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 June 30, 2008





OR








 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from _____________ to _____________





Commission
file number:  001-13003








SILVERLEAF RESORTS,
INC.


(Exact
name of registrant as specified in its charter)





TEXAS
            75-2259890(State
      of incorporation)
            (I.R.S.
      Employer Identification No.)








1221
RIVER BEND DRIVE, SUITE 120


DALLAS,
TEXAS  75247


(Address
of principal executive offices, including zip code)








214-631-1166


(Registrant’s
telephone number, including area code)








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


Yes  x  No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):


Large
      accelerated filer   ̈
            Accelerated
      filer  xNon-accelerated
      filer   ̈
            Smaller
      reporting company   ̈





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


Yes   ̈  No  x





As of
August 7, 2008, 38,078,154 shares of the registrant’s common stock, $0.01 par
value, were issued and outstanding.












SILVERLEAF RESORTS, INC.
 
 INDEX




PagePART
      I. FINANCIAL INFORMATIONItem
      1.
            
            Condensed Consolidated Statements of Operations for the
      three months and six months ended June 30, 2008 and
    2007
            2Condensed Consolidated Balance Sheets as of June 30, 2008
      and December 31, 2007.
            3Condensed Consolidated Statement of Shareholders' Equity
      for the six months ended June 30, 2008
            4Condensed Consolidated Statements of Cash Flows for the six
      months ended June 30, 2008 and 2007
            5Notes to the Condensed Consolidated Financial
      Statements
            6Item
      2.
            
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            16Item
      3.
            
            Quantitative and Qualitative Disclosures about Market
      Risk
            23Item
      4.
            
            Controls and Procedures
            25PART
      II. OTHER INFORMATIONItem
      1.
            
            Legal Proceedings
            25Item
      1A.
            
            Risk Factors
            25Item
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            26Item
      6.
            
            Exhibits
            26Signatures
            27


1
 Index


PART
I: FINANCIAL INFORMATION


Item
1. Financial Statements


SILVERLEAF
RESORTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share amounts)


(Unaudited)





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Vacation
      Interval sales
            
            $
            67,959
            
            
            $
            58,577
            
            
            $
            133,040
            
            
            $
            111,942Estimated
      uncollectible revenue
            
            
            (16,242
            )
            
            
            (9,372
            )
            
            
            (30,560
            )
            
            
            (17,913
            )Net
      sales
            
            
            51,717
            
            
            
            49,205
            
            
            
            102,480
            
            
            
            94,029Interest
      income
            
            
            15,310
            
            
            
            12,940
            
            
            
            29,817
            
            
            
            25,487Management
      fee income
            
            
            780
            
            
            
            615
            
            
            
            1,560
            
            
            
            1,230Other
      income
            
            
            1,261
            
            
            
            1,093
            
            
            
            2,237
            
            
            
            1,933Total
      revenues
            
            
            69,068
            
            
            
            63,853
            
            
            
            136,094
            
            
            
            122,679Costs
      and Operating Expenses:Cost
      of Vacation Interval sales
            
            
            7,756
            
            
            
            5,683
            
            
            
            12,630
            
            
            
            11,453Sales
      and marketing
            
            
            33,940
            
            
            
            29,142
            
            
            
            67,477
            
            
            
            56,591Operating,
      general and administrative
            
            
            10,224
            
            
            
            9,480
            
            
            
            19,516
            
            
            
            17,903Depreciation
            
            
            1,210
            
            
            
            858
            
            
            
            2,324
            
            
            
            1,716Interest
      expense and lender fees
            
            
            6,367
            
            
            
            6,126
            
            
            
            12,469
            
            
            
            11,777Total
      costs and operating expenses
            
            
            59,497
            
            
            
            51,289
            
            
            
            114,416
            
            
            
            99,440Income
      before provision for income taxes
            
            
            9,571
            
            
            
            12,564
            
            
            
            21,678
            
            
            
            23,239Provision
      for income taxes
            
            
            (3,685
            )
            
            
            (4,837
            )
            
            
            (8,346
            )
            
            
            (8,947
            )Net
      income
            
            $
            5,886
            
            
            $
            7,727
            
            
            $
            13,332
            
            
            $
            14,292Basic
      net income per share
            
            $
            0.15
            
            
            $
            0.20
            
            
            $
            0.35
            
            
            $
            0.38Diluted
      net income per share
            
            $
            0.15
            
            
            $
            0.20
            
            
            $
            0.34
            
            
            $
            0.36Weighted
      average basic common shares outstanding
            
            
            38,065,077
            
            
            
            37,808,154
            
            
            
            37,995,956
            
            
            
            37,808,154Weighted
      average diluted common shares outstanding
            
            
            39,289,637
            
            
            
            39,396,758
            
            
            
            39,346,094
            
            
            
            39,384,338





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


2
 Index


SILVERLEAF
RESORTS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share amounts)





ASSETS
            
            June 30,
              2008
            
            
            December 31,
              2007(Unaudited)Cash
      and cash equivalents
            
            $
            14,669
            
            
            $
            13,170Restricted
      cash
            
            
            19,693
            
            
            
            12,816Notes
      receivable, net of allowance for uncollectible notes of $77,099 and
      $69,128, respectively
            
            
            314,232
            
            
            
            289,907Accrued
      interest receivable
            
            
            3,952
            
            
            
            3,744Investment
      in special purpose entity
            
            
            5,975
            
            
            
            7,315Amounts
      due from affiliates
            
            
            3,042
            
            
            
            1,358Inventories
            
            
            183,548
            
            
            
            179,188Land,
      equipment, buildings, and leasehold improvements, net
            
            
            51,396
            
            
            
            41,565Land
      held for sale
            
            
            509
            
            
            
            509Prepaid
      and other assets
            
            
            34,178
            
            
            
            31,487TOTAL
      ASSETS
            
            $
            631,194
            
            
            $
            581,059LIABILITIES
      AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
      payable and accrued expenses
            
            $
            15,563
            
            
            $
            21,071Accrued
      interest payable
            
            
            2,467
            
            
            
            2,470Unearned
      Vacation Interval sales
            
            
            -
            
            
            
            296Unearned
      samplers
            
            
            7,059
            
            
            
            6,921Income
      taxes payable
            
            
            2,456
            
            
            
            782Deferred
      income taxes
            
            
            34,749
            
            
            
            30,463Notes
      payable and capital lease obligations
            
            
            354,711
            
            
            
            316,198Senior
      subordinated notes
            
            
            24,671
            
            
            
            26,817Total
      Liabilities
            
            
            441,676
            
            
            
            405,018COMMITMENTS
      AND CONTINGENCIES (Note 8)SHAREHOLDERS'
      EQUITYPreferred
      stock, 10,000,000 shares authorized, none issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, par value $0.01 per share, 100,000,000 shares authorized,
      38,068,154 and 37,818,154 shares issued and outstanding at June 30, 2008
      and December 31, 2007, respectively
            
            
            381
            
            
            
            378Additional
      paid-in capital
            
            
            112,842
            
            
            
            112,700Retained
      earnings
            
            
            76,295
            
            
            
            62,963Total
      Shareholders' Equity
            
            
            189,518
            
            
            
            176,041TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            631,194
            
            
            $
            581,059





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


3
 Index


SILVERLEAF
RESORTS, INC.


CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS'
EQUITY


(in
thousands, except share amounts)


(Unaudited)





Common
      StockNumber of Shares Issued
            
            
            $0.01 Par Value
            
            
            Additional Paid-in Capital
            
            
            Retained Earnings
            
            
            TotalJanuary
      1, 2008
            
            
            37,818,154
            
            
            $
            378
            
            
            $
            112,700
            
            
            $
            62,963
            
            
            $
            176,041Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            70
            
            
            
            -
            
            
            
            70Exercise
      of stock options
            
            
            250,000
            
            
            
            3
            
            
            
            72
            
            
            
            -
            
            
            
            75Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,332
            
            
            
            13,332June
      30, 2008
            
            
            38,068,154
            
            
            $
            381
            
            
            $
            112,842
            
            
            $
            76,295
            
            
            $
            189,518





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


4
 Index


SILVERLEAF
RESORTS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





Six
      Months Ended
              June 30,2008
            
            
            2007OPERATING
      ACTIVITIES:Net
      income
            
            $
            13,332
            
            
            $
            14,292Adjustments
      to reconcile net income to net cash used in operating
      activities:Estimated
      uncollectible revenue
            
            
            30,560
            
            
            
            17,913Deferred
      income taxes
            
            
            4,286
            
            
            
            5,826Depreciation
            
            
            2,324
            
            
            
            1,716Stock-based
      compensation
            
            
            70
            
            
            
            71Cash
      effect from changes in operating assets and liabilities:Restricted
      cash
            
            
            (1,350
            )
            
            
            (5
            )Notes
      receivable
            
            
            (54,565
            )
            
            
            (46,436
            )Accrued
      interest receivable
            
            
            (208
            )
            
            
            (282
            )Investment
      in special purpose entity
            
            
            1,340
            
            
            
            2,911Amounts
      due from/to affiliates
            
            
            (1,684
            )
            
            
            (1,328
            )Inventories
            
            
            (4,360
            )
            
            
            (8,074
            )Prepaid
      and other assets
            
            
            (2,691
            )
            
            
            (4,392
            )Accounts
      payable and accrued expenses
            
            
            (4,728
            )
            
            
            (1,529
            )Accrued
      interest payable
            
            
            (3
            )
            
            
            484Unearned
      Vacation Interval sales
            
            
            (296
            )
            
            
            1,057Unearned
      samplers
            
            
            138
            
            
            
            906Income
      taxes payable
            
            
            1,674
            
            
            
            222Net
      cash used in operating activities
            
            
            (16,161
            )
            
            
            (16,648
            )INVESTING
      ACTIVITIES:Additions
      to land, equipment, buildings, and leasehold improvements
            
            
            (12,921
            )
            
            
            (6,399
            )Net
      cash used in investing activities
            
            
            (12,921
            )
            
            
            (6,399
            )FINANCING
      ACTIVITIES:Proceeds
      from borrowings of debt
            
            
            224,208
            
            
            
            81,337Payments
      of debt and capital leases
            
            
            (188,175
            )
            
            
            (62,737
            )Restricted
      cash reserved for payments of debt
            
            
            (5,527
            )
            
            
            674Proceeds
      from exercise of stock options
            
            
            75
            
            
            
            -Net
      cash provided by financing activities
            
            
            30,581
            
            
            
            19,274Net
      change in cash and cash equivalents
            
            
            1,499
            
            
            
            (3,773
            )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            13,170
            
            
            
            11,450End
      of period
            
            $
            14,669
            
            
            $
            7,677SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid, net of amounts capitalized
            
            $
            10,570
            
            
            $
            10,639Income
      taxes paid
            
            $
            1,246
            
            
            $
            2,900Income
      tax refund
            
            $
            1,646
            
            
            $
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING
      ACTIVITIES:Land,
      equipment, buildings, and leasehold improvements acquired under capital
      leases
            
            $
            1,072
            
            
            $
            -





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


5
 Index


SILVERLEAF
RESORTS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








Note
1 – Background





The
primary business of Silverleaf Resorts, Inc. (the “Company,” “Silverleaf,” “we,”
or “our”) is marketing and selling vacation intervals (“Vacation Intervals”)
related to our 13 owned resorts.  The condensed consolidated financial
statements should be read in conjunction with our audited consolidated financial
statements and footnotes included in our Form 10-K for the year ended December
31, 2007 as filed with the Securities and Exchange Commission (“SEC”), as well
as all the financial information contained in interim and other reports filed
with the SEC since then. The accounting policies used in preparing these
condensed consolidated financial statements are consistent with those described
in such Form 10-K.  In addition, operating results for the six months
ended June 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008.





Note
2 – Significant Accounting Policies Summary





Basis of Presentation —The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting policies generally accepted in the United States of
America for interim financial information and in accordance with the rules and
regulations of the SEC.  Accordingly, these financial statements do
not include certain information and disclosures required by GAAP for complete
financial statements.  However, in the opinion of management, all
adjustments, consisting of normal recurring adjustments and accruals, considered
necessary for a fair presentation have been included.





Use of Estimates — The
preparation of these condensed consolidated financial statements requires the
use of management’s estimates and assumptions in determining the carrying values
of certain assets and liabilities, the 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 estimates. Significant management
estimates include the allowance for uncollectible notes, estimates for income
taxes, valuation of our investment in Silverleaf Finance III, LLC (“SF-III”),
our wholly-owned off-balance-sheet qualified special purpose finance subsidiary,
and the future sales plan and estimated recoveries used to allocate certain
costs to inventory phases and cost of sales.





Principles of Consolidation —The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, excluding SF-III. All significant
intercompany accounts and transactions have been eliminated in the condensed
consolidated financial statements.





SFAS No. 152 —We follow
industry specific guidance established by Statement of Financial Accounting
Standards No. 152, “Accounting for Real Estate Time-Sharing Transactions” (“SFAS
No. 152”).  In general, SFAS No. 152 provides guidance on determining
revenue recognition for timeshare transactions, evaluation of uncollectibility
of Vacation Interval receivables, accounting for costs of Vacation Interval
sales, accounting for operations during holding periods (or incidental
operations), and other accounting transactions specific to timeshare
operations.





Revenue and Expense Recognition
(including Cost of Sales) —A substantial portion of Vacation Interval
sales are consummated in exchange for installment notes receivable secured by
deeds of trust on each Vacation Interval sold.  If development costs
related to a particular project or phase are complete, we recognize related
Vacation Interval sales under the full accrual method after a binding sales
contract has been executed, the buyer has made a down payment of at least 10%,
and the statutory rescission period has expired. If all such criteria are met
yet significant development costs remain to complete the project or phase,
revenues are recognized on the percentage-of-completion basis. Under this
method, once the sales criteria are met, revenues are recognized proportionate
to costs already incurred relative to total costs expected for the project or
phase.  There were no sales deferred at June 30, 2008 related to the
percentage-of-completion method.





Both of
these revenue recognition methods employ the relative sales value method in
determining related costs of sales and inventory applicable to each Vacation
Interval sale recognized. Under the relative sales value method, a cost of sales
percentage is used to apply costs to related sales as follows:





·
            Total
      revenues to be recognized over an entire project or phase, considering
      both revenues recognized to date plus estimated revenues to be recognized
      over future periods (considering an estimate of uncollectibility and
      subsequent resale of recovered Vacation Intervals), are
      determined.


6
 Index


·
            Total
      costs of a project or phase, considering both costs already incurred plus
      estimated costs to complete the phase, if any, are determined. Common
      costs, including amenities, are included in total estimated costs and
      allocated to inventory phases that such costs are expected to
      benefit.


·
            The
      cost of sales ratio applied to each sale represents total estimated costs
      as a percentage of total estimated revenues, which is specific to each
      inventory phase.  Generally, each building type is considered a
      separate phase.





The
estimate of total revenue for a particular phase also considers factors such as
trends in uncollectibles, changes in sales mix and unit sales prices,
repossessions of Vacation Intervals, effects of upgrade programs, and past and
expected sales programs to sell slow moving inventory units.  At least
quarterly, we evaluate the estimated cost of sales percentage applied to each
sale using updated information for total estimated phase revenue and total
estimated phase costs. The effects of changes in estimates are accounted for in
the period in which such changes first become known on a retrospective basis,
such that the balance sheet at the end of the period of change and the
accounting in subsequent periods reflect the revised estimates as if such
estimates had been the original estimates.





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





We also
sell additional and upgraded Vacation Intervals to existing owners. Revenues are
recognized on an additional Vacation Interval sale, which represents a new
Vacation Interval sale treated as a separate transaction from the original
Vacation Interval sale, when the buyer makes a down payment of at least 10%,
excluding any equity from the original Vacation Interval
purchased.  Revenues are recognized on an upgrade Vacation Interval
sale, which is a modification and continuation of the original sale, by
including the buyer’s equity from the original Vacation Interval towards the
down payment of at least 10%.  Revenue recognized on upgrade Vacation
Interval sales represents the difference between the upgrade sales price and
traded-in sales price, while related cost of sales represents the incremental
increase in the cost of the Vacation Interval purchased.





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





We
receive fees for management services provided to Silverleaf Club and Orlando
Breeze Resort Club. These revenues are recognized on an accrual basis in the
period the services are provided if collection is deemed probable.





Services
and other income are recognized on an accrual basis in the period such services
are provided.





Sales and
marketing costs are charged to expense in the period
incurred.  Commissions, however, are recognized in the same period the
related revenues are recognized.





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





Restricted Cash — Restricted
cash consists of certificates of deposit, collateral for construction bonds, and
cash reserved for payments of debt.





Allowance for Uncollectible Notes —Estimated uncollectible revenue 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. The allowance for
uncollectible notes is adjusted based upon a periodic static-pool analysis of
the notes receivable portfolio, which tracks uncollectible notes for each year’s
sales over the lives of the notes. Other factors considered in the assessment of
uncollectibility include the aging of notes receivable, historical collection
experience and credit losses, customer credit scores (FICO® scores), and current
economic factors.


7
 Index


Credit
losses represent three varieties as follows:





·
            A
      full cancellation of the note, whereby the customer is relieved of the
      obligation and we recover the underlying
  inventory,


·
            A
      deemed cancellation, whereby we record the cancellation of all notes that
      become 90 days delinquent, net of notes that are no longer 90 days
      delinquent, and


·
            A
      note receivable reduction that occurs when a customer trades a higher
      value product for a lower value
product.





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 certain recourse obligations.
Recourse on sales of customer notes receivable is governed by agreements between
the purchasers of said notes and the Company.





Investment in Special Purpose
Entity — In 2005, we consummated a securitization transaction with
SF-III, which is a qualified special purpose entity formed for the purpose of
issuing $108.7 million of Timeshare Loan-Backed Notes Series 2005-A (“Series
2005-A Notes”) in a private placement.  In connection with this
transaction, we sold SF-III $132.8 million in timeshare receivables that were
previously pledged as collateral under revolving credit facilities with our
senior lenders and Silverleaf Finance I, Inc., (“SF-I”), our former qualified
special purpose entity which was dissolved in 2005.  This transaction
qualified as a sale for accounting purposes. The Series 2005-A Notes are secured
by timeshare receivables we sold to SF-III. The timeshare receivables we sold to
SF-III are without recourse, except for breaches of certain representations and
warranties at the time of sale. Pursuant to the terms of an agreement, we will
continue servicing these timeshare receivables and receive fees for our
services. As such fees approximate both our internal cost of servicing such
timeshare receivables and fees a third party would charge to service such
receivables, the related servicing asset or liability was estimated to be
insignificant.





We
account for and evaluate the investment in our special purpose entity in
accordance with Statement of Financial Accounting Standards No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS No. 140”), EITF 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” and
Statement of Financial Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” as applicable. Effective January 1,
2007, SFAS No. 140 was amended by Statement of Financial Accounting Standards
No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”), which
did not affect the manner in which we account for our investment in our special
purpose entity.  On January 1, 2008, we adopted the provisions of
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which also amended SFAS No. 140.  The adoption of
SFAS No. 157 did not impact the method in which we calculate the fair value of
the investment in our special purpose entity, however, did require expanded
disclosures about the fair value measurement.  See Note 6 – “Fair
Value Measurements.”  The gain or loss on the sale of notes receivable
is determined based on the proceeds received, the fair value assigned to the
investment in our special purpose entity, and the recorded value of notes
receivable sold. The fair value of the investment in our special purpose entity
is estimated based on the present value of future cash flows we expect to
receive from the notes receivable sold.  We utilized the following key
assumptions to estimate the fair value of such cash flows related to SF-III:
customer prepayment rate (including expected accounts paid in full as a result
of upgrades) – 15.9% to 23.3%; expected credit losses – 16.2%; discount rate –
0% to 21.5%; base interest rate – 5.37%; and loan servicing fees – 1.75%. Our
assumptions are based on experience with our notes receivable portfolio,
available market data, estimated prepayments, the cost of servicing, and net
transaction costs. Such assumptions are assessed quarterly and, if necessary,
adjustments are made to the carrying value of the investment in our special
purpose entity on a prospective basis as a change in accounting estimate, with
the amount of periodic interest accretion adjusted over the remaining life of
the beneficial interest. The carrying value of the investment in our special
purpose entity represents our maximum exposure to loss regarding our involvement
with our special purpose entity.  We periodically review the carrying
value of our investment in special purpose entity for impairment to ensure that
the carrying value does not exceed market value.





Inventories —Inventories are
stated at the lower of cost or market value less cost to sell.  Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, an estimate for the value of future recoveries,
taxes, and capitalized interest incurred in the construction or through the
acquisition of resort dwellings held for timeshare sale.  At June 30,
2008, the estimated costs not yet incurred but expected to complete promised
amenities was $956,000.  Inventory costs are allocated to cost of
Vacation Interval sales using the relative sales value method, as described
above.  We periodically review the carrying value of our inventory on
an individual project basis for impairment to ensure that the carrying value
does not exceed market value.





Vacation
Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu of
foreclosure) or (ii) trade-in associated with the purchase of an upgraded or
downgraded Vacation Interval. Vacation Intervals reacquired are recorded in
inventory at the lower of their original cost or market value.


8
 Index


Land, Equipment, Buildings, and
Leasehold Improvements — Land, equipment (including equipment under
capital lease), buildings, and leasehold improvements are stated at cost. When
assets are disposed of, the cost and related accumulated depreciation are
removed, and any resulting gain or loss is reflected in income for the
period.  Maintenance and repairs are charged to expense as
incurred.  Significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, which range from 3 to 20
years.





Valuation of Long-Lived
Assets — In accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we
assess potential impairments to our long-lived assets, including land,
equipment, buildings, and leasehold improvements, when there is evidence that
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  If circumstances require a long-lived asset
be tested for possible impairment, we compare undiscounted cash flows expected
to be generated by an asset to the carrying value of the asset.  If
the carrying value of the long-lived asset is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying
value exceeds its fair value.  Fair value is determined through
various valuation techniques including discounted cash flow models, quoted
market values, and third-party independent appraisals, as considered
necessary.  We did not recognize any impairments for our long-lived
assets in the first six months of 2008 and 2007.





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





Income Taxes —Deferred
income taxes are recorded for temporary differences between the basis of assets
and liabilities as recognized by tax laws and their carrying values as reported
in the condensed consolidated financial statements. A provision or benefit is
recognized for deferred income taxes relating to such temporary
differences.  To the extent a deferred tax asset does not meet the
criteria of "more likely than not" for realization, a valuation allowance is
recorded. Although we do not currently have any material charges related to
interest and penalties, such costs, if incurred, are reported within the
provision for income taxes.  Our federal tax return includes all items
of income, gain, loss, expense, and credit of SF-III, which is a
non-consolidated subsidiary for reporting purposes and a disregarded entity for
federal income tax purposes.  We have a tax sharing agreement with
SF-III.





We file
U.S. federal income tax returns as well as income tax returns in various
states.  We are no longer subject to income tax examinations by the
Internal Revenue Service for years prior to 2004, although carryforward
attributes that were generated prior to 2004 may still be subject to
examination.  For the majority of state tax jurisdictions, we are no
longer subject to income tax examinations for years prior to 2004.  In
the state of Texas, we are no longer subject to franchise tax examinations for
years prior to 2003.





Derivative Financial Instruments —Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended,
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts and hedging activities.  All derivatives, whether designed
as hedging relationships or not, are required to be recorded on the balance
sheet at fair value.  Accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting
designation.  Derivatives used to hedge exposure to changes in the
fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges.  Derivatives used to hedge exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered
cash flow hedges.





For
derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are recognized in
earnings.  For derivatives designated as cash flow hedges, the
effective portion of changes in the fair value of the derivative is initially
reported in other comprehensive income (outside of earnings) and subsequently
reclassified to earnings when the hedged transaction affects earnings, while the
ineffective portion of changes in the fair value of the derivative is recognized
directly in earnings.  We assess the effectiveness of each hedging
relationship by comparing the changes in fair value or cash flows of the
derivative hedging instrument with the changes in fair value or cash flows of
the designated hedged item or transaction.  For derivatives not
designated as hedges, changes in the fair value are recognized in
earnings.


9
 Index


Our
objective in using derivatives is to increase stability related to interest
expense and to manage our exposure to interest rate movements or other
identified risks.  To accomplish this objective, we primarily use
interest rate swaps and caps within our cash flow hedging
strategy.  Interest rate swaps designated as cash flow hedges involve
the receipt of variable-rate amounts in exchange for fixed-rate payments over
the life of the agreements without exchange of the underlying principal
amount.  Interest rate caps designated as cash flow hedges provide
interest rate protection above the strike rate on the cap and result in our
receipt of interest payments when actual rates exceed the cap
strike.  We recognize changes in fair value of our interest rate swaps
in earnings.  The amounts recognized for such interest rate swaps for
the six months ended June 30, 2008 and 2007 were not significant.





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





Stock-Based Compensation— We
adopted Statement of Financial Accounting Standards No. 123R, “Share Based
Payment” (“SFAS No. 123R”), as of January 1, 2006, using the modified
prospective method. Under this transition method, for all stock options granted
on or prior to December 31, 2005 that were outstanding as of that date,
compensation cost is recognized for the unvested portion over the remaining
requisite service period using the fair value for these options as estimated at
the date of grant using the Black-Scholes option-pricing model under the
original provisions of SFAS No. 123 for pro-forma disclosure
purposes.  Accordingly, we recognized stock-based compensation of
$70,000 and $71,000 for the six months ended June 30, 2008 and 2007,
respectively.  At June 30, 2008, unamortized compensation expense
related to stock options granted prior to 2006 was $18,000, which will be fully
recognized by August 31, 2008.





The
following table summarizes our outstanding stock options for the six months
ended June 30, 2008 and 2007:





2008
            
            
            2007Options
      outstanding, January 1
            
            
            2,513,807
            
            
            
            2,823,807Granted
            
            
            —
            
            
            
            —Exercised
            
            
            (250,000
            )
            
            
            —Expired
            
            
            (233,500
            )
            
            
            (297,000
            )Forfeited
            
            
            —
            
            
            
            (1,000
            )Options
      outstanding, June 30
            
            
            2,030,307
            
            
            
            2,525,807Exercisable,
      June 30
            
            
            1,941,307
            
            
            
            2,347,807





For the
six months ended June 30, 2008, the weighted average exercise price of the
250,000 stock options exercised was $0.30 per share and the intrinsic value was
$592,000.  There were no stock options exercised during the first six
months of 2007.





Other Recent Accounting
Pronouncements—





SFAS No. 157 – We
adopted the provisions of Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” on January 1, 2008.  SFAS No. 157 defines
fair value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements.  SFAS
No. 157 is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value.  SFAS No.
157 does not expand or require any new fair value measures.  However,
the application of this statement may change current practice.  In
February 2008, the FASB decided that an entity need not apply this standard to
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis until
2009.  Accordingly, our adoption of this standard in 2008 was limited
to financial assets and liabilities, which primarily affected the disclosures
for the investment in our special purpose entity and our derivative
contracts.  The adoption of SFAS No. 157 did not impact our financial
position, results of operations, or cash flows. We are still in the process of
evaluating this standard with respect to its effect on non-financial assets and
liabilities and therefore have not yet determined the impact that it will have
on our financial statements upon full adoption in 2009.


10
 Index


SFAS No. 159–We adopted the
provisions of Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) on
January 1, 2008.  SFAS No. 159 allows an irrevocable election to
measure certain financial assets and financial liabilities at fair value on an
instrument-by-instrument basis, with unrealized gains and losses recognized
currently in earnings. Under SFAS No. 159, the fair value option may only be
elected at the time of initial recognition of a financial asset or financial
liability or upon the occurrence of certain specified events. Additionally, SFAS
No. 159 provides that application of the fair value option must be based on the
fair value of an entire financial asset or financial liability and not selected
risks inherent in those assets or liabilities. SFAS No. 159 requires that assets
and liabilities which are measured at fair value pursuant to the fair value
option be reported in the financial statements in a manner that separates those
fair values from the carrying amounts of similar assets and liabilities which
are measured using another measurement attribute. SFAS No. 159 also provides
expanded disclosure requirements regarding the effects of electing the fair
value option on the financial statements.  The adoption of SFAS No.
159 did not impact our consolidated financial position, results of operations,
or cash flows.





SFAS No. 141R–In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), “Business Combinations” (“SFAS No. 141R”), which changes the
accounting for business combinations including the following: i) the measurement
of acquirer shares issued in consideration for a business combination, ii) the
recognition of contingent consideration, iii) the accounting for preacquisition
gain and loss contingencies, iv) the recognition of capitalized in-process
research and development, v) the accounting for acquisition-related
restructuring cost accruals, vi) the treatment of acquisition related
transaction costs, and vii) the recognition of changes in the acquirer’s income
tax valuation allowance.  SFAS No. 141R is effective prospectively for
fiscal years beginning after December 15, 2008.  Early adoption is not
permitted.  We are currently assessing the financial impact the
adoption of SFAS No. 141R will have on our consolidated financial position,
results of operations, and cash flows.





SFAS No. 160 –In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No.
160”).  SFAS No. 160 amends Accounting Research Bulletin No. 51
“Consolidated Financial Statements,” and Financial Accounting Standards Board
Statement No. 128, “Earnings Per Share.”  A noncontrolling interest is
defined in SFAS No. 160 as the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent.  SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit
organizations.  SFAS No. 160 is effective prospectively for fiscal
years beginning after December 15, 2008.  We are currently assessing
the financial impact the adoption of SFAS No. 160 will have on our consolidated
financial position, results of operations, and cash flows.





SFAS No. 161 –In March 2008,
the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.
161”).  SFAS No. 161 amends and expands the disclosure requirements of
SFAS No. 133.  SFAS No. 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.  SFAS No. 161 applies to all entities that prepare
consolidated financial statements and to all derivative instruments, including
bifurcated derivative instruments (and nonderivative instruments that are
designated and qualify as hedging instruments as defined in SFAS No. 133) and
related hedged items accounted for under SFAS No. 133 and its related
interpretations.  SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  Early adoption is encouraged.  We are currently
assessing the financial impact the adoption of SFAS No. 161 will have on our
consolidated financial position, results of operations, and cash
flows.





SFAS No. 162 –In May 2008,
the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No.
162”).  SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP in the United States (“the GAAP hierarchy”).  The
current GAAP hierarchy is set forth in the AICPA Statement on Auditing Standards
No. 69, “The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles” (“SAS No. 69”).  The FASB believes the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  Accordingly,
the FASB concluded that the GAAP hierarchy should reside in the accounting
literature established by the FASB and has issued SFAS No. 162 to achieve that
result.  SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to SAS No.
69.  We do not expect the adoption of SFAS No. 162 to have an impact
on our consolidated financial position, results of operations, or cash
flows.


11
 Index


Note
3 – Earnings Per Share





The
following table illustrates the reconciliation between basic and diluted
weighted average common shares outstanding for the three and six-month periods
ended June 30, 2008 and 2007:





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Weighted
      average shares outstanding - basic
            
            
            38,065,077
            
            
            
            37,808,154
            
            
            
            37,995,956
            
            
            
            37,808,154Issuance
      of shares from stock options exercisable
            
            
            1,699,884
            
            
            
            2,031,807
            
            
            
            1,769,637
            
            
            
            2,031,807Repurchase
      of shares from stock options proceeds
            
            
            (475,324
            )
            
            
            (443,203
            )
            
            
            (419,499
            )
            
            
            (455,623
            )Weighted
      average shares outstanding - diluted
            
            
            39,289,637
            
            
            
            39,396,758
            
            
            
            39,346,094
            
            
            
            39,384,338





Outstanding
stock options totaling 1.7 million and 2.0 million were dilutive securities that
were included in the computation of diluted earnings per share at June 30, 2008
and 2007, respectively. Outstanding stock options totaling 334,000 and 494,000
were not dilutive at June 30, 2008 and 2007, respectively, because the exercise
price for such options exceeded the market price for our common
shares.





Note 4–Notes Receivable





We
provide financing to the purchasers of Vacation Intervals in the form of notes
receivable, which are collateralized by their interest in such Vacation
Intervals.  Such notes receivable generally have initial terms of
seven to ten years.  The average yield on outstanding notes receivable
at June 30, 2008 and 2007 was 16.4% and 16.0%, respectively, with individual
rates ranging from 0% to 17.9%.  As of June 30, 2008, $1.1 million of
timeshare notes receivable have interest rates below 10%.  In
connection with the sampler program, we routinely enter into notes receivable
with terms of 10 months.  Notes receivable from sampler sales were
$3.2 million and $3.6 million at June 30, 2008 and 2007, respectively, and are
non-interest bearing.





We
consider accounts over 60 days past due to be delinquent.  As of June
30, 2008, $5.5 million of notes receivable, net of accounts charged off, were
considered delinquent. An additional $26.6 million of notes receivable, of which
$23.3 million is pledged to senior lenders, would have been considered to be
delinquent had we not granted payment concessions to the customers, which brings
a delinquent note current and extends the maturity date if two consecutive
payments are made.





Notes
receivable are scheduled to mature as follows at June 30, 2008 (in
thousands):





For
      the 12-Month Period Ending June 30,2009
            
            $
            43,7792010
            
            
            43,1292011
            
            
            48,6572012
            
            
            53,5972013
            
            
            56,033Thereafter
            
            
            146,136391,331Less
      allowance for uncollectible notes
            
            
            (77,099
            )Notes
      receivable, net
            
            $
            314,232





The
activity in gross notes receivable is as follows for the three and six-month
periods ended June 30, 2008 and 2007 (in thousands):





Three Months Ended
              June 30,
            
            
            Six Months Ended
              June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance,
      beginning of period
            
            $
            374,721
            
            
            $
            310,609
            
            
            $
            359,035
            
            
            $
            297,835Sales
            
            
            49,237
            
            
            
            45,643
            
            
            
            99,693
            
            
            
            85,768Collections
            
            
            (23,083
            )
            
            
            (20,289
            )
            
            
            (44,808
            )
            
            
            (39,332
            )Receivables
      charged off
            
            
            (9,544
            )
            
            
            (7,140
            )
            
            
            (22,589
            )
            
            
            (15,448
            )Balance,
      end of period
            
            $
            391,331
            
            
            $
            328,823
            
            
            $
            391,331
            
            
            $
            328,823


12
 Index


The
activity in the allowance for uncollectible notes is as follows for the three
and six-month periods ended June 30, 2008 and 2007 (in thousands):





Three Months Ended
              June 30,
            
            
            Six Months Ended
              June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance,
      beginning of period
            
            $
            70,401
            
            
            $
            68,351
            
            
            $
            69,128
            
            
            $
            68,118Estimated
      uncollectible revenue
            
            
            16,242
            
            
            
            9,372
            
            
            
            30,560
            
            
            
            17,913Receivables
      charged off
            
            
            (9,544
            )
            
            
            (7,140
            )
            
            
            (22,589
            )
            
            
            (15,448
            )Balance,
      end of period
            
            $
            77,099
            
            
            $
            70,583
            
            
            $
            77,099
            
            
            $
            70,583





Note
5 – Debt





The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at June 30, 2008 and December 31, 2007 (in
thousands):





June
      30,
                2008
              
              
              December
      31,
                2007
              
              
              Revolving
                Term
              
              Maturity$100
      million receivable-based revolver ($100 million maximum combined
      receivable, inventory, and acquisition commitments, see inventory /
      acquisition component below)
              
              $
              22,014
              
              
              $
              63,119
              
              
              1/31/10
              
              1/31/13$20
      million receivable-based revolver
              
              
              4,732
              
              
              
              14,122
              
              
              6/29/10
              
              6/29/10$35
      million receivable-based revolver
              
              
              1,643
              
              
              
              8,044
              
              
              12/31/08
              
              12/31/11$150
      million receivable-based revolver
              
              
              44,407
              
              
              
              59,268
              
              
              9/3/09
              
              9/3/11$37.5
      million receivable-based revolver
              
              
              34,886
              
              
              
              9,860
              
              
              9/28/09
              
              9/28/12$66.4
      million receivable-based non-revolving conduit loan
              
              
              9,695
              
              
              
              13,489
              
              
              
              —
              
              3/22/14$26.3
      million receivable-based non-revolving conduit loan
              
              
              5,631
              
              
              
              7,765
              
              
              
              —
              
              9/22/11$128.1
      million receivable-based non-revolver
              
              
              54,628
              
              
              
              68,761
              
              
              
              —
              
              7/16/18$115.4
      million receivable-based non-revolver, including a total remaining
      discount of approximately $7.7 million
              
              
              104,032
              
              
              
              —
              
              
              
              —
              
              3/15/20Inventory
      / acquisition loan agreement (see $100 million receivable-based revolver
      above)
              
              
              26,704
              
              
              
              30,005
              
              
              1/31/10
              
              1/31/12$50
      million inventory loan agreement
              
              
              27,584
              
              
              
              20,091
              
              
              4/29/10
              
              4/29/12$15
      million inventory loan agreement
              
              
              10,176
              
              
              
              12,982
              
              
              12/31/08
              
              12/31/10Various
      notes, due from January 2009 through August 2016, collateralized by
      various assets
              
              
              6,185
              
              
              
              6,970
              
              
              
              —
              
              variousTotal
      notes payable
              
              
              352,317
              
              
              
              314,476Capital
      lease obligations
              
              
              2,394
              
              
              
              1,722
              
              
              
              —
              
              variousTotal
      notes payable and capital lease obligations
              
              
              354,711
              
              
              
              316,198101⁄2%
      senior subordinated notes, due 2008
              
              
              —
              
              
              
              2,146
              
              
              
              —
              
              4/1/088.0%
      senior subordinated notes, due 2010
              
              
              24,671
              
              
              
              24,671
              
              
              
              —
              
              4/1/10Total
      senior subordinated notes
              
              
              24,671
              
              
              
              26,817Total
              
              $
              379,382
              
              
              $
              343,015





At June
30, 2008, our senior credit facilities provided for loans of up to $541.2
million, of which $195.0 million was available for future
advances.  Our weighted average cost of borrowings for the six months
ended June 30, 2008 was 6.3% compared to 7.7% for the six months ended June 30,
2007.





For the
three and six months ended June 30, 2008, interest expense and lender fees
related to debt collateralized by assets supporting interest income are $5.7
million and $11.1 million, respectively.  For the three and six months
ended June 30, 2007, interest expense and lender fees related to debt
collateralized by assets supporting interest income are $5.4 million and $10.8
million, respectively.





Effective April 1, 2008,
we amended our $50.0 million receivable-based revolver to reduce availability to
$20 million and extend the revolving term and maturity date from April 29, 2008
to June 30, 2008.  Effective June 10, 2008, this receivable-based
facility was further amended to extend the revolving term and maturity
date from June 2008 to June 2010, with the option to extend for a one-year
term.  The interest rate on advances under the receivables facility
remained the same at the Prime rate plus 0.75%, with the addition of a Prime
rate floor of 5.5%.  Effective June 10, 2008, we also amended our
inventory facility with this same senior lender to increase availability from
$30 million to $50 million and extend the revolving period April 2009 to April
2010 and the maturity date from April 2011 to April 2012, with the option to
extend both for additional one-year terms.  The interest rate on
advances under the inventory facility remained the same at the Prime rate plus
1.5%, with the addition of a Prime rate floor of 5.5%.  Regarding the
inventory facility, the financial covenant for the maximum allowable limit on
the ratio of sales and marketing expense to revenue from the sale of Vacation
Intervals was increased from .55 to 1 to .60 to 1.  In addition, in
the event that this ratio is no longer required to be tested under our $100
million consolidated receivables, inventory, and acquisition revolving line of
credit with another of our senior lenders, this covenant would no longer be
required by the senior lender of our amended $50 million inventory
facility.


13
 Index


Effective June 6, 2008, we
executed a term securitization transaction through a newly-formed, wholly-owned
and fully consolidated special purpose finance subsidiary, Silverleaf Finance
VI, LLC (“SF-VI”).  SF-VI was formed for the purpose of issuing
approximately $115.4 million of its Timeshare Loan-Backed Notes Series 2008-A
(“Series 2008-A Notes”) in a private offering and sale through certain financial
institutions.The Series 2008-A Notes were issued in seven
classes with a blended coupon rate of 7.263% and at discounts totaling
approximately $8.0 million. These discounts are amortized as an adjustment to
interest expense over the terms of the related loans using the effective
interest method, which generates a blended effective interest rate on these
notes of approximately 10.7%.  The Series 2008-A Notes have a final
maturity date of March 2020.  As discussed below, credit facilities
with certain of our other senior lenders have been amended to modify the
availability under the loan agreements as a result of such lenders’
participation in the securitization.





The
Series 2008-A Notes are secured by customer notes receivable sold to SF-VI by
Silverleaf Finance
IV, LLC (“SF-IV”) and Silverleaf.  The customer notes
receivable sold to SF-VI were previously sold to SF-IV or pledged as collateral
by Silverleaf under revolving credit facilities with senior
lenders.  The cash proceeds from the sale of the customer notes
receivable to SF-VI were primarily used to repay approximately $93.8 million in
consolidated indebtedness to senior lenders.  All customer notes
receivable purchased by SF-VI were acquired without recourse, except in the case
of breaches of customary representations and warranties made in connection with
the sale of the notes.  Silverleaf, however, is obligated to pay up to
an aggregate of $1 million to SF-VI in the event there are insufficient funds
available on scheduled payment dates to make required debt
payments.  Pursuant to the terms of an agreement, we will continue to
service these customer notes receivable and receive fees for our
services.





Effective
June 6, 2008, we amended our $35 million revolving receivable-based facility and
$15 million revolving inventory facility.  Regarding the
receivable-based facility, the commitment for financing of our receivables is
the lesser of (a) $35 million or (b) the amount by which $75 million exceeds the
sum of the aggregate amount of the outstanding Series 2008-A Notes purchased by
the senior lender plus the amount outstanding under the inventory facility.
Regarding the inventory facility, the commitment for financing of our inventory
is the lesser of (a) $15 million or (b) the amount by which $75 million exceeds
the sum of the aggregate amount of the outstanding Series 2008-A Notes purchased
by the senior lender plus the amount outstanding under the receivable-based
facility.





Effective
June 6, 2008, we amended our $100 million consolidated receivables, inventory,
and acquisition revolving line of credit.  The availability under the
acquisition loan component of the $100 million line of credit was reduced from
$20 million to $10 million.  The total availability under the facility
was reduced by the aggregate of the outstanding principal balance of the Series
2008-A Notes owned by the senior lender and an amount equal to 10.5% of the
outstanding principal balance of the two conduit loan facilities for $66.4
million and $26.3 million, respectively, provided by the senior lender to
Silverleaf Finance II, Inc. (“SF-II”).  The interest rate under the
acquisition line was increased from Prime rate plus 1% to Prime rate plus 3%,
but never less than 8%.  The interest rate on the receivables line
remained Prime rate, with the addition of a 6% floor.  The interest
rate on the inventory line remained Prime rate plus 1%, with the addition of a
6% floor.  In addition, certain financial covenants were also
modified.  The maximum allowable limit on the ratio of sales and
marketing expense to revenue from the sale of Vacation Intervals was increased
from .57 to 1 to .60 to 1.  The interest coverage ratio of at least
1.25 to 1 was modified to calculate the ratio based upon a trailing twelve month
period as opposed to a calculation based upon the calendar quarter as previously
required.





Note
6 – Fair Value Measurements





As
discussed in Note 2, we adopted SFAS No. 157 on January 1, 2008, which among
other things, requires enhanced disclosures about assets and liabilities
measured at fair value.  Our adoption of SFAS No. 157 was limited to
financial assets and liabilities, which primarily relate to the investment in
our special purpose entity and a derivative contract.





SFAS No.
157 includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures.  The
fair value hierarchy is based on inputs to valuation techniques that are used to
measure fair value that are either observable or
unobservable.  Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on market data
obtained from independent sources while unobservable inputs reflect a reporting
entity’s pricing based upon its own market assumptions.  The fair
value hierarchy consists of the following three levels:





Level
      1  -
            Inputs
      are quoted prices in active markets for identical assets or
      liabilities.


14
 Index


Level
      2  -
            Inputs
      are quoted prices for similar assets or liabilities in an active market,
      quoted prices for identical or similar assets or liabilities in markets
      that are not active, inputs other than quoted prices that are observable,
      and market-corroborated inputs which are derived principally from or
      corroborated by observable market
data.


Level
      3  -
            Inputs
      are derived from valuation techniques in which one or more significant
      inputs or value drivers are
unobservable.





The
following table represents our assets measured at fair value on a recurring
basis as of June 30, 2008 and the basis for that measurement (in
thousands):





Fair Value Measurements at
      Reporting Date UsingDescription
            
            June 30,
              2008
            
            
            Quoted Prices inActive Markets forIdentical
      Assets
              (Level 1)
            
            
            Significant OtherObservable
      Inputs
              (Level 2)
            
            
            SignificantUnobservable
      Inputs
              (Level 3)Investment in special purpose
      entity
            
            $
            5,975
            
            
            $
            —
            
            
            $
            —
            
            
            $
            5,975Interest rate cap
      derivative
            
            
            66
            
            
            
            —
            
            
            
            66
            
            
            
            —Total
            
            $
            6,041
            
            
            $
            —
            
            
            $
            66
            
            
            $
            5,975





The
following table is a rollforward of the investment in our special purpose entity
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the three and six-month periods ended June 30, 2008 (in
thousands):




Three
      Months
            
            
            Six
      MonthsBalance,
      beginning of period
            
            $
            6,693
            
            
            $
            7,315Net
      investment returns
            
            
            (718
            )
            
            
            (1,340
            )Balance,
      end of period
            
            $
            5,975
            
            
            $
            5,975




Note
7 – Subsidiary Guarantees





All
subsidiaries of the Company, except SF-II, SF-III, SF-IV, Silverleaf Finance V,
L.P., and SF-VI, have guaranteed our senior subordinated notes of $24.7 million
at June 30, 2008. Separate financial statements and other disclosures concerning
these guaranteeing subsidiaries are not presented herein because such guarantees
are full and unconditional and joint and several, and such subsidiaries
represent wholly-owned subsidiaries of the Company. In addition, these
subsidiaries had nominal balance sheets at June 30, 2008 and December 31, 2007,
and no operations for the six months ended June 30, 2008 and 2007.





Note 8–Commitments and
Contingencies





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





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





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


15
 Index


Note
9 – Subsequent Events





Effective
July 2, 2008, we amended our $37.5 million receivable-based revolver to increase
availability to $72.5 million, extend the revolving period from September 2009
to July 2010, and extend the maturity date from September 2012 to July 2013, or
if the revolving period is further extended, 36 months from the expiration of
the revolving period.  The financial covenant for the maximum
allowable limit on the ratio of sales and marketing expense to revenue from the
sale of Vacation Intervals was increased from .57 to 1 to .60 to 1 and is based
on a cumulative ratio for the immediately preceding four consecutive fiscal
quarters.  The interest rate on advances under the receivables
facility remained unchanged at the LIBOR plus 2.40%, with the addition of a
LIBOR floor of 2.85%.





On July
29, 2008, our shareholders approved our 2008 Stock Option Plan, which reserves
for issuance up to two million shares of our common stock as either incentive or
nonqualified stock options to our directors, officers, and key
employees.





On July
29, 2008, our Board of Directors authorized us to purchase up to two million
shares of our common stock from time to time in the open market or in negotiated
transactions.  This stock repurchase program expires July
2010.





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





Forward-Looking
Statements





The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere herein. This report contains
forward-looking statements within the meaning of applicable federal securities
laws.  Silverleaf Resorts, Inc. (the “Company” or “we” or “our” or
“us”) cautions investors that any forward-looking statements presented herein,
or which management may express orally or in writing from time to time, are
based on management’s beliefs and assumptions at that time. Throughout this
report, words such as “anticipate,” “believe,” “expect,” “intend,” “may,”
“might,” “plan,” “estimate,” “project,” “should,” “will,” “result,” and other
similar expressions, which do not relate solely to historical matters, are
intended to identify forward-looking statements. Such statements are subject to
risks, uncertainties, and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends,
uncertainties, and factors beyond our control. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected.  We caution investors that while forward-looking statements
reflect our good-faith beliefs at the time such statements are made, such
statements are not guarantees of future performance and are affected by actual
events that occur after said statements are made. We expressly disclaim any
responsibility to update forward-looking statements, whether as a result of new
information, future events, or otherwise. Accordingly, investors should use
caution in relying on past forward-looking statements, which were based on
results and trends existing when those statements were made, to anticipate
future results or trends.





Some
risks and uncertainties that may cause our actual results, performance, or
achievements to differ materially from those expressed or implied by
forward-looking statements include, among others, those discussed in our Form
10-K as filed with the Securities and Exchange Commission on March 12, 2008.
These risks and uncertainties continue to be relevant to our performance and
financial condition. Moreover, we operate in a very competitive and rapidly
changing environment where new risk factors emerge from time to time. It is not
possible for management to predict all such risk factors, nor can management
assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as indicators of actual results.





Executive
Overview





As of
June 30, 2008, we own and operate 13 timeshare resorts in various stages of
development in Texas, Missouri, Illinois, Georgia, Massachusetts, and Florida,
and a hotel near the Winter Park recreational area in Colorado.  Our
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. We have a Vacation Interval ownership base of over 109,000
members.  Our condensed consolidated financial statements include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, with the exception of
SF-III, all of which are wholly-owned.


16
 Index


Results
of Operations





The
following table summarizes key ratios from our consolidated statements of
operations for the three and six months ended June 30, 2008 and
2007:




Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007As
      a percentage of total revenues:Vacation
      Interval sales
              
              
              98.4
              %
              
              
              91.7
              %
              
              
              97.8
              %
              
              
              91.2
              %Estimated
      uncollectible revenue
              
              
              -23.5
              %
              
              
              -14.7
              %
              
              
              -22.5
              %
              
              
              -14.6
              %Net
      sales
              
              
              74.9
              %
              
              
              77.0
              %
              
              
              75.3
              %
              
              
              76.6
              %Interest
      income
              
              
              22.2
              %
              
              
              20.3
              %
              
              
              21.9
              %
              
              
              20.8
              %Management
      fee income
              
              
              1.1
              %
              
              
              1.0
              %
              
              
              1.1
              %
              
              
              1.0
              %Other
      income
              
              
              1.8
              %
              
              
              1.7
              %
              
              
              1.7
              %
              
              
              1.6
              %Total
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %As
      a percentage of Vacation Interval sales:Cost
      of Vacation Interval sales
              
              
              11.4
              %
              
              
              9.7
              %
              
              
              9.5
              %
              
              
              10.2
              %Sales
      and marketing
              
              
              49.9
              %
              
              
              49.7
              %
              
              
              50.7
              %
              
              
              50.6
              %As
      a percentage of total revenues:Operating,
      general and administrative
              
              
              14.8
              %
              
              
              14.8
              %
              
              
              14.3
              %
              
              
              14.6
              %Depreciation
              
              
              1.8
              %
              
              
              1.3
              %
              
              
              1.7
              %
              
              
              1.4
              %As
      a percentage of interest income:Interest
      expense and lender fees
              
              
              41.6
              %
              
              
              47.3
              %
              
              
              41.8
              %
              
              
              46.2
              %




Results
of Operations for the Three Months Ended June 30, 2008 and 2007





Revenues





Revenues
for the quarter ended June 30, 2008 were $69.1 million, representing a $5.2
million, or 8.2%, increase compared to revenues of $63.9 million for the quarter
ended June 30, 2007.  As discussed below, the increase is primarily
attributable to a $9.4 million increase in Vacation Interval sales during the
second quarter of 2008.





The
following table summarizes our Vacation Interval sales for the three months
ended June 30, 2008 and 2007 (dollars in thousands, except average
price):





2008
                
                
                2007Sales
                
                
                Intervals
                
                
                Average
      Price
                
                
                Sales
                
                
                Intervals
                
                
                Average
      PriceInterval
      Sales to New Customers
                
                $
                26,551
                
                
                
                2,350
                
                
                $
                11,298
                
                
                $
                22,918
                
                
                
                1,841
                
                
                $
                12,449Upgrade
      Interval Sales to Existing Customers
                
                
                22,104
                
                
                
                2,278
                
                
                
                9,703
                
                
                
                23,174
                
                
                
                2,639
                
                
                
                8,781Additional
      Interval Sales to Existing Customers
                
                
                19,304
                
                
                
                1,894
                
                
                
                10,192
                
                
                
                12,485
                
                
                
                1,267
                
                
                
                9,854Total
                
                $
                67,959
                
                
                
                
                
                
                
                
                
                
                $
                58,577


Vacation
Interval sales increased 16.0% during the second quarter of 2008 versus the same
period of 2007 due to increased interval sales to both new and existing
customers as a result of continued high closing percentages and an increase in
average sales prices for upgrades and second-week sales to existing customers.
The number of interval sales to new customers increased 27.6% offset by a
decrease in average prices of 9.2% (due to promotional pricing we offered during
the second quarter of 2008 on select products), which resulted in a 15.9% net
increase in sales to new customers in the second quarter of 2008 versus the same
period of 2007. The number of upgrade interval sales to existing customers
decreased 13.7% and average prices increased 10.5%, resulting in a 4.6% decrease
in upgrade interval sales to existing customers during the second quarter of
2008 compared to the same period of 2007. The number of additional interval
sales to existing customers increased 49.5% and average prices increased 3.4%
resulting in a 54.6% net increase in additional interval sales to existing
customers during the second quarter of 2008 versus the same period of 2007. In
addition, Vacation Interval sales to existing owners comprised 60.9% of total
Vacation Interval sales in the second quarters of 2008 and 2007, which maintains
our favorable sales mix trend toward upgrades and second-week sales to existing
customers, which have relatively lower related sales and marketing
costs.


17
 Index


Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $16.2 million for the second quarter of 2008 versus $9.4
million for the same period of 2007.  Our estimated uncollectible
revenue as a percentage of Vacation Interval sales was 23.9% during the quarter
ended June 30, 2008 and 16.0% during the same period of 2007.  Our
receivables charged off as a percentage of beginning of period gross notes
receivable was 2.5% for the second quarter of 2008 compared to 2.3% for the same
period of 2007.  Since the second quarter of 2007, we have increased
the provision for estimated uncollectible revenue each successive quarter as
follows: 17.5% for the third quarter of 2007, 18.5% for the fourth quarter of
2007, 22.0% for the first quarter of 2008, and 23.9% for the second quarter of
2008.  By doing so, we have maintained the allowance for uncollectible
notes at a level management considers adequate to provide for anticipated losses
resulting from customer defaults.  We will review the allowance each
quarter and make such additional adjustments as necessary.





Interest
income increased $2.4 million, or 18.3%, to $15.3 million for the second quarter
of 2008 from $12.9 million for the second quarter of 2007. The increase
primarily resulted from a higher average notes receivable balance during the
second quarter of 2008 versus the same period of 2007 and an increase in the
average yield on our outstanding notes receivable to 16.4% at June 30, 2008 from
16.0% at June 30, 2007.





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 $165,000 to $780,000 for the second quarter of 2008 versus
$615,000 for the same period of 2007, due primarily to increased profitability
of the resorts’ management clubs.





Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items. Other income was $1.3
million for the second quarter of 2008 compared to $1.1 million for the second
quarter of 2007.  The increase is primarily attributable to income
from our water park at The Villages Resort which opened in January
2008.





Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including amounts already recognized and estimated future revenues.
Common costs, including amenities, are allocated to inventory cost among the
phases that those costs are expected to benefit. The estimate of total revenue
for a phase considers factors such as trends in uncollectibles, changes in sales
mix and unit sales prices, repossessions of Vacation Intervals, effects of
upgrade programs, and past and expected future sales programs to sell slow
moving inventory units.





Cost of
Vacation Interval sales increased to 11.4% of Vacation Interval sales for the
second quarter of 2008 compared to 9.7% in the 2007 comparable
period.  This increase resulted from sales of higher cost basis
inventory during the second quarter of 2008.





Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales increased to 49.9%
for the second quarter of 2008 versus 49.7% for the comparable prior year
period.  The $4.8 million increase in sales and marketing expense is
primarily attributable to a 16.0% increase in Vacation Interval sales during the
second quarter of 2008 versus the second quarter of 2007.  The sales
mix remained the same in the second quarter of 2008 compared to the second
quarter of 2007 at 60.9% of  sales to existing customers versus 39.1%
of sales to new customers.





In
accordance with SFAS No. 152, sampler sales and related costs are accounted for
as incidental operations, whereby incremental costs in excess of related
incremental revenues are charged to expense as incurred. Since our sampler sales
primarily function as a marketing program, allowing us additional opportunities
to sell Vacation Intervals to prospective customers, the incremental costs of
our sampler sales typically exceed incremental sampler revenues. Accordingly,
$725,000 and $758,000 of sampler revenues were recorded as a reduction to sales
and marketing expense for the quarters ended June 30, 2008 and 2007,
respectively.


18
 Index


Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues remained
flat at 14.8% for the second quarter of 2008 versus the same period of
2007.  Overall, operating, general and administrative expenses
increased by $744,000 for the second quarter of 2008 compared to the same period
of 2007, primarily due to an increase in salaries of
$611,000.





Depreciation





Depreciation
expense as a percentage of total revenues increased to 1.8% for the quarter
ended June 30, 2008 versus 1.3% for the same quarter of 2007. Overall,
depreciation expense was $1.2 million for the second quarter of 2008 compared to
$858,000 for the same period of 2007, an increase of $352,000 due to capital
expenditures of $23.6 million since June 30, 2007.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income decreased to 41.6%
for the second quarter of 2008 compared to 47.3% for the same period of
2007.  Overall, interest expense and lender fees increased $241,000
for the second quarter of 2008 versus the same period of 2007 primarily due to a
larger average debt balance outstanding during the second quarter of 2008, which
was $366.1 million compared to $306.4 million for the prior year comparative
period, partially offset by a decrease in our weighted average cost of
borrowings to 6.2% for the quarter ended June 30, 2008 compared to 7.7% for the
quarter ended June 30, 2007.





Income before Provision for
Income Taxes





Income
before provision for income taxes decreased to $9.6 million for the quarter
ended June 30, 2008 compared to $12.6 million for the quarter ended June 30,
2007 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 was
38.5% for the quarters ended June 30, 2008 and 2007.





Net
Income





Net
income was $5.9 million for the quarter ended June 30, 2008 compared to $7.7
million for the quarter ended June 30, 2007 as a result of the above-mentioned
operating results.





Results
of Operations for the Six Months Ended June 30, 2008 and 2007





Revenues





Revenues
for the six months ended June 30, 2008 were $136.1 million, representing a $13.4
million, or 10.9%, increase compared to revenues of $122.7 million for the six
months ended June 30, 2007.  As discussed below, the increase is
primarily attributable to a $21.1 million increase in Vacation Interval sales
offset by a $12.6 million increase in estimated uncollectible revenue during the
first six months of 2008.





The
following table summarizes our Vacation Interval sales for the six months ended
June 30, 2008 and 2007 (dollars in thousands, except average
price):





2008
              
              
              2007Sales
              
              
              Intervals
              
              
              Average
      Price
              
              
              Sales
              
              
              Intervals
              
              
              Average
      PriceInterval
      Sales to New Customers
              
              $
              53,586
              
              
              
              4,852
              
              
              $
              11,044
              
              
              $
              46,185
              
              
              
              3,758
              
              
              $
              12,290Upgrade
      Interval Sales to Existing Customers
              
              
              43,577
              
              
              
              4,592
              
              
              
              9,490
              
              
              
              42,576
              
              
              
              4,901
              
              
              
              8,687Additional
      Interval Sales to Existing Customers
              
              
              35,877
              
              
              
              3,860
              
              
              
              9,295
              
              
              
              23,181
              
              
              
              2,365
              
              
              
              9,802Total
              
              $
              133,040
              
              
              
              
              
              
              
              
              
              
              $
              111,942




19
 Index


Vacation
Interval sales increased 18.8% during the first six months of 2008 versus the
same period of 2007 due to increased interval sales to both new and existing
customers as a result of an overall growth in customer tours and continued high
closing percentages. The number of interval sales to new customers increased
29.1% offset by a decrease in average prices of 10.1% (due to promotional
pricing we offered during the first half of 2008 on select products), which
resulted in a 16.0% net increase in sales to new customers in the first half of
2008 versus the same period of 2007. The number of upgrade interval sales to
existing customers decreased 6.3% but average prices increased 9.2%, resulting
in a 2.4% increase in upgrade interval sales to existing customers during the
first six months of 2008 compared to the same period of 2007. The number of
additional interval sales to existing customers increased 63.2% and average
prices decreased 5.2% (due to promotional pricing on additional interval sales)
resulting in a 54.8% net increase in additional interval sales to existing
customers during the first six months of 2008 versus the same period of
2007.  In addition, Vacation Interval sales to existing owners
comprised 59.7% and 58.7% of total Vacation Interval sales in the first six
months of 2008 and 2007, respectively, which continues our favorable sales mix
trend toward sales with relatively lower related sales and marketing
costs.





Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $30.6 million for the first half of 2008 versus $17.9
million for the same period of 2007. Our estimated uncollectible revenue as a
percentage of Vacation Interval sales was 23.0% during the first six months of
2008 and 16.0% during the same period of 2007.  Our receivables
charged off as a percentage of beginning of period gross notes receivable was
6.3% for the six months ended June 30, 2008 compared to 5.2% for the same period
of 2007.  Since the second quarter of 2007, we have increased the
provision for estimated uncollectible revenue each successive quarter as
follows: 17.5% for the third quarter of 2007, 18.5% for the fourth quarter of
2007, 22.0% for the first quarter of 2008, and 23.9% for the second quarter of
2008.  By doing so, we have maintained the allowance for uncollectible
notes at a level management considers adequate to provide for anticipated losses
resulting from customer defaults.  We will review the allowance each
quarter and make such additional adjustments as necessary.





Interest
income increased $4.3 million, or 17.0%, to $29.8 million during the first half
of 2008 from $25.5 million during the same period of 2007. The increase
primarily resulted from a higher average notes receivable balance during the
first half of 2008 versus the same period of 2007 and an increase in the average
yield on our outstanding notes receivable to 16.4% at June 30, 2008 from 16.0%
at June 30, 2007.





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 $330,000 to $1.6 million for the first six months of 2008
versus $1.2 million for the same period of 2007, due primarily to increased
profitability of the resorts’ management clubs.





Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items. Other income was $2.2
million for the first six months of 2008 compared to $1.9 million for the same
period in 2007.  The increase is primarily attributable to income from
our water park at The Villages Resort which opened in January 2008.





Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including amounts already recognized and estimated future revenues.
Common costs, including amenities, are allocated to inventory cost among the
phases that those costs are expected to benefit. The estimate of total revenue
for a phase considers factors such as trends in uncollectibles, changes in sales
mix and unit sales prices, repossessions of Vacation Intervals, effects of
upgrade programs, and past and expected future sales programs to sell slow
moving inventory units.





Cost of
Vacation Interval sales decreased to 9.5% of Vacation Interval sales for the
first half of 2008 compared to 10.2% in the 2007 comparable
period.  This decrease resulted from expected increases in our future
relative sales value related to an increase in expected future sales prices on
some of our higher-end products, partially offset by sales of higher cost basis
inventory during the first six months of 2008.


20
 Index


Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales remained fairly
constant at 50.7% for the six-month period ended June 30, 2008 as compared to
50.6% for the same period of 2007.  The $10.9 million increase in
sales and marketing expense is primarily attributable to our increased volume of
Vacation Interval sales.  The sales mix remained fairly constant for
the first six months of 2008 compared to the first six months of 2007 at 59.7%
of sales to existing customers in 2008 versus 58.7% of sales to existing
customers in 2007.





In
accordance with SFAS No. 152, sampler sales and related costs are accounted for
as incidental operations, whereby incremental costs in excess of related
incremental revenues are charged to expense as incurred. Since our sampler sales
primarily function as a marketing program, allowing us additional opportunities
to sell Vacation Intervals to prospective customers, the incremental costs of
our sampler sales typically exceed incremental sampler revenues. Accordingly,
$1.7 million and $1.6 million of sampler revenues were recorded as a reduction
to sales and marketing expense for the six months ended June 30, 2008 and 2007,
respectively.





Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues decreased
to 14.3% for the first half of 2008 versus 14.6% for the same period of
2007.  Overall, operating, general and administrative expenses
increased by $1.6 million for the first six months of 2008 compared to the same
period of 2007, primarily due to an increase in salaries of
$743,000, an increase in bank fees of $263,000 (resulting from higher credit
card processing fees related to increased sales volume), and an increase in
utilities of $192,000 (primarily due to the opening of the water park at The
Villages Resort in January of 2008).





Depreciation





Depreciation
expense as a percentage of total revenues increased to 1.7% for the six months
ended June 30, 2008 versus 1.4% for the same period of 2007. Overall,
depreciation expense was $2.3 million for the first half of 2008 compared to
$1.7 million for the same period of 2007, an increase of $608,000 due to capital
expenditures of $23.6 million since June 30, 2007.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income decreased to 41.8%
for the first six months of 2008 compared to 46.2% for the same period of
2007.  Overall, interest expense and lender fees increased $692,000
for the first half of 2008 versus the same period of 2007 primarily due to a
larger average debt balance outstanding during the first six months of 2008,
which was $361.2 million compared to $295.3 million for the prior year
comparative period, partially offset by a decrease in our weighted average cost
of borrowings to 6.3% for the six months ended June 30, 2008 compared to 7.7%
for the six months ended June 30, 2007.





Income before Provision for
Income Taxes





Income
before provision for income taxes decreased to $21.7 million for the six months
ended June 30, 2008 compared to $23.2 million for the six months ended June 30,
2007 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 was
38.5% for the six months ended June 30, 2008 and 2007.





Net
Income





Net
income was $13.3 million for the six months ended June 30, 2008 compared to
$14.3 million for the six months ended June 30, 2007 as a result of the
above-mentioned operating results.


21
 Index


Liquidity
and Capital Resources





Sources of Cash.We generate cash primarily from the cash received on the sale of Vacation
Intervals, the financing and collection of customer notes receivable from
Vacation Interval owners, the sale of notes receivable to our special purpose
entities, management fees, sampler sales, marina income, golf course and pro
shop income, and hotel income.  We typically receive a 10% to 15% down
payment on sales of Vacation Intervals and finance the remainder with the
issuance of a seven-to-ten-year customer promissory note. We generate cash from
customer notes receivable (i) by borrowing at an advance rate of 75% to 80% of
eligible customer notes receivable, (ii) by selling notes receivable, and (iii)
from the spread between interest received on customer notes receivable and
interest paid on related borrowings.  Because we use significant
amounts of cash in the development and marketing of Vacation Intervals, but
collect cash on customer notes receivable over a seven-to-ten-year period,
borrowing against receivables has historically been a necessary part of normal
operations.





During
the six months ended June 30, 2008, cash used in operating activities was $16.2
million compared to $16.6 million during the same period of
2007.  This $488,000 decrease in cash used in operating activities
during the first half of 2008 versus the comparable 2007 period primarily
resulted from the timing of operational payments.





Considering
forecasted sales and expansion plans, our senior credit facilities provide
adequate liquidity to meet our needs through at least 2009.  To
finance our growth, development, and any future expansion plans, we may at some
time be required to consider the issuance of other debt, equity, or
collateralized mortgage-backed securities.  Any debt we incur or issue
may be secured or unsecured, have fixed or variable rate interest, and may be
subject to such terms as we deem prudent.





Uses of Cash.During the first six months of 2008, investing activities used $12.9
million of cash compared to $6.4 million during the first six months of
2007.  The total cash used in both of these periods included purchases
of equipment, leasehold improvements, and construction of the water park at The
Villages Resort, as well as other general capital expenditures.





During
the first half of 2008, net cash provided by financing activities was $30.6
million compared to $19.3 million for the comparable 2007 period.  The
net cash of $30.6 million provided by financing activities during the first six
months of 2008 was primarily the result of $224.2 million of proceeds received
from borrowings against pledged notes receivable and our inventory loans,
partially offset by $188.2 million of payments on borrowings against pledged
notes receivable and our inventory loans.  The securitization
transaction we closed in June 2008 through our newly-formed, wholly-owned and
fully consolidated special purpose finance subsidiary, SF-VI, generated $107.4
million of the $224.2 million of proceeds received from borrowings and $93.8
million of the $188.2 million of payments on borrowings for the six months ended
June 30, 2008.  The net cash of $19.3
million provided by financing activities during the first six months of 2007 was
primarily the result of $81.3 million of proceeds received from borrowings
against pledged notes receivable and our inventory loans, partially offset by
$62.7 million of payments on borrowings against pledged notes
receivable.





At June
30, 2008, our senior credit facilities provided for loans of up to $541.2
million, of which $346.1 million of principal related to advances under the
credit facilities was outstanding.  As of June 30, 2008, the weighted
average cost of funds for all borrowings was 7.4%. Customer defaults have a
significant impact on our cash available from financing customer notes
receivable in that notes more than 60 days past due are not eligible as
collateral.  As a result, we must repay borrowings against such
delinquent notes.  As of June 30, 2008, $5.5 million of notes were
more than 60 days past due.





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





Off-Balance-Sheet Arrangements.In 2005, we consummated a securitization transaction with our
wholly-owned off-balance-sheet qualified special purpose finance subsidiary,
SF-III, which was formed for the purpose of issuing $108.7 million of its Series
2005-A Notes in a private placement through UBS Securities LLC.  In
connection with this transaction, we sold SF-III $132.8 million in timeshare
receivables that were previously pledged as collateral under revolving credit
facilities with our senior lenders and SF-I, our former qualified special
purpose entity which was dissolved in 2005.  The Series 2005-A Notes
are secured by timeshare receivables we sold to SF-III.  The timeshare
receivables we sold to SF-III are without recourse to us, except for breaches of
certain representations and warranties at the time of sale. In accordance with
the agreement, we will continue servicing these timeshare receivables and
receive fees for our services equal to 1.75% of eligible timeshare receivables
held by the facility. Such fees were $279,000 and $486,000 for the six months
ended June 30, 2008 and 2007, respectively.





At June
30, 2008, SF-III held notes receivable totaling $29.1 million, with related
borrowings of $22.7 million. Except for the repurchase of notes that fail to
meet initial eligibility requirements, we are not obligated to repurchase
defaulted or any other contracts sold to SF-III. As the servicer of notes
receivable sold to SF-III, we are obligated to foreclose upon Vacation Intervals
securing defaulted note receivables. We may, but are not obligated to, purchase
foreclosed Vacation Intervals for an amount equal to the net fair market value
of such Vacation Intervals, which may not be less than fifteen percent of the
original acquisition price that the customer paid for the Vacation Interval. For
the six months ended June 30, 2008, we paid $358,000 to repurchase Vacation
Intervals securing defaulted notes receivable to facilitate the re-marketing of
those Vacation Intervals.  The carrying value of our
investment in SF-III was $6.0 million atJune 30, 2008, which represents our
maximum exposure to loss regarding our obligation with SF-III.


22
 Index


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





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





In
addition, we are subject to current alternative minimum tax ("AMT") as a result
of the deferred income that results from the installment sales
treatment.  Payment of AMT creates a deferred tax asset in the form of
a minimum tax credit, which, unless otherwise limited, reduces the future
regular tax liability attributable to Vacation Interval sales. Due to AMT losses
in certain years prior to 2003, which offset all AMT income for years prior to
2003, no minimum tax credit exists for years prior to 2003. Nevertheless, we had
significant AMT in 2007 and for the six months ended June 30, 2008, and
anticipate that we will pay significant AMT in future periods.





Federal
net operating losses (“NOLs”) of $155.5 million existing at December 31, 2007
expire between 2020 and 2021. Realization of the deferred tax assets arising
from NOLs is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards.





Due to a
restructuring that occurred in 2002, an ownership change within the meaning of
Section 382(g) of the Internal Revenue Code (the “Code”) occurred.  As
a result, our NOL is subject to an annual limitation for the current and future
taxable years.  This annual limitation may be increased for any
recognized built-in gain to the extent allowed in Section 382(h) of the
Code.  The current annual limitation of $768,000 represents the value
of our stock immediately before the ownership change multiplied by the
applicable long-term tax exempt rate.  We believe that $22.7 million
of our net operating loss carryforwards as of December 31, 2007 were subject to
the Section 382 limitations.





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





General— Interest on our
notes receivable portfolio, senior subordinated debt, capital leases, and
miscellaneous notes is fixed, whereas interest on our primary loan agreements,
which had a total facility amount of $541.2 million at June 30, 2008, have a
fixed-to-floating debt ratio of 50% fixed-rate debt to 50% floating-rate
debt.  The impact of a one-point effective interest rate change on the
$172.1 million balance of variable-rate financial instruments at June 30, 2008
would be approximately $529,000 on our results of operations, after taxes, for
the six months ended June 30, 2008, or approximately $0.01 per diluted
share.





At June
30, 2008, the carrying value of our notes receivable portfolio approximates fair
value because the weighted average interest rate on the portfolio approximates
current interest rates received on similar notes. Our fixed-rate notes
receivable are subject to interest rate risk and will decrease in fair value if
market rates increase, which may negatively impact our ability to sell our
fixed-rate notes in the marketplace.  A hypothetical one-point
interest rate increase in the marketplace at June 30, 2008 would result in a
fair value decrease of approximately $12.7 million on our notes receivable
portfolio.





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


23
 Index


We offer
financing to the buyers of Vacation Intervals at our resorts. These buyers
generally make a down payment of 10% to 15% of the purchase price and deliver a
promissory note to us for the balance. The promissory notes generally bear
interest at a fixed rate, are payable over a seven to ten year period, and are
secured by a deed of trust on the Vacation Interval. We bear the risk of
defaults on these promissory notes. Although we prescreen prospects via credit
scoring techniques in the early stages of the marketing and sales process, we
generally do not perform a detailed credit history review of our
customers.  Due to the state of the economy in general, and recent
deterioration of the residential real estate market and sub-prime mortgage
markets, the risk of Vacation Interval defaults has
heightened.  Because we use various mass marketing techniques, a
certain percentage of our sales are generated from customers who may be
considered to have marginal credit quality.  During the second
quarters of 2008 and 2007, approximately 15.5% and 20.7%, respectively, of our
sales were made to customers with FICO® scores below 600.  In
addition, we have experienced an increase in defaults in our loan portfolio as
compared to historical rates.  Due to deteriorating economic
conditions, there can be no assurance that defaults have stabilized or that they
will not increase further.  These and other recent adverse changes in
the credit markets and related uncertain economic conditions may eliminate or
reduce the availability or increase the cost of significant sources of funding
for us in the future.  We increased our estimated uncollectible
revenue as a percentage of Vacation Interval sales to 23.0% during the first six
months of 2008 from 18.5% during the fourth quarter of 2007.  However,
if default rates for our borrowers were to continue to rise, it may require an
additional increase in our estimated uncollectible revenue.  We will
continue to evaluate our collections process and marketing programs with a view
toward establishing procedures aimed at reducing note defaults and improving the
credit quality of our customers. However, there can be no assurance that these
efforts will be successful.





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





Interest Rate Risk —We have
historically derived net interest income from our financing activities because
the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceed the interest rates we pay to our senior lenders.
Because 50% of our senior indebtedness bears interest at variable rates and our
customer notes receivable bear interest at fixed rates, increases in interest
rates will erode the spread in interest rates that we have historically
experienced and could cause our interest expense on borrowings to exceed our
interest income on our portfolio of customer loans.  Although interest
rates have recently been trending downward, any increase in interest rates,
particularly if sustained, could have a material adverse effect on our results
of operations, cash flows, and financial position.





To
partially offset potential increases in interest rates, we have executed two
interest rate swaps related to our conduit loan with SF-II, with fixed rates of
7.04% and 7.90%, for a total notional amount of $15.3 million at June 30,
2008.  Such interest rate swaps expire between September 2011 and
March 2014.  Our variable funding note with SF-IV also acts as an
interest rate hedge since it contains a provision for an interest rate
cap.  The balance outstanding under this line of credit at June 30,
2008 was $44.4 million.  Such variable funding note will mature in
September 2011.





In
addition, the Series 2005-A Notes related to our off-balance-sheet special
purpose finance subsidiary, SF-III, with a balance of $22.7 million at June 30,
2008, bear interest at a blended fixed rate of 5.4%.





Availability of Funding Sources —We fund substantially all of the notes receivable, timeshare inventories,
and land inventories which we originate or purchase with borrowings through our
financing facilities, sales of notes receivable, internally generated funds, and
proceeds from public debt and equity offerings. Borrowings are in turn repaid
with the proceeds we receive from collections on such notes receivable. To the
extent that we are not successful in maintaining or replacing existing
financings, we would have to curtail our operations or sell assets, thereby
having a material adverse effect on our results of operations, cash flows, and
financial position.





Geographic Concentration —Our notes receivable and Vacation Interval inventories are primarily
originated in Texas, Missouri, Illinois, Massachusetts, Georgia, and
Florida.  Risks inherent in such concentrations are:





·
            regional
      and general economic stability, which affects property values and the
      financial stability of the borrowers,
and


·
            the
      continued popularity of our resort destinations, which affects the
      marketability of our products and the collection of notes
      receivable.


24
 Index


Item 4.  Controls and Procedures





Management's
Report on Internal Control over Financial Reporting





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of June
30, 2008.  Based on that evaluation, management concluded that our
disclosure controls and procedures as of the end of the period covered by this
report have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms. We
believe that a controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been
detected.  Management is required to apply judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.





PART
II: OTHER INFORMATION





Item 1.Legal Proceedings





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





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





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





We are a
co-plaintiff with two other parties in a related matter brought in the Land
Court Department of the Trial Court of the Commonwealth of Massachusetts, styled
as Silverleaf Resorts, Inc.,
et al. v. Zoning Board of Appeals of the Town of Lanesborough, et al.,Civil Action No. 07 MISC 351155.  In this action, the Company
and the co-plaintiffs have challenged the validity of a special permit issued by
the Lanesborough Zoning Board of Appeals to Berkshire Wind Power, LLC
(“Berkshire”), for a portion of a road needed to access the wind farm facility
that was the subject of the U.S. District Court Action.  We seek a
court decree that the special permit granted to Berkshire expired from non-use
and is therefore no longer valid. On July 11, 2008, the Court granted the
Company permission to file an amended Complaint. The Amended Complaint, which
was served and filed on July 16, 2008, included an additional claim that
Berkshire should not be permitted to use the access road because the road was
not built as permitted.  In May 2008, the Massachusetts Municipal
Wholesale Electric Company (“MMWEC”) purchased all of Berkshire’s assets, which
MMWEC then assigned to Berkshire Wind Power Cooperative Corporation
(“BWPCC”).  BWPCC will be substituted as defendant in place of
Berkshire.  The case is now in fast track discovery, but no final
trial date has been set.





Item 1A.  Risk Factors





No
changes.


25
 Index


Item 4. Submission of Matters to a Vote of Security
Holders





At the
2008 Annual Meeting of Shareholders held on May 8, 2008, the shareholders of the
Company elected directors, and ratified the selection of BDO Seidman, LLP as the
Company’s independent auditors.





The board
nominees were elected as directors with the following vote:





Nominee
            For
            WithheldJ.
      Richard Budd, III.
            33,509,433
            327,477James
      B. Francis, Jr.
            33,375,779
            461,131Herbert
      B. Hirsch
            33,509,433
            327,477Robert
      E. Mead
            33,507,333
            329,577Rebecca
      Janet Whitmore
            33,503,283
            333,627





With
respect to the Board proposal to ratify the appointment of BDO Seidman, LLP as
the Company’s independent registered public accounting firm, the vote was as
follows:





For
            Against
            Abstain33,704,809
            94,810
            37,291





Item 6.  Exhibits





(a)
              Exhibits
      filed herewith:





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




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




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




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


26
 Index


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:  August
      7, 2008
            By:
            /s/  ROBERT
      E. MEADRobert
      E. MeadChairman
      of the Board andChief
      Executive OfficerDated:  August
      7, 2008
            By:
            /s/  ROBERT
      M. SINNOTTRobert
      M. SinnottChief
      Financial Officer


27
 Index


INDEX
TO EXHIBITS





Exhibit
      No.
            
            Description31.1
            
            Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification
      of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            
            Certification
      of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002






28