UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**


(Mark
      One)


[X]
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE **SECURITIES
                EXCHANGE ACT OF 1934********





For
      the
      quarterly period ended September 30, 2006





**OR**




[ 
                ]
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) **OF
                THE SECURITIES EXCHANGE ACT OF
                1934********





For
      the
      transition period from _____________ to _____________





Commission
      file number: 001-13003





**SILVERLEAF
      RESORTS, INC**.


(Exact
      name of registrant as specified in its charter)





**TEXAS**
            **75-2259890**(State
                of incorporation)
            (I.R.S.
                EmployerIdentification
                No.)





**1221
      RIVER BEND DRIVE, SUITE 120**


**DALLAS,
      TEXAS 75247**


(Address
      of principal executive offices, including zip code)





**214-631-1166**


(Registrant’s
      telephone number, including area code)








Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
      [X]
      No [  ]





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated filer [  ]  Accelerated
      filer [  ]  Non-accelerated
      filer [X]





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
      [  ] No [X]


Number
      of
      shares of common stock outstanding of the issuer’s Common Stock, par value $0.01
      per share, as of November 13, 2006: 37,685,397








**Explanatory
      Note**





This
      quarterly report on Form 10-Q contains forward-looking statements within the
      meaning of the Private Securities Litigation Reform Act of 1995,
      Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934, including in particular, statements about
      our
      plans, objectives, expectations and prospects under Items 1 and 2. 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
      discussed under the heading “Risk Factors” beginning on page 22 of our annual
      report on Form 10-K for the year ended December 31, 2005. 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.




1


**SILVERLEAF
        RESORTS, INC.**


**INDEX**
  PagePART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Condensed
                  Consolidated Statements of Operations for the threemonths
                  and nine months ended September 30, 2006 and 2005
              3Condensed
                  Consolidated Balance Sheets as of September 30, 2006and
                  December 31, 2005
              4Condensed
                  Consolidated Statement of Shareholders' Equity forthe
                  nine months ended September 30, 2006
              5Condensed
                  Consolidated Statements of Cash Flows for thenine
                  months ended September 30, 2006 and 2005
              6Notes
                  to the Condensed Consolidated Financial Statements
              7Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition andResults
                  of Operations
              19Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              28Item
                  4.
              Controls
                  and Procedures
              29PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              30Item
                  1A.
              Risk
                  Factors
              30Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              30Signatures
              31




2




**PART
                  1: FINANCIAL INFORMATION****Item
                  1. Financial Statements****SILVERLEAF
                  RESORTS, INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS**(in
                  thousands, except share and per share amounts)(Unaudited)
  Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2006
              
              
              2005
              
              
              2006
              
              
              2005**Revenues:**Vacation
                  Interval sales
              
              $
              51,414
              
              $
              41,833
              
              $
              141,516
              
              $
              109,304Estimated
                  uncollectible revenue
              
              
              (8,910
              )
              
              -
              
              
              (24,525
              )
              
              -Sampler
                  sales
              
              
              -
              
              
              617
              
              
              -
              
              
              1,759Net
                  sales
              
              
              42,504
              
              
              42,450
              
              
              116,991
              
              
              111,063Interest
                  income
              
              
              12,021
              
              
              9,067
              
              
              33,439
              
              
              28,937Management
                  fee income
              
              
              465
              
              
              450
              
              
              1,396
              
              
              1,351Gain
                  on sale of notes receivable
              
              
              -
              
              
              5,789
              
              
              -
              
              
              6,457Other
                  income
              
              
              1,110
              
              
              4,549
              
              
              2,980
              
              
              5,931Total
                  revenues
              
              
              56,100
              
              
              62,305
              
              
              154,806
              
              
              153,739**Costs
                  and Operating Expenses:**Cost
                  of Vacation Interval sales
              
              
              6,069
              
              
              6,772
              
              
              14,986
              
              
              17,507Sales
                  and marketing
              
              
              25,880
              
              
              19,648
              
              
              68,535
              
              
              54,985Provision
                  for uncollectible notes
              
              
              -
              
              
              6,275
              
              
              -
              
              
              18,083Operating,
                  general and administrative
              
              
              7,958
              
              
              7,344
              
              
              23,329
              
              
              21,177Depreciation
                  and amortization
              
              
              627
              
              
              616
              
              
              1,750
              
              
              2,158Interest
                  expense and lender fees
              
              
              5,730
              
              
              4,094
              
              
              15,273
              
              
              12,765Total
                  costs and operating expenses
              
              
              46,264
              
              
              44,749
              
              
              123,873
              
              
              126,675Income
                  before provision for income taxesand
                  discontinued operations
              
              
              9,836
              
              
              17,556
              
              
              30,933
              
              
              27,064Provision
                  for income taxes
              
              
              (3,787
              )
              
              (5,306
              )
              
              (11,909
              )
              
              (8,189
              )**Income
                  from continuing operations**
              
              
              6,049
              
              
              12,250
              
              
              19,024
              
              
              18,875**Discontinued
                  Operations**Gain
                  on sales of discontinued operations (net of taxes)
              
              
              -
              
              
              613
              
              
              -
              
              
              613Income
                  from discontinued operations (net of taxes)
              
              
              -
              
              
              -
              
              
              -
              
              
              128**Net
                  income from discontinued operations (net of
                  taxes)**
              
              
              -
              
              
              613
              
              
              -
              
              
              741**Net
                  income**
              
              $
              6,049
              
              $
              12,863
              
              $
              19,024
              
              $
              19,616**Basic
                  income per share:**Income
                  from continuing operations
              
              $
              0.16
              
              $
              0.33
              
              $
              0.51
              
              $
              0.51Income
                  from discontinued operations
              
              $
              -
              
              $
              0.02
              
              $
              -
              
              $
              0.02Net
                  income
              
              $
              0.16
              
              $
              0.35
              
              $
              0.51
              
              $
              0.53**Diluted
                  income per share:**Income
                  from continuing operations
              
              $
              0.15
              
              $
              0.31
              
              $
              0.48
              
              $
              0.48Income
                  from discontinued operations
              
              $
              -
              
              $
              0.02
              
              $
              -
              
              $
              0.02Net
                  income
              
              $
              0.15
              
              $
              0.33
              
              $
              0.48
              
              $
              0.50**Weighted
                  average basic common shares outstanding**
              
              
              37,590,168
              
              
              36,954,948
              
              
              37,528,924
              
              
              36,918,265**Weighted
                  average diluted common shares outstanding**
              
              
              39,233,579
              
              
              39,042,770
              
              
              39,232,479
              
              
              38,934,572The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




3




**SILVERLEAF
                  RESORTS, INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**(in
                  thousands, except share and per share amounts)
  September
                  30,
              
              
              December
                  31,ASSETS
              
              
              2006
              
              
              2005(Unaudited)Cash
                  and cash equivalents
              
              $
              8,834
              
              $
              10,990Restricted
                  cash
              
              
              38,082
              
              
              4,893Notes
                  receivable, net of allowance for uncollectible notes of$69,836
                  and $52,479, respectively
              
              
              218,298
              
              
              177,572Accrued
                  interest receivable
              
              
              2,858
              
              
              2,243Investment
                  in special purpose entity
              
              
              15,020
              
              
              22,802Amounts
                  due from affiliates
              
              
              4,122
              
              
              680Inventories
              
              
              145,203
              
              
              117,597Land,
                  equipment, and leasehold improvements, net
              
              
              22,264
              
              
              10,441Land
                  held for sale
              
              
              203
              
              
              495Prepaid
                  and other assets
              
              
              20,297
              
              
              14,083TOTAL
                  ASSETS
              
              $
              475,181
              
              $
              361,796LIABILITIES
                  AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
                  payable and accrued expenses
              
              $
              10,721
              
              $
              9,556Accrued
                  interest payable
              
              
              2,011
              
              
              1,354Amounts
                  due to affiliates
              
              
              104
              
              
              544Unearned
                  samplers
              
              
              6,167
              
              
              5,310Income
                  taxes payable
              
              
              4,094
              
              
              1,268Deferred
                  income taxes payable
              
              
              15,601
              
              
              8,485Notes
                  payable and capital lease obligations
              
              
              260,026
              
              
              177,269Senior
                  subordinated notes
              
              
              32,321
              
              
              33,175Total
                  Liabilities
              
              
              331,045
              
              
              236,961COMMITMENTS
                  AND CONTINGENCIESSHAREHOLDERS'
                  EQUITYPreferred
                  stock, 10,000,000 shares authorized, none issued and
                  outstanding
              
              
              -
              
              
              -Common
                  stock, par value $0.01 per share, 100,000,000 shares
                  authorized,37,685,397
                  shares issued and outstanding at September 30, 2006, and37,494,304
                  shares issued and outstanding at December 31, 2005
              
              
              377
              
              
              375Additional
                  paid-in capital
              
              
              112,482
              
              
              112,207Retained
                  earnings
              
              
              31,277
              
              
              12,253Total
                  Shareholders' Equity
              
              
              144,136
              
              
              124,835TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              475,181
              
              $
              361,796
  The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




4


**SILVERLEAF
                  RESORTS, INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY**(in
                  thousands, except share amounts)(Unaudited)
  Common
                  StockNumber
                  of
              
              
              $0.01
              
              
              AdditionalShares
              
              
              Par
              
              
              Paid-in
              
              
              RetainedIssued
              
              
              Value
              
              
              Capital
              
              
              Earnings
              
              
              TotalJanuary
                  1, 2006
              
              
              37,494,304
              
              $
              375
              
              $
              112,207
              
              $
              12,253
              
              $
              124,835Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              217
              
              
              -
              
              
              217Exercise
                  of stock options
              
              
              191,093
              
              
              2
              
              
              58
              
              
              -
              
              
              60Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              19,024
              
              
              19,024September
                  30, 2006
              
              
              37,685,397
              
              $
              377
              
              $
              112,482
              
              $
              31,277
              
              $
              144,136
   The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.
















5




**SILVERLEAF
                  RESORTS, INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS**(in
                  thousands)(Unaudited)
  Nine
                  Months EndedSeptember
                  30,2006
              
              
              2005(Revised-see
                  Note 2)OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              19,024
              
              $
              19,616Adjustments
                  to reconcile net income to net cash (used in) provided byoperating
                  activities:Income
                  from discontinued operations, net of taxes
              
              
              -
              
              
              (741
              )Estimated
                  uncollectible revenue / provision for uncollectible notes
              
              
              24,525
              
              
              18,083Depreciation
                  and amortization
              
              
              1,750
              
              
              2,158Gain
                  on sale of notes receivable
              
              
              -
              
              
              (6,457
              )Gain
                  on sale of land held for sale
              
              
              (499
              )
              
              (3,635
              )Proceeds
                  from sale of notes receivable
              
              
              -
              
              
              104,193Stock-based
                  compensation
              
              
              217
              
              
              -Cash
                  effect from changes in operating assets and liabilities:Restricted
                  cash
              
              
              (661
              )
              
              (1,112
              )Notes
                  receivable
              
              
              (77,037
              )
              
              (31,987
              )Accrued
                  interest receivable
              
              
              (615
              )
              
              186Investment
                  in special purpose entity
              
              
              7,782
              
              
              (16,794
              )Amounts
                  due from/to affiliates
              
              
              (3,882
              )
              
              (2,231
              )Inventories
              
              
              (15,820
              )
              
              (6,092
              )Prepaid
                  and other assets
              
              
              (6,214
              )
              
              (1,046
              )Accounts
                  payable and accrued expenses
              
              
              1,165
              
              
              479Accrued
                  interest payable
              
              
              657
              
              
              126Unearned
                  samplers
              
              
              857
              
              
              742Income
                  taxes payable
              
              
              9,942
              
              
              6,638Net
                  cash (used in) provided by operating activities
              
              
              (38,809
              )
              
              82,126INVESTING
                  ACTIVITIES:Purchases
                  of land, equipment, and leasehold improvements
              
              
              (13,573
              )
              
              (419
              )Proceeds
                  from sale of discontinued operations
              
              
              -
              
              
              13,101Proceeds
                  from sale of land held for sale
              
              
              791
              
              
              6,131Net
                  cash (used in) provided by investing activities
              
              
              (12,782
              )
              
              18,813FINANCING
                  ACTIVITIES:Proceeds
                  from borrowings from unaffiliated entities
              
              
              291,426
              
              
              111,796Payments
                  on borrowings to unaffiliated entities
              
              
              (209,523
              )
              
              (215,837
              )Restricted
                  cash for repayment of debt
              
              
              (32,528
              )
              
              (258
              )Proceeds
                  from exercise of stock options
              
              
              60
              
              
              30Net
                  cash provided by (used in) financing activities
              
              
              49,435
              
              
              (104,269
              )Net
                  change in cash and cash equivalents
              
              
              (2,156
              )
              
              (3,330
              )CASH
                  AND CASH EQUIVALENTS:Beginning
                  of period
              
              
              10,990
              
              
              10,935End
                  of period
              
              $
              8,834
              
              $
              7,605SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid, net of amounts capitalized
              
              $
              13,026
              
              $
              11,108Income
                  taxes paid
              
              $
              3,800
              
              $
              1,200SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
                  ACTIVITIES:Notes
                  receivable, net of allowance for uncollectible notes, acquired
                  from
                  SPE
              
              $
              -
              
              $
              62,884Notes
                  payable acquired from SPE
              
              $
              -
              
              $
              50,386Other
                  assets, liabilities, and equity acquired from SPE
              
              $
              -
              
              $
              12,498Land
                  and equipment acquired under capital leases
              
              $
              -
              
              $
              62The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




6




**SILVERLEAF
      RESORTS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      1 - Background**





These
      condensed consolidated financial statements of Silverleaf Resorts, Inc.
      (“Silverleaf,” “the Company,” “we,” or “our”) presented herein do not include
      certain information and disclosures required by accounting principles generally
      accepted in the United States of America for complete financial statements.
      However, in our opinion, all normal and recurring adjustments considered
      necessary for a fair presentation have been included. Operating results for
      the
      three and nine months ended September 30, 2006 are not necessarily indicative
      of
      the results that may be expected for the year ending December 31,
      2006.





These
      condensed consolidated financial statements should be read in conjunction with
      the audited consolidated financial statements and footnotes included in our
      Form
      10-K for the year ended December 31, 2005 as filed with the Securities and
      Exchange Commission (“SEC”), as well as all the financial information contained
      in interim and other reports filed with the SEC since then. The accounting
      policies used in preparing these condensed consolidated financial statements
      are
      the same as those described in such Form 10-K, with the exception of Statement
      of Financial Accounting Standards No. 152, “Accounting for Real Estate
      Time-Sharing Transactions” (“SFAS No. 152”) and Statement of Financial
      Accounting Standards No. 123R, “Share-Based Payment” (“SFAS No. 123R”) noted
      below.





**Note
      2** **-
      Significant Accounting Policies Summary**





*Basis
      of Presentation —* The
      accompanying condensed consolidated financial statements have been prepared
      in
      conformity with accounting policies generally accepted in the United States
      of
      America. In our opinion, the accompanying condensed consolidated financial
      statements contain all material adjustments, consisting only of normal recurring
      adjustments necessary to present fairly our financial condition, our results
      of
      operations and changes in our cash flows.





*Principles
      of Consolidation —* The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned subsidiaries, excluding Silverleaf Finance I, Inc., our
      wholly-owned qualified special purpose entity dissolved during the third quarter
      of 2005 (“SF-I”), and Silverleaf Finance III, LLC, a wholly-owned off-balance
      sheet qualified special purpose finance subsidiary, formed during the third
      quarter of 2005 (“SF-III”). All significant intercompany accounts and
      transactions have been eliminated in the condensed consolidated financial
      statements.





*Adoption
      of SFAS No. 152 —* SFAS
      No.
      152 is effective for financial statements for fiscal years beginning after
      June
      15, 2005, and is to be reported as a cumulative effect of a change in accounting
      principle. Accordingly, we adopted SFAS No. 152 effective January 1, 2006.
      SFAS
      No. 152 amends Financial Accounting Standards Board Statement No. 66,
“Accounting for Sales of Real Estate”, to reference the financial accounting and
      reporting guidance for real estate time-sharing transactions that is provided
      in
      American Institute of Certified Public Accountants Statement of Position 04-2,
      “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). This
      Statement also amends Financial Accounting Standards Board Statement No. 67,
      “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to
      state that the guidance for (a) incidental operations and (b) costs incurred
      to
      sell real estate projects does not apply to real estate time-sharing
      transactions. The accounting for those operations and costs is subject to the
      guidance in SOP 04-2. SFAS No. 152 provides guidance on determining revenue
      recognition for timeshare transactions, evaluation of uncollectibility of
      Vacation Interval receivables, accounting for costs of Vacation Interval sales,
      operations during holding periods (or incidental operations), and other
      accounting transactions specific to time share operations. Restatement or
      reclassification of previously reported financial statements is not permitted.
      Accordingly, as a result of the adoption of SFAS No. 152, our financial
      statements for periods beginning on or after January 1, 2006 are not comparable,
      in all respects, with those prepared for periods ending on or prior to December
      31, 2005.





Specifically,
      SFAS No. 152 requires the following changes to our accounting for time-sharing
      transactions:




·
            The
                relative sales value method of recording Vacation Interval cost of
                sales
                has been amended to include estimated future defaults of uncollectible
                sales and the subsequent resale of the recovered Vacation Intervals
                reacquired on future cancelled sales in our total estimate of revenues
                we
                expect to earn on a project.




7







·
            The
                estimated uncollectible revenue on Vacation Interval sales excludes
                an
                estimate for the value of inventory recoveries. Prior to SFAS No.
                152 we
                included a reduction to our provision for uncollectible notes for
                our
                estimate of inventory recoveries.





·
            The
                estimated uncollectible revenue (i.e. provision for uncollectible
                notes)
                is recorded as a reduction to Vacation Interval sales rather than
                as an
                expense, as it was previously recorded prior to SFAS No.
                152.





·
            Revenues
                related to sampler contracts, which entitle the prospective owner
                to
                sample a resort during certain periods, have been and will continue
                to be
                deferred until the customer uses the stay or allows the contract
                to
                expire. Effective January 1, 2006, sampler sales and related costs
                are
                accounted for as incidental operations, whereby incremental costs
                in
                excess of incremental revenue are charged to expense as incurred
                and the
                operations are presented as a net expense in the condensed consolidated
                statement of operations. Conversely, incremental revenue in excess
                of
                incremental costs is recorded as a reduction of inventory in the
                condensed
                consolidated balance sheet. Incremental costs include costs that
                would not
                have been incurred had we not sold samplers. During the three and
                nine
                months ended September 30, 2006, all sampler sales were recorded
                as a
                reduction to sales and marketing expense since direct and incremental
                costs of sampler sales exceeded incremental sampler sales. Prior
                to SFAS
                No. 152, sampler sales were reported separately as revenue.





*Revenue
      and Expense Recognition —* A
      substantial portion of Vacation Interval sales are made in exchange for mortgage
      notes receivable, which are secured by a deed of trust on the Vacation Interval
      sold. We recognize the sale of a Vacation Interval under the full accrual method
      after a binding sales contract has been executed, the buyer has made a down
      payment of at least 10%, and the statutory rescission period has expired. If
      all
      accrual method criteria are met except that significant development costs remain
      to complete the project or phase, revenues are recognized on the
      percentage-of-completion basis. Under this method, the amount of revenue
      recognized (based on the sales value) at the time a sale is recognized is
      measured by the relationship of costs already incurred to the total of costs
      already incurred and estimated future costs. The remaining amount is deferred
      and recognized as the remaining costs are incurred. There were no sales deferred
      at September 30, 2006 related to the percentage-of-completion
      method.





Both
      of
      the above methods employ the relative sales value method in accounting for
      costs
      of sales and inventory, which are applied to each phase separately. Generally,
      we consider each building a separate phase. Pursuant to the provisions of SFAS
      No. 152, in determining relative sales value, an estimate of uncollectibility
      is
      used to reduce the estimate of total Vacation Interval revenue under the
      project, both actual to date plus expected future revenue. The relative sales
      value method is used to allocate inventory cost and determine cost of sales
      in
      conjunction with a sale. Under the relative sales value method, cost of sales
      is
      estimated as a percentage of net sales using a cost of sales percentage which
      represents the ratio of total estimated cost, including both costs already
      incurred plus estimated costs to complete the phase, if any, to total estimated
      Vacation Interval revenue under the project. Common costs, including amenities,
      are allocated to inventory cost among the phases that those costs are expected
      to benefit, and are included in total estimated costs.





The
      estimate of total revenue for a phase, which includes both actual to date
      revenues and expected future revenues, incorporates factors such as actual
      or
      estimated uncollectibles, changes in sales mix and unit sales prices,
      repossessions of intervals, effects of upgrade programs, and past and expected
      sales programs to sell slow moving inventory units. On at least a quarterly
      basis, we recalculate the estimated cost of sales percentage, using the new
      estimate of total estimated phase revenue and total estimated phase costs,
      both
      actual to date and expected in the future. The effects of changes in estimates
      are accounted for in the period in which they first become known on a
      retrospective basis using a current period adjustment.





Certain
      Vacation Interval sales transactions are deferred until the minimum down payment
      has been received. We account for these transactions utilizing the deposit
      method. Under this method, the sale is not recognized, a receivable is not
      recorded, and inventory is not relieved. Any cash received is carried as a
      deposit until the sale can be recognized. When these types of sales are
      cancelled without a refund, deposits forfeited are recognized as income and
      the
      interest portion is recognized as interest income. This income is not
      significant.





8


In
      addition to sales of Vacation Intervals to new prospective owners, we sell
      additional and upgraded Vacation Intervals to existing owners. Revenues are
      recognized on an additional Vacation Interval sale, which is a new interval
      sale
      that is treated as a separate transaction from the original Vacation Interval
      for accounting purposes, when the buyer makes a down payment of at least 10%,
      excluding any equity from the original Vacation Interval purchased. Revenues
      are
      recognized on an upgrade Vacation Interval sale, which is a modification and
      continuation of the original sale, by including the buyer’s equity from the
      original Vacation Interval towards the down payment of at least 10%. The
      additional accrual method criteria described above must also be satisfied for
      revenue recognition of additional and upgraded Vacation Intervals. The revenue
      recognized on upgrade Vacation Interval sales is the difference between the
      upgrade sales price and traded-in sales price, and cost of sales is the
      incremental increase in the cost of the Vacation Interval purchased.





We
      recognize interest income as earned. Interest income is accrued on notes
      receivable, net of an estimated amount that will not be collected, until the
      individual notes become 90 days delinquent. Once a note becomes 90 days
      delinquent, the accrual of interest income ceases until collection is deemed
      probable.





We
      receive fees for management services provided to each timeshare resort’s owners’
association (a “Club”). These revenues are recognized on an accrual basis in the
      period the services are provided if collection is deemed probable.





Services
      and other income are recognized on an accrual basis in the period service is
      provided.





Sales
      and
      marketing costs are charged to expense in the period incurred. Commissions,
      however, are recognized in the same period as the revenue is recognized.





*Cash
      and Cash Equivalents —* Cash
      and
      cash equivalents consist of all highly liquid investments with an original
      maturity at the date of purchase of three months or less. Cash and cash
      equivalents include cash, certificates of deposit, and money market
      funds.





*Restricted
      Cash* —
      Restricted cash consists of certificates of deposit that serve as collateral
      for
      construction bonds and cash restricted for repayment of debt.





*Investment
      in Special Purpose Entities* — ** We
      were
      party to a $75 million revolving credit agreement to finance Vacation Interval
      notes receivable through SF-I, an off-balance-sheet qualified special purpose
      entity through July 2005. Sales of notes receivable from the Company to SF-I
      that met certain underwriting criteria occurred on a periodic basis. SF-I funded
      these purchases through advances under a credit agreement arranged for this
      purpose.





We
      closed
      a securitization transaction with SF-III, which is a qualified special purpose
      entity formed for the purpose of issuing $108.7 million of Timeshare Loan-Backed
      Notes Series 2005-A (“Series 2005-A Notes”) in a private placement during the
      third quarter of 2005. The Series 2005-A Notes are secured by timeshare
      receivables sold to SF-III by the Company pursuant to a transfer agreement
      between us and SF-III. Under that agreement, we sold to SF-III approximately
      $132.8 million in timeshare receivables that were previously pledged as
      collateral under revolving credit facilities with our senior lenders and SF-I.
      The proceeds from the sale of the timeshare receivables to SF-III were used
      to
      pay off in full the credit facility of SF-I and to pay down amounts we owed
      under our senior credit facilities. The timeshare receivables we sold to SF-III
      are without recourse, except for breaches of certain representations and
      warranties at the time of sale. We are responsible for servicing the timeshare
      receivables purchased by SF-III pursuant to the terms of the agreement and
      will
      receive a fee for our services. Such fees received approximate our internal
      cost
      of servicing such timeshare receivables, and approximates the fee a third party
      would receive to service such receivables. As a result, the related servicing
      asset or liability was estimated to be insignificant.





We
      account for and evaluate our investment in special purpose entities in
      accordance with SFAS 140, EITF 99-20, and SFAS 115, as applicable. The gain
      or
      loss on the sale is determined based on the proceeds received, the fair value
      assigned to the investment in special purpose entities, and the recorded value
      of notes receivable sold. The fair value of the investment in special purpose
      entities is estimated based on the present value of future cash flows we expect
      to receive from the notes receivable sold. We utilized the following key
      assumptions to estimate the fair value of such cash flows related to SF-I:
      customer prepayment rate - ranging from 2.3% to 4.3%; expected accounts paid
      in
      full as a result of upgrades - ranging from 5.8% to 6.2%; expected credit losses
      - ranging from 5.6% to 8.1%; discount rate - ranging from 13.5% to 19%; base
      interest rate - ranging from 3.3% to 4.4%; agent fee - ranging from 2% to 2.37%;
      and loan servicing fees - 1%. We utilized the following key assumptions to
      estimate the fair value of such cash flows related to SF-III: customer
      prepayment rate (including expected accounts paid in full as a result of
      upgrades) - 15.9%; expected credit losses - 8.81% to 11.38%; discount rate
      - 15%
      to 34.7%; base interest rate - 5.37%; and loan servicing fees - 1.75%. Our
      assumptions are based on experience with our notes receivable portfolio,
      available market data, estimated prepayments, the cost of servicing, and net
      transaction costs. Such assumptions are assessed quarterly and, if necessary,
      adjustments are made to the carrying value of the investment in special purpose
      entities on a prospective basis as a change in accounting estimate, with the
      amount of periodic interest accretion adjusted over the remaining life of the
      beneficial interest. The carrying value of the investment in special purpose
      entities represents our maximum exposure to loss regarding our involvement
      with
      our special purpose entities. **





9


*Allowance
      for Uncollectible Notes —* Beginning
      January 1, 2006, estimated uncollectible revenue, which is an offset to Vacation
      Interval sales, is recorded at an amount sufficient to maintain the allowance
      for uncollectible notes at a level management considers adequate to provide
      for
      anticipated losses resulting from customers' failure to fulfill their
      obligations under the terms of their notes. Prior to the adoption of SFAS No.
      152, this line item was recorded as an expense: provision for uncollectible
      notes. The allowance for uncollectible notes is adjusted based upon periodic
      analysis of the notes receivable portfolio, historical credit loss experience,
      and current economic factors.





Credit
      losses take three forms. The first is the full cancellation of the note, whereby
      the customer is relieved of the obligation and we recover the underlying
      inventory. The second form is a deemed cancellation, whereby we record the
      cancellation of all notes that become 90 days delinquent, net of notes that
      are
      no longer 90 days delinquent. The third form is the note receivable reduction
      that occurs when a customer trades a higher value product for a lower value
      product. In estimating the allowance, we project future cancellations and credit
      losses for each sales year by using historical cancellations experience.





The
      allowance for uncollectible notes is reduced by actual cancellations and losses
      experienced, including losses related to previously sold notes receivable which
      became delinquent and were reacquired pursuant to the recourse obligations
      discussed herein. Recourse to the Company on sales of customer notes receivable
      is governed by the agreements between the purchasers and the
      Company.





*Inventories
      —* Inventories
      are stated at the lower of cost or fair value less cost to sell. Cost includes
      amounts for land, construction materials, amenities and common costs, direct
      labor and overhead, an estimate for the value of future recoveries, taxes,
      and
      capitalized interest incurred in the construction or through the acquisition
      of
      resort dwellings held for timeshare sale. Timeshare unit costs are capitalized
      as inventory and are allocated to Vacation Intervals based upon their relative
      sales values.





We
      estimate the total cost to complete all amenities at each resort. This cost
      includes both costs incurred to date and expected costs to be incurred. At
      September 30, 2006, the estimated costs not yet incurred, which are expected
      to
      complete promised amenities was $1.2 million. We allocate the estimated promised
      and completed amenities cost to cost of Vacation Interval sales based on
      Vacation Intervals sold in a given period as a percentage of total Vacation
      Intervals expected to sell over the life of a particular resort
      project.





The
      relative sales value method of recording Vacation Interval cost of sales has
      been amended by SFAS No. 152 beginning January 1, 2006 to include estimated
      future defaults of uncollectible sales and the subsequent resale of the
      recovered Vacation Intervals reacquired on future cancelled sales in our total
      estimate of revenues we expect to earn on a project. We periodically review
      the
      carrying value of our inventory on an individual project basis for impairment,
      to ensure that the carrying value does not exceed fair value.





*Land,
      Equipment, and Leasehold Improvements* —
Land,
      equipment (including equipment under capital lease), and leasehold improvements
      are stated at cost. When assets are disposed of, the cost and related
      accumulated depreciation are removed, and any resulting gain or loss is
      reflected in income for the period. Maintenance and repairs are charged to
      expense as incurred; significant betterments and renewals, which extend the
      useful life of a particular asset, are capitalized. Depreciation is calculated
      for all fixed assets, other than land, using the straight-line method over
      the
      estimated useful life of the assets, ranging from 3 to 20 years. We periodically
      review our long-lived assets for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable.





*Prepaid
      and Other Assets* —
Prepaid
      and other assets consists primarily of prepaid insurance, prepaid postage,
      commitment fees, debt issuance costs, deferred commissions, novelty inventories,
      deposits, collected cash in senior lender lock boxes which has not yet been
      applied to the loan balances by the senior lenders, and miscellaneous
      receivables. Commitment fees and debt issuance costs are amortized over the
      life
      of the related debt.





10


*Income
      Taxes* —
      Deferred income taxes are recorded for temporary differences between the basis
      of assets and liabilities as recognized by tax laws and their carrying value
      as
      reported in the condensed consolidated financial statements. A provision is
      made
      or benefit recognized for deferred income taxes relating to temporary
      differences for financial reporting purposes. To the extent a deferred tax
      asset
      does not meet the criteria of "more likely than not" for realization, a
      valuation allowance is recorded. Our federal tax return includes all items
      of
      income, gain, loss, expense and credit of SF-III, since it is a disregarded
      entity for federal income tax purposes. We have a tax sharing agreement with
      SF-III.





*Derivative
      Financial Instruments* —
We
      follow Statement of Financial Accounting Standard No. 133, as amended, which
      establishes accounting and reporting standards for derivative financial
      instruments, including certain derivative instruments embedded in other
      contracts and hedging activities. ** All
      derivatives, whether designed as hedging relationships or not, are required
      to
      be recorded on the balance sheet at fair value. If the derivative is designated
      as a fair value hedge, the changes in the fair value of the derivative and
      of
      the hedged item attributable to the hedged risk are recognized in earnings.
      If
      the derivative is designated as a cash flow hedge, the effective portions of
      changes in the fair value of the derivative are recorded in other comprehensive
      income and ineffective portions of changes in the fair value of cash flow hedges
      are recognized in earnings.





We
      have
      engaged in two interest rate hedging transactions, or derivatives, to hedge
      against fluctuations in interest rates. As of September 30, 2006, we had hedging
      contracts with notional amounts of $45.4 million, which expire between September
      2011 and March 2014. The hedge transactions are reflected at fair value on
      our
      balance sheet.





*Earnings
      Per Share* —
Basic
      earnings per share is computed by dividing net income by the weighted average
      common shares outstanding. Earnings per share assuming dilution is computed
      by
      dividing net income by the weighted average number of common shares and
      potentially dilutive shares outstanding. The number of potentially dilutive
      shares is computed using the treasury stock method, which assumes that the
      increase in the number of common shares resulting from the exercise of the
      stock
      options is reduced by the number of common shares that we could have repurchased
      with the proceeds from the exercise of the stock options.





*Stock-Based
      Compensation* — ** In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 123, Share-Based Payment, revised SFAS No.
      123R, effective for the next fiscal year beginning after June 15, 2005.
      Accordingly, we adopted the provisions of SFAS No. 123R effective January 1,
      2006. SFAS No. 123R addresses the accounting for share-based payments to
      employees, including grants of employee stock options. Under the new standard,
      we are no longer able to account for share-based compensation transactions
      using
      the intrinsic method in accordance with APB Opinion No. 25, Accounting for
      Stock
      Issued to Employees, or the pro forma disclosure requirements of SFAS No. 148,
      Accounting for Stock Based Compensation - Transition and Disclosure, as if
      we
      had accounted for our employee stock options under the fair value method of
      SFAS
      No. 123. Instead, we are required to account for such transactions using a
      fair-value method and recognize the expense in the consolidated statement of
      operations.





We
      adopted SFAS No. 123R using the modified prospective method. Under this
      transition method, for all stock options granted on or prior to December 31,
      2005 that remain outstanding as of that date, compensation cost is recognized
      for the unvested portion over the remaining requisite service period, using
      the
      fair value for these options as estimated at the date of grant using the
      Black-Scholes option-pricing model under the original provisions of SFAS No.
      123
      for pro-forma disclosure purposes. Furthermore, compensation cost will be
      recognized for any stock option grants issued, modified, repurchased, or
      canceled after December 31, 2005.





The
      following table illustrates the effect on net income and net income per share
      had we applied the fair-value recognition provisions of SFAS No. 123 to our
      stock option grants for the three and nine month periods ended September 30,
      2005, prior to the adoption of SFAS No. 123R (in thousands, except per share
      amounts):




**Three
                Months**
            
            
            **Nine
                Months****Ended**
              **September
                30,**
            
            
            **Ended**
              **September
                30,****2005**
            
            
            **2005**Net
                income, as reported
            
            $
            12,863
            
            $
            19,616Add:
                Stock-based compensation expense included in net income
            
            
            —
            
            
            —Deduct:
                Stock-based compensation expense computed under the fair value method,
                net
                of tax
            
            
            (48
            )
            
            (133
            )Pro
                forma net income
            
            $
            12,815
            
            $
            19,483Net
                income per share, basicAs
                reported
            
            $
            0.35
            
            $
            0.53Pro
                forma
            
            $
            0.35
            
            $
            0.53Net
                income per share, dilutedAs
                reported
            
            $
            0.33
            
            $
            0.50Pro
                forma
            
            $
            0.33
            
            $
            0.50





11


There
      were 267,000 stock options granted during the first nine months of 2005 with
      an
      exercise price of $1.62 per share. There were no stock options granted,
      forfeited, or expired during the first nine months of 2006. There were 191,093
      stock options exercised during the first nine months of 2006 at a weighted
      average exercise price of $0.315 per share. At September 30, 2006 there is
      $265,000 of unamortized compensation expense related to the stock option grants
      during 2005, which will be fully recognized by August 2008.





*Use
      of Estimates* —
The
      preparation of the condensed consolidated financial statements requires the
      use
      of management’s estimates and assumptions in determining the carrying values of
      certain assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the condensed consolidated financial statements
      and
      the reported amounts for certain revenues and expenses during the reporting
      period. Actual results could differ from those estimated. Significant management
      estimates include the allowance for uncollectible notes, valuation of SF-III,
      and the future sales plan and estimated recoveries used to allocate certain
      costs to inventories and cost of sales.





*Revised
      Statements of Cash Flows Presentation* —
In
      previously issued Statements of Cash Flows, we reported the operating and
      investing activities of our discontinued operations on a combined basis as
      a
      single amount. In 2006, we separately disclosed those activities within the
      Company’s other operating and investing activities. There were no activities
      from discontinued operations during 2006, however during 2005 we previously
      disclosed a net use of cash for operating activities of $841,000 pertaining
      to
      discontinued operations, all of which took place in the first quarter of 2005.
      We have revised the 2005 Statement of Cash Flow to reflect $781,000 of cash
      used
      in operating activities and $60,000 of cash used in investing activities
      pertaining to discontinued operations, within the Company’s other operating and
      investing activities.





In
      addition, our 2004 and 2003 Statements of Cash Flows presentation will be
      revised in future annual reports on Form 10-K as follows to reflect this
      revision (in thousands):


**Cash
                Provided**
            
            
            **Cash
                Provided by (Used in)****By
                Operating**
            
            
            **Investing****Activities**
            
            
            **Activities**2004,
                as previously reported
            
            $
            5,748
            
            $
            (570
            )2004,
                revised
            
            $
            6,901
            
            $
            (1,334
            )2003,
                as previously reported
            
            $
            22,419
            
            $
            4,4282003,
                revised
            
            $
            23,953
            
            $
            2,982





*Other
      Recent Accounting Pronouncements* — **





SFAS
      No.
      155 - In February 2006, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 155, Accounting for Certain
      Hybrid Financial Instruments (“SFAS No. 155”). SFAS No. 155 amends Financial
      Accounting Standards Board Statements No. 133 and 140. The statement applies
      to
      certain hybrid financial instruments, which are instruments that contain
      embedded derivatives. The new standard establishes a requirement to evaluate
      beneficial interests in securitized financial assets to determine if the
      interests represent freestanding derivatives or are hybrid financial instruments
      containing embedded derivatives requiring bifurcation. This new standard also
      permits an election for fair value re-measurement of any hybrid financial
      instrument containing an embedded derivative that otherwise would require
      bifurcation under Financial Accounting Standards Board Statement No. 133. The
      fair value election can be applied on an instrument-by-instrument basis to
      existing instruments at the date of adoption and can be applied to new
      instruments on a prospective basis. The adoption of SFAS No. 155 is not expected
      to impact our consolidated financial position or results of
      operations.





SFAS
      No.
      156 - In March 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 156, Accounting for Servicing of Financial
      Assets (“SFAS No. 156”). The statement allows for the adoption of the fair value
      method of accounting for servicing assets, as opposed to the lower of amortized
      cost or market value, including mortgage servicing rights, which represent
      an
      entity’s right to a future stream of cash flows based upon the contractual
      servicing fee associated with servicing mortgage loans. The statement is
      effective as of the beginning of any fiscal year beginning after September
      15,
      2006, with early adoption permitted as of January 1, 2006. We
      are
      still evaluating the impact t he
      adoption of SFAS No. 156 will have on our consolidated financial position and
      results of operations.





12


FIN
      No.
      48 **-** In
      July
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement No. 109,
      Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. It also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal
      years beginning after December 15, 2006. We are still evaluating the impact
      the
      adoption of FIN No. 48 will have on our consolidated financial position and
      results of operations. Our adoption of FIN No. 48 effective January 1, 2007
      may
      result in an adjustment to our tax liability and retained earnings.





SFAS
      No.
      157 **-** In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, Fair Value Measurements ** (“SFAS
      No. 157”), which clarifies that the term fair value is intended to mean a
      market-based measure, not an entity-specific measure, and gives the highest
      priority to quoted prices in active markets in determining fair value. 
SFAS No. 157 requires disclosures about (1) the extent to which companies
      measure assets and liabilities at fair value, (2) the methods and assumptions
      used to measure fair value, and (3) the effect of fair value measures on
      earnings.  SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007.  The adoption of SFAS No. 157 is not expected to have a
      material effect on our consolidated financial position or results of
      operations.





SAB
      108 **-**  In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).
      SAB 108 provides interpretive guidance on how the effects of prior-year
      uncorrected misstatements should be considered when quantifying misstatements
      in
      the current year financial statements. SAB 108 requires registrants to quantify
      misstatements using both an income statement (“rollover”) and balance sheet
      (“iron curtain”) approach and evaluate whether either approach results in a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. If prior year errors that had been previously
      considered immaterial now are considered material based on either approach,
      no
      restatement is required so long as management properly applied its previous
      approach and all relevant facts and circumstances were considered. If prior
      years are not restated, the cumulative effect adjustment is recorded in opening
      accumulated earnings as of the beginning of the fiscal year of adoption.
      SAB 108 is effective for fiscal years ending on or after November 15,
      2006, with earlier adoption encouraged. The adoption of SAB 108 is not expected
      to have a material effect on our consolidated financial position or results
      of
      operations.





SFAS
      No.
      158 **-**  I n
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No.158, Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans (“SFAS No. 158”), which amends Financial
      Accounting Standards No. 87, 88, 106, and 132(R) to require recognition of
      the over-funded or under-funded status of pension and other postretirement
      benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior
      service costs and credits, and any remaining transition amounts that have not
      yet been recognized through net periodic benefit cost will be recognized in
      accumulated other comprehensive income, net of tax effects, until they are
      amortized as a component of net periodic cost. The measurement date, the date
      at
      which the benefit obligation and plan assets are measured, is required to be
      the
      company’s fiscal year end. SFAS No. 158 is effective for publicly held companies
      for fiscal years ending after December 15, 2006, except for the measurement
      date provisions, which are effective for fiscal years ending after
      December 15, 2008. The adoption of SFAS No. 158 is not expected to impact
      our consolidated financial position or results of operations.


13





**Note
      3 - Earnings Per Share**





The
      following table illustrates the reconciliation between basic and diluted
      weighted average shares outstanding for the three and nine months ended
      September 30, 2006 and 2005:


Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2006
              
              
              2005
              
              
              2006
              
              
              2005Weighted
                  average shares outstanding - basic
              
              
              37,590,168
              
              
              36,954,948
              
              
              37,528,924
              
              
              36,918,265Issuance
                  of shares from stock options exercisable
              
              
              2,174,793
              
              
              2,656,198
              
              
              2,236,037
              
              
              2,543,013Repurchase
                  of shares from stock options proceeds
              
              
              (531,382
              )
              
              (568,376
              )
              
              (532,482
              )
              
              (526,706
              )Weighted
                  average shares outstanding - diluted
              
              
              39,233,579
              
              
              39,042,770
              
              
              39,232,479
              
              
              38,934,572


Outstanding
      stock options totaling approximately 867,000 and 870,500 were not dilutive
      at
      September 30, 2006 and 2005, respectively, because the exercise price for such
      options exceeded the market price for our shares.





**Note
      4** - **Notes Receivable**





We
      provide financing to the purchasers of Vacation Intervals, which are
      collateralized by their interest in such Vacation Intervals. The notes
      receivable generally have initial terms of seven to ten years. The average
      yield
      on outstanding notes receivable at September 30, 2006 was approximately 15.7%,
      with individual rates ranging from 0% to 17.5%. In connection with the sampler
      program, we routinely enter into notes receivable with terms of 10 months.
      Notes
      receivable from sampler sales were $3.1 million and $2.2 million at September
      30, 2006 and 2005, respectively, and are non-interest bearing.





We
      consider accounts over 60 days past due to be delinquent. As of September 30,
      2006, $4.8 million of notes receivable, net of accounts charged off, were
      considered delinquent. An additional $28.3 million of notes, of which $25.4
      million is pledged to senior lenders, would have been considered to be
      delinquent and therefore ineligible to be used for collateral purposes had
      we
      not granted payment concessions to our customers, which brings a delinquent
      note
      current and extends the maturity date if two consecutive timely payments are
      made.





Notes
      receivable are scheduled to mature as follows at September 30, 2006 (in
      thousands):





For
                the 12-Month Period Ending September 30,2007
            
            $
            35,7892008
            
            
            35,3322009
            
            
            36,7972010
            
            
            37,2042011
            
            
            38,170Thereafter
            
            
            104,866288,158Less
                discounts on notes
            
            
            (24
            )Less
                allowance for uncollectible notes
            
            
            (69,836
            )Notes
                receivable, net
            
            $
            218,298





The
      activity in gross notes receivable is as follows for the three and nine-month
      periods ended September 30, 2006 and 2005 (in thousands):




**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Balance,
                beginning of period
            
            $
            270,601
            
            $
            258,993
            
            $
            230,051
            
            $
            248,972Sales
            
            
            42,376
            
            
            37,457
            
            
            127,599
            
            
            95,962Collections
            
            
            (17,598
            )
            
            (16,462
            )
            
            (50,562
            )
            
            (49,179
            )Receivables
                charged off
            
            
            (8,778
            )
            
            (4,595
            )
            
            (24,488
            )
            
            (12,344
            )Receivables
                received via dissolution of SF-I
            
            
            —
            
            
            73,687
            
            
            —
            
            
            73,687(Sold)
                or repurchased notes receivable
            
            
            1,533
            
            
            (132,826
            )
            
            5,534
            
            
            (140,844
            )Balance,
                end of period
            
            $
            288,134
            
            $
            216,254
            
            $
            288,134
            
            $
            216,254





Prior
      to
      the adoption of SFAS No. 152, we provided for estimated Vacation Interval
      defaults at the time the Vacation Interval revenue was recorded by a charge
      to
      the provision for uncollectible notes and an increase to the allowance for
      uncollectible notes. The provision was calculated as the estimated future losses
      for newly originated Vacation Intervals offset by estimated future recoveries
      of
      inventory. Beginning January 1, 2006 with the adoption of SFAS No. 152, we
      now
      record estimated uncollectible revenue as a reduction to Vacation Interval
      sales. The estimated uncollectible revenue is calculated as gross losses for
      newly originated Vacation Intervals and does not include an offset for inventory
      recoveries, which is now a component of the relative sales value method.





14


The
      activity in the allowance for uncollectible notes is as follows for the three
      and nine months ended September 30, 2006 and 2005 (in thousands):





**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Balance,
                beginning of period
            
            $
            68,171
            
            $
            55,636
            
            $
            52,479
            
            $
            52,506Reclassification
                of estimated inventory recoveries on future charge offs
            
            
            —
            
            
            —
            
            
            11,786
            
            
            —Estimated
                uncollectible revenue
            
            
            8,910
            
            
            —
            
            
            24,525
            
            
            —Provision
                for uncollectible notes
            
            
            —
            
            
            6,275
            
            
            —
            
            
            18,083Receivables
                charged off
            
            
            (8,778
            )
            
            (4,595
            )
            
            (24,488
            )
            
            (12,344
            )Allowance
                received via dissolution of SF-I
            
            
            —
            
            
            10,803
            
            
            —
            
            
            10,803Allowance
                related to notes sold or repurchased
            
            
            1,533
            
            
            (15,461
            )
            
            5,534
            
            
            (16,390
            )Balance,
                end of period
            
            $
            69,836
            
            $
            52,658
            
            $
            69,836
            
            $
            52,658





**Note
      5 - Debt**





Notes
      payable, capital lease obligations, and senior subordinated notes as of
      September 30, 2006 and December 31, 2005 are as follows (in
      thousands):





**September
                30,**
            
            
            **December
                31,****2006**
            
            
            **2005**$100.0
                million revolving loan agreement, which contains certain financial
                covenants, revolving through June 2008 and due June 2011, principal
                and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus
                1.0%, with a 6% floor (the loan agreement is currently limited to
                $60
                million of availability)
            
            $
            27,489
            
            $
            53,661$66.4
                million conduit loan, due March 2014, principal and interest payable
                from
                the proceeds obtained on customer notes receivable pledged as collateral
                for the note, at an interest rate of 7.035%
            
            
            28,808
            
            
            37,224$26.3
                million conduit loan, due September 2011, principal and interest
                payable
                from the proceeds obtained on customer notes receivable pledged as
                collateral for the note, at an interest rate of 7.9%
            
            
            16,312
            
            
            20,839$50
                million revolving loan agreement, which contains certain financial
                covenants, revolving through and due April 2008, principal and interest
                payable from the proceeds obtained on customer notes receivable pledged
                as
                collateral for the note, at an interest rate of Prime plus
                0.75%
            
            
            16,279
            
            
            28,800$50
                million revolving loan agreement, which contains certain financial
                covenants, revolving through December 2008, due December 2011, principal
                and interest payable from the proceeds obtained on customer notes
                receivable pledged as collateral for the note, at an interest rate
                of
                Prime plus 0.5%, with a 6% floor
            
            
            153
            
            
            —$100.0
                million revolving credit facility, backed by a $100.0 million variable
                funding note bearing interest at a rate of LIBOR plus 1.5%, revolving
                through and due March 2010, principal and interest payable from the
                proceeds obtained on customer notes receivable sold as collateral
                for the
                variable funding note
            
            
            —
            
            
            —$128.0
                million term securitization, backed by $128.0 million of timeshare
                loan-backed notes, issued in seven classes and bearing interest at
                a
                blended coupon rate of 6.7%, due July 2018, principal and interest
                payable
                from the proceeds obtained on customer notes receivable sold as collateral
                for the timeshare loan-backed notes
            
            
            126,223
            
            
            —$25
                million revolving loan agreement, which contains certain financial
                covenants, revolving through May 2007, due May 2010, principal and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus
                1.5%, with a 6.5% floor
            
            
            —
            
            
            —$10
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of LIBOR plus 3.25%
            
            
            10,000
            
            
            10,000$6
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of Prime plus 3% with a 6%
                floor
            
            
            —
            
            
            —$5
                million inventory term loan agreement, which contains certain financial
                covenants, due March 2007, interest payable monthly, at an interest
                rate
                of Prime plus 3% with a 6% floor
            
            
            1,670
            
            
            3,335$30
                million inventory loan agreement, which contains certain financial
                covenants, revolving through April 2009, due April 2011, interest
                payable
                monthly, at an interest rate of Prime plus 1.5%
            
            
            18,876
            
            
            15,000




15




$15
                million inventory loan agreement, which contains certain financial
                covenants, revolving through December 2008, due December 2010, interest
                payable monthly, at an interest rate of Prime plus 2%, with a 6%
                floor
            
            
            5,984
            
            
            6,000Various
                notes, due from November 2006 through August 2016,
                collateralized
              by
                various assets with interest rates ranging from 2.95% to
                7.85%
            
            
            8,132
            
            
            2,282Total
                notes payable
            
            
            259,926
            
            
            177,141Capital
                lease obligations
            
            
            100
            
            
            128Total
                notes payable and capital lease obligations
            
            
            260,026
            
            
            177,2698.0%
                senior subordinated notes, due 2010, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            24,671
            
            
            24,6716.0%
                senior subordinated notes, due 2007, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            3,796
            
            
            3,796101⁄2%
                senior subordinated notes, subordinate to the 6.0% senior subordinated
                notes above, due 2008, interest payable semiannually on April 1 and
                October 1, guaranteed by all of the Company’s present and future domestic
                restricted subsidiaries
            
            
            2,146
            
            
            2,146Interest
                on the 6.0% senior subordinated notes, due 2007, and the 8.0% senior
                subordinated notes, due 2010, interest payable semiannually through
                October 2007 on April 1 and October 1, guaranteed by all of the Company’s
                present and future domestic restricted subsidiaries
            
            
            1,708
            
            
            2,562Total
                senior subordinated notes
            
            
            32,321
            
            
            33,175Total
            
            $
            292,347
            
            $
            210,444





At
      September 30, 2006, LIBOR rates on our senior credit facilities were from 5.32%
      to 5.47%, and the Prime rate was 8.25%. At December 31, 2005, LIBOR rates on
      our
      senior credit facilities were from 4.26% to 4.49%, and the Prime rate on these
      facilities was 7.00%.





In
      March
      2006, we closed a $100 million revolving senior credit facility through a
      newly-formed, wholly-owned and consolidated special purpose finance subsidiary,
      Silverleaf Finance IV, LLC ("SF-IV"), a Delaware limited liability company.
      SF-IV was formed for the purpose of issuing a $100 million variable funding
      note
      ("VFN") to UBS Real Estate Securities Inc. (“UBS”). The VFN bears interest on
      advances by UBS to SF-IV at an initial rate equal to LIBOR plus 1.5%, and
      matures in March 2010. The VFN is secured by customer notes receivable sold
      to
      SF-IV. Proceeds from the sale of customer notes receivable to SF-IV are used
      to
      fund normal business operations and for general working capital purposes. The
      VFN was issued pursuant to the terms and conditions of an indenture between
      SF-IV, UBS, and Wells Fargo Bank, National Association, as indenture trustee.
      We
      will service the customer notes receivable sold to SF-IV under the terms of
      an
      agreement with the indenture trustee and SF-IV.





In
      August
      2006, we closed a $128 million term securitization transaction through a
      newly-formed, wholly-owned and consolidated special purpose finance subsidiary,
      Silverleaf Finance V, L.P. (“SF-V”), a Delaware limited partnership. SF-V was
      formed for the purpose of issuing approximately $128.0 million of its Timeshare
      Loan-Backed Notes Series 2006-A (“Series 2006-A Notes”) in a private offering
      and sale through UBS Securities LLC (“UBS”). The Series 2006-A Notes were issued
      pursuant to the terms and conditions of an indenture between ourselves as
      servicer, SF-V, as issuer, Silverleaf Finance V, LLC, as general partner of
      SF-V, and Wells Fargo Bank, National Association, as indenture trustee,
      custodian, backup servicer, and account intermediary. The Series 2006-A Notes
      were issued in seven classes ranging from Class A through Class G notes with
      a
      blended coupon rate of 6.7%. The Class A through Class G notes have been rated
      Aaa, Aa2, A2, Baa1, Baa2, Baa3, and Ba2 respectively by Moody’s Investors
      Service, Inc., and have a final maturity of July 2018.





The
      Series 2006-A Notes are secured by customer notes receivable sold to SF-V by
      SF-IV and Silverleaf. The proceeds from the sale of the customer notes
      receivable to SF-V were primarily used to pay down $93.3 million in consolidated
      indebtedness to senior lenders. Approximately $24.8 million of the proceeds
      received by SF-V from the sale of the Series 2006-A Notes is being held in
      a
      special pre-funding account under the terms of the indenture. We have until
      November 29, 2006 to sell up to approximately $30 million in additional
      qualifying timeshare loans to SF-V. All funds held in the pre-funding account
      that are not used by SF-V to finance the purchase of additional qualifying
      customer notes receivable by November 29 will be returned to the holders of
      the
      Series 2006-A Notes as a distribution of principal. All customer notes
      receivable purchased by SF-V are being acquired without recourse, except in
      the
      case of breaches of customary representations and warranties made in connection
      with the sale of the notes. We will continue to service the customer notes
      receivable sold to SF-V under the terms of the indenture and will receive a
      fee
      for our services.





To
      partially offset an increase in interest rates, we have engaged in two interest
      rate hedging transactions, or derivatives, related to our conduit loan with
      Silverleaf Finance II, Inc., (“SF-II”), a Delaware corporation, for a notional
      amount of $45.4 million at September 30, 2006, that expires between September
      2011 and March 2014. Our VFN with SF-IV also acts as an interest rate hedge
      since it contains a provision for an interest rate cap, however there are no
      amounts outstanding under this line of credit at September 30, 2006. The Series
      2005-A Notes related to our off-balance sheet special purpose finance
      subsidiary, SF-III, with a balance of $60.1 million at September 30, 2006,
      bear
      interest at fixed rates ranging from 4.857% to 6.756%, and the above-mentioned
      Series 2006-A Notes related to SF-V bear interest at a fixed blended rate of
      6.7%.





16


**Note
      6 - Subsidiary Guarantees**





All
      subsidiaries of the Company, except SF-II, SF-III, SF-IV, and SF-V have
      guaranteed the $32.3 million of senior subordinated notes. Separate financial
      statements and other disclosures concerning each guaranteeing subsidiary (each,
      a “Guarantor Subsidiary”) are not presented herein because the guarantee of each
      Guarantor Subsidiary is full and unconditional and joint and several, and each
      Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together
      comprise all of our direct and indirect subsidiaries.





The
      Guarantor Subsidiaries had no operations for the nine months ended September
      30,
      2006 and 2005. Combined summarized balance sheet information as of September
      30,
      2006 and December 31, 2005 for the Guarantor Subsidiaries is as follows (in
      thousands):


September
                  30,
              
              
              December
                  31,2006
              
              
              2005Other
                  assets
              
              $
              2
              
              $
              2Total
                  assets
              
              $
              2
              
              $
              2Investment
                  by parent (includes equityand
                  amounts due to parent)
              
              $
              2
              
              $
              2Total
                  liabilities and equity
              
              $
              2
              
              $
              2


**Note
      7** - **Discontinued Operations**





In
      accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS No. 144”), the water and utility property assets and
      liabilities were designated as held for sale effective December 31, 2004. In
      accordance with the provisions of SFAS No. 144, the results of operations of
      these properties are included in income from discontinued operations.





On
      March
      11, 2005, we sold the water distribution and waste water treatment utilities
      assets at eight of our timeshare resorts for an aggregate sales price of $13.1
      million, which resulted in a pretax gain of $879,000 during the third quarter
      of
      2005, once all conditions of the sale were met. The purchasers of the utilities
      are Algonquin Water Resources, of Texas, LLC, a Texas limited liability company;
      Algonquin Water Resources of Missouri, LLC, a Missouri limited liability
      company; Algonquin Water Resources of Illinois, LLC, an Illinois limited
      liability company; Algonquin Water Resources of America, Inc., a Delaware
      corporation; and Algonquin Power Income Fund, an open-ended investment trust
      established under the laws of Ontario, Canada (collectively, the “Purchasers”).
      Certain of the Purchasers have entered into a services agreement to provide
      uninterrupted water supply and waste water treatment services to our eight
      timeshare resorts to which the transferred utility assets relate. The Purchasers
      will charge our timeshare resorts the tariffed rate for those utility services
      that are regulated by the states in which the resorts are located. For any
      unregulated utility services, the Purchasers will charge a rate set in
      accordance with the ratemaking procedures of the Texas Commission on
      Environmental Quality. The proceeds of our sale of these utility assets were
      used to reduce senior debt in accordance with our loan agreements with our
      senior lenders.





Notwithstanding
      the closing of this sale of utilities assets, our agreement with the Purchasers
      contains provisions relating to the required post-closing receipt of customary
      governmental approvals from utility regulators in Missouri and Texas. During
      the
      third quarter of 2005, the Purchasers received governmental approval from the
      utility regulators in Missouri. Approval from the utility regulators in Texas
      is
      still pending at this time. However, we entered into an amendment during July
      2006 in which the deadline for obtaining required approvals from the appropriate
      Texas regulatory agencies was extended from September 2006 to March 2007. If
      the
      Purchasers do not receive required approvals from Texas regulators relating
      to
      the utility assets in Texas (the “Texas Assets”) by March 2007, the Texas Assets
      will be reconveyed to us, the transaction involving the Texas Assets will be
      rescinded, and we will be obligated to return to the Purchasers approximately
      $6.2 million of the purchase price attributable to the Texas Assets.





17


The
      net
      income from discontinued operations is summarized as follows (in thousands):





**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**REVENUE:Gain
                on sale of discontinued operations
            
            $
            —
            
            $
            879
            
            $
            —
            
            $
            879Other
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            438Total
                revenue
            
            
            —
            
            
            879
            
            
            —
            
            
            1,317COSTS
                AND OPERATING EXPENSES:Other
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            278Depreciation
                and amortization
            
            
            —
            
            
            —
            
            
            —
            
            
            —Interest
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                costs and operating expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            278Income
                from discontinued operations
            
            
            —
            
            
            879
            
            
            —
            
            
            1,039Provision
                for income taxes
            
            
            —
            
            
            (266
            )
            
            —
            
            
            (298
            )Net
                income from discontinued operations
            
            $
            —
            
            $
            613
            
            $
            —
            
            $
            741




**Note
      8** - **Commitments and Contingencies**





We
      are
      currently subject to litigation arising in the normal course of our business.
      From time to time, such litigation includes claims regarding employment, tort,
      contract, truth-in-lending, the marketing and sale of Vacation Intervals, and
      other consumer protection matters. Litigation has been initiated from time
      to
      time by persons seeking individual recoveries for themselves, as well as, in
      some instances, persons seeking recoveries on behalf of an alleged class. In
      our
      judgment, none of the lawsuits currently pending against us, either individually
      or in the aggregate, is likely to have a material adverse effect on our
      business, results of operations, or financial condition.





Various
      legal actions and claims may be instituted or asserted in the future against
      us
      and our subsidiaries, including those arising out of our sales and marketing
      activities and contractual arrangements. Some of the matters may involve claims,
      which, if granted, could be materially adverse to our financial
      condition.





Litigation
      is subject to many uncertainties, and the outcome of individual litigated
      matters is not predictable with assurance. We will establish reserves from
      time
      to time when deemed appropriate under generally acceptable accounting
      principles. However, the outcome of a claim for which we have not deemed a
      reserve to be necessary may be decided unfavorably against us and could require
      us to pay damages or make other expenditures in amounts or a range of amounts
      that could be materially adverse to our business, results of operations, or
      financial condition.





**Note
      9** **-
      Subsequent Events**





During
      October 2006, we entered into an amendment with one of our senior lenders to
      decrease the existing line of credit we have available to us under the
      receivables loan agreement with this lender from $50 million to $35 million.
      In
      addition, the calculation of one of the financial covenants under this loan
      agreement was modified and there were amendments to the eligibility requirements
      of customer notes receivable that can be pledged as collateral under the
      receivables agreement. The inventory loan agreement with this lender was also
      amended to conform with the amendments made to the receivables loan agreement.
      We do not believe these amendments will have a material impact on our liquidity
      or working capital requirements.





As
      previously disclosed, in August 2006 we closed a $128 million term
      securitization transaction through a newly-formed, wholly-owned and consolidated
      special purpose finance subsidiary, SF-V, a Delaware limited partnership. SF-V
      was formed for the purpose of issuing approximately $128.0 million of its
      Timeshare Loan-Backed Notes Series 2006-A in a private offering and sale through
      UBS. Approximately $24.8 million of the proceeds received by SF-V from the
      sale
      of the Series 2006-A Notes was being held in a special pre-funding account,
      pending the sale of up to approximately $30 million in additional qualifying
      timeshare loans to SF-V by November 29, 2006. All funds held in the pre-funding
      account that are not used by SF-V to finance the purchase of additional
      qualifying customer notes receivable will be returned to the holders of the
      Series 2006-A Notes as a distribution of principal.





In
      October 2006 we sold $25.5 million in customer notes receivable to SF-V for
      a
      purchase price of $21.1 million. The proceeds from the sale were primarily
      used
      to pay down consolidated indebtedness to senior lenders. As a result of this
      subsequent sale, $3.7 million of the proceeds received by SF-V from the sale
      of
      the Series 2006-A Notes remains in the pre-funding account and will be returned
      to the holders of the Series 2006-A Notes as a distribution of principal if
      additional qualifying timeshare loans up to approximately $4.5 million are
      not
      sold by November 29, 2006.




18


**Item
      2. Management’s Discussion and Analysis of** **Financial** **Condition and Results of Operations**





Certain
      matters discussed throughout this Form 10-Q filing are forward-looking
      statements that are subject to risks and uncertainties that could cause actual
      results to differ materially from those projected. Such risks and uncertainties
      include, but are not limited to, those discussed in the Company’s Form 10-K for
      the year ended December 31, 2005.





As
      of
      September 30, 2006, we own and operate 13 timeshare resorts in various stages
      of
      development in Texas, Missouri, Illinois, Georgia, Massachusetts, and Florida,
      and a hotel in Colorado. These resorts offer a wide array of country club-like
      amenities, such as golf, swimming, horseback riding, boating, and many organized
      activities for children and adults. The Company has a Vacation Interval
      ownership base of over 98,000 members. Our condensed consolidated financial
      statements include the accounts of Silverleaf Resorts, Inc. and its
      subsidiaries, with the exception of SF-III, all of which are wholly-owned.





As
      required, we adopted SFAS No. 152, "Accounting for Real Estate Time-Sharing
      Transactions" as of January 1, 2006. The adoption of SFAS No. 152 prospectively
      revises the classification of certain revenue and cost activity. However, the
      adoption of SFAS No. 152 did not have a material effect on our reported net
      income for the three and nine-month periods ended September 30, 2006, nor did
      it
      result in a cumulative effect adjustment.





**Results
      of Operations**





The
      following table sets forth certain operating information for the
      Company. ******


Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2006
              
              
              2005
              
              
              2006
              
              
              2005As
                  a percentage of total revenues:Vacation
                  Interval sales
              
              
              91.7
              %
              
              67.1
              %
              
              91.4
              %
              
              71.1
              %Estimated
                  uncollectible revenue
              
              
              -15.9
              %
              
              0.0
              %
              
              -15.8
              %
              
              0.0
              %Sampler
                  sales
              
              
              0.0
              %
              
              1.0
              %
              
              0.0
              %
              
              1.1
              %Total
                  sales
              
              
              75.8
              %
              
              68.1
              %
              
              75.6
              %
              
              72.2
              %Interest
                  income
              
              
              21.4
              %
              
              14.6
              %
              
              21.6
              %
              
              18.8
              %Management
                  fee income
              
              
              0.8
              %
              
              0.7
              %
              
              0.9
              %
              
              0.9
              %Gain
                  on sale of notes receivable
              
              
              0.0
              %
              
              9.3
              %
              
              0.0
              %
              
              4.2
              %Other
                  income
              
              
              2.0
              %
              
              7.3
              %
              
              1.9
              %
              
              3.9
              %Total
                  revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %As
                  a percentage of Vacation Interval sales:Cost
                  of Vacation Interval sales
              
              
              11.8
              %
              
              16.2
              %
              
              10.6
              %
              
              16.0
              %Sales
                  and marketing
              
              
              50.3
              %
              
              47.0
              %
              
              48.4
              %
              
              50.3
              %Provision
                  for uncollectible notes
              
              
              0.0
              %
              
              15.0
              %
              
              0.0
              %
              
              16.5
              %As
                  a percentage of total revenues:Operating,
                  general and administrative
              
              
              14.2
              %
              
              11.8
              %
              
              15.1
              %
              
              13.8
              %Depreciation
                  and amortization
              
              
              1.1
              %
              
              1.0
              %
              
              1.1
              %
              
              1.4
              %As
                  a percentage of interest income:Interest
                  expense and lender fees
              
              
              47.7
              %
              
              45.2
              %
              
              45.7
              %
              
              44.1
              %




19


***Results
      of Operations for the Three Months Ended September 30, 2006 and 2005***





Revenues





Revenues
      for the quarter ended September 30, 2006 were $56.1 million, representing a
      $6.2
      million decrease from revenues of $62.3 million for the quarter ended September
      30, 2005. As discussed below, the decrease is primarily attributable to an
      $8.9
      million reduction in revenue during the third quarter of 2006 related to the
      classification of estimated uncollectible revenue in accordance with SFAS No.
      152, a $5.8 million gain in the third quarter of 2005 related to sales of notes
      receivable, and a $3.6 million gain on sale of undeveloped land during the
      third
      quarter of 2005. Our primary source of revenue, Vacation Interval sales,
      increased $9.6 million, or 22.9%, during the third quarter of 2006 versus the
      same period of 2005.





In
      accordance with SFAS No. 152, total revenue in the third quarter of 2006 is
      decreased by estimated uncollectible revenue of $8.9 million, which represents
      estimated future gross cancellations of notes receivable prior to any recoveries
      of inventory. In addition, under SFAS No. 152, sampler sales are accounted
      for
      as incidental operations, which require that any such incidental revenues be
      recorded as a reduction of incremental costs or expenses. Accordingly, $686,000
      of sampler sales, which would have been reported as revenue prior to adoption
      of
      SFAS No. 152, were accounted for as a reduction to sales and marketing expense
      in the quarter ended September 30, 2006. Had these two changes mandated by
      SFAS
      No. 152 not been made, revenues would have increased by 5.4% to $65.7
      million.





The
      following table summarizes our Vacation Interval sales (dollars in thousands,
      except average price).





**Three
                Months Ended Sept 30, 2006**
            
            
            **Three
                Months Ended Sept 30, 2005****Average**
            
            
            
            
            
            
            
            
            **Average****$
                Sales**
            
            
            **Units**
            
            
            **Price**
            
            
            **$
                  Sales**
            
            
            **Units**
            
            
            **Price**Interval
                Sales to New Customers
            
            $
            22,400
            
            
            1,960
            
            $
            11,428
            
            $
            17,429
            
            
            1,630
            
            $
            10,693Upgrade
                Interval Sales to Existing Customers
            
            
            17,063
            
            
            1,829
            
            
            9,329
            
            
            13,671
            
            
            1,510
            
            
            9,054Additional
                Interval Sales to Existing Customers
            
            
            11,951
            
            
            1,228
            
            
            9,732
            
            
            10,733
            
            
            1,147
            
            
            9,357Total
            
            $
            51,414
            
            
            
            
            
            
            
            $
            41,833





Overall,
      Vacation Interval sales increased $9.6 million during the third quarter of
      2006
      versus the third quarter of 2005, due to increased interval sales to both new
      and existing customers as a result of increased demand from our existing
      customers for upgraded intervals, higher closing percentages, and lower
      rescission rates. The number of interval sales to new customers increased 20.2%
      and average prices increased 6.9%, resulting in a 28.5% net increase in sales
      to
      new customers in the third quarter of 2006 versus the same period of 2005.
      The
      number of interval sales to existing customers increased 15.1% and average
      prices increased 3.3%, resulting in an 18.9% net increase in sales to existing
      customers during the third quarter of 2006 versus the same period of 2005.





Estimated
      uncollectible revenue was $8.9 million for the third quarter of 2006 versus
      $0
      reported on this line for the same period of 2005. As discussed previously,
      SFAS
      No. 152 requires the estimated uncollectible revenue to be recorded as a
      reduction to Vacation Interval sales and no longer net of inventory recovery
      beginning in 2006 rather than as an expense item: provision for uncollectible
      notes, as it was previously recorded.





Sampler
      sales primarily function as a marketing program, allowing us additional
      opportunities to sell a Vacation Interval to a prospective customer. Sampler
      sales are not recognized in the condensed consolidated statement of operations
      until the customer uses the stay or our obligation has elapsed, which often
      does
      not occur until the sampler contract expires eighteen months after the sale
      is
      consummated. Sampler sales in the third quarter of 2006 were reported as $0
      compared to $617,000 for the third quarter of 2005. Beginning in 2006 per SFAS
      No. 152, sampler sales and related costs are accounted for as incidental
      operations, whereby incremental costs in excess of incremental revenue are
      charged to expense as incurred and the operations are presented as a net expense
      in the consolidated statement of operations. Conversely, incremental revenue
      in
      excess of incremental costs is recorded as a reduction of inventory. Incremental
      costs include costs that would not have been incurred had we not sold samplers.
      During the quarter ended September 30, 2006, all sampler sales of $686,000
      were
      recorded as a reduction to sales and marketing expense, since incremental costs
      of sampler sales exceeded incremental sampler sales.




Interest
      income increased $3.0 million, or 32.6%, to $12.0 million during the third
      quarter of 2006 from $9.1 million during the same period of 2005. The increase
      primarily resulted from a higher average notes receivable balance during the
      third quarter of 2006 versus the same period of 2005, a $676,000 increase in
      interest accretion related to the investment in special purpose entity during
      the third quarter of 2006 versus the third quarter of 2005, and an increase
      in
      the average yield on our outstanding notes receivable to 15.7% at September
      30,
      2006 from 15.2% at September 30, 2005.





20


Management
      fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
      income remained fairly constant at $465,000 during the third quarter of 2006
      versus $450,000 during the same period of 2005.





There
      were no sales of notes receivable during the third quarter of 2006. Gain on
      sale
      of notes receivable was $5.8 million during the third quarter of 2005, resulting
      from the sale of $132.8 million of notes receivable to SF-III.





Other
      income consists of marina income, golf course and pro shop income, land sales,
      and other miscellaneous items. Other income decreased $3.4 million to $1.1
      million for the third quarter of 2006 from $4.5 million during the same period
      of 2005, due to a $3.6 million gain on the sale of undeveloped land located
      in
      Pennsylvania during the third quarter of 2005.





Cost
      of Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 11.8% during
      the
      third quarter of 2006 versus 16.2% reported for the same period of 2005. This
      decrease is primarily due to the implementation of SFAS No. 152 effective
      January 1, 2006, which amends the relative sales value method of recording
      Vacation Interval cost of sales to include an estimate of future defaults of
      uncollectible revenue, both actual to date plus expected future revenue. The
      relative sales value method is used to allocate inventory cost and determine
      cost of sales in conjunction with a sale. Under the relative sales value method,
      cost of sales is estimated as a percentage of net sales using a cost of sales
      percentage which represents the ratio of total estimated cost, including both
      costs already incurred plus costs to complete the phase, if any, to total
      estimated Vacation Interval revenue under the project, including amounts already
      recognized and future revenues. Common costs, including amenities, are allocated
      to inventory cost among the phases that those costs are expected to benefit.
      The
      estimate of total revenue for a phase, which includes both actual to date
      revenues and expected future revenues, incorporates factors such as actual
      or
      estimated uncollectibles, changes in sales mix and unit sales prices,
      repossessions of intervals, effects of upgrade programs, and past and expected
      future sales programs to sell slow moving inventory units.





For
      comparability, assuming SFAS No. 152 had been in place during 2005, cost of
      sales as a percentage of Vacation Interval sales during the third quarter of
      2005 would have been 11.9%, approximately the same as the third quarter of
      2006.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of Vacation Interval sales increased to
      50.3%
      during the third quarter of 2006 versus 47.0% for the third quarter of 2005.
      In
      accordance with SFAS No. 152 and as discussed in sampler sales above, $686,000
      of sampler revenues were recorded as a reduction to sales and marketing expense
      since the incremental costs of our sampler sales exceeded incremental sampler
      revenue. Had sales and marketing expense not been reduced by sampler sales,
      sales and marketing expense would have been 51.7% of Vacation Interval sales
      during the third quarter of 2006. The increase compared to the previous year’s
      quarter is due in large part to our costs associated with our newly opened
      off-site sales centers as well as the investment in securing additional
      personnel and processes ahead of the expected growth for which we are
      planning.




Provision
      for Uncollectible Notes





The
      provision for uncollectible notes as a percentage of Vacation Interval sales
      was
      reported as 0% in the provision expense line for the third quarter of 2006.
      In
      accordance with SFAS No. 152 and as discussed previously, estimated losses
      on
      Vacation Interval notes receivable are recorded
      as a reduction to Vacation Interval sales beginning in 2006 rather than as
      an
      expense item: provision for uncollectible notes, as it was recorded prior to
      2006.





Our
      estimated uncollectible revenue as a percentage of Vacation Interval sales
      was
      17.3% during the third quarter of 2006. Our provision
      for uncollectible notes as a percentage of Vacation Interval sales was 15.0%
      during the
      third
      quarter of 2005. As noted above, an estimate for the value of inventory
      recoveries was included as a reduction to the provision for uncollectible notes
      prior to 2006 but is now included as a component in the relative sales value
      method of our inventory costing and allocation accounting. Considering the
      estimate for inventory recoveries of approximately 4.3% of Vacation Interval
      sales, our net provision for expected credit losses was 13.0% during the third
      quarter of 2006, which compares favorably to 15.0% during the third quarter
      of
      2005. The net percentage improvement is due to the improved
      performance of notes originated in 2003 through 2006 as compared to notes
      originated in earlier years, before we implemented programs focused on selling
      to customers with a higher quality of credit. We will continue our current
      collection programs and seek new programs to reduce note defaults and improve
      the credit quality of our customers. However, there can be no assurance that
      these efforts will be successful.





21


Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues increased
      to 14.2% for the third quarter of 2006 versus 11.8% for the same period of
      2005.
      Excluding the impact of SFAS No. 152 on our revenues during the third quarter
      of
      2006 as described above, operating, general and administrative expenses as
      a
      percentage of total revenues would have been 12.1% during the third quarter
      of
      2006. Overall, operating, general and administrative expense increased by
      $614,000 for the third quarter of 2006, as compared to the same period of 2005,
      primarily due to increased salaries, professional fees, and higher recording
      fees due to higher Vacation Interval sales volume.





Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues remained fairly
      unchanged at 1.1% for the quarter ended September 30, 2006 versus 1.0% for
      the
      same quarter of 2005. Overall, depreciation and amortization expense increased
      $11,000 for the third quarter of 2006 versus the same period of 2005.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income increased to 47.7%
      for the third quarter of 2006, compared to 45.2% for the same period of 2005.
      This increase is primarily the result of an increase in our weighted average
      cost of borrowings from 7.4% for the quarter ended September 30, 2005 to 7.9%
      for the quarter ended September 30, 2006. Overall, interest expense and lender
      fees increased $1.6 million for the third quarter of 2006 versus the same period
      of 2005, primarily due to a larger average debt balance outstanding during
      2006.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations decreased to
      $9.8
      million for the quarter ended September 30, 2006, as compared to $17.6 million
      for the quarter ended September 30, 2005, as a result of the above-mentioned
      operating results.





Provision
      for Income Taxes





Provision
      for income taxes as a percentage of income before provision for income taxes
      and
      discontinued operations was 38.5% for the third quarter of 2006 as compared
      to
      30.2% for the third quarter of 2005. The higher effective income tax rate during
      the third quarter of 2006 was the result of utilizing a sufficient level of
      the
      NOL carryforward and other deferred tax assets during 2005, which caused us
      to
      move into a net deferred tax liability position at year-end.





Income
      from Continuing Operations





Income
      from continuing operations decreased to $6.0 million for the quarter ended
      September 30, 2006, as compared to $12.3 million for the quarter ended September
      30, 2005, as a result of the above-mentioned operating results.





Net
      Income from Discontinued Operations





We
      recognized a gain on sale of discontinued operations, net of income taxes,
      of
      $613,000 during the third quarter of 2005 related to the sale of our water
      distribution and waste water treatment utilities assets at eight of our
      timeshare resorts during the first quarter of 2005. This gain was deferred
      until
      certain conditions of the sale were met, which occurred during the third quarter
      of 2005. There has been no income from discontinued operations since the third
      quarter of 2005.





22


Net
      Income





Net
      income was $6.0 million for the quarter ended September 30, 2006, as compared
      to
      $12.9 million for the quarter ended September 30, 2005, as a result of the
      above-mentioned operating results.





***Results
      of Operations for the Nine Months Ended September 30, 2006 and 2005***





Revenues





Revenues
      for the nine months ended September 30, 2006 were $154.8 million, representing
      a
      $1.1 million increase from revenues of $153.7 million for the nine months ended
      September 30, 2005. As discussed below, we had a $24.5 million reduction in
      revenue during the first nine months of 2006 related to the classification
      of
      estimated uncollectible revenue in accordance with SFAS No. 152, a $6.5 million
      gain in the first nine months of 2005 related to sales of notes receivable,
      and
      a $3.6 million gain on sale of undeveloped land during the third quarter of
      2005. Our primary source of revenue, Vacation Interval sales, increased $32.2
      million, or 29.5%, during the first nine months of 2006 versus the same period
      of 2005.





Total
      revenue in the first nine months of 2006 is decreased by estimated uncollectible
      revenue of $24.5 million in accordance with SFAS No. 152, representing estimated
      future gross cancellations of notes receivable prior to any recoveries of
      inventory. In addition, under SFAS No. 152, sampler sales are accounted for
      as
      incidental operations, which require that any such incidental revenues be
      recorded as a reduction of incremental costs or expenses. Accordingly, $2.1
      million of sampler sales, which would have been reported as revenue prior to
      adoption of SFAS No. 152, were accounted for as a reduction to sales and
      marketing expense in the nine months ended September 30, 2006. Had these two
      changes mandated by SFAS No. 152 not been made, revenues would have increased
      by
      18.0% to $181.5 million.





The
      following table summarizes our Vacation Interval sales (dollars in thousands,
      except average price).





**Nine
                Months Ended Sept 30, 2006**
            
            
            **Nine
                Months Ended Sept 30, 2005****Average**
            
            
            
            
            
            
            
            
            **Average****$
                Sales**
            
            
            **Intervals**
            
            
            **Price**
            
            
            **$
                  Sales**
            
            
            **Intervals**
            
            
            **Price**Interval
                Sales to New Customers
            
            $
            64,350
            
            
            5,808
            
            $
            11,079
            
            $
            48,471
            
            
            4,224
            
            $
            11,475Upgrade
                Interval Sales to Existing Customers
            
            
            43,960
            
            
            4,821
            
            
            9,118
            
            
            27,589
            
            
            3,183
            
            
            8,668Additional
                Interval Sales to Existing Customers
            
            
            33,206
            
            
            3,461
            
            
            9,594
            
            
            33,244
            
            
            3,649
            
            
            9,110Total
            
            $
            141,516
            
            
            
            
            
            
            
            $
            109,304





Overall,
      Vacation Interval sales increased $32.2 million during the first nine months
      of
      2006 versus the same period of 2005, due to increased interval sales to both
      new
      and existing customers as a result of increased demand from our existing
      customers for upgraded intervals, higher closing percentages, and lower
      rescission rates. The number of interval sales to new customers increased 37.5%,
      but average prices decreased 3.5%, resulting in a 32.8% net increase in sales
      to
      new customers in the first nine months of 2006 versus the same period of 2005.
      The number of interval sales to existing customers increased 21.2% and average
      prices increased 4.6%, resulting in a 26.8% net increase in sales to existing
      customers during the first nine months of 2006 versus the same period of 2005.





Estimated
      uncollectible revenue was $24.5 million for the first nine months of 2006 versus
      $0 reported on this line for the same period of 2005. As discussed previously,
      SFAS No. 152 requires the estimated uncollectible revenue to be recorded as
      a
      reduction to Vacation Interval sales and no longer net of inventory recovery
      beginning in 2006 rather than as an expense item: provision for uncollectible
      notes, as it was previously recorded.





Sampler
      sales primarily function as a marketing program, allowing us additional
      opportunities to sell a Vacation Interval to a prospective customer. Sampler
      sales are not recognized in the consolidated statement of operations until
      the
      customer uses the stay or our obligation has elapsed, which often does not
      occur
      until the sampler contract expires eighteen months after the sale is
      consummated. Sampler sales in the first nine months of 2006 were reported as
      $0
      compared to $1.8 million for the same period of 2005. Beginning in 2006, per
      SFAS No. 152, sampler sales and related costs are accounted for as incidental
      operations, whereby incremental costs in excess of incremental revenue are
      charged to expense as incurred and the operations are presented as a net expense
      in the condensed consolidated statement of operations. Conversely, incremental
      revenue in excess of incremental costs is recorded as a reduction of inventory.
      Incremental costs include costs that would not have been incurred had we not
      sold samplers. During the nine months ended September 30, 2006, all sampler
      sales of $2.1 million were recorded as a reduction to sales and marketing
      expense, since incremental costs of sampler sales exceeded incremental sampler
      sales.




23


Interest
      income increased $4.5 million, or 15.6%, to $33.4 million during the first
      nine
      months of 2006 from $28.9 million during the same period of 2005. The increase
      primarily resulted from a higher average notes receivable balance during the
      first nine months of 2006 versus the same period of 2005, a $1.8 million
      increase in interest accretion related to the investment in special purpose
      entity during the first nine months of 2006 versus the first nine months of
      2005, and the increase in average yield on our outstanding notes receivable
      from
      15.2% at September 30, 2005 to 15.7% at September 30, 2006.





Management
      fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
      income remained fairly constant at $1.4 million for each of the nine-month
      periods ended September 30, 2006 and 2005.





There
      was
      no gain on sales of notes receivable during the first nine months of 2006.
      Gain
      on sales of notes receivable was $6.5 million for the first nine months of
      2005,
      resulting from the sale of $8.0 million of notes receivable to SF-I and $132.8
      million of notes receivable to SF-III.





Other
      income consists of marina income, golf course and pro shop income, land sales,
      and other miscellaneous items. Other income decreased approximately $3.0 million
      during the first nine months of 2006 versus the same period of 2005. We
      recognized a $499,000 gain on the sale of two parcels of Mississippi land during
      the first nine months of 2006, and we recognized a $3.6 million gain on the
      sale
      of undeveloped land located in Pennsylvania during the first nine months of
      2005. Other than these two land sales, other income remained fairly constant
      for
      the nine-month periods ended September 30, 2006 and 2005.





Cost
      of Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 10.6% during
      the
      first nine months of 2006 versus 16.0% reported for the same period of 2005.
      This decrease is primarily due to the implementation of SFAS No. 152 effective
      January 1, 2006, which amends the relative sales value method of recording
      Vacation Interval cost of sales to include an estimate of future defaults of
      uncollectible revenue, both actual to date plus expected future revenue. The
      relative sales value method is used to allocate inventory cost and determine
      cost of sales in conjunction with a sale. Under the relative sales value method,
      cost of sales is estimated as a percentage of net sales using a cost of sales
      percentage which represents the ratio of total estimated cost, including both
      costs already incurred plus costs to complete the phase, if any, to total
      estimated Vacation Interval revenue under the project, including amounts already
      recognized and future revenues. Common costs, including amenities, are allocated
      to inventory cost among the phases that those costs are expected to benefit.
      The
      estimate of total revenue for a phase, which includes both actual to date
      revenues and expected future revenues, incorporates factors such as actual
      or
      estimated uncollectibles, changes in sales mix and unit sales prices,
      repossessions of intervals, effects of upgrade programs, and past and expected
      sales programs to sell slow moving inventory units.





For
      comparability, assuming SFAS No. 152 had been in place during 2005, cost of
      sales as a percentage of Vacation Interval sales during 2005 would have been
      11.7%. The decrease in cost of sales as a percentage of Vacation Interval sales
      during 2006 versus adjusted 2005 is primarily due to a larger percentage of
      sales being made at phases having lower amenity and land cost of sales.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of Vacation Interval sales decreased to
      48.4%
      for the nine-month period ended September 30, 2006, from 50.3% for the same
      period of 2005. In accordance with SFAS No. 152 and as discussed in sampler
      sales above, $2.1 million of sampler revenues were recorded as a reduction
      to
      sales and marketing expense during the first nine months of 2006 since the
      incremental costs of our sampler sales exceeded incremental sampler revenue.
      Had
      sales and marketing expense not been reduced by sampler sales, sales and
      marketing expense would have been 49.9% of Vacation Interval sales during the
      first nine months of 2006, representing a 0.4% decrease versus the first nine
      months of 2005. The decrease is primarily due to improved closing percentages
      on
      sales to both new and existing customers and increased average sales prices
      on
      sales to existing customers, partially offset by increased costs associated
      with
      our newly opened off-site sales centers as well as the investment in securing
      additional personnel and processes ahead of the expected growth for which we
      are
      planning.




24


Provision
      for Uncollectible Notes





The
      provision for uncollectible notes as a percentage of Vacation Interval sales
      was
      reported as 0% in the provision expense line for the first nine months of 2006.
      In accordance with SFAS No. 152 and as discussed previously, estimated losses
      on
      Vacation Interval notes receivable are recorded
      as a reduction to Vacation Interval sales beginning in 2006 rather than as
      an
      expense item: provision for uncollectible notes, as it was recorded prior to
      2006.





Our
      estimated uncollectible revenue as a percentage of Vacation Interval sales
      was
      17.3% during the first nine months of 2006. Our provision
      for uncollectible notes as a percentage of Vacation Interval sales was 16.5%
      during the
      first
      nine months of 2005. As noted above, an estimate for the value of inventory
      recoveries was included as a reduction to the provision for uncollectible notes
      prior to 2006 but is now included as a component in the relative sales value
      method of our inventory costing and allocation accounting. Considering the
      estimate for inventory recoveries of approximately 4.3% of Vacation Interval
      sales, our net provision for expected credit losses was 13.0% during the first
      nine months of 2006, which compares favorably to 16.5% during the same period
      of
      2005.




The
      net
      percentage improvement is due to the improved
      performance of notes originated in 2003 through 2006 as compared to notes
      originated in earlier years, before we implemented programs focused on selling
      to customers with a higher quality of credit. We will continue our current
      collection programs and seek new programs to reduce note defaults and improve
      the credit quality of our customers. However, there can be no assurance that
      these efforts will be successful.





Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues increased
      to 15.1% for the first nine months of 2006 versus 13.8% for the same period
      of
      2005. Excluding the impact of SFAS No. 152 on our revenues during the first
      nine
      months of 2006 as described above, operating, general and administrative
      expenses as a percentage of total revenues would have been 12.9% during the
      first nine months of 2006. Overall, operating, general and administrative
      expense increased by $2.2 million for the first nine months of 2006, as compared
      to the same period of 2005, primarily due to increased title and recording
      fees,
      which resulted from higher Vacation Interval sales, and increased salaries
      and
      professional fees.





Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.1%
      for
      the nine months ended September 30, 2006 versus 1.4% for the same period of
      2005. Overall, depreciation and amortization expense decreased $408,000 for
      the
      first nine months of 2006 versus the same period of 2005 due to a general
      reduction in capital expenditures since 2000, partially offset by an increase
      in
      capital expenditures during the third quarter of 2006.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income increased to 45.7%
      for the first nine months of 2006, compared to 44.1% for the same period of
      2005. This increase is primarily the result of an increase in our weighted
      average cost of borrowings during the nine-month period ended September 30,
      2005
      versus the same period of 2006, from 7.1% to 8.0%. Overall, interest expense
      and
      lender fees increased $2.5 million for the first nine months of 2006 versus
      the
      comparable 2005 period, primarily due to a larger average debt balance
      outstanding during 2006.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $30.9
      million for the nine months ended September 30, 2006, as compared to $27.1
      million for the nine months ended September 30, 2005, as a result of the
      above-mentioned operating results.





Provision
      for Income Taxes





Provision
      for income taxes as a percentage of income before provision for income taxes
      and
      discontinued operations was 38.5% for the first nine months of 2006 as compared
      to 30.3% for the same period of 2005. The higher effective income tax rate
      during 2006 was the result of utilizing a sufficient level of the NOL
      carryforward and other deferred tax assets during 2005, which caused us to
      move
      into a net deferred tax liability position at year-end.





25


Income
      from Continuing Operations





Income
      from continuing operations increased to $19.0 million for the nine months ended
      September 30, 2006, as compared to $18.9 million for the nine months ended
      September 30, 2005, as a result of the above-mentioned operating
      results.





Net
      Income from Discontinued Operations





We
      sold
      the water distribution and waste water treatment utilities assets at eight
      of
      our timeshare resorts during the first quarter of 2005. Before we sold these
      assets we recognized $128,000 of income from discontinued operations, net of
      taxes, during the first quarter of 2005. We also recognized a gain on sale
      of
      discontinued operations, net of income taxes, of $613,000 during the third
      quarter of 2005 related to the first quarter sale of these assets, once certain
      conditions of the sale were met. There has been no income (loss) from
      discontinued operations since the third quarter of 2005.





Net
      Income





Net
      income was $19.0 million for the nine months ended September 30, 2006, as
      compared to $19.6 million for the nine months ended September 30, 2005, as
      a
      result of the above-mentioned operating results.





**Liquidity
      and Capital Resources**





***Sources
      of Cash.*** We
      generate cash primarily from the cash received on the sale of Vacation
      Intervals, the financing and collection of customer notes receivable from
      Vacation Interval owners, the sale of notes receivable to our special purpose
      entities, management fees, sampler sales, marina income, and golf course and
      pro
      shop income. We typically receive a 10% down payment on sales of Vacation
      Intervals and finance the remainder with the issuance of a seven-year to
      ten-year customer promissory note. We generate cash from customer notes
      receivable by (i) borrowing at an advance rate of up to 85% of eligible customer
      notes receivable, (ii) selling notes receivable, and (iii) from the spread
      between interest received on customer notes receivable and interest paid on
      related borrowings. Because we use significant amounts of cash in the
      development and marketing of Vacation Intervals, but collect cash on customer
      notes receivable over a seven-year to ten-year period, borrowing against
      receivables has historically been a necessary part of normal operations. During
      the nine months ended September 30, 2006, our operating activities used $38.8
      million of cash compared to providing $82.1 million of cash during the same
      period of 2005. This $120.9 million difference in cash used in operating
      activities during the first nine months of 2006 versus cash provided by
      operating activities during the comparable 2005 period was primarily the result
      of $104.2 million of proceeds from sale of notes receivable during 2005. We
      had
      no proceeds from the sale of notes receivable during 2006. Other factors
      contributing to the increase in cash used in operating activities was the
      increase in gross customer notes receivable during the first nine months of
      2006
      versus the same period of 2005 and an increase in cash spent on inventories
      during the first nine months of 2006 versus the same period of 2005, largely
      due
      to the acquisition of approximately 30 acres of undeveloped land contiguous
      to
      our Orlando Breeze resort in Florida for $4.0 million, and a general expansion
      of timeshare units and amenities at several other resorts.




Although
      it appears we have adequate liquidity to meet our needs through 2007, we are
      continuing to identify additional financing arrangements into 2008 and beyond.
      To finance our growth, development, and any future expansion plans, we may
      at
      some time be required to consider the issuance of other debt, equity, or
      collateralized mortgage-backed securities. Any debt we incur or issue may be
      secured or unsecured, have fixed or variable rate interest, and may be subject
      to such terms as we deem prudent.





***Uses
      of Cash.*** During
      the first nine months of 2006, investing activities used $12.8 million of cash,
      primarily due to $13.6 million of purchases related to property, equipment,
      and
      leasehold improvements, partially offset by net proceeds of $791,000 received
      from the sale of two parcels of land in Mississippi. However during the first
      nine months of 2005, investing activities provided cash of $18.8 million. The
      reduction in the amount of cash provided by investing activities was primarily
      due to $13.1 million of proceeds received from the sale of our water
      distribution and waste water treatment utilities assets at eight of our resorts
      during the first quarter of 2005 and net proceeds of $6.1 million related to
      the
      sale of undeveloped land located in Pennsylvania during the third quarter of
      2005. We
      evaluate sites for additional new resorts or acquisitions on an ongoing basis.





26


During
      the first nine months of 2006, net cash provided by financing activities was
      $49.4 million compared to net cash used in financing activities of $104.3
      million in the comparable 2005 period. The net cash of $49.4 million provided
      by
      financing activities during the first nine months of 2006 was primarily the
      result of $291.4 million of proceeds received from borrowings against pledged
      notes receivable, partially offset by $209.5 million of payments on borrowings
      against pledged notes receivable and $32.5 million of increases in restricted
      cash for repayment of debt, all of which were primarily due to our transactions
      with SF-IV and SF-V. During 2005 we paid in full the $50.4 million balance
      under
      the SF-1 credit facility, our two non-revolving loans with one of our senior
      lenders for an aggregate amount of $12.5 million, and our $20.7 million of
      term
      notes with one of our senior lenders, largely due to receiving $26.3 million
      in
      a conduit term loan transaction through SF-II during the first quarter of 2005.





At
      September 30, 2006, our senior credit facilities provided for loans of up to
      $519.0 million of which approximately $251.8 million of principal related to
      advances under the credit facilities was outstanding. As of September 30, 2006,
      the weighted average cost of funds for all borrowings was 7.6%. Customer
      defaults have a significant impact on our cash available from financing customer
      notes receivable in that notes more than 60 days past due are not eligible
      as
      collateral. As a result, we must repay borrowings against such delinquent notes.
      As of September 30, 2006, $4.8 million of notes were more than 60 days past
      due.





Certain
      debt agreements include restrictions on our ability to pay dividends based
      on
      minimum levels of net income and cash flow. Our ability to pay dividends might
      also be restricted by the Texas Business Corporation Act.





*Off-Balance
      Sheet Arrangements.* We
      entered into a $100 million revolving credit agreement to finance Vacation
      Interval notes receivable through SF-I, our off-balance-sheet special purpose
      entity during 2000. We agreed to reduce the principal amount of the facility
      from $100 million to $85 million in 2003, and during the first quarter of 2005
      the facility amount was further reduced to $75 million. During 2005, we sold
      $8.0 million of notes receivable to SF-I and recognized pre-tax gains of
      $669,000. In conjunction with this sale, we received cash consideration of
      $6.0
      million, which was used to pay down borrowings under our revolving loan
      facilities. SF-I funded this purchase through advances under a credit agreement
      arranged for this purpose. We receive fees for servicing sold receivables to
      SF-I, calculated based on 1% of eligible receivables held by the facility.
      Such
      fees were $355,000 for the nine months ended September 30, 2005. Such fees
      received approximate our internal cost of servicing such receivables, and
      approximates the fee a third party would receive to service such receivables.
      As
      a result, the related servicing asset or liability was estimated to be
      insignificant. SF-I was dissolved in July 2005.





During
      the third quarter of 2005, we closed a term securitization transaction with
      a
      newly-formed, wholly-owned off-balance sheet qualified special purpose finance
      subsidiary, SF-III, a Delaware limited liability company, which was formed
      for
      the purpose of issuing $108.7 million of its Series 2005-A Notes in a private
      placement through UBS Securities LLC. The Series 2005-A Notes were issued
      pursuant to an Indenture ("Indenture") between Silverleaf, as Servicer of the
      timeshare loans, SF-III, and Wells Fargo Bank, National Association, as
      Indenture Trustee, Custodian, Backup Servicer, and Account Intermediary. The
      Series 2005-A Notes were issued in four classes as follows:





$46,857,000
      4.857% Timeshare Loan-Backed Notes, Series 2005-A, Class A;


$28,522,000
      5.158% Timeshare Loan-Backed Notes, Series 2005-A, Class B;


$16,299,000
      5.758% Timeshare Loan-Backed Notes, Series 2005-A, Class C; and


$16,977,000
      6.756% Timeshare Loan-Backed Notes, Series 2005-A, Class D.





The
      Class
      A Notes, Class B Notes, Class C Notes and Class D Notes have received a rating
      from Moody's Investor Services, Inc. of “Aaa”, “Aa2”, “A2” and “Baa2”,
      respectively.





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between SF-III and us. Under that agreement,
      we
      sold to SF-III approximately $132.8 million in timeshare receivables that were
      previously pledged as collateral under revolving credit facilities with our
      senior lenders and SF-I, and recognized a pre-tax gain of $5.8 million. In
      connection with this sale, we received cash consideration of $108.7 million,
      which was primarily used to pay off in full the credit facility of SF-I and
      to
      pay down amounts we owed under credit facilities with our senior lenders. We
      dissolved SF-I simultaneously with the sale of the timeshare receivables to
      SF-III. The timeshare receivables we sold to SF-III are without recourse to
      us,
      except for breaches of certain representations and warranties at the time of
      sale. W e
      are responsible
      for servicing the timeshare receivables purchased by SF-III pursuant to the
      terms of the Indenture and will receive a fee for our services equal to 1.75%
      of
      eligible timeshare receivables held by the facility. Such fees were $1.2 million
      for the nine months ended September 30, 2006. Such fees received approximate
      our
      internal cost of servicing such timeshare receivables, and approximates the
      fee
      a third party would receive to service such receivables. As a result, the
      related servicing asset or liability was estimated to be insignificant.





27


At
      September 30, 2006, SF-III held notes receivable totaling $71.9 million, with
      related borrowings of $60.1 million. Except for the repurchase of notes that
      fail to meet initial eligibility requirements, we are not obligated to
      repurchase defaulted or any other contracts sold to SF-III. As the Servicer
      of
      the notes receivable sold to SF-III, we are obligated by the terms of the
      conduit facility to foreclose upon the Vacation Interval securing a defaulted
      note receivable. We may, but are not obligated to, purchase the foreclosed
      Vacation Interval for an amount equal to the net fair market value of the
      Vacation Interval if the net fair market value is no less than fifteen percent
      of the original acquisition price that the customer paid for the Vacation
      Interval. For the nine months ended September 30, 2006, we paid approximately
      $1.7 million to repurchase the Vacation Intervals securing defaulted contracts
      to facilitate the re-marketing of those Vacation Intervals. Total investment
      in
      SF-III was valued at $15.0 million at September 30, 2006, which represents
      our
      maximum exposure to loss regarding our involvement with SF-III.





Our
      special purpose entities allow us to realize the benefit of additional credit
      availability we have with our current senior lenders. We require credit
      facilities to have the liquidity necessary to fund our costs and expenses,
      therefore it is vitally important to our liquidity plan to have financing
      available to us in order to finance future sales, since we finance the majority
      of our timeshare sales over seven to ten years.





*Income
      Taxes.* For
      regular federal income tax purposes, we report substantially all of the Vacation
      Interval sales we finance under the installment method. Under this method,
      income on sales of Vacation Intervals is not recognized until cash is received,
      either in the form of a down payment or as installment payments on customer
      notes receivable. The deferral of income tax liability conserves cash resources
      on a current basis. Interest is imposed, however, on the amount of tax
      attributable to the installment payments for the period beginning on the date
      of
      sale and ending on the date the payment is received. If we are not subject
      to
      tax in a particular year, no interest is imposed since the interest is based
      on
      the amount of tax paid in that year. The consolidated financial statements
      do
      not contain an accrual for any interest expense that would be paid on the
      deferred taxes related to the installment method as the interest expense is
      not
      reasonably estimable.





In
      addition, we are subject to current alternative minimum tax ("AMT") as a result
      of the deferred income that results from the installment sales treatment.
      Payment of AMT creates a deferred tax asset in the form of a minimum tax credit,
      which, unless otherwise limited, reduces the future regular tax liability
      attributable to Vacation Interval sales. Due to AMT losses in certain years
      prior to 2003, which offset all AMT income for years prior to 2003, no minimum
      tax credit exists for years prior to 2003. Nevertheless, we had significant
      AMT
      for the three and nine months ended September 30, 2006 and anticipate that
      we
      will pay significant AMT in future periods.





The
      federal net operating losses (“NOLs”) expire between 2019 through 2021.
      Realization of the deferred tax assets arising from NOLs is dependent on
      generating sufficient taxable income prior to the expiration of the loss
      carryforwards.





Due
      to
      the exchange offer that took place during 2002, an ownership change within
      the
      meaning of Section 382(g) of the Internal Revenue Code (“the Code”) occurred. As
      a result, a portion of our NOL is subject to an annual limitation for taxable
      years beginning after the date of the exchange (“change date”) and a portion of
      the taxable year that includes the change date. The annual limitation is equal
      to the value of our stock immediately before the ownership change, multiplied
      by
      the long-term tax-exempt rate (i.e., the highest of the adjusted Federal
      long-term rates in effect for any month in the three-calendar-month period
      ending with the calendar month in which the change date occurs). This annual
      limitation may be increased for any recognized built-in gain to the extent
      allowed in Section 382(h) of the Code.





**Item
      3. Quantitative and Qualitative Disclosures About Market Risk**





As
      of and
      for the three and nine month periods ended September 30, 2006, we had no foreign
      operations. Interest on our notes receivable portfolio, senior subordinated
      debt, capital leases, and miscellaneous notes is fixed, whereas interest on
      our
      primary loan agreements, which totaled $251.8 million at September 30, 2006,
      is
      partially fixed and partially variable. The impact of a one-point effective
      interest rate change on the $80.5 million balance of variable-rate financial
      instruments at September 30, 2006, would be approximately $603,000 on our
      results of operations for the nine months ended September 30, 2006, or
      approximately $0.02 per diluted share.





28


At
      September 30, 2006, the carrying value of our notes receivable portfolio
      approximates fair value because the weighted average interest rate on the
      portfolio approximates current interest rates received on similar notes. If
      interest rates on our notes receivable are increased or perceived to be above
      market rates, the fair market value of our fixed-rate notes will decline, which
      may negatively impact our ability to sell new notes. The impact of a one-point
      interest rate change on the portfolio at September 30, 2006, could result in
      a
      fair value impact of approximately $9.0 million over the weighted average
      remaining life of our notes receivable portfolio.





*Credit
      Risk* —
We
      are
      exposed to on-balance sheet credit risk related to our notes receivable. We
      are
      exposed to off-balance sheet credit risk related to notes sold.





We
      offer
      financing to the buyers of Vacation Intervals at our resorts. These buyers
      generally make a down payment of at least 10% of the purchase price and deliver
      a promissory note to us for the balance. The promissory notes generally bear
      interest at a fixed rate, are payable over a seven to ten year period, and
      are
      secured by a first mortgage on the Vacation Interval. We bear the risk of
      defaults on these promissory notes.





If
      a
      buyer of a Vacation Interval defaults, we generally must foreclose on the
      Vacation Interval and attempt to resell it; the associated marketing, selling,
      and administrative costs from the original sale are not recovered; and such
      costs must be incurred again to resell the Vacation Interval. Although in many
      cases we may have recourse against a Vacation Interval buyer for the unpaid
      price, certain states have laws that limit our ability to recover personal
      judgments against customers who have defaulted on their loans. Accordingly,
      we
      have generally not pursued this remedy.





*Interest
      Rate Risk —* We
      have
      historically derived net interest income from our financing activities because
      the interest rates we charge our customers who finance the purchase of their
      Vacation Intervals exceed the interest rates we pay to our senior lenders.
      Because a portion of our indebtedness bears interest at variable rates and
      our
      customer notes receivable bear interest at fixed rates, increases in interest
      rates will erode the spread in interest rates that we have historically
      experienced and could cause our interest expense on borrowings to exceed our
      interest income on our portfolio of customer loans. Therefore, any increase
      in
      interest rates, particularly if sustained, could have a material adverse effect
      on our results of operations, cash flows, and financial position.





To
      partially offset an increase in interest rates, we have engaged in two interest
      rate hedging transactions, or derivatives, related to our conduit loan with
      Silverleaf Finance II, Inc., (“SF-II”), a Delaware corporation, for a notional
      amount of $45.4 million at September 30, 2006, that expires between September
      2011 and March 2014. Our VFN with SF-IV also acts as an interest rate hedge
      since it contains a provision for an interest rate cap, however there are no
      amounts outstanding under this line of credit at September 30, 2006. The Series
      2005-A Notes related to our off-balance sheet special purpose finance
      subsidiary, SF-III, with a balance of $60.1 million at September 30, 2006,
      bear
      interest at fixed rates ranging from 4.857% to 6.756%, and the Series 2006-A
      Notes related to SF-V bear interest at a fixed blended rate of
      6.7%.





*Availability
      of Funding Sources —* We
      fund
      substantially all of the notes receivable, timeshare inventories, and land
      inventories which we originate or purchase with borrowings through our financing
      facilities, sales of notes receivable, internally generated funds, and proceeds
      from public debt and equity offerings. Borrowings are in turn repaid with the
      proceeds we receive from repayments of such notes 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 having a material adverse
      effect on our results of operations, cash flows, and financial condition.





*Geographic
      Concentration —* Our
      notes
      receivable are primarily originated in Texas, Missouri, Illinois, Massachusetts,
      and Georgia. The risk inherent in such concentrations is dependent upon regional
      and general economic stability, which affects property values and the financial
      stability of the borrowers. Our Vacation Interval inventories are concentrated
      in Texas, Missouri, Illinois, Massachusetts, Georgia, and Florida. The risk
      inherent in such concentrations is in the continued popularity of the resort
      destinations, which affects the marketability of our products and the collection
      of notes receivable.





**Item
      4. Controls and Procedures**





An
      evaluation as of the end of the period covered by this report was carried out
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, of the effectiveness
      and design and operation of our disclosure controls and procedures (as defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
      Based upon that evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded that the disclosure controls and procedures were effective
      to
      ensure that information we are required to disclose in the report we file or
      submit under the Exchange Act, is recorded, processed, summarized, and reported
      within the time periods specified in the Commission’s rules and forms. There
      were no changes made in our internal control over financial reporting during
      the
      first nine months of 2006 that materially affected or is reasonably likely
      to
      materially affect our internal control over financial reporting.





29


**PART
      II: OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





We
      are
      currently subject to litigation arising in the normal course of our business.
      From time to time, such litigation includes claims regarding employment, tort,
      contract, truth-in-lending, the marketing and sale of Vacation Intervals, and
      other consumer protection matters. Litigation has been initiated from time
      to
      time by persons seeking individual recoveries for themselves, as well as, in
      some instances, persons seeking recoveries on behalf of an alleged class. In
      our
      judgment, none of the lawsuits currently pending against us, either individually
      or in the aggregate, is likely to have a material adverse effect on our
      business, results of operations, or financial condition.





**Item
      1A. Risk Factors**





There
      have been no material changes to the risk factors previously disclosed under
      the
      heading “Risk Factors” beginning on page 22 of our annual report on Form 10-K
      for the year ended December 31, 2005.





**Item
      6. Exhibits and Reports on Form 8-K**





(a) Exhibits
      filed herewith:





31.1
      Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of
      2002


31.2  Certification
      of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002


32.1  Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002


32.2  Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002





(b) Reports
      on Form 8-K:





We
      filed
      the following Current Reports on Form 8-K with the SEC during the quarter ended
      September 30, 2006:





Current
      report on Form 8-K filed with the SEC on July 7, 2006 relating to the inclusion
      of the Company’s stock on the Russell Microcap Index.





Current
      report on Form 8-K filed with the SEC on August 4, 2006 relating to the
      Company’s earnings release for the quarter ended June 30, 2006.





Current
      report on Form 8-K filed with the SEC on August 31, 2006 relating to a
      securitization transaction with Silverleaf Finance V, LP.





Current
      report on Form 8-K filed with the SEC on September 7, 2006 relating to the
      Company’s participation at Oppenheimer’s Third Annual Beauty, Lifestyle &
Leisure Conference.





Current
      report on Form 8-K filed with the SEC on September 11, 2006 relating to the
      presentation materials for Oppenheimer’s Third Annual Beauty, Lifestyle &
Leisure Conference.







30





**SIGNATURES**





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





Dated:
                November 13, 2006
            By:
                /s/ ROBERT E. MEADRobert
                E. MeadChairman
                of the Board andChief
                Executive OfficerDated:
                November 13, 2006
            By:
                /s/ HARRY J. WHITE, JR.Harry
                J. White, Jr.Chief
                Financial Officer







31





**INDEX
      TO EXHIBITS**











**Exhibit
                No.**
            **Description**31.1
            Certification
                of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Certification
                of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Certification
                of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Certification
                of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002













32