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As filed with the Securities and Exchange Commission on March 15, 2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

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

(Address of principal executive offices)

(702) 804-8600

Registrant’s telephone number, including area code

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 Rule 12b-2 of the Act) YES ¨ NO x

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003 was $65.7 million, based upon the reported last sale prices of such equity on that date.

Number of shares of the registrant’s common stock outstanding at March 15, 2004: 18,494,890

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this report (Items 10, 11, 12, 13 and 14) is incorporated by reference from the registrant’s proxy statement to be filed pursuant to Regulation 14A with respect to the registrant’s 2004 annual meeting of stockholders.             

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SUNTERRA CORPORATION

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2003

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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, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including in particular statements about our plans, objectives, expectations and prospects under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can identify these statements by forward-looking words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and similar expressions. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements are contained herein under “Business-Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report 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.

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

PART I

Unless the context otherwise requires, throughout this report the words “Sunterra,” “we,” “us,” and “our” refer to Sunterra Corporation, a Maryland corporation, and its subsidiaries. “Sunterra^®,” “Club Sunterra^®,” “SunOptions^®,” “Sunterra Escapes^®,” “Grand Vacation Club^™,” “One World, One Club^™,” and “Own Your World^®” are trademarks of Sunterra.

History of Sunterra

We were incorporated in May 1996 as KGK Resorts, Inc., and in June 1996 changed our corporate name to Signature Resorts, Inc. At the time of our August 1996 initial public offering, we owned nine vacation ownership resorts in Hawaii, Florida, South Carolina, Missouri, California and in the Caribbean, and generated $75 million in annual vacation ownership sales. In the following three years, the Company grew rapidly through a series of acquisitions, reaching eighty-nine resorts around the globe and generating $423 million of vacation ownership sales in fiscal 1999. We became known as Sunterra Corporation in the second quarter of 1998.

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

Financial Information About Industry and Geographic Segments

All of our operations are contained within and are in support of a single industry segment—the vacation ownership industry. Geographic segment information is presented in Note 21 to our consolidated financial statements included in this report.

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Description of Our Business

Sunterra has grown to become one of the world’s largest vacation ownership companies, as measured by the number of individual resort locations and owner families. At December 31, 2003 we had approximately 340,000 owner families vacationing at 91 resorts in 12 countries located in North America, Europe and the Caribbean.

Our operations consist of:

Marketing of Vacation Interests

We market and sell or lease 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, websites and vacation package wholesalers. We believe that our room rental operations, in addition to providing us with supplemental revenue, provide us with a good source of potential customers for the purchase of Vacation Interests.

Receivables Financing

Predominantly in North America and the Caribbean, we provide consumer financing to consumers exclusively for the purchase and lease of Vacation Interests. We benefit by retaining the positive cash flow spread that results from the difference between our borrowing rate on mortgage receivables, which averaged approximately 4.1% at December 31, 2003 and the rate charged to our owner families, which averaged 14.6% per annum as of the same date. This financing generally is made available to consumers who make a down payment within established credit guidelines and bears interest at fixed rates that are collateralized by the underlying Vacation Interest. Our European subsidiary generally originates the mortgages receivable for a third party financial institution and receives a commission based upon the principal amount of eligible consumer loans on a non-recourse basis. At December 31, 2003, our European subsidiary had approximately $7.4 million in gross mortgages receivable (on balance sheet).

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During fiscal year 2003, we provided mortgage financing for approximately 58% of domestic Vacation Interests revenue. As of December 31, 2003, our on-balance sheet mortgages and contracts receivable portfolio included approximately 30,600 active loans and contracts with gross amounts outstanding totaling approximately $201.0 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 4.7% as a percentage of gross mortgages and contracts receivable. Our allowance for loan and contract losses was 14.6% as a percentage of gross mortgages and contracts receivable at December 31, 2003.

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 senior 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, 2003, we serviced approximately 25,000 loans with an outstanding balance of approximately $193.4 million relating to the conduit, securitizations, joint venture properties and other facilities not included on our balance sheet. We anticipate resuming securitizations during 2004.

Management Services

We provide resort rental, management, maintenance and collection services for which we receive fees paid by the resorts’ homeowners associations. Under such arrangements, we typically have primary responsibility for all activities necessary for the day-to-day operations of the managed resort properties, including administrative services, procurement of inventory and supplies and promotion and marketing. Such management agreements typically provide that we are paid a monthly management fee equal to a percentage of monthly maintenance fees and a reservation and accounting fee at certain resorts. The management agreements are usually for a three-year period and are automatically renewed 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.

We have contracts with homeowners associations at forty-eight of our resorts and contracts to manage five non-Sunterra resorts. In addition, we serve in the capacity of acting as the homeowners’ association at two resorts located in St. Maarten, Netherlands Antilles, as well as provide resort rental, management, maintenance and collection services to these resorts.

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

The Vacation Ownership Industry

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

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

According to Resort Timesharing in the United States, a study of timeshare developers and owners by Ragatz Associates, the U.S. vacation ownership industry reached sales levels of $5.5 billion in 2002. The U.S. vacation ownership community was comprised of approximately 1,600 resorts and 132,000 timeshare units at the start of 2003, and an estimated 3.0 million households owned 4.9 million timeshare weeks or their equivalent. Ragatz Associates also prepared a study on the global vacation ownership industry, Resort Timesharing Worldwide, that reflected global sales of $9.4 billion in 2002 and just over 5,400 vacation ownership resorts in over 100 countries around the globe. The global study noted 6.7 million households owned almost 11 million timeshare weeks. According to the Ragatz study the market penetration rate of households with incomes of $100,000 or more was 7.3%.

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

Vacation Points Ownership

In general, under a points-based vacation ownership system, owners, who are more commonly referred to as “members,” purchase points which act as an annual currency exchangeable for occupancy rights at participating resorts. We currently operate three separate points-based vacation ownership systems: our United States “Club Sunterra” program, with approximately 47,000 members and 32 resort locations in the United States and the Caribbean; Club Sunterra Vacations II (formerly known as Epic Vacation Club), with approximately 21,600 members and five resort locations in the United States, and Club Sunterra Europe (formerly known as Grand Vacation Club), with approximately 45,000 members and thirty-one resort locations in the United Kingdom, Portugal, Spain, the Canary Islands, Germany, France, Austria and Italy. Historically, we operated Sunterra Pacific’s “VTS” program, with approximately 31,400 members and twenty-three resort locations in the United States, Canada and Mexico, including three that are also included in Club Sunterra. Our agreement with the VTS Owners Association ended on December 31, 2003.

Our Club Sunterra internal exchange system has operated as an exchange program allowing our current members that have a home resort and a deeded, fee-simple interest in a particular unit or units at that home resort with an ability to exchange use-nights with any other resort within the Club Sunterra system. Club Sunterra members assign their occupancy rights to their deeded Vacation Interval to Club Sunterra and then spend their

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points to acquire occupancy rights to a Vacation Interval that is available through the Club. Members in our new, multi-site clubs that are presently being implemented in North America, will not hold deeded fee simple interests, but rather will own beneficial interests in a trust, which holds legal title to the deeded fee simple interests. Club Sunterra Europe (formerly known as the Grand Vacation Club program) members also do not hold deeded fee simple interests, but rather have membership in a limited liability company, Grand Vacation Club Limited, plus a right to use the accommodations that are part of the club. Club Sunterra Vacations II is also a right-to-use club, so its members similarly do not hold deeded interests. All members, irrespective of ownership of Vacation Points or Vacation Intervals, will be permitted to exchange through Club Sunterra.

The advantages of a points-based vacation ownership system relate to the flexibility given to members with respect to the use of their Vacation Points versus the use of a traditional Vacation Interval. In traditional Vacation Interval ownership, owners can either use their Vacation Interval for a one-week stay in a specific unit size at a specific resort or can attempt to exchange their weeks through an external exchange organization, such as Interval International, Inc., 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, during 2002 Sunterra entered into an exclusive external exchange affiliation agreement with II. This agreement replaced Sunterra’s previous agreements with RCI to provide exchange services for its Sunterra owners.

A significant component of our business plan is our “One World One Club” initiative to offer a single headline product to the consumers throughout the world. This project is intended to result in the integration of our various regional points-based vacation products into a single global membership program. Key aspects of this One World One Club^™ initiative are already in progress through a carefully planned phased implementation of our new multi-site clubs. Sales for the first of our new multi-site clubs began in Williamsburg, Virginia on March 1, 2004. When completed, management believes that the full One World One Club initiative will provide the membership with significant flexibility and enhance its attractiveness to the consumer, and will also result in numerous operational efficiencies being gained by the business.

Vacation Interval Ownership

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

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.

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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 $800 per Vacation Interval per year, consist of an annual maintenance fee plus applicable real estate taxes, funding of replacement reserves and, when needed, special assessments. If the owner does not pay such charges, the owner’s use rights may be suspended and the homeowners association may foreclose on the owner’s Vacation Interval, subject to the rights of the mortgagee.

Seasonality

Historically, our third quarter has produced the strongest operating results because this period coincides with the typical summer seasonality of the vacation ownership industry and the greater number of families vacationing. Our first fiscal quarter has historically produced the weakest operating results primarily due to the effects of reduced leisure travel.

Competition

All of our vacation ownership and vacation ownership related products face competition for prospects, sales leads and personnel from established, highly visible operators, as well as a fragmented array of smaller operators and owners. In developing, marketing and selling Vacation Interests, we compete against the vacation ownership divisions of several established and respected hospitality companies. These include Marriott (which operates Marriott Vacation Club, the Ritz-Carlton Club, Horizons by Marriott and Marriott Grand Residence Club), Cendant (which operates Fairfield Resorts, Equivest Finance Inc, and Trendwest Resorts), Hilton (Hilton Grand Vacations), Starwood (Starwood Vacation Ownership), and Disney (Disney Vacation Club). In addition, in certain markets we also compete with many established companies focused primarily on vacation ownership, and it is possible that other potential competitors may develop properties near our current resorts and compete with us in the future. The majority of the remaining worldwide vacation ownership resorts are owned and operated by smaller, regional companies. We believe that the vacation ownership industry will continue to consolidate in the future.

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

Our resort rental management and maintenance services face competition from established real estate entities, as well as similar operations in the companies noted above.

Insurance

We generally carry commercial general liability insurance and, with respect to resort locations that we manage and for corporate offices, a manuscript all-risk property insurance policy with fire, flood, windstorm and earthquake coverage 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.

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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^®,” “Own Your World^®,” “SunOptions^®,” and “Sunterra Escapes^®” registered trademarks, and “Grand Vacation Club^™,” and “One World, One Club^™” which, in the aggregate, are of material importance to our business. We are licensed to use technology and other intellectual property rights owned and controlled by others, and we license other companies to use technology and other intellectual property rights owned and controlled by us.

Governmental Regulation

Our marketing and sales of Vacation Interests are subject to extensive and ever-changing regulations by the federal and state governments and foreign jurisdictions in which our resort properties are located and in which Vacation Interests are marketed and sold. At the U.S. federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which generally prohibits unfair or deceptive acts or competition in interstate commerce. Other significant U.S. federal legislation to which we are or may be subject to 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 are prohibited from calling anyone on that registry. Telemarketers must pay a fee to access the registry, and are required to do so on a quarterly basis. Enforcement of the federal do-not-call provisions began in the fall of 2003, and the rule provides for fines of up to $11,000 per violation.

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

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,

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imposition of fines or an award of damages to private litigants. Because some accessibility laws impose ongoing obligations, we are likely to incur additional costs to improve the accessibility of our resorts based upon Sunterra’s percentage ownership. These costs, however, are not expected to have a material adverse effect on our business, results of operations or financial condition. Any new legislation may impose further burdens or restrictions on property owners with respect to access by disabled persons. If a homeowners association at a resort were required to make significant improvements as a result of non-compliance with these accessibility laws, special assessments might be needed to fund such improvements, which additional costs might cause Vacation Interests owners to default on their mortgages or cease making required homeowners association assessment payments. In addition, the homeowners association under these circumstances may pursue the resort developer to recover the cost of any corrective measures. We are not aware of any non-compliance with accessibility laws that management believes would have a material adverse effect on our business, results of operations or financial condition.

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

The marketing and sales of club Sunterra Europe’s 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 that regulate our activities in those countries.

Environmental Matters

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

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In connection with the acquisition and development of Embassy Vacation Resort Lake Tahoe and Sunterra Resorts San Luis Bay Inn, several areas of environmental concern have been identified. The areas of concern at Lake Tahoe relate to possible soil and groundwater contamination that has migrated onto the resort site from an underground petroleum storage tank on an adjacent upgradient property. We have been indemnified by the former owner of the upgradient property for certain costs and expenses in connection with the off-site contamination. California regulatory authorities are monitoring the off-site contamination and the parties have taken action to comply with the remedial action plan put in place by the Lahontan Regional Water Quality Control Board. Residual contamination exists on the resort site as a result of leaking underground storage tanks that were removed prior to our acquisition of the resort site. An in-situ groundwater remediation system was installed to enhance remediation effectiveness. This groundwater remediation system consists of three pumping wells and a carbon filtration system. The groundwater is pumped from the aquifer under the property, treated by the carbon filtration system, and pumped back into the aquifer. This remediation system will operate for approximately two years. We do not believe that we will be held liable for this contamination and do not anticipate incurring material costs in connection with this site. There can be no assurance, however, that the party responsible for the clean up of this contamination will meet its obligations in a complete and timely manner.

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

Employees

As of December 31, 2003, we had approximately 4,700 full and part-time employees. None of our employees are represented by a labor union except for 19 employees in Europe. We are not aware of any union organizational efforts with respect to our employees.

Risk Factors

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

We are subject to intense industry competition

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

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Unfavorable general economic and industry conditions may affect our business and could decrease the demand for vacation ownership units, impair our ability to collect our mortgages 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 for our customers and may materially adversely affect our business. Furthermore, changes in general economic conditions may adversely affect our ability to collect our loans to Vacation Interest buyers. Because our operations are conducted solely within the vacation ownership industry, any adverse changes affecting the industry, such as an oversupply of vacation ownership units, a reduction in demand for such units, changes in travel and vacation patterns, changes in governmental regulation of the industry, increases in construction costs or taxes and negative publicity for the industry, could have a material adverse effect on our business.

We will continue to be subject to extensive government regulation which may result in additional costs

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

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 are prohibited from calling anyone on that registry. We are required to pay a fee to access the registry on a quarterly basis as required by the rules. Enforcement of the federal do-not-call provisions began in the fall of 2003, and the rule provides for fines of up to $11,000 per violation. This legislation may restrict our ability to market effectively our services to new customers. Furthermore, compliance with the new legislation may prove difficult and we may incur penalties under this legislation for conducting our marketing activities.

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

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We emerged from Chapter 11 bankruptcy proceedings in July 2002

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.”

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 2 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 in all respects 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 reorganization will continue to 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, could worsen 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.

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

Our ability to execute our business plan must be considered in light of the inherent risks, expenses and difficulties typically encountered by companies 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 system, and the potential development of comparable vacation ownership products by competitors.

We may not be able to effectively integrate points-based vacation ownership programs into a true “One World One Club” under our Club Sunterra exchange program

As an integral part of our business plan, we are seeking to achieve true club globalization through the integration of our existing separate points-based vacation exchange 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 points-based vacation ownership systems separately, 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 implement such a system, given differences in levels of maintenance fees among the several points-based systems. Points-based vacation ownership systems, like traditional timeshare arrangements, are subject to extensive regulation by federal, state and local jurisdictions, which regulation may adversely impact, delay or prevent achievement of our integration goals.

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We may not successfully integrate our acquisitions

Our growth strategy may continue to include acquisitions. Our ability to successfully integrate acquisitions will depend on a number of factors including our ability to market and sell Vacation Interests at the acquired resorts, our ability to manage acquired resorts in a manner that results in customer satisfaction and our ability to integrate vacation club operations with Club Sunterra, as well as the need to achieve other back office efficiencies. There is no assurance that we will be successful with respect to any of these factors. During the start-up phase of sales at a newly acquired resort we could experience lower operating margins at that resort until its sales operation matures. The lower margins could negatively impact our cash flow. We cannot provide assurance that we will maintain or improve our operating margins at newly acquired resorts or that they will not reduce our overall operating margins.

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

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

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

Changes in interest rates may increase our borrowing costs and otherwise adversely affect our business

The interest rates applicable to borrowings under our senior credit facility are subject to change based on fluctuations in short-term interest rates. If these rates increase, our interest expense would increase and our results of operations would be adversely affected. Our business and our strategies for future growth are dependent on our ability to obtain additional debt financing to fund our operations and to access the securitization markets to expand our portfolio of mortgages and contracts receivable. Increases in interest rates, changes in the financial markets and other factors could increase our borrowing costs, prevent us from accessing the securitization markets and otherwise reduce our ability to obtain the funds required for our future operations. Our business and results of operations are also dependent on the ability of our customers to finance their purchase of Vacation Interests. Limitations on the availability of financing to our customers or increases in the cost of such financing could reduce our sales of Vacation Interests and adversely affect our operations.

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Fluctuations in foreign currency exchange rates may affect our reported results of operations

We receive a significant portion of our revenues from our European resorts, the operations of which are primarily conducted in euros and British pounds. Because our financial results are reported in U.S. dollars, fluctuations in the value of the euro and British pound against the U.S. dollar have had and will continue to have a significant effect on our reported financial results. A decline in the value of the euro or British pound against the U.S. dollar will tend to reduce our reported revenues and expenses, while an increase in the value of the euro or British pound will tend to increase our reported revenues and expense. Variations in exchange rates can significantly affect the comparability of our financial results between financial periods.

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

We provide financing to consumers for the purchase and lease of Vacation Interests in North America and the Caribbean. We benefit by retaining a positive cash flow spread that results from the difference between our borrowing rate and the rate charged to our owner families. As of December 31, 2003, our mortgages and contracts receivable portfolio included approximately 30,600 active loans and contracts totaling approximately $201.0 million in outstanding principal. In Europe, we generally originate mortgages receivable for a third party financial institution and receive a commission based on the principal amount of eligible consumer loans we originate.

A significant increase in the delinquency rate applicable to our portfolio of mortgages and contracts receivable could adversely affect our financial condition and results of operations. An increased level of delinquencies could result from changes in economic or market conditions, increases in interest rates, adverse employment conditions and other factors beyond our control. Increased delinquencies could also result from our inability to evaluate accurately the credit-worthiness of the customers to whom we extend financing.

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

We are a party to management contracts under which we receive fees for providing management services to certain affiliated resorts. During our 2003 fiscal year, we earned management fees of $20.1 million, representing approximately 6.5% of our total consolidated revenues for this period. Our management contracts generally have three year terms, except in Europe where the contracts generally run for the life of the association, and provide for early termination rights in certain circumstances. If we fail to renew a significant number of our management contracts or the contracts are otherwise terminated, we will no longer be entitled to receive management fees under these contracts and our results of operations could be adversely affected.

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

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

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We are subject to various restrictions under our senior finance facility which limit our ability to incur debt

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

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

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

Our continued liquidity depends on our ability to borrow against our notes receivable and inventory

In North America we offer financing of up to 90% of the purchase price to purchasers of Vacation Interests. Approximately 58% of our domestic Vacation Interest revenues were financed with us for the year ended December 31, 2003. However, we incur selling, marketing and administrative cash expenditures prior to and concurrent with the sale. Accordingly, our ability to borrow against the notes receivable we receive from our customers is a critical factor in our continued liquidity. As of December 31, 2003, our borrowings secured by mortgages and contracts receivable under our senior finance facility were $127.3 million and the borrowings secured by unsold inventory and points were $90.7 million. If this facility was to terminate or expire and we were unable to replace it with a comparable facility, our liquidity and cash flow would be materially and adversely affected.

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

Prior to our bankruptcy, we securitized a substantial portion of the mortgages and contracts receivable we generated by financing the purchase of Vacation Interests by our customers. Since our bankruptcy, we have not securitized our mortgages and contracts receivable and have utilized our senior credit facility to fund our mortgages and contracts receivable portfolio. We currently anticipate accessing the securitization markets in the second quarter of 2004, however there can be no assurance regarding our ability to successfully do so. If we are unable to access the securitization markets, we may be required to obtain additional debt or equity financing to finance our operations. We cannot ensure that this additional financing will be available or, if it is available, that it can be obtained on terms and conditions we will deem acceptable. Any additional financing derived from the sale of equity securities, including convertible debt securities, may result in significant dilution to our stockholders.

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

Our common stock began trading on the Nasdaq National Market on January 5, 2004. Prior to that date, our common stock was quoted on the OTC Bulletin Board. Because our common stock has a limited trading history on the Nasdaq Stock Market, we cannot assure that an active trading market for our common stock will continue in the future. If an active and liquid trading market does not continue, our stock price may be adversely affected and investors may have difficulty in trading their shares. In addition, the market price of our common stock may

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be subject to significant fluctuations in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial analysts in their estimates, if any, of our future earnings, unfavorable publicity or conditions in the economy in general or in the travel, vacation ownership and leisure industries in particular. The stock market also has, from time to time, experienced significant price and volume fluctuations that have been unrelated to the operating performance of companies with publicly traded securities. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our management’s attention and resources.

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

Future sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. The issuance of shares of our common stock under our plan of reorganization was exempt from the registration requirements of the federal and state securities laws. Persons who are not our affiliates and who acquired shares pursuant to our plan of reorganization may trade those shares. Our affiliates who acquired shares of our common stock pursuant to our plan of reorganization may sell those shares in the public market subject to applicable volume and other limitations imposed under the federal securities laws or pursuant to a registration statement registering such shares for resale to the public. A total of 18,494,890 shares of common stock have been issued to date pursuant to our plan of reorganization. We expect that an additional 600,000 shares of common stock will be issued during the next three to six months pursuant to our plan of reorganization and that the remaining 905,110 shares of common stock will be issued at the settlement of certain claims, the expected date of which is uncertain at this time. Resale of these shares, or the perception that resale could occur, could cause the market price of our common stock to decrease significantly.

We do not anticipate paying any dividends in the foreseeable future

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

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

Certain provisions of the Maryland General Corporation Law and of our charter and bylaws may have the effect of delaying or preventing a change in control of Sunterra. These provisions may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that stockholders might consider to be in their best interests. These provisions could limit the price that certain investors are willing to pay in the future for shares of our common stock.

Provisions in our charter and bylaws that may have the effect of delaying or preventing a change in control include:

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We are subject to the Subtitle 6 of the Maryland General Corporation Law, which prohibits “business combinations” for a period of five years with persons owning 10% or more of the voting shares of a corporation’s outstanding stock, unless the combination is approved by the board of directors prior to the person acquiring 10% or more of the stock or is approved by an extraordinary stockholder vote. We are also subject to Subtitle 7 of the Maryland General Corporation Law, which limits the voting rights of “control shares” acquired in a “controlled share acquisition” except to the extent approved by extraordinary stockholder vote.

Subtitle 8 of the Maryland General Corporation Law provides that a Maryland corporation that is subject to the Securities Exchange Act of 1934 and that has at least three outside directors (who are not affiliated with any potential acquirer of the company) under certain circumstances may elect by resolution of its board of directors or by amendment of its charter or bylaws to be subject to statutory corporate governance provisions that may be inconsistent with the corporation’s charter and bylaws. Under these provisions, a board of directors may divide itself into three separate classes without the vote of stockholders so that only one-third of the directors are elected each year. Directors serving on a board of directors classified in this manner may not be removed from office without cause and the classified board arrangement may not be altered by amendment to the charter of the corporation.

Further, the board of directors may, by electing to be covered by the applicable statutory provisions and notwithstanding the corporation’s charter or bylaws:

In addition, a director elected to fill a vacancy under these provisions serves for the balance of the unexpired term rather than until the next annual meeting of stockholders.

A board of directors may implement all or any of these provisions without amending the charter or bylaws and without stockholder approval. The Maryland General Corporation Law further provides that an act of a director relating to or affecting an acquisition or potential acquisition of control of a corporation, including a decision by a director to implement the provisions of Subtitle 8, is not subject to a higher duty or greater scrutiny than is applied to any other act of a director. Although a corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute, Sunterra has not adopted such a prohibition. If our board of directors chooses in the future to implement these provisions, it could discourage offers to acquire our common stock and could delay or prevent a change in control of Sunterra.

Available Information

We file reports with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934. The general public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. This site is located at www.sec.gov.

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Our Internet address is www.sunterra.com. On our Internet website, we provide a link to the SEC’s website where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 can be viewed. Upon request, we will make available free of charge copies of the aforementioned reports, as well as copies of the charters of the three independent committees of our board of directors and our Code of Business Conduct and Ethics. This information can be requested through our website or by written request to us at: Sunterra Corporation, Investor Relations Department, 3865 West Cheyenne Avenue, North Las Vegas, Nevada 89032. The information contained on our website, or on other websites linked to our website, is not part of this report.

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 offices in Arizona, California, Florida and Virginia, 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, and an approximately 25,000 square foot building in Orlando, Florida, which, prior to our relocation to North Las Vegas in 2002, was our world headquarters. This property is currently under contract to be sold. Historically, our Sunterra Pacific operations were also housed at a leased facility in Bellevue, Washington.

As of December 31, 2003, resorts at which Sunterra owns unsold Vacation Interests, or with which Club Sunterra holds an affiliation agreement totaled ninety-one resorts; sixty of which are located in the United States, Canada, the Caribbean and Mexico, and thirty-one of which are located in Europe. Twenty of the resorts located in Hawaii, Mexico, Canada and the Pacific Northwest have been affiliated with Club Sunterra through an agreement with the Vacation Timeshare Owners Association (“VTSOA”), which agreement terminated when Sunterra Pacific’s management agreement with the VTSOA ended. These resorts remain affiliated with Club Sunterra pending finalization of a new Club Sunterra affiliation agreement with the VTSOA. The following table shows the number of resorts at which Sunterra owned unsold Vacation Interests or with which Club Sunterra holds an affiliation agreement as of December 31, 2003, 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, and many units also include a private deck.

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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reorganization” for a further description of the nature and results of our reorganization, and note 25 to the accompanying consolidated financial statements for a general description of our commitments and contingencies.

During the fourth quarter of fiscal 2003, no matter was submitted to a vote of our security holders.

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PART II

Market Information

Our common stock began trading on the Nasdaq National Market on January 5, 2004, under the symbol “SNRR.” For the period from January 2, 2003, until January 2, 2004, our common stock was traded on the over-the-counter bulletin board system. During the period from July 29, 2002 through December 31, 2002, there was no established public trading market for our common stock.

On July 29, 2002, we emerged from Chapter 11 bankruptcy proceedings. Under our plan of reorganization, previously 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. As a result of the cancellation of outstanding shares of the common stock at July 29, 2002, the issuance of new common stock pursuant to our plan of reorganization and the lack of an established public trading market for our new common stock during the period from July 29, 2002 through December 31, 2002, a quarterly disclosure of the closing prices for the common stock for the fiscal year ended December 31, 2002 is not meaningful and has not been included in this report. The high and low closing prices for our common stock for each quarter during the 2003 fiscal year are set forth below, as reported in the transaction reporting system.

Holders

As of February 25, 2004, there were approximately 1,500 holders of record of our common stock. The number of beneficial owners may be substantially greater than the number of record holders, because a large portion of our common stock is held of record through brokerage firms in “street name.”

Dividend Policy

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

See Item 12 for information about our equity compensation plans.

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The following table sets forth selected financial data of Sunterra for the fiscal years ended December 31, 2003, 2002 and 2001. For purposes of this presentation, the year ended December 31, 2003 (Successor) has been compared to the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor), and to the year ended December 31, 2001 (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 of our financial condition and results of operations should be read in conjunction with Item 6, “Selected Financial Data,” and our consolidated financial statements and related notes in Item 8. This discussion and analysis contains forward-looking statements. Please see “Forward Looking Statements” and “Risk Factors” for discussions of the uncertainties, risks and assumptions associated with these statements.

For purposes of discussion of results of operations, the year ended December 31, 2003 (Successor) has been compared to the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor). Likewise, 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 results of operations for the year ended December 31, 2001 (Predecessor).

Overview

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

Reorganization

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

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

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

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Also, in connection with the effectiveness of 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 2 to the consolidated financial statements included elsewhere in this annual report for a discussion of the fresh-start adjustments.

We recorded a net loss of $89.2 million for the year ended December 31, 2003, including charges totaling $91.6 million for the impairment of reorganization value in excess of identifiable assets and $2.3 million for the impairment of other assets. For the year ended December 31, 2002, we recorded net income totaling $307.7 million, including gains on cancellation and settlements of debt totaling $253.9 million and fresh-start adjustments of $112.7 million in conjunction with our emergence from bankruptcy on July 29, 2002. The 2002 results of operations also included $51.9 million in charges relating to the bankruptcy and our restructuring efforts during the year, including movement of our headquarters to North Las Vegas, Nevada. We incurred a net loss totaling $71.5 million for the year ended December 31, 2001, which included significant charges for reorganization expenses of $50.4 million. 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” above).

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

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Reclassifications

In previously issued financial statements, the Company’s consolidated statements of operations included the captions “Vacation Interest sales,” representing sales of Vacation Interests on an accrual basis, and “Vacation Interest lease revenue” which was comprised of transactions relating to certain Caribbean resorts. Both the leasing of Vacation Interests and the homeowners’ association transactions for these two resorts were included within that caption. The line items “Vacation Interest lease revenue” and “Vacation Interest sales” have been removed and the components thereof reclassified. Sales of Vacation Interests under the accrual method and lease revenue recognized on the St. Maarten leases now comprise the caption “Vacation Interest revenue,” and revenues from the Company’s activities as the homeowners’ association of these St. Maarten resorts are now included in the caption “Management services revenue” on the accompanying consolidated statements of operations. Similarly, certain of the expenses relating to the homeowners’ association transactions, such as the provision for bad debt and depreciation expense, were reclassified from General and Administrative expenses to conform to the consolidated presentation.

Prior consolidated statements of operations included the caption “Club Sunterra membership fees,” representing fees and membership dues earned by the Company’s U.S. exchange system, Club Sunterra. These revenues are now included in the caption “Other revenues” on the accompanying consolidated statements of operations.

The Company also reclassified certain carrying costs relating to Vacation Interests of Sunterra Europe, from Advertising, Sales and Marketing expense to Vacation Interests carrying costs, to conform to the consolidated presentation. All revenues recognized relating to the overnight rental of Vacation Interests, including hotel operations and mini-vacation packages, were reclassified to Resort Rental revenues from Other revenues. The Company also receives fees and reimbursements from two joint ventures in which it holds minority equity interests. These fees were formerly classified within Other revenues, and on the accompanying consolidated statements of operations, were reclassified to Management Services revenues. Other prior year amounts have also been reclassified to conform to the 2003 consolidated presentation.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Management believes that the following accounting policies fall within the Securities and Exchange Commission’s definition of “critical accounting policies,” or involve a “critical accounting estimate” because they are particularly dependent upon estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period, and changes in the accounting estimates we used are reasonably likely to occur from period to period which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. We have reviewed our critical accounting policies with our audit committee.

Revenue Recognition

Vacation Interests

We follow the guidelines of Statement of Financial Accounting Standards (SFAS) No. 66, “Accounting for Sales of Real Estate.” In accordance with SFAS No. 66, we recognize sales of Vacation Interests on an 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

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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.

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. The direct marketing costs of the lease contracts are also deferred and amortized over the term of the leases.

Resort rental and management services

We rent unsold Vacation Interests on a short-term basis, and additionally, will sell one-week leases and mini-vacations that allow prospective owners to sample a resort property. The related revenue is deferred until the vacation is used by the customer or the expiration date of the mini-vacation passes. Property management fee revenues are accrued as earned in accordance with the management contracts. In addition, in our capacity as the homeowners association for certain Caribbean resorts, we collect maintenance fees from the lessees on these properties, which are accrued as earned and included in management services revenue.

Interest revenue

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 the upgrade of Vacation Interval ownership to Club Sunterra membership, which is deferred and amortized over ten years. Club Sunterra membership annual dues are recognized monthly as earned. Other revenue also includes nonrefundable commissions earned by our European subsidiary on the origination of loans to customers by a third party to finance purchases of Vacation Interests. The commission revenue is recorded upon recognition of the related Vacation Interest revenue.

Retained Interests in Mortgages 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 is being amortized over the estimated life of the related mortgages and contract receivable portfolio as an adjustment to interest income.

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We provide for estimated mortgages and contracts 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. 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.

We charge off mortgages and contracts receivable upon default on the first scheduled principal and interest payment (first payment defaults) or greater than 180 days of contractual delinquency. Vacation Interests recovered on defaulted mortgages receivable are recorded in Unsold Vacation Interests 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 costs are expensed as incurred.

Unsold Vacation Interests

Unsold Vacation Interests 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 unsold Vacation Interests. 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 2003 and 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, 2003 and 2002 include reorganization value in excess of identifiable assets totaling $61.6 million and $154.0 million, respectively. 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 the carrying value of a reporting unit exceeds the fair value.

As of December 31, 2003, all of the Company’s goodwill arises from the adoption of fresh start accounting upon emergence from bankruptcy in July 2002, and is identified on the accompanying financial statements as “Reorganization value in excess of identifiable assets.” SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested at least annually for impairment, or more frequently if circumstances exist to indicate potential impairment. The Company has elected to perform the required testing in the fourth quarter. Under SFAS 142, goodwill is to be tested for impairment at the reporting unit level.

Under SFAS 142, the first step to test for impairment is the comparison of the fair value of the reporting unit with its carrying value (including goodwill). The Company identified its Domestic and Foreign reporting units to be tested for impairment. Carrying value in excess of the fair value of a reporting unit is an indicator of possible impairment and requires the second step of the impairment test, which is to compare the implied fair value of the goodwill to its carrying value. Implied fair value is the amount of goodwill that would be recognized in a business combination, assuming such had taken place on the measurement date. Impairment exists to the extent the carrying value of goodwill exceeds its implied fair value.

The Company utilized a discounted cash flow approach, as well as a market value approach, in its estimate of the fair value of the respective reporting units. Both methods determined that the carrying value of the Domestic reporting unit exceeded its fair value. After comparing the implied fair value of the goodwill to its carrying value, the Company concluded that impairment of the Domestic reporting unit existed and recorded a charge of $91.6 million in the fourth quarter. Since emerging from Chapter 11 in 2002 the Domestic reporting unit has underperformed relative to the Company’s Plan of Reorganization giving rise to the impairment of goodwill. During the same period, the Foreign reporting unit has consistently met expectations of the Plan.

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The remainder of the balance in Intangible Assets represents management contracts and the remaining unamortized cost relating to certain intellectual property. These balances are being amortized monthly over the life of the contract or the estimated useful life of the property.

Valuation Allowance on Net Deferred Tax Assets

We account for income taxes in accordance with the 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.

Results of Operations

Please refer to the information noted above in Item 6, Selected Financial Data. The following table sets forth additional operating information for the fiscal years 2003, 2002 and 2001. For purposes of discussion of results of operations, the results of operations for the year ended December 31, 2003 (Successor) have been compared to the combined results of operations for the seven months ended July 31, 2002 (Predecessor) and the five months ended December 31, 2002 (Successor), and to the year ended December 31, 2001 (Predecessor):

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

We achieved total revenues of $308.3 million for the year ended December 31, 2003, compared to $283.9 million for the year ended December 31, 2002, an increase of $24.4 million, or 8.6%. Overall revenues for domestic operations increased $14.3 million, or 7.6% to $201.9 million for the year ended December 31, 2003 compared to $187.6 million for the year ended December 31, 2002, while revenues from foreign operations increased 10.5%, or $10.0 million to $106.3 million for the year ended December 31, 2003 from $96.3 million for the prior year. Approximately $8.6 million of the increase in revenues from our foreign operations relates to favorable foreign exchange rates. The increased revenues levels were driven by higher volumes of Vacation Interest transactions, as described below.

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Vacation Interest revenues of $216.3 million for the year ended December 31, 2003 increased by $31.6 million, or 17.1%, compared to revenues of $184.7 million for the year ended December 31, 2002, fueled by a $23.3 million increase in domestic Vacation Interest revenues to $129.9 million, compared to the prior year total of $106.6 million. The opening of multiple new sales centers, new marketing collateral and tools, extensive training and a stable management team contributed to this increase, as well as the continuing maturity of the vacation ownership industry and improved awareness and understanding by the purchasing public of the industry. Inclusive of $7.0 million of favorable exchange rate movements, our foreign Vacation Interest revenues rose from $78.1 million for the year ended December 31, 2002 to $86.4 million for the year ended December 31, 2003, an increase of 10.5%. The increased levels reflect acquisitions made in 2002, offset by lower revenues in certain marketing lines.

Resort rental revenue decreased 29.2% to $11.0 million for the year ended December 31, 2003 from $15.6 million for the year ended December 31, 2002, primarily as a result of the Company’s on-going sales of Vacation Interests (which reduces the number of Vacation Interests available for rental), increased utilization of available space for internal marketing purposes (‘mini-vacation’ packages designed to give potential customers a sample of the vacations they could enjoy if the Vacation Interest is purchased), and the disposition of certain resort properties in 2002.

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

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

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

Vacation Interest cost of sales of $40.5 million for the year ended December 31, 2003 increased $3.5 million, or 9.5%, from $37.0 million for the year ended December 31, 2002, on 17.1% higher Vacation Interest volume. As a percentage of Vacation Interest revenues for the years ended December 31, 2003 and 2002, Vacation Interest cost of sales was 18.7% and 20.0%, respectively. The improvement in this measure is attributable to the fresh start adjustments made in 2002 to Unsold Vacation Interests.

For the year ended December 31, 2003, advertising, sales and marketing costs were $119.0 million compared to $110.5 million for the year ended December 31, 2002. As a percentage of Vacation Interest revenues, these costs declined to 55.0% in 2003 compared to 59.9% in the prior year. This decrease is due to effective direct marketing programs, improvements in closing efficiencies as the sales staff stabilized, the resulting increased sales for the year ended 2003 versus 2002, allowing the costs to be spread over the larger Vacation Interest revenue pool in 2003 and increased use of in-house tours.

Vacation Interests carrying costs, which consist of annual maintenance fee, reserve and special assessments on Unsold Vacation Interests, as well as the cost of un-annexed units (owned units not declared as part of the timeshare program) decreased 7.3%, or $1.3 million, to $17.5 million for the year ended December 31, 2003

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from $18.8 million for the year ended December 31, 2002. As a percentage of Vacation Interest revenues, inventory-carrying cost was 8.1% for the year ended December 31, 2003 compared to 10.2% for the year ended December 31, 2002. The decrease was primarily the result of higher charges and assessments for certain properties in 2002, as well as the sale of Vacation Interests to customers and the wholesale disposition of certain resorts in the prior year, offset by additional Vacation Interests acquired in the current year through the Epic Resorts acquisition.

The provision for doubtful accounts and loan losses was $5.6 million for the year ended December 31, 2003 compared to $7.3 million for the year ended December 31, 2002. Of these amounts, $5.5 million and $5.0 million for 2003 and 2002, respectively, related to mortgages and contracts receivable. The resulting allowances for mortgages and contracts receivable at December 31, 2003 and 2002 were $29.4 million and $32.4 million, respectively, representing approximately 14.6% and 16.3%, respectively, of the gross mortgages and contracts receivable outstanding at those dates. The balance of the provision for doubtful accounts of $0.1 million for 2003 and $2.3 million for 2002 represents provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees (at certain Caribbean resorts) and for other receivables. The increase in the provision for doubtful accounts and loan losses related to mortgages and contracts receivable is attributed to the higher levels of Vacation Interests revenues, as the provision is recorded as a percentage of each financed sale. The decrease in the provision for doubtful accounts for non-mortgage receivables is due to clean up and calling campaigns and other improvements to the collection process.

Loan portfolio expenses decreased 21.7% to $10.1 million for the year ended December 31, 2003 from $12.8 million for the year ended December 31, 2002. This improvement is attributable to process improvement initiatives, including standardizing underwriting procedures, increased and timely correspondence with customers whose mortgages and contracts are perceived to be in danger of becoming delinquent, and cross training of personnel allowing the team to service higher loan volumes with fewer personnel.

General and administrative expenses decreased $4.8 million to $70.6 million for the year ended December 31, 2003 from $75.4 million for the year ended December 31, 2002. As a percentage of total revenues, general and administrative expenses improved to 22.9% for 2003 from 26.6% for 2002. This decrease is attributable to the effects of restructuring initiatives implemented in late 2002 and early 2003, the disposition of certain resorts and operations in the prior year, dependence in the prior year on contract and temporary labor, as well as duplication of certain costs in 2002 associated with recruiting and moving permanent personnel to Las Vegas and maintaining “dual” headquarters.

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

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

Reorganization costs for the year ended December 31, 2003 showed a gain of $0.6 million, relating primarily to a $0.6 million gain on a settlement of certain bankruptcy-related litigation in the third quarter of 2003. The prior year gain of $325.2 million included $232.7 million and $112.7 million in gains on cancellation of pre-petition liabilities and fresh start adjustments related to our emergence from Chapter 11, respectively, and

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$4.2 million and $21.2 million of net gains on asset sales and cancellation of debt, respectively. Excluding the effect of these adjustments, reorganization costs were $45.6 million. Theses charges were primarily professional fees, charges for employee retention programs and other reorganization costs.

We incurred restructuring costs of $1.3 million and $6.1 million for the years ended December 31, 2003 and 2002, respectively, related to the implementation of our 2002 strategic plan, which included streamlining of our legal structure, relocation of our headquarters to North Las Vegas, Nevada and expenditures related to the “One World, One Club^™” points-based program. The majority of our restructuring processes and associated costs occurred in the third quarter of 2002.

Impairment of assets totaled $93.9 million in 2003. These charges included $91.6 million for the impairment of the reorganization value in excess of identifiable assets, $0.9 million related to our former headquarters in Orlando in conjunction with a pending sale, $0.9 million relating to Unsold Vacation Interests relating to a resort disposed of, and $0.5 million representing the undepreciated cost of our former (sword) enterprise software. We completed our development of the ATLAS enterprise software, and as such, the (sword) software was deemed to have no continuing value and was written off in the third quarter of 2003. There were no charges for impairment of assets in 2002.

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

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

We achieved total revenues of $283.9 million for the year ended December 31, 2002, compared to $274.5 million for the year ended December 31, 2001, an increase of $9.4 million, or 3.4%. Overall revenues for domestic operations increased $3.4 million, or 1.8% to $187.6 million for the year ended December 31, 2002 compared to $184.2 million for the year ended December 31, 2001, while revenues from foreign operations increased 6.6% to $96.3 million for the year ended December 31, 2002 from $90.3 million for the prior year, due in part to the acquisition of several resorts in 2002.

Vacation Interest revenues of $184.7 million for the year ended December 31, 2002 increased by $16.8 million, or 10.0%, compared to sales of $167.9 million for the year ended December 31, 2001. Domestic Vacation Interest revenues rose $12.1 million, or 12.7% to $106.6 million, versus $94.5 million in the prior year, and foreign Vacation Interest revenues rose from $73.4 million for the year ended December 31, 2001 to $78.1 million for the year ended December 31, 2002, an increase of 6.4%. 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 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 revenues 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 revenues of $16.8 million were recognized in 2001 for customers that elected not to rescind.

Resort rental revenue increased 8.4% to $15.6 million for the year ended December 31, 2002 from $14.4 million for the year ended December 31, 2001, primarily as a result of the increased levels of domestic travel in 2002, compared to the previous year (which included the September 11 terrorist acts), as well as special incentives and discounting offered by the Company to raise volumes, offset by a 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.

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Management services revenues were $29.2 million in 2002, versus $31.5 million the prior year. The 7.5% decrease relates to the discontinuance of management contracts on several resorts in 2002, and one-time assessments billed to the owners of certain Caribbean properties in 2001.

Interest revenues, primarily from financing provided to purchasers and lessees of Vacation Interests, decreased to $30.6 million for the year ended December 31, 2002 compared to $31.6 million for the year ended December 31, 2001.

Other income, which mainly consists of Club Sunterra revenues, sampler vacation program revenues, travel service revenue, resort amenity income and finance commissions, fell by $5.2 million, or 17.9% to $23.9 million, for the year ended December 31, 2002 from $29.1 million for the year ended December 31, 2001. This decline is due principally to decreases in finance commissions and travel service revenue, partially offset by higher Club Sunterra revenues, reflecting increased membership in 2002 from 2001.

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 20.0% and 20.4%, 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 $110.5 million or 59.9% of Vacation Interest revenues compared to $100.2 million or 59.7% for the year ended December 31, 2001. This represents a $10.3 million or 10.3% 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.

Vacation Interests carrying cost decreased 8.1%, or $1.7 million, to $18.8 million for the year ended December 31, 2002 from $20.5 million for the year ended December 31, 2001 and totaled 10.2% of Vacation Interest revenues for the year ended December 31, 2002 as compared to 12.2% 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 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 $7.3 million for the year ended December 31, 2002 compared to $18.7 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 decrease in the provision relates to significant changes made to underwriting guidelines in the prior year, and resulting improvements in the underlying pool of mortgages. The balance of the provision for doubtful accounts of $2.3 million for 2002 and $8.1 million for 2001 represents provisions for estimated uncollectible amounts due from homeowner associations, assessments to owners for maintenance fees (at certain Caribbean resorts) and for other receivables. The improvements in this area result from institution of stricter credit guidelines and improved collections practices.

Loan portfolio expenses increased 23.2% to $12.8 million for the year ended December 31, 2002 from $10.4 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 $2.0 million to $75.4 million for the year ended December 31, 2002 from $73.4 million for the year ended December 31, 2001. As a percentage of total revenues, general and administrative expenses improved to 26.6% for 2002 from 26.7% for 2001 and reflect our efforts to contain expenses following our exit from Chapter 11 on July 29, 2002.

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Depreciation and amortization expense decreased 29.9%, or $5.5 million, to $13.0 million for the year ended December 31, 2002 from $18.5 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 senior finance facility. Contractual interest on unsecured subordinated debt 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 2002 strategic plan, which included streamlining of our legal structure and relocation of our headquarters to North Las Vegas, Nevada and expenditures related to and expenditures related to the One World, One Club^™ points-based program. The majority of our restructuring processes and associated costs occurred in the third quarter of 2002. 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.

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, 2003, net cash provided by operating activities was $17.9 million and was primarily the result of the net loss of $89.2 million offset by non-cash expenses totaling $124.7 million (notably $93.9 million of impairment charges) and other non-cash gains of $4.1 million and increases in retained interests on mortgages receivable sold of $1.5 million. Cash provided by operating activities was also impacted by changes in operating assets and liabilities, including a reduction in unsold Vacation Interests of $18.3 million offset by an increase in cash in escrow and restricted cash of $7.7 million, an increase in receivables of $6.5 million, an increase in prepaid and other assets of $7.8 million and decreases in operating liabilities of $8.6 million.

During the year ended December 31, 2003, net cash used in investing activities was $21.8 million, the result of cash distributions from our joint ventures of $13.1 million offset by the acquisition of certain assets of the former Epic Resorts Group totaling $26.3 million, capital expenditures of $8.5 million and an increase in intangibles of $0.4 million.

During the year ended December 31, 2003, net cash provided by financing activities was $1.0 million. Payments on the senior finance facility and notes payable totaled $39.2 million, with an additional outlay of $4.5 million anniversary fee recorded as debt issuance costs. These payments were funded primarily through borrowings on the senior finance facility and term notes, totaling $44.7 million.

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We currently anticipate spending $47.0 million for unsold Vacation Interests at existing and anticipated resort locations during 2004, primarily in our European operations. Also in 2004, we plan to invest $10.0 million in capital expenditures related to property and equipment. We plan to fund these expenditures with cash generated from operations and borrowings under the senior finance facility and anticipated securitization transactions. We believe that, with respect to our current operations, cash generated from operations and future borrowings will be sufficient to meet our working capital and capital expenditure needs through the end of 2004. If these are not sufficient, we have the ability to adjust our spending on Unsold Vacation Interests.

The allowance for mortgage loan losses at December 31, 2003 was $29.4 million, or 14.6% of the gross mortgages and contracts receivable outstanding at that date. Management believes the allowance is adequate. However, if the amounts of the mortgages and contracts receivable that are ultimately written off materially exceed the related allowances, our business, results of operations and financial condition could be adversely affected.

Our plan for meeting our liquidity needs may be affected by, but not limited to, the following: demand for our product, our ability to borrow funds under our current financing arrangements, an increase in prepayment speeds and default rates on our mortgages and contracts receivable, the threat and/or effects on the travel and leisure industry of future terrorists’ attacks, limitations on our ability to conduct marketing activities, and other factors, including those discussed under “Business—Risk Factors.”

Completed units at various resort properties are acquired or developed in advance, and we finance a significant portion of the purchase price of Vacation Intervals. Thus, we continually need funds to acquire and develop property, to carry mortgages and contracts receivable and to provide working capital. We anticipate being able to borrow against our mortgages and contracts receivable at terms favorable to us. If we are unable to borrow against or 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, 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.

Corporate Finance

Overview

On average we finance approximately 58% of domestic Vacation Interest sales and leases. Accordingly, we do not generate sufficient cash from sales to provide the necessary capital to pay the costs of developing or acquiring additional resorts and to replenish working capital. We believe that revenues together with amounts available under our senior finance facility will be sufficient to fund operations for the next twelve months.

Under the terms of our senior finance facility, we obtained a two-year senior secured non-amortizing revolving credit facility in the amount of $300 million. The availability of borrowings under the senior finance facility is based on the amount of eligible mortgages receivable, the value of eligible Unsold Vacation Interests and the value of certain real property and other assets. The senior finance facility is secured by a first priority lien on our mortgages receivable and Unsold Vacation Interests as well as certain real property and other assets, subject to certain exceptions. Borrowings under the senior finance facility bear interest at an annual rate equal to one month LIBOR plus 3% or 7%, depending on the type of assets collateralizing various advances. In addition to the facility fee (2.5% of $300 million) paid in connection with the commitment and the closing of the senior finance facility and an anniversary fee of $4.5 million paid in August 2003, we pay an unused commitment fee of 0.25% per annum on the excess availability under the credit facility. Borrowing availability under the senior finance facility on December 31, 2003 was $17.3 million.

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As disclosed in note 29 to the accompanying consolidated financial statements, in February 2004 the Company and Merrill Lynch Mortgage Capital, Inc., amended our senior financing facility and extended its term until February 28, 2006. The interest rate on loans secured by our eligible mortgages and contracts receivable was reduced from the one-month LIBOR rate plus 3.00% to the one-month LIBOR rate plus 2.25%, and, for the loans secured by our unsold Vacation Interests, the rate was reduced from the one-month LIBOR rate plus 7.00% to LIBOR plus 4.00%. The amendment reduced the exercise price of the warrants to purchase 1,190,148 shares of our common stock held by the lender from $15.25 per share to $14.00 per share. Additionally, the advance rate under Tranche A was increased to 85% from 80%. The amendment also expanded our ability of the Company to borrow against Vacation Points and contracts receivable collateralized by Vacation Points, including both assets we acquired as part of the Epic acquisition as well as assets associated with the Company’s new multi-site clubs that are implementing the Company’s “One World One Club” strategy.

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

Off-balance sheet financing arrangements

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

The qualifying entities raised cash by issuing beneficial interests in the form of rights to cash flows from the mortgages and contracts receivable assets as collateral for borrowings under a line of credit or under promissory notes issued to third-party investors. We provide servicing for the transferred assets and collect a fee for those services, as well as retaining 100% interest in the excess spread over the borrowing rate. Sales of mortgages and contracts receivable to the qualifying entities were made without recourse to us as to collectibility. All of the qualifying entities’ assets serve as collateral for 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

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

Debt Settlement

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

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

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

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

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

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

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Derivatives

In the past, we have utilized derivative financial instruments from time to time, which included interest rate cap agreements, to manage well-defined interest rate exposure. It is our policy that derivative financial instruments are not used for trading or speculative purposes. Counter parties to our derivative financial instruments generally have been major financial institutions. At December 31, 2003 and 2002, no agreements were in effect.

Contractual Obligations

The following table summarizes the payments due for specific contractual obligations. These amounts are as of December 31, 2003.

New Accounting Pronouncements

New accounting pronouncements are discussed in Note 5 to the consolidated financial statements included in this report.

Credit Risk

We are exposed to on-balance sheet credit risk related to our mortgages and contracts receivable. We offer financing to the buyers and lessees of Vacation Intervals at our resorts. We bear the risk of defaults on promissory notes delivered to us by buyers of Vacation Interests. If a buyer of a Vacation Interval defaults, we generally must foreclose on the Vacation Interval (or, in the case of Vacation Points, by exercise of a Power of Sale) and attempt to resell it. The associated marketing, selling and administrative costs from the original sale are not recovered and such costs must be incurred again to resell the Vacation 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 Interest without further recovery efforts.

Availability of Funding Sources

We have historically funded mortgages and contracts receivable, and Unsold Vacation Interests with borrowings through our financing facilities, sales of mortgages and contracts receivable, internally generated 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.

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Geographic Concentration

Our owned and serviced loan portfolio borrowers are geographically diversified within the United States and internationally. At December 31, 2003, borrowers residing in the United States accounted for approximately 87.9% of our loan portfolio. With the exception of Arizona and California, which represented 13.0% and 13.6%, respectively, no state or foreign country concentration accounted for in excess of 5.0% of the serviced portfolios. The credit risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial well being of the borrowers.

Foreign Currency Risk

For the years ended December 31, 2003, 2002 and 2001, total revenues denominated in a currency other than U.S. dollars, primarily revenues derived from the United Kingdom, were approximately 34%, 34% and 33% respectively, of total revenues. Our net assets maintained in a functional currency other than U.S. dollars at December 31, 2003 and 2002, which were primarily assets located in Western Europe, were approximately 24% and 17%, respectively, of total net assets. The effects of changes in foreign currency exchange rates have not historically been significant to our operations or net assets.

Interest Rate Risks

As of December 31, 2003, we had floating interest rate debt of approximately $245.7 million, comprised of amounts outstanding under the senior finance facility. The floating interest rate on the senior finance facility is based upon the prevailing LIBOR rate and interest rate changes can impact earnings and operating cash flows. A change in interest rates of one percent on the balance outstanding at December 31, 2003 would cause a change in total annual interest costs of $2.4 million.

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 sheets of Sunterra Corporation and subsidiaries (the Company) as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year ended December 31, 2003, for the five-month period ended December 31, 2002, and the seven-month period ended July 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the year ended December 31, 2003, for the five-month period ended December 31, 2002 and the seven-month period ended July 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 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 12, 2004

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Sunterra Corporation:

We have audited the accompanying predecessor consolidated statement of operations of Sunterra Corporation and subsidiaries (the Company) for the year ended December 31, 2001 and the related predecessor consolidated statements of stockholders’ deficiency and comprehensive loss and of cash flows for the year then ended. 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 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, such predecessor consolidated financial statements present fairly, in all material respects, the results of the predecessor’s operations and the predecessor’s cash flows for the year ended December 31, 2001 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 statements of operations, of stockholders’ equity (deficiency) and comprehensive income (loss), and of cash flows for the year ended December 31, 2001 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 stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (b) as to operations, the effect of any changes that may be made in its business.

The accompanying predecessor consolidated statements of operations, of stockholders’ equity (deficiency) and comprehensive income (loss), and of cash flows for the year ended December 31, 2001 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, 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.

/S/  DELOITTE & TOUCHE LLP

Certified Public Accountants

Orlando, Florida

May 15, 2002

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SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Seven Months Ended July 31, 2002, and

Year Ended December 31, 2001

(In thousands, except per share amounts)

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

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SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

(In thousands, except per share amounts)

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

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SUNTERRA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Seven Months Ended July 31, 2002, and

Year Ended December 31, 2001

(In thousands)