a profound impact on the hospitality and travel industry in general. A review of the financial results of the vacation ownership divisions of the major brands, coupled with operating performance announcements of major independents, indicates that timeshare continues to grow as a product in this current difficult economic climate. According to Vacation Ownership World, January 2003, timeshare sales grew by 15% in 2002.

One of the most noteworthy trends in the past few years is the rapid growth of target market segmentation in the vacation ownership industry into luxury, upscale quality, and value segments, to name a few. The luxury segment includes two Marriott-owned brands including the Ritz-Carlton Club and Marriott Grand Residence club, plus Four Seasons, Hyatt and Fairmont. Four Seasons and Hyatt are offering both traditional luxury vacation ownership properties as well as fractional ownership—which typically involves the sale of between 28 days to 13 weeks or more, while the other luxury competitors are concentrating primarily on the new fractional market.

Operating in the upscale segment are such property groups as Marriott Vacation Club International, Westin-branded interval ownership resorts, Disney Vacation Club, Hilton Grand Vacation Club and Embassy Vacation Resorts, which is operated by Sunterra under a license agreement with Hilton.

The quality segment of the industry includes such brands as Sunterra, Starwood Vacation Ownership, and Cendant-owned vacation ownership groups including Fairfield Resorts, Trendwest and Equivest. Horizons by Marriott is a new mid-tier vacation ownership product and the value segment of the industry is also starting to emerge with hoteliers licensing products under such names as Ramada Vacation Suites, Hampton Inns, Wyndham and Amerisuites.

Vacation Points Ownership

In general, under a points-based vacation ownership system, owners, who are more commonly referred to as “members,” purchase points which act as an annual currency exchangeable for occupancy rights at participating resorts. We currently operate three separate points-based vacation ownership systems: our United States “Club Sunterra^™” program, with approximately 41,000 members and 23 resort locations in the United States and the Caribbean; Sunterra Pacific’s “VTS” program, with approximately 31,000 members and 23 resort locations in the United States, Canada and Mexico; and Sunterra Europe’s Grand Vacation Club program, with approximately 42,000 members and 32 resort locations in the United Kingdom, Portugal, Spain, the Canary Islands, Germany, France, Austria and Italy.

Our Club Sunterra points-based vacation ownership system operates on a basis similar to the standard Vacation Interval ownership structure in that members usually have a home resort and have a deeded, fee-simple interest in a particular unit or units at that home resort with an ability to exchange use-nights with any other resort within the Club Sunterra system. Club Sunterra members assign their occupancy rights to their deeded Vacation Interval to Club Sunterra and then spend their points to acquire occupancy rights to a Vacation Interval that is available through the Club. Members in Sunterra Pacific’s VTS program do not hold deeded fee simple interests, but rather own beneficial interests in a trust, which holds legal title to the deeded fee simple interests. Members in Sunterra Europe’s Grand Vacation Club^™ program also do not hold deeded fee simple interests, but rather have membership in a limited liability company, Grand Vacation Club Limited, plus a right to use the accommodations which are part of the club.

The advantages of a points-based vacation ownership system relate to the flexibility given to members with respect to the use of their Vacation Points versus the use of a traditional Vacation Interval. In traditional Vacation

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Interval ownership, owners can either use their Vacation Interval for a one-week stay in a specific unit size at a specific resort or can attempt to exchange their weeks through an external exchange organization, such as Interval International, Inc., or “II,” or Resort Condominium International, LLC or “RCI,” for which an exchange fee is charged by the exchange company. Because Vacation Points function as currency under a points-based vacation ownership system, owners, subject to availability and other factors, have flexibility in choosing the location, season, duration and unit size of their Vacation Interest, based on their annual Vacation Points allocations. In a points-based vacation ownership system, owners can redeem their points for a stay in any one of the resorts included in the club without having to exchange through an external exchange company and without having to pay any exchange fees. Moreover, under our Club Sunterra system, members are also able to effect exchanges through an external exchange program for vacation stays at resorts outside the Club Sunterra resort network if they desire, as the annual Club Sunterra membership fee usually includes annual membership in one of these exchange programs.

To consolidate our exchange company alliances, Sunterra announced on June 20, 2002 that it entered into an exclusive external exchange affiliation agreement with II. This agreement replaced Sunterra’s existing agreement with RCI to provide exchange services for its Sunterra owners. It also replaced the previous agreement between Sunterra Europe and II to provide exchange services for Sunterra Europe’s GVC members. We believe that II’s desire to complement rather than compete with its developer clients coupled with its quality resorts, service, and experience with the leading brands is an advantage of this new relationship, although there is no assurance that II will not compete with developer clients in the future.

A significant component of our business plan is our “One World One Club^™” initiative to offer a single headline product to the consumer throughout our areas of operation. This project is intended to result in the integration of our various regional points-based vacation products into a single global membership program. Key aspects of this One World One Club initiative are already in progress through a carefully planned phased implementation. When completed, management believes that the full One World One Club initiative will provide us with significant flexibility in developing the membership system to enhance its attractiveness to the consumer, and also to result in numerous operational efficiencies being gained by the business.

Vacation Interval Ownership

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

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

Each Vacation Interval owner is required to pay the homeowners association a share of the overall cost of maintaining the property. These assessments, which generally range from $300 to $700 per Vacation Interval per year, consist of an annual maintenance fee plus applicable real estate taxes, funding of replacement reserves and, when needed, special assessments. If the owner does not pay such charges, the owner’s use rights may be suspended and the homeowners association may foreclose on the owner’s Vacation Interval, subject to the rights of the mortgagee.

Competition

All of our vacation and related products face competition for prospects, sales leads and personnel from established, highly visible operators as well as a fragmented array of smaller operators and owners. In

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developing, marketing and selling Vacation Interests, we compete against the vacation ownership divisions of several established and respected hospitality companies. These include Marriott (Marriott Vacation Club, the Ritz-Carlton Club, Horizons by Marriott and Marriott Grand Residence Club), Cendant (Fairfield Resorts, Equivest Finance Inc, and Trendwest Resorts), Hilton (Hilton Grand Vacations), Starwood (Starwood Vacation Ownership), Disney (Disney Vacation Club), and Hyatt (Hyatt Vacation Club). In addition, in certain markets we also compete with many established companies focused solely on vacation ownership, including Shell Vacations, ILX Resorts, Club LaCosta, Silverleaf Resorts, and Westgate Resorts, and it is possible that other competitors such as Bluegreen Corporation, IntraWest or others may develop properties near our current resorts and compete with us in the future. The majority of the remaining worldwide vacation ownership resorts are owned and operated by smaller, regional companies. We believe that the vacation ownership industry will continue to consolidate in the future.

Historically, we also have competed with the buyers of our Vacation Intervals who subsequently decide to resell their Vacation Intervals, in addition to third-party resellers of vacation ownership interests of our competitors. Such resales are typically at prices substantially less than the original purchase price. While this has not been a significant problem to date, the market price of Vacation Intervals sold by us at a given resort or by our competitors in the market in which a resort is located could be depressed by a substantial number of Vacation Intervals offered for resale.

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

Our resort rental management and maintenance services face competition from established real estate entities, as well as similar operations in the companies noted above. These include Vacation Resorts International, RCI Resort Management (a unit of Cendant Corporation, which also owns Fairfield Resorts, Equivest Finance Inc., and Trendwest Resorts), Shell Hospitality, Inc. (a unit of Shell Vacations) and Southern Property Management.

Insurance

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

Intellectual Property

We own and control a number of trade secrets, trademarks, trade names, copyrights and other intellectual property rights, including the “Sunterra^™”, “Club Sunterra^™” and “Own Your World^™” trademarks, which, in the aggregate, are of material importance to our business. We are licensed to use technology and other intellectual property rights owned and controlled by others, and we license other companies to use technology and other intellectual property rights owned and controlled by us.

Governmental Regulation

Our marketing and sales of Vacation Interests are subject to extensive and ever-changing regulations by the federal and state governments and foreign jurisdictions in which our resort properties are located and in which

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Vacation Interests are marketed and sold. At the U.S. federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce generally. Other significant U.S. federal legislation to which we are or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Americans With Disabilities Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Gramm Leach Bliley Act, the Real Estate Settlement Procedures Act, the Deceptive Mail Prevention and Enforcement Act, the Civil Rights Acts of 1964 and 1968 and federal and state securities laws.

Recent federal legislation amends the Telemarketing Sales Rule, regulated by the Federal Trade Commission, to include provisions for a nationwide telemarketing do-not-call registry. Generally, telemarketers will be prohibited from calling anyone on that registry. Telemarketers must pay a fee to access the registry, and are required to do so on a quarterly basis. Basic provisions of the rules are effective March 31, 2003, with other provisions becoming effective in October 2003 and January 2004. Enforcement of the federal do-not-call provisions will begin in the fall of 2003, and the rule provides for fines of up to $11,000 per violation. For example, in most states we are required to deliver a disclosure statement, sometimes referred to as a public offering statement or public report, to all prospective purchasers of Vacation Interests, together with certain additional information concerning the terms of the purchase. Laws in most states generally grant the purchaser of a vacation interest the right to cancel a contract of purchase at any time within a period ranging from three to ten calendar days following the later of the date the contract was signed or the date the purchaser received the last of the documents which we are required to provide to the purchaser. Most states have other laws that regulate other activities such as those relating to real estate licensure, exchange program registration, seller of travel licensure, anti-fraud laws, telemarketing and do not call laws, prize, gift and sweepstakes laws and labor laws. Any failure to comply with applicable laws or regulations could have a material adverse effect on our business, results of operations or financial condition.

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

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

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

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

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

Environmental Matters

Under various federal, state, local and foreign environmental, health, safety and land use laws, ordinances, regulations and similar requirements, a current or previous owner or operator of real property may be required to investigate and clean up hazardous substances, wastes or releases of petroleum products at such property and may be held liable to a governmental entity or to third parties for associated damages and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws may impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral. Any failure to comply with applicable environmental laws or regulations could have a material adverse effect on our business, results of operations or financial condition.

In connection with the acquisition and development of Embassy Vacation Resort Lake Tahoe and Sunterra Resorts San Luis Bay Inn, several areas of environmental concern have been identified. The areas of concern at Lake Tahoe relate to possible soil and groundwater contamination that has migrated onto the resort site from an underground petroleum storage tank on an adjacent upgradient property. We have been indemnified by the former owner of the upgradient property for certain costs and expenses in connection with the off-site contamination. California regulatory authorities are monitoring the off-site contamination and the parties have taken action to comply with the remedial action plan put in place by the Lahontan Regional Water Quality Control Board. Residual contamination exists on the resort site as a result of leaking underground storage tanks that were removed prior to our acquisition of the resort site. Beginning in April 2003, access to the resort will be

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necessary to install an in-situ groundwater remediation system to enhance remediation effectiveness. This groundwater remediation system will consist of three pumping wells and a carbon filtration system. The groundwater will be pumped from the aquifer under the property, treated by the carbon filtration system, and pumped back into the aquifier. This remediation system will operate for approximately two years. We do not believe that we will be held liable for this contamination and do not anticipate incurring material costs in connection with this site. There can be no assurance, however, that the party responsible for the clean up of this contamination will meet its obligations in a complete and timely manner.

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

Employees

As of December 31, 2002, we had approximately 4,950 full and part-time employees and engaged approximately 150 independent sales agents to sell Vacation Interests. None of our employees are represented by a labor union and we are not aware of any union organizational efforts with respect to our employees.

Reorganization Under Chapter 11

On July 29, 2002 we and certain of our wholly-owned subsidiaries consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to an order entered on June 21, 2002 by the U.S. Bankruptcy Court for the District of Maryland (Baltimore Division) approving our joint plan of reorganization. We have been operating out of bankruptcy since July 29, 2002.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reorganization” for a further description of the nature and results of our reorganization and a description of other recent matters impacting our business and results of operations.

Risk Factors

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

We recently emerged from Chapter 11 bankruptcy proceedings

We sought protection under Chapter 11 of the Bankruptcy Code in May 2000 as a result of defaults on our senior unsecured notes and our secured credit facilities. In July 2002, we fulfilled the conditions to the effectiveness of our plan of reorganization and emerged from bankruptcy. The principal terms of our plan of reorganization are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reorganization.”

As a result of our emergence from bankruptcy, we no longer enjoy the protections from our creditors previously afforded to us under the Bankruptcy Code. The financial and other obligations we have incurred since the date of the filing of our bankruptcy petition in May 2000 were not discharged in connection with our bankruptcy proceedings. We will therefore be responsible for satisfying the full amount of these obligations as they become due. These post-petition obligations include those incurred under our exit financing facility with Merrill Lynch Mortgage Capital, Inc.

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Upon emergence from our bankruptcy proceeding, we adopted the principles of fresh-start financial accounting effective as of July 31, 2002 as described in Note 3 to our consolidated financial statements. Our adoption of fresh-start accounting means that our consolidated financial statements for recent periods prepared on this basis are not comparable with our consolidated financial statements for prior periods. This lack of comparability may make it more difficult for investors to evaluate our financial condition and results of operations.

There can be no assurance that our plan of reorganization will be successful or that we will be able to operate our business profitably following our emergence from bankruptcy. Certain of the challenges that contributed to our filing for bankruptcy, such as intense industry competition and a downturn in economic conditions affecting the travel and tourism industry, continue to exist and are likely to continue to affect our business operations and financial condition adversely. Other companies that have emerged from bankruptcy have encountered operational and financial problems that have caused them to seek bankruptcy protection for a second time.

We are subject to intense industry competition

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

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

We cannot assure that we can effectively integrate Club Sunterra and our two other points-based vacation ownership programs into a true “One World One Club”

As an integral part of our business plan, we are seeking to achieve true club globalization through the integration of our three existing separate points-based global vacation systems into a functionally single “One World One Club” system, with the existing Club Sunterra system serving as the platform for this points-based exchange program. Although we have operated these points-based vacation ownership systems separately through certain of the companies we have acquired, we have not previously developed a true, global, system-wide points-based vacation ownership system, and no assurance can be given as to our ability to efficiently develop, integrate or operate such a system, or the form that such system may take or the timing of the implementation of any such system. Risks associated with the integration and operation of a global club include the risks that:

We cannot assure that we will be able to enter into the branding affiliation called for by our business plan

Our ability to establish and maintain a branding affiliation with an organization possessing a strong established identity among vacation ownership consumers is a component of our business plan. Although discussions to establish a brand affiliation are ongoing, entering into a branding affiliation often is a complex and

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time-consuming process that requires accommodating a number of competing interests. Moreover, even if we do enter into such a relationship, such affiliations often present their own risks, such as lack of a shared marketing vision, loss of managerial control, increased resort or homeowners association operating costs, and a possible overall reduction in marketing flexibility. Consequently, we can offer no assurance that we will be able to enter into and maintain a successful brand affiliation.

If we are unable to offer purchasers of Vacation Interests the opportunity to participate in effective exchange networks, our sales will suffer

The attractiveness of Vacation Interest ownership is enhanced significantly by the availability of exchange networks that allow Vacation Interest owners to exchange in a particular year the occupancy right in their Vacation Interest for an occupancy right in another participating network resort. According to the American Resort Development Association, the ability to exchange Vacation Interests was cited by buyers as a primary reason for purchasing a Vacation Interest. On June 20, 2002, we entered into an exclusive exchange affiliation agreement with II. If external exchange networks cease to function effectively, or if our resorts are no longer included in an exchange network, notwithstanding our existing points-based clubs, our sales of Vacation Interests could be materially adversely affected.

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

Our business has been adversely affected in recent years by unfavorable general economic and industry conditions, including the effects of weak domestic and world economies, rising unemployment and job insecurity, the terrorist attacks in the United States in September 2001, instability in the airline industry and geopolitical conflict in the Middle East, North Korea and other areas. Any additional downturn in economic conditions or any price increases related to the travel and tourism industry, such as higher airfares or increased gasoline prices, could depress discretionary consumer spending and have a material adverse effect on our business. Any such economic conditions, including recession, may also adversely affect the future availability of attractive financing rates for us or our customers and may materially adversely affect our business. Furthermore, changes in general economic conditions may adversely affect our ability to collect our loans to Vacation Interest buyers. Because our operations are conducted solely within the vacation ownership industry, any adverse changes affecting the industry, such as an oversupply of vacation ownership units, a reduction in demand for such units, changes in travel and vacation patterns, changes in governmental regulation of the industry, increases in construction costs or taxes and negative publicity for the industry, could have a material adverse effect on our business.

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

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

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

Some of our resorts are located in areas that are subject to hurricanes and tropical storms. We have suffered damages from hurricanes and tropical storms in the past, and we may suffer damage from them in the future.

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

We are dependent upon senior executive management, some of whom are new

Our future success largely depends on the skills and efforts of our senior management team. There has been significant turnover in many of our key senior executives since the date of our bankruptcy filing. While our current President and Chief Executive Officer, Nicholas J. Benson, has held that position since November 2001 and was previously the Chief Executive Officer of Sunterra Europe, our Chief Financial Officer and our General Counsel have held these positions since September 2002 and February 2003 respectively. Consequently, select key members of senior management have a limited history and experience with our companies.

We may be unable to attract, retain and motivate necessary management and other skilled personnel

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

We will continue to be subject to extensive government regulation

Our marketing and sales of Vacation Interests are subject to extensive and ever-changing regulations by the federal and state governments and foreign jurisdictions in which our resort properties are located and in which Vacation Interests are marketed and sold. On the United States federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce generally. Other significant federal legislation to which we are or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Americans With Disabilities Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Gramm Leach Bliley Act, the Real Estate Settlement Procedures Act, the Deceptive Mail Prevention and Enforcement Act, the Civil Rights Acts of 1964 and 1968 and federal and state securities laws. Recent federal legislation amends the Telemarketing Sales Rule, regulated by the Federal Trade Commission, to include provisions for a nationwide telemarketing do-not-call registry. Generally, we will be prohibited from calling anyone on that registry. We will be required to pay a fee to access the registry on a quarterly basis as required by the rules. Basic provisions of the rule are effective March 31, 2003, with other provisions becoming effective in October 2003 and January 2004. Enforcement of the federal do-not-call provisions will begin in the fall of 2003, and the rule provides for fines of up to $11,000 per violation. This legislation may restrict our ability to market effectively our services to new customers. Furthermore, compliance with the new legislation may prove difficult and we may incur penalties under this legislation for conducting our marketing activities. In addition, many states have adopted specific laws and regulations regarding the establishment of condominium and timeshare projects and the sale of vacation interest ownership programs. For example, in most states we are required to deliver a disclosure statement,

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

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

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

During the Chapter 11 Cases, we did not file required quarterly and annual SEC reports

During the term of our Chapter 11 cases, we did not file required quarterly and annual reports with the SEC. Specifically, we failed to file Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30 in 2000 and for the quarters ended March 31, June 30 and September 30 in 2001. We also failed to file an Annual Report on Form 10-K for the year ended December 31, 2000, were delinquent in filing the Annual Report on Form 10-K for the year ended December 31, 2001 and were delinquent in filing our Quarterly Report on Form 10-Q for the first quarter of 2002. In addition, because our previously audited financial statements for the 1999 and 1998 fiscal years cannot be used, and because we are not able to present unaudited financial statements or certain information for any periods prior to 2000, this report does not, and certain of our future filings under the Securities Exchange Act of 1934 will not comply with certain SEC requirements.

Our common stock is not traded on a securities exchange and may be illiquid or experience significant price volatility

Our common stock was de-listed by the New York Stock Exchange in 2000 as a result of our entering into bankruptcy. On July 29, 2002, the effective date of our plan of reorganization, Sunterra’s then existing common stock was cancelled, and shares of new common stock were issued in accordance with the provisions of the plan. Price information regarding our new common stock is currently quoted on the OTC Bulletin Board. Since our bankruptcy, trading in our common stock has been extremely limited and the price at which our shares have traded has been volatile. Although we intend to apply to have our common stock listed on a securities exchange, we cannot assure you that we will be successful in obtaining a listing or quotation for our common stock on the New York Stock Exchange, NASDAQ or any other securities exchange. Even if our common stock is listed or quoted, an active market for our shares may not develop, and no determination can be made as to the prices at which purchases or sales of our shares may be made. The market price of our common stock may be subject to significant fluctuations in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial analysts in their estimates, if any, of our future earnings, conditions in the economy in general or in the travel, vacation ownership and leisure industries in particular or unfavorable publicity as well as the “Risk Factors” discussed above. The stock market also has, from time to time, experienced significant price and volume fluctuations that have been unrelated to the operating performance of companies with publicly-traded securities.

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

Future sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. The issuance of shares of our new common stock under our plan of reorganization was exempt from the registration requirements of the federal and state securities laws. Shares of our common stock may be resold in the public market by existing stockholders subject to applicable holding period, volume and other limitations imposed under the federal securities laws or pursuant to a registration statement to register such shares for resale to the public. Under the terms of agreements entered into with our principal stockholders and lenders in connection with our plan of reorganization, we are required to file a registration statement with the Securities and Exchange Commission covering the resale to the public of a substantial amount of our outstanding shares of common stock issued to the stockholders and lenders under our plan of reorganization. We are obligated to file the registration statement on or before May 15, 2003 and to use our best efforts to cause the registration statement to become effective as soon as practicable after the date it is filed. After the registration statement becomes effective, the resales of our shares, or the perception that resales could occur, could cause the amount of our common stock available or perceived to be available for sale in the public market to exceed demand, which could cause the market price of our common stock to drop significantly.

Our stock ownership is concentrated, which may make it difficult for stockholders to exert control over us or to replace our management

Under our plan of reorganization, certain of our pre-petition creditors acquired amounts of our common stock that enable them to exert substantial influence over the election of directors and the management and affairs of our business. Two of our stockholders each hold approximately 25% of our common stock. Accordingly, if these persons vote their shares of our common stock in the same manner, they will have sufficient voting power to determine the outcome of various matters submitted to our stockholders for approval, including mergers, consolidations and the sale of substantially all of our assets. This control may result in decisions that are not in the best interest of our other stockholders.

Our charter and bylaws contain provisions that could limit the value of our common stock

Certain provisions of our charter and bylaws, as well as applicable state law, may have the effect of delaying, deferring, or preventing a change in control of Sunterra. These provisions may make it more difficult for other persons, without the approval of our Board of Directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a stockholder might consider to be in the stockholder’s best interest. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

We do not anticipate paying any dividends

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

We are subject to various restrictions under our Merrill Lynch Financing Facility

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

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Virtually all of our assets are subject to security interests

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

We need to be able to access the securitization markets in the future

While we securitized our mortgages receivable prior to our bankruptcy, there can be no assurance with regard to our ability to successfully access the securitization markets in the future. Our inability to do so could adversely affect our business and financial condition.

ITEM 2.     PROPERTIES

Our principal executive office is located in approximately 52,000 square feet of leased space in North Las Vegas, Nevada. This location also holds our consumer finance and property management operations as well as the majority of our domestic administrative, marketing, legal, construction management, accounting, finance and support operations. Similar functions for Sunterra Europe, our European subsidiary, are housed in approximately 40,000 square feet of leased space in Lancaster, England. We also lease a number of smaller locations including the offices of Sunterra Pacific in Bellevue, Washington, and RMI in Carlsbad, California, and have short-term lease agreements for multiple off-premises contact booths and sales centers at various locations. We own a 9,000 square foot building in Sedona, Arizona, where administrative functions relating to our Sedona resorts are housed. We also own an approximately 25,000 square foot building in Orlando, Florida, which, prior to our relocation to North Las Vegas in 2002, was our headquarters. This property is currently under contract to be sold.

As of December 31, 2002, resorts affiliated with Club Sunterra totaled 78 resorts, 46 of which are located in the United States, Canada, the Caribbean and Mexico, and 32 in Europe. In addition to the Club Sunterra resorts, we sell Vacation Interests at four Embassy Vacation Resorts. Two of these properties are located in Hawaii, one in Orlando, FL and one in Lake Tahoe, CA. These four Embassy Vacation Resorts are not included in the following table which shows the number of Club Sunterra affiliated resorts we had as of December 31, 2002, by the state and country of their location:

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

In order to focus our business on those operations which offer a significant opportunity for sustainable growth, we determined during 2000 to seek to maximize the operations and financial performance of so-called “core resorts” and identified several “non-core resorts” that did not provide a suitable platform for our branding affiliation, One World One Club and other strategic initiatives. Our efforts in this regard have focused on the closure of select sales centers and the sale of “non-core resorts” and other assets. Most of the asset sales were completed by the end of 2002, and the few remaining non-core properties are expected to be divested during the first half of 2003. Nevertheless, we intend to monitor and measure the operating and financial performance of our core resorts against expectations in order to identify other resorts for possible sale and achieve an optimal resort mix.

ITEM 3.     LEGAL PROCEEDINGS

In the normal course of business, we are subject to various legal claims and actions. In the opinion of management, taking into account the effect of the plan of reorganization, any liability arising from or relating to these claims, or other claims under the plan, should not materially and adversely affect us, with the possible exception of the matters described below.

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

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

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

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

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

No matters were submitted to a vote of our stockholders during the 2002 fiscal year.

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PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER

MATTERS

On July 29, 2002, we emerged from Chapter 11 bankruptcy proceedings. Under our plan of reorganization, outstanding shares of our common stock were canceled, and approximately 18 million shares of new common stock were issued to pre-petition creditors pursuant to the plan. The shares of new common stock are not currently listed on any stock exchange.

As a result of the cancellation of outstanding shares of the common stock at July 29, 2002 and the issuance of new common stock pursuant to our plan of reorganization, a disclosure of the closing prices for the common stock for each quarter during the fiscal years ended December 31, 2002 and 2001 is not meaningful and has not been included in this report.

We anticipate that approximately 1,900 holders of general unsecured claims will receive our common stock upon completion of the distribution process. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reorganization.” On March 24, 2003, there were 11 holders of record of our common stock.

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

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ITEM 6.     SELECTED FINANCIAL DATA

The following table sets forth summarized consolidated financial data of Sunterra for the fiscal years ended December 31, 2002, 2001 and 2000. For purposes of this presentation, the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor), have been compared to the years ended December 31, 2001 and 2000 (Predecessor). You should read the following financial data in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes contained elsewhere in this report.

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The following discussion should be read in conjunction with Item 6, “Selected Financial Data”, and our financial statements and related notes and the other financial data included elsewhere in this report. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth herein under “Business—Risk Factors.” See the Safe Harbor Statement at the beginning of this report. For purposes of discussion of results of operations, the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor), have been compared to the years ended December 31, 2001 and 2000 (Predecessor).

Overview

Our operations consist of:

We recorded net income totaling $307.7 million for the year ended December 31, 2002, including gains on cancellation and settlement of debt totaling $253.9 million and fresh-start adjustments of $112.7 million in conjunction with our emergence from bankruptcy. The results of operations also included $51.9 million in charges relating to the bankruptcy and our restructuring efforts in 2002, including movement of our headquarters to North Las Vegas, Nevada. We incurred significant net losses totaling $71.5 million and $375.7 million for the years ended December 31, 2001 and 2000, respectively. The fiscal year 2001 net loss included significant charges for (i) advertising, sales and marketing expenses of $104.3 million, (ii) general and administrative expenses of $76.1 million and (iii) reorganization expenses of $50.4 million. The fiscal year 2000 net loss included significant charges for (i) advertising, sales and marketing expenses of $150.7 million, (ii) general and administrative expenses of $117.2 million, (iii) other reorganization expenses and restructuring costs of $38.7 million and (iv) loss on impairment of properties, equipment and goodwill and development costs of $122.3 million. The net loss for fiscal year 2000 also includes charges totaling $30.0 million to reflect impairment loss on retained interests in mortgages receivable sold. See the additional discussion below under “Results of Operations.” The results for all three years shown in the accompanying consolidated statements of operations reflect the substantial efforts during our entering into, and emergence from, Chapter 11 bankruptcy (see “Reorganization” below).

Reorganization

As a result of the defaults on our senior unsecured notes and our secured credit facilities, on May 31, 2000 we sought protection under Chapter 11 of the Bankruptcy Code in order to restructure existing debt and maximize existing cash.

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Following a hearing on June 20, 2002, the Bankruptcy Court entered an order on June 21, 2002 confirming our plan of reorganization filed on January 31, 2002, as amended. We subsequently fulfilled the conditions to the effectiveness of the plan of reorganization and on July 29, 2002 emerged from Chapter 11. See Note 2 to the accompanying consolidated financial statements for a summary of certain provisions of the plan.

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

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

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

Fresh-start Reporting and Factors Affecting Comparability of Financial Information

Upon emergence from our Chapter 11 proceedings, we adopted the principles of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code.” For financial reporting purposes, we adopted the provisions of fresh-start reporting effective July 31, 2002. Accordingly, all assets and liabilities were restated to reflect their respective fair values. See Note 3 to the consolidated financial statements included

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elsewhere in this annual report for a discussion of the fresh-start adjustments. References to “Predecessor” refer to Sunterra and its subsidiaries through July 31, 2002. References to “Successor” refer to Sunterra and its subsidiaries on or after August 1, 2002, after giving effect to the implementation of fresh-start reporting. Successor consolidated financial statements are not comparable to Predecessor consolidated financial statements.

Critical Accounting Policies and Significant Estimates

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts and the retained interests in mortgages receivable sold. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following fall within the Securities and Exchange Commission’s definition of “critical accounting policies”:

Revenue Recognition

Vacation Interest sales

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

Our European operations recognize Vacation Interests revenue after the rescission period expires and upon receipt of all purchase consideration, usually subsequent to the closing of a mortgage loan provided to the customer by a third party. Our European operations do not sell Vacation Interests in properties prior to completion of construction and do not record deferred revenue.

Vacation Interest lease revenue

Transactions involving Vacation Interests in certain Caribbean locations are legally structured as long-term lease arrangements for either 99 years or a term expiring in 2050. The Vacation Interests subject to such leases currently revert to us at the end of the lease terms. These transactions are accordingly accounted for as operating leases, with the sales value of the intervals recorded as deferred revenue at the date of execution of the transactions. Revenue deferred under these arrangements is amortized on a straight-line method over the term of the lease agreements. In addition, in our capacity as the homeowners association for these resorts, we collect maintenance fees from the lessees on these properties, which are accrued as earned and included in Vacation Interest lease revenue. The direct marketing costs of the lease contracts are also deferred and amortized over the term of the leases.

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Club Sunterra revenue

Revenue on the upgrade of Vacation Interval ownership to Club Sunterra membership is deferred and amortized over ten years. Club Sunterra membership annual dues are accrued as earned.

Resort rental revenues and management service revenue

We rent unsold Vacation Interests on a short-term basis. This resort rental revenue is accrued as earned. Property management fee revenues are accrued as earned in accordance with the management contracts.

Interest revenue

Mortgages and contracts receivable interest is accrued as earned based on the contractual provisions of the mortgages and contracts. Interest accrual is suspended on mortgages and contracts receivable that are at least 180 days delinquent or are a first payment default.

Other revenue

Included in other revenue is revenue on sales of one-week leases and mini-vacations that allow prospective owners to sample a resort property and which is deferred until the vacation is used by the customer or the expiration date of the mini-vacation passes.

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

Retained Interests in Mortgages Receivable Sold

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

Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses

Mortgages and contracts receivable are recorded at amortized cost, including deferred loan and contract origination costs, less the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for Vacation Interests are capitalized and amortized over the term of the mortgages or contracts receivable as an adjustment to interest income on mortgages and contracts receivable using the effective interest method. We recorded a premium in fresh-start accounting on mortgages and contracts receivable of $10.7 million as of July 31, 2002. This amount will be amortized over the estimated life of the related mortgages and contract receivable portfolio as an adjustment to interest income.

We provide for estimated mortgages receivable cancellations and defaults at the time the Vacation Interest sales are recorded by a charge to operations and a credit to an allowance for loan losses. A similar loss allowance is provided for certain interval transactions structured as long-term operating lease arrangements by a charge to deferred lease revenue, which is included in deferred revenue on the consolidated balance sheets, and a credit to an allowance for loan losses. We perform an analysis of factors such as economic conditions and industry trends, defaults, past due agings and historical write-offs of mortgages and contracts receivable to evaluate the adequacy of the allowance.

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We charge off mortgages and contracts receivable upon default on the first scheduled principal and interest payment (first payment defaults) or 180 days of contractual delinquency. Vacation Interests recovered on defaulted mortgages receivable are recorded in real estate and development costs and as a reduction of loan charge-offs at the lower of historical cost or fair market value of Vacation Interests at the respective property. All collection and foreclosure costs are expensed as incurred.

Real Estate and Development Costs

Real estate and development costs are valued at the lower of cost or fair value. Development costs include both hard and soft construction costs, and together with real estate costs, are allocated to Vacation Interests. Interest, 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 units sold on the relative sales value method. During the fourth quarter 2002, management obtained information necessary to complete its evaluation of the fair value of the real estate and development costs. The recorded cost was adjusted to the estimated fair value as of July 31, 2002, in connection with adoption of fresh-start accounting.

Intangible Assets

Our 2002 financial statements have been presented in conformity with American Institute of Certified Public Accountants’ Statement of Position (SOP) 90-7, “Financial Reporting By Entities In Reorganization Under the Bankruptcy Code,” as amended. In accordance with SOP 90-7, we were required to adopt ‘fresh-start’ accounting, under which all assets and liabilities are restated to reflect their fair value. Intangible assets at December 31, 2002 include reorganization value in excess of identifiable assets totaling $154.0 million. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we will review goodwill, along with other long-lived assets, for impairment periodically. Impairment exists when future undiscounted cash flows are not sufficient to recover the carrying amount of the related asset.

The remainder of the balance in Intangible Assets represents the remaining unamortized cost relating to certain intellectual property. These balances are being amortized monthly and will be fully amortized in mid 2004.

Valuation Allowance on Net Deferred Tax Assets

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

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Results of Operations

The following table sets forth certain operating information for the fiscal years 2002, 2001 and 2000. For purposes of discussion of results of operations, the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor), have been compared to the years ended December 31, 2001 and 2000 (Predecessor):

Comparison of the year ended December 31, 2002 to the year ended December 31, 2001

We achieved total revenues of $281.6 million for the year ended December 31, 2002, compared to $272.4 million for the year ended December 31, 2001, an increase of $9.2 million, or 3.4%. Overall revenues for domestic operations increased $2.1 million, or 1.2% to $183.8 million for the year ended December 31, 2002 compared to $181.7 million for the year ended December 31, 2001, while revenues from foreign operations increased 7.8% to $97.8 million for the year ended December 31, 2002 from $90.7 million for the prior year, due in part to the acquisition of several resorts in 2002.

Vacation Interest sales of $182.5 million for the year ended December 31, 2002 increased by $16.2 million, or 9.7%, compared to sales of $166.3 million for the year ended December 31, 2001. Domestic Vacation Interest sales rose $10.3 million, or 11.2% to $102.6 million, versus $92.3 million in the prior year, and foreign Vacation Interest sales rose from $74 million for the year ended December 31, 2001 to $79.9 million for the year ended December 31, 2002, an increase of 8.0%. The positive change is due to a more stable travel climate in the last two quarters of 2002 versus the prior year following the September 11, 2001 terrorist attacks, our emergence

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from Chapter 11 bankruptcy, and acquisitions by our European operations, partially offset by the sale of several resorts in the United States.

Further impacting Vacation Interest sales during 2001, the Bankruptcy Court issued an order in November 2000 requiring us to provide certain consumers with renewed rescission rights for timeshare transactions entered into but not consummated fully prior to the date we filed for bankruptcy protection. As a result, $31 million in Vacation Interest revenue was converted to pending sales. The reconfirmation acceptance for these transactions was substantially completed in 2001, and Vacation Interest sales of $16.8 million were recognized in 2001 for customers that elected not to rescind.

Vacation Interest lease revenue decreased $0.2 million, or 1.8%, to $10.7 million for the year ended December 31, 2002 from $10.9 million for the year ended December 31, 2001. This decrease is attributable to one-time assessments billed to the owners of certain Caribbean properties in 2001.

Club Sunterra revenue earned of $7.4 million for the year ended December 31, 2002 was $0.6 million higher than revenues earned for the year ended December 31, 2001 of $6.8 million, reflecting increased membership in 2002 from 2001.

Resort rental revenue decreased 2.4% to $12.0 million for the year ended December 31, 2002 from $12.3 million for the year ended December 31, 2001, primarily as a result of the decrease in the number of company-owned Vacation Interests available for rental due to on-going sales of Vacation Interests and the disposition of certain resort properties in 2002 and 2001, and decreased levels of domestic travel in the first two quarters of 2002.

Management services revenues were $19.1 million in 2002, versus $21.0 million the prior year. The 8.7% decrease relates to the discontinuance of management contracts on several resorts in 2002.

Interest revenues, primarily from financing provided to purchasers and lessees of Vacation Interests, remained stable at $30.4 million for the year ended December 31, 2002 compared to $30.5 million for the year ended December 31, 2001.

Other income, which mainly consists of sampler vacation program revenues, travel service revenue, resort amenity income and finance commissions, fell by $5.1 million, or 20.7% to $19.5 million, for the year ended December 31, 2002 from $24.6 million for the year ended December 31, 2001. This decline is due principally to decreases in finance commissions and travel service revenue.

Vacation Interest cost of sales of $37.0 million for the year ended December 31, 2002 increased $2.7 million, or 7.9%, from $34.3 million for the year ended December 31, 2001. As a percentage of Vacation Interest sales for the years ended December 31, 2002 and 2001, Vacation Interest cost of sales was 20.3% and 20.6%, respectively. The $2.7 million increase is consistent with the rise in Vacation Interest sales noted above.

For the year ended December 31, 2002, advertising, sales and marketing costs were $115.2 million or 63.1% of Vacation Interest sales compared to $104.3 million or 62.7% for the year ended December 31, 2001. This represents a $10.9 million or 10.5% increase from 2001. This increase was driven by higher Vacation Interest sales and new marketing programs which offset the closing of certain sales centers and the elimination or revision of sales and the implementation of marketing and incentive programs that were deemed not to be cost effective.

Maintenance fees and subsidy expense decreased 14.8%, or $2.1 million, to $12.0 million for the year ended December 31, 2002 from $14.1 million for the year ended December 31, 2001 and totaled 6.6% of Vacation Interest sales for the year ended December 31, 2002 as compared to 8.5% for the year ended December 31, 2001. The decrease was primarily the result of a decrease in the number of Company-owned Vacation Interests (due to

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ongoing sales and the disposition of certain resort properties in 2001 and 2002) and decreases in developer subsidies and guarantees.

The provision for doubtful accounts and loan losses was $6.1 million for the year ended December 31, 2002 compared to $15.8 million for the year ended December 31, 2001. Of these amounts, $5.0 million and $10.6 million for 2002 and 2001, respectively, related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts receivable at December 31, 2002 and 2001 were $32.4 million and $36.2 million, respectively, representing approximately 16.3% and 17.3%, respectively, of the gross mortgages and contracts receivable outstanding at those dates. The balance of the provision for doubtful accounts of $1.1 million for 2002 and $5.2 million for 2001 represents provisions for estimated uncollectible amounts due from homeowner associations and for other receivables.

Loan portfolio expenses increased 19.3% to $13.2 million for the year ended December 31, 2002 from $11.0 million for the year ended December 31, 2001. The overall increase is attributable to efforts in maximizing collections on delinquent accounts and recovering our Vacation Interests from defaulted loans and contracts, as well as improving loan and contract administration.

General and administrative expenses increased $0.2 million to $76.3 million for the year ended December 31, 2002 from $76.1 million for the year ended December 31, 2001. As a percentage of total revenues, general and administrative expenses improved to 27.1% for 2002 from 27.9% for 2001 and reflect our efforts to contain expenses following our exit from Chapter 11 on July 29, 2002.

Depreciation and amortization expense decreased 27.6%, or $5.1 million, to $13.3 million for the year ended December 31, 2002 from $18.4 million in 2001, primarily as a result of reduction in the basis of fixed assets due to fresh-start adjustments. Additionally, no depreciation was recorded in 2002 for certain property and equipment with a net book value of $14.0 million that were designated as held for sale.

Interest expense for the year ended December 31, 2002, net of capitalized interest of $0.3 million, was $19.0 million, compared to $20.5 million, net of capitalized interest of $0.4 million, for the year ended December 31, 2001. The decrease was primarily attributable to settlement of debt using proceeds from the Merrill Lynch Financing Facility. Contractual interest on these obligations of $23.6 million in 2002 and $40.4 million in 2001 was unaccrued due to our bankruptcy filing.

Reorganization costs for the year ended December 31, 2002 of $325.2 million included $345.4 million in income from adjustments related to the implementation of fresh-start accounting upon our emergence from Chapter 11, primarily attributable to the cancellation of pre-petition liabilities. Excluding the effect of these adjustments, reorganization costs were $20.2 million, representing a decrease of $30.2 million or 60.0% compared to $50.4 million for the year ended December 31, 2001. The decrease is primarily due to a $21.2 million gain on debt restructuring recorded in 2002 and decreases in professional fees and other reorganization costs.

We incurred restructuring costs of $6.1 million for the year ended December 31, 2002 related to the implementation of our new strategic plan, which included streamlining of our legal structure and relocation of our headquarters to North Las Vegas, Nevada and expenditures related to ATLAS, the software which we use for many of our operating activities. No restructuring costs were recorded in fiscal year 2001.

We recorded provisions for income taxes of $6.0 million and $2.7 million for 2002 and 2001, respectively, primarily related to our European operations. The income tax benefits arising from the substantial operating losses for these years have been offset by a valuation allowance taken against the resulting deferred tax assets, the future realization of which is currently considered less than likely.

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Comparison of the year ended December 31, 2001 to the year ended December 31, 2000

We achieved total revenues of $272.4 million for the year ended December 31, 2001, compared to $288.1 million for the year ended December 31, 2000, a decrease of 5.4%. Overall revenues for domestic operations fell 9.9% to $181.7 million for the year ended December 31, 2001 compared to $201.7 million for the year ended December 31, 2000, while revenues from foreign operations increased 5.0% to $90.7 million for the year ended December 31, 2001.

Vacation Interest sales of $166.3 million for the year ended December 31, 2001 decreased by $20.9 million, or 11.2%, compared to sales of $187.2 million for the year ended December 31, 2000. The decrease is attributable to domestic operations, which saw Vacation Interest revenues decline by $22.5 million due to the uncertainty surrounding our status as a debtor-in-possession, the impact of the terrorists’ attacks on the travel and leisure industry following September 11, 2001, implementation of revised credit and underwriting policies during 2001 (resulting in lower sales to potential higher-risk customers), less spending on sales and marketing activities, the closing of sales centers at off-site locations and certain resort locations and discontinued sales efforts for properties designated for disposal. Vacation Interest sales from foreign operations increased by $1.6 million in 2001.

Further impacting Vacation Interest sales during 2000, the Bankruptcy Court issued an order (in November 2000) to provide certain consumers with renewed rescission rights for timeshare transactions entered into but not consummated fully prior to the Petition Date. As a result, $31.0 million in revenue was converted to pending sales. The reconfirmation acceptance for these transactions was substantially completed in 2001 and Vacation Interest sales of $16.8 million were recognized in 2001 for customers that elected not to rescind.

Vacation Interest lease revenue increased $4.4 million, or 67.3%, to $10.9 million for the year ended December 31, 2001 from $6.5 million for the year ended December 31, 2000. The increase is primarily attributable to additional assessments charged to owners of certain Caribbean properties in 2001.

Club Sunterra revenue earned of $6.8 million for the year ended December 31, 2001 was $0.2 million lower than membership fees earned for the year ended December 31, 2000 of $7.0 million, despite a 12% increase in club membership. Certain sales incentives that directly contributed to membership fee revenue were discontinued in 2000.

Resort rental revenue decreased 8.7% to $12.3 million for the year ended December 31, 2001 from $13.5 million for the year ended December 31, 2000, primarily as a result of the decrease in the number of Company-owned Vacation Interests available for rental due to on-going sales of Vacation Interests and the disposition of certain resort properties in 2000 and 2001.

Interest revenue, primarily from financing provided to purchasers and lessees of Vacation Interests, increased 15.1% to $30.5 million for the year ended December 31, 2001 from $26.5 million for the year ended December 31, 2000. The increase largely resulted from an accretion in residual interests retained for mortgages receivable sold.

Other revenue, which mainly consists of sampler vacation program revenues, travel service revenue, resort amenity income and finance commissions, fell by 10.1% to $24.6 million for the year ended December 31, 2001 from $27.4 million for the year ended December 31, 2000. This decrease is primarily due to the recognition of revenue resulting from the expiration of pre-sold sampler programs in 2000.

Vacation Interest cost of sales of $34.3 million for the year ended December 31, 2001 decreased $51.0 million, or 59.8%, from $85.3 million for the year ended December 31, 2000. As a percentage of Vacation Interest sales for the years ended December 31, 2001 and 2000, Vacation Interest cost of sales was 20.6% and 45.6%, respectively. This decrease is primarily attributable to a $39.6 million impairment write-down of real

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estate and development costs recorded in 2000. No such write-downs were recorded in 2001. Excluding the impairment write-down, Vacation Interest cost of sales was 20.6% and 24.5% of Vacation Interest sales for the years ended December 31, 2001 and 2000, respectively. The remaining decrease of $11.4 million relates to the decline in Vacation Interest sales from 2000 to 2001 and a product mix that reflects the disposition of certain non-core properties.

Maintenance fees and subsidy expense decreased 15.6%, or $2.6 million, to $14.1 million for the year ended December 31, 2001 from $16.7 million for the year ended December 31, 2000 and totaled 8.5% of Vacation Interest sales for the year ended December 31, 2001 as compared to 8.9% for the year ended December 31, 2000. The decrease was primarily the result of a decrease in the number of Company-owned Vacation Interests (due to ongoing sales and the disposition of certain resort properties in 2000 and 2001) and decreases in developer subsidies and guarantees.

The provision for doubtful accounts and loan losses was $15.8 million for the year ended December 31, 2001 compared to $34.0 million for the year ended December 31, 2000. Of these amounts, $10.6 million and $24.5 million for 2001 and 2000, respectively, related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts receivable at December 31, 2001 and 2000 were $36.2 million and $37.3 million, respectively, representing approximately 17.3% and 16.5%, respectively, of the total portfolio outstanding at those dates. The balance of the provision for doubtful accounts of $5.2 million for 2001 and $9.5 million for 2000 represents estimated uncollectible amounts due from homeowner associations and other receivables.

For the year ended December 31, 2001, advertising, sales and marketing costs were $104.3 million or 62.7% of Vacation Interest sales compared to $150.7 million or 80.5% for the year ended December 31, 2000. This represents a $46.4 million or 30.8% decrease from 2000, with domestic operations accounting for $47.1 million of the change. This decrease was primarily a result of the decrease in Vacation Interest sales, the closing of certain sales centers and the elimination or revision of sales and marketing and incentive programs that were deemed not to be cost effective.

General and administrative expenses decreased $41.1 million or 35.1% to $76.1 million for the year ended December 31, 2001 from $117.2 million for the year ended December 31, 2000. Included in the change was a $16.0 million reduction in administrative payroll. As a percentage of total revenues, general and administrative expenses improved to 27.9% for 2001 from 40.7% for 2000 and reflect our efforts to increase efficiencies as we moved toward exiting Chapter 11. The closing of sales centers and other facilities and disposal of certain resort locations also contributed directly to the improvement over 2000.

Loan portfolio expenses increased 31.3% to $11.0 million for the year ended December 31, 2001 from $8.4 million for the year ended December 31, 2000, including a $1.5 million increase in salaries. The overall increase is attributable to efforts in maximizing collections on delinquent accounts and recovering our Vacation Interests from defaulted loans and contracts, as well as improving loan and contract administration.

Depreciation and amortization expense decreased 33.0%, or $9.1 million, to $18.4 million for the year ended December 31, 2001 from $27.5 million in 2000, primarily as a result of impairment write-downs of property and equipment and goodwill of $37.4 million and $44.6 million, respectively, that were recorded in 2000. Additionally, no depreciation was recorded in 2001 for certain property and equipment with a net book value of $13.6 million that were designated as held for sale in the fourth quarter of 2000.

Interest expense for the year ended December 31, 2001, net of capitalized interest of $0.4 million, was $20.5 million, compared to $42.8 million, net of capitalized interest of $1.8 million, for the year ended December 31, 2000. The decrease was primarily attributable to cessation of interest accruals of unsecured subordinated debt obligations after our bankruptcy filing. Contractual interest on these obligations of $40.4 million in 2001 and $23.5 million in 2000 was unaccrued due to our bankruptcy filing.

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Reorganization expenses decreased 35.4%, or $27.6 million, to $50.4 million for the year ended December 31, 2001 from $78.0 million for the year ended December 31, 2000. The decrease was primarily the result of write-downs totaling $45.3 million and $16.4 million related to asset impairments and debt issuance costs, respectively, recorded in year 2000. The decrease was partially offset by an increase in professional fees charged to reorganization expense, which totaled $47.8 million for the year ended December 31, 2001 compared to $14.7 million for the year ended December 31, 2000.

We incurred restructuring costs of $6.0 million for the year ended December 31, 2000 primarily related to severance and termination benefits for 55 employees, as well as lease termination and other sales center closure costs incurred prior to bankruptcy. No restructuring costs were recorded in fiscal year 2001.

Impairment losses on retained interests in mortgages receivable sold totaling $30.0 million for the year ended December 31, 2000 was primarily the result of a contractual change, as a direct result of our bankruptcy filing, which affords the purchaser a higher priority in the distribution of principal and interest payments collected and an increase in the interest rate paid on borrowings under certain off-balance sheet facilities. Additionally, we reduced our estimates of future cash collection on loans sold based on historical performance.

Other non-operating income (expenses) for the year ended December 31, 2000 is comprised of a one-time charge to write off uncollectible mortgages that were replaced through the conduit financing facility. The replacement of these mortgages ceased upon the bankruptcy filing.

In 2000 we recorded a one-time charge of $18.8 million for the cumulative effect of a change in the method of accounting for homeowners’ fees and property taxes during the developer guarantee and subsidy periods. Prior to 2000, we had capitalized such costs during these periods as part of real estate and development costs. After an evaluation of this policy, it was determined that a preferable method, in accordance with industry conventions, is to charge these costs to expense as incurred at the time a project is substantially complete and available for occupancy.

We recorded provisions for income taxes of $2.7 million and $0.5 million for 2001 and 2000, respectively, primarily related to our European operations. The income tax benefits arising from the substantial operating losses for these years have been offset by a valuation allowance taken against the resulting deferred tax assets, the future realization of which is currently considered less than likely.

Liquidity and Capital Resources

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

During the year ended December 31, 2002, net cash provided by operating activities was $10.1 million and was primarily the result of net income of $307.7 million plus non-cash expenses totaling $25.4 million offset by the non-cash gain on settlement and cancellation of debt of $267.3 million, non-cash fresh-start adjustments of $112.7 million and other non-cash gains of $9.1 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities, including a reduction of $50.6 million in cash in escrow and restricted cash due to implementation of our reorganization plan, a reduction in real estate and development costs of $19.1 million and a decrease in deferred revenue of $12.3 million, an increase in taxes payable of $4.5 million and an increase in receivables totaling $4.6 million, offset by an increase in prepaid and other assets of $7.0 million and decreases in operating liabilities of $14.5 million and liabilities subject to compromise of $2.0 million.

During the year ended December 31, 2002, net cash used in investing activities was $17.5 million, with proceeds from sale of assets of $7.3 million offset by capital expenditures of $20.4 million and an increase in intangibles of $5.7 million due to goodwill recorded on an acquisition by our European subsidiary. The goodwill was subsequently eliminated as a portion of the non-cash fresh-start adjustments.

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During the year ended December 31, 2002, net cash used in financing activities was $2.2 million. Payments on notes payable and related accrued interest totaled $340.8 million, including payments of $170.2 million to payoff the debtor-in-possession financing facility upon emergence from bankruptcy. These payments were funded primarily through borrowings on our debtor-in-possession financing facility and Merrill Lynch Financing Facility totaling $342.0 million.

We currently anticipate spending $36.5 million for real estate and development costs at existing resort locations during 2003. We plan to fund these expenditures with cash generated from operations and borrowings under the Merrill Lynch Financing Facility and the anticipated securitization transaction. We believe that, with respect to our current operations, cash generated from operations and future borrowings will be sufficient to meet our working capital and capital expenditure needs through the end of 2003. If these are not sufficient, we have the ability to adjust our spending on real estate and development costs.

The allowance for mortgage loan losses at December 31, 2002 was $32.4 million, or 16.3% of the gross mortgages and contracts receivable outstanding at that date. Management believes the allowance is adequate. However, if the amounts of the mortgages and contracts receivable that are ultimately written off materially exceed the related allowances, our business, results of operations and financial condition could be adversely affected.

Our plan for meeting our liquidity needs may be affected by our ability to continue to access the Merrill Lynch Financing Facility, demand for our product, an increase in prepayment speeds and default rates on our mortgages and contracts receivable, the threat and/or effects on the travel and leisure industry of future terrorists’ attacks and the war on terrorism, and other factors, including those discussed under “Business—Risk Factors.”

Completed units at various resort properties are acquired or developed in advance, and we finance a significant portion of the purchase price of Vacation Intervals. Thus, we continually need funds to acquire and develop property, to carry mortgages and contracts receivable and to provide working capital. In the past, our principal method of funding our cash requirements was borrowing against or selling the mortgages and contracts receivable originating from the sale of Vacation Interests. Historically, we were able to securitize our mortgages and contracts receivable at terms favorable to us and anticipate that in the future we will be able to resume doing so. If we are unable to borrow against or to 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 or if the market for our mortgages and contracts receivable declines, our ability to acquire additional resort units will be adversely affected and our profitability from sales of Vacation Interests may be reduced or eliminated.

Recent economic forecasts suggest continued higher level of prepayment versus that evidenced historically. To the extent that mortgages receivable pay off prior to their contractual maturity at a rate more rapid than we have estimated, the fair value of our residual interests will be impacted.

At December 31, 2002, our U.S. Operations had approximately 18,500 Vacation Intervals available for sale or lease and our European and Sunterra Pacific operations had approximately 622,500 points available, which is approximately equivalent to 12,500 Vacation Intervals. With the completion of current projects in progress, the acquisition of new resorts and the expansion of existing resorts, we believe we will have an adequate supply of Vacation Intervals available to meet our planned growth through the year 2005.

Corporate Finance

Overview

During 2002, we financed approximately 62% of domestic Vacation Interest revenues. Accordingly, we do not generate sufficient cash from sales to provide the necessary capital to pay the costs of developing or acquiring additional resorts and to replenish working capital. In the past, we have financed our business principally from the sale of mortgages and contracts receivable and loans under various financing agreements.

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Mortgages and contracts receivable were sold to our conduit facility and through securitization transactions. See further discussion of the conduit facility and securitization transactions below.

Off-balance sheet financing arrangements

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

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

Conduit Facility

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

Securitization Transactions

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

Finova Transaction

In January 2002, pursuant to order of the Bankruptcy Court, we entered into a Payoff Agreement and Mutual Release with Finova Capital Corporation (the “Finova Agreement”). The Finova agreement provided for the payment by us and certain of our affiliates of various loans from and financing facilities with Finova or its affiliates and the return by Finova of collateral securing the Finova loans. Pursuant to the Finova agreement, on January 28, 2002, we paid Finova, in cash and by application of other funds, $100 million (determined after giving effect to a prior release to Finova of $5 million held by Finova as cash collateral). The payment to Finova, net of fees paid to our lender who brokered and financed the payoff, represented a discount of approximately $13.6 million from the principal amount of the Finova loans, and we recorded that amount in 2002 as an

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extraordinary gain on settlement of debts. Pursuant to the Finova agreement, we released each other from liabilities and obligations relating to the Finova loans and certain other matters including those that were the subject of pending litigation between the parties.

Debt Settlement

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

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

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

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

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

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

Derivatives

In the past, we have utilized derivative financial instruments from time to time, which included interest rate cap agreements, to manage well-defined interest rate exposure. It is our policy that derivative financial instruments are not used for trading or speculative purposes. Counterparties to our derivative financial instruments are generally major financial institutions. At December 31, 2002 and 2001, no agreements were in effect.

New Accounting Pronouncements

New accounting pronouncements are discussed in Note 6 to the consolidated financial statements included in this report.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Credit Risk

We are exposed to on-balance sheet credit risk related to our mortgages and contracts receivable. We offer financing to the buyers and lessees of Vacation Intervals at our resorts. We bear the risk of defaults on

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promissory notes delivered to us by buyers of Vacation Intervals. If a buyer of a Vacation Interval defaults, we generally must foreclose on the Vacation Interval 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 Interval. Although in many cases we may have recourse against a Vacation Interval buyer for the unpaid price, certain states have laws that limit our ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, we have generally not pursued this remedy. If a lessee of a Vacation Interval defaults, the lessee forfeits its contract rights previously held to use the Vacation Interval, and we are able to re-lease the Vacation Interval without further recovery efforts.

Availability of Funding Sources

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

Geographic Concentration

Our owned and serviced loan portfolio borrowers are geographically diversified within the United States and internationally. At December 31, 2002, borrowers residing in the United States accounted for approximately 90.4% of our loan portfolio. With the exception of Arizona and California, which represented 14.3% and 13.8%, respectively, no state or foreign country concentration accounted for more than approximately 5.1% of the serviced portfolios. The credit risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial well being of the borrowers.

Foreign Currency Risk

Our total revenues denominated in a currency other than U.S. dollars for 2002, primarily revenues derived from the United Kingdom, were approximately 35% of total revenues. Our net assets maintained in a functional currency other than U.S. dollars at December 31, 2002, which were primarily assets located in Western Europe, were approximately 13% of total net assets. The effect of changes in foreign currency exchange rates has not historically been significant to our operations or net assets.

Interest Rate Risks

As of December 31, 2002, we had floating interest rate debt of approximately $240 million, comprised of amounts outstanding under the Merrill Lynch Financing Facility. The floating interest rate on the Merrill Lynch Financing Facility is based upon the prevailing LIBOR rate and interest rate changes can impact earnings and operating cash flows. A change in interest rates of one percent on the balance outstanding at December 31, 2002 would cause a change in total annual interest costs of $2.4 million.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the registrant are listed in the index contained in Item 15 herein and are included in this report beginning on page F-1.

None.

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PART III

ITEMS 10-13.

The information required by these items will be set forth in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2003 annual meeting of stockholders which is incorporated by reference herein.

ITEM 14.    CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation was carried out by our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with its reorganization under Chapter 11 of the Bankruptcy Code, management became aware of certain conditions that impacted its control environment. Such matters included: inconsistent and improper application of accounting policies, weak supervision and review of accounting staff, weakness of certain key accounting staff, certain unreconciled account balances, poor and in some cases, lack of communication between accounting and operational personnel, weaknesses arising from decentralized accounting systems, reclassification and reallocation of certain journal entries and incomplete document retention.

Our management has, during the period of its evaluation, considered the matters referred to above as part of its general evaluation of our internal accounting controls in particular and our disclosure controls and procedures generally. We have implemented a number of changes as described below:

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We continue to evaluate the effectiveness of these actions as well as our overall disclosure controls and procedures. Where changes are underway, but not yet fully implemented, we have attempted to impose mitigating and redundant controls to ensure that an effective control environment is maintained.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index to Financial Statements

We have provided the following consolidated financial statements immediately following the Index to Financial Statements on Page F-1 of this report:

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

(b) Reports on Form 8-K

We filed the following Current Reports on Form 8-K with the SEC during the quarter ended December 31, 2002:

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(c) Exhibits

The exhibits required by Item 601 of Regulation S-K are listed below.

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

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SIGNATURES

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

SUNTERRA CORPORATION

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

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CERTIFICATIONS

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

/s/    NICHOLAS J. BENSON            

Dated: April 14, 2003

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

/s/    STEVEN E. WEST            

Dated: April 14, 2003

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INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Sunterra Corporation:

We have audited the accompanying consolidated balance sheet of Sunterra Corporation and subsidiaries (the Company) as of December 31, 2002 and the related consolidated statements of operations, stockholders’ equity (deficiency) and comprehensive loss, and cash flows for the five-month period then ended and the seven-month period ended July 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002, and the results of its operations and its cash flows for the five-month period then ended and the seven-month period ended July 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 3 to the consolidated financial statements, the consolidated financial statements reflect the application of fresh-start reporting as of July 31, 2002 and, therefore, consolidated financial statements for periods after July 31, 2002 are not comparable in all respects to consolidated financial statements for periods prior to such date.

/s/    GRANT THORNTON LLP

Los Angeles, California

March 28, 2003

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Sunterra Corporation:

We have audited the accompanying predecessor consolidated balance sheet of Sunterra Corporation and subsidiaries (the Company) as of December 31, 2001, and the related predecessor consolidated statements of operations, stockholders’ equity (deficiency) and comprehensive loss, and cash flows for the years ended December 31, 2001 and 2000. These predecessor consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these predecessor consolidated financial statements based on our audits.

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

In our opinion, such predecessor consolidated financial statements present fairly, in all material respects, the predecessor financial position of the Company as of December 31, 2001, and the results of the predecessor’s operations and the predecessor’s cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2, the Company filed for reorganization under Chapter 11 of the United States Bankruptcy Code on May 31, 2000. The accompanying predecessor consolidated balance sheet as of December 31, 2001 and the related predecessor consolidated statements of operations, stockholders’ equity (deficiency) and comprehensive income (loss), and cash flows for the years ended December 31, 2001 and 2000 do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such predecessor consolidated financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying predecessor consolidated balance sheet as of December 31, 2001 and the related predecessor consolidated statements of operations, stockholders’ equity (deficiency) and comprehensive income (loss), and cash flows for the years ended December 31, 2001 and 2000 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company’s consolidated stockholders’ deficiency of $336 million as of December 31, 2001 and its status as a debtor-in-possession operating under Chapter 11 Bankruptcy Court protection as of that date, the lack of approval of the proposed Plan of Reorganization, and the Company’s lack of binding commitments for an exit financing facility and a post emergence working capital financing facility raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1. The predecessor consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.

As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for developer paid owners’ association fees and property taxes during the developer guarantee and subsidy periods of real estate project developments in 2000.

/s/    DELOITTE & TOUCHE LLP

Orlando, Florida

May 15, 2002

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SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

and Years Ended December 31, 2001 and 2000

(In thousands, except per share amounts)