Third Point LLC Discloses 9.8% Stake in Sunterra (SNRR), Wants Company Put Up for Sale, Independent Director

In a 13D filing with the SEC on Sunterra Corporation (OTC: SNRR), Daniel Loeb's Third Point LLC disclosed a 9.8% stake. The firm sent a letter to the Board of Directors of the Company which, among other things, demands that the Company be put up for sale and that an independent director be added to the Board of Directors to oversee the sale process and protect the interests of shareholders of the Company. NOTE: Chapman Capital sent a similar letter to the company on 06/29.
VIA EMAIL AND U.S. MAILJuly 17, 2006

Mr. David Gubbay
Mr. Olof S. Nelson
Mr. Nicholas J. Benson
Mr. James H. Dickerson, Jr.
Mr. James A. Weissenborn
Mr. Charles F. Willes

To the Board of Directors of Sunterra Corporation:

I am writing to you as CEO of Third Point LLC, the largest shareholder ofSunterra Corporation ("Sunterra," or the "Company"). We currently own 1,925,000shares of the Company, or just less than 10% of the shares outstanding. Likeother shareholders have warned you, do not in any way interpret our significantholdings as a sign of support for either management or the Company's board ofdirectors.

Indeed, as the largest owner of the Company, we have one simple and explicitmessage to deliver to the Board: WE DEMAND THAT YOU DEVOTE YOUR FULL RESOURCESAND ATTENTION TO SELLING SUNTERRA - EITHER IN WHOLE OR IN ITS TWO COMPONENTPIECES - AS EXPEDITIOUSLY AS POSSIBLE.

We obviously took note of your July 13th press release, in which you announcedthe planned engagement of an investment bank "for the purpose of assessingstrategic alternatives for Sunterra, including a potential sale of the company."We are confident that after a brief review of the "alternatives" the bank andthe board will conclude that selling the Company is the only viable way tocreate significant value without saddling Sunterra's shareholders with theserious operational risks that management and the Board have shown no ability tonavigate successfully over time. Any conclusion short of a sale will be anexplicit rebuke to us and the Company's other shareholders.

The case for a sale of the Company is simple and compelling:

1. Sunterra should sell at a significant premium to its current trading value in a private market transaction (or transactions). We believe that if the Company were to be put up for sale it would fetch a price in the high teens - on the order of 75% above current levels. We base this view on our extensive due diligence, which shows, among other things, a voracious appetite for
Sunterra's assets on the part of private equity firms and industry competitors that we've spoken with.


2. There is no reason to have faith in the ability of incumbent management or the Board to maximize shareholder value as a going concern. This conclusion is supported, unfortunately, by past performance and is driven home by the obvious divergence of the economic interests of senior management and the Company's shareholders.

Towards that end, we are deeply troubled by Sunterra's conflict-riddenrelationship with Mackinac Partners. Specifically, given the minimum of $1.6million in annual cash compensation that the Company pays Mackinac for theservices of Messrs. Weissenborn and Bentley, Mackinac has a clear incentive tokeep this gravy train rolling for as long as possible. (Indeed, we insist thatthe Company provide us with a detailed accounting of the additional sumsMackinac has billed Sunterra for services other than those of Weissenborn andBentley.) These ongoing payments put Mackinac, and therefore management, indirect conflict with the owners of Sunterra - who want the Company sold as soonas possible.

Moreover, for the many reasons outlined by Robert L. Chapman, Jr. in his letterto you, as well as others uncovered in our due diligence (wherein Mr.Weissenborn and Mackinac Partners were both referred to several times as"lightweights" - which captures the essence of what we heard), we have gravedoubts as to whether Mr. Weissenborn should be involved with Sunterra at all. Itis not often that someone who helped oversee a company (in his capacity as adirector) when misdeeds were committed is promoted and lavishly rewarded as aresult of such a failure. Hopefully he will justify this undeserved kids-glovetreatment by delivering significantly enhanced value to shareholders.

We are also perplexed by the hiring of Keith Maib last week. His retention asCOO was glossed over within the body of a multi-subject release, which omittedhis professional background. Having conducted a preliminary investigation intoMr. Maib's background and current circumstances, we understand why hisapparently sketchy employment history was left out. Especially cautionary to usis his disastrous short stint as COO of Borland in 1994 - a position from whichhe resigned just one week after emphatically stating that he had no intention ofdoing so. We look forward to seeing the details of Mr. Maib's compensationpackage shortly in an 8-K filing, and also learning more about any pastrelationships between Maib and the employees of Mackinac Partners and therationale for bringing in another executive with no relevant industry expertise.

We are further disturbed that whereas Mackinac is already being paid a generoussum to run this Company, Mr. Weissenborn feels the need to apparently"double-dip" by hiring Mr. Maib to do work that his firm should be doing.According to the website for Crossroads, LLC, where Mr. Maib appears to haveworked briefly in 2003-04, both he and Crossroads provided identical services tothose of Mr. Weissenborn, Mr. Bentley and Mackinac. What we conclude from thisis that while we are paying Mackinac upwards of $2 million annually in cash(i.e., even before equity-based payments) for its services, or about 1% of thecurrent market capitalization of Sunterra, this princely sum is not enough tobuy Sunterra shareholders competent management, and, thus, the need for additional expensive senior management (who brings noapparent incremental value to the Company). We also wonder whether a managementteam truly intent on selling the Company in the near-term would bring on a newsenior executive at this point.

Let me reiterate then - we demand that you immediately decide and announce thata sale of Sunterra in its entirety (in one or two pieces) is the only strategicalternative that you will pursue. The owners of over 25% of the shares of theCompany have called on you in the past three weeks to take this step. It is ourstrong belief that a majority of Sunterra shareholders share our view. While youseem to be more comfortable dealing in numbers in the millions, the math here issimple: 20% of the outstanding shares are needed to call a special meeting toremove the Board. Over 25% of the shares (based simply on public correspondencewith you over the past three weeks) would be in favor of doing this should younot immediately determine that attempting to run the Company yourselves is notan option and that selling the Company is the only logical and responsibleoption that you have. Well over 50% of the shares agree with this - the numbershere speak for themselves.

Given that management's "payoff" and that for shareholders are at odds, at leastas it relates to timing, and due to the decidedly negative signal as to yourtrue intentions sent by the recent hiring of Mr. Maib, we further demand that anindependent director satisfactory to Third Point and the Company's other largeshareholders be added to the Sunterra Board to help ensure that the process tosell the Company is conducted earnestly and expeditiously. We have seen too manyexamples in the financial markets recently wherein a corporation's overseersannounce the intent to sell a company, but the process is run neither properlynor wholeheartedly. Given this, and our distrust of your motivations, westrongly believe that a shareholder representative on the Board is necessary. Wewill provide you with the name and credentials of our candidate after youannounce the retention of your investment bank; we leave it to your other largeshareholders to offer their own candidates if they so choose.

We look forward to learning the findings from the Wilmer Hale investigation,which was presumably discussed at your reported Board meeting this weekend andwill shortly be ready for public disclosure. Until then, we will defer judgmenton Mr. Benson notwithstanding our concerns about his past compensation; at aminimum we will adamantly press for its return to shareholders should he befound to have been culpable in the misdeeds that have occurred at Sunterra.

More important, we anxiously await your naming of an investment banker laterthis month - and the mandate that such banker is given by the Board. Anindependent report, written earlier this month by a respected brokerage firm,stated: "[Sunterra's management and board] have proven themselves to be inept atmanaging the complexities of a public company. We view the sale of the companyas the only logical step at this point." So do we.

Sincerely,

/s/ Daniel S. Loeb