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, 2005
                
                **OR**o
              **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
o





Indicate
      by check mark whether the Registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Securities Exchange Act of 1934). Yes o No x





Number
      of
      shares of common stock outstanding of the issuer’s Common Stock, par value $0.01
      per share, as of November 10, 2005: 36,954,948










**Explanatory
      Note**





CERTAIN
      STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION
      TO
      CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS
      QUALIFIED BY THE WORDS “BELIEVE,”“INTEND,”“ANTICIPATE,”“EXPECTS,” AND WORDS OF
      SIMILAR IMPORT, ARE “FORWARD-LOOKING STATEMENTS” AND ARE THUS PROSPECTIVE. THESE
      STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY REGARDING THE
      COMPANY’S FUTURE PROFITABILITY, PROSPECTS, AND RESULTS OF OPERATIONS. ALL SUCH
      FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER
      FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS
      EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS,
      UNCERTAINTIES, AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING “CAUTIONARY
      STATEMENTS” BEGINNING ON PAGE 19 OF THE COMPANY’S ANNUAL REPORT ON FORM
      10-K FOR THE YEAR ENDED DECEMBER 31, 2004. ALL FORWARD-LOOKING STATEMENTS ARE
      MADE AS OF THE DATE OF THIS REPORT ON FORM 10-Q AND THE COMPANY ASSUMES NO
      OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS
      WHY
      ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN THE FORWARD-LOOKING
      STATEMENTS.





1


**SILVERLEAF
        RESORTS, INC.**


**INDEX**


PagePART
                  I.
              FINANCIAL
                  INFORMATION (Unaudited)Item
                  1.
              Consolidated
                  Statements of Income for the three monthsand
                  nine months ended September 30, 2005 and 2004
              3Consolidated
                  Balance Sheets as of September 30, 2005 andDecember
                  31, 2004
              4Consolidated
                  Statement of Shareholders' Equity for thenine
                  months ended September 30, 2005
              5Consolidated
                  Statements of Cash Flows for the ninemonths
                  ended September 30, 2005 and 2004
              6Notes
                  to the Condensed Consolidated Financial Statements
              7Item
                  2.
              Management's
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations
              18Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              27Item
                  4.
              Controls
                  and Procedures
              28PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              28Item
                  5.
              Other
                  Information
              29Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              29Signatures
              30





2




**PART
      1: FINANCIAL INFORMATION (UNAUDITED)**


**Item
        1. Financial Statements**


**SILVERLEAF
      RESORTS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


(in
      thousands, except share and per share amounts)


(Unaudited)





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004**Revenues:**Vacation
                Interval sales
            
            $
            41,833
            
            $
            36,738
            
            $
            109,304
            
            $
            105,869Sampler
                sales
            
            
            617
            
            
            571
            
            
            1,759
            
            
            1,485Total
                sales
            
            
            42,450
            
            
            37,309
            
            
            111,063
            
            
            107,354Interest
                income
            
            
            9,067
            
            
            9,354
            
            
            28,937
            
            
            27,575Management
                fee income
            
            
            450
            
            
            300
            
            
            1,351
            
            
            900Gain
                on sales of notes receivable
            
            
            5,789
            
            
            —
            
            
            6,457
            
            
            580Other
                income
            
            
            4,549
            
            
            808
            
            
            5,931
            
            
            2,011Total
                revenues
            
            
            62,305
            
            
            47,771
            
            
            153,739
            
            
            138,420**Costs
                and Operating Expenses:**Cost
                of Vacation Interval sales
            
            
            6,772
            
            
            6,166
            
            
            17,507
            
            
            19,485Sales
                and marketing
            
            
            19,648
            
            
            18,477
            
            
            54,985
            
            
            53,643Provision
                for uncollectible notes
            
            
            6,275
            
            
            7,348
            
            
            18,083
            
            
            21,180Operating,
                general and administrative
            
            
            7,344
            
            
            6,549
            
            
            21,177
            
            
            19,386Depreciation
                and amortization
            
            
            616
            
            
            845
            
            
            2,158
            
            
            2,636Interest
                expense and lender fees
            
            
            4,094
            
            
            4,568
            
            
            12,765
            
            
            13,143Total
                costs and operating expenses
            
            
            44,749
            
            
            43,953
            
            
            126,675
            
            
            129,473Income
                before provision for income taxesand
                discontinued operations
            
            
            17,556
            
            
            3,818
            
            
            27,064
            
            
            8,947Provision
                for income taxes
            
            
            (5,306
            )
            
            —
            
            
            (8,189
            )
            
            (23
            )**Net
                income from continuing operations**
            
            
            12,250
            
            
            3,818
            
            
            18,875
            
            
            8,924**Discontinued
                Operations**Gain
                on sale of discontinued operations (net of taxes)
            
            
            613
            
            
            —
            
            
            613
            
            
            —Income
                from discontinued operations (net of taxes)
            
            
            —
            
            
            214
            
            
            128
            
            
            503**Net
                income from discontinued operations**
            
            
            613
            
            
            214
            
            
            741
            
            
            503**Net
                income**
            
            $
            12,863
            
            $
            4,032
            
            $
            19,616
            
            $
            9,427**Basic
                income per share:**Net
                income from continuing operations
            
            $
            0.33
            
            $
            0.10
            
            $
            0.51
            
            $
            0.24Net
                income from discontinued operations
            
            $
            0.02
            
            $
            0.01
            
            $
            0.02
            
            $
            0.02Net
                income
            
            $
            0.35
            
            $
            0.11
            
            $
            0.53
            
            $
            0.26**Diluted
                income per share:**Net
                income from continuing operations
            
            $
            0.31
            
            $
            0.09
            
            $
            0.48
            
            $
            0.23Net
                income from discontinued operations
            
            $
            0.02
            
            $
            0.01
            
            $
            0.02
            
            $
            0.01Net
                income
            
            $
            0.33
            
            $
            0.10
            
            $
            0.50
            
            $
            0.24**Weighted
                average basic shares outstanding:**
            
            
            36,954,948
            
            
            36,860,238
            
            
            36,918,265
            
            
            36,849,411**Weighted
                average diluted shares outstanding:**
            
            
            39,042,770
            
            
            38,954,815
            
            
            38,934,572
            
            
            38,922,668




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




3




**SILVERLEAF
        RESORTS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(in
      thousands, except share and per share amounts)


(Unaudited)





September
                30,
            
            December
                31,ASSETS
            
            2005
            
            2004Cash
                and cash equivalents
            
            $
            7,605
            
            $
            10,935Restricted
                cash
            
            
            4,798
            
            
            3,428Notes
                receivable, net of allowance for uncollectible notes of$52,658
                and $52,506, respectively
            
            
            163,596
            
            
            196,466Accrued
                interest receivable
            
            
            2,021
            
            
            2,207Investment
                in special purpose entities
            
            
            21,967
            
            
            5,173Amounts
                due from affiliates
            
            
            2,145
            
            
            288Inventories
            
            
            114,815
            
            
            109,303Land,
                equipment, buildings, and utilities, net
            
            
            10,664
            
            
            24,375Land
                held for sale
            
            
            495
            
            
            2,991Prepaid
                and other assets
            
            
            15,215
            
            
            14,340TOTAL
                ASSETS
            
            $
            343,321
            
            $
            369,506LIABILITIES
                AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
                payable and accrued expenses
            
            $
            8,535
            
            $
            7,980Accrued
                interest payable
            
            
            1,428
            
            
            1,302Amounts
                due to affiliates
            
            
            692
            
            
            929Unearned
                revenues
            
            
            5,376
            
            
            4,634Income
                taxes payable
            
            
            6,638
            
            
            —Notes
                payable and capital lease obligations
            
            
            165,509
            
            
            218,310Senior
                subordinated notes
            
            
            34,029
            
            
            34,883Total
                Liabilities
            
            
            222,207
            
            
            268,038COMMITMENTS
                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,37,249,006
                shares issued, 36,954,948 shares outstanding at September
                30,2005,
                and 36,860,238 shares outstanding at December 31, 2004
            
            
            372
            
            
            372Additional
                paid-in capital
            
            
            115,522
            
            
            116,614Retained
                earnings (deficit)
            
            
            8,702
            
            
            (10,914
            )Treasury
                stock, at cost, 294,058 shares at September 30, 2005 and
                388,768shares
                at December 31, 2004
            
            
            (3,482
            )
            
            (4,604
            )Total
                Shareholders' Equity
            
            
            121,114
            
            
            101,468TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            343,321
            
            $
            369,506




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


4





**SILVERLEAF
        RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF SHAREHOLDERS' EQUITY**
 (in
        thousands, except share amounts)
 (Unaudited)


Common
                  StockNumber
                  of
              
              $0.01
              
              Additional
              
              RetainedShares
              
              Par
              
              Paid-in
              
              Earnings
              
              Treasury
                  StockIssued
              
              Value
              
              Capital
              
              (Deficit)
              
              Shares
              
              Cost
              
              TotalJanuary
                  1, 2005
              
              
              37,249,006
              
              $
              372
              
              $
              116,614
              
              $
              (10,914
              )
              
              388,768
              
              $
              (4,604
              )
              $
              101,468Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              (1,092
              )
              
              —
              
              
              (94,710
              )
              
              1,122
              
              
              30Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              19,616
              
              
              —
              
              
              —
              
              
              19,616September
                  30, 2005
              
              
              37,249,006
              
              $
              372
              
              $
              115,522
              
              $
              8,702
              
              
              294,058
              
              $
              (3,482
              )
              $
              121,114
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  5


**SILVERLEAF
        RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (in
        thousands)
 (Unaudited)


Nine
                  Months Ended September 30,2005
              
              2004OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              19,616
              
              $
              9,427Adjustments
                  to reconcile net income to net cash provided by (used in) operatingactivities:Income
                  from discontinued operations, net of taxes
              
              
              (741
              )
              
              (503
              )Provision
                  for uncollectible notes
              
              
              18,083
              
              
              21,180Depreciation
                  and amortization
              
              
              2,158
              
              
              2,636Gain
                  on sales of notes receivable
              
              
              (6,457
              )
              
              (580
              )Gain
                  on sale of land held for sale
              
              
              (3,635
              )
              
              —Proceeds
                  from sales of notes receivable
              
              
              104,193
              
              
              9,559Cash
                  effect from changes in assets and liabilities:Restricted
                  cash
              
              
              (1,370
              )
              
              (1,370
              )Notes
                  receivable
              
              
              (31,987
              )
              
              (40,917
              )Accrued
                  interest receivable
              
              
              186
              
              
              (168
              )Investment
                  in special purpose entity
              
              
              (16,794
              )
              
              612Amounts
                  due from affiliates
              
              
              (1,575
              )
              
              (301
              )Inventories
              
              
              (6,092
              )
              
              (1,187
              )Prepaid
                  and other assets
              
              
              (991
              )
              
              (1,766
              )Accounts
                  payable and accrued expenses
              
              
              549
              
              
              933Accrued
                  interest payable
              
              
              126
              
              
              (32
              )Unearned
                  revenues
              
              
              742
              
              
              1,024Income
                  taxes payable
              
              
              6,638
              
              
              —Net
                  cash provided by (used in) operating activities - continuing
                  operations
              
              
              82,649
              
              
              (1,453
              )Net
                  cash used in operating activities - discontinued
                  operations
              
              
              (841
              )
              
              (98
              )INVESTING
                  ACTIVITIES:Purchases
                  of land, equipment, buildings, and utilities
              
              
              (359
              )
              
              (247
              )Proceeds
                  from sale of discontinued operations
              
              
              13,101
              
              
              —Sale
                  of land held for sale
              
              
              6,131
              
              
              —Net
                  cash provided by (used in) investing activities
              
              
              18,873
              
              
              (247
              )FINANCING
                  ACTIVITIES:Proceeds
                  from borrowings from unaffiliated entities
              
              
              111,796
              
              
              70,413Payments
                  on borrowings to unaffiliated entities
              
              
              (215,837
              )
              
              (68,495
              )Proceeds
                  from exercise of stock options
              
              
              30
              
              
              10Net
                  cash provided by (used in) financing activities
              
              
              (104,011
              )
              
              1,928Net
                  change in cash and cash equivalents
              
              
              (3,330
              )
              
              130CASH
                  AND CASH EQUIVALENTS:Beginning
                  of period
              
              
              10,935
              
              
              4,093End
                  of period
              
              $
              7,605
              
              $
              4,223SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid, net of amounts capitalized
              
              $
              11,108
              
              $
              12,944Income
                  taxes paid
              
              $
              1,200
              
              $
              —SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
                  ACTIVITIES:Notes
                  receivable, net of allowance for uncollectible notes, acquired
                  from
                  SPE
              
              $
              62,884
              
              $
              —Notes
                  payable acquired from SPE
              
              $
              50,386
              
              $
              —Other
                  assets, liabilities, and equity acquired from SPE
              
              $
              12,498
              
              $
              —Equipment
                  acquired under capital leases
              
              $
              62
              
              $
              —
  The
        accompanying notes are an integral part of these 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. and
      subsidiaries (“the Company”) 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 the
      opinion of management, all adjustments considered necessary for a fair
      presentation have been included. Operating results for the three and nine months
      ended September 30, 2005 are not necessarily indicative of the results that
      may
      be expected for the year ending December 31, 2005





These
      condensed consolidated financial statements should be read in conjunction with
      the audited consolidated financial statements and footnotes included in the
      Company’s Form 10-K for the year ended December 31, 2004 as filed with the
      Securities and Exchange Commission. The accounting policies used in preparing
      these condensed consolidated financial statements are the same as those
      described in such Form 10-K.





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





*Basis
      of Presentation —* The
      accompanying condensed consolidated financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (“SEC”). In the opinion of the Company, the accompanying condensed consolidated
      financial statements contain all material adjustments, consisting only of normal
      recurring adjustments necessary to present fairly the financial condition,
      the
      results of operations and changes in cash flows of the Company and its
      subsidiaries.





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





*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. The Company recognizes the sale of a Vacation Interval under the 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 construction is not
      substantially complete, revenues are recognized on the percentage-of-completion
      basis. Under this method, the portion of revenue applicable to costs incurred,
      as compared to total estimated construction and direct selling costs, is
      recognized in the period of sale. The remaining amount is deferred and
      recognized as the remaining costs are incurred. The deferral of sales and costs
      related to the percentage-of-completion method is not significant.





Certain
      Vacation Interval sales transactions are deferred until the minimum down payment
      has been received. The Company accounts 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.





In
      addition to sales of Vacation Intervals to new prospective owners, the Company
      sells upgraded and additional Vacation Intervals to existing Silverleaf Owners.
      Revenues are recognized on these upgrade Vacation Interval sales when the
      criteria described above are satisfied. The revenue recognized is the net of
      the
      incremental increase in the upgrade sales price and cost of sales is the
      incremental increase in the cost of the Vacation Interval purchased.





A
      provision for estimated customer returns is reported net against Vacation
      Interval sales. Customer returns represent cancellations of sales transactions
      in which the customer fails to make the first installment payment.





7


The
      Company recognizes 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 additional interest income ceases until collection
      is
      deemed probable.





Revenues
      related to one-time sampler contracts, which entitles the prospective owner
      to
      sample a resort during certain periods, are recognized when earned. Revenue
      recognition is deferred until the customer uses the stay, purchases a Vacation
      Interval, or allows the contract to expire.





The
      Company receives 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.





Utilities,
      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 related sales.





*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* — ** The
      Company was party to a $75 million revolving credit agreement to finance
      Vacation Interval notes receivable through an off-balance-sheet SPE through
      July
      2005. Sales of notes receivable from the Company to its SPE that met certain
      underwriting criteria occurred on a periodic basis. The SPE funded these
      purchases through advances under a credit agreement arranged for this purpose.





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





The
      Company accounts for and evaluates its 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 expected cash flows
      back to the Company from the notes receivable sold. The Company utilized the
      following key assumptions to estimate the fair value of such cash flows related
      to its SPE: 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%. The Company 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 - 11.38%; discount rate
      -
      15%; base interest rate - 5.37%; and loan servicing fees - 1.75%. The Company's
      assumptions are based on experience with its 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. The carrying value of the investment in special purpose entities
      represents the Company’s maximum exposure to loss regarding its involvement with
      its special purpose entities. **





8


*Provision
      for Uncollectible Notes —* Such
      provision 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. Such 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 the Company recovers the
      underlying inventory. The second form is a deemed cancellation, whereby the
      Company records 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, the Company projects
      future cancellations, net of recovery of the related inventory, 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. Actual cancellations and losses experienced represents all
      notes identified by management as being probable of cancellation. Recourse
      to
      the Company on sales of customer notes receivable is governed by the agreements
      between the purchasers and the Company.





The
      Company classifies the components of the provision for uncollectible notes
      as
      either credit losses or customer returns (cancellations of sales whereby the
      customer fails to make the first installment payment). The provision for
      uncollectible notes pertaining to credit losses and customer returns are
      classified in provision for uncollectible notes and Vacation Interval sales,
      respectively.





*Inventories
      —* Inventories
      are stated at the lower of cost or market value. Cost includes amounts for
      land,
      construction materials, direct labor and overhead, 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. Upon sale of a Vacation Interval, these costs are charged to
      cost
      of sales on a specific identification basis. Vacation Intervals reacquired
      are
      placed back into inventory at the lower of their original historical cost basis
      or market value.





The
      Company estimates the total cost to complete all amenities at each resort.
      This
      cost includes both costs incurred to date and expected costs to be incurred.
      The
      Company allocates the estimated total 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.





Company
      management periodically reviews the carrying value of its inventory on an
      individual project basis to ensure that the carrying value does not exceed
      market value.





*Land,
      Equipment, Buildings, and Utilities* —
      Land,
      equipment (including equipment under capital lease), buildings, and utilities
      are stated at cost, which includes amounts for construction materials, direct
      labor and overhead, and capitalized interest. 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. Company
      management periodically reviews its 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, novelty inventories, deposits, collected
      cash in lender lock boxes which have not yet been applied to the loan balances
      by the lenders, and miscellaneous receivables. Commitment fees and debt issuance
      costs are amortized over the life of the related debt.





*Income
      Taxes* —
      Deferred income taxes are recorded for temporary differences between the bases
      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.





9


*Earnings
      Per Share* —
      Basic
      earnings per share is computed by dividing net income by the weighted average
      shares outstanding. Earnings per share assuming dilution is computed by dividing
      net income by the weighted average number of 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
      shares resulting from the exercise of the stock options is reduced by the number
      of shares that could have been repurchased by the Company with the proceeds
      from
      the exercise of the stock options.





*Stock-Based
      Compensation* — ** In
      December 2002, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
      -- Transition and Disclosure" ("SFAS 148"). SFAS 148 amends the disclosure
      provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and APB
      Opinion No. 28, "Interim Financial Reporting," to require disclosure in the
      summary of significant accounting policies of the effects of an entity's
      accounting policy with respect to stock-based employee compensation on reported
      net income and earnings per share in annual and interim financial statements.
      While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
      for employee stock options using the fair value method, the disclosure
      provisions of SFAS No. 148 are applicable to all companies with stock-based
      employee compensation, regardless of whether they account for that compensation
      using the fair value method of SFAS No. 123 or the intrinsic value method of
      APB
      Opinion No. 25, "Accounting for Stock Issued to Employee” (“APB No.
      25”).





As
      allowed by SFAS No. 123, the Company has elected to continue to utilize the
      accounting method prescribed by APB No. 25, provide the disclosure requirements
      of SFAS No. 123 and, as of December 31, 2002, adopted the disclosure
      requirements of SFAS No. 148. Although the Company selected an accounting policy
      which requires only the excess of the market value of its common stock over
      the
      exercise price of options granted to be recorded as compensation expense
      (intrinsic method), pro forma information regarding net income is required
      as if
      the Company had accounted for its employee stock options under the fair value
      method of SFAS No. 123. Pro forma net income applicable to the options granted
      is not likely to be representative of the effects on reported net income for
      future years. The fair value for these options is estimated at the date of
      grant
      using the Black-Scholes option-pricing model. Stock compensation determined
      under the intrinsic method is recognized over the vesting period using the
      straight-line method.





Had
      compensation cost for the Company’s stock option grants been determined based on
      the fair value at the date of grant in accordance with the provisions of SFAS
      No. 123, the Company’s net income and net income per share would have been the
      following pro forma amounts:





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                income, as reported
            
            $
            12,863
            
            $
            4,032
            
            $
            19,616
            
            $
            9,427Stock-based
                compensation expense recorded under the intrinsic value method
            
            
            —
            
            
            —
            
            
            —
            
            
            —Pro
                forma stock-based compensation expense computed under the fair value
                method
            
            
            (69
            )
            
            (75
            )
            
            (191
            )
            
            (230
            )Pro
                forma net income
            
            $
            12,794
            
            $
            3,957
            
            $
            19,425
            
            $
            9,197Net
                income per share, basicAs
                reported
            
            $
            0.35
            
            $
            0.11
            
            $
            0.53
            
            $
            0.26Pro
                forma
            
            $
            0.35
            
            $
            0.11
            
            $
            0.53
            
            $
            0.25Net
                income per share, dilutedAs
                reported
            
            $
            0.33
            
            $
            0.10
            
            $
            0.50
            
            $
            0.24Pro
                forma
            
            $
            0.33
            
            $
            0.10
            
            $
            0.50
            
            $
            0.24





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 during
      the first nine months of 2004.





*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 used to allocate certain costs to inventories and
      cost
      of sales.





10


*Reclassifications* —
      Certain
      reclassifications have been made to the 2004 condensed consolidated financial
      statements to conform to the 2005 presentation. These reclassifications had
      no
      effect on net income. In
      accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS No. 144”), the water utility property assets and
      liabilities have been 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. The first
      nine months of 2004 has been reclassified for comparability, as required.





*Recent
      Accounting Pronouncements* — **





SFAS
      No.
      151 - In November 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 151, “Inventory Costs, an
      Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB
      43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
      freight, handling costs and wasted materials (spoilage) be recognized as current
      period charges. It also requires that allocation of fixed production overheads
      to the costs of conversion be based on the normal capacity of the production
      facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal
      years beginning after June 15, 2005. The adoption of SFAS No. 151 will not
      impact the Company’s consolidated financial position or results of
      operations.





SFAS
      No.
      152 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate
      Time-Sharing Transactions” (“SFAS No. 152”). SFAS No. 152 amends FASB 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 AICPA Statement of Position 04-2, Accounting for Real Estate
      Time-Sharing Transactions (“SOP 04-2”). This Statement also amends FASB
      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 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. The Company is
      still
      evaluating the impact the adoption of SFAS No. 152 will have on its results
      of
      operations, financial position, and future financial statements.





SFAS
      No.
      123 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 123, Share-Based Payment,
      revised (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for
      share-based payments to employees, including grants of employee stock options.
      Under the new standard, companies will no longer be 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. Instead,
      companies will be required to account for such transactions using a fair-value
      method and recognize the expense in the consolidated statement of income. SFAS
      No. 123R will be effective for the next fiscal year beginning after June 15,
      2005 and allows, but does not require, companies to restate the fiscal year
      of
      2005 to reflect the impact of expensing share-based payments under SFAS No.
      123R. The Company has not yet determined which fair-value method and
      transitional provision it will follow. The adoption of SFAS No. 123R is not
      expected to have a material impact on the Company’s consolidated financial
      position or results of operations. See Stock-Based Compensation in Note 2 for
      the pro forma impact on net income and net income per share from calculating
      stock-based compensation costs under the fair value alternative of SFAS No.
      123.





SFAS
      No.
      153 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary
      Assets, An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The guidance in APB
      Opinion No. 29, Accounting for Non-monetary Transactions, is based on the
      principle that exchanges of non-monetary assets should be measured based on
      the
      fair value of the assets exchanged. The guidance in APB Opinion No. 29, however,
      included certain exceptions to that principle. SFAS No. 153 amends APB Opinion
      No. 29 to eliminate the exception for non-monetary exchanges of similar
      productive assets and replaces it with a general exception for exchanges of
      non-monetary assets that do not have commercial substance. A non-monetary
      exchange has commercial substance if the future cash flows of the entity are
      expected to change significantly as a result of the exchange. SFAS No. 153
      is
      effective for non-monetary asset exchanges in fiscal periods beginning after
      June 15, 2005. The adoption of SFAS No. 153 is not expected to impact the
      Company’s consolidated financial position or results of operations.





11


SFAS
      No.
      154 - In May
      2005, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards No. 154, Accounting Changes and Error Corrections ("SFAS
      No. 154"). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes ("APB
      No. 20") and Statement of Financial Accounting Standards No. 3, Reporting
      Accounting Changes in Interim Financial Statements (“SFAS No. 3”). The statement
      requires a voluntary change in accounting principle to be applied
      retrospectively to all prior period financial statements so that those financial
      statements are presented as if the current accounting principle had always
      been
      applied. APB No. 20 previously required most voluntary changes in accounting
      principle to be recognized by including in net income of the period of change
      the cumulative effect of changing to the new accounting principle. In addition,
      SFAS No. 154 carries forward without change the guidance contained in APB No.
      20
      for reporting a correction of an error in previously issued financial statements
      and a change in accounting estimate. SFAS No. 154 is effective for accounting
      changes and correction of errors made after January 1, 2006, with early adoption
      permitted.





**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, 2005 and 2004:


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
              
              2005
              
              2004Weighted
                  average shares outstanding - basic
              
              
              36,954,948
              
              
              36,860,238
              
              
              36,918,265
              
              
              36,849,411Issuance
                  of shares from stock options exercisable
              
              
              2,656,198
              
              
              2,777,147
              
              
              2,543,013
              
              
              2,777,147Repurchase
                  of shares from stock options proceeds
              
              
              (568,376
              )
              
              (682,570
              )
              
              (526,706
              )
              
              (703,890
              )Weighted
                  average shares outstanding - diluted
              
              
              39,042,770
              
              
              38,954,815
              
              
              38,934,572
              
              
              38,922,668




Outstanding
      stock options totaling approximately 2,810,013 and 2,777,147 were dilutive
      securities that were included in the computation of diluted EPS at September
      30,
      2005 and 2004, respectively. Outstanding stock options totaling approximately
      870,500 and 875,500 were not dilutive at September 30, 2005 and 2004,
      respectively, because the exercise price for such options substantially exceeded
      the market price for the Company's shares.





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





The
      Company provides 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, 2005 was approximately 15.2%.
      In connection with the sampler program, the Company routinely enters into notes
      receivable with terms of 10 months. Notes receivable from sampler sales were
      $2.2 million and $2.1 million at September 30, 2005 and 2004, respectively,
      and
      are non-interest bearing.





The
      activity in gross notes receivable is as follows for the three and nine-month
      periods ended September 30, 2005 and 2004 (in thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Balance,
                beginning of period
            
            $
            258,993
            
            $
            252,674
            
            $
            248,972
            
            $
            241,751Sales
            
            
            37,457
            
            
            30,145
            
            
            95,962
            
            
            90,622Collections
            
            
            (16,462
            )
            
            (16,008
            )
            
            (49,179
            )
            
            (46,098
            )Receivables
                charged off
            
            
            (4,595
            )
            
            (6,486
            )
            
            (12,344
            )
            
            (13,305
            )Receivables
                received via dissolution of the SPE
            
            
            73,687
            
            
            —
            
            
            73,687
            
            
            —Sold
                notes receivable
            
            
            (132,826
            )
            
            —
            
            
            (140,844
            )
            
            (12,725
            )Balance,
                end of period
            
            $
            216,254
            
            $
            260,245
            
            $
            216,254
            
            $
            260,245





The
      Company considers accounts over 60 days past due to be delinquent. As of
      September 30, 2005, $800,000 of notes receivable, net of accounts charged off,
      were considered delinquent. An additional $35.5 million of notes would have
      been
      considered to be delinquent had the Company not granted payment concessions
      to
      the customers. The activity in the allowance for uncollectible notes is as
      follows for the three and nine months ended September 30, 2005 and 2004 (in
      thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Balance,
                beginning of period
            
            $
            55,636
            
            $
            54,310
            
            $
            52,506
            
            $
            48,372Provision
                for credit losses
            
            
            6,275
            
            
            7,348
            
            
            18,083
            
            
            21,180Receivables
                charged off
            
            
            (4,595
            )
            
            (6,486
            )
            
            (12,344
            )
            
            (13,305
            )Allowance
                received via dissolution of the SPE
            
            
            10,803
            
            
            —
            
            
            10,803
            
            
            —Allowance
                related to notes sold
            
            
            (15,461
            )
            
            —
            
            
            (16,390
            )
            
            (1,075
            )Balance,
                end of period
            
            $
            52,658
            
            $
            55,172
            
            $
            52,658
            
            $
            55,172





12


During
      the nine months ended September 30, 2005, the Company sold $8.0 million and
      $132.8 million of notes receivable to its SPE and SF-III, respectively, and
      recognized pre-tax gains of $669,000 and $5.8 million, respectively. In
      connection with the sale to the Company’s SPE, the Company received cash
      consideration of $6.0 million, which was used to pay down borrowings under
      its
      senior revolving loan facilities. In connection with the sale to SF-III, the
      Company received cash consideration of $108.7 million, which was primarily
      used
      to pay off in full the credit facility of the SPE and to pay down borrowings
      under its senior revolving loan facilities.





**Note
      5 - Debt**





Notes
      payable, capital lease obligations, and senior subordinated notes as of
      September 30, 2005 and December 31, 2004 (in thousands):


**September
                30,**
            
            **December
                31,****2005**
            
            **2004**$55.9
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement is limited to a $44.6 million revolver with an interest
                rate of
                LIBOR plus 3% with a 6% floor, revolving through March 2006, and
                a $11.3
                million term loan with an interest rate of 8%)
            
            $
            —
            
            $
            37,514$11.3
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            —
            
            
            9,991$55.1
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement is limited to a $44.1 million revolver with an interest
                rate of
                LIBOR plus 3% with a 6% floor, revolving through March 2006, and
                a $11.0
                million term loan with an interest rate of 8%)
            
            
            —
            
            
            37,039$11.0
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            —
            
            
            9,852$7.9
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement is limited to a $6.2 million revolver with an interest
                rate of
                Prime plus 3% with a 6% floor, revolving through March 2006, and
                a $1.7
                million term loan with an interest rate of 8%)
            
            
            —
            
            
            5,250$1.7
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            —
            
            
            1,415$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%
                (the loan agreement is currently limited to $60 million of
                availability)
            
            
            56,467
            
            
            —$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%
            
            
            40,081
            
            
            50,299$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%
            
            
            22,367
            
            
            —$40.4
                million loan agreement, which contains certain financial covenants,
                due
                March 2009, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement is limited to a $25 million revolver with an interest rate
                of
                the higher of Prime or Federal Funds plus 2.75% with a 6% floor,
                revolving
                through March 2006)
            
            
            —
            
            
            18,689$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 LIBOR plus
                4.25%
            
            
            11,906
            
            
            —$70
                million loan agreement, capacity reduced by amounts outstanding under
                the
                $10 million inventory loan agreement and the $9 million supplemental
                revolving loan agreement, which contains certain financial covenants,
                due
                February 2006, principal and interest payable from the proceeds obtained
                on customer notes receivable pledged as collateral for the note,
                at an
                interest rate of LIBOR plus 2.65% with a 6.0% floor (additional draws
                are
                no longer available under this facility)
            
            
            —
            
            
            9,080$9
                million supplemental revolving loan agreement, which contains certain
                financial covenants, due March 2007, principal and interest payable
                from
                the proceeds obtained on customer notes receivable pledged as collateral
                for the note, at an interest rate of LIBOR plus 2.67% with a 6%
                floor
            
            
            —
            
            
            5,735$10
                million revolving loan agreement, which contains certain financial
                covenants, revolving through March 2006, due March 2009, collateralized
                by
                either notes receivable or inventory, interest payable monthly, at
                an
                interest rate of the higher of Prime plus 2% or Federal Funds plus
                4.75%
                with a 6.0% floor
            
            
            8,800
            
            
            10,000$10
                million inventory loan agreement, which contains certain financial
                covenants, revolving through March 2007, due March 2009, interest
                payable
                monthly, at an interest rate of LIBOR plus 3.25%
            
            
            10,000
            
            
            10,000$8
                million inventory loan agreement, which contains certain financial
                covenants, revolving through March 2007, due March 2009, interest
                payable
                monthly, at an interest rate of Prime plus 3% with a 6% floor (the
                loan
                agreement is limited to $6 million)
            
            
            —
            
            
            6,000$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
            
            
            3,890
            
            
            —$15
                million inventory loan agreement, which contains certain financial
                covenants, revolving through and due April 2008, interest payable
                monthly,
                at an interest rate of Prime plus 3%
            
            
            10,000
            
            
            —Various
                notes, due from January 2006 through January 2010, collateralizedby
                various assets with interest rates ranging from 2.1% to
                12.4%
            
            
            1,852
            
            
            7,122Total
                notes payable
            
            
            165,363
            
            
            217,986Capital
                lease obligations
            
            
            146
            
            
            324Total
                notes payable and capital lease obligations
            
            
            165,509
            
            
            218,3108.0%
                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
            
            
            3,416
            
            
            4,270Total
                senior subordinated notes
            
            
            34,029
            
            
            34,883Total
            
            $
            199,538
            
            $
            253,193





13


At
      September 30, 2005, LIBOR rates on the Company’s senior credit facilities were
      from 3.37% to 3.89%, and the Prime rate on these facilities was 6.50%. At
      December 31, 2004, LIBOR rates on the Company’s senior credit facilities were
      from 2.03% to 2.42%, and the Prime rate on these facilities was
      5.00%.





During
      the third quarter of 2005 the Company closed a securitization transaction with
      its newly-formed, wholly-owned off-balance sheet 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
      offering and sale through UBS Securities LLC. The Series 2005-A Notes were
      issued pursuant to an Indenture ("Indenture") between the Company, 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 loans sold to SF-III by the Company
      pursuant to a transfer agreement between the Company and SF-III. Under that
      agreement, the Company sold to SF-III approximately $132.8 million in timeshare
      loans that were previously pledged as collateral under revolving credit
      facilities with senior lenders of the Company and its SPE, Silverleaf Finance
      I,
      Inc. The proceeds from the sale of the timeshare loans to SF-III were used
      to
      pay off in full the credit facility of the SPE and to pay down amounts owed
      by
      the Company under credit facilities with its senior lenders. The SPE was
      dissolved by the Company simultaneously with the sale of the notes to SF-III.
      The timeshare loans were sold to SF-III without recourse to the Company, except
      for breaches of certain representations and warranties at the time of sale. The
      Company is responsible
      for servicing the timeshare loans pursuant to the terms of the Indenture and
      will receive a fee for its services. Such fees received approximate the
      Company’s internal cost of servicing such notes. As a result, the related
      servicing asset or liability was estimated to be insignificant.





Also
      during the third quarter of 2005 the Company reached an agreement with one
      of
      its senior lenders to consolidate, amend, and restate all prior receivables
      loan
      agreements between the Company and the senior lender. Under the terms of the
      new
      agreement, the Company has entered into a $100 million revolving loan agreement,
      of which $60 million is currently available, secured by notes receivable from
      timeshare sales and unsold inventory of timeshare intervals. The additional
      $40
      million under the agreement will not be available to the Company unless the
      senior lender seeks and finds third party participants, which it is not
      currently doing. The agreement matures in June 2011 and bears interest at a
      rate
      of Prime plus 1%, with a 6% floor.





14


**Note
      6 - Subsidiary Guarantees**





As
      of
      September 30, 2005, all subsidiaries of the Company, except the SPE, Silverleaf
      Finance II, Inc. a Delaware corporation, (“SF-II”), and SF-III have guaranteed
      the $34.0 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 direct and indirect subsidiaries of the Company.





The
      Guarantor Subsidiaries had no operations for the nine months ended September
      30,
      2005 and 2004. Combined summarized balance sheet information as of September
      30,
      2005 and December 31, 2004 for the Guarantor Subsidiaries is as follows (in
      thousands):





**September
                30,**
            
            **December
                31,****2005**
            
            **2004**Other
                assets
            
            $
            2
            
            $
            2Total
                assets
            
            $
            2
            
            $
            2Investment
                by parent (includes equity and 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. The three
      and nine month periods ended September 30, 2004 have been reclassified for
      comparability, as required. The carrying amounts of the water and utility
      property assets and liabilities are summarized below (in
      thousands):





**September
                30,**
            
            **December
                31,****2005**
            
            **2004**Cash
            
            $
            —
            
            $
            841Amount
                due from affiliates.
            
            
            —
            
            
            150Land,
                equipment, buildings, and utilities, net
            
            
            —
            
            
            11,912Prepaid
                and other assets
            
            
            —
            
            
            55Total
                assets
            
            $
            —
            
            $
            12,958Accounts
                payable
            
            $
            —
            
            $
            70Total
                liabilities
            
            $
            —
            
            $
            70





On
      March
      11, 2005, the Company sold the water distribution and waste water treatment
      utilities assets at eight of its timeshare resorts for an aggregate purchase
      price of $13.1 million, which resulted in a gain of approximately $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 the Company’s eight timeshare resorts to which the transferred
      utility assets relate. The Purchasers will charge the Company’s 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
      the
      Company’s sale of these utility assets were used to reduce senior debt in
      accordance with the Company’s loan agreements with its senior lenders.





Notwithstanding
      the closing of this sale of utilities assets, the agreement 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. If the Purchasers do not receive required approvals from
      Texas regulators relating to the utility assets in Texas (the “Texas Assets”)
      within eighteen months of closing, the Texas Assets will be reconveyed to the
      Company, the transaction involving the Texas Assets will be rescinded, and
      the
      Company will be obligated to return to the Purchasers approximately $6.2 million
      of the purchase price attributable to the Texas Assets.





15


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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**REVENUE:Gain
                on sale of discontinued operations
            
            $
            879
            
            $
            —
            
            $
            879
            
            $
            —Other
                income
            
            
            —
            
            
            802
            
            
            438
            
            
            2,160Total
                revenue
            
            
            —
            
            
            802
            
            
            1,317
            
            
            2,160COSTS
                AND OPERATING EXPENSES:Other
                expense
            
            
            —
            
            
            359
            
            
            278
            
            
            1,019Depreciation
                and amortization
            
            
            —
            
            
            229
            
            
            —
            
            
            637Interest
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            1Total
                costs and operating expenses
            
            
            —
            
            
            588
            
            
            278
            
            
            1,657Income
                from discontinued operations
            
            
            879
            
            
            214
            
            
            1,039
            
            
            503Provision
                for income taxes
            
            
            (266
            )
            
            —
            
            
            (298
            )
            
            —Net
                income from discontinued operations
            
            $
            613
            
            $
            214
            
            $
            741
            
            $
            503





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





*Holiday
      Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
      al* ,
      Circuit
      Court of Christian County, Missouri. The homeowners’ associations of five
      condominium projects that a former subsidiary of the Company constructed in
      Missouri filed two separate actions against the Company in 1999 and 2000,
      respectively, alleging breach of warranty, construction defects and breach
      of
      management agreements. These two cases have been consolidated. The plaintiffs
      filed an amended petition alleging actual damages in excess of $25,000 and
      punitive damages. The Company filed a counterclaim seeking contractual
      indemnification under the terms of management agreements with each of the
      plaintiffs. The parties mediated this matter in October 2005 and agreed
      upon the terms of a settlement. Pursuant to the terms of the settlement, which
      terms have not yet been reduced to a definitive settlement agreement executed
      by
      the parties, the Company has agreed to pay to the Holiday Hills Condominium
      Association $1.15 million, of which $1.1 million will be paid by the Company's
      insurers. The parties agreed to certain other terms, including the
      Company deeding two non-timeshare condominium units to the plaintiffs,
      waiving amenities fees currently due and owing from the plaintiffs, and making
      repairs to a parking lot and other public areas of the condominium development.
      The settlement agreement further provides that each party will execute a general
      and mutual release of all claims and for the dismissal of the suit. Should
      the settlement not be fully implemented, the Company intends to continue to
      vigorously defend this litigation.





*Ozark
      Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,* Circuit
      Court of Stone County, Missouri. The homeowners’ associations of three
      condominium projects that a former subsidiary of the Company constructed in
      Missouri filed an action against the Company in 2000 alleging construction
      defects, misrepresentation, breach of fiduciary duty, negligence, and breach
      of
      management agreements and seeking damages and certain other equitable relief.
      A
      definitive settlement agreement concerning this matter was executed by all
      parties in October 2005. The settlement agreement provides that three of the
      Company’s insurance carriers pay plaintiffs $500,000. The terms of settlement
      limit any possible future contingent liability of the Company to a maximum
      of
      $200,000. In order for any further claims of this sort to be asserted against
      the Company by the plaintiffs, the settlement agreement requires that the
      plaintiffs must first exhaust all reasonable efforts to collect at least
      $200,000 from a third party insurance carrier and all amounts collected from
      the
      carrier would be a credit against the Company’s $200,000 maximum liability.
      Should the settlement not be fully implemented, the Company intends to continue
      to vigorously defend this litigation.





The
      Company is currently subject to other litigation arising in the normal course
      of
      its 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 the judgment of the Company, none of the lawsuits currently pending
      against the Company, either individually or in the aggregate, is likely to
      have
      a material adverse effect on the Company, its business, results of operations,
      or financial condition.





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





16


Litigation
      is subject to many uncertainties, and the outcome of individual litigated
      matters is not predictable with assurance. Reserves will be established from
      time to time by the Company when deemed appropriate under generally acceptable
      accounting principles. However, the outcome of a claim for which the Company
      has
      not deemed a reserve to be necessary may be decided unfavorably to the Company
      and could require the Company to pay damages or make other expenditures in
      amounts or a range of amounts that could be materially adverse to the
      Company.





During
      2001, Silverleaf Club entered into a loan agreement for $1.8 million, whereby
      the Company guaranteed such debt with certain of its aircraft or related sales
      proceeds. As of September 30, 2005, Silverleaf Club’s related note payable
      balance was $240,000.





**Note
      9 - Subsequent Events**





During October
      2005, the Company executed a definitive agreement with one of its senior lenders
      to extend the period during which the Company may obtain advances under two
      of
      its inventory loan agreements from March 2007 to August 2008. In addition,
      the
      definitive agreement extends the final maturity date of the two inventory loan
      agreements from March 2009 to August 2010. However, the final effectiveness
      of
      the definitive agreement is subject to delivery to the senior lender of
      endorsements of certain existing title insurance policies in favor of the senior
      lender.





17





**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, 2004.





The
      Company currently owns and operates 13 resorts in various stages of development.
      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 represents a Vacation Interval ownership base of
      approximately 92,000. The condensed consolidated financial statements of the
      Company include the accounts of Silverleaf Resorts, Inc. and its subsidiaries,
      all of which are wholly-owned.





**Results
      of Operations**





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


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
              
              2005
              
              2004As
                  a percentage of total revenues:Vacation
                  Interval sales
              
              
              67.1
              %
              
              76.9
              %
              
              71.1
              %
              
              76.5
              %Sampler
                  sales
              
              
              1.0
              %
              
              1.2
              %
              
              1.1
              %
              
              1.1
              %Total
                  sales
              
              
              68.1
              %
              
              78.1
              %
              
              72.2
              %
              
              77.6
              %Interest
                  income
              
              
              14.6
              %
              
              19.6
              %
              
              18.8
              %
              
              19.9
              %Management
                  fee income
              
              
              0.7
              %
              
              0.6
              %
              
              0.9
              %
              
              0.6
              %Gain
                  on sale of notes receivable
              
              
              9.3
              %
              
              0.0
              %
              
              4.2
              %
              
              0.4
              %Other
                  income
              
              
              7.3
              %
              
              1.7
              %
              
              3.9
              %
              
              1.5
              %Total
                  revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %As
                  a percentage of Vacation Interval sales:Cost
                  of Vacation Interval sales
              
              
              16.2
              %
              
              16.8
              %
              
              16.0
              %
              
              18.4
              %Provision
                  for uncollectible notes
              
              
              15.0
              %
              
              20.0
              %
              
              16.5
              %
              
              20.0
              %As
                  a percentage of total sales:Sales
                  and marketing
              
              
              46.3
              %
              
              49.5
              %
              
              49.5
              %
              
              50.0
              %As
                  a percentage of total revenues:Operating,
                  general and administrative
              
              
              11.8
              %
              
              13.7
              %
              
              13.8
              %
              
              14.0
              %Depreciation
                  and amortization
              
              
              1.0
              %
              
              1.8
              %
              
              1.4
              %
              
              1.9
              %As
                  a percentage of interest income:Interest
                  expense and lender fees
              
              
              45.2
              %
              
              48.8
              %
              
              44.1
              %
              
              47.7
              %





18





***Results
      of Operations for the Three Months Ended September 30, 2005 and 2004***





Revenues





Revenues
      for the quarter ended September 30, 2005 were $62.3 million, a $14.5 million
      increase from revenues of $47.8 million for the quarter ended September 30,
      2004. The increase is primarily due to increased Vacation Interval sales, gain
      on sales of notes receivable, and other income during the third quarter of
      2005
      versus the same period of 2004.





The
      following table summarizes our Vacation Interval sales (dollars in
      thousands).





**Three
                Months Ended**
            
            **Three
                Months Ended****September
                30, 2005**
            
            **September
                30, 2004****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Intervals**
            
            **Price**
            
            **$
                Sales**
            
            **Intervals**
            
            **Price**Interval
                Sales to New Customers
            
            $
            17,429
            
            
            1,421
            
            $
            12,266
            
            $
            16,849
            
            
            1,503
            
            $
            11,210Upgrade
                Interval Sales to Existing Customers
            
            
            13,671
            
            
            1,510
            
            
            9,054
            
            
            6,286
            
            
            893
            
            
            7,039Additional
                Interval Sales to Existing Customers
            
            
            10,733
            
            
            1,147
            
            
            9,357
            
            
            13,603
            
            
            1,665
            
            
            8,170Total
            
            $
            41,833
            
            
            
            
            
            
            
            $
            36,738





Overall,
      Vacation Interval sales increased $5.1 million, or 13.9%, during the third
      quarter of 2005 versus the third quarter of 2004. The number of interval sales
      to new customers decreased 5.5% as a result of the Company’s marketing strategy
      to improve the sales margin by increasing the proportion of sales to existing
      customers over sales to new customers. Average prices of sales to new customers
      increased 9.4% however, resulting in a 3.4% net increase in the sales amount.
      The number of interval sales to existing customers increased 3.9%, and average
      prices increased 18.1%, resulting in a 22.7% net increase in the sales amount
      during the third quarter of 2005 versus the same period of 2004.





The
      Company anticipates annual Vacation Interval sales to grow approximately 10%
      to
      15% beginning in 2006. This growth will be achieved through a combination
      of:





·
            Opening
                new off site sales centers in major metropolitan areas. The Company
                believes the off site sales centers will result in more first time
                sales.
                These off site sales centers will be conveniently located in the
                major
                markets the Company serves, allowing touring families to save the
                time
                necessary to drive to and from the existing sales centers located
                at the
                Company’s getaway resorts. The off site sales centers will compliment the
                on site sales centers. Each off site sales center is estimated to
                cost
                approximately $800,000 to $1.0 million to
                construct.





·
            Increased
                upgrade sales and additional week sales to existing
                customers.





·
            Potentially
                opening new resorts. The Company has identified potential markets
                for
                future expansion that may include Washington DC, Las Vegas, Wisconsin
                Dells, and/or Myrtle Beach, South Carolina. Depending on the size
                and
                location, a new resort’s land, infrastructure, and amenities will cost
                between $5.0 million and $15.0 million.





Because
      of the variables discussed above, it is not possible for the Company to forecast
      at this time the precise impact that this projected growth in Vacation Interval
      sales will have on the Company’s future earnings.





Sampler
      sales increased $46,000 to $617,000 for the quarter ended September 30, 2005,
      compared to $571,000 for the same period in 2004. Sampler sales are not
      recognized as revenue until the Company’s obligation has elapsed, which often
      does not occur until the sampler contract expires eighteen months after the
      sale
      is consummated. Hence, a significant portion of sampler sales recognized in
      the
      third quarter of 2005 relate to 2004 sales activity.




Interest
      income decreased $287,000, or 3.1%, to $9.1 million during the third quarter
      of
      2005 from $9.4 million during the same period of 2004. The decrease resulted
      from the lower average outstanding notes receivable balance during the third
      quarter of 2005 versus the same period of 2004, primarily due to the sale of
      notes receivable to the Company’s newly-formed off-balance-sheet special purpose
      finance subsidiary, SF-III, during the third quarter of 2005. The average yield
      on the Company’s outstanding notes receivable increased to 15.2% at September
      30, 2005 from 15.1% at September 30, 2004, which partially offset the reduction
      in average outstanding notes receivable balance.





19


Management
      fee income, which consists of management fees collected from the resorts’
      management clubs, cannot exceed the management clubs’ net income. Management fee
      income increased $150,000 to $450,000 for the third quarter of 2005 versus
      $300,000 for the third quarter of 2004, due primarily to increased profitability
      of the resorts’ management clubs during the third quarter of 2005 versus the
      same period of 2004.





Gain
      on
      sales 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. There
      were no sales of notes receivable during the third quarter of 2004.





Other
      income consists of marina income, golf course and pro shop income, condo rental
      income, and other miscellaneous items. Other income increased $3.7 million
      to
      $4.5 million for the third quarter of 2005 versus $808,000 for the same period
      of 2004, primarily 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 16.2% during
      the
      third quarter of 2005 versus 16.8% for the same period of 2004 primarily due
      to
      the Company selling a higher percentage of its lower cost inventory in the
      third
      quarter of 2005 versus selling primarily its higher cost inventory during the
      same period of 2004. Higher average sales prices during the third quarter of
      2005 compared to the third quarter of 2004 also contributed to the reduction
      in
      cost of sales as a percentage of Vacation Interval sales. The $606,000 increase
      in cost of sales in the third quarter of 2005 compared to the third quarter
      of
      2004 is due to the increase in Vacation Interval sales, partially offset by
      increased sales of lower cost inventory. Cost of sales as a percentage of
      Vacation Interval sales is expected to increase in future periods as the Company
      continues to deplete its inventory of low-cost Vacation Intervals and shifts
      its
      sales mix to more recently constructed units, which were built at higher average
      costs.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of total sales decreased to 46.3% for the
      quarter ended September 30, 2005, from 49.5% for the same period of 2004. The
      decreased percentage is the result of the Company’s marketing strategy to
      improve the sales margin by increasing the proportion of sales to existing
      customers over sales to new customers, as sales to existing customers require
      less sales and marketing expense. The opening of new off site sales centers
      discussed in “Revenues” above could result in slightly higher sales and
      marketing expenses as a percentage of total sales in 2006 and later years.
      For
      the third quarter of 2005, sales to existing customers increased to 58.3% of
      Vacation Interval sales, up from 54.1% during the same period of 2004. Sales
      and
      marketing expense increased $1.2 million during the third quarter of 2005,
      as
      compared to the same period of 2004, due to higher Vacation Interval sales,
      partially offset by increased sales to existing customers.





Certain
      credit facilities of the Company contain a financial covenant that requires
      sales and marketing expense to be 55% or less of total sales for the latest
      rolling twelve months. For the latest rolling twelve months ended September
      30,
      2005, this percentage was 50.9%. The Company does not currently foresee issues
      regarding compliance with this financial covenant for the remainder of the
      year
      ending December 31, 2005.




Provision
      for Uncollectible Notes





The
      provision for uncollectible notes as a percentage of Vacation Interval sales
      was
      15.0% in the third quarter of 2005 compared to 20.0% for the third quarter
      of
      2004. The decrease from 2004 to 2005 is due to improved performance of notes
      originated in 2003, 2004, and 2005 as compared to notes originated in earlier
      years, before the Company focused on selling to customers with a higher quality
      of credit. The allowance for doubtful accounts was 24.4% and 21.1% of gross
      notes receivable as of September 30, 2005 and December 31, 2004, respectively.
      The Company will continue its current collection programs and seek new programs
      to reduce note defaults and improve the credit quality of its 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 decreased
      to 11.8% for the third quarter of 2005, from 13.7% for the same period of 2004.
      Overall, operating, general and administrative expense increased by $795,000
      for
      the third quarter of 2005, as compared to the same period of 2004. This was
      primarily due to increased salaries and professional fees.





20


Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.0%
      for
      the quarter ended September 30, 2005 versus 1.8% for the same quarter of 2004.
      Overall, depreciation and amortization expense decreased $229,000 for the third
      quarter of 2005, as compared to 2004, primarily due to a general reduction
      in
      capital expenditures since 2000. In addition, depreciation of the Company’s
      water distribution and waste water treatment utilities assets was ceased
      effective December 31, 2004 due to the assets being designated as held for
      sale.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income decreased to 45.2%
      for the third quarter of 2005, from 48.8% for the same period of 2004. This
      decrease is primarily the result of lower average debt during the third quarter
      of 2005 versus the same period of 2004, partially offset by an increase in
      the
      Company’s weighted average cost of borrowings from 6.8% during the third quarter
      of 2004 to 7.6% during the third quarter of 2005. Overall, interest expense
      and
      lender fees decreased $474,000 during the third quarter of 2005 versus the
      same
      period of 2004 primarily due to the reduction in average debt during the
      quarter.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $17.6
      million for the quarter ended September 30, 2005, as compared to $3.8 million
      for the quarter ended September 30, 2004, 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 30.2% for the third quarter of 2005 as compared
      to
      0% for the third quarter of 2004. The higher effective income tax rate during
      the third quarter of 2005 was the result of utilizing enough of the NOL
      carryforward during the year, causing the Company to move into a projected
      net
      deferred tax liability position at year-end. No income tax during the third
      quarter of 2004 was the result of the Company being in a projected net deferred
      tax asset position for its 2004 year-end, which was offset by a valuation
      allowance, which reduced the projected net deferred tax assets to zero due
      to
      the unpredictability of recovery.





Net
      Income from Continuing Operations





Net
      income from continuing operations increased to $12.3 million for the quarter
      ended September 30, 2005, as compared to $3.8 million for the quarter ended
      September 30, 2004, as a result of the above-mentioned operating
      results.





Net
      Income from Discontinued Operations





The
      Company 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
      its
      water distribution and waste water treatment utilities assets at eight of its
      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. Income from discontinued operations, net of income taxes, was $214,000
      for the third quarter of 2004.





Net
      Income





Net
      income increased to $12.9 million for the quarter ended September 30, 2005,
      as
      compared to $4.0 million for the quarter ended September 30, 2004, as a result
      of the above-mentioned operating results.





21





***Results
      of Operations for the Nine Months Ended September 30, 2005 and 2004***





Revenues





Revenues
      for the nine months ended September 30, 2005 were $153.7 million, representing
      a
      $15.3 million increase from revenues of $138.4 million for the nine months
      ended
      September 30, 2004. The increase is primarily due to increased Vacation Interval
      sales, gain on sales of notes receivable, and other income.





The
      following table summarizes our Vacation Interval sales (dollars in
      thousands).





**Nine
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2004****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Intervals**
            
            **Price**
            
            **$
                Sales**
            
            **Intervals**
            
            **Price**Interval
                Sales to New Customers
            
            $
            48,471
            
            
            4,015
            
            $
            12,073
            
            $
            50,193
            
            
            4,486
            
            $
            11,189Upgrade
                Interval Sales to Existing Customers
            
            
            27,589
            
            
            3,183
            
            
            8,668
            
            
            23,201
            
            
            3,323
            
            
            6,982Additional
                Interval Sales to Existing Customers
            
            
            33,244
            
            
            3,649
            
            
            9,110
            
            
            32,475
            
            
            3,914
            
            
            8,297Total
            
            $
            109,304
            
            
            
            
            
            
            
            $
            105,869





Overall,
      Vacation Interval sales increased $3.4 million during the first nine months
      of
      2005 versus the same period of 2004, primarily due to the increase in average
      sales prices during 2005. The number of interval sales to new customers
      decreased 10.5%, but average prices increased 7.9%, resulting in a 3.4% net
      decrease in the sales amount, and the number of interval sales to existing
      customers decreased 5.6%, but average prices increased 15.7%, resulting in
      a
      9.3% net increase in the sales amount during the first nine months of 2005
      versus the same period of 2004.





The
      Company anticipates annual Vacation Interval sales to grow approximately 10%
      to
      15% beginning in 2006. This growth will be achieved through a combination
      of:





·
            Opening
                new off site sales centers in major metropolitan areas. The Company
                believes the off site sales centers will result in more first time
                sales.
                These off site sales centers will be conveniently located in the
                major
                markets the Company serves, allowing touring families to save the
                time
                necessary to drive to and from the existing sales centers located
                at the
                Company’s getaway resorts. The off site sales centers will compliment the
                on site sales centers. Each off site sales center is estimated to
                cost
                approximately $800,000 to $1.0 million to
                construct.





·
            Increased
                upgrade sales and additional week sales to existing
                customers.





·
            Potentially
                opening new resorts. The Company has identified potential markets
                for
                future expansion that may include Washington DC, Las Vegas, Wisconsin
                Dells, and/or Myrtle Beach, South Carolina. Depending on the size
                and
                location, a new resort’s land, infrastructure, and amenities will cost
                between $5.0 million and $15.0 million.





Because
      of the variables discussed above, it is not possible for the Company to forecast
      at this time the precise impact that this projected growth in Vacation Interval
      sales will have on the Company’s future earnings.





Sampler
      sales increased $274,000 to $1.8 million for the first nine months of 2005,
      compared to $1.5 million for the same period in 2004. Sampler sales are not
      recognized as revenue until the Company’s obligation has elapsed, which often
      does not occur until the sampler contract expires eighteen months after the
      sale
      is consummated. Hence, a significant portion of sampler sales recognized in
      the
      first nine months of 2005 relate to 2003 and 2004 sales activity.




Interest
      income increased $1.4 million, or 4.9%, to $28.9 million during the first nine
      months of 2005 from $27.6 million during the same period of 2004. The increase
      primarily resulted from the improved performance of notes originated in 2003,
      2004, and 2005 as compared to notes originated in earlier years, before the
      Company focused on selling to customers with a higher quality of credit. The
      improved performance of the Company’s notes receivable resulted in greater
      collections of interest during the first nine months of 2005 versus the same
      period of 2004. In addition, the average yield on the Company’s outstanding
      notes receivable increased to 15.2% at September 30, 2005 from 15.1% at
      September 30, 2004, which also contributed to the increase. The increase is
      partially offset by the sale of notes receivable to the Company’s newly-formed
      off-balance-sheet special purpose finance subsidiary, SF-III, during the third
      quarter of 2005.





22


Management
      fee income, which consists of management fees collected from the resorts’
      management clubs, cannot exceed the management clubs’ net income. Management fee
      income increased $451,000 to $1.4 million for the first nine months of 2005
      versus $900,000 for the first nine months of 2004, due primarily to increased
      profitability of the resorts’ management clubs during the first nine months of
      2005 versus the same period of 2004.





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 and $132.8 million of notes receivable
      to the Company’s SPE and SF-III, respectively, and recognizing pre-tax gains of
      $669,000 and $5.8 million, respectively. In connection with the sale to the
      Company’s SPE, the Company received cash consideration of $6.0 million, which
      was used to pay down borrowings under its senior revolving loan facilities.
      In
      connection with the sale to SF-III, the Company received cash consideration
      of
      $108.7 million, which was used to pay off in full the credit facility of the
      SPE
      and to pay down borrowings under its senior revolving loan facilities. The
      $580,000 gain during the first nine months of 2004 resulted from the sale of
      $12.7 million of notes receivable to the SPE.





Other
      income consists of marina income, golf course and pro shop income, condo rental
      income, and other miscellaneous items. Other income increased $3.9 million
      to
      $5.9 million for the first nine months of 2005 versus $2.0 million for the
      same
      period of 2004, primarily due to a $3.6 million gain on the sale of undeveloped
      land located in Pennsylvania during the first nine months of 2005. In addition,
      condo rentals at the Company’s Orlando Breeze resort, acquired in the fourth
      quarter of 2004, contributed to the increase.





Cost
      of Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 16.0% during
      the
      first nine months of 2005 versus 18.4% for the same period of 2004 primarily
      due
      to the Company selling a much higher percentage of its lower cost inventory
      in
      the first nine months of 2005 versus selling primarily its higher cost inventory
      during the same period of 2004. Higher average sales prices during the first
      nine months of 2005 compared to the first nine months of 2004 also contributed
      to the reduction in cost of sales as a percentage of Vacation Interval sales.
      The $2.0 million decrease in cost of sales in the first nine months of 2005
      compared to the same period of 2004 is primarily due to increased sales of
      lower
      cost inventory. Cost of sales as a percentage of Vacation Interval sales is
      expected to increase in future periods as the Company continues to deplete
      its
      inventory of low-cost Vacation Intervals and shifts its sales mix to more
      recently constructed units, which were built at higher average
      costs.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of total sales decreased to 49.5% for the
      nine months ended September 30, 2005, from 50.0% for the same period of 2004.
      The decreased percentage is the result of the Company’s marketing strategy to
      improve the sales margin by increasing the proportion of sales to existing
      customers over sales to new customers, as sales to existing customers require
      less sales and marketing expense. The opening of new off site sales centers
      discussed in “Revenues” above could result in slightly higher sales and
      marketing expenses as a percentage of total sales in 2006 and later
      years.  For
      the
      nine months ended September 30, 2005, sales to existing customers increased
      to
      55.7% of Vacation Interval sales, up from 52.6% during the same period of
      2004.  Overall,
      sales and marketing expense increased $1.3 million during the first nine months
      of 2005 versus the same period of 2004, primarily due to increased Vacation
      Interval sales.





Certain
      credit facilities of the Company contain a financial covenant that requires
      sales and marketing expense to be 55% or less of total sales for the latest
      rolling twelve months. For the latest rolling twelve months ended September
      30,
      2005, this percentage was 50.9%. The Company does not currently foresee issues
      regarding compliance with this financial covenant for the remainder of the
      year
      ending December 31, 2005.




Provision
      for Uncollectible Notes





The
      provision for uncollectible notes as a percentage of Vacation Interval sales
      was
      16.5% during the first nine months of 2005 compared to 20.0% for the first
      nine
      months of 2004. The decrease from 2004 to 2005 is due to improved performance
      of
      notes originated in 2003, 2004, and 2005 as compared to notes originated in
      earlier years, before the Company focused on selling to customers with a higher
      quality of credit. The allowance for doubtful accounts was 24.4% and 21.1%
      of
      gross notes receivable as of September 30, 2005 and December 31, 2004,
      respectively. The Company will continue its current collection programs and
      seek
      new programs to reduce note defaults and improve the credit quality of its
      customers. However, there can be no assurance that these efforts will be
      successful.





23


Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues decreased
      to 13.8% for the first nine months of 2005, from 14.0% for the same period
      of
      2004. Overall, operating, general and administrative expense increased by $1.8
      million for the first nine months of 2005, as compared to the same period of
      2004. This was primarily due to increased salaries and professional fees.





Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.4%
      for
      the nine months ended September 30, 2005 versus 1.9% for the same period of
      2004. Overall, depreciation and amortization expense decreased $478,000 for
      the
      first nine months of 2005, as compared to 2004, primarily due to a general
      reduction in capital expenditures since 2000. In addition, depreciation of
      the
      Company’s water distribution and waste water treatment utilities assets was
      ceased effective December 31, 2004 due to the assets being designated as held
      for sale.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income decreased to 44.1%
      for the first nine months of 2005, from 47.7% for the same period of 2004.
      This
      decrease is primarily the result of the increased interest income during the
      first nine months of 2005 versus the same period of 2004, partially offset
      by an
      increase in the Company’s weighted average cost of borrowings from 6.8% during
      the first nine months of 2004 to 7.1% during the first nine months of 2005.
      Overall, interest expense and lender fees decreased $378,000 during the first
      nine months of 2005 versus the same period of 2004, due to the overall reduction
      in average debt during the first nine of 2005 compared to the average debt
      during the first nine months of 2004.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $27.1
      million for the nine months ended September 30, 2005, as compared to $8.9
      million for the nine months ended September 30, 2004, 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 30.3% for the first nine months of 2005 as compared
      to 0.3% for the first nine months of 2004. The higher effective income tax
      rate
      during the nine months ended September 30, 2005 was the result of utilizing
      enough of the NOL carryforward during the year, causing the Company to move
      into
      a projected net deferred tax liability position at year-end. The low effective
      income tax rate during the same period of 2004 was the result of the Company
      being in a projected net deferred tax asset position for its 2004 year-end,
      which was offset by a valuation allowance, which reduced the projected net
      deferred tax assets to zero due to the unpredictability of
      recovery.





Net
      Income from Continuing Operations





Net
      income from continuing operations increased to $18.9 million for the nine months
      ended September 30, 2005, as compared to $8.9 million for the same period of
      2004, as a result of the above-mentioned operating results.





Net
      Income from Discontinued Operations





Net
      Income from discontinued operations increased to $741,000 during the first
      nine
      months of 2005, compared to $503,000 during the same period of 2004. The Company
      recognized a gain on sale of discontinued operations, net of income taxes,
      of
      $613,000 during the first nine months of 2005 related to the sale of its water
      distribution and waste water treatment utilities assets at eight of its
      timeshare resorts. The Company sold these assets during March 2005, thus there
      has been no income (loss) from discontinued operations since that time.





24


Net
      Income





Net
      income increased to $19.6 million for the nine months ended September 30, 2005,
      as compared to $9.4 million for the nine months ended September 30, 2004, as
      a
      result of the above-mentioned operating results.





**Liquidity
      and Capital Resources**





***Sources
      of Cash.*** The
      Company generates cash primarily from the cash received on the sale of Vacation
      Intervals, the financing of customer notes receivable from Silverleaf Owners,
      the sale of notes receivable to its special purpose entities, management fees,
      sampler sales, and utility operations (through the first quarter of 2005).
      The
      Company typically receives a 10% down payment on sales of Vacation Intervals
      and
      finances the remainder by receipt of a seven-year to ten-year customer
      promissory note. The Company generates cash from customer notes receivable
      by
      (i) borrowing at an advance rate of up to 75% 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 the Company uses significant amounts of cash in the
      development and marketing of Vacation Intervals, but collects 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, 2005, the Company’s operating activities
      reflected cash provided by operating activities of $82.6 million versus cash
      used in operating activities of $1.5 million during the same period of 2004.
      The
      increase in cash provided by operating activities was primarily the result
      of
      increased sales of notes receivable, partially offset by the increase in the
      Company’s maximum exposure to loss regarding its involvement with SF-III, as
      well as an increase in cash spent towards construction of new inventory during
      the first nine months of 2005 versus the same period of 2004.





The
      Company also entered into two new revolving credit facilities during the nine
      months ended September 30, 2005, which expanded the Company's borrowing capacity
      by $75 million. Additionally, the Company negotiated an amendment to the credit
      facility with one of its other senior lenders to extend the revolving
      availability of that facility until June 2008. Although it appears the Company
      has adequate liquidity to meet its needs in 2005 and 2006, it is continuing
      to
      identify additional financing arrangements into 2007 and beyond. To finance
      the
      Company’s growth, development, and any future expansion plans, the Company may
      at some time be required to consider the issuance of other debt, equity, or
      collateralized mortgage-backed securities. Any debt incurred or issued by the
      Company may be secured or unsecured, have fixed or variable rate interest,
      and
      may be subject to such terms as management deems prudent.





***Uses
      of Cash.*** Investing
      activities typically reflect a net use of cash due to capital additions and
      property acquisitions. However, during the first nine months of 2005, net cash
      provided by investing activities was $18.9 million, due primarily to the sale
      of
      the Company’s water
      distribution and waste water treatment utilities assets at eight of its resorts,
      and the sale of undeveloped land located in Luzerne County, Pennsylvania. During
      the first nine months of 2004, net cash used in investing activities was
      $247,000, due to equipment purchases. The Company evaluates sites for additional
      new resorts or acquisitions on an ongoing basis.





During
      the nine months ended September 30, 2005, net cash used in financing activities
      was $104.0 million compared to net cash provided by financing activities of
      $1.9
      million in the comparable 2004 period. The increase in cash used in financing
      activities was the result of increased payments on borrowings against pledged
      notes receivable during the first nine months of 2005. The Company paid in
      full
      the outstanding balance under its SPE credit facility of $50.4 million, its
      two
      non-revolving loans with one of its senior lenders in an aggregate amount of
      $12.5 million, and its $20.7 million of term notes with another of its senior
      lenders. This activity was partially offset by increased borrowings against
      pledged notes receivable, largely due to the $26.3 million conduit term loan
      transaction through SF-II during the first nine months of 2005. During the
      first
      nine months of 2004, net cash of $1.9 million provided by financing activities
      was the result of $70.4 million of proceeds received from borrowings against
      pledged notes receivable, partially offset by $68.5 million of payments on
      borrowings against pledged notes receivable.





At
      September 30, 2005, the Company's senior credit facilities provided for loans
      of
      up to $267.3 million of which approximately $163.5 million of principal related
      to advances under the credit facilities was outstanding. For the nine months
      ended September 30, 2005, the weighted average cost of funds for all borrowings,
      including the senior subordinated debt, was 7.1%. Customer defaults have a
      significant impact on cash available to the Company from financing customer
      notes receivable in that notes more than 60 days past due are not eligible
      as
      collateral. As a result, the Company must repay borrowings against such
      delinquent notes.





25


Certain
      debt agreements include restrictions on the Company’s ability to pay dividends.
      The Company’s ability to pay dividends might also be restricted by the Texas
      Business Corporation Act.





*Off-Balance-Sheet
      Arrangements.* The
      Company entered into a $100 million revolving credit agreement to finance
      Vacation Interval notes receivable through an off-balance-sheet SPE during
      2000.
      The Company 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 the first nine months
      of 2005, the Company sold $8.0 million of notes receivable to the SPE and
      recognized pre-tax gains of $669,000. In conjunction with these sales, the
      Company received cash consideration of $6.0 million, which was used to pay
      down
      borrowings under its revolving loan facilities. During the first nine months
      of
      2004, the Company sold $12.7 million of notes receivable to the SPE and
      recognized pre-tax gains of $580,000. In conjunction with these sales, the
      Company received cash consideration of $9.6 million, which was primarily used
      to
      pay down borrowings under its revolving loan facilities. The SPE funded these
      purchases through advances under a credit agreement arranged for this purpose.
      The Company receives fees for servicing sold notes, calculated based on 1%
      of
      eligible notes held by the facility. Such fees were $355,000 and $526,000 for
      the nine months ended September 30, 2005 and 2004, respectively. Such fees
      received approximate the Company’s internal cost of servicing such notes. As a
      result, the related servicing asset or liability was estimated to be
      insignificant.





During
      the third quarter of 2005 the Company closed a securitization transaction with
      its newly-formed, wholly-owned off-balance sheet 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
      offering and sale through UBS Securities LLC. The Series 2005-A Notes were
      issued pursuant to an Indenture between the Company, 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 loans sold to SF-III by the Company
      pursuant to a transfer agreement between the Company and SF-III. Under that
      agreement, the Company sold to SF-III approximately $132.8 million in timeshare
      loans that were previously pledged as collateral under revolving credit
      facilities with senior lenders of the Company and its SPE, Silverleaf Finance
      I,
      Inc. The proceeds from the sale of the timeshare loans to SF-III were used
      to
      pay off in full the credit facility of the SPE and to pay down amounts owed
      by
      the Company under credit facilities with its senior lenders. The SPE was
      dissolved by the Company simultaneously with the sale of the notes to SF-III.
      The timeshare loans were sold to SF-III without recourse to the Company, except
      for breaches of certain representations and warranties at the time of sale. The
      Company is responsible
      for servicing the timeshare loans pursuant to the terms of the Indenture and
      will receive a fee for its services. Such fees were $570,000 for the quarter
      ended September 30, 2005. Such fees received approximate the Company’s internal
      cost of servicing such notes. As a result, the related servicing asset or
      liability was estimated to be insignificant.





The
      Company’s sales of timeshare loans to SF-III allow the Company to realize the
      benefit of additional credit availability it has with its current senior
      lenders. Credit facilities are necessary for the Company to have the liquidity
      necessary to fund its costs and expenses. Therefore it is vitally important
      to
      the Company’s liquidity plan to have financing available in order to finance
      future sales, since it finances the majority of its timeshare sales over seven
      to ten years.




*Taxes.* For
      regular federal income tax purposes, the Company reports substantially all
      of
      the Vacation Interval sales it finances 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 the Company is otherwise
      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 condensed
      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 estimable. In addition, the Company is
      subject to current alternative minimum tax ("AMT") as a result of the deferred
      income that results from the installment sales treatment. It is anticipated
      that
      significant AMT will be due during 2005. 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.





26


As
      of
      December 31, 2004, the Company had $213 million in net operating losses
      (“NOLs”), which 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. The amount of the
      deferred tax asset considered realizable could be decreased if estimates of
      future taxable income during the carryforward period are reduced.





Due
      to
      the restructuring completed in May 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 the Company’s 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 which includes the change date. The annual
      limitation will be equal to the value of the stock of the Company 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 nine months ended September 30, 2005, the Company had no significant
      derivative financial instruments or foreign operations. Interest on the
      Company’s notes receivable portfolio, senior subordinated debt, capital leases,
      and miscellaneous notes is fixed, whereas interest on the Company’s primary loan
      agreements, which totaled $163.5 million at September 30, 2005, is partially
      fixed and partially variable. The impact of a one-point interest rate change
      on
      the outstanding balance of variable-rate financial instruments at September
      30,
      2005, on the Company’s results of operations for the first nine months of 2005
      would be approximately $758,000, or approximately $0.02 per share.





At
      September 30, 2005, the carrying value of the Company’s 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 the Company’s notes receivable are increased or perceived to
      be above market rates, the fair market value of the Company's fixed-rate notes
      will decline, which may negatively impact the Company's ability to sell new
      notes. The impact of a one-point interest rate change on the portfolio could
      result in a fair value impact of $4.8 million or approximately $0.13 per
      share.





*Credit
      Risk* —
      The
      Company is exposed to on-balance sheet credit risk related to its notes
      receivable. The Company is exposed to off-balance sheet credit risk related
      to
      notes receivable sold.





The
      Company offers financing to the buyers of Vacation Intervals at the Company's
      resorts. These buyers generally make a down payment of at least 10% of the
      purchase price and deliver a promissory note to the Company 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. The Company bears the risk of defaults on these promissory
      notes.





If
      a
      buyer of a Vacation Interval defaults, the Company 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
      the
      Company in many cases may have recourse against a Vacation Interval buyer for
      the unpaid price, certain states have laws that limit the Company's ability
      to
      recover personal judgments against customers who have defaulted on their loans.
      Accordingly, the Company has generally not pursued this remedy.





*Interest
      Rate Risk —* The
      Company has historically derived net interest income from its financing
      activities because the interest rates it charges its customers who finance
      the
      purchase of their Vacation Intervals exceed the interest rates the Company
      pays
      to its lenders. Because the Company's indebtedness primarily bears interest
      at
      variable rates and the Company's customer receivables bear interest at fixed
      rates, increases in interest rates will erode the income that the Company has
      historically obtained due to this spread and could cause the rate on the
      Company's borrowings to exceed the rate at which the Company provides financing
      to its customers. The Company has not engaged in interest rate hedging
      transactions. Therefore, any increase in interest rates, particularly if
      sustained, could have a material adverse effect on the Company's results of
      operations, cash flows, and financial position.





27


*Availability
      of Funding Sources —* The
      Company funds substantially all of the notes receivable, timeshare inventories,
      and land inventories which it originates or purchases with borrowings through
      its 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 received by the Company from repayments of such notes
      receivable. To the extent that the Company is not successful in maintaining
      or
      replacing existing financings, it would have to curtail its operations or sell
      assets, thereby having a material adverse effect on the Company's results of
      operations, cash flows, and financial condition.





*Geographic
      Concentration —* The
      Company’s 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. The Company's
      Vacation Interval inventories are concentrated in Texas, Missouri, Illinois,
      Massachusetts, and Georgia. The risk inherent in such concentrations is in
      the
      continued popularity of the resort destinations, which affects the marketability
      of the Company's 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 management, including the
      Company’s Chief Executive Officer and Chief Financial Officer, of the
      effectiveness and design and operation of the Company’s disclosure controls and
      procedures. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the disclosure controls and procedures were
      adequate to ensure that information required to be disclosed in the reports
      the
      Company files and submits under the Exchange Act is recorded, processed,
      summarized, and reported as and when required.





There
      have been no significant changes in the Company’s internal controls or in other
      factors that could significantly affect internal controls subsequent to the
      date
      of the evaluation referred to above.





**PART
      II: OTHER INFORMATION**





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





*Holiday
      Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
      al* ,
      Circuit
      Court of Christian County, Missouri. The homeowners’ associations of five
      condominium projects that a former subsidiary of the Company constructed in
      Missouri filed two separate actions against the Company in 1999 and 2000,
      respectively, alleging breach of warranty, construction defects and breach
      of
      management agreements. These two cases have been consolidated. The plaintiffs
      filed an amended petition alleging actual damages in excess of $25,000 and
      punitive damages. The Company filed a counterclaim seeking contractual
      indemnification under the terms of management agreements with each of the
      plaintiffs. The parties mediated this matter in October 2005 and agreed
      upon the terms of a settlement. Pursuant to the terms of the settlement, which
      terms have not yet been reduced to a definitive settlement agreement executed
      by
      the parties, the Company has agreed to pay to the Holiday Hills Condominium
      Association $1.15 million, of which $1.1 million will be paid by the Company's
      insurers. The parties agreed to certain other terms, including the
      Company deeding two non-timeshare condominium units to the plaintiffs,
      waiving amenities fees currently due and owing from the plaintiffs, and making
      repairs to a parking lot and other public areas of the condominium development.
      The settlement agreement further provides that each party will execute a general
      and mutual release of all claims and for the dismissal of the suit. Should
      the settlement not be fully implemented, the Company intends to continue to
      vigorously defend this litigation.





*Ozark
      Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,* Circuit
      Court of Stone County, Missouri. The homeowners’ associations of three
      condominium projects that a former subsidiary of the Company constructed in
      Missouri filed an action against the Company in 2000 alleging construction
      defects, misrepresentation, breach of fiduciary duty, negligence, and breach
      of
      management agreements and seeking damages and certain other equitable relief.
      A
      definitive settlement agreement concerning this matter was executed by all
      parties in October 2005. The settlement agreement provides that three of the
      Company’s insurance carriers pay plaintiffs $500,000. The terms of settlement
      limit any possible future contingent liability of the Company to a maximum
      of
      $200,000. In order for any further claims of this sort to be asserted against
      the Company by the plaintiffs, the settlement agreement requires that the
      plaintiffs must first exhaust all reasonable efforts to collect at least
      $200,000 from a third party insurance carrier and all amounts collected from
      the
      carrier would be a credit against the Company’s $200,000 maximum liability.
      Should the settlement not be fully implemented, the Company intends to continue
      to vigorously defend this litigation.





28


The
      Company is currently subject to other litigation arising in the normal course
      of
      its 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 the judgment of the Company, none of the lawsuits currently pending
      against the Company, either individually or in the aggregate, is likely to
      have
      a material adverse effect on the Company, its business, results of operations,
      or financial condition.





**Item
      5. Other Information**





During
      the third quarter of 2005 the American Stock Exchange ("AMEX") approved the
      Company’s application to list its shares of common stock under the ticker symbol
      SVL. The Company’s stock began trading on the AMEX effective September 19, 2005.





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





(a)
            Exhibits
                filed herewith.


3.1
            Second
                Amended and Restated Bylaws of Silverleaf Resorts, Inc. dated November
                8,
                2005.


10.1
            First
                Amendment to Inventory Loan and Security Agreement dated October
                5, 2005
                between the Registrant and CapitalSource Finance
                LLC.


10.2
            Second
                Amendment to Amended and Restated Loan and Security Agreement, dated
                as ofOctober
                26, 2005, between the Registrant and Textron Financial
                Corporation.


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





The
      Company filed the following Current Reports on Form 8-K with the SEC during
      the
      quarter ended September 30, 2005:





Current
      report on Form 8-K filed with the SEC on July 6, 2005 relating to a loan
      agreement between the Registrant and Resort Funding LLC.





Current
      report on Form 8-K filed with the SEC on July 20, 2005 relating to a note
      purchase agreement pursuant to which Silverleaf Finance III, LLC sold
      approximately $108.6 million of its Timeshare Loan-Backed Notes,
      Series 2005-A (“Notes”).





Current
      report on Form 8-K filed with the SEC on July 28, 2005 relating to a
      securitization transaction with Silverleaf Finance III, LLC.





Current
      report on Form 8-K filed with the SEC on August 17, 2005 relating to the
      Registrant's earnings release for the quarter ended June 30, 2005.





Current
      report on Form 8-K filed with the SEC on August 22, 2005 relating to an
      Employment Agreement between the Registrant and an officer of the
      Registrant.




Current
      report on Form 8-K filed with the SEC on September 16, 2005 relating to a loan
      agreement between the Registrant and Textron Financial Corp.




Current
      report on Form 8-K filed with the SEC on September 23, 2005 relating to the
      listing of the Registrant's common stock on AMEX.




29


Current
      report on Form 8-K filed with the SEC on September 27, 2005 relating to the
      impact of Hurricane Rita on two of the Registrant's Texas resorts.





Current
      report on Form 8-K filed with the SEC on September 30, 2005 updating the impact
      of Hurricane Rita on two of the Registrant's Texas resorts.





**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 10, 2005
            By:/s/
                ROBERT E. MEAD
              Robert
                E. Mead
              Chairman
                of the Board and
              Chief
                Executive OfficerDated: November 10, 2005
            By:/s/
                HARRY J. WHITE, JR.
              Harry
                J. White, Jr.
              Chief
                Financial Officer




30








**INDEX
      TO EXHIBITS**





**Exhibit
                No.**
              **Description**
 
 3.1
              Second
                  Amended and Restated Bylaws of Silverleaf Resorts, Inc. dated November
                  8,
                  2005





10.1
            First
                Amendment to Inventory Loan and Security Agreement dated October
                5, 2005
                between the Registrant and CapitalSource Finance
                LLC





10.2
            Second
                Amendment to Amended and Restated Loan and Security Agreement, dated
                as ofOctober
                26, 2005, between the Registrant and Textron Financial
                Corporation





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





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





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





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






31