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, 2006





**OR**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR
                15(D)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from _____________ to _____________





Commission
      file number: 001-13003





**SILVERLEAF
      RESORTS, INC**.


(Exact
      name of registrant as specified in its charter)





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





**1221
      RIVER BEND DRIVE, SUITE 120**


**DALLAS,
      TEXAS 75247**


(Address
      of principal executive offices, including zip code)





**214-631-1166**


(Registrant’s
      telephone number, including area code)





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


Yes
x    
No
o





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


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x





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


Yes
o    
No
x




Number
      of
      shares of common stock outstanding of the issuer’s Common Stock, par value $0.01
      per share, as of August 10, 2006: 37,545,972











**Explanatory
      Note**





This
      quarterly report on Form 10-Q contains forward-looking statements within the
      meaning of the Private Securities Litigation Reform Act of 1995,
      Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934, including in particular, statements about
      our
      plans, objectives, expectations and prospects under Items 1 and 2. You can
      identify these statements by forward-looking words such as “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and similar
      expressions. Although we believe that the plans, objectives, expectations and
      prospects reflected in or suggested by our forward-looking statements are
      reasonable, those statements involve uncertainties and risks, and we can give
      no
      assurance that our plans, objectives, expectations and prospects will be
      achieved. Important factors that could cause our actual results to differ
      materially from the results anticipated by the forward-looking statements are
      discussed under the heading “Risk Factors” beginning on page 22 of our annual
      report on Form 10-K for the year ended December 31, 2005. Any or all of these
      factors could cause our actual results and financial or legal status for future
      periods to differ materially from those expressed or referred to in any
      forward-looking statement. All written or oral forward-looking statements
      attributable to us are expressly qualified in their entirety by these cautionary
      statements. Forward-looking statements speak only as of the date on which they
      are made.




1




**SILVERLEAF
        RESORTS, INC.**


**INDEX**


PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Condensed
                Consolidated Statements of Operations for the threemonths
                and six months ended June 30, 2006 and 2005
            3Condensed
                Consolidated Balance Sheets as of June 30, 2006and
                December 31, 2005
            4Condensed
                Consolidated Statement of Shareholders' Equity forthe
                six months ended June 30, 2006
            5Condensed
                Consolidated Statements of Cash Flows for thesix
                months ended June 30, 2006 and 2005
            6Notes
                to the Condensed Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition andResults
                of Operations
            18Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            27Item
                4.
            Controls
                and Procedures
            28PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            28Item
                1A.
            Risk
                Factors
            28Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            28Item
                6.
            Exhibits
                and Reports on Form 8-K
            29Signatures
            29





2





**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
            
            Six
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005
            
            2006
            
            2005**Revenues:**Vacation
                Interval sales
            
            $
            48,635
            
            $
            37,334
            
            $
            90,102
            
            $
            67,471Estimated
                uncollectible revenue
            
            
            (8,428
            )
            
            -
            
            
            (15,615
            )
            
            -Sampler
                sales
            
            
            -
            
            
            501
            
            
            -
            
            
            1,142Net
                sales
            
            
            40,207
            
            
            37,835
            
            
            74,487
            
            
            68,613Interest
                income
            
            
            11,323
            
            
            10,113
            
            
            21,418
            
            
            19,871Management
                fee income
            
            
            465
            
            
            450
            
            
            930
            
            
            900Gain
                on sale of notes receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            669Other
                income
            
            
            1,038
            
            
            957
            
            
            1,870
            
            
            1,382Total
                revenues
            
            
            53,033
            
            
            49,355
            
            
            98,705
            
            
            91,435**Costs
                and Operating Expenses:**Cost
                of Vacation Interval sales
            
            
            4,736
            
            
            6,017
            
            
            8,917
            
            
            10,735Sales
                and marketing
            
            
            23,423
            
            
            18,153
            
            
            42,655
            
            
            35,337Provision
                for uncollectible notes
            
            
            -
            
            
            6,534
            
            
            -
            
            
            11,808Operating,
                general and administrative
            
            
            8,181
            
            
            7,105
            
            
            15,370
            
            
            13,833Depreciation
                and amortization
            
            
            584
            
            
            744
            
            
            1,123
            
            
            1,542Interest
                expense and lender fees
            
            
            5,117
            
            
            4,286
            
            
            9,542
            
            
            8,671Total
                costs and operating expenses
            
            
            42,041
            
            
            42,839
            
            
            77,607
            
            
            81,926Income
                before provision for income taxesand
                discontinued operations
            
            
            10,992
            
            
            6,516
            
            
            21,098
            
            
            9,509Provision
                for income taxes
            
            
            (4,232
            )
            
            (2,285
            )
            
            (8,123
            )
            
            (2,884
            )**Income
                from continuing operations**
            
            
            6,760
            
            
            4,231
            
            
            12,975
            
            
            6,625**Discontinued
                Operations**Income
                from discontinued operations (net of taxes)
            
            
            -
            
            
            -
            
            
            -
            
            
            128**Net
                income**
            
            $
            6,760
            
            $
            4,231
            
            $
            12,975
            
            $
            6,753**Basic
                income per share:**Income
                from continuing operations
            
            $
            0.18
            
            $
            0.11
            
            $
            0.35
            
            $
            0.18Income
                from discontinued operations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Net
                income
            
            $
            0.18
            
            $
            0.11
            
            $
            0.35
            
            $
            0.18**Diluted
                income per share:**Income
                from continuing operations
            
            $
            0.17
            
            $
            0.11
            
            $
            0.33
            
            $
            0.17Income
                from discontinued operations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Net
                income
            
            $
            0.17
            
            $
            0.11
            
            $
            0.33
            
            $
            0.17**Weighted
                average basic common shares outstanding**
            
            
            37,501,246
            
            
            36,937,648
            
            
            37,497,794
            
            
            36,899,620**Weighted
                average diluted common shares outstanding**
            
            
            39,250,633
            
            
            38,933,675
            
            
            39,217,335
            
            
            38,874,506




The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 3


**SILVERLEAF
        RESORTS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (in
        thousands, except share and per share amounts)





June
                30,
            
            December
                31,ASSETS
            
            2006
            
            2005(Unaudited)Cash
                and cash equivalents
            
            $
            7,883
            
            $
            10,990Restricted
                cash
            
            
            9,267
            
            
            4,893Notes
                receivable, net of allowance for uncollectible notes of$68,171
                and $52,479, respectively
            
            
            202,430
            
            
            177,572Accrued
                interest receivable
            
            
            2,618
            
            
            2,243Investment
                in special purpose entity
            
            
            17,375
            
            
            22,802Amounts
                due from affiliates
            
            
            2,595
            
            
            680Inventories
            
            
            143,442
            
            
            117,597Land,
                equipment, and leasehold improvements, net
            
            
            15,718
            
            
            10,441Land
                held for sale
            
            
            203
            
            
            495Prepaid
                and other assets
            
            
            16,588
            
            
            14,083TOTAL
                ASSETS
            
            $
            418,119
            
            $
            361,796LIABILITIES
                AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
                payable and accrued expenses
            
            $
            9,197
            
            $
            9,556Accrued
                interest payable
            
            
            1,612
            
            
            1,354Amounts
                due to affiliates
            
            
            855
            
            
            544Unearned
                Vacation Interval sales
            
            
            591
            
            
            -Unearned
                samplers
            
            
            5,675
            
            
            5,310Income
                taxes payable
            
            
            3,068
            
            
            1,268Deferred
                income taxes payable
            
            
            12,832
            
            
            8,485Notes
                payable and capital lease obligations
            
            
            213,978
            
            
            177,269Senior
                subordinated notes
            
            
            32,321
            
            
            33,175Total
                Liabilities
            
            
            280,129
            
            
            236,961COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS'
                EQUITYPreferred
                stock, 10,000,000 shares authorized, none issued and
                outstanding
            
            
            -
            
            
            -Common
                stock, par value $0.01 per share, 100,000,000 shares
                authorized,37,545,972
                shares issued and outstanding at June 30, 2006, and37,494,304
                shares issued and outstanding at December 31, 2005
            
            
            375
            
            
            375Additional
                paid-in capital
            
            
            112,387
            
            
            112,207Retained
                earnings
            
            
            25,228
            
            
            12,253Total
                Shareholders' Equity
            
            
            137,990
            
            
            124,835TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            418,119
            
            $
            361,796


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





4





**SILVERLEAF
        RESORTS, INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY**


(in
        thousands, except share amounts)
 (Unaudited)


Common
                StockNumber
                of
            
            $0.01
            
            AdditionalShares
            
            Par
            
            Paid-in
            
            RetainedIssued
            
            Value
            
            Capital
            
            Earnings
            
            TotalJanuary
                1, 2006
            
            
            37,494,304
            
            $
            375
            
            $
            112,207
            
            $
            12,253
            
            $
            124,835Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            164
            
            
            -
            
            
            164Exercise
                of stock options
            
            
            51,668
            
            
            -
            
            
            16
            
            
            -
            
            
            16Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            12,975
            
            
            12,975June
                30, 2006
            
            
            37,545,972
            
            $
            375
            
            $
            112,387
            
            $
            25,228
            
            $
            137,990




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


5




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





Six
                Months EndedJune
                30,2006
            
            2005(Revised-see
                Note 2)OPERATING
                ACTIVITIES:Net
                income
            
            $
            12,975
            
            $
            6,753Adjustments
                to reconcile net income to net cash (used in) provided byoperating
                activities:Income
                from discontinued operations, net of taxes
            
            
            -
            
            
            (128
            )Estimated
                uncollectible revenue / provision for uncollectible notes
            
            
            15,615
            
            
            11,808Depreciation
                and amortization
            
            
            1,123
            
            
            1,542Gain
                on sale of notes receivable
            
            
            -
            
            
            (669
            )Gain
                on sale of land held for sale
            
            
            (499
            )
            
            -Proceeds
                from sale of notes receivable
            
            
            -
            
            
            6,021Stock-based
                compensation
            
            
            164
            
            
            -Cash
                effect from changes in operating assets and liabilities:Restricted
                cash
            
            
            (662
            )
            
            (1,003
            )Notes
                receivable
            
            
            (52,259
            )
            
            (23,655
            )Accrued
                interest receivable
            
            
            (375
            )
            
            (86
            )Investment
                in special purpose entity
            
            
            5,427
            
            
            3,173Amounts
                due from/to affiliates
            
            
            (1,604
            )
            
            (32
            )Inventories
            
            
            (14,059
            )
            
            (5,858
            )Prepaid
                and other assets
            
            
            (2,505
            )
            
            906Accounts
                payable and accrued expenses
            
            
            (359
            )
            
            352Accrued
                interest payable
            
            
            258
            
            
            (3
            )Unearned
                Vacation Interval sales
            
            
            591
            
            
            646Unearned
                samplers
            
            
            365
            
            
            524Income
                taxes payable
            
            
            6,147
            
            
            1,692Net
                cash (used in) provided by operating activities
            
            
            (29,657
            )
            
            1,983INVESTING
                ACTIVITIES:Purchases
                of land, equipment, and leasehold improvements
            
            
            (6,400
            )
            
            (276
            )Proceeds
                from sale of discontinued operations
            
            
            -
            
            
            13,101Proceeds
                from sale of land held for sale
            
            
            791
            
            
            -Net
                cash (used in) provided by investing activities
            
            
            (5,609
            )
            
            12,825FINANCING
                ACTIVITIES:Proceeds
                from borrowings from unaffiliated entities
            
            
            126,241
            
            
            72,696Payments
                on borrowings to unaffiliated entities
            
            
            (90,386
            )
            
            (90,080
            )Restricted
                cash for repayment of debt
            
            
            (3,712
            )
            
            (784
            )Proceeds
                from exercise of stock options
            
            
            16
            
            
            30Net
                cash provided by (used in) financing activities
            
            
            32,159
            
            
            (18,138
            )Net
                change in cash and cash equivalents
            
            
            (3,107
            )
            
            (3,330
            )CASH
                AND CASH EQUIVALENTS:Beginning
                of period
            
            
            10,990
            
            
            10,935End
                of period
            
            $
            7,883
            
            $
            7,605SUPPLEMENTAL
                CASH FLOW INFORMATION:Interest
                paid, net of amounts capitalized
            
            $
            8,650
            
            $
            7,894Income
                taxes paid
            
            $
            3,100
            
            $
            750SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
                ACTIVITIES:Land
                and equipment acquired under capital leases
            
            $
            -
            
            $
            62




The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 6





**SILVERLEAF
      RESORTS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      1 - Background**





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





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





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





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





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





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





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





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





7


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





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





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





*Revenue
      and Expense Recognition —* A
      substantial portion of Vacation Interval sales are made in exchange for mortgage
      notes receivable, which are secured by a deed of trust on the Vacation Interval
      sold. We recognize the sale of a Vacation Interval under the full accrual method
      after a binding sales contract has been executed, the buyer has made a down
      payment of at least 10%, and the statutory rescission period has expired. If
      all
      accrual method criteria are met except that significant development costs remain
      to complete the project or phase, revenues are recognized on the
      percentage-of-completion basis. Under this method, the amount of revenue
      recognized (based on the sales value) at the time a sale is recognized is
      measured by the relationship of costs already incurred to the total of costs
      already incurred and estimated future costs. The remaining amount is deferred
      and recognized as the remaining costs are incurred. Sales totaling $591,000
      are
      deferred at June 30, 2006 related to the percentage-of-completion
      method.





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





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





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





8


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





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





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





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





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





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





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





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





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





We
      account for and evaluate our investment in special purpose entities in
      accordance with SFAS 140, EITF 99-20, and SFAS 115, as applicable. The gain
      or
      loss on the sale is determined based on the proceeds received, the fair value
      assigned to the investment in special purpose entities, and the recorded value
      of notes receivable sold. The fair value of the investment in special purpose
      entities is estimated based on the present value of future cash flows we expect
      to receive from the notes receivable sold. We utilized the following key
      assumptions to estimate the fair value of such cash flows related to SF-I:
      customer prepayment rate - ranging from 2.3% to 4.3%; expected accounts paid
      in
      full as a result of upgrades - ranging from 5.8% to 6.2%; expected credit losses
      - ranging from 5.6% to 8.1%; discount rate - ranging from 13.5% to 19%; base
      interest rate - ranging from 3.3% to 4.4%; agent fee - ranging from 2% to 2.37%;
      and loan servicing fees - 1%. We utilized the following key assumptions to
      estimate the fair value of such cash flows related to SF-III: customer
      prepayment rate (including expected accounts paid in full as a result of
      upgrades) - 15.9%; expected credit losses - 8.81% to 11.38%; discount rate
      - 15%
      to 29.7%; base interest rate - 5.37%; and loan servicing fees - 1.75%. Our
      assumptions are based on experience with our notes receivable portfolio,
      available market data, estimated prepayments, the cost of servicing, and net
      transaction costs. Such assumptions are assessed quarterly and, if necessary,
      adjustments are made to the carrying value of the investment in special purpose
      entities on a prospective basis as a change in accounting estimate, with the
      amount of periodic interest accretion adjusted over the remaining life of the
      beneficial interest. The carrying value of the investment in special purpose
      entities represents our maximum exposure to loss regarding our involvement
      with
      our special purpose entities. **





9


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





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





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





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





We
      estimate the total cost to complete all amenities at each resort. This cost
      includes both costs incurred to date and expected costs to be incurred. At
      June
      30, 2006, the estimated cost not yet incurred which are expected to complete
      improvements and planned amenities was $14.3 million. We allocate the estimated
      total amenities cost to cost of Vacation Interval sales based on Vacation
      Intervals sold in a given period as a percentage of total Vacation Intervals
      expected to sell over the life of a particular resort project.





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





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





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





10


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





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





We
      have
      engaged in two separate interest rate hedging transactions, or derivatives,
      to
      hedge against fluctuations in interest rates. As of June 30, 2006, we had
      hedging contracts with notional amounts of $109.7 million, which expire between
      September 2011 and March 2015. The hedge transactions are reflected at fair
      value on our balance sheet.





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





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





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





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




**Three
                Months**
            
            **Six
                Months****Ended
                June 30,**
            
            **Ended
                June 30,****2005**
            
            **2005**Net
                income, as reported
            
            $
            4,231
            
            $
            6,753Add:
                Stock-based compensation expense included in net income
            
            
            —
            
            
            —Deduct:
                Stock-based compensation expense computed under the fair value method
            
            
            (57
            )
            
            (122
            )Pro
                forma net income
            
            $
            4,174
            
            $
            6,631Net
                income per share, basicAs
                reported
            
            $
            0.11
            
            $
            0.18Pro
                forma
            
            $
            0.11
            
            $
            0.18Net
                income per share, dilutedAs
                reported
            
            $
            0.11
            
            $
            0.17Pro
                forma
            
            $
            0.11
            
            $
            0.17





11


There
      were no stock options granted during the first six months of 2005 or 2006.





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





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





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




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





*Other
      Recent Accounting Pronouncements* — **





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





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





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





12




**Note
      3 - Earnings Per Share**




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


Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005
            
            2006
            
            2005Weighted
                average shares outstanding - basic
            
            
            37,501,246
            
            
            36,937,648
            
            
            37,497,794
            
            
            36,899,620Issuance
                of shares from stock options exercisable
            
            
            2,396,241
            
            
            2,543,013
            
            
            2,267,589
            
            
            2,543,013Repurchase
                of shares from stock options proceeds
            
            
            (646,854
            )
            
            (546,986
            )
            
            (548,048
            )
            
            (568,127
            )Weighted
                average shares outstanding - diluted
            
            
            39,250,633
            
            
            38,933,675
            
            
            39,217,335
            
            
            38,874,506




Outstanding
      stock options totaling approximately 867,000 and 871,500 were not dilutive
      at
      June 30, 2006 and 2005, respectively, because the exercise price for such
      options exceeded the market price for our shares.





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





We
      provide financing to the purchasers of Vacation Intervals, which are
      collateralized by their interest in such Vacation Intervals. The notes
      receivable generally have initial terms of seven to ten years. The average
      yield
      on outstanding notes receivable at June 30, 2006 was approximately 15.6%, with
      individual rates ranging from 0% to 17.5%. In connection with the sampler
      program, we routinely enter into notes receivable with terms of 10 months.
      Notes
      receivable from sampler sales were $2.7 million and $2.1 million at June 30,
      2006 and 2005, respectively, and are non-interest bearing.





We
      consider accounts over 60 days past due to be delinquent. As of June 30, 2006,
      $3.0 million of notes receivable, net of accounts charged off, were considered
      delinquent. An additional $30.4 million of notes, of which $27.2 million is
      pledged to senior lenders, would have been considered to be delinquent and
      therefore ineligible to be used for collateral purposes had we not granted
      payment concessions to our customers, which brings a delinquent note current
      and
      extends the maturity date if two consecutive timely payments are
      made.





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





For
                the 12-Month Period Ending June 30,2007
            
            $
            34,1972008
            
            
            33,7032009
            
            
            35,0352010
            
            
            35,1322011
            
            
            35,269Thereafter
            
            
            97,293270,629Less
                discounts on notes
            
            
            (28
            )Less
                allowance for uncollectible notes
            
            
            (68,171
            )Notes
                receivable, net
            
            $
            202,430





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




**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Balance,
                beginning of period
            
            $
            247,593
            
            $
            246,687
            
            $
            230,051
            
            $
            248,972Sales
            
            
            44,984
            
            
            32,511
            
            
            85,223
            
            
            58,505Collections
            
            
            (16,882
            )
            
            (16,566
            )
            
            (32,964
            )
            
            (32,717
            )Receivables
                charged off
            
            
            (6,850
            )
            
            (3,639
            )
            
            (15,710
            )
            
            (7,749
            )Sold
                or repurchased notes receivable
            
            
            1,756
            
            
            —
            
            
            4,001
            
            
            (8,018
            )Balance,
                end of period
            
            $
            270,601
            
            $
            258,993
            
            $
            270,601
            
            $
            258,993





13


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





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





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Balance,
                beginning of period
            
            $
            64,837
            
            $
            52,741
            
            $
            52,479
            
            $
            52,506Reclassification
                of estimated inventory recoveries on future charge offs
            
            
            —
            
            
            —
            
            
            11,786
            
            
            —Estimated
                uncollectible revenue
            
            
            8,428
            
            
            —
            
            
            15,615
            
            
            —Provision
                for credit losses
            
            
            —
            
            
            6,534
            
            
            —
            
            
            11,808Receivables
                charged off
            
            
            (6,850
            )
            
            (3,639
            )
            
            (15,710
            )
            
            (7,749
            )Allowance
                related to notes sold or repurchased
            
            
            1,756
            
            
            —
            
            
            4,001
            
            
            (929
            )Balance,
                end of period
            
            $
            68,171
            
            $
            55,636
            
            $
            68,171
            
            $
            55,636





**Note
      5 - Debt**





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





**June
                30,**
            
            **December
                31,****2006**
            
            **2005**$100.0
                million revolving loan agreement, which contains certain financial
                covenants, revolving through June 2008 and due June 2011, principal
                and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus
                1.0%, with a 6% floor (the loan agreement is currently limited to
                $60
                million of availability)
            
            $
            42,338
            
            $
            53,661$66.4
                million conduit loan, due March 2014, principal and interest payable
                from
                the proceeds obtained on customer notes receivable pledged as collateral
                for the note, at an interest rate of 7.035%
            
            
            32,305
            
            
            37,224$26.3
                million conduit loan, due September 2011, principal and interest
                payable
                from the proceeds obtained on customer notes receivable pledged as
                collateral for the note, at an interest rate of 7.9%
            
            
            18,126
            
            
            20,839$50
                million revolving loan agreement, which contains certain financial
                covenants, revolving through and due April 2008, principal and interest
                payable from the proceeds obtained on customer notes receivable pledged
                as
                collateral for the note, at an interest rate of Prime plus
                0.75%
            
            
            23,567
            
            
            28,800$50
                million revolving loan agreement, which contains certain financial
                covenants, revolving through December 2008, due December 2011, principal
                and interest payable from the proceeds obtained on customer notes
                receivable pledged as collateral for the note, at an interest rate
                of
                Prime plus 0.5%, with a 6% floor
            
            
            385
            
            
            —$100.0
                million revolving credit facility, backed by a $100.0 million variable
                funding note bearing interest at a rate of LIBOR plus 1.5%, revolving
                through and due March 2010, principal and interest payable from the
                proceeds obtained on customer notes receivable sold as collateral
                for the
                variable funding note
            
            
            55,614
            
            
            —$25
                million revolving loan agreement, which contains certain financial
                covenants, revolving through May 2007, due May 2010, principal and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus
                1.5%, with a 6.5% floor
            
            
            —
            
            
            —$10
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of LIBOR plus 3.25%
            
            
            10,000
            
            
            10,000$6
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of Prime plus 3% with a 6% floor
            
            
            —
            
            
            —$5
                million inventory term loan agreement, which contains certain financial
                covenants, due March 2007, interest payable monthly, at an interest
                rate
                of Prime plus 3% with a 6% floor
            
            
            2,225
            
            
            3,335$30
                million inventory loan agreement, which contains certain financial
                covenants, revolving through April 2009, due April 2011, interest
                payable
                monthly, at an interest rate of Prime plus 1.5%
            
            
            18,876
            
            
            15,000$15
                million inventory loan agreement, which contains certain financial
                covenants, revolving through December 2008, due December 2010, interest
                payable monthly, at an interest rate of Prime plus 2%, with a 6%
                floor
            
            
            5,984
            
            
            6,000Various
                notes, due from July 2006 through December 2009,
                collateralized
              by
                various assets with interest rates ranging from 2.95% to
                10.25%
            
            
            4,449
            
            
            2,282Total
                notes payable
            
            
            213,869
            
            
            177,141Capital
                lease obligations
            
            
            109
            
            
            128Total
                notes payable and capital lease obligations
            
            
            213,978
            
            
            177,2698.0%
                senior subordinated notes, due 2010, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            24,671
            
            
            24,6716.0%
                senior subordinated notes, due 2007, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            3,796
            
            
            3,796101⁄2%
                senior subordinated notes, subordinate to the 6.0% senior subordinated
                notes above, due 2008, interest payable semiannually on April 1 and
                October 1, guaranteed by all of the Company’s present and future domestic
                restricted subsidiaries
            
            
            2,146
            
            
            2,146Interest
                on the 6.0% senior subordinated notes, due 2007, and the 8.0% senior
                subordinated notes, due 2010, interest payable semiannually through
                October 2007 on April 1 and October 1, guaranteed by all of the Company’s
                present and future domestic restricted subsidiaries
            
            
            1,708
            
            
            2,562Total
                senior subordinated notes
            
            
            32,321
            
            
            33,175Total
            
            $
            246,299
            
            $
            210,444





14


At
      June
      30, 2006, LIBOR rates on our senior credit facilities were from 5.13% to 5.33%,
      and the Prime rate was 8.25%. At December 31, 2005, LIBOR rates on our senior
      credit facilities were from 4.26% to 4.49%, and the Prime rate on these
      facilities was 7.00%.





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





In
      April
      2006, we entered into amendments to our inventory and receivables loan
      agreements with CapitalSource Finance, LLC. The inventory loan was amended
      to
      increase the availability from $15 million to $30 million, to modify the
      interest rate from prime rate plus 3% to prime rate plus 1.5%, and to extend
      the
      maturity date from April 2008 to April 2011. Additionally, the inventory loan
      was amended to allow up to $15 million of funds under this line of credit to
      be
      used to finance certain acquisitions of property. The receivables loan was
      also
      amended to adjust the interest rate from LIBOR plus 4.25% to prime rate plus
      0.75%.





To
      partially offset an increase in interest rates, we have engaged in two separate
      interest rate hedging transactions, or derivatives, related to our conduit
      loan
      with Silverleaf Finance II, Inc., a Delaware corporation, (“SF-II”), and our VFN
      with SF-IV, for a combined notional amount of $109.7 million at June 30, 2006.
      These hedging contracts expire between September 2011 and March 2015. In
      addition, the Series 2005-A Notes related to our off-balance sheet special
      purpose finance subsidiary, SF-III, with a balance of $69.0 million at June
      30,
      2006, bear interest at fixed rates ranging from 4.857% to 6.756%.





**Note
      6 - Subsidiary Guarantees**





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


15


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




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




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





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





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





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





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





**Six
                Months Ended****June
                30,****2006**
            
            **2005**REVENUE:Other
                income
            
            $
            —
            
            $
            438COSTS
                AND OPERATING EXPENSES:Other
                expense
            
            
            —
            
            
            278Depreciation
                and amortization
            
            
            —
            
            
            —Total
                costs and operating expenses
            
            
            —
            
            
            278Income
                from discontinued operations before provision for income
                taxes
            
            
            —
            
            
            160Provision
                for income taxes
            
            
            —
            
            
            (32
            )Income
                from discontinued operations
            
            $
            —
            
            $
            128




16


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





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





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





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





17


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





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





As
      of
      June 30, 2006, we own and operate 13 timeshare resorts in various stages of
      development in Texas, Missouri, Illinois, Georgia, Massachusetts, and Florida,
      and a hotel in Colorado. These resorts offer a wide array of country club-like
      amenities, such as golf, swimming, horseback riding, boating, and many organized
      activities for children and adults. The Company has a Vacation Interval
      ownership base of over 96,000 members. Our condensed consolidated financial
      statements include the accounts of Silverleaf Resorts, Inc. and its
      subsidiaries, with the exception of SF-III, all of which are wholly-owned.





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





**Results
      of Operations**





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





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2006
            
            2005
            
            2006
            
            2005As
                a percentage of total revenues:Vacation
                Interval sales
            
            
            91.7
            %
            
            75.7
            %
            
            91.3
            %
            
            73.8
            %Estimated
                uncollectible revenue
            
            
            -15.9
            %
            
            0.0
            %
            
            -15.8
            %
            
            0.0
            %Sampler
                sales
            
            
            0.0
            %
            
            1.0
            %
            
            0.0
            %
            
            1.2
            %Total
                sales
            
            
            75.8
            %
            
            76.7
            %
            
            75.5
            %
            
            75.0
            %Interest
                income
            
            
            21.4
            %
            
            20.5
            %
            
            21.7
            %
            
            21.8
            %Management
                fee income
            
            
            0.9
            %
            
            0.9
            %
            
            0.9
            %
            
            1.0
            %Gain
                on sale of notes receivable
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.7
            %Other
                income
            
            
            1.9
            %
            
            1.9
            %
            
            1.9
            %
            
            1.5
            %Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %As
                a percentage of Vacation Interval sales:Cost
                of Vacation Interval sales
            
            
            9.7
            %
            
            16.1
            %
            
            9.9
            %
            
            15.9
            %Sales
                and marketing
            
            
            48.2
            %
            
            48.6
            %
            
            47.3
            %
            
            52.4
            %Provision
                for uncollectible notes
            
            
            0.0
            %
            
            17.5
            %
            
            0.0
            %
            
            17.5
            %As
                a percentage of total revenues:Operating,
                general and administrative
            
            
            15.4
            %
            
            14.4
            %
            
            15.6
            %
            
            15.1
            %Depreciation
                and amortization
            
            
            1.1
            %
            
            1.5
            %
            
            1.1
            %
            
            1.7
            %As
                a percentage of interest income:Interest
                expense and lender fees
            
            
            45.2
            %
            
            42.4
            %
            
            44.6
            %
            
            43.6
            %





18


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





Revenues





Revenues
      for the quarter ended June 30, 2006 were $53.0 million, representing a $3.7
      million increase from revenues of $49.4 million for the quarter ended June
      30,
      2005. Total revenue in the second quarter of 2006 is decreased by estimated
      uncollectible revenue of $8.4 million in accordance with SFAS No. 152,
      representing estimated future gross cancellations of notes receivable prior
      to
      any recoveries of inventory. In addition, under SFAS No. 152, sampler sales
      are
      accounted for as incidental operations, which require that any such incidental
      revenues be recorded as a reduction of incremental costs or expenses.
      Accordingly, $691,000 of sampler sales, which would have been reported as
      revenue prior to adoption of SFAS No. 152, were accounted for as a reduction
      to
      sales and marketing expense in the quarter ended June 30, 2006. Had these two
      changes mandated by SFAS No. 152 not been made, revenues would have increased
      by
      25.9% to $62.2 million.





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





**Three
                Months Ended June 30, 2006**
            
            **Three
                Months Ended June 30, 2005****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Units**
            
            **Price**
            
            **$
                Sales**
            
            **Units**
            
            **Price**Interval
                Sales to New Customers
            
            $
            21,956
            
            
            1,930
            
            $
            11,376
            
            $
            16,033
            
            
            1,314
            
            $
            12,201Upgrade
                Interval Sales to Existing Customers
            
            
            14,192
            
            
            1,571
            
            
            9,034
            
            
            8,959
            
            
            1,023
            
            
            8,757Additional
                Interval Sales to Existing Customers
            
            
            12,487
            
            
            1,293
            
            
            9,658
            
            
            12,342
            
            
            1,309
            
            
            9,429Total
            
            $
            48,635
            
            
            
            
            
            
            
            $
            37,334





Overall,
      Vacation Interval sales increased $11.3 million during the second quarter of
      2006 versus the second quarter of 2005, due to increased interval sales to
      both
      new and existing customers, primarily due to increased demand from our existing
      owners for upgraded intervals, higher closing percentages, and lower rescission
      rates. The number of interval sales to new customers increased 46.9%, but
      average prices decreased 6.8%, resulting in a 36.9% net increase in sales to
      new
      customers in the second quarter of 2006 versus the same period of 2005. The
      number of interval sales to existing customers increased 22.8% and average
      prices increased 2.0%, resulting in a 25.3% net increase in sales to existing
      customers during the second quarter of 2006 versus the same period of 2005.





Our
      focus
      will continue to be on sales to existing customers while providing new vacation
      experiences, such as the indoor water park we plan to build at The Villages
      Resort in East Texas and the recent acquisition of The Pinnacle Lodge near
      Winter Park, CO. In addition, new sales initiatives, such as the Silverleaf
      Vacation Stores in the Dallas and Chicago markets as well as targeted
      acquisitions, will help us to continue to grow sales to new customers.





Estimated
      uncollectible revenue was $8.4 million for the second quarter of 2006 versus
      $0
      reported on this line for the same period of 2005. As discussed previously,
      SFAS
      No. 152 requires the estimated uncollectible revenue to be recorded as a
      reduction to Vacation Interval sales and no longer net of inventory recovery
      beginning in 2006 rather than as an expense item: provision for uncollectible
      notes, as it was previously recorded.





Sampler
      sales primarily function as a marketing program for us, allowing us additional
      opportunities to sell a Vacation Interval to a prospective customer. Sampler
      sales are not recognized in the consolidated statement of operations until
      the
      customer uses the stay or our obligation has elapsed, which often does not
      occur
      until the sampler contract expires eighteen months after the sale is
      consummated. Sampler sales in the second quarter of 2006 were reported as $0
      compared to $501,000 for the second quarter of 2005. Beginning in 2006, per
      SFAS
      No. 152, sampler sales and related costs are accounted for as incidental
      operations, whereby incremental costs in excess of incremental revenue are
      charged to expense as incurred and the operations are presented as a net expense
      in the consolidated statement of operations. Conversely, incremental revenue
      in
      excess of incremental costs is recorded as a reduction of inventory. Incremental
      costs include costs that would not have been incurred had we not sold samplers.
      During the quarter ended June 30, 2006, all sampler sales of $691,000 were
      recorded as a reduction to sales and marketing expense, since incremental costs
      of sampler sales exceeded incremental sampler sales.




Interest
      income increased $1.2 million, or 12.0%, to $11.3 million during the second
      quarter of 2006 from $10.1 million during the same period of 2005. The increase
      primarily resulted from a $763,000 increase in interest accretion related to
      the
      investment in special purpose entity during the second quarter of 2006 versus
      the second quarter of 2005. Other factors contributing to the increase is the
      average yield on our outstanding notes receivable increasing to 15.6% at June
      30, 2006 from 15.2% at June 30, 2005, and a higher average notes receivable
      balance during the second quarter of 2006 versus the same period of 2005.





19


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





Other
      income consists of marina income, golf course and pro shop income, land sales,
      and other miscellaneous items. Other income remained fairly constant at $1.0
      million for the second quarter of 2006 versus $957,000 for the same period
      of
      2005.





Cost
      of Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 9.7% during the
      second quarter of 2006 versus 16.1% reported for the same period of 2005. This
      decrease is primarily due to the implementation of SFAS No. 152 effective
      January 1, 2006, which amends the relative sales value method of recording
      Vacation Interval cost of sales to include an estimate of future defaults of
      uncollectible revenue, both actual to date plus expected future revenue. The
      relative sales value method is used to allocate inventory cost and determine
      cost of sales in conjunction with a sale. Under the relative sales value method,
      cost of sales is estimated as a percentage of net sales using a cost of sales
      percentage which represents the ratio of total estimated cost, including both
      costs already incurred plus costs to complete the phase, if any, to total
      estimated Vacation Interval revenue under the project, including amounts already
      recognized and future revenues. Common costs, including amenities, are allocated
      to inventory cost among the phases that those costs are expected to benefit.
      The
      estimate of total revenue for a phase, which includes both actual to date
      revenues and expected future revenues, incorporates factors such as actual
      or
      estimated uncollectibles, changes in sales mix and unit sales prices,
      repossessions of intervals, effects of upgrade programs, and past and expected
      sales programs to sell slow moving inventory units.





For
      comparability, assuming SFAS No. 152 had been in place during 2005, cost of
      sales as a percentage of Vacation Interval sales during 2005 would have been
      11.8%. The decrease in cost of sales as a percentage of Vacation Interval sales
      during 2006 versus adjusted 2005 is primarily due to a larger percentage of
      sales being made at phases having lower amenity and land cost of sales.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of Vacation Interval sales remained
      relatively unchanged at 48.2% for the quarter ended June 30, 2006, from 48.6%
      for the same period of 2005. In accordance with SFAS No. 152 and as discussed
      in
      sampler sales above, $691,000 of sampler revenues were recorded as a reduction
      to sales and marketing expense since the incremental costs of our sampler sales
      exceeded incremental sampler revenue. Had sales and marketing expense not been
      reduced by sampler sales, sales and marketing expense would have been 49.6%
      of
      Vacation Interval sales during the second quarter of 2006, representing a 1%
      increase versus the second quarter of 2005.




Provision
      for Uncollectible Notes





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





Our
      estimated uncollectible revenue as a percentage of Vacation Interval sales
      was
      17.3% during the second quarter of 2006. Our provision
      for uncollectible notes as a percentage of Vacation Interval sales was 17.5%
      during the
      second quarter of 2005. As noted above, an estimate for the value of inventory
      recoveries was included as a reduction to the provision for uncollectible notes
      prior to 2006 but is now included as a component in the relative sales value
      method of our inventory costing and allocation accounting. Considering the
      estimate for inventory recoveries of approximately 4.3% of Vacation Interval
      sales, our net provision for expected credit losses was 13.0% during the second
      quarter of 2006, which compares favorably to 17.5% during the second quarter
      of
      2005.




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





20


Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues increased
      to 15.4% for the second quarter of 2006 versus 14.4% for the same period of
      2005. Excluding the impact of SFAS No. 152 on our revenues during the second
      quarter of 2006 as described above, operating, general and administrative
      expenses as a percentage of total revenues would have been 13.2% during the
      second quarter of 2006. Overall, operating, general and administrative expense
      increased by $1.1 million for the second quarter of 2006, as compared to the
      same period of 2005, primarily due to increased salaries and higher recording
      fees due to higher Vacation Interval sales volume.





Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.1%
      for
      the quarter ended June 30, 2006 versus 1.5% for the same quarter of 2005.
      Overall, depreciation and amortization expense decreased $160,000 for the second
      quarter of 2006 versus the same period of 2005 due to a general reduction in
      capital expenditures since 2000.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income increased to 45.2%
      for the second quarter of 2006, compared to 42.4% for the same period of 2005.
      This increase is primarily the result of an increase in our weighted average
      cost of borrowings from 6.9% at June 30, 2005 to 8.1% at June 30, 2006.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $11.0
      million for the quarter ended June 30, 2006, as compared to $6.5 million for
      the
      quarter ended June 30, 2005, as a result of the above-mentioned operating
      results.





Provision
      for Income Taxes





Provision
      for income taxes as a percentage of income before provision for income taxes
      and
      discontinued operations was 38.5% for the second quarter of 2006 as compared
      to
      35.1% for the second quarter of 2005. The higher effective income tax rate
      during the second quarter of 2006 was the result of utilizing a sufficient
      level
      of the NOL carryforward and other deferred tax assets during 2005, which caused
      us to move into a net deferred tax liability position at year-end.





Income
      from Continuing Operations





Income
      from continuing operations increased to $6.8 million for the quarter ended
      June
      30, 2006, as compared to $4.2 million for the quarter ended June 30, 2005,
      as a
      result of the above-mentioned operating results.





Net
      Income





Net
      income increased to $6.8 million for the quarter ended June 30, 2006, as
      compared to $4.2 million for the quarter ended June 30, 2005, as a result of
      the
      above-mentioned operating results.





***Results
      of Operations for the Six Months Ended June 30, 2006 and 2005***





Revenues





Revenues
      for the six months ended June 30, 2006 were $98.7 million, representing a $7.3
      million increase from revenues of $91.4 million for the six months ended June
      30, 2005. Total revenue in the first half of 2006 is decreased by estimated
      uncollectible revenue of $15.6 million in accordance with SFAS No. 152,
      representing estimated future gross cancellations of notes receivable prior
      to
      any recoveries of inventory. In addition, under SFAS No. 152, sampler sales
      are
      accounted for as incidental operations, which require that any such incidental
      revenues be recorded as a reduction of incremental costs or expenses.
      Accordingly, $1.5 million of sampler sales, which would have been reported
      as
      revenue prior to adoption of SFAS No. 152, were accounted for as a reduction
      to
      sales and marketing expense in the six months ended June 30, 2006. Had these
      two
      changes mandated by SFAS No. 152 not been made, revenues would have increased
      by
      26.6% to $115.8 million.





21


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





**Six
                Months Ended June 30, 2006**
            
            **Six
                Months Ended June 30, 2005****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Intervals**
            
            **Price**
            
            **$
                Sales**
            
            **Intervals**
            
            **Price**Interval
                Sales to New Customers
            
            $
            41,950
            
            
            3,848
            
            $
            10,902
            
            $
            31,042
            
            
            2,594
            
            $
            11,967Upgrade
                Interval Sales to Existing Customers
            
            
            26,897
            
            
            2,992
            
            
            8,990
            
            
            13,918
            
            
            1,673
            
            
            8,319Additional
                Interval Sales to Existing Customers
            
            
            21,255
            
            
            2,233
            
            
            9,519
            
            
            22,511
            
            
            2,502
            
            
            8,997Total
            
            $
            90,102
            
            
            
            
            
            
            
            $
            67,471





Overall,
      Vacation Interval sales increased $22.6 million during the first six months
      of
      2006 versus the same period of 2005, due to increased interval sales to both
      new
      and existing customers, primarily due to increased demand from our existing
      owners for upgraded intervals, higher closing percentages, and lower rescission
      rates. The number of interval sales to new customers increased 48.3%, but
      average prices decreased 8.9%, resulting in a 35.1% net increase in sales to
      new
      customers in the first half of 2006 versus the same period of 2005. The number
      of interval sales to existing customers increased 25.1% and average prices
      increased 5.6%, resulting in a 32.2% net increase in sales to existing customers
      during the first six months of 2006 versus the same period of 2005.





Our
      focus
      will continue to be on sales to existing customers while providing new vacation
      experiences, such as the indoor water park we plan to build at The Villages
      Resort in East Texas and the recent acquisition of The Pinnacle Lodge near
      Winter Park, CO. In addition, new sales initiatives, such as the Silverleaf
      Vacation Stores in the Dallas and Chicago markets as well as targeted
      acquisitions, will help us to continue to grow sales to new customers.





Estimated
      uncollectible revenue was $15.6 million for the first half of 2006 versus $0
      reported on this line for the same period of 2005. As discussed previously,
      SFAS
      No. 152 requires the estimated uncollectible revenue to be recorded as a
      reduction to Vacation Interval sales and no longer net of inventory recovery
      beginning in 2006 rather than as an expense item: provision for uncollectible
      notes, as it was previously recorded.





Sampler
      sales primarily function as a marketing program for us, allowing us additional
      opportunities to sell a Vacation Interval to a prospective customer. Sampler
      sales are not recognized in the consolidated statement of operations until
      the
      customer uses the stay or our obligation has elapsed, which often does not
      occur
      until the sampler contract expires eighteen months after the sale is
      consummated. Sampler sales in the first six months of 2006 were reported as
      $0
      compared to $1.1 million for the same period of 2005. Beginning in 2006, per
      SFAS No. 152, sampler sales and related costs are accounted for as incidental
      operations, whereby incremental costs in excess of incremental revenue are
      charged to expense as incurred and the operations are presented as a net expense
      in the consolidated statement of operations. Conversely, incremental revenue
      in
      excess of incremental costs is recorded as a reduction of inventory. Incremental
      costs include costs that would not have been incurred had we not sold samplers.
      During the six months ended June 30, 2006, all sampler sales of $1.5 million
      were recorded as a reduction to sales and marketing expense, since incremental
      costs of sampler sales exceeded incremental sampler sales.




Interest
      income increased $1.5 million, or 7.8%, to $21.4 million during the first half
      of 2006 from $19.9 million during the same period of 2005. The increase
      primarily resulted from a $1.1 million increase in interest accretion related
      to
      the investment in special purpose entity during the first half of 2006 versus
      the first half of 2005. The increase in average yield on our outstanding notes
      receivable from 15.2% at June 30, 2005 to 15.6% at June 30, 2006 also
      contributed to the increase in interest income.





Management
      fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
      income remained fairly constant at $930,000 during the first six months of
      2006
      versus $900,000 during the same period of 2005.





Gain
      on
      sales of notes receivable was $669,000 for the first half of 2005, resulting
      from the sale of $8.0 million of notes receivable to SF-I. There was no gain
      on
      sales of notes receivable during the first half of 2006.





Other
      income consists of marina income, golf course and pro shop income, land sales,
      and other miscellaneous items. Other income increased to $1.9 million for the
      first six months of 2006 versus $1.4 million for the same period of 2005, due
      to
      the sale of two parcels of Mississippi land in 2006 which resulted in pretax
      gains of approximately $499,000.





22





Cost
      of Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 9.9% during the
      first half of 2006 versus 15.9% reported for the same period of 2005. This
      decrease is primarily due to the implementation of SFAS No. 152 effective
      January 1, 2006, which amends the relative sales value method of recording
      Vacation Interval cost of sales to include an estimate of future defaults of
      uncollectible revenue, both actual to date plus expected future revenue. The
      relative sales value method is used to allocate inventory cost and determine
      cost of sales in conjunction with a sale. Under the relative sales value method,
      cost of sales is estimated as a percentage of net sales using a cost of sales
      percentage which represents the ratio of total estimated cost, including both
      costs already incurred plus costs to complete the phase, if any, to total
      estimated Vacation Interval revenue under the project, including amounts already
      recognized and future revenues. Common costs, including amenities, are allocated
      to inventory cost among the phases that those costs are expected to benefit.
      The
      estimate of total revenue for a phase, which includes both actual to date
      revenues and expected future revenues, incorporates factors such as actual
      or
      estimated uncollectibles, changes in sales mix and unit sales prices,
      repossessions of intervals, effects of upgrade programs, and past and expected
      sales programs to sell slow moving inventory units.





For
      comparability, assuming SFAS No. 152 had been in place during 2005, cost of
      sales as a percentage of Vacation Interval sales during 2005 would have been
      11.6%. The decrease in cost of sales as a percentage of Vacation Interval sales
      during 2006 versus adjusted 2005 is primarily due to a larger percentage of
      sales being made at phases having lower amenity and land cost of sales.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of Vacation Interval sales decreased to
      47.3%
      for the six-month period ended June 30, 2006, from 52.4% for the same period
      of
      2005. In accordance with SFAS No. 152 and as discussed in sampler sales above,
      $1.5 million of sampler revenues were recorded as a reduction to sales and
      marketing expense during the first half of 2006 since the incremental costs
      of
      our sampler sales exceeded incremental sampler revenue. Had sales and marketing
      expense not been reduced by sampler sales, sales and marketing expense would
      have been 49.0% of Vacation Interval sales during the first half of 2006,
      representing a 3.4% decrease versus the first half of 2005. The decrease is
      primarily due to improved closing percentages on sales to both new and existing
      customers and increased average sales prices on sales to existing customers.




Provision
      for Uncollectible Notes





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





Our
      estimated uncollectible revenue as a percentage of Vacation Interval sales
      was
      17.3% during the first half of 2006. Our provision
      for uncollectible notes as a percentage of Vacation Interval sales was 17.5%
      during the
      first
      half of 2005. As noted above, an estimate for the value of inventory recoveries
      was included as a reduction to the provision for uncollectible notes prior
      to
      2006 but is now included as a component in the relative sales value method
      of
      our inventory costing and allocation accounting. Considering the estimate for
      inventory recoveries of approximately 4.3% of Vacation Interval sales, our
      net
      provision for expected credit losses was 13.0% during the first six months
      of
      2006, which compares favorably to 17.5% during the same period of 2005.




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





Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues remained
      fairly constant at 15.6% for the first half of 2006 versus 15.1% for the same
      period of 2005. Excluding the impact of SFAS No. 152 on our revenues during
      the
      first half of 2006 as described above, operating, general and administrative
      expenses as a percentage of total revenues would have been 13.3% during the
      first six months of 2006. Overall, operating, general and administrative expense
      increased by $1.5 million for the first half of 2006, as compared to the same
      period of 2005, primarily due to increased title and recording fees which
      resulted from higher Vacation Interval sales and increased salaries.





23


Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.1%
      for
      the six months ended June 30, 2006 versus 1.7% for the same period of 2005.
      Overall, depreciation and amortization expense decreased $419,000 for the first
      half of 2006 versus the same period of 2005 due to a general reduction in
      capital expenditures since 2000.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income increased to 44.6%
      for the first six months of 2006, compared to 43.6% for the same period of
      2005.
      This increase is primarily the result of an increase in our weighted average
      cost of borrowings from 6.9% at June 30, 2005 to 8.1% at June 30, 2006.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $21.1
      million for the six months ended June 30, 2006, as compared to $9.5 million
      for
      the six months ended June 30, 2005, as a result of the above-mentioned operating
      results.





Provision
      for Income Taxes





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





Income
      from Continuing Operations





Income
      from continuing operations increased to $13.0 million for the six months ended
      June 30, 2006, as compared to $6.6 million for the six months ended June 30,
      2005, as a result of the above-mentioned operating results.





Income
      from Discontinued Operations





Income
      from discontinued operations, net of income taxes, was $0 for the first half
      of
      2006 compared to $128,000 for the first half of 2005. We sold the water
      distribution and waste water treatment utilities assets at eight of our
      timeshare resorts during the first quarter of 2005, thus there has been no
      income (loss) from discontinued operations since that time.





Net
      Income





Net
      income increased to $13.0 million for the six months ended June 30, 2006, as
      compared to $6.8 million for the six months ended June 30, 2005, as a result
      of
      the above-mentioned operating results.





**Liquidity
      and Capital Resources**





***Sources
      of Cash.*** We
      generate cash primarily from the cash received on the sale of Vacation
      Intervals, the financing and collection of customer notes receivable from
      Vacation Interval owners, the sale of notes receivable to our special purpose
      entities, management fees, sampler sales, marina income, and golf course and
      pro
      shop income. We typically receive a 10% down payment on sales of Vacation
      Intervals and finance the remainder with the issuance of a seven-year to
      ten-year customer promissory note. We generate cash from customer notes
      receivable by (i) borrowing at an advance rate of up to 85% of eligible customer
      notes receivable, (ii) selling notes receivable, and (iii) from the spread
      between interest received on customer notes receivable and interest paid on
      related borrowings. Because we use significant amounts of cash in the
      development and marketing of Vacation Intervals, but collect cash on customer
      notes receivable over a seven-year to ten-year period, borrowing against
      receivables has historically been a necessary part of normal operations. During
      the six months ended June 30, 2006, our operating activities used $29.7 million
      of cash compared to providing $2.0 million of cash during the same period of
      2005. The increase in cash used in operating activities was primarily the result
      of the increase in gross customer notes receivable during the six months ended
      June 30, 2006 versus the same period of 2005, an increase in cash used on
      inventories during the first half of 2006 versus the same period of 2005,
      largely due to the acquisition of approximately 30 acres of undeveloped land
      contiguous to our Orlando Breeze resort in Florida for $4.0 million, and no
      proceeds from the sales of notes receivable during the first half of 2006 versus
      $6.0 million of proceeds from the sale of notes receivable during the first
      half
      of 2005.




24


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





***Uses
      of Cash.*** Investing
      activities typically result in a net use of cash, due to investing cash in
      capital additions and property acquisitions. During the first half of 2006,
      investing activities used $5.6 million of cash, primarily due to $6.4 million
      of
      equipment purchases, partially offset by net proceeds of $791,000 received
      from
      the sale of two parcels of land in Mississippi. However during the first half
      of
      2005, investing activities provided cash of $12.8 million. The reduction in
      the
      amount of cash provided by investing activities was primarily due to $13.1
      million of proceeds received from the sale of our water
      distribution and waste water treatment utilities assets at eight of our resorts
      during the first quarter of 2005. We
      evaluate sites for additional new resorts or acquisitions on an ongoing basis.





During
      the first half of 2006, net cash provided by financing activities was $32.2
      million compared to net cash used in financing activities of $18.1 million
      in
      the comparable 2005 period. The net cash of $32.2 million provided by financing
      activities during the first six months of 2006 was primarily the result of
      $126.2 million of proceeds received from borrowings against pledged notes
      receivable, partially offset by $90.4 million of payments on borrowings against
      pledged notes receivable. During 2005, we paid in full our two non-revolving
      loans with one of our senior lenders in an aggregate amount of $12.5 million
      and
      we also paid off $20.7 million of term notes with one of our senior lenders,
      largely due to receiving $26.3 million in a conduit term loan transaction
      through SF-II during the first quarter of 2005.





At
      June
      30, 2006, our senior credit facilities provided for loans of up to $398.6
      million of which approximately $209.4 million of principal related to advances
      under the credit facilities was outstanding. As of June 30, 2006, the weighted
      average cost of funds for all borrowings was 8.1%. 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, 2006, $3.0 million of notes were more than 60 days past
      due.





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





*Off-Balance
      Sheet Arrangements.* We
      entered into a $100 million revolving credit agreement to finance Vacation
      Interval notes receivable through SF-I, our off-balance-sheet special purpose
      entity during 2000. We agreed to reduce the principal amount of the facility
      from $100 million to $85 million in 2003, and during the first quarter of 2005
      the facility amount was further reduced to $75 million. During 2005, we sold
      $8.0 million of notes receivable to SF-I and recognized pre-tax gains of
      $669,000. In conjunction with this sale, we received cash consideration of
      $6.0
      million, which was used to pay down borrowings under our revolving loan
      facilities. SF-I funded this purchase through advances under a credit agreement
      arranged for this purpose. We receive fees for servicing sold receivables to
      SF-I, calculated based on 1% of eligible receivables held by the facility.
      Such
      fees were $309,000 for the six months ended June 30, 2005. Such fees received
      approximate our internal cost of servicing such receivables, and approximates
      the fee a third party would receive to service such receivables. As a result,
      the related servicing asset or liability was estimated to be insignificant.
      SF-I
      was dissolved in July 2005.





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





25


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


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


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


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





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





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between SF-III and us. Under that agreement,
      we
      sold to SF-III approximately $132.8 million in timeshare receivables that were
      previously pledged as collateral under revolving credit facilities with our
      senior lenders and SF-I, and recognized a pre-tax gain of $5.8 million. In
      connection with this sale, we received cash consideration of $108.7 million,
      which was primarily used to pay off in full the credit facility of SF-I and
      to
      pay down amounts we owed under credit facilities with our senior lenders. We
      dissolved SF-I simultaneously with the sale of the timeshare receivables to
      SF-III. The timeshare receivables we sold to SF-III are without recourse to
      us,
      except for breaches of certain representations and warranties at the time of
      sale. W e
      are responsible
      for servicing the timeshare receivables purchased by SF-III pursuant to the
      terms of the Indenture and will receive a fee for our services equal to 1.75%
      of
      eligible timeshare receivables held by the facility. Such fees were $840,000
      for
      the six months ended June 30, 2006. Such fees received approximate our internal
      cost of servicing such timeshare receivables, and approximates the fee a third
      party would receive to service such receivables. As a result, the related
      servicing asset or liability was estimated to be insignificant.





At
      June
      30, 2006, SF-III held notes receivable totaling $82.3 million, with related
      borrowings of $69.0 million. Except for the repurchase of notes that fail to
      meet initial eligibility requirements, we are not obligated to repurchase
      defaulted or any other contracts sold to SF-III. As the Servicer of the notes
      receivable sold to SF-III, we are obligated by the terms of the conduit facility
      to foreclose upon the Vacation Interval securing a defaulted note receivable.
      We
      may, but are not obligated to, purchase the foreclosed Vacation Interval for
      an
      amount equal to the net fair market value of the Vacation Interval if the net
      fair market value is no less than fifteen percent of the original acquisition
      price that the customer paid for the Vacation Interval. For the six months
      ended
      June 30, 2006, we paid approximately $1.0 million to repurchase the Vacation
      Intervals securing defaulted contracts to facilitate the re-marketing of those
      Vacation Intervals. Total investment in SF-III was valued at $17.4 million
      at
      June 30, 2006, which represents our maximum exposure to loss regarding our
      involvement with SF-III.





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





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





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





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





26


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





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





As
      of and
      for the three months ended June 30, 2006, we had no foreign operations. Interest
      on our notes receivable portfolio, senior subordinated debt, capital leases,
      and
      miscellaneous notes is fixed, whereas interest on our primary loan agreements,
      which totaled $209.4 million at June 30, 2006, is partially fixed and partially
      variable. The impact of a one-point effective interest rate change on the $159.0
      million balance of variable-rate financial instruments at June 30, 2006, would
      be approximately $703,000 on our results of operations for the six months ended
      June 30, 2006, or approximately $0.02 per diluted share.





At
      June
      30, 2006, the carrying value of our notes receivable portfolio approximates
      fair
      value because the weighted average interest rate on the portfolio approximates
      current interest rates received on similar notes. If interest rates on our
      notes
      receivable are increased or perceived to be above market rates, the fair market
      value of our fixed-rate notes will decline, which may negatively impact our
      ability to sell new notes. The impact of a one-point interest rate change on
      the
      portfolio at June 30, 2006, could result in a fair value impact of approximately
      $3.4 million on our six-month results of operations, or approximately $0.09
      per
      diluted share.





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





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





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





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





To
      partially offset an increase in interest rates, we have engaged in two separate
      interest rate hedging transactions, or derivatives, related to our conduit
      loan
      with SF-II and our VFN with SF-IV, for a combined notional amount of $109.7
      million on June 30, 2006. These hedging contracts expire between September
      2011
      and March 2015. In addition, the Series 2005-A Notes related to our off-balance
      sheet special purpose finance subsidiary, SF-III, with a balance of $69.0
      million at June 30, 2006, bear interest at fixed rates ranging from 4.857%
      to
      6.756%.





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





27


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





**Item
      4. Controls and Procedures**





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





**Item
      1A. Risk Factors**





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





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





At
      the
      2006 Annual Meeting of Shareholders held on May 9, 2006, the shareholders of
      the
      Company elected directors, approved the terms of a performance-based incentive
      bonus plan for 2007 and 2008 for the Company's chief executive officer (the
      "2007 and 2008 CEO Incentive Bonus Plan") to comply with the requirements of
      Internal Revenue Code Section 162(m), 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**
            **Withheld**J.
                Richard Budd, III.
            35,904,361
            3,200James
                B. Francis, Jr.
            35,904,361
            3,200Herbert
                B. Hirsch
            35,904,311
            3,250Robert
                E. Mead
            35,762,459
            145,102Rebecca
                Janet Whitmore
            35,903,209
            4,352




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With
      respect to the approval of the 2007 and 2008 CEO Incentive Bonus Plan, the
      vote
      was as follows:





**For**
            **Against**
            **Abstain**24,606,549
            1,481,085
            1,050





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**
            **Abstain**35,902,461
            4,300
            800





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





(a)
            Exhibits
                filed herewith.





10.1
            First
                Supplement to Indenture dated as of February 8, 2006 between the
                Company,
                Silverleaf Finance III, LLC and Wells Fargo Bank, National
                Association


10.2
            Second
                Supplement to Indenture dated as of July 14, 2006 between the Company,
                Silverleaf Finance III, LLC and Wells Fargo Bank, National
                Association


10.3
            Ninth
                Amendment dated as of July 27, 2006 to Asset Purchase Agreement between
                the Company; Algonquin Water Resources of Texas, LLC; Algonquin Water
                Resources of Missouri, LLC; Algonquin Water Resources of Illinois,
                LLC;
                Algonquin Water Resources of America, Inc.; and Algonquin Power Income
                Fund 31.1
            Certification
                of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of
                2002


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


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


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








(b)
            Reports
                on Form 8-K





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





Current
      report on Form 8-K filed with the SEC on April 7, 2006 relating to the entry
      into amendments to the employment agreements with the Company’s Chief Executive
      Officer and President.





Current
      report on Form 8-K filed with the SEC on April 10, 2006 relating to the
      Company’s acquisition of real property in Colorado.





Current
      report on Form 8-K filed with the SEC on May 2, 2006 relating to the Company's
      earnings for the quarter ended March 31, 2006.





Current
      report on Form 8-K filed with the SEC on May 4, 2006 relating to the entry
      into
      amendments to the financing agreements with one of the Company’s senior lenders.





Current
      report on Form 8-K filed with the SEC on May 26, 2006 relating to the completion
      of the sale of shares of the Company’s common stock by two affiliates of the
      Company.





**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 10, 2006
            By:
            /s/
              ROBERT E. MEADRobert
              E. MeadChairman
                of the Board and
              Chief
                Executive Officer


Dated:
              August 10, 2006
            By:
            /s/
              HARRY J. WHITE, JR.Harry
              J. White, Jr.Chief
              Financial Officer




29





**INDEX
      TO EXHIBITS**





**Exhibit
              No.**
            **Description**





10.1
            First
                Supplement to Indenture dated as of February 8, 2006 between the
                Company,
                Silverleaf Finance III, LLC and Wells Fargo Bank, National
                Association





10.2
            Second
                Supplement to Indenture dated as of July 14, 2006 between the Company,
                Silverleaf Finance III, LLC and Wells Fargo Bank, National
                Association


10.3
              Ninth
                  Amendment dated as of July 27, 2006 to Asset Purchase Agreement
                  between
                  the Company; Algonquin Water Resources of Texas, LLC; Algonquin
                  Water
                  Resources of Missouri, LLC; Algonquin Water Resources of Illinois,
                  LLC;
                  Algonquin Water Resources of America, Inc.; and Algonquin Power
                  Income
                  Fund


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





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





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





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






30