UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**Form
      10-K**


**(Mark
      One)**





**** **x
      ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      The Fiscal Year Ended December 31, 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
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)**1221
                River Bend Drive, Suite 120**
            
            **75247****Dallas,
                Texas**
            
            (Zip
                Code)(Address
                of Principal Executive Offices)





Registrant's
      Telephone Number, Including Area Code: **214-631-1166**





Securities
      Registered Pursuant to Section 12(b) of the Act:





**Common
      Stock, $.01 par value**




Securities
      Registered Pursuant to Section 12(g) of the Act:





**None**








Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o No
x





Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Securities Act. Yes o No x





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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. 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







The
      aggregate market value of the Registrant’s common stock held by non-affiliates
      of the Registrant, based upon the closing sales price of the common stock on
      June 30, 2006 as reported on the American Stock Exchange, was approximately
      $63,024,794 (based on 17,079,890 shares held by non-affiliates). For this
      purpose, “affiliates” include members of the board of directors and executive
      management of the Registrant and all persons known to be the beneficial owners
      of more than 5% of the Registrant’s outstanding common stock. There were
      37,545,972 shares of the Registrant's Common Stock, $.01 par value, issued
      and
      outstanding at June 30, 2006.





As
      of
      March 15, 2007 there were 37,808,154 shares of the Registrant’s Common Stock,
      $.01 par value, issued and outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      information required by Part III of this report (Items 10, 11, 12, 13, and
      14)
      is incorporated by reference from the Registrant’s definitive proxy statement to
      be filed pursuant to Regulation 14A with respect to the Registrant’s fiscal 2007
      annual meeting of shareholders, or if such proxy statement is not so filed
      on or
      before 120 days after the end of the fiscal year covered by this annual report,
      such information will be included in an amendment to this report filed no later
      than the end of such 120-day period.
















**FORM
      10-K TABLE OF CONTENTS**


**Page****Item
                  Number****PART
                  I**Item
                  1.
              Business
              
              4Item
                  1A.
              Risk
                  Factors
              
              21Item
                  1B.
              Unresolved
                  Staff Comments
              
              30Item
                  2.
              Properties
              
              30Item
                  3.
              Legal
                  Proceedings
              
              41Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              41**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters,and Issuer
                  Purchases of Equity Securities
              
              42Item
                  6.
              Selected
                  Financial Data
              
              44Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              45Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              61Item
                  8.
              Financial
                  Statements and Supplementary Data
              
              62Item
                  9.
              Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              62Item
                  9A.
              Controls
                  and Procedures
              
              62Item
                  9B.
              Other
                  Information
              
              62**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers, and Corporate Governance
              
              63Item
                  11.
              Executive
                  Compensation
              
              63Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              64Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              64Item
                  14.
              Principal
                  Accountant Fees and Services
              
              64**PART
                  IV**Item
                  15.
              Exhibits,
                  Financial Statement Schedules, and Reports on Form 8-K
              
              64Index
                  to Consolidated Financial Statements
              
              F-1





3




**Forward-Looking
      Statements**





This
      Annual Report on Form 10-K 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 the headings “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.” 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 contained herein under Part 1, Item 1 “Business-Risk Factors,” Part I, Item
      II “Properties,” Part I, Item 7 “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” and elsewhere in this report.
      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.





**PART
      I**





**ITEM
      1. BUSINESS**





**Overview**





Silverleaf
      Resorts, Inc. (the “Company,” “Silverleaf,” “we,” or “our”) was incorporated in
      Texas in 1989. Our principal business is the development, marketing, and
      operation of “getaway” and “destination” timeshare resorts. As of December 31,
      2006, we own seven “getaway resorts” in Texas, Missouri, Illinois, and Georgia
      (the “Getaway Resorts”). We also own six “destination resorts” in Texas,
      Missouri, Massachusetts, and Florida (the “Destination Resorts”). In April 2006
      we purchased Pinnacle Lodge, a hotel property located near the Winter Park
      recreational area in Colorado which provides our owners with another destination
      vacation alternative and gives Silverleaf an entry point into this increasingly
      popular destination area.





The
      Getaway Resorts are designed to appeal to vacationers seeking comfortable and
      affordable accommodations in locations convenient to their residences and are
      located near major metropolitan areas. Our Getaway Resorts are located close
      to
      principal areas where we market our vacation products to facilitate more
      frequent “short-stay” getaways. We believe such short-stay getaways are growing
      in popularity as a vacation trend. Our Destination Resorts are located in or
      near areas with national tourist appeal and offer our customers the opportunity
      to upgrade into a more upscale resort area as their lifestyles and travel
      budgets permit. Both the Getaway Resorts and the Destination Resorts
      (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation
      environment. We believe our resorts offer our customers an economical
      alternative to commercial vacation lodging. The average price for an annual
      one-week vacation ownership interval (“Vacation Interval”) for a two-bedroom
      unit at the Existing Resorts was $11,681 for 2006 and $11,124 for
      2005.





Owners
      of
      Silverleaf Vacation Intervals at the Existing Resorts (“Silverleaf Owners”)
      enjoy certain distinct benefits. These benefits include (i) use of vacant
      lodging facilities at the Existing Resorts through our “Bonus Time” Program;
      (ii) year-round access to the Existing Resorts' non-lodging amenities such
      as
      fishing, boating, horseback riding, swimming, tennis, or golf on a daily basis
      for little or no additional charge; and (iii) the right to exchange the use
      of a
      Vacation Interval at one of our Existing Resorts for a different time period
      at
      a different Existing Resort through our internal exchange program. These
      benefits are subject to availability and other limitations. Most Silverleaf
      Owners may also enroll in the Vacation Interval exchange network operated by
      Resort Condominiums International (“RCI”). Our destination resort in Florida is
      not under contract with RCI; however it is under contract with Interval
      International, Inc., a competitor of RCI.





**Certain
      Significant 2006 Events**





·
            In
                January 2006, we purchased approximately 30 acres of undeveloped
                land
                contiguous to our Orlando Breeze resort in Davenport, Polk County,
                Florida, just outside Orlando, Florida for a purchase price of $4.0
                million. Extensive planning and pre-development work must be completed
                before we can begin developing the property. In addition, development
                of
                the property is subject to state and local governmental approvals
                necessary before commencing timeshare operations on this 30 acre
                tract.




4




·
            In
                March 2006, we opened our first showroom-style, off-site sales office.
                The
                showroom, located in the Dallas/Fort Worth metroplex in Irving, Texas,
                operates under the name “Silverleaf Vacation Store.” It offers potential
                customers an interactive “virtual” experience of our resorts, including a
                model unit, photo gallery, and film presentation for each of our
                13
                current resorts and their related amenities. The 16,500 square-foot
                showroom cost approximately $1.1 million and employs approximately
                30 to
                40 on-site sales personnel. We believe this new showroom will generate
                between $10 million to $12 million in annual sales to new members.
                The
                showroom will provide us with a significant sales opportunity by
                enabling
                potential customers to experience the quality and service of our
                resorts
                in their own community. We expect that new owners who purchase at
                these
                showrooms will later participate in our upgrade and additional week
                sales
                programs.





·
            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”). During the fourth quarter of 2006 the facility was amended
                to increase funding availability from $100 million to $125 million.
                The
                funding period was originally scheduled to end in March 2007 but
                was
                extended to December 2008, and the interest rate on advances by UBS
                to
                SF-IV was reduced from the initial rate of LIBOR plus 1.5% to LIBOR
                plus
                1.25%. The revised facility will mature in December 2010. The VFN
                is
                secured by customer notes receivable sold to SF-IV. Proceeds from
                the sale
                of customer notes receivable to SF-IV are used to fund normal business
                operations and for general working capital purposes. The VFN was
                issued
                pursuant to the terms and conditions of an indenture between SF-IV,
                UBS,
                and Wells Fargo Bank, National Association, as indenture trustee.
                We will
                service the customer notes receivable sold to SF-IV under the terms
                of an
                agreement with the indenture trustee and
                SF-IV.





·
            In
                April 2006, we acquired property located near the Winter Park recreational
                area in Colorado for a purchase price of approximately $3.6 million.
                The
                property is currently being operated as the Pinnacle Lodge, a 64-room
                hotel. We will continue to operate the property as a hotel as well
                as a
                destination for our current timeshare owners.





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





The
      Series 2006-A Notes are secured by customer notes receivable sold to SF-V by
      SF-IV and Silverleaf in three separate transactions from August 2006 to November
      2006. The original amount of notes receivable purchased by SF-V to secure the
      Series 2006-A Notes was $155.1 million and the balance of eligible notes
      receivable pledged as collateral at December 31, 2006 was $132.2 million. The
      proceeds from the sale of the customer notes receivable to SF-V were primarily
      used to pay down consolidated indebtedness to senior lenders. All customer
      notes
      receivable purchased by SF-V are being acquired without recourse, except in
      the
      case of breaches of customary representations and warranties made in connection
      with the sale of the notes. We will continue to service the customer notes
      receivable sold to SF-V under the terms of the indenture and will receive a
      fee
      for our services.





**Certain
      Significant Events Subsequent to 2006**





·
            We
                entered into a consolidated, amended and restated loan and security
                agreement (the “Agreement”) with Textron Financial Corporation effective
                February 21, 2007. Our current receivables and inventory financing
                arrangements were consolidated into one facility, with a reduction
                in the
                interest rate on the “receivables component” from Prime Rate plus 1% to
                the Prime Rate. The interest rate on advances under the “acquisition
                component” and the “inventory component” of the consolidated debt are now
                Prime Rate plus 1%. The interest rates charged under our prior inventory
                loan agreements with Textron were the Prime Rate plus 3% and LIBOR
                plus
                3.25%. The funding period has been extended from June 2008 to January
                2010. The receivables component matures on January 31, 2013, and
                the
                acquisition and inventory component each mature on January 31, 2012.
                The
                new terms of the agreement will provide us with additional liquidity
                to
                acquire additional developed or undeveloped
                properties.




5




·
            We
                listed our common stock on The NASDAQ Capital Market (“NASDAQ”), under the
                symbol “SVLF”, effective as of the opening of the market on February 28,
                2007. As a result, trading in Silverleaf common stock ceased on the
                American Stock Exchange effective at the closing of the markets on
                February 27, 2007.




**Operations**





Our
      primary business is marketing and selling Vacation Intervals from our inventory
      to individual consumers. Our principal activities in this regard
      include:





·
            acquiring
                and developing timeshare resorts;




·
            marketing
                and selling one-week annual and biennial Vacation Intervals to prospective
                first-time owners;




·
            marketing
                and selling upgraded and additional Vacation Intervals to existing
                Silverleaf Owners;




·
            financing
                the purchase of Vacation Intervals; and




·
            managing
                timeshare resorts.





We
      have
      in-house capabilities which enable us to coordinate all aspects of development
      and expansion of the Existing Resorts and the potential development of any
      future resorts, including site selection, design, and construction pursuant
      to
      standardized plans and specifications.





We
      perform substantial marketing and sales functions internally. We have made
      significant investments in operating technology, including telemarketing and
      computer systems and proprietary software applications. We identify potential
      purchasers through internally developed marketing techniques and through
      cooperative arrangements with outside vendors. We sell Vacation Intervals
      predominately through on-site sales offices located at certain of our resorts,
      which are located near major metropolitan areas. This practice provides us
      an
      alternative to marketing costs of subsidized airfare or lodging, which are
      typically associated with the timeshare industry. In 2006, we began marketing
      and sales activity at our first off-site sales center, which is located in
      the
      Dallas / Ft. Worth metroplex.





As
      part
      of the Vacation Interval sales process, we offer potential purchasers financing
      of up to 90% of the purchase price over a seven-year to ten-year period. We
      have
      historically financed our operations by borrowing from third-party lending
      institutions at an advance rate of 75% to 80% of eligible customer receivables.
      At December 31, 2006 and 2005, we had a portfolio of approximately 36,104 and
      30,293 customer promissory notes, respectively, totaling approximately $297.4
      million and $230.5 million, respectively, with an average yield of 15.7% and
      15.3% per annum, respectively, which compares favorably to our weighted average
      cost of borrowings of 7.9% per annum at December 31, 2006. We cease recognition
      of interest income when collection is no longer deemed probable. At December
      31,
      2006 and 2005, approximately $4.7 million and $3.4 million in principal, or
      1.6%
      and 1.5%, respectively, of our loans to Silverleaf Owners were 61 to 120 days
      past due. As of December 31, 2006 and 2005, no timeshare loans receivable were
      over 120 days past due. We continue collection efforts with regard to all
      timeshare notes receivable from customers until all collection techniques that
      we utilize have been exhausted. We provide for uncollectible notes by reserving
      an estimated amount that our management believes is sufficient to cover
      anticipated losses from customer defaults.





Each
      timeshare resort has a timeshare owners' association (a “Club”). At December 31,
      2006, each Club (other than the club at Orlando Breeze) operates through a
      centralized organization to manage its respective resort on a collective basis.
      This centralized organization is Silverleaf Club, a Texas not-for-profit
      corporation. Silverleaf Club is under contract with each Club for each of the
      Existing Resorts (with the exception of Orlando Breeze) to operate and manage
      their resort. In turn, we have a contract (“Management Agreement”) with
      Silverleaf Club, under which we perform the supervisory and management functions
      of the resorts on a collective basis. All costs of operating the timeshare
      resorts, including management fees payable to us under the Management Agreement,
      are to be covered by monthly dues paid by the timeshare owners to their
      respective Clubs as well as income generated by the operation of certain
      amenities at the timeshare resorts.





Orlando
      Breeze has its own club (“Orlando Breeze Resort Club”), which is operated
      independently of Silverleaf Club. We also provide certain supervisory and
      management functions for Orlando Breeze Resort Club under the terms of a written
      agreement.





**Marketing
      and Sales**





Marketing
      is the process by which we attract potential customers to visit and tour an
      Existing Resort or attend a sales presentation. Sales is the process by which
      we
      seek to sell a Vacation Interval to a potential customer once he arrives for
      a
      tour at an Existing Resort or attends a sales presentation.




6





*Marketing* . ** Our
      in-house marketing staff creates databases of new prospects, which are
      principally developed through cooperative arrangements with outside vendors
      to
      identify prospects that meet our marketing criteria. Using our automated dialing
      and bulk mailing equipment, in-house marketing specialists conduct coordinated
      telemarketing and direct mail procedures which invite prospects to tour one
      of
      our resorts and receive an incentive, such as a free gift, without regard to
      whether or not an interval is purchased.





*Sales* .
      We sell
      our Vacation Intervals primarily through on-site salespersons at certain
      Existing Resorts. Upon arrival at an Existing Resort for a scheduled tour,
      the
      prospect is met by a member of our sales force who leads the prospect on a
      90-minute tour of the resort and its amenities. At the conclusion of the tour,
      the sales representative explains the benefits and costs of becoming a
      Silverleaf Owner. The presentation also includes a description of the financing
      alternatives that we offer. Prior to the closing of any sale, a verification
      officer interviews each prospect to ensure our compliance with sales policies
      and regulatory agency requirements. The verification officer also plays a Bonus
      Time video for the customer to explain the advantages of and limitations on
      the
      Bonus Time program. No sale becomes final until a statutory waiting period
      (which varies from state to state) of three to fifteen calendar days has passed.
      We also sell our Vacation Intervals to existing Silverleaf Owners as either
      upgraded sales of more desirable higher priced Vacation Intervals or additional
      week Vacation Interval sales.




Sales
      representatives receive commissions ranging from 4.0% to 14.0% of the sales
      price of a Vacation Interval depending on established guidelines. Sales managers
      also receive commissions of 2.0% to 6.0% and are subject to commission
      chargebacks in the event the purchaser fails to make the first required payment.
      Sales directors also receive commissions of 1.0% to 3.5%, which are also subject
      to chargebacks.





Prospects
      who are interested in a lower priced product are offered biennial (alternate
      year) intervals or other lower priced products that entitle the prospect to
      sample a resort for a specified number of nights. The prospect may apply the
      cost of a lower priced product against the down payment on a Vacation Interval
      if the interval is purchased by a certain date. In addition, we actively market
      both on-site and off-site upgraded Vacation Intervals to existing Silverleaf
      Owners, as well as additional week sales to existing Silverleaf Owners. Although
      most upgrades and additional week sales are sold by our in-house sales staff,
      we
      have contracted with a third party to assist in offsite marketing of these
      at
      the Destination Resorts. We have been focusing on increasing the percentage
      mix
      of sales to existing customers in 2006 and 2005. These upgrade and additional
      week programs have been well received by Silverleaf Owners and accounted for
      approximately 55.7% and 55.2% of our gross revenues from Vacation Interval
      sales
      for the years ended December 31, 2006 and 2005, respectively. By offering lower
      priced products and upgraded and additional week Vacation Intervals, we believe
      we offer an affordable product for all prospects in our target market. Also,
      by
      offering products with a range of prices, we attempt to broaden our market
      with
      initial sales of lower-priced products, which we attempt to gradually upgrade
      and/or augment with additional week sales over time.





In
      March
      2006, we opened our first showroom-style, off-site sales office. The showroom,
      located in the Dallas/Fort Worth metroplex in Irving, Texas, operates under
      the
      name “Silverleaf Vacation Store.” It offers potential customers an interactive
“virtual” experience of our resorts, including a model unit, photo gallery, and
      film presentation for each of our 13 current resorts and their related
      amenities. The 16,500 square-foot showroom cost approximately $1.1 million
      and
      employs approximately 30 to 40 on-site sales personnel. After a nine to twelve
      month ramp up period, we believe this new showroom will generate between $10
      million to $12 million in annual sales to new members. The showroom will provide
      us with a significant sales opportunity by enabling potential customers to
      experience the quality and service of our resorts in their own community. We
      expect that new owners who purchase at these showrooms will later participate
      in
      our upgrade and additional week sales programs.





Our
      sales
      representatives are a critical component of our sales and marketing effort.
      We
      continually strive to attract, train, and retain a dedicated sales force. We
      provide intensive sales instruction and training, which assists the sales
      representatives in acquainting prospects with the resort's benefits. Our sales
      instruction and training also focuses on compliance by each sales representative
      with all federal, state, and local laws applicable to timeshare sales. Each
      sales representative is our employee and receives some employment benefits.
      At
      December 31, 2006, we employed 537 sales representatives.





**Seasonality**





Our
      sales
      of Vacation Intervals have generally been lower in the months of November and
      December. Cash flow and earnings may be impacted by the timing of development,
      the completion of future resorts, and the potential impact of weather or other
      conditions in the regions where we operate. Our operating results could be
      negatively impacted by these factors.





7




**Customer
      Financing**





We
      offer
      financing to buyers of Vacation Intervals at our resorts. Buyers who elect
      to
      finance their purchases through us typically make down payments of at least
      10%
      of the purchase prices and deliver promissory notes for the balances. The
      promissory notes generally bear interest at a fixed rate, are generally payable
      over a seven-year 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.
      In
      2005, we began obtaining a pre-screen credit score on touring families. If
      the
      credit score does not meet certain minimum credit criteria, a 15% down payment
      is generally required instead of our standard 10% down payment. There are a
      number of risks associated with financing customers’ purchases of Vacation
      Intervals. For an explanation of these risks, please see “Risk Factors”
beginning on page 21 of this report.





In
      2006
      we accrued 17.3% of the purchase price of Vacation Intervals as estimated
      uncollectible revenue, which is an offset to Vacation Interval sales. 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 was
      22.9% of gross notes receivable as of December 31, 2006 compared to 22.8% at
      December 31, 2005. We plan to 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 our efforts will be
      successful.





If
      a
      buyer of a Vacation Interval defaults, we generally must foreclose on the
      Vacation Interval and attempt to resell it. When this occurs the associated
      marketing, selling, and administrative costs from the original sale are not
      recovered and sales and marketing 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 or hinder our ability to recover personal judgments against customers
      who
      have defaulted on their loans. For example, under Texas law, if we pursue a
      post-foreclosure deficiency claim against a customer, the customer may file
      a
      court proceeding to determine the fair market value of the property foreclosed
      upon. In such event, we may not recover a personal judgment against the customer
      for the full amount of the deficiency, but may recover only to the extent that
      the indebtedness owed to the Company exceeds the fair market value of the
      property. Accordingly, we do not generally pursue this remedy because we have
      not found it to be cost effective.





At
      December 31, 2006, we had notes receivable (including notes unrelated to
      Vacation Intervals) in the approximate principal amount of $297.8 million with
      an allowance for uncollectible notes of approximately $68.1 million.





Additionally,
      at December 31, 2006, our off-balance sheet finance subsidiary, SF-III, held
      notes receivable totaling $62.7 million, with related borrowings of $52.3
      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, which may not be less than
      fifteen percent of the original acquisition price that the customer paid for
      the
      Vacation Interval. For the year ended December 31, 2006, we paid approximately
      $2.1 million to repurchase the Vacation Intervals securing defaulted notes
      receivable to facilitate the re-marketing of those Vacation Intervals. Our
      total
      investment in SF-III was valued at $13.0 million at December 31,
      2006.





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
      intend
      to borrow either directly or through our fully consolidated special purpose
      finance subsidiaries additional funds under our existing revolving credit
      facilities with our lenders to finance our operations. At December 31, 2006,
      we
      and our fully consolidated subsidiaries, had borrowings under our credit
      facilities in the approximate principal amount of $245.2 million, of which
      $204.3 million of such facilities are receivables based and currently permit
      borrowings of 75% to 80% of the principal amount of performing notes. Payments
      from Silverleaf Owners on such notes are credited directly to the senior lender
      and applied against our loan balance. At December 31, 2006, we had a portfolio
      of approximately 36,104 Vacation Interval customer promissory notes in the
      approximate principal amount of $297.4 million, of which approximately $4.7
      million in principal amount was 61 days or more past due and therefore
      ineligible as collateral.





At
      December 31, 2006, our portfolio of customer notes receivable had an average
      yield of 15.7%. At such date, our borrowings had a weighted average cost of
      7.9%, and had a fixed-to-floating debt ratio of 62% fixed rate debt to 38%
      floating rate debt. We have historically derived net interest income from our
      operating activities because the interest rates we charge our customers who
      finance the purchase of their Vacation Intervals exceed the interest rates
      we
      pay our senior lenders. Because 38% of our existing indebtedness currently
      bears
      interest at variable rates and our customer notes receivable bear interest
      at
      fixed rates, increases in interest rates would 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, liquidity, and financial
      condition.




8





To
      partially offset an increase in interest rates, we have engaged in two interest
      rate hedging transactions, or derivatives, related to our conduit loan through
      Silverleaf Finance II, Inc., a Delaware corporation, for a notional amount
      of
      $39.3 million at December 31, 2006, that expires between September 2011 and
      March 2014. SF-IV’s VFN also acts as an interest rate hedge since it contains a
      provision for an interest rate cap, however there are no amounts outstanding
      under this line of credit at December 31, 2006.





In
      addition, the Series 2005-A Notes related to our off-balance sheet special
      purpose finance subsidiary, SF-III, with a balance of $52.3 million at December
      31, 2006, bear interest at a blended fixed rate of 5.4%, and our Series 2006-A
      Notes related to SF-V bear interest at a blended fixed rate of 6.7%.





Limitations
      on availability of financing would inhibit sales of Vacation Intervals due
      to
      (i) the lack of funds to finance the initial negative cash flow that results
      from sales that we finance, and (ii) reduced demand if we are unable to provide
      financing to purchasers of Vacation Intervals. We ordinarily receive only 10%
      to
      15% of the purchase price as a cash down payment on the sale of a Vacation
      Interval that we finance, but we must pay in full the costs of developing,
      marketing, and selling the Vacation Interval. Maximum borrowings available
      under
      our current credit agreements may not be sufficient to cover these costs,
      thereby straining capital resources, liquidity, and capacity to grow. In
      addition, to the extent interest rates decrease generally on loans available
      to
      our customers, we face an increased risk that customers will pre-pay their
      loans
      and reduce our income from operating activities.





We
      typically provide financing to customers over a seven-year to ten-year period.
      Our customer notes receivable had an average maturity of 6.75 years at December
      31, 2006. Our credit facilities have scheduled maturities between April 2008
      and
      July 2018. Additionally, our revolving credit facilities could be declared
      immediately due and payable as a result of any default by us. Although it
      appears that we have adequate liquidity to meet our needs through at least
      December 2008, we are continuing to identify additional financing arrangements
      beyond such date.





In
      the
      first quarter of 2007, we consolidated our debt with Textron Financial
      Corporation into one revolving loan. As a result of the amended and restated
      loan and security agreement, the funding period on the consolidated debt has
      been extended from June 2008 to January 2010, with revised maturity dates of
      January 31, 2013 for the receivables component and January 31, 2012 on both
      the
      acquisition and inventory components. In addition, the interest rates previously
      charged have been reduced. This transaction is described in more detail under
      the heading “Subsequent Events” in Note 17 to our Consolidated Financial
      Statements beginning on page F-1.





**Development
      and Acquisition Process**





We
      intend
      to develop at our Existing Resorts and/or acquire new resorts only to the extent
      we deem such expansion financially beneficial, and then only as the capital
      markets permit.





If
      we are
      able to develop or acquire new resorts, we will do so under our established
      development policies. Before committing capital to a site, we test the market
      using our own market analysis testing techniques and explore the zoning and
      land-use laws applicable to the potential site and the regulatory issues
      pertaining to licenses and permits for timeshare marketing, sales, and
      operations. We also contact various governmental entities and review
      applications for necessary governmental permits and approvals. If we are
      satisfied with our market analysis and regulatory review, we will prepare a
      conceptual layout of the resort, including building site plans and resort
      amenities. After we apply our standard lodging unit design and amenity package,
      we prepare a budget that estimates the cost of developing the resort, including
      costs of lodging facilities, infrastructure, and amenities, as well as projected
      sales, marketing, and general and administrative costs. We typically perform
      additional due diligence, including obtaining an environmental report by an
      environmental consulting firm, a survey of the property, and a title commitment.
      We employ legal counsel to review these documents and pertinent legal issues.
      If
      we are satisfied with the site after the environmental and legal review, we
      will
      complete the purchase of the property.





We
      manage
      all construction activities internally. We typically complete the development
      of
      a new resort's basic infrastructure and models within one year, with additional
      units to be added within 180 to 270 days based on demand, weather permitting.
      A
      normal part of the development process is the establishment of a functional
      sales office at the new resort.





**Clubs
      / Silverleaf Club**





The
      Silverleaf Club directors are elected by the majority of the boards of directors
      of the individual Clubs. We have the right to supervise the management of our
      resorts under the terms of the Management Agreement. The Silverleaf Owners
      are
      obligated to pay monthly dues to their respective Clubs, which obligation is
      secured by a lien on their Vacation Interval in favor of their Club. If a
      Silverleaf Owner fails to pay his monthly dues, his Club may institute
      foreclosure proceedings regarding the delinquent Silverleaf Owner's Vacation
      Interval. The number of foreclosures that occurred as a result of Silverleaf
      Owners failing to pay monthly dues was 1,222 in 2006 and 808 in 2005. Typically,
      we purchase at foreclosure all Vacation Intervals that are the subject of
      foreclosure proceedings instituted by the Club because of delinquent
      dues.




9





At
      December 31, 2006, the Club at each timeshare resort (other than Orlando Breeze)
      operates through a centralized organization provided by Silverleaf Club to
      manage the resorts on a collective basis. The consolidation of resort operations
      through Silverleaf Club permits: (i) a centralized reservation system for all
      resorts; (ii) substantial cost savings by purchasing goods and services for
      all
      resorts on a group basis, which generally results in a lower cost of goods
      and
      services than if such goods and services were purchased by each resort on an
      individual basis; (iii) centralized management for the entire resort system;
      (iv) centralized legal, accounting, and administrative services for the entire
      resort system; and (v) uniform implementation of various rules and regulations
      governing all resorts. All furniture, furnishings, recreational equipment,
      and
      other personal property used in connection with the operation of the Existing
      Resorts are owned by either that resort’s Club or the Silverleaf Club, rather
      than by us.





Orlando
      Breeze has its own club, Orlando Breeze Resort Club, which is operated
      independently of Silverleaf Club; however, we supervise the management and
      operation of the Orlando Breeze Resort Club under the terms of a written
      agreement.





At
      December 31, 2006, Silverleaf Club had 758 full-time employees and Orlando
      Breeze Resort Club had 12 full-time **** employees.
      Each Club is solely responsible for their salaries, as well as the direct
      expenses of operating the Existing Resorts, while we are responsible for the
      direct expenses of new development and all marketing and sales activities.
      To
      the extent Silverleaf Club provides payroll, administrative, and other services
      that directly benefit the Company, we reimburse Silverleaf Club for such
      services and vice versa.





Silverleaf
      Club collects dues from Silverleaf Owners, plus certain other amounts assessed
      against the Silverleaf Owners from time to time, and generates income by the
      operation of certain amenities at the Existing Resorts. Silverleaf Club and
      Orlando Breeze Resort Club dues were approximately $59.96 per month ($29.98
      for
      biennial owners) during 2006, except for certain members of Oak N’ Spruce
      Resort, who prepay dues at an annual rate of approximately $497. Such amounts
      are used by the respective Clubs to pay the costs of operating the Existing
      Resorts and the management fees due to the Company pursuant to Management
      Agreements. The Management Agreement with Silverleaf Club authorizes the Company
      to supervise the management and operations of the resorts and provides for
      a
      maximum management fee equal to 15% of gross revenues of Silverleaf Club, but
      our right to receive such a fee on an annual basis is limited to the amount
      of
      Silverleaf Club's net income. However, if we do not receive the maximum fee,
      such deficiency is deferred for payment to succeeding years, subject again
      to
      the annual net income limitation. The Management Agreement between Orlando
      Breeze Resort Club and us authorizes us to supervise management and operation
      of
      Orlando Breeze Resort and provides for a maximum annual management fee equal
      to
      15% of gross revenues of Orlando Breeze Resort Club, but our right to receive
      such a fee on an annual basis is limited to the amount of Orlando Breeze Resort
      Club’s net income. However, if we do not receive the maximum fee, such
      deficiency is deferred for payment to succeeding years, subject again to the
      annual net income limitation. Due to anticipated refurbishment of units at
      the
      Existing Resorts, together with the operational and maintenance expenses
      associated with our current expansion and development plans, our 2006 management
      fees were subject to the annual net income limitation. Accordingly, for the
      year
      ended December 31, 2006, management fees recognized were $1.9 million. For
      financial reporting purposes, management fees from Silverleaf Club are
      recognized based on the lower of (i) the aforementioned maximum fees or (ii)
      Silverleaf Club’s net income. The Silverleaf Club Management Agreement is
      effective through March 2010, and will continue year-to-year thereafter unless
      cancelled by either party. As a result of the past performance of the Silverleaf
      Club, it is uncertain whether Silverleaf Club will consistently generate
      positive net income. Therefore, future income to the Company under the
      Management Agreement with Silverleaf Club could be limited. At December 31,
      2006, there were approximately 100,000 Vacation Interval owners who pay dues
      to
      Silverleaf Club and approximately 900 Vacation Interval owners who pay dues
      to
      Orlando Breeze Resort Club. If we develop new resorts outside of Florida, their
      respective Clubs are expected to be added to the Silverleaf Club Management
      Agreement.





**Other
      Operations**





***Operation
      of Amenities.*** We own,
      operate, and receive the revenues from the marina at The Villages, the golf
      course and pro shop at Holiday Hills, and the golf course and pro shop at Apple
      Mountain. Although we own the golf course at Holly Lake, a homeowners’
association in the development operates the golf course. In general, Silverleaf
      Club receives revenues from the various amenities that require a usage fee,
      such
      as watercraft rentals, horseback rides, and restaurants.





***Samplers.*** 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 consolidated statement of operations. Conversely, incremental revenue
      in
      excess of incremental costs is recorded as a reduction of inventory in the
      consolidated balance sheet. Incremental costs include costs that would not
      have
      been incurred had we not sold samplers. During the year ended December 31,
      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. The amount of the reduction to sales and marketing expense for sampler
      sales in 2006 was $2.9 million. Prior to SFAS No. 152, sampler sales were
      reported separately as revenue. We recognized $2.6 million and $2.2 million
      in
      revenues from sampler sales for the years ended December 31, 2005 and 2004,
      respectively.




10





***Utility
      Services.*** At
      December 31, 2004, we owned the water supply facilities at Piney Shores, The
      Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills, Timber Creek,
      and Fox River resorts. We also owned the waste-water treatment facilities at
      The
      Villages, Piney Shores, Ozark Mountain, Holly Lake, Timber Creek, and Fox River
      resorts. We maintained permits to supply and charge third parties for the water
      supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark Mountain,
      Hill Country, Piney Shores, and Timber Creek resorts, and the waste-water
      facilities at the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and
      The Villages resorts. In March 2005, all of our utility services assets and
      liabilities were sold for an aggregate sales price of $13.1 million, which
      resulted in a pretax gain of $879,000. Certain of the purchasers of these
      utility assets entered into a services agreement to provide uninterrupted water
      supply and waste water treatment services to the eight timeshare resorts to
      which the transferred utility assets relate. The purchasers of these utility
      assets charge the 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 of these utility assets charge
      a
      rate set in accordance with the ratemaking procedures of the Texas Commission
      on
      Environmental Quality.





***Other
      Property.*** At
      December 31, 2005, we owned approximately 11 acres in Mississippi, and we are
      entitled to 85% of any profits from this land. An affiliate of a director of
      the
      Company owns a 10% net profits interest in this land. We subsequently sold
      approximately 9 acres of this land during the first quarter of 2006 for
      approximately $789,000, which resulted in a pretax gain of approximately
      $499,000. ****





Since
      1998, we owned 1,940 acres of undeveloped land near Philadelphia, Pennsylvania,
      which we were holding for future development as a timeshare resort. In 2005,
      we
      sold this property for an aggregate sales price of $6.1 million after related
      expenses, which resulted in a gain of $3.6 million.





We
      also
      own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts
      that we are in the initial stages of developing. We have not yet finalized
      our
      future development plans for this site; however, we believe that its proximity
      to major population centers in the Northeastern United States and the year-round
      outdoor recreational attractions in the Berkshire region make this property
      suitable for future development as a timeshare resort.





**Policies
      with Respect to Certain Activities**





Our
      board
      of directors sets policies with regard to all aspects of our business operations
      without a vote of security holders. In some instances the power to set certain
      policies may be delegated by the board of directors to a committee comprised
      of
      its members, or to the officers of the Company. As set forth herein under the
      headings “Customer Financing” and “Description of Certain Indebtedness,” we
      borrow money to finance all of our operations and we make loans to our customers
      to finance the purchase of our Vacation Intervals.





We
      do
      not:





·
            invest
                in the securities of unaffiliated issuers for the purpose of exercising
                control;





·
            underwrite
                securities of other issuers;





·
            engage
                in the purchase and sale (or turnover) of investments sponsored by
                other
                issuers; or





·
            offer
                securities in exchange for property.





Nor
      do we
      propose to engage in any of the above activities. In the past we have from
      time
      to time repurchased or otherwise reacquired our own common stock and other
      securities. In May 2002 we reacquired $56.9 million in principal amount of
      our
      10 1⁄2% senior subordinated notes in exchange for $28.5 million of our 6% senior
      subordinated notes and 23.9 million shares of our common stock. In July 2003
      we
      reacquired $7.6 million in principal amount of our 10 1⁄2% senior subordinated
      notes for approximately $2.4 million of cash, which resulted in a one-time
      gain
      of approximately $5.1 million. In June 2004 we completed an offer to exchange
      $24.7 million in principal amount of our 6% senior subordinated notes due 2007
      for $24.7 million in principal amount of our 8% senior subordinated notes due
      2010 and a cash payment of approximately $271,000, representing accrued, unpaid
      interest from April 1, 2004 through June 6, 2004. We have no policy or proposed
      policy with respect to future repurchases or re-acquisitions of our common
      stock
      or other securities; however, our board of directors may approve such repurchase
      activities if it finds these activities to be in the best interests of the
      Company and its shareholders.




11





**Investment
      Policies**





Our
      board
      of directors also determines all of our policies concerning investments,
      including the percentage of assets, which we may invest in any one type of
      investment, and the principles and procedures we will employ in connection
      with
      the acquisition of assets. The board of directors both determines our policies
      with regard to investment matters and may change these policies without a vote
      of security holders. We do not propose to invest in any investments or
      activities not related directly or indirectly to (i) the timeshare business,
      (ii) the acquisition, development, marketing, selling or financing of Vacation
      Intervals, or (iii) the management of timeshare resorts. We currently have
      no
      policies limiting the geographic areas in which we might engage in investments
      in the timeshare business, or limiting the percentage of our assets invested
      in
      any specific timeshare related property. We primarily acquire assets for income
      and not to hold for possible capital gain.





**Participation
      in Vacation Interval Exchange Networks**





***Silverleaf
      Plus Program.*** In
      February 2006 we began offering the new Silverleaf Plus program. This program,
      administered through Silverleaf Club, includes all of the prior benefits to
      Silverleaf Owners plus enhanced vacation options through the Silverleaf exchange
      program. In addition to use of their owned weeks and bonus time, Silverleaf
      Owners who purchase under the Silverleaf Plus program can also split their
      weeks
      into a minimum of 2-day up to 5-day increments, and extend any unused days
      into
      the following year.





***Internal
      Exchanges.*** Each
      Silverleaf Owner has certain exchange privileges through the Silverleaf Club
      which may be used on an annual basis to: (i) exchange an interval for a
      different interval (week) at the same resort so long as the desired interval
      is
      of an equal or lower rating; or (ii) exchange an interval for the same interval
      (week) of equal or lower rating at any other of our Existing Resorts. Silverleaf
      Owners of Getaway Resorts can only exchange for an interval in a Getaway Resort
      unless they own a “Presidents” or “Chairmans” Vacation Interval. These exchange
      rights are a convenience we provide Silverleaf Owners as an accommodation to
      them, and are conditioned upon availability of the desired interval or resort.
      Approximately 5,168 exchanges occurred in 2006. Silverleaf Owners pay an
      exchange fee of $75 to Silverleaf Club for each such internal exchange.





***Exchanges.*** We
      believe that our Vacation Intervals are made more attractive by our
      participation in a Vacation Interval exchange network operated by RCI. At
      December 31, 2006, the Existing Resorts (except for Orlando Breeze) are
      registered with RCI, and approximately 42% of Silverleaf Owners participate
      in
      RCI's exchange network. Membership in RCI allows participating Silverleaf Owners
      to exchange their occupancy right in a unit in a particular year for an
      occupancy right at the same time or a different time of the same or lower color
      rating in another participating resort, based upon availability and the payment
      of a variable exchange fee. A member may exchange a Vacation Interval for an
      occupancy right in another participating resort by listing the Vacation Interval
      as available with the exchange organization and by requesting occupancy at
      another participating resort, indicating the particular resort or geographic
      area to which the member desires to travel, the size of the unit desired, and
      the period during which occupancy is desired.





RCI
      assigns a rating of “red,” “white,” or “blue” to each Vacation Interval for
      participating resorts based upon a number of factors, including the location
      and
      size of the unit, the quality of the resort, and the period during which the
      Vacation Interval is available, and attempts to satisfy exchange requests by
      providing an occupancy right in another Vacation Interval with a similar rating.
      For example, an owner of a red Vacation Interval may exchange his interval
      for a
      red, white, or blue interval. An owner of a white Vacation Interval may exchange
      only for a white or blue interval, and an owner of a blue interval may exchange
      only for a blue interval. At December 31, 2006, RCI’s designation of our units
      of red, white, and blue Vacation Intervals is approximately 67%, 20%, and 13%,
      respectively. If RCI is unable to meet the member's initial request, it suggests
      alternative resorts based on availability. The annual membership fees in RCI,
      which are at the option and expense of the owner of the Vacation Interval,
      are
      currently $89. Exchange rights with RCI require an additional fee of
      approximately $164 for domestic exchanges and $199 for foreign exchanges.
      Silverleaf Club charges an exchange fee of $75 for each exchange through its
      internal exchange program. Resorts participating in the exchange networks are
      required to adhere to certain minimum standards regarding available amenities,
      safety, security, décor, unit supplies, maid service, room availability, and
      overall ambiance. See “Risk Factors” for a description of risks associated with
      the exchange programs.





Orlando
      Breeze is not under contract with RCI; however it is under contract with
      Interval International, Inc., a competitor of RCI. An owner of a Vacation
      Interval at Orlando Breeze may, for annual membership fees and exchange fees
      similar to those charged by RCI, become a member of the Interval International
      timeshare exchange system.





12





**Competition**





All
      of
      our operations are contained within and are in support of a single industry
      segment - the vacation ownership industry - and we currently operate in only
      six
      geographic areas of the United States. These geographic areas are Texas,
      Missouri, Massachusetts, Illinois, Georgia, and Florida. We encounter
      significant competition from other timeshare resorts in the markets that we
      serve. The timeshare industry is highly fragmented and includes a large number
      of local and regional resort developers and operators. However, some of the
      world's most recognized lodging, hospitality, and entertainment companies,
      such
      as Marriott International (Marriott Vacation Club brands), The Walt Disney
      Company, Hilton Hotels Corporation, Hyatt Corporation, and Four Seasons Resorts
      have entered the industry. Other companies in the timeshare industry, including
      Sunterra Corporation (“Sunterra”), Wyndham Worldwide Corporation (“Wyndham”),
      through its Wyndham Vacation Resorts (formerly Fairfield Resorts), and WorldMark
      by Wyndham (formerly Trendwest Resorts), Starwood Hotels & Resorts Worldwide
      Inc. (“Starwood”), Ramada Vacation Suites (“Ramada”), and Bluegreen Corporation
      (“Bluegreen”) are, or are subsidiaries of, public companies with enhanced access
      to capital and other resources that public ownership implies.





Wyndham,
      Sunterra, and Bluegreen own timeshare resorts in or near Branson, Missouri,
      which compete with our Holiday Hills and Ozark Mountain resorts, and to a lesser
      extent with our Timber Creek Resort. Sunterra also owns a resort that is located
      near and competes with Piney Shores Resort. Additionally, there are a number
      of
      public or privately-owned and operated timeshare resorts in most states in
      which
      we own resorts that compete with the Existing Resorts.





Many
      competitors also own timeshare resorts in or near Orlando, Florida where our
      newest resort, Orlando Breeze, is located. However sales of Orlando Breeze
      Vacation Intervals are primarily upgrade and additional week interval sales
      to
      our existing customers, with the sales taking place at our other Existing
      Resorts. We do not have a sales office in Orlando that directly competes with
      other resort developers and operators located there.





We
      believe Marriott, Disney, Hilton, Hyatt, and Four Seasons generally target
      consumers with higher annual incomes than our target market. Our other
      competitors target consumers with similar income levels as our target market.
      Our competitors may possess significantly greater financial, marketing,
      personnel, and other resources than we do. We cannot be certain that such
      competitors will not significantly reduce the price of their Vacation Intervals
      or offer greater convenience, services, or amenities than we do.





The
      American Resort Development Association (“ARDA”) recently published a study
      entitled State of the Vacation Timeshare Industry, 2006 United States Study
      (the
“ARDA Study”), which reported sales volume in the United States of $8.6 billion
      for 2005, compared to $4.2 billion in 2000 and $2.2 billion in 1996, equating
      to
      a 10-year compound annual growth rate exceeding 16 percent. The study estimated
      that 4.1 million households owned one or more U.S. timeshare intervals or
      points equivalent at January 1, 2006, representing a 5.1 percent increase
      over the amount reported one year earlier; however, there can be no assurance
      that the existing levels of growth in timeshare demand will continue or that
      we
      will not have to compete with larger and better capitalized competitors in
      future periods for a declining number of potential timeshare
      purchasers.





While
      our
      principal competitors are developers of timeshare resorts, we are also subject
      to competition from other entities engaged in the commercial lodging business,
      including condominiums, hotels, and motels, as well as others engaged in the
      leisure business and, to a lesser extent, from campgrounds, recreational
      vehicles, tour packages, and second home sales. A reduction in the product
      costs
      associated with any of these competitors, or an increase in the Company's costs
      relative to such competitors' costs, could have a material adverse effect on
      our
      results of operations, liquidity, and financial condition.





Numerous
      businesses, individuals, and other entities compete with us in seeking
      properties for acquisition and development of new resorts. Some of these
      competitors are larger and have greater financial and other resources. Such
      competition may result in a higher cost for properties we wish to acquire or
      may
      cause us to be unable to acquire suitable properties for the development of
      new
      resorts.





**Governmental
      Regulation**





***General.*** Our
      marketing and sales of Vacation Intervals and other operations are subject
      to
      extensive regulation by the federal government and the states and jurisdictions
      in which the Existing Resorts are located and in which our Vacation Intervals
      are marketed and sold. On a federal level, the Federal Trade Commission has
      taken the most active regulatory role through the Federal Trade Commission
      Act,
      which prohibits unfair or deceptive acts or competition in interstate commerce.
      Other federal legislation to which the Company is or may be subject includes
      the
      Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act and
      Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate
      Settlement Procedures Act, the Consumer Credit Protection Act, the Telephone
      Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse
      Prevention Act, the Fair Housing Act, the Civil Rights Acts of 1964 and 1968,
      the Fair Credit Reporting Act, the Fair Debt Collection Act, and the Americans
      with Disabilities Act. Additionally, as a publicly owned company, we are subject
      to all federal and state securities laws, including the Sarbanes-Oxley Act
      of
      2002.




13





In
      response to certain fraudulent marketing practices in the timeshare industry
      in
      the 1980's, various states enacted legislation aimed at curbing such abuses.
      Certain states in which we operate have adopted specific laws and regulations
      regarding the marketing and sale of Vacation Intervals. The laws of most states
      require us to file a detailed offering statement and supporting documents with
      a
      designated state authority, which describe the Company, the project, and our
      promotion and sale of Vacation Intervals. The offering statement must be
      approved by the appropriate state agency before we may solicit residents of
      such
      state. The laws of certain states require us to deliver an offering statement
      (or disclosure statement), together with certain additional information
      concerning the terms of the purchase, to prospective purchasers of Vacation
      Intervals who are residents of such states, even if the resort is not located
      in
      such state. The laws of Missouri generally only require certain disclosures
      in
      sales documents for prospective purchasers. There are also laws in each state
      where we sell Vacation Intervals that grant the purchaser the right to cancel
      a
      contract of purchase at any time within three to fifteen calendar days following
      the sale.





We
      market
      and sell our Vacation Intervals to residents of certain states adjacent or
      proximate to the states where our resorts are located. Many of these neighboring
      states also regulate the marketing and sale of Vacation Intervals to their
      residents. Most states have additional laws which regulate our activities and
      protect purchasers, such as real estate licensure laws; travel sales licensure
      laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize,
      gift, and sweepstakes laws; and other related laws. We do not register all
      of
      our resorts in each of the states where we register certain
      resorts.





Most
      of
      the states where we currently operate have enacted laws and regulations that
      limit our ability to market our resorts through telemarketing activities. These
      states have enacted “do not call” lists that permit consumers to block
      telemarketing activities by registering their telephone numbers for a period
      of
      years for a nominal fee. We purchase these lists from the various states
      quarterly and do not contact those telephone numbers listed. Additionally,
      the
      federal “Do-Not-Call Implementation Act” (the “DNC Act”), which was enacted on
      March 11, 2003, provided for the establishment of a National Do Not Call
      Registry administered by the United States Federal Trade Commission (“FTC”)
      under its Telemarketing Sales Rule (“TSR”) and the Federal Communications
      Commission. The FTC began enforcement actions in October 2003 for violations
      of
      the TSR by telemarketers. Violations could result in penalties up to $11,000
      per
      violation. The FTC has reported that approximately 107 million telephone numbers
      had been registered on the National Do Not Call List Registry by the end of
      2005. Since the introduction of state and federal Do-Not-Call legislation,
      we
      have become somewhat more reliant on direct mail solicitations as an alternative
      to some of the telemarketing techniques we have historically utilized. Existing
      and future restrictions on telemarketing practices could cause our sales to
      decline.





We
      believe we are in material compliance with applicable federal and state laws
      and
      regulations relating to the sales and marketing of Vacation Intervals in the
      jurisdictions in which we currently do business. However, we are normally and
      currently the subject of a number of consumer complaints and regulatory
      inquiries generally relating to our marketing or sales practices. We always
      attempt to resolve all such complaints or inquiries directly with the consumer
      or the regulatory authority involved. We cannot be certain that all of these
      complaints and inquiries by regulators can be resolved without adverse
      regulatory actions or other consequences, such as class action lawsuits or
      rescission offers. We expect some level of consumer complaints in the ordinary
      course of business as we aggressively market and sell Vacation Intervals to
      households, which may include individuals who may not be financially
      sophisticated. We cannot be certain that the costs of resolving consumer
      complaints, regulatory inquiries, or of qualifying under Vacation Interval
      ownership regulations in all jurisdictions in which we conduct sales or wish
      to
      conduct sales in the future will not be significant, that we are in material
      compliance with applicable federal and state laws and regulations, or that
      violations of law will not have adverse implications, including negative public
      relations, potential litigation, and regulatory sanctions. The expense, negative
      publicity, and potential sanctions associated with the failure to comply with
      applicable laws or regulations could have a material adverse effect on our
      results of operations, liquidity, or financial condition. Further, we cannot
      be
      certain that either the federal government or states having jurisdiction over
      our business will not adopt additional regulations or take other actions that
      would adversely affect our results of operations, liquidity, and financial
      condition.





During
      the 1980's and continuing through the present, the timeshare industry has been
      and continues to be afflicted with negative publicity and prosecutorial
      attention due to, among other things, marketing practices which were widely
      viewed as deceptive or fraudulent. Among the many timeshare companies which
      have
      been the subject of federal, state, and local enforcement actions and
      investigations in the past were certain of the partnerships and corporations
      that were merged into the Company prior to 1996 (the “Merged Companies,” or
      individually “Merged Company”). Some of the settlements, injunctions, and
      decrees resulting from litigation and enforcement actions (the “Orders”) to
      which certain of the Merged Companies consented in the 1980’s purport to bind
      all successors and assigns, and accordingly may also be enforceable against
      the
      Company. In addition, at that time the Company was directly a party to one
      such
      Order issued in Missouri. No past or present officers, directors, or employees
      of the Company or any Merged Company were named as subjects or respondents
      in
      any of these Orders; however, each Order purports to bind generically unnamed
      “officers, directors, and employees” of certain Merged Companies. Therefore,
      certain of these Orders may be interpreted to be enforceable against the present
      officers, directors, and employees of the Company even though they were not
      individually named as subjects of the enforcement actions which resulted in
      these Orders. These Orders require, among other things, that all parties bound
      by the Orders, including the Company, refrain from engaging in deceptive sales
      practices in connection with the offer and sale of Vacation Intervals. The
      requirements of the Orders are substantially what applicable state and federal
      laws and regulations mandate, but the consequence of violating the Orders may
      be
      that sanctions (including possible financial penalties and suspension or loss
      of
      licensure) may be imposed more summarily and may be harsher than would be the
      case if the Orders did not bind the Company. In addition, the existence of
      the
      Orders may be viewed negatively by prospective regulators in jurisdictions
      where
      the Company does not now do business, with attendant risks of increased costs
      and reduced opportunities.




14





In
      early
      1997, we were the subject of some consumer complaints that triggered
      governmental investigations into the Company's affairs. In March 1997, we
      entered into an Assurance of Voluntary Compliance with the Texas Attorney
      General, in which we agreed to make additional disclosure to purchasers of
      Vacation Intervals regarding the limited availability of our Bonus Time program
      during certain periods. We paid $15,200 for investigatory costs and attorneys'
      fees of the Texas Attorney General in connection with this matter. Also, in
      March 1997, we entered into an agreed order (the “Agreed Order”) with the Texas
      Real Estate Commission requiring that we comply with certain aspects of the
      Texas Timeshare Act, Texas Real Estate License Act, and Rules of the Texas
      Real
      Estate Commission, with which we had allegedly been in non-compliance until
      mid-1995. The allegations included (i) our admitted failure to register the
      Missouri Destination Resorts in Texas (due to our misunderstanding of the reach
      of the Texas Timeshare Act); (ii) payment of referral fees for Vacation Interval
      sales, the receipt of which was improper on the part of the recipients; and
      (iii) miscellaneous other actions alleged to violate the Texas Timeshare Act,
      which we denied. While the Agreed Order acknowledged that we independently
      resolved ten consumer complaints referenced in the Agreed Order, discontinued
      the practices complained of, and registered the Missouri Destination Resorts
      during 1995 and 1996, the Texas Real Estate Commission ordered us to cease
      these
      discontinued practices and enhance our disclosure to purchasers of Vacation
      Intervals. In the Agreed Order, we agreed to make a voluntary donation of
      $30,000 to the State of Texas. The Agreed Order also directed that we revise
      our
      training manual for timeshare salespersons and verification officers. While
      the
      Agreed Order resolved all of the alleged violations contained in complaints
      received by the Texas Real Estate Commission through December 31, 1996, we
      have
      encountered and expect to encounter some level of additional consumer
      complaints, regulatory scrutiny, and periodic remedial action in the ordinary
      course of our business. In this regard, during 2004 we renewed our
      timeshare-offering plan in the state of New York, which we inadvertently allowed
      to lapse in 2001. As part of this renewal process, we rescinded approximately
      $897,000 of sales to New York residents that were made in 2001 after our
      timeshare offering plan lapsed.





We
      have
      established compliance and supervisory methods in training sales and marketing
      personnel as to adherence to legal requirements. With regard to direct mailings,
      a designated compliance employee reviews all mailings to determine if they
      comply with applicable state legal requirements. With regard to telemarketing,
      our marketing management personnel prepare a script for telemarketers based
      upon
      applicable state legal requirements. All telemarketers receive training that
      includes, among other things, directions to adhere strictly to the approved
      script. Telemarketers are also monitored by their supervisors to ensure that
      they do not deviate from the approved script. Additionally, sales personnel
      receive training as to such applicable legal requirements. We have a salaried
      employee at each sales office who reviews the sales documents prior to closing
      a
      sale to review compliance with legal requirements. Periodically, we are notified
      by regulatory agencies to revise our disclosures to consumers and to remedy
      other alleged inadequacies regarding the sales and marketing process. In such
      cases, we revise our direct mailings, telemarketing scripts, or sales disclosure
      documents, as appropriate, to comply with such requests. We have supervisors
      to
      monitor compliance with all state and federal Do-Not-Call
      regulations.





We
      are
      not currently aware of any non-compliance with any state or federal statute,
      rule, or regulation which we believe would have a material adverse effect on
      our
      business, results of operations, or financial condition.





***Environmental
      Matters*** *.* Under
      various federal, state, and local environmental laws, ordinances, and
      regulations, a current or previous owner or operator of real estate may be
      required to investigate and clean up hazardous or toxic substances or petroleum
      product releases at such property, and may be held liable to a governmental
      entity or to third parties for property damage and tort liability and for
      investigation and clean-up costs incurred by such parties in connection with
      the
      contamination. Such laws typically impose clean-up responsibility and liability
      without regard to whether the owner or operator knew of or caused the presence
      of the contaminants, and the liability under such laws has been interpreted
      to
      be joint and several unless the harm is divisible and there is a reasonable
      basis for allocation of responsibility. The cost of investigation, remediation,
      or removal of such substances may be substantial, and the presence of such
      substances, or the failure to properly remediate the contamination on such
      property, may adversely affect the owner's ability to sell such property or
      to
      borrow using such property as collateral. Persons who arrange for the disposal
      or treatment of hazardous or toxic substances at a disposal or treatment
      facility also may be liable for the costs of removal or remediation of a release
      of hazardous or toxic substances at such disposal or treatment facility, whether
      or not such facility is owned or operated by such person. In addition, some
      environmental laws create a lien on the contaminated site in favor of the
      government for damages and costs it incurs in connection with the contamination.
      Finally, the owner or operator of a site may be subject to common law claims
      by
      third parties based on damages and costs resulting from environmental
      contamination emanating from a site or from environmental regulatory violations.
      In connection with our ownership and operation of our properties, we may be
      potentially liable for such claims.




15





Certain
      federal, state, and local laws, regulations, and ordinances govern the removal,
      encapsulation, or disturbance of asbestos-containing materials (“ACMs”) when
      such materials are in poor condition or in the event of construction,
      remodeling, renovation, or demolition of a building. Such laws may impose
      liability for release of ACMs and may provide for third parties to seek recovery
      from owners or operators of real properties for personal injury associated
      with
      ACMs. In connection with our ownership and operation of our properties, we
      may
      be potentially liable for such costs. In 1994, we conducted a limited asbestos
      survey at each of our Existing Resorts, which surveys did not reveal material
      potential losses associated with ACMs at certain of the Existing
      Resorts.





In
      addition, recent studies have linked radon, a naturally occurring substance,
      to
      increased risks of lung cancer. While there are currently no state or federal
      requirements regarding the monitoring for, presence of, or exposure to radon
      in
      indoor air, the EPA and the Surgeon General recommend testing residences for
      the
      presence of radon in indoor air, and the EPA further recommends that
      concentrations of radon in indoor air be limited to less than 4 picocuries
      per
      liter of air (Pci/L) (the “Recommended Action Level”). The presence of radon in
      concentrations equal to or greater than the Recommended Action Level in one
      or
      more of our properties may adversely affect our ability to sell Vacation
      Intervals at such properties and the market value of such property. We have
      not
      tested our properties for radon. Recently-enacted federal legislation will
      eventually require us to disclose to potential purchasers of Vacation Intervals
      at our resorts that were constructed prior to 1978 any known lead-paint hazards
      and will impose treble damages for failure to so notify.





Electric
      transmission lines are located in the vicinity of some of our properties.
      Electric transmission lines are one of many sources of electromagnetic fields
      (“EMFs”) to which people may be exposed. Research into potential health impacts
      associated with exposure to EMFs has produced inconclusive results.
      Notwithstanding the lack of conclusive scientific evidence, some states now
      regulate the strength of electric and magnetic fields emanating from electric
      transmission lines, while others have required transmission facilities to
      measure for levels of EMFs. In addition, we understand that lawsuits have,
      on
      occasion, been filed (primarily against electric utilities) alleging personal
      injuries resulting from exposure as well as fear of adverse health effects.
      In
      addition, fear of adverse health effects from transmission lines has been a
      factor considered in determining property value in obtaining financing and
      in
      condemnation and eminent domain proceedings brought by power companies seeking
      to construct transmission lines. Therefore, there is a potential for the value
      of a property to be adversely affected as a result of its proximity to a
      transmission line and for the Company to be exposed to damage claims by persons
      exposed to EMFs.





We
      conducted Phase I environmental assessments at each of our resorts during 2001
      or later, in order to identify potential environmental concerns. These Phase
      I
      assessments were carried out in accordance with accepted industry practices
      and
      consisted of non-invasive investigations of environmental conditions at the
      properties, including a preliminary investigation of the sites and
      identification of publicly known conditions concerning properties in the
      vicinity of the sites, physical site inspections, review of aerial photographs
      and relevant governmental records where readily available, interviews with
      knowledgeable parties, investigation for the presence of above ground and
      underground storage tanks presently or formerly at the sites, and the
      preparation and issuance of written reports. Our Phase I assessments of the
      properties did not reveal any environmental liability that we believe would
      have
      a material adverse effect on our business, assets, or results of operations
      taken as a whole; nor are we aware of any such material environmental liability.
      Nevertheless, it is possible that our Phase I assessments did not reveal all
      environmental liabilities or that there are material environmental liabilities
      of which we are unaware. Moreover, there can be no assurance that (i) future
      laws, ordinances, or regulations will not impose any material environmental
      liability or (ii) the current environmental condition of the properties will
      not
      be affected by the condition of land or operations in the vicinity of the
      properties (such as the presence of underground storage tanks) or by third
      parties unrelated to us. We do not believe that compliance with applicable
      environmental laws or regulations will have a material adverse effect on our
      results of operations, liquidity, or financial condition.





We
      believe that our properties are in compliance in all material respects with
      all
      federal, state, and local laws, ordinances, and regulations regarding hazardous
      or toxic substances. We have not been notified by any governmental authority
      or
      any third party, and are not otherwise aware, of any material noncompliance,
      liability, or claim relating to hazardous or toxic substances or petroleum
      products in connection with any of our present properties.





***Utility
      Regulation.*** At
      December 31, 2004, we owned the water supply and waste-water treatment
      facilities at several of the Existing Resorts, which are regulated by various
      governmental agencies. The Texas Natural Resource Conservation Commission is
      the
      primary state umbrella agency regulating utilities at the resorts in Texas;
      and
      the Missouri Department of Natural Resources and Public Service Commission
      of
      Missouri are the primary state umbrella agencies regulating utilities at the
      resorts in Missouri. The Environmental Protection Agency, division of Water
      Pollution Control, and the Illinois Commerce Commission are the primary state
      agencies regulating water utilities in Illinois. These agencies regulate the
      rates and charges for the services (allowing a reasonable rate of return in
      relation to invested capital and other factors), the size and quality of the
      plants, the quality of water supplied, the efficacy of waste-water treatment,
      and many other aspects of the utilities' operations. The agencies have approval
      rights regarding the entity owning the utilities (including its financial
      strength) and the right to approve a transfer of the applicable permits upon
      any
      change in control of the entity holding the permits. Other federal, state,
      regional, and local environmental, health, and other agencies also regulate
      various aspects of the provision of water and waste-water treatment services.
      In
      March 2005, all of our utility services assets and liabilities were sold for
      an
      aggregate sales price of $13.1 million, which resulted in a pretax gain of
      $879,000.




16





***Other
      Regulation.*** Under
      various state and federal laws governing housing and places of public
      accommodation, we are required to meet certain requirements related to access
      and use by disabled persons. Although we believe that our facilities are
      generally in compliance with present requirements of such laws, we are aware
      of
      certain of our properties that are not in full compliance with all aspects
      of
      such laws. We are presently responding, and expect to respond in the future,
      to
      inquiries, claims, and concerns from consumers and regulators regarding our
      compliance with existing state and federal regulations affording the disabled
      access to housing and accommodations. It is our practice to respond positively
      to all such inquiries, claims and concerns and to work with regulators and
      consumers to resolve all issues arising under existing regulations concerning
      access and use of our properties by disabled persons. We believe that we will
      incur additional costs of compliance and/or remediation in the future with
      regard to the requirements of such existing regulations. Future legislation
      may
      also impose new or further burdens or restrictions on owners of timeshare resort
      properties with respect to access by the disabled. The ultimate cost of
      compliance with such legislation and/or remediation of conditions found to
      be
      non-compliant is not currently ascertainable, and while such costs are not
      expected to have a material effect on our business, such costs could be
      substantial. Limitations or restrictions on the completion of certain
      renovations may limit application of our growth strategy in certain instances
      or
      reduce profit margins on our operations. We are also subject to a variety of
      local, state, and federal laws and regulations concerning health and sanitation,
      facility operations, fire safety and occupational safety.





**Employees**





At
      December 31, 2006, we had 1,956 full and part-time employees and the Clubs
      collectively had 770 full and part-time employees. Our employee relations are
      good, both at the Company and at the Clubs. **** None
      of
      our employees are represented by a labor union and we are not aware of any
      union
      organization efforts with respect to any of our employees.





**Insurance**





We
      carry
      comprehensive liability, fire, hurricane, and storm insurance with respect
      to
      our resorts, with policy specifications, insured limits, and deductibles
      customarily carried for similar properties, which we believe are adequate.
      There
      are, however, certain types of losses (such as losses arising from floods and
      acts of war) that are not generally insured because they are either uninsurable
      or not economically insurable. Should an uninsured loss or a loss in excess
      of
      insured limits occur, we could lose the capital invested in a resort, as well
      as
      the anticipated future revenues from such resort, and would continue to be
      obligated on any mortgage indebtedness or other obligations related to the
      property. Any such loss could have a material adverse effect on our results
      of
      operations, liquidity, or financial condition. We self-insure for employee
      medical claims reduced by certain stop-loss provisions. We also self-insure
      for
      property damage to certain vehicles and heavy equipment.





**DESCRIPTION
      OF OUR INDEBTEDNESS AND SENIOR CREDIT FACILITIES AT DECEMBER 31,
      2006**





***Existing
      Indebtedness.*** We use
      the following credit agreements to finance the sale of Vacation Intervals,
      to
      finance construction, and for working capital needs. The loans are
      collateralized (or cross-collateralized) by customer notes receivable,
      inventory, construction in process, land, improvements, and related equipment
      at
      certain of the Existing Resorts. The credit facilities secured by customer
      notes
      receivable allow advances ranging from 75% to 80% of the unpaid balance of
      certain eligible customer notes receivable. The following table summarizes
      our
      credit agreements with our senior lenders, our wholly-owned and consolidated
      special purpose finance subsidiaries, and our off-balance sheet qualified
      special purpose entity, SF-III, as of December 31, 2006 (in
      thousands):





**MaximumAmount**
              **Available**
            
            **12/31/06**
              **Balance**Receivable
                Based Revolving Facilities
            
            $
            295,000
            
            $
            51,827Receivable
                Based Non-Revolving Facilities
            
            
            152,438
            
            
            152,438Inventory
                Loans
            
            
            62,115
            
            
            40,976Sub-Total
                On Balance Sheet
            
            
            509,553
            
            
            245,241Off-Balance
                Sheet Receivable Based Term Loan
            
            
            52,295
            
            
            52,295Grand
                Total
            
            $
            561,848
            
            $
            297,536




17




***Textron
      Facility*** **.** We
      have a
      long-standing relationship with Textron Financial Corporation dating back to
      August 1995. Since that time, we have had various loan facilities in place
      with
      Textron. Our facilities with Textron Financial are as follows at December 31,
      2006:





·
            Receivables
                Loan - During the third quarter of 2005 we reached an agreement with
                Textron to consolidate, amend, and restate all prior receivables
                loan
                agreements between our two companies. Under the terms of the new
                agreement, we entered into a $100 million revolving loan agreement,
                of
                which $60 million is currently available, secured by notes receivable
                from
                timeshare sales and unsold inventory of timeshare intervals. The
                additional $40 million under the agreement will not be available
                unless
                Textron seeks and finds third party participants, which by agreement
                with
                us they are not currently doing. The agreement matures in June 2011
                and
                bears interest at a rate of Prime plus 1%, with a 6% floor.





·
            Inventory
                Loans - We have two revolving inventory loan facilities in the aggregate
                amount of $16 million, revolving through June 2008 and due in August
                2010,
                which bear interest at a rate of LIBOR plus 3.25% and Prime plus
                3% with a
                6% floor, respectively. We also have a $5 million inventory term
                loan
                facility with Textron that is due in March 2007 and bears interest
                at a
                rate of Prime plus 3% with a 6% floor.





·
            Conduit
                Loans - During the fourth quarter of 2003, we closed a $66.4 million
                conduit term loan transaction through our conduit financing subsidiary,
                SF-II, which was arranged through Textron. Under the terms of the
                SF-II
                conduit loan, we sold approximately $78.1 million of our Vacation
                Interval
                receivables to SF-II for an amount equal to the aggregate principal
                balances of the receivables. Textron financed the purchase of these
                receivables through a one-time advance to SF-II of $66.4 million,
                which is
                approximately 85% of the outstanding balance of the receivables SF-II
                purchased from us. All customer receivables that we transferred to
                SF-II
                have been pledged as security to Textron. Textron has also received
                as
                additional collateral a pledge of all of our equity interest in SF-II
                and
                a $15.7 million demand note from us to SF-II under which payment
                may be
                demanded if SF-II defaults on its loan from the senior lender. Textron's
                conduit loan to SF-II will mature in 2014 and bears interest at a
                fixed
                annual rate of 7.035%. During the first quarter of2005,
                we entered into a $26.3 million amendment and expansion of our conduit
                term loan agreement with SF-II. Under the terms of the amendment,
                we sold
                approximately $31.0 million of notes receivable and received cash
                proceeds
                of approximately $26.3 million. The new conduit term loan with SF-II
                will
                mature in 2011 and bears interest at a fixed annual rate of
                7.9%.





***CapitalSource
      Facility*** **.** During
      the second quarter of 2005, we entered into a $50 million receivables loan
      agreement with CapitalSource, which matures in April 2008 and bears interest
      at
      a rate of Prime plus 0.75%. We also have a $30 million revolving inventory
      loan
      facility with CapitalSource, which revolves through April 2009, is due in April
      2011, and bears interest at a rate of Prime plus 1.5%.





***Resort
      Funding Facility.***  During
      the second quarter of 2005, we entered into a $25 million receivables loan
      agreement with Resort Funding, which revolves through May 2007, matures in
      May
      2010, and bears interest at a rate of Prime plus 1.5% with a 6.5% floor. We
      have
      not borrowed against this loan facility.





***Wells
      Fargo Foothill Facility.*** During
      the fourth quarter of 2005, we entered into a $50 million receivables loan
      agreement with Wells Fargo Foothill, which was subsequently reduced to $35
      million during the fourth quarter of 2006. This facility matures in December
      2011 and bears interest at a rate of Prime plus 0.5% with a 6% floor. We also
      have a $15 million revolving inventory loan facility with Wells Fargo Foothill,
      which revolves through December 2008, matures in December 2010, and bears
      interest at a rate of Prime plus 2% with a 6% floor.





***Silverleaf
      Finance III Facility.*** During
      the third quarter of 2005 we closed a term securitization transaction with
      a
      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 Real Estate Securities Inc. (“UBS”). The Series 2005-A Notes were
      issued pursuant to an Indenture between Silverleaf, as servicer of the timeshare
      receivables, SF-III, and Wells Fargo Bank, National Association, as Indenture
      Trustee, Custodian, Backup Servicer, and Account Intermediary. The Series 2005-A
      Notes were issued by SF-III in four classes ranging from Class A through Class
      D
      notes with a blended fixed rate of 5.4%. 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 our qualified special purpose entity, SF-I. We dissolved
      SF-I
      simultaneously with the sale of 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. 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 net servicing asset or liability was estimated to be
      insignificant.




18





***Silverleaf
      Finance IV Facility.*** During
      the first quarter of 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, a Delaware limited liability
      company. SF-IV was formed for the purpose of issuing a $100 million variable
      funding note to UBS. During the fourth quarter of 2006 the facility was amended
      to increase the availability from $100 million to $125 million. The funding
      period was originally scheduled to end in March 2007 but was extended to
      December 2008, and the interest rate on advances by UBS to SF-IV was reduced
      from the initial rate of LIBOR plus 1.5% to LIBOR plus 1.25%. The revised
      facility will mature in December 2010. The VFN is secured by customer notes
      receivable sold to SF-IV. Proceeds from the sale of customer notes receivable
      to
      SF-IV are used to fund normal business operations and for general working
      capital purposes. The VFN was issued pursuant to the terms and conditions of
      an
      indenture between SF-IV, UBS, and Wells Fargo Bank, National Association, as
      indenture trustee. We will service the customer notes receivable sold to SF-IV
      under the terms of an agreement with the indenture trustee and
      SF-IV.





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





The
      Series 2006-A Notes are secured by customer notes receivable sold to SF-V by
      SF-IV and Silverleaf in three separate transactions from August 2006 to November
      2006. The original amount of notes receivable purchased by SF-V to secure the
      Series 2006-A Notes was $155.1 million and the balance of eligible notes
      receivable pledged as collateral at December 31, 2006 was $132.2 million. The
      proceeds from the sale of the customer notes receivable to SF-V were primarily
      used to pay down consolidated indebtedness to senior lenders. All customer
      notes
      receivable purchased by SF-V are being acquired without recourse, except in
      the
      case of breaches of customary representations and warranties made in connection
      with the sale of the notes. We will continue to service the customer notes
      receivable sold to SF-V under the terms of the indenture and will receive a
      fee
      for our services.





***Senior
      Subordinated Notes.*** We
      have
      $3.8 million of 6% senior subordinated notes due April 2007, $2.1 million of
      101⁄2% senior subordinated notes due April 2008, and $24.7 million of 8% senior
      subordinated notes due April 2010, with interest payable semi-annually on April
      1 and October 1. Our payment and performance under these senior subordinated
      notes has been guaranteed by all of our present and future domestic restricted
      subsidiaries.





The
      following table summarizes our notes payable, capital lease obligations, and
      senior subordinated notes at December 31, 2005 and 2006 (in
      thousands):


**December
                  31,**
              
              **Revolving**
              
              
              
              **Interest********2005**
              
              ******2006**
              
              **Term**
              
              **Maturity**
              
              **Rate**$100
                  million Textron receivable-based revolver (the loan agreement is
                  currently
                  limited to $60 million of availability).
              
              $
              53,661
              
              $
              28,903
              
              
              6/30/08
              
              
              6/30/11
              
              
              Prime
                  + 1.00%$50
                  million CapitalSource receivable-based revolver
              
              
              28,800
              
              
              22,831
              
              
              4/29/08
              
              
              4/29/08
              
              
              Prime
                  + 0.75%$35
                  million Wells Fargo Foothill receivable-based revolver
              
              
              —
              
              
              93
              
              
              12/31/08
              
              
              12/31/11
              
              
              Prime
                  + 0.50%$125
                  million SF-IV receivable-based revolver
              
              
              —
              
              
              —
              
              
              12/3/08
              
              
              12/3/10
              
              
              LIBOR+1.25%$25
                  million Resort Funding receivable-based revolver
              
              
              —
              
              
              —
              
              
              5/20/07
              
              
              5/20/10
              
              
              Prime
                  + 1.50%$66.4
                  million Textron receivable-based non-revolving conduit
                  loan
              
              
              37,224
              
              
              25,090
              
              
              —
              
              
              3/22/14
              
              
              7.035%$26.3
                  million Textron receivable-based non-revolving conduit
                  loan
              
              
              20,839
              
              
              14,210
              
              
              —
              
              
              9/22/11
              
              
              7.90%$128
                  million SF-V receivable-based non-revolver
              
              
              —
              
              
              113,138
              
              
              —
              
              
              7/16/18
              
              
              6.70%$10
                  million Textron inventory loan agreement
              
              
              10,000
              
              
              10,000
              
              
              8/31/08
              
              
              8/31/10
              
              
              LIBOR+3.25%$6
                  million Textron inventory loan agreement
              
              
              —
              
              
              5,000
              
              
              8/31/08
              
              
              8/31/10
              
              
              Prime
                  + 3.00%$5
                  million Textron inventory loan agreement
              
              
              3,335
              
              
              1,115
              
              
              —
              
              
              3/31/07
              
              
              Prime
                  + 3.00%$30
                  million CapitalSource inventory loan agreement
              
              
              15,000
              
              
              18,876
              
              
              4/29/09
              
              
              4/29/11
              
              
              Prime
                  + 1.50%$15
                  million Wells Fargo Foothill inventory loan agreement
              
              
              6,000
              
              
              5,985
              
              
              12/31/08
              
              
              12/31/10
              
              
              Prime
                  + 2.00%Various
                  notes, due from January 2009 through August 2016, collateralized
                  by
                  various assets with interest rates ranging from 6.0% to
                  8.5%
              
              
              2,282
              
              
              7,590
              
              
              —
              
              
              various
              
              
              variousTotal
                  notes payable
              
              
              177,141
              
              
              252,831Capital
                  lease obligations
              
              
              128
              
              
              1,719
              
              
              —
              
              
              various
              
              
              variousTotal
                  notes payable and capital lease obligations
              
              
              177,269
              
              
              254,5506.0%
                  senior subordinated notes, due 2007
              
              
              3,796
              
              
              3,796
              
              
              —
              
              
              4/1/07
              
              
              6.00%101⁄2%
                  senior subordinated notes, due 2008
              
              
              2,146
              
              
              2,146
              
              
              —
              
              
              4/1/08
              
              
              10.50%8.0%
                  senior subordinated notes, due 2010
              
              
              24,671
              
              
              24,671
              
              
              —
              
              
              4/1/10
              
              
              8.00%Interest
                  on the 6.0% senior subordinated notes, due 2007
              
              
              2,562
              
              
              854
              
              
              —
              
              
              4/1/07
              
              
              6.00%Total
                  senior subordinated notes
              
              
              33,175
              
              
              31,467Total
              
              $
              210,444
              
              $
              286,017
  19





We
      have
      $264.3 million available funding under our current debt facilities. At December
      31, 2006, the LIBOR rates on our senior credit facilities were 5.32% (1 month)
      and 5.37% (3 month) and the Prime rate on these facilities was 8.25%.





**Financial
      Covenants Under Senior Credit Facilities.**





The
      Company’s senior credit facilities discussed above provide certain financial
      covenants that we must satisfy. Any failure to comply with the financial
      covenants in any single loan agreement will result in a cross default under
      the
      various facilities. The financial covenants as they exist at December 31, 2006
      are described below.





***Tangible
      Net Worth Covenant.*** Each
      of
      our senior lenders has a somewhat different requirement, the most restrictive
      being that we must maintain a Tangible Net Worth at all times greater than
      the
      Tangible Net Worth as of December 31, 2004, or $132.1 million, plus 50% of
      the
      aggregate amount of Consolidated Net Income after December 31, 2004. “Tangible
      Net Worth” is (i) the consolidated net worth of the Company and our consolidated
      subsidiaries, plus (ii) to the extent not otherwise included in the such
      consolidated net worth, unsecured subordinated indebtedness of the Company
      and
      our consolidated subsidiaries the terms and conditions of which are reasonably
      satisfactory to the required banks, minus (iii) the consolidated intangibles
      of
      the Company and our consolidated subsidiaries, including, without limitation,
      goodwill, trademarks, trade names, copyrights, patents, patent applications,
      licenses and rights in any of the foregoing and other items treated as
      intangibles in accordance with generally accepted accounting principles.
“Consolidated Net Income” is the consolidated net income of the Company and our
      subsidiaries, after deduction of all expenses, taxes, and other proper charges
      (but excluding any extraordinary profits or losses), determined in accordance
      with generally accepted accounting principles.





***Marketing
      and Sales Expenses Covenant.*** Our
      ratio of marketing expenses to Vacation Interval sales for the latest rolling
      12
      months then ended must not equal or exceed 55% as of the last day of any fiscal
      quarter. Two senior lenders have increased the ratio we are required to stay
      below to 57% as of the last day of each fiscal quarter.





***Minimum
      Loan Delinquency Covenant.*** Our over
      30-day delinquency rate on our entire consumer loan portfolio may not be greater
      than 10% as of the last day of each fiscal quarter.





***Debt
      Service Covenant*** .
      Our
      ratio of (i) earnings before interest, income taxes, depreciation and
      amortization (“EBITDA”) less capital expenditures as determined in accordance
      with generally accepted accounting principles to (ii) the
      interest expense minus all non-cash items constituting interest expense for
      such
      period, for the latest rolling 12 months then ending must not be
      less
      than 1.25 to 1 as of the last day of each fiscal quarter.





***Profitable
      Operations Covenant*** *.* Our
      Consolidated Net Income (i) for any fiscal year must not be less than $1.00,
      (ii) for any two consecutive fiscal quarters (reviewed on an individual rather
      than on an aggregate basis) must not be less than $1.00, and (iii) for any
      rolling 12-month period must not be less than $1.00.





***Leverage
      Ratio Covenant.*** Our
      ratio
      of debt to Tangible Net Worth must not exceed 6.0 to 1 at any time during the
      term of the loans.





***FICO
      Score Covenant.*** Our
      weighted average FICO Credit Bureau Score for all sales to Silverleaf Owners
      with respect to which a FICO score can be obtained must not be less than 640
      for
      any fiscal calendar quarter.





Our
      credit facilities also contain covenants including requirements that we (i)
      preserve and maintain the collateral securing the loans; (ii) pay all taxes
      and
      other obligations relating to the collateral; and (iii) refrain from selling
      or
      transferring the collateral or permitting any encumbrances on the collateral.
      The credit agreements also contain restrictive covenants which include (i)
      restrictions on liens against and dispositions of collateral, (ii) restrictions
      on distributions to affiliates and prepayments of loans from affiliates, (iii)
      restrictions on changes in control and management of the Company, (iv)
      restrictions on sales of substantially all of the assets of the Company, and
      (v)
      restrictions on mergers, consolidations, or other reorganizations of the
      Company. Under certain credit facilities, a sale of all or substantially all
      of
      the assets of the Company, a merger, consolidation, or reorganization of the
      Company, or other changes of control of the ownership of the Company, would
      constitute an event of default and permit the senior lenders to accelerate
      the
      maturity of the facility.




20




As
      of
      December 31, 2003 and all periods thereafter, we have been in full compliance
      with our debt covenants in our credit facilities with all of our senior lenders.





**Termination
      of Silverleaf Finance I Facility**





During
      the fourth quarter of 2000, our qualified special purpose entity, SF-I, entered
      into a loan and security agreement with Autobahn Funding Company LLC
      (“Autobahn”), as Lender, DZ Bank, as Agent, and other parties. We serviced
      receivables that we sold to SF-I under a separate agreement. SF-I pledged the
      receivables it purchased from us as collateral for funds borrowed from Autobahn.
      The facility began with a maximum borrowing capacity of $100 million and a
      scheduled maturity of October 2005. It was subsequently extended to revolve
      through March 2006 with a final maximum borrowing capacity of $75 million.
      We
      dissolved SF-I simultaneously with the sale of our timeshare receivables to
      SF-III during the third quarter of 2005.





**ITEM
      1A. RISK FACTORS**





**If
      our assumptions and estimates in our business model are wrong, our future
      results could be negatively impacted.**





The
      financial covenants in our credit facilities are based upon a business model
      prepared by our management. We used a number of assumptions and estimates in
      preparing the business model, including:





·
            We
                estimated that we will sell our existing and planned inventory of
                Vacation
                Intervals within 15 years;




·
            We
                assumed that our level of sales and operating profits and costs can
                be
                maintained and will grow in future periods;




·
            We
                assumed the availability of credit facilities necessary to sustain
                our
                operations and anticipated growth;
                and




·
            We
                assumed that we can raise the prices on our products and services
                as
                market conditions allow.





These
      assumptions and estimates are subject to significant business, economic and
      competitive risks and uncertainties. If our assumptions and estimates are wrong,
      our future financial condition and results of operations may vary significantly
      from those projected in the business model.





Neither
      our past nor present independent auditors have reviewed or expressed an opinion
      about our business model or our ability to achieve it.





**Changes
      in the timeshare industry could affect our operations.**





We
      operate principally within the timeshare industry. Our results of operations
      and
      financial condition could be negatively affected by any of the following
      events:





·
            An
                oversupply of timeshare units,




·
            A
                reduction in demand for timeshare units,




·
            Changes
                in travel and vacation patterns,




·
            A
                decrease in popularity of our resorts with our
                consumers,




·
            Governmental
                regulations or taxation of the timeshare industry,
                and




·
            Negative
                publicity about the timeshare
                industry.





**We
      may be impacted by general economic conditions.**





Our
      customers may be more vulnerable to deteriorating economic conditions than
      consumers in the luxury or upscale timeshare markets. An economic slowdown
      in
      the United States could depress consumer spending for Vacation Intervals.
      Additionally, significant increases in the cost of transportation may limit
      the
      number of potential customers who travel to our resorts for a sales
      presentation. During an economic slowdown we could experience increased
      delinquencies in the payment of Vacation Interval promissory notes and monthly
      Club dues.





**We
      are at risk for defaults by our customers.**





We
      offer
      financing to the buyers of Vacation Intervals at our resorts. Notes receivable
      from timeshare buyers constitute one of our principal assets. These buyers
      make
      down payments of at least 10% of the purchase price and deliver promissory
      notes
      to us for the balances. The promissory notes generally bear interest at a fixed
      rate, are payable over a seven-year 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. Although we prescreen prospects by credit scoring them in
      the
      early stages of the marketing and sales process, we generally do not perform
      a
      detailed credit history review of our customers, as is the case with most other
      timeshare developers.




21





We
      recorded 17.3% of the purchase price of Vacation Intervals as estimated
      uncollectible revenue for the year ended December 31, 2006, which resulted
      in a
      decrease in our sales revenue of $32.5 million for the year 2006, in accordance
      with SFAS 152 which we adopted effective January 1, 2006. When a buyer of a
      Vacation Interval defaults, we 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 we will incur such costs again when we
      resell the Vacation Interval. Although 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. For example, if we were to file a lawsuit to collect the balance
      owed to us by a customer in Texas (where approximately 61% of Vacation Interval
      sales took place in 2006), the customer could file a court proceeding to
      determine the fair market value of the property foreclosed upon. In such event,
      we may not recover a personal judgment against the customer for the full amount
      of the deficiency. We would only recover an amount that the indebtedness owed
      to
      us exceeds the fair market value of the property. Accordingly, we have generally
      not pursued this remedy.





At
      December 31, 2006, we had Vacation Interval customer notes receivable in the
      approximate principal amount of $297.4 million, and had an allowance for
      uncollectible notes of approximately $68.1 million. We cannot be certain that
      this allowance is adequate.





**We
      must borrow funds to finance our operations.**





Our
      business is dependent on our ability to finance customer notes receivable
      through our banks. At December 31, 2006, we either directly or through our
      fully
      consolidated finance subsidiaries owed approximately $245.2 million of principal
      to our senior lenders.





***Borrowing
      Base.*** We
      have
      receivable-based loan agreements with senior lenders to borrow up to
      approximately $447.4 million. We pledged our customer promissory notes and
      mortgages as security under these agreements. Our senior lenders typically
      lend
      us 75% to 80% of the principal amount of our customers' notes, and payments
      from
      Silverleaf Owners on such notes are credited directly to the senior lender
      and
      applied against our loan balance. At December 31, 2006, we had a portfolio
      of
      approximately 36,104 Vacation Interval customer notes receivable in the
      approximate principal amount of $297.4 million. Approximately $4.7 million
      in
      principal amount of our customers' notes were 61 days or more past due and,
      therefore, ineligible as collateral. The amount of customer notes receivable
      eligible as collateral in the future may not be sufficient to support the
      borrowings we may require for our liquidity and continued growth.





***Negative
      Cash Flow.*** We
      ordinarily receive only 10% to 15% of the purchase price as a down payment
      on
      the sale of a Vacation Interval, but we must pay in full the costs of
      development, marketing, and sale of the interval. Maximum borrowings available
      under our credit facilities may not be sufficient to cover these costs, thereby
      straining our capital resources, liquidity, and capacity to grow.





***Interest
      Rate Mismatch.*** At
      December 31, 2006, our portfolio of customer loans had a weighted average fixed
      interest rate of 15.7%. At such date, our borrowings (which bear interest
      predominantly at variable rates) against the portfolio had a weighted average
      cost of funds of 7.9%. We have historically derived net interest income from
      our
      operating activities because the interest rates we charge our customers who
      finance the purchase of their Vacation Intervals exceed the interest rates
      we
      pay to our senior lenders. Because 38% of our existing indebtedness currently
      bears interest at variable rates and our customer notes receivable bear interest
      at fixed rates, increases in interest rates charged by our senior lenders would
      erode the spread in interest rates that we have historically enjoyed and could
      cause the interest expense on our borrowings to exceed our interest income
      on
      our portfolio of customer notes receivable. Therefore, any increase in interest
      rates, particularly if sustained, could have a material adverse effect on our
      results of operations, liquidity, and financial condition. To the extent
      interest rates decrease on loans available to our customers, we face an
      increased risk that customers will pre-pay their loans, which would reduce
      our
      income from operating activities.





To
      partially offset an increase in interest rates, we have engaged in two interest
      rate hedging transactions, or derivatives, related to our conduit loan with
      Silverleaf Finance II, Inc., a Delaware corporation, for a notional amount
      of
      $39.3 million at December 31, 2006, that expires between September 2011 and
      March 2014. Our VFN with SF-IV also acts as an interest rate hedge since it
      contains a provision for an interest rate cap, however there are no amounts
      outstanding under this line of credit at December 31, 2006.





In
      addition, the Series 2005-A Notes related to our off-balance sheet special
      purpose finance subsidiary, SF-III, with a balance of $52.3 million at December
      31, 2006, bear interest at a blended fixed rate of 5.4%, and our Series 2006-A
      Notes related to SF-V bear interest at a blended fixed rate of 6.7%.




22





***Maturity
      Mismatch.*** We
      typically provide financing to our customers over a seven-year to ten-year
      period. Our customer notes had an average maturity of 6.75 years at December
      31,
      2006. Our senior credit facilities have scheduled maturity dates between April
      2008 and July 2018. Additionally, should our revolving credit facilities be
      declared in default, the amount outstanding could be declared to be immediately
      due and payable. Accordingly, there could be a mismatch between our anticipated
      cash receipts and cash disbursements in 2007 and subsequent periods. Although
      we
      have historically been able to secure financing sufficient to fund our
      operations, we do not presently have agreements with our senior lenders to
      extend the term of our existing funding commitments beyond their scheduled
      maturity dates or to replace such commitments upon their expiration, with the
      exception of our debt with Textron Financial Corporation, noted directly below.
      If we are unable to refinance our existing loans, we could be required to sell
      our portfolio of customer notes receivable, probably at a substantial discount,
      or to seek other alternatives to enable us to continue in business. We cannot
      be
      certain that we will be able to obtain required financing in the future.





In
      the
      first quarter of 2007, we consolidated our debt with Textron Financial
      Corporation into one revolving loan. As a result of the amended and restated
      loan and security agreement, the funding period on the consolidated debt has
      been extended from June 2008 to January 2010, with revised maturity dates of
      January 31, 2013 for the receivables component and January 31, 2012 on both
      the
      acquisition and inventory components. In addition, the interest rates previously
      charged have been reduced. This transaction is described in more detail under
      the heading “Subsequent Events” in Note 17 to our Consolidated Financial
      Statements beginning on page F-1.





***Impact
      on Sales.*** Limitations on the availability of financing would inhibit sales of Vacation
      Intervals due to (i) the lack of funds to finance the initial negative cash
      flow
      that results from sales that we finance and (ii) reduced demand if we are unable
      to provide financing to purchasers of Vacation Intervals.





**We
      may not be able to obtain additional financing.**





Several
      unpredictable factors may cause our adjusted EBITDA to be insufficient to meet
      debt service requirements or satisfy financial covenants. We incurred net losses
      in one of the past five years. Should we record net losses in future periods,
      our cash flow and our ability to obtain additional financing could be materially
      and adversely impacted.





Many
      of
      the factors that will determine whether or not we generate sufficient EBITDA
      to
      meet current or future debt service requirements and satisfy financial covenants
      are inherently difficult to predict. These factors include:





·  the
      number of sales of Vacation Intervals;




·  the
      average purchase price per interval;




·  the
      number of customer defaults;




·  our
      cost
      of borrowing;




·  our
      sales
      and marketing costs and other operating expenses; and




·  the
      continued sale of notes receivable.





Our
      current and planned expenses and debt repayment levels are and will be to a
      large extent fixed in the short term, and are based in part on past expectations
      as to future revenues and cash flows. We may be unable to reduce spending in
      a
      timely manner to compensate for any past or future revenue or cash flow
      shortfall. It is possible that our revenue, cash flow or operating results
      may
      not meet the expectations of our business model, and may even result in our
      being unable to meet the debt repayment schedules or financial covenants
      contained in the various agreements which evidence our indebtedness.





Our
      leverage is significant and may impair our ability to obtain additional
      financing, reduce the amount of cash available for operations, and make us
      more
      vulnerable to financial downturns.





Our
      agreements with our various lenders may:





·
            require
                a substantial portion of our cash flow to be used to pay interest
                expense
                and principal;




·
            impair
                our ability to obtain on acceptable terms, if at all, additional
                financing
                that might be necessary for working capital,capital
                expenditures or other purposes; and




·
            limit
                our ability to further refinance or amend the terms of our existing
                debt
                obligations, if necessary or
                advisable.





We
      may
      not be able to manage our financial leverage as we intend, and we may not be
      able to achieve an appropriate balance between the rate of growth which we
      consider acceptable and future reductions in financial leverage. If we are
      not
      able to achieve growth in adjusted EBITDA, we may not be able to refinance
      our
      existing debt obligations and we may be precluded from incurring additional
      indebtedness due to cash flow coverage requirements under existing or future
      debt instruments.




23





**Our
      business is highly regulated.**





We
      are
      subject to substantial governmental regulation in the conduct of our business.
      See “Item 1. Business - Governmental Regulation, Environmental Matters, Utility
      Regulation, Other Regulation, and Item 3. Legal Proceedings.” If we are found to
      have violated any statute, rule, or regulation applicable to us, our assets,
      or
      our business, it could have a material adverse effect on our results of
      operations, liquidity, and financial condition.





**We
      are dependent on our key personnel.**





The
      loss
      of the services of the key members of management or our inability to hire when
      needed, retain, and integrate needed new or replacement management and employees
      could have a material adverse effect on our results of operations, liquidity,
      and financial condition in future periods.





**We
      will incur costs at our resorts for additional development and construction
      activities.**





We
      intend
      to continue to develop our Existing Resorts. We also intend to acquire or
      develop additional timeshare resorts; however, continued development of our
      resorts places substantial demands on our liquidity and capital resources,
      as
      well as on our personnel and administrative capabilities. Risks associated
      with
      our development and construction activities include:





·
            construction
                costs or delays at a property may exceed original estimates which
                could
                make the development uneconomical or
                unprofitable;




·
            sales
                of Vacation Intervals at a newly completed property may not be sufficient
                to make the property profitable; and




·
            financing
                may not be available on favorable terms for development of or the
                continued sales of Vacation Intervals at a property.





We
      cannot
      be certain that we will have the liquidity and capital resources to develop
      and
      expand our resorts as we presently intend.





Our
      development and construction activities, as well as our ownership and management
      of real estate, are subject to comprehensive federal, state, and local laws
      regulating such matters as environmental and health concerns, protection of
      endangered species, water supplies, zoning, land development, land use, building
      design and construction, marketing and sales, and other matters. Our failure
      to
      maintain the requisite licenses, permits, allocations, authorizations, and
      other
      entitlements pursuant to such laws could impact the development, completion,
      and
      sale of Vacation Intervals at our resorts. The enactment of “slow growth” or
“no-growth” initiatives or changes in labor or other laws in any area where our
      resorts are located could also delay, affect the cost or feasibility of, or
      preclude entirely the expansion planned at one or more of our resorts.





Most
      of
      our resorts are located in rustic areas; which in the past have often required
      us to provide public utility water and sanitation services in order to proceed
      with development. This development is subject to permission and regulation
      by
      governmental agencies, the denial or conditioning of which could limit or
      preclude development. Although we are not currently operating any such
      utilities, if future development requires that we do, we would be subject to
      risk of liability in connection with both the quality of fresh water provided
      and the treatment and discharge of waste-water.





In
      March
      2005, we sold the water distribution and waste water treatment utilities assets
      at eight of our resorts located in Texas, Illinois and Missouri. The purchasers
      of those assets entered into separate services agreements to provide
      uninterrupted water supply and waste water treatment services to the eight
      resorts and to maintain the utilities assets. The purchasers have also agreed
      to
      provide sufficient future capital additions at each resort as will be required
      to provide at least the same level of utility services to the resort as is
      currently provided. Failure by the purchasers of these utility assets to supply
      service to the resorts or to adequately maintain and expand when required the
      water distribution and waste water treatment utilities assets could impact
      our
      ability to provide the utilities necessary to operate the resorts or to expand
      them, either of which could have a material effect on our results of operation.





**We
      must incur costs to comply with laws governing accessibility of facilities
      to
      disabled persons.**





We
      are
      subject to a number of state and federal laws, including the Fair Housing Act
      and the Americans with Disabilities Act (the “ADA”),
      that impose requirements related to access and use by disabled persons of a
      variety of public accommodations and facilities. The ADA requirements did not
      become effective until after January 1, 1991. Although we believe our Existing
      Resorts are substantially
      in compliance with these laws, we will incur additional costs to fully comply
      with these laws. Additional federal, state, and local legislation may impose
      further restrictions or requirements on us with respect to access by disabled
      persons. The ultimate cost of compliance with such legislation is not currently
      known, however such costs are not expected to have a material effect on our
      results of operations, liquidity, and financial condition.




24





**We
      may be vulnerable to regional conditions.**





Our
      performance and the value of our properties are affected by regional factors,
      including local economic conditions (which may be adversely impacted by business
      layoffs or downsizing, industry slowdowns, changing demographics, and other
      factors) and the local regulatory climate. Our current geographic concentration
      could make us more susceptible to adverse events or conditions that affect
      these
      areas in particular. At December 31, 2006, 54% of our owners lived in Texas, 15%
      lived in Illinois, 8% lived in Massachusetts, and 4% lived in Missouri. Our
      remaining customer base lives primarily in other states within the United States
      of America.





**We
      may be liable for environmental claims.**




Under
      various federal, state, and local laws, ordinances, and regulations, as well
      as
      common law, the owner or operator of real property generally is liable for
      the
      costs of removal or remediation of certain hazardous or toxic substances located
      on, in, or emanating from, such property, as well as related costs of
      investigation and property damage. Such laws often impose liability without
      regard to whether the owner knew of, or was responsible for, the presence of
      the
      hazardous or toxic substances. The presence of such substances, or the failure
      to properly remediate such substances, may adversely affect the owner's ability
      to sell or lease a property or to borrow money using such real property as
      collateral. Other federal and state laws require the removal or encapsulation
      of
      asbestos-containing material when such material is in poor condition or in
      the
      event of construction, demolition, remodeling, or renovation. Other statutes
      may
      require the removal of underground storage tanks. Noncompliance with these
      and
      other environmental, health, or safety requirements may result in the need
      to
      cease or alter operations at a property. Further, the owner or operator of
      a
      site may be subject to common law claims by third parties based on damages
      and
      costs resulting from violations of environmental regulations or from
      contamination associated with the site. Phase I environmental reports (which
      typically involve inspection without soil sampling or ground water analysis)
      were prepared in 2001 or later by independent environmental consultants for
      all
      of the Existing Resorts. The reports did not reveal, nor are we aware of, any
      environmental liability that would have a material adverse effect on our results
      of operations, liquidity, or financial condition. We cannot be certain that
      the
      Phase I reports revealed all environmental liabilities or that no prior owner
      created any material environmental condition not known to us.





Certain
      environmental laws impose liability on a previous owner of property to the
      extent hazardous or toxic substances were present during the prior ownership
      period. A transfer of the property may not relieve an owner of such liability.
      Thus, we may have liability with respect to properties previously sold by us
      or
      by our predecessors.





We
      believe that we are in compliance in all material respects with all federal,
      state, and local ordinances and regulations regarding hazardous or toxic
      substances. We have not been notified by any governmental authority or third
      party of any non-compliance, liability, or other claim in connection with any
      of
      our present or former properties.





**Our
      sales could decline if our resorts do not qualify for participation in an
      exchange network.**




The
      attractiveness of Vacation Interval ownership is enhanced by the availability
      of
      exchange networks that allow Silverleaf Owners to exchange in a particular
      year
      the occupancy right in their Vacation Interval for an occupancy right in another
      participating network resort. According to ARDA, the ability to exchange
      Vacation Intervals was cited by many buyers as an important reason for
      purchasing a Vacation Interval. Several companies, including RCI, provide
      broad-based Vacation Interval exchange services, and as of December 31, 2006,
      the Existing Resorts are qualified for participation in the RCI exchange network
      (except for Orlando Breeze, which is qualified through Interval International,
      a
      competitor of RCI). We cannot be certain that we will be able to continue to
      qualify the Existing Resorts or any future resorts for participation in these
      networks or any other exchange network. If such exchange networks cease to
      function effectively, or if our resorts are not accepted as exchanges for other
      desirable resorts, our sales of Vacation Intervals could decline.





**Our
      sales would be affected by a secondary market for Vacation Intervals.**





We
      believe the market for resale of Vacation Intervals is very limited and that
      resale prices are substantially below the original purchase price of a Vacation
      Interval. This may make ownership of Vacation Intervals less attractive to
      prospective buyers. Owners of Vacation Intervals who wish to sell their Vacation
      Interval compete with our sales. Vacation Interval resale clearing houses and
      brokers, including Internet-based clearinghouses, do not currently have a
      material impact on our sales. However, if the secondary market for Vacation
      Intervals becomes more organized and liquid, whether through Internet-based
      clearinghouses and brokers or other means, the availability of resale intervals
      at lower prices could materially adversely affect our prices and our ability
      to
      sell new Vacation Intervals.




25





**Our
      sales are seasonal in nature.**





Our
      sales
      of Vacation Intervals have generally been lower in the months of November and
      December. Cash flow and earnings may be impacted by the timing of development,
      the completion of future resorts, and the potential impact of weather or other
      conditions in the regions where we operate. Our operating results could be
      negatively impacted by these factors.





**We
      are not insured for certain types of losses.**





We
      do not
      insure certain types of losses (such as losses arising from floods and acts
      of
      war) either because insurance is unavailable or unaffordable. Should an
      uninsured loss or a loss in excess of insured limits occur, we could be required
      to repair damage at our expense or lose our capital invested in a resort, as
      well as the anticipated future revenues from such resort. We would continue
      to
      be obligated on any mortgage indebtedness or other obligations related to the
      property. Our results of operations, liquidity, and financial condition could
      be
      adversely affected by such losses.





**We
      will continue to be leveraged.**




Our
      ability to finance customer notes receivable and develop our resorts is
      dependent upon borrowed funds, which would be collateralized by certain of
      our
      assets. In addition, our loan agreements contain financial covenants that must
      be complied with in order to continue to borrow additional funds. Failure to
      comply with such covenants could result in an event of default which, if not
      cured or waived, could have a material adverse effect on our results of
      operations, liquidity, and financial condition. Future loan agreements would
      likely contain similar restrictions.





The
      indentures pertaining to our 6% and 8% senior subordinated notes permit us
      to
      incur certain additional indebtedness, including indebtedness secured by our
      customer notes receivable. Accordingly, to the extent our customer notes
      receivable increase and we have sufficient credit facilities available, we
      may
      be able to borrow additional funds. The indentures pertaining to our 6% and
      8%
      senior subordinated notes also permit us to borrow additional funds in order
      to
      finance development of our resorts. Future construction loans will likely result
      in liens against the respective properties.





**Common
      Stock could be impacted by our indebtedness.**





The
      level
      of our indebtedness could negatively impact holders of our Common Stock,
      because:





·
            a
                substantial portion of our cash flow from operations must be dedicated
                to
                the payment of principal and interest on our indebtedness;




·
            our
                ability to obtain additional debt financing in the future for working
                capital, capital expenditures or acquisitions may be limited;




·
            our
                level of indebtedness could limit our flexibility in reacting to
                changes
                in the industry and economic conditions generally;




·
            negative
                covenants in our loan agreements may limit our management’s ability to
                operate our business in the best interests of our
                shareholders;




·
            some
                of our loans are at variable rates of interest, and a substantial
                increase
                in interest rates could adversely affect our ability to meet debt
                service
                obligations; and




·
            increased
                interest expense will reduce earnings, if any.





**We
      could lose the right to manage the Clubs.**





Each
      Existing Resort has a Club that operates through a centralized organization
      called Silverleaf Club, to manage most of our Existing Resorts on a collective
      basis, except for Orlando Breeze, which has its own Club. The consolidation
      of
      operations at most of our Existing Resorts through Silverleaf Club
      permits:





·
            a
                centralized reservation system for all
                resorts;




·
            substantial
                cost savings by purchasing goods and services for all resorts on
                a group
                basis, which generally results in a lower cost of goods and services
                than
                if such goods and services were purchased by each resort on an individual
                basis;




·
            centralized
                management for the entire resort system;




·
            centralized
                legal, accounting, and administrative services for the entire resort
                system; and




·
            uniform
                implementation of various rules and regulations governing all resorts.





26


We
      currently have the right to unilaterally appoint the board of directors or
      governors of the Clubs until the respective control periods have expired
      (typically triggered by the cessation of sales of the planned development),
      unless otherwise provided by the bylaws of the association or under applicable
      law. Thereafter, the bylaws of certain of the Clubs require that a majority
      of
      the members of the board of directors or governors of those Clubs be owners
      of
      Vacation Intervals of those resorts. The loss of control of the board of
      directors or governors of the Clubs could result in our being unable to
      unilaterally cause the renewal of the Management Agreement with the Silverleaf
      Club when it expires in 2010. This could result in a loss of revenue and have
      other materially adverse effects on our business, financial condition, or
      results of operations.





**We
      could issue Preferred Stock that would have rights and preferences senior to
      Common Stock.**





Our
      Articles of Incorporation authorize the Board of Directors to issue up to
      10,000,000 shares of Preferred Stock in one or more series and to establish
      the
      preferences and rights (including the right to vote and the right to convert
      into Common Stock) of any series of Preferred Stock issued. Such preferences
      and
      rights would likely grant to the holders of the Preferred Stock certain
      preferences in right of payment upon a dissolution of the Company and the
      liquidation of our assets that would not be available to the holders of our
      Common Stock. To the extent that our credit facilities would permit, the Board
      could also establish a dividend payable to the holders of the Preferred Stock
      that would not be available to the holders of the Common Stock.





**Our
      cash flow may not be adequate upon an acceleration of deferred
      taxes.**





While
      we
      report sales of Vacation Intervals as income for financial reporting purposes
      at
      the time of the sale after receiving a 10% to 15% down payment, for federal
      income tax purposes, we report substantially all Vacation Interval sales on
      the
      installment method. Under the installment method, we recognize income for
      regular federal income tax purposes on the sale of Vacation Intervals when
      cash
      is received in the form of a down payment and as payments on customer loans
      are
      received. Our liability for deferred taxes (i.e., taxes owed to taxing
      authorities in the future in consequence of income previously reported in the
      financial statements) was $88.7 million at December 31, 2006, primarily
      attributable to this method of reporting Vacation Interval sales, before
      utilization of any available deferred tax benefits (up to $71.0 million at
      December 31, 2006), including net operating loss carryforwards, limitations
      on
      the use of which are discussed below. These amounts do not include accrued
      interest on the deferred taxes, which will be payable if the deferred taxes
      become payable, the amount of which is not now reasonably ascertainable. If
      we
      should sell the installment notes or be required to factor them or if the notes
      were foreclosed on by one of our senior lenders or otherwise disposed of, the
      deferred gain would be reportable for regular federal tax purposes and the
      deferred taxes, including interest on the taxes for the period the taxes were
      deferred, as computed under Section 453 of the Internal Revenue Code of 1986,
      as
      amended (the “Code”), would become due. We cannot be certain that we would have
      sufficient cash resources to pay those taxes and interest nor can we be certain
      how the payment of such taxes may affect our operational liquidity needs.
      Furthermore, if our sales of Vacation Intervals should decrease in the future,
      our diminished operations may not generate either sufficient tax losses to
      offset taxable income or funds to pay the deferred tax liability from prior
      periods.




**We
      will be subject to Alternative Minimum Taxes.**





For
      purposes of computing the 20% alternative minimum tax (“AMT”) imposed under
      Section 55 of the Code on our alternative minimum taxable income (“AMTI”), the
      installment sale method is generally not allowed. The Code requires an
      adjustment to our AMTI for a portion of our adjusted current earnings (“ACE”).
      Our ACE must be computed without application of the installment sale method.
      Accordingly, we anticipate that we will pay significant AMT in future years.
      Section 53 of the Code does provide that we will be allowed a credit (“minimum
      tax credit”) against our regular federal income tax liability for all or a
      portion of any AMT previously paid.





Due
      to
      losses incurred in 2000 and 2001, we received refunds of AMT totaling $8.3
      million during 2001 and $1.6 million during 2002 as a result of the carryback
      of
      our 2000 and 2001 AMT losses to 1999, 1998, and 1997. For 2006, we estimate
      our
      AMT liability is approximately $7.2 million, with the result that we will have
      total AMT credit carryforwards of approximately $8.5 million as of December
      31,
      2006.





Due
      to
      the exchange offer described under the next heading, an ownership change, within
      the meaning of Section 382(g) of the Code occurred. Under Section 383, the
      amount of the excess credits which exist as of the date of an ownership change
      can be used to offset tax liability for post-change years only to the extent
      of
      the Section 383 Credit Limitation, which amount is defined as the tax liability
      which is attributable to so much of the taxable income as does not exceed the
      Section 382 limitation for such post-change year to the extent available after
      the application of various adjustments. As a result of the above-described
      refunds of previously paid AMT, there is no minimum tax credit that is subject
      to Section 383 of the Code as a result of our ownership change. If it is
      subsequently determined that we have an AMT liability for prior years, and
      thus
      a minimum tax credit as of the time of the exchange offer, or if additional
      “ownership changes” within the meaning of Section 382(g) of the Code occur in
      the future, we cannot be certain that such ownership changes will not result
      in
      a limitation on the use of any such minimum tax credit. See the discussion
      under
      the next heading regarding possible future ownership changes.





27


**Our
      use of net operating loss carryforwards could be limited by an ownership
      change.**




We
      had
      net operating loss (“NOL”) carryforwards of approximately $162.4 million at
      December 31, 2006, for regular federal income tax purposes, related primarily
      to
      the immediate deduction of expenses and the simultaneous deferral of installment
      sale gains. In addition to the general limitations on the carryback and
      carryforward of NOLs under Section 172 of the Code, Section 382 of the Code
      imposes additional limitations on the utilization of NOLs by a corporation
      following various types of ownership changes which result in more than a 50
      percentage point change in ownership of a corporation within a three year
      period.





Our
      completion in 2002 of our exchange offer with certain holders of our senior
      subordinated notes resulted in an ownership change within Section 382(g) as
      of
      May 2, 2002 (the “change date”). As a result, the future utilization of
      approximately $36.2 million of our NOL as of December 31, 2006, is subject
      to
      limitation for regular federal income tax purposes. There is an annual
      limitation of approximately $768,000, which was the value of our stock
      immediately before the ownership change, multiplied by the applicable long
      term
      tax exempt rate. However, that annual limitation may be increased for any
      recognized built in gain, which existed as of the change date to the extent
      allowed in Section 382 of the Code. We believe that the built in gain associated
      with the installment sale gains as of the change date increases the annual
      limitation and will allow the utilization of most of the $36.2 million portion
      of our NOL as needed. Nevertheless, we cannot be certain that the limitations
      of
      Section 382 will not limit or deny our future utilization of the $36.2 million
      portion of our NOL. Such limitation or denial could require us to pay
      substantial additional federal and state taxes and interest.





Moreover,
      we cannot be certain that future ownership changes will not limit or deny our
      future utilization of all of our NOL. The more than 50 percentage point test
      for
      a change in ownership is based on a three year lookback and will be determined
      for the three years commencing May 26, 2006, by including the 8,000,000 shares
      sold by two of our principal shareholders on that date, which resulted in an
      approximately 21.3 percentage point change in ownership based on the shares
      outstanding on that date. Therefore, that change in ownership, when combined
      with other changes before and after that date, could result in another more
      than
      50 percentage point change in ownership in the future.





If
      we
      cannot utilize our NOL, we will be required to pay substantial additional
      federal and state taxes and interest. Such tax and interest liabilities may
      adversely affect our liquidity.





**We
      could be liable for back payroll taxes if our independent contractors are
      reclassified as employees.**





Although
      we treat all on-site sales personnel as employees for payroll tax purposes,
      we
      do have independent contractor agreements with certain sales and marketing
      persons or entities. We have not treated these independent contractors as
      employees and do not withhold payroll taxes from the amounts paid to such
      persons or entities. In the event the Internal Revenue Service or any state
      or
      local taxing authority were to successfully classify such persons or entities
      as
      employees, rather than as independent contractors, we could be liable for back
      payroll taxes. This could have a material adverse effect on our results of
      operations, liquidity and financial condition.





**We
      could be negatively impacted by National and state Do Not Call
      Lists.**





We
      rely
      heavily on telemarketing activities to arrange tours of our resorts to potential
      customers. On July 3, 2003, the Federal Communications Commission (“FCC”)
      released new rules and regulations promulgated under the Telephone Consumer
      Protection Act of 1991, which could have a negative impact on our telemarketing
      activities. The FCC has implemented, in conjunction with the Federal Trade
      Commission (“FTC”), a National Do Not Call Registry, which applies to both
      interstate and intrastate commercial telemarketing calls. The
      FTC
      has reported that approximately 107 million telephone numbers had been
      registered on the National Do Not Call Registry by the end of 2005. This
      could sharply limit the number of contacts we will be able to make through
      our
      telemarketing activities. We will continue to telemarket to individuals who
      do
      not place their telephone numbers on a do-not-call list and those with whom
      we
      have an established business relationship. Our use of autodialers to call
      potential customers in our database could also be restricted by new call
      abandonment standards specified in the FCC rules and regulations. We cannot
      currently determine the impact that these new regulations could have on our
      sales; however, the large number of telephone numbers registered on the National
      Do Not Call Registry and the restrictions on our use of autodialers could
      negatively affect our sales and marketing efforts and require us to use less
      effective, more expensive alternative marketing methods. Th e
      new
      rules became effective on October 1, 2003 and we have experienced a decline
      in
      the number of telemarketing calls we are able to complete as a result of the
      changes in the rules relating to the use of automatic dialers. All companies
      involved in telemarketing expect some negative impact to their businesses as
      a
      result of the do-not-call rules and other federal and state legislation, which
      seeks to protect the privacy of consumers from various types of marketing
      solicitations. Because of our historical dependence on telemarketing, we believe
      that these changes in the law will continue to have a material impact on our
      operations and will require us to modify our historical marketing practices
      in
      order to both remain compliant with the law and to achieve the levels of resort
      tours by consumers which are necessary for our profitable operation. We will
      continue to assess both the rules' impact on operations and alternative methods
      of marketing, such as direct mail, that are not impacted by the new rules.
      In
      addition to the National Do Not Call List, various states have implemented
      Do
      Not Call legislation that also may affect our business.





28


**The
      substantially increased costs of our compliance with the requirements of the
      Sarbanes-Oxley Act, including the requirements of Section 404, may
      adversely affect our available cash, our management team’s attention to our core
      business, and the price of our stock.**





We
      are
      not yet required to fully comply with the internal control reporting provisions
      of §404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations
      promulgated thereunder by the SEC to implement §404. Unless extended further by
      the SEC, companies of our size (i.e., non-accelerated filers) are required
      to be
      in full compliance with §404 for fiscal years ending on or after July 15,
      2007. If we become subject to §404, we will be required to furnish a report by
      our management to include in our Annual Report on Form 10-K regarding the
      effectiveness of our internal control over financial reporting. The report
      would
      include, among other things, an assessment of the effectiveness of our internal
      control over financial reporting as of the end of our fiscal year, including
      a
      statement as to whether or not our internal control over financial reporting
      is
      effective. This assessment must include disclosure of any material weaknesses
      in
      our internal control over financial reporting identified by management.
      Section 404 would also require our auditors to express an opinion on the
      effectiveness of our internal control. In an effort to be prepared to comply
      with the requirements of §404, we have taken steps over the last several years
      to increase the effectiveness of our internal control over financial reporting.
      These internal control enhancements have resulted in substantially increased
      costs to us. Our management also regularly evaluates the effectiveness and
      design and operation of our disclosure controls and procedures and our internal
      control over financial reporting. While we currently believe our disclosure
      controls and procedures and our internal controls over financial reporting
      which
      are in place are effective and properly documented, we may find it necessary
      to
      continue to incur substantially increased costs in future periods to further
      enhance our internal controls over financial reporting. There can be no
      assurance that our continuing assessment of the effectiveness of our internal
      control over financial reporting will not result in increased costs of
      compliance which may adversely affect our available cash, our management team’s
      attention to our core business, and our stock price.





**The
      market trading price of our Common Stock has been and is likely to continue
      to
      be volatile.**





The
      market trading price of our common stock has been and is likely to continue
      to
      be subject to significant fluctuations. For example, the closing market trading
      price for our common stock has fluctuated over the past two years from a low
      of
      $1.20 to a high of $5.00. Because of our stock’s history of trading volatility,
      we believe that significant market fluctuations are likely to continue in future
      periods.




**The
      trading market for our Common Stock may be limited.**





Approximately
      45% of our shares are held by non-affiliates and there has historically been
      a
      low and inconsistent trading volume for our shares. For example, the average
      daily trading volume for our shares for the two-month period ended February
      28,
      2007 was approximately 79,000 shares. There can be no assurance that an active
      and steady trading market, which is not subject to extreme fluctuations, will
      develop for our shares.





**Sales
      of Common Stock by existing shareholders, including officers or directors,
      may
      adversely affect the market price of our Common Stock.**





Approximately
      55% of our common stock is held by affiliates, including our officers and
      directors. Volume sales of stock by these affiliates in the trading market
      coupled with the historically low daily trading volume for our common stock
      may
      materially and adversely affect the market price of our common stock.





**We
      may fail to meet the continued listing requirements of The NASDAQ Capital
      Market.**





Effective
      as of February 28, 2007, we began trading on The NASDAQ Capital Market and
      ceased trading on AMEX. However, due to the historic volatility of the market
      trading price of our common stock, there can be no assurance that we will
      continue to meet the requirements for continued listing on NASDAQ. Our failure
      to comply with NASDAQ listing standards could result in the delisting of our
      common stock by NASDAQ, thereby limiting the ability of our shareholders to
      sell
      our common stock. ****





29





**Certain
      of our existing shareholders have the ability to exert a significant amount
      of
      control over the Company.**





As
      of
      December 31, 2006, Robert E. Mead, our Chairman of the Board and Chief Executive
      Officer, beneficially owned approximately 24.7% of our outstanding common stock
      and one related entity, Grace Brothers, Ltd. (“Grace”), beneficially owned 16.2%
      of our common stock.  As a result, these individuals and entities are able
      to exert significant influence over the Company and its activities, including
      the nomination, election and removal of our board of directors, the adoption
      of
      amendments to our charter documents, and the outcome of any corporate
      transaction or other matter submitted to our shareholders for approval,
      including mergers, consolidations, and the sale of all or substantially all
      of
      our assets.





Mr.
      Mead's interests and Grace's interest may conflict with the interests of other
      holders of our common stock and they may take actions affecting us with which
      other shareholders may disagree. For example, if they determined to act in
      concert, Grace and Mr. Mead may decide not to enter into a transaction in which
      our shareholders would receive consideration for their shares that is much
      higher than the cost of their investment in our common stock, or than the then
      current market price of our common stock.





**Available
      Information**




We
      file
      reports with the Securities and Exchange Commission (“SEC”), including our
      annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant
      to the requirements of the Securities Exchange Act of 1934. The general public
      may read and copy any materials that we file with the SEC at the SEC’s Public
      Reference Room located at 100 F Street N.E., Washington, DC 20549. The public
      may also obtain information on the operation of the Public Reference Room by
      calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
      contains reports, proxy and information statements, and other information
      regarding issuers that file electronically with the SEC. This site is located
      at www.sec.gov .




Our
      Internet address is www.silverleafresorts.com .
      On our
      Internet website, we provide a link to the SEC’s website where our annual
      reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
      8-K, and amendments to those reports filed or furnished to the SEC pursuant
      to
      the requirements of the Securities Exchange Act of 1934 can be viewed. Upon
      request, we will make available free of charge copies of the aforementioned
      reports, as well as copies of the charters of the three independent committees
      of our board of directors and our Code of Business Conduct and Ethics. This
      information can be obtained by written request to us at: Silverleaf Resorts,
      Inc. Attention: Sandra G. Cearley, Corporate Secretary, 1221 River Bend Drive,
      Suite 120, Dallas, Texas 75247. The information contained on our website, or
      on
      other websites linked to our website, is not part of this report.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2. PROPERTIES**





Our
      principal executive office, located in Dallas, Texas, is approximately 66,000
      square feet of leased space. We also maintain two leased telemarketing centers
      in the Dallas area. Our sales are conducted primarily through sales centers
      located at our various resorts and a leased off-site sales center in Irving,
      Texas, which opened in March 2006.





At
      December 31, 2006, we owned a total of 13 timeshare resorts. Each of these
      resorts was encumbered by various liens and security agreements at December
      31,
      2006 due to inventory from each resort being pledged as collateral under our
      inventory credit facilities with our senior lenders. See Note 8 - Debt, in
      the
      Notes to our Consolidated Financial Statements for a further description of
      these credit facilities. Principal developmental activity which occurred at
      our
      Existing Resorts during 2006 and future plans are summarized below.





***Continued
      Development of The Villages Resort.*** The
      Villages Resort, located approximately 100 miles east of Dallas, Texas, has
      346
      existing units. We intend to develop approximately 84 additional units (4,368
      Vacation Intervals) at this resort in the future. During 2006 we did not add
      any
      new units at this resort.





***Continued
      Development of Piney Shores Resort.*** Piney
      Shores Resort, located near Conroe, Texas, north of Houston, has 190 existing
      units. We intend to develop approximately 102 additional units (5,304 Vacation
      Intervals) at this resort. During 2006, we added 12 new units at this
      resort.





***Continued
      Development of Timber Creek Resort.*** Timber
      Creek Resort, located in Desoto, Missouri, has 72 existing units. We intend
      to
      develop approximately 24 additional units (1,248 Vacation Intervals) at this
      resort. During 2006, we did not add any new units at this resort.





30


***Continued
      Development*** ** ***of
      Fox River Resort.*** Fox
      River
      Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 228
      existing units. We intend to develop approximately 222 additional units (11,544
      Vacation Intervals) at this resort. During 2006, we added 6 new units at this
      resort.





***Continued
      Development*** ** ***of
      Apple Mountain Resort.*** Apple
      Mountain Resort, located approximately 125 miles north of Atlanta, Georgia,
      has
      72 existing units. We intend to develop approximately 144 additional units
      (7,488 Vacation Intervals) at this resort. During 2006, we did not add any
      new
      units at this resort.





***Continued
      Development*** ** ***of
      Ozark Mountain Resort.*** Ozark
      Mountain Resort, located approximately 15 miles from Branson, Missouri, has
      148
      existing units. We intend to develop approximately 12 additional units (624
      Vacation Intervals) at this resort. During 2006, we added 12 new units at this
      resort.





***Continued
      Development*** ** ***of
      Holiday Hills Resort.*** Holiday
      Hills Resort, located two miles east of Branson, Missouri, in Taney County,
      has
      446 existing units. We intend to develop approximately 456 additional units
      (23,712 Vacation Intervals) at this resort. During 2006, we added 24 units
      at
      this resort. In addition, in December 2005 we acquired approximately 81 acres
      of
      land near this resort that we intend to newly develop in the
      future.





***Continued
      Development*** ** ***of
      Hill Country Resort.*** Hill
      Country Resort, located near Canyon Lake in the hill country of central Texas
      between Austin and San Antonio, has 302 existing units. We intend to develop
      approximately 210 additional units (10,920 Vacation Intervals) at this resort.
      During 2006, we added 12 new units at this resort.





***Continued*** ** ***Development
      of Oak N' Spruce Resort.*** Oak
      N’
Spruce Resort, located 134 miles west of Boston, Massachusetts, has 308 existing
      units. We intend to develop approximately 42 additional units (2,184 Vacation
      Intervals) at this resort in the future. During 2006, we added 24 new units
      at
      this resort.





***Continued
      Development*** ** ***of
      Silverleaf’s Seaside Resort.*** Silverleaf’s
      Seaside Resort, located in Galveston, Texas, has 120 existing units. We intend
      to develop approximately 288 additional units (14,976 Vacation Intervals) at
      this resort. During 2006, we added 24 new units at this resort.





***Continued
      Development of Orlando Breeze Resort.*** Orlando
      Breeze Resort, located in Davenport, Florida, just outside Orlando, Florida,
      has
      48 existing units. We intend to develop approximately 24 additional units (1,248
      Vacation Intervals) at this resort. During 2006, we did not add any new units
      at
      this resort. On January 4, 2006, we purchased an additional 30 acres contiguous
      to the Orlando Breeze Resort. We have not yet finalized plans for development
      of
      this property.





As
      of
      December 31, 2006, we had construction commitments of approximately $21.8
      million.





***Pinnacle
      Lodge.*** In
      April
      2006 we purchased Pinnacle Lodge, a 64 room hotel property located near the
      Winter Park recreational area in Colorado which provides our owners with another
      destination vacation alternative and gives Silverleaf an entry point into this
      increasingly popular destination area.





In
      December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia,
      Pennsylvania, for approximately $1.9 million. The property was intended to
      be
      developed as a Getaway Resort (i.e., Beech Mountain Resort). We received
      regulatory approval to develop 408 **** units
      (21,216 Vacation Intervals), but we did not schedule dates for construction,
      completion of initial units, or commencement of marketing and sales efforts.
      In
      2003, we determined that we would not develop this property as initially
      planned. In 2005, we sold this property for an aggregate sales price of $6.1
      million after related expenses, which resulted in a gain of $3.6
      million.





We
      also
      own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts
      that we are in the initial stages of developing. We have not yet finalized
      our
      future development plans for this site; however, we believe that its proximity
      to major population centers in the Northeastern United States and the year-round
      outdoor recreational attractions in the Berkshire region make this property
      suitable for future development as a timeshare resort.





**Future
      Growth Strategy**





Our
      future growth strategy is to conservatively increase annual revenues through
      a
      combination of:





·
            continuing
                to develop new or existing resorts;




·
            maintaining
                marketing, sales, and development activities at those resorts in
                accordance with our current business
                model;




31


·
            concentrating
                on marketing to existing members, including sales of upgraded Vacation
                Intervals, additional week sales, and existing owner referral
                programs;




·
            adding
                other assets and amenities to attract our customers by enhancing
                vacation
                experiences;




·
            opening
                new off-site sales centers in major metropolitan areas;
                and




·
            emphasizing
                our secondary products, such as biennial (alternate year) intervals,
                to
                broaden our potential market with a wider price range of products
                for
                first time buyers.





**Competitive
      Advantages**





We
      believe our business affords us the following competitive
      advantages:





***Convenient
      Getaway Locations.*** Our
      Getaway Resorts are located within a two-hour drive of a majority of our target
      customers' residences, which accommodates what we believe to be the growing
      demand for shorter, more frequent, close-to-home vacations. This proximity
      of
      our customer base to our resorts facilitates use of our Bonus Time program,
      allowing Silverleaf Owners to use vacant units, subject to availability and
      certain limitations. We believe we are the only timeshare operator that offers
      customers these expanded use benefits. Silverleaf Owners can also conveniently
      drive to and enjoy non-lodging resort amenities at our resorts year-round on
      a
      day use “country-club” type basis.





***Substantial
      Internal Growth Capacity.*** At
      December 31, 2006, we had an inventory of 28,801 Vacation Intervals and a master
      plan to construct new units which will result in up to 83,616 additional
      Vacation Intervals at our Existing Resorts. Our master plan for construction
      of
      new units is contingent upon future sales at our Existing Resorts and the
      availability of financing, granting of governmental permits, and future
      land-planning and site-layout considerations.





***In-House
      Operations.*** We have
      in-house marketing, sales, financing, development, and property management
      capabilities. While we utilize outside contractors to supplement internal
      resources, our internal capabilities provide greater control over all phases
      of
      our operations, help maintain operating standards, and reduce overall
      costs.





***Lower
      Construction and Operating Costs.*** We have
      developed and generally employ standard architectural designs and operating
      procedures, which we believe significantly reduce construction and operating
      expenses. Standardization and integration also allow us to rapidly develop
      new
      inventory in response to demand. Weather permitting, new units at Existing
      Resorts can normally be constructed on an “as needed” basis within 180 to 270
      days.





***Centralized
      Property Management Supervision.*** We
      presently supervise the operation of all of our Existing Resorts (except for
      Orlando Breeze) on an integrated, centralized, and collective basis through
      our
      Management Agreement with Silverleaf Club with operating and maintenance costs
      paid from Silverleaf Owners' monthly dues. While our Orlando Breeze resort
      in
      Florida has its own separate Club (Orlando Breeze Resort Club) we also provide
      centralized supervision of its operations under the terms of a written
      agreement, to ensure the quality of services provided to Orlando Breeze
      timeshare owners. We believe that consolidation of resort operations benefits
      Silverleaf Owners by providing them with a uniform level of service,
      accommodations, and amenities on a standardized, cost-effective basis.
      Integration also facilitates our internal exchange program and the Bonus Time
      program.





***Experienced
      Management.*** Our
      senior management has extensive experience in the acquisition, development,
      marketing, sales, and operation of timeshare resorts. The senior officers have
      an average of seventeen years of experience in the timeshare
      industry.





32




**Resorts
      Summary**





The
      following tables set forth certain information regarding each of the Existing
      Resorts at December 31, 2006, unless otherwise indicated.





***Existing
      Resorts***


**Units
                      at Resorts**
                
                
                **Vacation
                        Intervals**
                      **At
                        Resorts**
                
                
                
                
                **Vacation
                      Intervals Sold****Resort/Location**
                
                **Primary**
                        **Market**
                        **Served**
                
                **Inventory**
                        **At**
                        **12/31/06**
                
                **Planned**
                      **Expansion(b)**
                
                
                **Inventory**
                        **At**
                        **12/31/06**
                
                **Planned**
                    **Expansion**
                
                
                **Date**
                    **Sales**
                    **Commenced**
                
                **Through**
                      **12/31/06
                        (c)**
                
                **In**
                    **2006**
                    **Only
                      (a)**
                
                **Percentage**
                      **Through**
                      **12/31/06**
                
                
                **Average**
                    **Sales**
                    **Price
                      in**
                    **2006(a)**
                
                ****
                  **Amenities/**
                    **Activities(d)****Getaway
                    Resorts**Holly
                    Lake
                
                Dallas-
                
                130
                
                —
                
                
                2,132
                
                —
                
                
                1982
                
                4,368
                
                311
                
                67.2
                %
                $
                9,008
                
                B,F,G,H,M,S,THawkins,
                    TX
                
                Ft.
                    Worth, TXThe
                    Villages
                
                Dallas-
                
                346
                
                84
                
                
                5,606
                
                4,368
                (g)
                
                1980
                
                11,978
                
                1,399
                
                68.1
                %
                
                10,502
                
                B,F,H,M,S,TFlint,
                    TX
                
                Ft.
                    Worth, TXLake
                    O' The Woods
                
                Dallas-
                
                64
                
                —
                
                
                847
                
                —
                
                
                1987
                
                2,353
                
                261
                
                73.5
                %
                
                7,801
                
                F,M,S,T(e)Flint,
                    TX
                
                Ft.
                    Worth, TXPiney
                    Shores
                
                Houston,
                    TX
                
                190
                
                102
                (g)
                
                3,432
                
                5,304
                (g)
                
                1988
                
                6,256
                
                659
                
                64.6
                %
                
                12,127
                
                B,F,H,M,S,TConroe,
                    TXTimber
                    Creek
                
                St.
                    Louis,
                
                72
                
                24
                (g)
                
                1,768
                
                1,248
                (g)
                
                1997
                
                1,976
                
                42
                
                52.8
                %
                
                11,744
                
                B,F,G,M,S,TDeSoto,
                    MO
                
                MOFox
                    River
                
                Chicago,
                    IL
                
                228
                
                222
                (g)
                
                3,105
                
                11,544
                (g)
                
                1997
                
                8,751
                
                865
                
                73.8
                %
                
                12,063
                
                B,F,G,M,S,TSheridan,
                    ILApple
                      Mountain
                
                Atlanta,
                    GA
                
                72
                
                144
                (g)
                
                2,083
                
                7,488
                (g)
                
                1999
                
                1,661
                
                257
                
                44.4
                %
                
                10,692
                
                G,H,M,S,TClarkesville,
                    GA**Destination
                    Resorts**
                
                **Locations**Ozark
                    Mountain
                
                Branson,
                
                148
                
                12
                (g)
                
                937
                
                624
                (g)
                
                1982
                
                6,535
                
                952
                
                87.5
                %
                
                10,962
                
                B,F,M,S,TKimberling
                    City, MO
                
                MOHoliday
                    Hills
                
                Branson,
                
                446
                
                456
                (g)
                
                2,734
                
                23,712
                (g)
                
                1984
                
                20,322
                
                1,343
                
                88.1
                %
                
                14,230
                
                G,S,T(e)Branson,
                    MO
                
                MOHill
                    Country
                
                Austin-San
                
                302
                (f)
                210
                (g)
                
                1,493
                
                10,920
                (g)
                
                1984
                
                13,839
                
                1,912
                
                90.3
                %
                
                11,912
                
                M,S,T(e)Canyon
                    Lake, TX
                
                Antonio,
                    TXOak
                    N' Spruce
                
                Boston,
                    MA-
                
                308
                
                42
                (g)
                
                2,173
                
                2,184
                (g)
                
                1998
                
                13,843
                
                1,309
                
                86.4
                %
                
                11,506
                
                F,M,S,TSouth
                    Lee, MA
                
                New
                    York, NYSilverleaf's
                    Seaside
                
                Galveston,
                
                120
                
                288
                (g)
                
                1,012
                
                14,976
                (g)
                
                2000
                
                5,228
                
                530
                
                83.8
                %
                
                11,631
                
                S,TGalveston,
                    TX
                
                TXOrlando
                    Breeze
                
                Orlando,
                
                48
                
                24
                (g)
                
                1,479
                
                1,248
                (g)
                
                2005
                
                1,017
                
                15
                
                40.8
                %
                
                24,697
                
                SDavenport,
                    FL
                
                FLTotal
                
                
                
                2,474
                
                1,608
                
                
                28,801
                
                83,616
                
                
                
                
                98,127
                
                9,855
                
                77.3
                %
                $
                11,681





33


(a)
            These
                totals do not reflect sales of upgraded Vacation Intervals to existing
                Silverleaf Owners. In this context, a sale of an “upgraded Vacation
                Interval” refers to an exchange of a lower priced interval for a higher
                priced interval in which the Silverleaf Owner is given credit for
                all
                principal payments previously made toward the purchase of the lower
                priced
                interval. For the year ended December 31, 2006, upgrade sales at
                the
                Existing Resorts were as follows:





**Resort**
            
            **Upgraded**
              **Vacation**
              **Intervals**
              **Sold**
            
            **Average
                Sales Price**
              **For
                the Year**
              **Ended
                12/31/06**
              **—
                Net of**
              **Exchanged
                Interval**Holly
                Lake
            
            
            58
            
            $
            5,773The
                Villages
            
            
            713
            
            
            7,153Lake
                O' The Woods
            
            
            49
            
            
            6,105Piney
                Shores
            
            
            645
            
            
            7,766Hill
                Country
            
            
            1,547
            
            
            7,705Timber
                Creek
            
            
            7
            
            
            6,415Fox
                River
            
            
            301
            
            
            8,476Ozark
                Mountain
            
            
            485
            
            
            7,946Holiday
                Hills
            
            
            2,293
            
            
            8,799Oak
                N’ Spruce
            
            
            793
            
            
            8,201Apple
                Mountain
            
            
            56
            
            
            5,423Silverleaf's
                Seaside
            
            
            1,196
            
            
            8,559Orlando
                Breeze
            
            
            634
            
            
            9,5188,777





The
      average sales price for the 8,777 upgraded Vacation Intervals sold was $8,245
      for the year ended December 31, 2006.





(b)
            Represents
                units included in our master plan. This plan is subject to change
                based
                upon various factors, including consumer demand, the availability
                of
                financing, grant of governmental land-use permits, and future
                land-planning and site layout considerations. The following chart
                reflects
                the status of certain planned units at December 31,
                2006:





**Land-Use**
              **Process**
              **Not
                Started**
            
            **Land-Use**
              **Process**
              **Pending**
            
            **Land-Use**
              **Process**
              **Complete**
            
            **Currently
                in**
              **Construction**
            
            **Total**The
                Villages
            
            
            —
            
            
            —
            
            
            68
            
            
            16
            
            
            84Piney
                Shores
            
            
            —
            
            
            —
            
            
            102
            
            
            —
            
            
            102Timber
                Creek
            
            
            —
            
            
            —
            
            
            24
            
            
            —
            
            
            24Fox
                River
            
            
            —
            
            
            —
            
            
            210
            
            
            12
            
            
            222Apple
                Mountain
            
            
            —
            
            
            90
            
            
            42
            
            
            12
            
            
            144Ozark
                Mountain
            
            
            —
            
            
            —
            
            
            12
            
            
            —
            
            
            12Holiday
                Hills
            
            
            —
            
            
            —
            
            
            444
            
            
            12
            
            
            456Hill
                Country
            
            
            —
            
            
            —
            
            
            182
            
            
            28
            
            
            210Oak
                N' Spruce
            
            
            —
            
            
            —
            
            
            30
            
            
            12
            
            
            42Silverleaf's
                Seaside
            
            
            —
            
            
            112
            
            
            164
            
            
            12
            
            
            288Orlando
                Breeze
            
            
            —
            
            
            —
            
            
            24
            
            
            —
            
            
            24—
            
            
            —
            
            
            202
            
            
            1,302
            
            
            104
            
            
            1,608





“Land-Use
      Process Pending” means that we have commenced the process which we believe is
      required under current law in order to obtain the necessary land-use
      authorizations from the applicable local governmental authority with
      jurisdiction, including submitting for approval any architectural drawings,
      preliminary plats, or other attendant items as may be required.





“Land-Use
      Process Complete” means either that (i) we believe that we have obtained all
      necessary land-use authorizations under current law from the applicable local
      governmental authority with jurisdiction, including the approval and filing
      of
      any required preliminary or final plat and the issuance of building permit(s),
      in each case to the extent applicable, or (ii) upon payment of any required
      filing or other fees, we believe that we will under current law obtain such
      necessary authorizations without further process.





(c)
            These
                totals are net of intervals received from upgrading customers and
                from
                intervals received from
                cancellations.





(d)
            Principal
                amenities available to Silverleaf Owners at each resort are indicated
                by
                the following symbols: B — boating; F — fishing; G — golf; H — horseback
                riding; M — miniature golf; S — swimming pool; and T —
                tennis.





(e)
            Boating
                is available near the resort.





(f)
            Includes
                three units which have not been finished-out for accommodations and
                which
                are currently used for other
                purposes.




(g)
            Engineering,
                architectural, and construction estimates have not been completed,
                and we
                cannot be certain that we will develop these properties at the unit
                numbers currently projected.





34


**Features
      Common to Existing Resorts**





Getaway
      Resorts are primarily located in rustic areas offering Silverleaf Owners a
      quiet, relaxing vacation environment. Furthermore, the resorts offer different
      vacation activities, including golf, fishing, boating, swimming, horseback
      riding, tennis, and archery. Destination Resorts are located in or near areas
      with national tourist appeal. Features common to the Existing Resorts include
      the following:





***Bonus
      Time Program.*** Silverleaf Club’s Bonus Time program offers Silverleaf Owners a benefit not
      typically enjoyed by other timeshare owners. In addition to the right to use
      a
      unit one week per year, the Bonus Time program allows all Silverleaf Owners,
      who
      are current on their dues and installment payments, to use vacant units for
      up
      to three nights at a time at any of our owned resorts. Sunday through Thursday
      night stays are currently without charge, while Friday through Saturday stays
      presently cost $49.95 per night payable to Silverleaf Club. The Bonus Time
      program is limited based on the availability of units. Availability is created
      when a Silverleaf Owner does not use his or her owned week. Silverleaf Owners
      who have utilized the resort less frequently are given priority to use the
      program and may only use an interval with an equal or lower rating than their
      owned Vacation Interval. We believe this program is important as many
      vacationers prefer shorter two to three day vacations. Owners of unused
      intervals that are utilized by the Bonus Time program are not compensated other
      than by their participation in the Bonus Time program.





***Silverleaf
      Plus Program.*** In
      February 2006, we began offering the new Silverleaf Plus program. This program,
      administered through Silverleaf Club, includes all of the prior benefits to
      Silverleaf Owners plus enhanced vacation options through the Silverleaf exchange
      program. In addition to use of their owned weeks and bonus time, Silverleaf
      Owners who purchase under the Silverleaf Plus program can also split their
      weeks
      into a minimum of 2-day up to 5-day increments, and extend any unused days
      into
      the following year.





***Year-Round
      Use of Amenities.*** Even
      when not using the lodging facilities, Silverleaf Owners have unlimited
      year-round day usage of the amenities located at the Existing Resorts, such
      as
      boating, fishing, miniature golf, tennis, swimming, or hiking, for little or
      no
      additional cost. Certain amenities, however, such as golf, horseback riding,
      or
      watercraft rentals, may require a usage fee.





***Exchange
      Privileges.*** Each
      Silverleaf Owner has certain exchange privileges through the Silverleaf Club
      which may be used on an annual basis to (i) exchange an interval for a different
      interval (week) at the same resort so long as the desired interval is of an
      equal or lower rating; or (ii) exchange an interval for the same interval (week)
      of equal or lower rating at any other of our Existing Resorts. Silverleaf Owners
      of Getaway Resorts can only exchange for an interval in a Getaway Resort unless
      they own a “Presidents” or “Chairmans” Vacation Interval. These exchange rights
      are a convenience we provide Silverleaf Owners as an accommodation to them,
      and
      are conditioned upon availability of the desired interval or resort.
      Approximately 5,168 exchanges occurred in 2006. Silverleaf Owners pay an
      exchange fee of $75 to Silverleaf Club for each such internal exchange. In
      addition, most Silverleaf Owners may join the exchange program administered
      by
      RCI for an annual fee of $89. Orlando Breeze, is not under contract with RCI;
      however it is under contract with Interval International, Inc., a competitor
      of
      RCI.





***Deeded
      Ownership.*** We
      typically sell a Vacation Interval that entitles the owner to use a specific
      unit for a designated one-week interval each year. The Vacation Interval
      purchaser receives a recorded deed, which grants the purchaser a percentage
      interest in a specific unit for a designated week. We also sell a biennial
      (alternate year) Vacation Interval that allows the owner to use a unit for
      a
      one-week interval every other year with reduced dues.





***Management
      Club.*** Each of
      the Existing Resorts has a Club for the benefit of the timeshare owners. At
      December 31, 2006, the Clubs (except for the club at Orlando Breeze) operate
      under Silverleaf Club to manage the Existing Resorts on a centralized and
      collective basis. We have contracted with Silverleaf Club to perform the
      supervisory and management functions granted by the Clubs. Costs of these
      operations are covered by monthly dues paid by timeshare owners to their
      respective Clubs together with income generated by the operation of certain
      amenities at each respective resort. Our destination resort in Florida, Orlando
      Breeze, has its own club, Orlando Breeze Resort Club, which operates
      independently of Silverleaf Club; however, we supervise the management and
      operation of the Orlando Breeze Resort Club under the terms of a written
      agreement.





***On-Site
      Security.*** Each of
      the Resorts is patrolled by security personnel who are either employees of
      the
      Management Club or personnel of independent security service companies that
      have
      contracted with the Clubs.




35


**Description
      Of Timeshare Resorts Owned and Operated By Silverleaf**





**Getaway
      Resorts**





***Holly
      Lake Resort.*** Holly
      Lake is a family-oriented golf resort located in the Piney Woods of east Texas,
      approximately 105 miles east of Dallas, Texas. The timeshare portion of Holly
      Lake is part of a 4,300 acre mixed-use development of single-family lots and
      timeshare units with other third-party developers. We own approximately 1,205
      acres within Holly Lake, of which approximately 1,133 acres may not be developed
      due to deed restrictions. At December 31, 2006, approximately 26 acres were
      developed. We currently have no future development plans.





At
      December 31, 2006 130 units were completed and no additional units are planned
      for development. Three different types of units are offered at the resort:
      (i)
      two bedroom, two bath, vinyl siding, fourplexes; (ii) one bedroom, one bath,
      one
      sleeping loft, log construction duplexes; and (iii) two bedroom, two bath,
      log
      construction fourplexes. Each unit has a living room with sleeper sofa and
      full
      kitchen. Other amenities within each unit include whirlpool tub, color
      television, and vaulted ceilings. Certain units include interior ceiling fans,
      imported ceramic tile, over-sized sliding glass doors, and rattan and pine
      furnishings.





Amenities
      at the resort include an 18-hole golf course with pro shop, 19th-hole private
      club, country store, indoor rodeo arena and stables, five tennis courts (four
      lighted), two different lakes (one with sandy swimming beach, one with boat
      launch for water-skiing), three outdoor swimming pools with bathhouses and
      pavilion, hiking/nature trails, children's playground area, two miniature golf
      courses, five picnic areas, activity center with grill, big screen television,
      game room with arcade games and pool tables, horseback trails, and activity
      areas for basketball, horseshoes, volleyball, shuffleboard, and archery.
      Silverleaf Owners can also rent canoes, bicycles, and water trikes. Homeowners
      in neighboring subdivisions are entitled to use the amenities at Holly Lake
      pursuant to easements or use agreements.





At
      December 31, 2006, the resort contained 6,500 Vacation Intervals, of which
      2,132
      intervals remained available for sale. We have no plans to build additional
      units. Vacation Intervals at the resort are currently priced from $8,500 to
      $12,800 for one-week stays. During 2006, 311 Vacation Intervals were
      sold.





***The
      Villages and Lake O' The Woods Resorts.*** The
      Villages and Lake O' The Woods are sister resorts located on the shores of
      Lake
      Palestine, approximately 100 miles east of Dallas, Texas. The Villages, located
      approximately five miles northwest of Lake O' The Woods, is an active sports
      resort popular for water-skiing and boating. Lake O' The Woods is a quiet wooded
      resort where Silverleaf Owners can enjoy the seclusion of dense pine forests
      less than two hours from the Dallas-Fort Worth metroplex. The Villages is a
      mixed-use development of single-family lots and timeshare units, while Lake
      O'
      The Woods has been developed solely as a timeshare resort. The two resorts
      contain approximately 619 acres, of which approximately 379 may not be developed
      due to deed restrictions. At December 31, 2006, approximately 148 acres were
      developed.





At
      December 31, 2006, 346 units were completed at The Villages and 64 units were
      completed at Lake O' The Woods. An additional 84 units are planned for
      development at The Villages and no additional units are planned for development
      at Lake O' The Woods. There are five different types of units at these resorts:
      (i) three bedroom, two and one-half bath, wood siding exterior duplexes and
      fourplexes (two units); (ii) two bedroom, two and one-half bath, wood siding
      exterior duplexes and fourplexes; (iii) two bedroom, two bath, brick and siding
      exterior fourplexes; (iv) two bedroom, two bath, wood and vinyl siding exterior
      fourplexes, sixplexes, twelveplexes and a sixteenplex; and (v) one bedroom,
      one
      bath with two-bed loft sleeping area, log construction duplexes. Amenities
      within each unit include full kitchen, whirlpool tub, and color television.
      Certain units include interior ceiling fans, ceramic tile, and/or a fireplace.
      “Presidents Harbor” units feature a larger, more spacious floor plan with a back
      veranda, washer and dryer, and a more elegant decor.





Both
      resorts are situated on Lake Palestine, a 27,000 acre public lake. Recreational
      facilities and improvements at The Villages include a full service marina with
      convenience store, gas dock, boat launch, water-craft rentals, and covered
      and
      locked rental boat stalls; three swimming pools; two lighted tennis courts;
      miniature golf course; nature trails; camp sites; riding stables;
      soccer/softball field; children's playground; RV sites; a 9,445 square foot
      activity center with theater room with wide-screen television, reading room,
      grill, tanning beds, pool table, sauna, and small indoor gym; and competitive
      sports facilities which include horseshoe pits, archery range, and shuffleboard,
      volleyball, and basketball courts. Silverleaf Owners at The Villages can also
      rent or use motor boats, paddle boats, and pontoon boats. Neighboring homeowners
      are also entitled to use these amenities pursuant to a use
      agreement.





In
      2006
      we commenced construction of an indoor water park at the Villages. This planned
      attraction is focused on indoor fun and entertainment for people of all ages.
      When completed, the water park will include inner tube and body slides, a wave
      pool, a lazy river ride and an interactive play system topped by a tipping
      water
      bucket.




36


Recreational
      facilities at Lake O' The Woods include swimming pool, bathhouse, lighted tennis
      court, a recreational beach area with picnic areas, a fishing pier on Lake
      Palestine, nature trails, soccer/softball field, children's playground, RV
      sites, an activity center with wide-screen television and pool table, horseshoe
      pits, archery range, miniature golf course, shuffleboard, volleyball, and
      basketball courts.




At
      December 31, 2006, the Villages contained 17,584 total Vacation Intervals,
      of
      which 5,606 remained available for sale. We plan to build 84 additional units
      at
      The Villages, which would yield an additional 4,368 Vacation Intervals available
      for sale. At December 31, 2006, Lake O' The Woods contained 3,200 total Vacation
      Intervals, of which 847 remained available for sale. We have no plans to build
      additional units at Lake O' The Woods. Vacation Intervals at The Villages and
      Lake O' The Woods are currently priced from $8,500 to $16,800 for one-week
      stays
      (and start at $5,100 for biennial intervals), while one-week “Presidents Harbor”
intervals are priced at $10,500 to $23,000 depending on the value rating of
      the
      interval. During 2006, 1,399 and 261 Vacation Intervals were sold at The
      Villages and Lake O' The Woods, respectively.





***Piney
      Shores Resort.*** Piney
      Shores Resort is a quiet, wooded resort ideally located for day-trips from
      metropolitan areas in the southeastern Gulf Coast area of Texas. Piney Shores
      Resort is located on the shores of Lake Conroe, approximately 40 miles north
      of
      Houston, Texas. The resort contains approximately 112 acres. At December 31,
      2006, approximately 71 acres were developed.





At
      December 31, 2006, 190 units were completed and 102 units are planned for
      development at Piney Shores Resort. All units are two bedroom, two bath units
      and will comfortably accommodate up to six people. Amenities include a living
      room with sleeper, full kitchen, whirlpool tub, color television, and interior
      ceiling fans. Certain “lodge-style” units feature stone fireplaces, white-washed
      pine wall coverings, “age-worn” paint finishes, and antique furnishings.
“Presidents Cove” units feature a larger, more spacious floor plan with a back
      veranda, washer and dryer, and a more elegant décor.





The
      primary recreational amenity at the resort is Lake Conroe, a 21,000 acre public
      lake. Other recreational facilities and improvements available at the resort
      include two swimming pools and a spa, a bathhouse complete with outdoor shower
      and restrooms, lighted tennis court, miniature golf course, stables, horseback
      riding trails, children's playground, picnic areas, boat launch, beach area,
      4,626-square foot activity center, 32-seat theatre room with big screen
      television, covered wagon rides, and facilities for horseshoes, archery,
      shuffleboard, and basketball.





At
      December 31, 2006, the resort contained 9,688 Vacation Intervals, of which
      3,432
      remained available for sale. We intend to build 102 additional units, which
      would yield an additional 5,304 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $8,500 to $16,800 for one-week
      stays (and start at $5,100 for biennial intervals), while one-week “Presidents
      Cove” intervals are priced at $10,500 to $23,000 depending on the value rating
      of the interval. During 2006, 659 Vacation Intervals were sold.





***Timber
      Creek Resort.*** Timber
      Creek Resort, in Desoto, Missouri, is located approximately 50 miles south
      of
      St. Louis, Missouri. The resort contains approximately 329 acres. At December
      31, 2006, approximately 177 acres were developed.





At
      December 31, 2006, 72 units were completed and an additional 24 units are
      planned for future development at Timber Creek Resort. All units are two
      bedroom, two bath units. Amenities within each new unit include a living room
      with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
      units include a fireplace, ceiling fans, imported ceramic tile, French doors,
      and rattan or pine furniture.





The
      primary recreational amenity available at the resort is a 40-acre fishing lake.
      Other amenities include a clubhouse, a five-hole par three executive golf
      course, swimming pool, two lighted tennis courts, themed miniature golf course,
      volleyball court, shuffleboard/multi-use sports court, fitness center,
      horseshoes, archery, a welcome center, playground, arcade, movie room, tanning
      bed, cedar sauna, sales and registration building, hook-ups for recreational
      vehicles, and boat docks. We are obligated to maintain and provide campground
      facilities for members of the previous owner's campground system.





At
      December 31, 2006, the resort contained 3,744 Vacation Intervals and 1,768
      Vacation Intervals remained available for sale. We plan to build 24 additional
      units, which would collectively yield 1,248 additional Vacation Intervals
      available for sale. Vacation Intervals at the resort are currently priced from
      $8,500 to $16,800 for one-week stays (and start at $5,100 for biennial
      intervals). During 2006, 42 Vacation Intervals were sold.





***Fox
      River Resort.*** Fox
      River
      Resort, in Sheridan, Illinois, is located approximately 70 miles southwest
      of
      Chicago, Illinois. The resort contains approximately 363 acres. At December
      31,
      2006, approximately 147 acres were developed.





37


At
      December 31, 2006, 228 units are completed and 222 units are planned for future
      development at Fox River Resort. All units are two bedroom, two bath units.
      Amenities within each unit include a living room with sleeper sofa, full
      kitchen, whirlpool tub, and color television. Certain units include ceiling
      fans, ceramic tile, and rattan or pine furniture. “Presidents Lakeside” units
      feature a larger, more spacious floor plan with a back veranda, washer and
      dryer, and a more elegant décor.





Amenities
      currently available at the resort include five-hole par three executive golf
      course, outdoor swimming pool, clubhouse, covered pool, miniature golf course,
      horseback riding trails, stable and corral, welcome center, sales and
      registration buildings, hook-ups for recreational vehicles, a tennis court,
      a
      basketball court / seasonal ice-skating rink, shuffleboard courts, sand
      volleyball courts, outdoor pavilion, and playgrounds. We also offer winter
      recreational activities at this resort, including ice-skating, snowmobiling,
      and
      cross-country skiing. We are obligated to maintain and provide campground
      facilities for members of the previous owner's campground system.





At
      December 31, 2006, the resort contained 11,856 Vacation Intervals and 3,105
      Vacation Intervals remained available for sale. We plan to build 222 additional
      units, which would collectively yield 11,544 additional Vacation Intervals
      available for sale. Vacation Intervals at the resort are currently priced from
      $8,500 to $16,800 for one-week stays (and start at $5,100 for biennial
      intervals), while one-week “Presidents Lakeside” intervals are priced at $10,500
      to $31,500 depending on the value rating of the interval. During 2006, 865
      Vacation Intervals were sold.





***Apple
      Mountain Resort.*** Apple
      Mountain Resort, in Clarkesville, Georgia, is located approximately 125 miles
      north of Atlanta, Georgia. The resort is situated on 285 acres of beautiful
      open
      pastures and rolling hills, with 150 acres being the resort’s golf course. At
      December 31, 2006, approximately 181 acres were developed.





At
      December 31, 2006, 72 units are completed and 144 units are planned for
      development at Apple Mountain Resort. The “lodge-style” units were the first
      units developed. Each unit is approximately 824 square feet with all units
      being
      two bedrooms, two full baths. Amenities within each unit include a living room
      with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
      units include ceiling fans, imported ceramic tile, electronic door locks, and
      rattan or pine furniture.





Amenities
      at the resort include a 9,445 square foot administration building and activity
      center featuring a theatre room with a wide screen television, a member services
      building, pool tables, arcade games, and snack area. Other amenities at the
      resort include two tennis courts, horseback riding, swimming pool, shuffleboard,
      miniature golf course, and volleyball and basketball courts. This resort is
      located in the Blue Ridge Mountains and offers accessibility to many other
      outdoor recreational activities, including Class 5 white water rapids.





The
      primary recreational amenity available to the resort is an established 18-hole
      golf course situated on approximately 150 acres of open fairways and rolling
      hills. Elevation of the course is 1,530 feet at the lowest point and 1,600
      feet
      at the highest point. The course is designed with approximately 104,000 square
      feet of bent grass greens. The course's tees total approximately 2 acres,
      fairways total approximately 24 acres, and primary roughs total approximately
      29
      acres, all covered with TIF 419 Bermuda. The balance of grass totals
      approximately 95 acres and is covered with Fescue. The course has 19 sand
      bunkers totaling 19,800 square feet and there are approximately seven miles
      of
      cart paths. Lining the course are apple orchards totaling approximately four
      acres, with white pine roughs along twelve of the fairways. The course has
      a
      five-acre irrigation lake and a pond of approximately 900 square feet located
      on
      the fifteenth hole. The driving range covers approximately nine acres and has
      20,000 square feet of tee area covered in TIF 419 Bermuda. The pro shop offers
      a
      full line of golfing accessories and equipment. There is also a golf
      professional on site to offer lessons and to plan events for the
      club.





At
      December 31, 2006, the resort contained 3,744 Vacation Intervals, of which
      2,083
      remained available for sale. We plan to build 144 additional units, which would
      yield an additional 7,488 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $8,500 to $16,800 for one-week
      stays (and start at $5,100 for biennial intervals). During 2006, 257 Vacation
      Intervals were sold.





**Destination
      Resorts**





***Ozark
      Mountain Resort.*** Ozark
      Mountain Resort is a family-oriented resort located on the shores of Table
      Rock
      Lake, which features bass fishing. The resort comprises 115 acres and is located
      approximately 15 miles from Branson, Missouri, a family music and entertainment
      center, 233 miles from Kansas City, and 276 miles from St. Louis. Ozark Mountain
      Resort is a mixed-use development of timeshare and condominium units. At
      December 31, 2006, approximately 114 acres were developed. There are 8 acres
      that may not be developed due to deed restrictions.




38


At
      December 31, 2006, 148 units are completed and 12 units are planned for
      development at Ozark Mountain Resort. There are two types of units at the
      resort: (i) two bedroom, two bath, one-story fourplexes and (ii) two bedroom,
      two bath, three-story sixplexes. Each standard unit includes two large bedrooms,
      two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities
      within each unit include whirlpool tub, color television, and vaulted ceilings.
      Certain units contain interior ceiling fans, imported ceramic tile, oversized
      sliding glass doors, rattan or pine furnishings, or fireplace. “Presidents View”
units feature a panoramic view of Table Rock Lake, a larger, more spacious
      floor
      plan with front and back verandas, washer and dryer, and a more elegant
      decor.





The
      primary recreational amenity available at the resort is Table Rock Lake, a
      43,100-acre public lake. Other recreational facilities and improvements at
      the
      resort include a swimming beach with dock, an activities center with pool table,
      covered boat dock and launch ramp, olympic-sized swimming pool, lighted tennis
      court, nature trails, two picnic areas, playground, miniature golf course,
      and a
      competitive sports area accommodating volleyball, basketball, tetherball,
      horseshoes, shuffleboard, and archery. Guests can also rent or use canoes,
      or
      paddle boats. Owners of neighboring condominium units we developed in the past
      are also entitled to use these amenities pursuant to use agreements they have
      with us.





At
      December 31, 2006, the resort contained 7,472 Vacation Intervals, of which
      937
      remained available for sale. We plan to build 12 additional units, which would
      yield an additional 624 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $10,000 to $17,500 for
      one-week stays, while one-week “Presidents View” intervals are priced at $13,500
      to $25,500 depending on the value rating of the interval. During 2006, 952
      Vacation Intervals were sold.





***Holiday
      Hills Resort.*** Holiday
      Hills Resort is a resort community located in Taney County, Missouri, two miles
      east of Branson, Missouri. The resort is 224 miles from Kansas City and 267
      miles from St. Louis. The resort is heavily wooded by cedar, pine, and hardwood
      trees, and is favored by Silverleaf Owners seeking quality golf and nightly
      entertainment in nearby Branson. Holiday Hills Resort is a mixed-use development
      of single-family lots, condominiums, and timeshare units. The resort contains
      approximately 484 acres, including a 91-acre golf course. At December 31, 2006,
      approximately 300 acres were developed.




At
      December 31, 2006, 446 units were completed and an additional 456 units are
      planned for future development. There are four types of timeshare units at
      this
      resort: (i) two bedroom, two bath, one-story fourplexes, (ii) one bedroom,
      one
      bath, with upstairs loft, log construction duplexes, (iii) two bedroom, two
      bath, two-story fourplexes, and (iv) two bedroom, two bath, three-story
      sixplexes and twelveplexes. Each unit includes a living room with sleeper sofa,
      full kitchen, whirlpool tub, and color television. Certain units include a
      fireplace, ceiling fans, imported tile, oversized sliding glass doors, vaulted
      ceilings, and rattan or pine furniture. “Presidents Fairway” and “Chairmans
      Fairway” units feature a larger, more spacious floor plan with back veranda,
      washer and dryer, and a more elegant décor.





Taneycomo
      Lake, a popular lake for trout fishing, is approximately three miles from the
      resort, and Table Rock Lake is approximately ten miles from the resort.
      Amenities at the resort include an 18-hole golf course, tennis court, picnic
      areas, camp sites, basketball court, activity area which includes shuffleboard,
      horseshoes, and a children’s playground, a 5,356 square foot clubhouse that
      includes a pro shop, restaurant, and meeting space, a 2,800 square foot outdoor
      swimming pool, and a sports pool. Lot and condominium unit owners are also
      entitled to use these amenities pursuant to use agreements we have with certain
      homeowners’ associations.





At
      December 31, 2006, the resort contained 23,056 Vacation Intervals, of which
      2,734 remained available for sale. We plan to build 456 additional units, which
      would yield an additional 23,712 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $9,995 to $17,500 for one-week
      stays (and start at $6,240 for biennial intervals), while one-week “Presidents
      Fairway” intervals are priced at $13,500 to $27,500 and “Chairmans Fairway”
intervals are priced from $18,000 to $38,000, depending on the value rating
      of
      the interval. During 2006, 1,343 Vacation Intervals were sold.





***Hill
      Country Resort.*** Hill
      Country Resort is located near Canyon Lake in the hill country of central Texas
      between Austin and San Antonio. The resort contains approximately 110 acres.
      At
      December 31, 2006, approximately 39 acres were developed.





At
      December 31, 2006, 302 units were completed and 210 units are planned for
      development at Hill Country Resort. Some units are single story, while certain
      other units are two-story structures in which the bedrooms and baths are located
      on the second story. Each unit contains two bedrooms, two bathrooms, living
      room
      with sleeper sofa, and full kitchen. Other amenities within each unit include
      whirlpool tub, color television, and interior design details such as vaulted
      ceilings. Certain units include interior ceiling fans, imported ceramic tile,
      over-sized sliding glass doors, rattan and pine furnishings, or fireplace.
      122
      units feature our “lodge style.” 68 “Presidents Villas” units feature a larger,
      more spacious floor plan with back veranda, washer and dryer, and a more elegant
      decor.





Amenities
      at the resort include a 7,943-square foot activity center with electronic games,
      pool table, and wide-screen television, miniature golf course, a children's
      playground areas, barbecue and picnic area, enclosed swimming pool and heated
      spa, children's wading pool, tennis court, and activity areas for basketball,
      horseshoes, shuffleboard and sand volleyball court. Area sights and activities
      include water-tubing on the nearby Guadeloupe River and visiting the many
      tourist attractions in San Antonio, such as Sea World, The Alamo, The River
      Walk, Fiesta Texas, and the San Antonio Zoo.





39


At
      December 31, 2006, the resort contained 15,332 Vacation Intervals, of which
      1,493 remained available for sale. We plan to build 210 additional units, which
      collectively would yield 10,920 additional Vacation Intervals available for
      sale. Vacation Intervals at the resort are currently priced from $7,500 to
      $17,500 for one-week stays (and start at $5,100 for biennial intervals), while
      one-week “Presidents Villas” intervals are priced at $10,500 to $35,500
      depending on the value rating of the interval. During 2006, 1,912 Vacation
      Intervals were sold.





***Oak
      N' Spruce Resort.*** In
      December 1997, we acquired the Oak N' Spruce Resort in the Berkshire mountains
      of western Massachusetts. The resort is located approximately 134 miles west
      of
      Boston, Massachusetts, and 114 miles north of New York City. Oak N' Spruce
      Resort is a mixed-use development which includes a hotel and timeshare units.
      The resort contains approximately 244 acres. At December 31, 2006, approximately
      37 acres were developed. There are 206 acres that we may not develop.





At
      December 31, 2006 the resort had 308 units completed and 42 units are planned
      for development. There are six types of existing units at the resort: (i)
      one-bedroom flat, (ii) one-bedroom townhouse, (iii) two-bedroom flat, (iv)
      two-bedroom townhouse, (v) two-bedroom, flex-time, and (vi) two-bedroom lodge
      style and “Presidents” style units. There is also a 21-room hotel at the resort
      that could be converted to timeshare use. Amenities within each new unit include
      a living room with sleeper sofa, full kitchen, whirlpool tub, and color
      television. Certain units include ceiling fans, ceramic tile, and rattan or
      pine
      furniture.





Amenities
      at the resort include two indoor heated swimming pools with hot tubs, an outdoor
      pool with sauna, health club, lounge, ski rentals, miniature golf, shuffleboard,
      basketball and tennis courts, horseshoe pits, hiking and ski trails, and an
      activity area for badminton. The resort is also near Beartown State
      Forest.





At
      December 31, 2006, the resort contained 16,016 Vacation Intervals, of which
      2,173 remained available for sale. We plan to build 42 additional units, which
      would yield an additional 2,184 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $8,500 to $18,500 for one-week
      stays (and start at $5,400 for biennial intervals), while one-week “Presidents
      Oak” intervals are priced at $10,500 to $31,500 depending on the value rating of
      the interval. During 2006, 1,309 Vacation Intervals were sold.





***Silverleaf’s
      Seaside Resort.*** Silverleaf’s Seaside Resort is located in Galveston, Texas, approximately 50
      miles south of Houston, Texas. The resort contains approximately 87 acres.
      At
      December 31, 2006, approximately 50 acres were developed.





At
      December 31, 2006, the resort had 120 units and an additional 288 are planned
      for development. The two bedroom, two bath units are situated in three-story
      twelveplex buildings. Amenities within each unit include two large bedrooms,
      two
      bathrooms (one with a whirlpool tub), living room with sleeper sofa, full
      kitchen, color television, and electronic door locks.





With
      635
      feet of beachfront, the primary amenity at the resort is the Gulf of Mexico.
      Other amenities include a lodge with kitchen, tennis court, swimming pool,
      sand
      volleyball court, playground, picnic pavilion, horseshoes, and shuffleboard.





At
      December 31, 2006, the resort contained 6,240 Vacation Intervals of which 1,012
      remained available for sale. We plan to build 288 additional units, which would
      yield an additional 14,976 Vacation Intervals for sale. Vacation Intervals
      at
      the resort are currently priced from $9,500 to $19,000 for one-week stays (and
      start at $5,100 for biennial intervals), while one-week “Presidents Seaside”
intervals are priced at $13,500 to $35,500 depending on the value rating of
      the
      interval. During 2006, 530 Vacation Intervals were sold.





***Orlando
      Breeze Resort.*** In
      October 2004, we acquired a 4.8-acre tract of land located in Davenport,
      Florida, just outside Orlando, Florida, for an aggregate purchase price of
      approximately $6.0 million. The site, formerly known as the Villas at Polo
      Park,
      is near the major Florida tourist attractions of Walt Disney World, Sea World,
      and Universal Studios. At December 31, 2006, approximately 4 acres were
      developed. In January 2006, we purchased approximately 30 acres of undeveloped
      land contiguous to the 4.8 acre tract of land in Davenport, Florida. Extensive
      pre-development work must be completed before we develop the property. Any
      development of the property is subject to State and Local Governmental approvals
      necessary for timeshare operations.





At
      December 31, 2006, the resort had 48 units and an additional 24 are planned
      for
      development. The units consist of two and three bedroom units, with eight
      two-bedroom units and eight three-bedroom units having been refurbished during
      2005. Amenities within each refurbished unit include a living room with sleeper
      sofa, full kitchen, color television, ceiling fans, ceramic tile, Broyhill
      furniture, and aluminum patio furniture. Amenities at the resort include a
      heated outdoor swimming pool with whirlpool, fitness center, arcade, playground,
      sand volleyball and basketball courts.





40


At
      December 31, 2006, the resort contained 2,496 Vacation Intervals of which 1,479
      remained available for sale. We plan to build 24 additional units, which would
      yield an additional 1,248 Vacation Intervals for sale. Vacation Intervals at
      the
      resort are currently priced from $25,500 to $35,500 for one-week stays. During
      2006, 15 Vacation Intervals were sold.





**ITEM
      3. 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.





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.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.




41


**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
      ISSUER PURCHASES OF EQUITY SECURITIES**




**STOCK
      PERFORMANCE GRAPH**





The
      Stock
      Performance Graph below shall not be deemed incorporated by reference by any
      general statement incorporating by reference this Annual Report on Form 10-K
      into any filing under the Securities Act or under the Exchange Act, except
      to
      the extent we specifically incorporate this information by reference, and it
      shall not otherwise be deemed filed under such Acts.





Set
      forth
      below is a line graph comparing the total cumulative return of our Common Stock
      since December 31, 2001 to (a) the S&P 500 Index, a broad equity market
      index, (b) the Russell 2000 Index, an index that measures the performance of
      stocks with small to medium-small market capitalization and (c) the Russell
      MicroCap Index, an index that measures the performance of stocks in the
      micro-cap segment of market capitalization. The comparisons in this table are
      required by the Securities and Exchange Commission and are not intended to
      forecast or be indicative of possible future performance of the Common
      Stock.





Only
      a
      few other publicly held companies engage in our principal line of business
      - the
      sale of vacation ownership intervals. Prominent among this limited group are
      The
      Walt Disney Company, Hilton Hotels Corporation, and Marriott International
      Inc.
      which are (i) diversified, with far less than 50% of their respective revenues
      attributable to vacation ownership interval sales, and (ii) substantially larger
      than we are in terms of revenue, assets and market capitalization. Therefore,
      we
      concluded that there was not a sufficient body of reliable market data for
      us to
      use a comparison peer group. Therefore, since 1998 we have used the Russell
      2000
      Index as an index of issuers with similar market capitalization. In 2006 our
      stock was added to the Russell MicroCap Index. As a result, we have elected
      to
      compare the performance of our stock to the S&P 500 Index and the Russell
      MicroCap Index for all future years and to cease comparing our stock to the
      Russell 2000. The following graph compares the performance of our stock to
      the
      S&P 500 Index, the Russell 2000 Index and the Russell MicroCap Index.





The
      graph
      assumes $100 was invested on December 31, 2001 in our stock, the S&P 500,
      the Russell 2000 and the Russell MicroCap and assumes dividends are reinvested.
      Silverleaf’s cumulative total return of $7,450 is due to the growth in the bid
      price of our common stock from $0.06 at December 31, 2001 to $4.47 at December
      31, 2006.




linegraph logo


42
 
 **Measurement
                  Period (Fiscal Year Covered)****12/01**
              
              **12/02**
              
              **12/03**
              
              **12/04**
              
              **12/05**
              
              **12/06****Silverleaf
                  Resorts, Inc.**
              
              
              **100.00**
              
              
              **583.33**
              
              
              **1333.33**
              
              
              **2300.00**
              
              
              **5433.33**
              
              
              **7450.00****S
                  & P 500**
              
              
              **100.00**
              
              
              **77.90**
              
              
              **100.24**
              
              
              **111.15**
              
              
              **116.61**
              
              
              **135.03****Russell
                  2000**
              
              
              **100.00**
              
              
              **79.52**
              
              
              **117.09**
              
              
              **138.55**
              
              
              **144.86**
              
              
              **171.47****Russell
                  MicroCap**
              
              
              **100.00**
              
              
              **83.90**
              
              
              **139.57**
              
              
              **159.31**
              
              
              **163.40**
              
              
              **190.43**
 
 The
        following table sets forth the high and low closing prices of our Common
        Stock
        for the quarterly periods indicated, which correspond to the quarterly fiscal
        periods for financial reporting purposes. The Common Stock prices from January
        2005 to September 18, 2005 are the closing bid prices as quoted on the OTC
        Bulletin Board. During the third quarter of 2005 the American Stock Exchange
        (“AMEX”) approved our application to list our shares of Common Stock under the
        ticker symbol “SVL”. Our stock began trading on the AMEX effective September 19,
        2005. From that point forward the Common Stock prices shown are the closing
        bid
        prices as quoted on the AMEX.
  **High**
                
                **Low**Year
                    Ended December 31, 2005:First
                    Quarter
                
                $
                1.60
                
                $
                1.20Second
                    Quarter
                
                
                1.58
                
                
                1.25Third
                    Quarter
                
                
                2.05
                
                
                1.41Fourth
                    Quarter
                
                
                4.29
                
                
                1.35Year
                    Ended December 31, 2006:First
                    Quarter
                
                $
                3.89
                
                $
                2.95Second
                    Quarter
                
                
                5.00
                
                
                3.10Third
                    Quarter
                
                
                3.82
                
                
                3.13Fourth
                    Quarter
                
                
                4.47
                
                
                3.82
 
 As
        of
        December 31, 2006, we believe that there were approximately 2,207 holders
        of our
        Common Stock, which is the only class of our equity securities outstanding.
 
 We
        listed our common stock on The NASDAQ Capital Market, under the symbol “SVLF”,
        effective as of the opening of the market on February 28, 2007. As a result,
        trading in Silverleaf common stock ceased on the American Stock Exchange
        effective at the closing of the markets on February 27, 2007.
  Our
        stock
        option plans provide for the award of nonqualified stock options to directors,
        officers, and key employees, and the grant of incentive stock options to
        salaried key employees. Stock options provide for the right to purchase common
        stock at a specified price, which may be less than or equal to fair market
        value
        on the date of grant (but not less than par value). Stock options may be
        granted
        for any term and upon such conditions determined by our Board of Directors.
 
 **Dividend
        Policy**
 
 We
        have
        never declared or paid any cash dividends on our capital stock and do not
        anticipate paying cash dividends on our Common Stock in the foreseeable future.
        We currently intend to retain future earnings to finance our operations and
        fund
        the growth of our business. Any payment of future dividends will be at the
        discretion of our Board of Directors and will depend upon, among other things,
        our earnings, financial condition, capital requirements, level of indebtedness,
        contractual and other restrictions in respect to payment of dividends under
        our
        senior credit facilities, and other factors that our Board of Directors deems
        relevant.
 
 **Shares
        Authorized for Issuance under Equity Compensation Plans**
 
 Please
        see “Security Ownership of Certain Beneficial Owners and Management” under item
        12 of this annual report on Form 10-K for information regarding shares
        authorized under our equity compensation plans.
 
 **Recent
        Sales of Unregistered Securities**
 
 There
        have been no recent sales of unregistered securities.
  43
  **ITEM
        6. SELECTED FINANCIAL DATA**
 
 **Selected
        Consolidated Historical Financial and Operating
        Information**
 
 The
        Selected Consolidated Historical Financial and Operating Information should
        be
        read in conjunction with the Consolidated Financial Statements and notes
        thereto
        and Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations appearing elsewhere in this report on Form 10-K. As
        discussed under the heading “Significant Accounting Policies Summary” in Note 2
        to our Consolidated Financial Statements beginning on page F-1, in 2006 we
        changed our accounting for real estate time-sharing transactions in connection
        with the adoption of Statement of Financial Accounting Standards No. 152,
        Accounting for Real Estate Time-Sharing Transactions, and changed our accounting
        for stock-based compensation in connection with the adoption of FASB Statement
        No. 123(R), Share-Based Payment. As a result, some of the amounts in the
        following tables for 2002 to 2005 may not be comparable to 2006.
  **Year
                  Ended December 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006****(in
                  thousands, except share and per share amounts)****Statement
                  of Income Data:**Revenues:Vacation
                  Interval sales
              
              $
              122,805
              
              $
              123,585
              
              $
              138,046
              
              $
              146,416
              
              $
              187,481Estimated
                  uncollectible revenue
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (32,491
              )Sampler
                  sales
              
              
              3,634
              
              
              1,765
              
              
              2,150
              
              
              2,623
              
              
              —Net
                  sales
              
              
              126,439
              
              
              125,350
              
              
              140,196
              
              
              149,039
              
              
              154,990Interest
                  income
              
              
              37,537
              
              
              34,730
              
              
              37,843
              
              
              38,154
              
              
              46,248Management
                  fee income
              
              
              1,920
              
              
              1,547
              
              
              1,201
              
              
              1,856
              
              
              1,861Gain
                  on sale of notes receivable
              
              
              6,838
              
              
              3,205
              
              
              1,915
              
              
              6,457
              
              
              —Other
                  income
              
              
              2,324
              
              
              2,834
              
              
              2,522
              
              
              6,402
              
              
              3,785Total
                  revenues
              
              
              175,058
              
              
              167,666
              
              
              183,677
              
              
              201,908
              
              
              206,884Costs
                  and operating expenses:Cost
                  of Vacation Interval sales
              
              
              23,123
              
              
              22,657
              
              
              24,964
              
              
              23,427
              
              
              19,003Sales
                  and marketing
              
              
              66,384
              
              
              65,775
              
              
              71,890
              
              
              74,667
              
              
              93,957Provision
                  for uncollectible notes
              
              
              24,562
              
              
              53,673
              
              
              26,811
              
              
              23,649
              
              
              —Operating,
                  general and administrative
              
              
              31,432
              
              
              26,209
              
              
              25,639
              
              
              28,038
              
              
              32,315Depreciation
              
              
              4,486
              
              
              3,806
              
              
              3,588
              
              
              2,723
              
              
              2,539Interest
                  expense and lender fees
              
              
              22,192
              
              
              16,550
              
              
              17,627
              
              
              17,253
              
              
              21,662Total
                  costs and operating expenses
              
              
              172,179
              
              
              188,670
              
              
              170,519
              
              
              169,757
              
              
              169,476Other
                  income:Gain
                  on early extinguishment of debt
              
              
              17,885
              
              
              6,376
              
              
              —
              
              
              —
              
              
              —Total
                  other income
              
              
              17,885
              
              
              6,376
              
              
              —
              
              
              —
              
              
              —Income
                  (loss) before (benefit) provision for income taxes and discontinued
                  operations
              
              
              20,764
              
              
              (14,628
              )
              
              13,158
              
              
              32,151
              
              
              37,408(Benefit)
                  provision for income taxes
              
              
              (1,523
              )
              
              86
              
              
              23
              
              
              9,725
              
              
              14,402Income
                  (loss) from continuing operations
              
              
              22,287
              
              
              (14,714
              )
              
              13,135
              
              
              22,426
              
              
              23,006Discontinued
                  operations:Gain
                  on sale of discontinued operations (net of taxes)
              
              
              —
              
              
              —
              
              
              —
              
              
              613
              
              
              —Income
                  from discontinued operations (net of taxes)
              
              
              506
              
              
              794
              
              
              624
              
              
              128
              
              
              —Income
                  from discontinued operations
              
              
              506
              
              
              794
              
              
              624
              
              
              741
              
              
              —Net
                  income (loss)
              
              $
              22,793
              
              $
              (13,920
              )
              $
              13,759
              
              $
              23,167
              
              $
              23,006Net
                  income (loss) per share — Basic (a)Income
                  (loss) from continuing operations
              
              $
              0.77
              
              $
              (0.40
              )
              $
              0.35
              
              $
              0.61
              
              $
              0.61Income
                  (loss) from discontinued operations
              
              
              0.02
              
              
              0.02
              
              
              0.02
              
              
              0.02
              
              
              —Net
                  income (loss)
              
              $
              0.79
              
              $
              (0.38
              )
              $
              0.37
              
              $
              0.63
              
              $
              0.61Net
                  income (loss) per share — Diluted (a)Income
                  (loss) from continuing operations
              
              $
              0.77
              
              $
              (0.40
              )
              $
              0.33
              
              $
              0.57
              
              $
              0.59Income
                  (loss) from discontinued operations
              
              
              0.02
              
              
              0.02
              
              
              0.02
              
              
              0.02
              
              
              —Net
                  income (loss)
              
              $
              0.79
              
              $
              (0.38
              )
              $
              0.35
              
              $
              0.59
              
              $
              0.59Weighted
                  average number of shares issued and outstanding — Basic
              
              
              28,825,882
              
              
              36,826,906
              
              
              36,852,133
              
              
              36,986,926
              
              
              37,579,462Weighted
                  average number of shares issued and Outstanding — Diluted
              
              
              28,825,882
              
              
              36,826,906
              
              
              38,947,854
              
              
              39,090,921
              
              
              39,261,652
  44
 **December
                  31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006****(dollars
                  in thousands)****Balance
                  Sheet Data:**Cash
                  and cash equivalents
              
              $
              1,153
              
              $
              4,093
              
              $
              10,935
              
              $
              10,990
              
              $
              11,450Notes
                  receivable, net of allowance for uncollectible notes
              
              
              233,237
              
              
              193,379
              
              
              196,466
              
              
              177,572
              
              
              229,717Amounts
                  due from affiliates
              
              
              750
              
              
              150
              
              
              288
              
              
              680
              
              
              1,251Inventories
              
              
              102,505
              
              
              101,399
              
              
              109,303
              
              
              117,597
              
              
              147,759Total
                  assets
              
              
              398,245
              
              
              351,787
              
              
              369,506
              
              
              361,796
              
              
              474,530Amounts
                  due to affiliates
              
              
              2,221
              
              
              656
              
              
              929
              
              
              544
              
              
              246Notes
                  payable and capital lease obligations
              
              
              236,413
              
              
              215,337
              
              
              218,310
              
              
              177,269
              
              
              254,550Senior
                  subordinated notes
              
              
              45,919
              
              
              36,591
              
              
              34,883
              
              
              33,175
              
              
              31,467Total
                  liabilities
              
              
              296,626
              
              
              264,088
              
              
              268,038
              
              
              236,961
              
              
              326,338Shareholders'
                  equity
              
              
              101,619
              
              
              87,699
              
              
              101,468
              
              
              124,835
              
              
              148,192**Cash
                  Flows Data:******Net
                  cash provided by (used in) operating activities
              
              $
              57,294
              
              $
              23,953
              
              $
              9,404
              
              $
              75,681
              
              $
              (45,648
              )
  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 our
        other operating and investing activities. In addition, during 2006 we reflected
        cash restricted for repayment of debt as a financing activity rather than
        an
        operating activity. Accordingly, we revised the 2002 to 2005 Cash Flows Data
        above for comparability purposes to 2006.
  **As
                  of and For the Year Ended December 31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006****(dollars
                  in thousands)****Other
                  Operating Data:**Number
                  of Existing Resorts at period end
              
              
              19
              
              
              12
              
              
              12
              
              
              13
              
              
              13Number
                  of Vacation Intervals sold (excluding Upgrades)(b)
              
              
              8,224
              
              
              9,560
              
              
              10,431
              
              
              8,332
              
              
              9,855Number
                  of in-house Vacation Intervals sold
              
              
              7,746
              
              
              4,833
              
              
              4,816
              
              
              6,576
              
              
              8,777Number
                  of Vacation Intervals in inventory
              
              
              24,121
              
              
              24,255
              
              
              22,857
              
              
              27,396
              
              
              28,801Average
                  price of Vacation Intervals sold (excluding
                  Upgrades)(b)(c)
              
              $
              9,846
              
              $
              9,510
              
              $
              10,031
              
              $
              11,124
              
              $
              11,681Average
                  price of upgraded Vacation Intervals sold (net of exchanged
                  interval)
              
              $
              5,401
              
              $
              6,759
              
              $
              6,938
              
              $
              8,171
              
              $
              8,245
 
 
 (a)
              Net
                  income (loss) per share is based on the weighted average number
                  of shares
                  issued and outstanding.
 
 (b)
              Vacation
                  Intervals sold during the years ended December 31, 2002, 2003,
                  2004, 2005,
                  and 2006, include 1,572 biennial intervals (counted as 786 annual
                  Vacation
                  Intervals), 1,620 biennial intervals (counted as 810 annual Vacation
                  Intervals), 2,556 biennial intervals (counted as 1,278 annual Vacation
                  Intervals), 2,780 biennial intervals (counted as 1,390 annual Vacation
                  Intervals), and 5,117 biennial intervals (counted as 2,558 annual
                  Vacation
                  Intervals), respectively.
 
 (c)
              Includes
                  annual and biennial Vacation Interval sales for one-bedroom and
                  two-bedroom units.
 
 **ITEM
        7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF** **OPERATIONS**
 
 The
        following discussion should be read in conjunction with the “Selected Financial
        Data” and our Financial Statements and the notes thereto and other financial
        data included elsewhere herein. The following Management’s Discussion and
        Analysis of Financial Condition and Results of Operations contains
        forward-looking statements that involve risks and uncertainties. Our actual
        results could differ materially from those anticipated in these forward-looking
        statements.
 
 **Executive
        Summary**
 
 We
        are in
        the business of owning and operating thirteen timeshare resorts as of December
        31, 2006. Our income is derived principally from marketing and selling timeshare
        interests at our resorts in one-week intervals, and from the interest earned
        from financed sales of such timeshare interests. As of December 31, 2006,
        seven
        of our resorts are located within one and one half to two hours of major
        metropolitan areas (“getaway resorts”), which are the primary market for
        timeshare sales to new purchasers. Six of our resorts are in destination
        resort
        areas located further from major metropolitan areas (“destination resorts”). The
        principal purchasers of timeshare interests at the destination resorts are
        existing owners who are upgrading or buying additional interests.
 
 45
 The
        following economic or industry-wide factors are relevant to us:
 
 ·
              We
                  sell a vacation and recreational product, predominantly to customers
                  who
                  drive to our locations. We believe that this type of usage is somewhat
                  immune from issues that would affect the travel industry as a whole
                  (i.e.
                  the disruptions to the airline industry and destination resort
                  industry
                  after September 11, 2001), but major increases in gasoline prices
                  or other
                  issues that cause the U.S population to drive less could have a
                  negative
                  impact on us.
 
 ·
              Telemarketing
                  is a very important element in the generation of tours to potential
                  new
                  customers of timeshare interests. We presently comply with state
                  and
                  national do not call regulations. Changes to existing regulations
                  could
                  have a negative impact on our ability to generate the necessary
                  tours to
                  sell timeshare interests.
 
 ·
              We
                  finance the majority of our sales over seven to ten years. An economic
                  downturn could negatively affect the ability of our customers to
                  pay their
                  principal and interest, which might result in additional provision
                  for
                  uncollectible notes.
 
 ·
              Our
                  fixed-to-floating debt ratio is 62% fixed and 38% floating. An
                  increase in
                  interest rates above the floor rates on our variable rate facilities
                  could
                  have a negative impact on our profitability.
 
 ·
              Since
                  we predominantly finance our sales of timeshare interests, we require
                  credit facilities to have the liquidity necessary to fund our costs
                  and
                  expenses. We presently have adequate credit facilities to fund
                  our
                  operations through December 2008. A disruption in the availability
                  of
                  credit facilities would severely impact our ability to continue
                  marketing
                  and selling timeshare interests as we do today. In the first quarter
                  of
                  2007, we consolidated our debt with Textron Financial Corporation
                  into one
                  revolving loan. As a result of the amended and restated loan and
                  security
                  agreement, the funding period on the consolidated debt has been
                  extended
                  from June 2008 to January 2010, with revised maturity dates of
                  January 31,
                  2013 for the receivables component and January 31, 2012 on both
                  the
                  acquisition and inventory components. In addition, the interest
                  rates
                  previously charged have been reduced. This transaction is described
                  in
                  more detail under the heading “Subsequent Events” in Note 17 to our
                  Consolidated Financial Statements beginning on page
                  F-1.
 
 ·
              We
                  believe there are two areas which are particularly important to
                  our
                  success as a business:
  ▪▪
              The
                  first area is identifying potential customers who are likely to
                  pay their
                  principal and interest payments when due after purchasing timeshare
                  intervals, thereby resulting in an acceptable provision for uncollectible
                  notes.
 
 ▪▪
              The
                  second area is to keep sales and marketing expenses at an acceptable
                  level
                  to result in a favorable percentage relationship between sales
                  and
                  marketing expense and Vacation Interval
                  sales.
 
 We
        earn
        revenue and income and finance our operations as follows:
 
 ·
              Our
                  primary source of revenue is Vacation Interval sales. Vacation
                  Interval
                  sales are a combination of sales to new customers and upgrade and/or
                  additional week sales to existing customers. We have been focusing
                  on
                  increasing the percentage mix of sales to existing customers in
                  2004,
                  2005, and 2006. In addition we have been focusing on identifying
                  potential
                  new customers who have better credit characteristics that will
                  ultimately
                  be more likely to pay their principal and interest when due. To
                  manage
                  sales we assess separately sales to potential new customers and
                  sales to
                  existing customers. For sales to potential new customers we measure
                  sales
                  per tour in order to ascertain that our marketing programs are
                  delivering
                  the proper types of family tours to effectively and efficiently
                  sell to
                  new customers. State law allows purchasers of timeshares to rescind
                  their
                  purchase within three to fifteen days depending on the state. We
                  also
                  measure rescission amounts and rates of new customers to ascertain
                  that
                  our marketing and sales programs continue effectively. The number
                  of tours
                  to existing customers is not meaningful. As a result, we begin
                  our
                  assessment of sales to existing customers by totaling gross sales
                  to
                  existing customers. Rescissions by existing customers are generally
                  much
                  lower than rescissions by new customers. We do measure rescission
                  amounts
                  and rates to calculate net sales to existing customers. We then
                  combine
                  net sales to new and existing customers to calculate total Vacation
                  Interval sales.
 
 One
        product that is sold to new customers is a Sampler, which gives the customer
        the
        right to use the resorts on an “as available” basis from Sunday to Thursday.
        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 consolidated statement of operations. Conversely, incremental
        revenue in excess of incremental costs is recorded as a reduction of inventory
        in the consolidated balance sheet. Incremental costs include costs that would
        not have been incurred had we not sold samplers. During the year ended December
        31, 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. The amount of the reduction to sales and marketing expense
        for
        sampler sales in 2006 was $2.9 million. Prior to SFAS No. 152, sampler sales
        were reported separately as revenue. We recognized $2.6 million and $2.2
        million
        in revenues from sampler sales for the years ended December 31, 2005 and
        2004,
        respectively.
 
 46
 The
        following table shows the elements management considers important to assessing
        our Vacation Interval sales (dollars in thousands, except for sales per
        tour):
 
 **Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Tours
                  to potential new purchasers
              
              
              73,065
              
              
              74,244
              
              
              86,950Sales
                  per tour
              
              $
              1,183
              
              $
              1,160
              
              $
              1,217Gross
                  sales to new customers
              
              
              86,466
              
              
              86,156
              
              
              105,785Rescission
                  of sales to new customers
              
              
              (18,619
              )
              
              (17,932
              )
              
              (19,970
              )Net
                  sales to new customers
              
              
              67,847
              
              
              68,224
              
              
              85,815Gross
                  sales to existing customers
              
              
              77,010
              
              
              87,083
              
              
              109,524Rescission
                  of sales to existing customers
              
              
              (4,661
              )
              
              (6,268
              )
              
              (4,953
              )Net
                  sales to existing customers
              
              
              72,349
              
              
              80,815
              
              
              104,571Total
                  sales
              
              
              140,196
              
              
              149,039
              
              
              190,386Less
                  sampler sales
              
              
              (2,150
              )
              
              (2,623
              )
              
              (2,905
              )Total
                  Vacation Interval sales
              
              $
              138,046
              
              $
              146,416
              
              $
              187,481Rescission
                  rate for new customers
              
              
              21.5
              %
              
              20.8
              %
              
              18.9
              %Rescission
                  rate for existing customers
              
              
              6.1
              %
              
              7.2
              %
              
              4.5
              %Rescission
                  rate for all customers
              
              
              14.2
              %
              
              14.0
              %
              
              11.6
              %
 
 ·
              In
                  assessing the effectiveness of our sales and marketing programs,
                  we
                  believe it is also important to compare sales and marketing expenses
                  to
                  sales. The separate elements of sales and marketing expense that
                  we assess
                  are the cost of marketing to new purchasers, the cost of marketing
                  to
                  existing purchasers, offsite marketing, commissions, and sales
                  and
                  marketing overhead, as detailed in the following table (dollars
                  in
                  thousands, except for cost per
                  tour):
  **Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Tours
                  to potential new purchasers
              
              
              73,065
              
              
              74,244
              
              
              86,950Cost
                  per tour (rounded to nearest whole dollar)
              
              $
              431
              
              $
              463
              
              $
              424Cost
                  of marketing to new purchasers
              
              
              31,490
              
              
              34,378
              
              
              36,875Cost
                  of marketing to existing purchasers
              
              
              7,885
              
              
              8,000
              
              
              11,649Offsite
                  marketing
              
              
              —
              
              
              —
              
              
              6,041Commissions
              
              
              23,513
              
              
              23,178
              
              
              29,733Sales
                  and marketing overhead
              
              
              9,002
              
              
              9,111
              
              
              12,564Sampler
                  sales offset
              
              
              —
              
              
              —
              
              
              (2,905
              )Total
                  sales and marketing expense
              
              $
              71,890
              
              $
              74,667
              
              $
              93,957As
                  a percentage of Vacation Interval sales:Cost
                  of marketing to new purchasers
              
              
              22.8
              %
              
              23.5
              %
              
              19.7
              %Cost
                  of marketing to existing purchasers
              
              
              5.7
              %
              
              5.5
              %
              
              6.2
              %Offsite
                  marketing
              
              
              0.0
              %
              
              0.0
              %
              
              3.2
              %Commissions
              
              
              17.1
              %
              
              15.8
              %
              
              15.9
              %Sales
                  and marketing overhead
              
              
              6.5
              %
              
              6.2
              %
              
              6.7
              %Sampler
                  sales offset
              
              
              0.0
              %
              
              0.0
              %
              
              (1.6
              )%Total
                  sales and marketing expense
              
              
              52.1
              %
              
              51.0
              %
              
              50.1
              %
 
 ·
              Our
                  second most important source of revenue is interest income, which
                  is
                  predominantly earned on our notes receivable. Interest income as
                  a
                  percentage of notes receivable has increased each year from 2002
                  through
                  2006****as
                  a result of periodically increasing the interest rate we charged
                  our new
                  customers.
 
 ·
              We
                  have three lesser revenue sources. They are management fees, predominantly
                  from Silverleaf Club, gain on sale of notes receivable from our
                  sale of
                  notes receivable to our off-balance sheet special purpose entities,
                  and
                  other income. The gain on sale of notes receivable were $1.9 million,
                  $6.5
                  million and $0 for the years ended December 31, 2004, 2005 and
                  2006,
                  respectively.
 
 47
 ·
              We
                  generate cash from the collection of down payments, principal and
                  interest
                  from purchasers of timeshare interval sales, the sales of notes
                  receivable
                  and from management fees and other income. We also generated cash
                  in 2005
                  and 2006 from the sale of undeveloped land at locations that had
                  been
                  previously acquired for the possible development of new resorts.
 
 ·
              Since
                  the majority of our sales are financed, we have revolving credit
                  facilities that are drawn on monthly to fund our costs, expenses
                  and
                  capital expenditures.
 
 We
        operate principally in only one business segment, the timeshare industry.
        Further, we only operate in the United States. As of December 31, 2006, we
        operate resorts in six states (Texas, Missouri, Illinois, Massachusetts,
        Georgia, and Florida), and sell primarily to residents of those states, with
        limited sales to residents of nearby states. In April 2006, we purchased
        Pinnacle Lodge, a hotel property located near the Winter Park recreational
        area
        in Colorado which provides our owners with another destination vacation
        alternative and gives Silverleaf an entry point into this increasingly popular
        destination area.
 
 Our
        principal short-term focus is on continuing to conservatively increase annual
        revenues. We will continue to identify new and existing customers with
        acceptable credit characteristics that will allow us to profitably sell new,
        upgrade, and additional Vacation Intervals at our Existing Resorts. Long
        term,
        if the opportunities present themselves, we will consider adding and developing
        new resorts where timeshare intervals can be marketed and sold at a
        profit.
 
 **Critical
        Accounting Policies**
 
 *Revenue
        and Expense Recognition —* 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 year ended December 31, 2006, nor did it result in a cumulative
        effect adjustment.
 
 A
        substantial portion of Vacation Interval sales are made in exchange for mortgage
        notes receivable, which are secured by a deed of trust on the Vacation Interval
        sold. We recognize the sale of a Vacation Interval under the full accrual
        method
        after a binding sales contract has been executed, the buyer has made a down
        payment of at least 10%, and the statutory rescission period has expired.
        If all
        accrual method criteria are met except that significant development costs
        remain
        to complete the project or phase, revenues are recognized on the
        percentage-of-completion basis. Under this method, the amount of revenue
        recognized (based on the sales value) at the time a sale is recognized is
        measured by the relationship of costs already incurred to the total of costs
        already incurred and estimated future costs. The remaining amount is deferred
        and recognized as the remaining costs are incurred. There were no sales deferred
        at December 31, 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 evaluate the estimated cost of sales percentage, using updated
        information for 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.
 
 48
 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.
 
 *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.
 
 The
        provision for uncollectible notes as a percentage of Vacation Interval sales
        was
        reported as 0% in the provision expense line for the year ended December
        31,
        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% for the year ended December 31, 2006. Our provision
        for uncollectible notes as a percentage of Vacation Interval sales was 19.4%
        and
        16.2% for the years ended December 31, 2004 and 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, our net provision for expected credit losses would have been
        lower
        for the year ended December 31, 2006 versus the year ended December 31, 2005.
        The net improvement is due to the improved
        performance of notes originated in 2003 through 2006 as compared to notes
        originated in earlier years, before we implemented programs focused on selling
        to customers with a higher quality of credit. We will continue our current
        collection programs and seek new programs to reduce note defaults and improve
        the credit quality of our customers. However, there can be no assurance that
        these efforts will be successful.
 
 49
 *Inventories
        -* Inventories
        are stated at the lower of cost or market value. Cost includes amounts for
        land,
        construction materials, amenities and common costs, direct labor and overhead,
        taxes, and capitalized interest incurred in the construction or through the
        acquisition of resort dwellings held for timeshare sale. Timeshare unit costs
        are capitalized as inventory and are allocated to cost of Vacation Interval
        sales 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
        December 31, 2006, the estimated costs not yet incurred, which are expected
        to
        complete promised amenities was $2.1 million. We allocate the estimated promised
        and completed amenities cost to cost of Vacation Interval sales based on
        Vacation Intervals sold in a given period as a percentage of total Vacation
        Intervals expected to sell over the life of a particular resort
        project.
 
 The
        relative sales value method of recording Vacation Interval cost of sales
        has
        been amended by SFAS No. 152 beginning January 1, 2006 to include estimated
        future defaults of uncollectible sales and the subsequent resale of the
        recovered Vacation Intervals reacquired on future cancelled sales in our
        total
        estimate of revenues we expect to earn on a project. We periodically review
        the
        carrying value of our inventory on an individual project basis for impairment,
        to ensure that the carrying value does not exceed market value.
 
 Management
        periodically reviews the carrying value of our inventory on an individual
        project basis to ensure that the carrying value does not exceed market
        value.
 
 Vacation
        Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu
        of
        foreclosure) and (ii) trade-in associated with the purchase of an upgraded
        or
        downgraded Vacation Interval. Vacation Intervals reacquired are recorded
        in
        inventory at the lower of their original cost or market value. Vacation
        Intervals that have been reacquired are relieved from inventory on a specific
        identification basis when resold. Inventory acquired several years ago through
        our program to reacquire Vacation Intervals owned but not actively used by
        Silverleaf Owners has a significantly lower average cost basis than recently
        constructed inventory, contributing significantly to historical operating
        margins. Newer inventory added through our construction and acquisition programs
        has a higher average cost than our older inventory.
 
 **Liquidity
        and Capital Resources**
 
 As
        of
        December 31, 2003 and all periods thereafter, we have been in full compliance
        with our debt covenants in our credit facilities with all of our senior lenders.
        The following table summarizes our credit agreements with our senior lenders
        and
        our off-balance sheet special purpose finance subsidiary, SF-III, as of December
        31, 2006 (in thousands):
 
 **Maximum**
                **Amount**
                **Available**
              
              **12/31/06**
                **Balance**Receivable
                  Based Revolvers
              
              $
              295,000
              
              $
              51,827Receivable
                  Based Non-Revolvers
              
              
              152,438
              
              
              152,438Inventory
                  Loans
              
              
              62,115
              
              
              40,976Sub-Total
                  On Balance Sheet
              
              
              509,553
              
              
              245,241Off-Balance
                  Sheet Receivable Based Term Loan
              
              
              52,295
              
              
              52,295Grand
                  Total
              
              $
              561,848
              
              $
              297,536
 
 We
        use
        these credit agreements to finance the sale of Vacation Intervals, to finance
        construction, and for working capital needs. The loans mature between April
        2008
        and July 2018, and are collateralized (or cross-collateralized) by customer
        notes receivable, inventory, construction in process, land, improvements,
        and
        related equipment at certain of the Existing Resorts. Our fixed-to-floating
        debt
        ratio at December 31, 2006 was 62% fixed rate debt to 38% floating rate debt.
        The credit facilities that bear interest at variable rates are tied to the
        prime
        rate, LIBOR, or the corporate rate charged by certain banks. The credit
        facilities secured by customer notes receivable allow advances of 75% to
        80% of
        the unpaid balance of certain eligible customer notes receivable. In addition,
        we have $3.8 million of senior subordinated notes due April 2007, $2.1 million
        of senior subordinated notes due April 2008, and $24.7 million of senior
        subordinated notes due April 2010, with interest payable semi-annually on
        April
        1 and October 1, guaranteed by all of our present and future domestic restricted
        subsidiaries.
 
 ***Sources
        of Cash.*** We
        generate cash primarily from the cash received on the sale of Vacation
        Intervals, the financing of customer notes receivable from Silverleaf Owners,
        the sale of notes receivable to our special purpose entities, management
        fees,
        sampler sales, marina income, golf course and pro shop income, and utility
        operations (through the first quarter of 2005). We typically receive a 10%
        to
        15% down payment on sales of Vacation Intervals and finance the remainder
        by
        receipt of a seven-year to ten-year customer promissory note. We generate
        cash
        from the financing of customer notes receivable by (i) borrowing at an advance
        rate of 75% to 80% 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 years ended December 31, 2004 and 2005,
        we
        had net cash provided by operating activities of $9.4 million and $75.7 million,
        respectively. In 2005, the increase in cash provided by operating activities
        was
        primarily the result of increased sales of notes receivable, partially offset
        by
        the increase in our maximum exposure to loss regarding our involvement with
        SF-III.
 
 50
 Operating
        activities typically reflect net cash provided by operations; however for
        the
        year ended December 31, 2006 we had net cash used in operating activities
        of
        $45.6 million. The net decrease in cash flow of $121.3 million between 2005
        and
        2006 resulted primarily from cash provided by the sale of notes receivable
        in
        2005 of $104.2 million. There were no sales of notes receivable in 2006.
        In
        addition, we had a 28.0% increase in Vacation Interval sales in 2006 which
        resulted in a $44.8 million increase in cash used for financing of sales
        between
        2005 and 2006. Construction of additional units at our existing resorts also
        increased $9.6 million in 2006.
 
 Although
        it appears we have adequate liquidity to meet our needs through 2008, we
        are
        continuing to identify additional financing arrangements into 2009 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 management deems prudent. In the first quarter of 2007,
        we
        consolidated our debt with Textron Financial Corporation into one revolving
        loan. As a result of the amended and restated loan and security agreement,
        the
        funding period on the consolidated debt has been extended from June 2008
        to
        January 2010, with revised maturity dates of January 31, 2013 for the
        receivables component and January 31, 2012 on both the acquisition and inventory
        components. In addition, the interest rates previously charged have been
        reduced. This transaction is described in more detail under the heading
“Subsequent Events” in Note 17 to our Consolidated Financial Statements
        beginning on page F-1.
 
 ***Uses
        of Cash.*** Investing activities typically reflect a net use of cash due to capital
        additions and property acquisitions. However, for the year ended 2005, net
        cash
        provided by investing activities was $18.5 million. In 2005, the net cash
        provided by investing activities was primarily due to the sale of our water
        distribution and waste water treatment utilities assets at eight of our resorts,
        and the sale of undeveloped land located in Luzerne County, Pennsylvania.
        Net
        cash used in investing activities for the years ended December 31, 2004 and
        2006
        was $1.3 million and $13.6 million, respectively. In 2004 the net cash used
        in
        investing activities consisted of equipment purchases. The increase in net
        cash
        used in investing activities for the year 2006 was primarily due to the purchase
        of the following assets in 2006; Pinnacle Lodge, a 64 room hotel located
        near
        the Winter Park recreational area in Colorado, two offsite sales offices,
        and a
        corporate aircraft. We also began construction on a water park at one of
        our
        resorts in 2006. We evaluate sites for additional new resorts or acquisitions
        on
        an ongoing basis.
 
 Net
        cash
        used in financing activities for the years ended December 31, 2004 and 2005
        was
        $1.2 million and $94.1 million, respectively. During 2005, the increase in
        cash
        used in financing activities was the result of increased payments on borrowings
        against pledged notes receivable and the repurchase of previously sold notes.
        We
        paid fair value for the outstanding balance of notes receivable under SF-I,
        two
        non-revolving loans with one of our senior lenders, three term notes with
        another senior lender, and the outstanding balance under both the receivable
        and
        inventory loans with a third senior lender. Net cash provided by financing
        activities was $59.7 million during the year ended December 31, 2006. This
        was
        due primarily to borrowings under the SF-V Series 2006-A Notes which originated
        in 2006.
 
 At
        December 31, 2006, our senior credit facilities provided for loans of up
        to
        $509.6 million, of which approximately $245.2 million of principal related
        to
        advances under the credit facilities was outstanding. At December 31, 2006,
        the
        weighted average cost of funds for all borrowings was 7.9%. Customer defaults
        have a significant impact on cash available to us 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 December 31, 2006, $4.7 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. The payment of 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 2003, we sold
        $40.4 million of notes receivable to SF-I and recognized pre-tax gains of
        $3.2
        million. In conjunction with these sales, we received cash consideration
        of
        $31.8 million, which was primarily used to pay down borrowings under our
        revolving loan facilities. During 2004, we sold $27.4 million of notes
        receivable to SF-I and recognized pre-tax gains of $1.9 million. In conjunction
        with these sales, we received cash consideration of $20.6 million, which
        was
        used to pay down borrowings under our revolving loan facilities. During 2005,
        we
        sold $8.0 million of notes receivable to SF-I and recognized pre-tax gains
        of
        $669,000. In conjunction with these sales, we received cash consideration
        of
        $6.0 million, which was used to pay down borrowings under our revolving loan
        facilities. SF-I funded all of these purchases through advances under a credit
        agreement arranged for this purpose. We receive fees for servicing sold
        receivables, calculated based on 1% of eligible receivables held by the
        facility. Such fees were $684,000, $355,000, and $0 for the years ended December
        31, 2004, 2005, and 2006, respectively. 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.
 
 51
 During
        the third quarter of 2005 we closed a term securitization transaction with
        a
        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 ranging from Class A through Class D notes with
        a
        blended fixed rate of 5.4%. 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 gross cash consideration of $108.7
        million, which was primarily used to pay off in full the credit facility
        of SF-I
        and to pay down amounts we owed under credit facilities with our senior lenders.
        We dissolved SF-I simultaneously with the sale of the timeshare receivables
        to
        SF-III. The timeshare receivables we sold to SF-III are without recourse
        to us,
        except for breaches of certain representations and warranties at the time
        of
        sale. W e
        are responsible
        for servicing the timeshare receivables purchased by SF-III pursuant to the
        terms of the Indenture and will receive a fee for our services equal to 1.75%
        of
        eligible timeshare receivables held by the facility. Such fees were $1.5
        million
        and $1.1 million for the years ended December 31, 2006 and 2005, respectively.
        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 December 31, 2006, SF-III held notes receivable totaling
        $62.7
        million, with related borrowings of $52.3 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 year ended December 31, 2006, we paid approximately $2.1
        million to repurchase the Vacation Intervals securing defaulted contracts
        to
        facilitate the re-marketing of those Vacation Intervals. Our total investment
        in
        SF-III was carried at $13.0 million at December 31, 2006, which represents
        our
        maximum exposure to loss regarding our involvement with SF-III.
 
 Our
        special purpose entities allow us to realize the benefit of additional credit
        availability we have with our current senior lenders. We require credit
        facilities to have the liquidity necessary to fund our costs and expenses,
        therefore it is vitally important to our liquidity plan to have financing
        available to us in order to finance future sales, since we finance the majority
        of our timeshare sales over seven to ten years.
 
 *Income
        Taxes.* For
        regular federal income tax purposes, we report substantially all of the Vacation
        Interval sales we finance under the installment method. Under this method,
        income on sales of Vacation Intervals is not recognized until cash is received,
        either in the form of a down payment or as installment payments on customer
        notes receivable. The deferral of income tax liability conserves cash resources
        on a current basis. Interest is imposed, however, on the amount of tax
        attributable to the installment payments for the period beginning on the
        date of
        sale and ending on the date the payment is received. If we are not subject
        to
        tax in a particular year, no interest is imposed since the interest is based
        on
        the amount of tax paid in that year. The consolidated financial statements
        do
        not contain an accrual for any interest expense that would be paid on the
        deferred taxes related to the installment method as the interest expense
        is not
        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 2006 and anticipate that we will pay significant AMT in future years.
 
 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.
 
 52
 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. This annual limitation may
        be
        increased for any recognized built-in gain to the extent allowed in Section
        382(h) of the Code. There is an annual limitation of approximately $768,000,
        which was the value of our stock immediately before the ownership change,
        multiplied by the applicable long term tax exempt rate. We believe that
        approximately $36.2 million of our net operating loss carryforwards as of
        December 31, 2006, are subject to the Section 382 limitations.
 
 *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. Prior
        periods have been reclassified for comparability, as required. The carrying
        amounts of the water and utility property assets were $0 as of December 31,
        2005.
  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.
        During
        February 2007, the deadline for obtaining approval from the Texas regulatory
        agencies was extended another 90 days from March 2007 to June 2007. If the
        Purchasers do not receive required approvals from Texas regulators relating
        to
        the utility assets in Texas (the “Texas Assets”) by June 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
        condensed consolidated statements of operations for discontinued operations
        are
        summarized as follows (in thousands):
 
 **Year
                  Ended December 31,****2004**
              
              **2005**REVENUES:Gain
                  on sale of discontinued operations
              
              $
              —
              
              $
              879Other
                  income
              
              
              2,860
              
              
              438Total
                  revenues
              
              
              2,860
              
              
              1,317COSTS
                  AND OPERATING EXPENSES:Other
                  expense
              
              
              1,376
              
              
              278Depreciation
              
              
              859
              
              
              —Interest
                  expense
              
              
              1
              
              
              —Total
                  costs and operating expenses
              
              
              2,236
              
              
              278Income
                  from discontinued operations
              
              
              624
              
              
              1,039Provision
                  for income taxes
              
              
              —
              
              
              (298
              )Income
                  from discontinued operations
              
              $
              624
              
              $
              741
 
 There
        were no discontinued operations during the year ended December 31,
        2006.
  53


**Results
      of Operations**





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


**Years
                Ended December 31,****2004**
            
            **2005**
            
            **2006**As
                a percentage of total revenues:Vacation
                Interval sales
            
            
            75.1
            %
            
            72.5
            %
            
            90.6
            %Estimated
                uncollectible revenue
            
            
            0.0
            %
            
            0.0
            %
            
            (15.7
            )%Sampler
                sales
            
            
            1.2
            %
            
            1.3
            %
            
            0.0
            %Net
                sales
            
            
            76.3
            %
            
            73.8
            %
            
            74.9
            %Interest
                income
            
            
            20.6
            %
            
            18.9
            %
            
            22.4
            %Management
                fee income
            
            
            0.7
            %
            
            0.9
            %
            
            0.9
            %Gain
                on sale of notes receivable
            
            
            1.0
            %
            
            3.2
            %
            
            0.0
            %Other
                income
            
            
            1.4
            %
            
            3.2
            %
            
            1.8
            %Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %As
                a percentage of Vacation Interval sales:Cost
                of Vacation Interval sales
            
            
            18.1
            %
            
            16.0
            %
            
            10.1
            %Sales
                and marketing
            
            
            52.1
            %
            
            51.0
            %
            
            50.1
            %Provision
                for uncollectible notes
            
            
            19.4
            %
            
            16.2
            %
            
            0.0
            %As
                a percentage of total revenues:Operating,
                general and administrative
            
            
            14.0
            %
            
            13.9
            %
            
            15.6
            %Depreciation
            
            
            2.0
            %
            
            1.3
            %
            
            1.2
            %As
                a percentage of interest income:Interest
                expense and lender fees
            
            
            46.6
            %
            
            45.2
            %
            
            46.8
            %





***Results
      of Operations for the Years Ended December 31, 2006 and December 31,
      2005***





Revenues ******





Revenues
      in 2006 were $206.9 million, representing a $5.0 million, or 2.5%, increase
      compared to revenues of $201.9 million for the year ended December 31, 2005.
      This increase primarily relates to increased Vacation Interval sales, discussed
      below, net of gain on sales of notes receivable and other income in
      2005.





In
      accordance with SFAS No. 152, total revenue for the year ended December 31, 2006
      is decreased by estimated uncollectible revenue of $32.5 million, which
      represents estimated future gross cancellations of notes receivable prior to
      any
      recoveries of inventory. In addition, under SFAS No. 152, sampler sales are
      accounted for as incidental operations, which require that any such incidental
      revenues be recorded as a reduction of incremental costs or expenses.
      Accordingly, $2.9 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 year ended December 31, 2006. Had these
      two
      changes mandated by SFAS No. 152 not been made, revenues would have increased
      by
      20.0% to $242.3 million.





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





**2005**
            
            **2006****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Units**
            
            **Price**
            
            **$
                Sales**
            
            **Units**
            
            **Price**Interval
                Sales to New Customers
            
            $
            65,601
            
            
            5,364
            
            $
            12,230
            
            $
            82,909
            
            
            6,557
            
            $
            12,644Upgrade
                Interval Sales to Existing Customers
            
            
            53,734
            
            
            6,576
            
            
            8,171
            
            
            72,366
            
            
            8,777
            
            
            8,245Additional
                Interval Sales to Existing Customers
            
            
            27,081
            
            
            2,968
            
            
            9,124
            
            
            32,206
            
            
            3,298
            
            
            9,765Total
            
            $
            146,416
            
            
            
            
            
            
            
            $
            187,481





Overall,
      Vacation Interval sales increased 28.0% in 2006 versus 2005, due to increased
      interval sales to both new and existing customers as a result of increased
      demand from our existing customers for upgraded intervals, higher closing
      percentages, and lower rescission rates. The number of interval sales to new
      customers increased 22.2% and average prices increased 3.4%, resulting in a
      26.4% net increase in Vacation Interval sales to new customers in 2006 versus
      2005. The number of interval sales to existing customers increased 26.5% and
      average prices increased 2.3%, resulting in a 29.4% net increase in sales to
      existing customers during 2006 versus 2005.




54





We
      anticipate continued growth in our annual Vacation Interval sales in 2007.
      This
      growth will be achieved through a combination of:





·
            Increased
                sales to new customers.





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





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





·
            Anticipate
                a permanent opening of our second off site sales center near Chicago,
                Illinois.





Estimated
      uncollectible revenue was $32.5 million for the year ended December 31, 2006
      versus $0 reported on this line for 2005. As discussed previously, SFAS No.
      152
      requires the estimated uncollectible revenue to be recorded as a reduction
      to
      Vacation Interval sales and no longer net of inventory recovery beginning in
      2006 rather than as an expense item: provision for uncollectible notes, as
      it
      was previously recorded.





Sampler
      sales primarily function as a marketing program, allowing us additional
      opportunities to sell a Vacation Interval to a prospective customer. Sampler
      sales are not recognized in the consolidated statement of operations until
      the
      customer uses the stay or our obligation has elapsed, which often does not
      occur
      until the sampler contract expires eighteen months after the sale is
      consummated. Sampler sales for the year 2006 were reported as $0 compared to
      $2.6 million for 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 year ended December
      31, 2006, all sampler sales of $2.9 million were recorded as a reduction to
      sales and marketing expense, since incremental costs of sampler sales exceeded
      incremental sampler sales.




Interest
      income increased $8.0 million, or 21.2%, to $46.2 for the year ended December
      31, 2006 from $38.2 million for 2005. The increase primarily resulted from
      a
      higher average notes receivable balance in 2006 versus the same period of 2005,
      a $2.1 million increase in interest accretion related to the investment in
      special purpose entity for the year ended December 31, 2006 versus the year
      ended December 31, 2005, and an increase in the average yield on our outstanding
      notes receivable to 15.7% at December 31, 2006 from 15.3% at December 31, 2005.





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 constant at $1.9 million for both years ended December 31,
      2006
      and 2005.





There
      were no sales of notes receivable during the year of 2006. Gain on sale of
      notes
      receivable was $6.5 million during 2005, resulting from the sale of $8.0 million
      and $132.8 million of notes receivable to SF-I and SF-III, respectively, and
      recognizing pre-tax gains of $669,000 and $5.8 million, respectively. In
      connection with the sale to SF-I, we received cash consideration of $6.0
      million, which was used to pay down borrowings under our senior revolving loan
      facilities. In connection with the sale to SF-III, we received gross cash
      consideration of $108.7 million, which was used to pay off in full the credit
      facility of SF-I and to pay down borrowings under our senior revolving loan
      facilities.





Other
      income consists of marina income, golf course and pro shop income, and other
      miscellaneous items. Other income decreased $2.6 million to $3.8 million for
      the
      year ended December 31, 2006, compared to $6.4 million for the year ended
      December 31, 2005. The decrease is primarily due to a $3.6 million gain on
      the
      sale of undeveloped land located in Pennsylvania during 2005, which is partially
      offset by a $0.5 million gain on the sale of two parcels of Mississippi land
      during 2006. Other than these two land sales, other income remained fairly
      constant for the years ended December 31, 2006 and 2005.





Cost
      of Vacation Interval Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 10.1% in 2006,
      versus 16.0% in 2005. This decrease is primarily due to the implementation
      of
      SFAS No. 152 effective January 1, 2006, which amends the relative sales value
      method of recording Vacation Interval cost of sales to include an estimate
      of
      future defaults of uncollectible revenue, both actual to date plus expected
      future revenue. The relative sales value method is used to allocate inventory
      cost and determine cost of sales in conjunction with a sale. Under the relative
      sales value method, cost of sales is estimated as a percentage of net sales
      using a cost of sales percentage which represents the ratio of total estimated
      cost, including both costs already incurred plus costs to complete the phase,
      if
      any, to total estimated Vacation Interval revenue under the project, including
      amounts already recognized and future revenues. Common costs, including
      amenities, are allocated to inventory cost among the phases that those costs
      are
      expected to benefit. The estimate of total revenue for a phase, which includes
      both actual to date revenues and expected future revenues, incorporates factors
      such as actual or estimated uncollectibles, changes in sales mix and unit sales
      prices, repossessions of intervals, effects of upgrade programs, and past and
      expected future sales programs to sell slow moving inventory units.




55





For
      comparability, had cost of sales not been reduced by the estimated future
      recoveries of inventory, as described above, cost of sales for 2006 would have
      been 14.5% of Vacation Interval Sales versus 16.0% in 2005. Higher
      average sales prices during 2006 compared to 2005 contributed to the reduction
      in cost of sales as a percentage of Vacation Interval sales.





Sales
      and Marketing





Sales
      and
      marketing expenses as a percentage of Vacation Interval sales decreased to
      50.1%
      for the year ended December 31, 2006 versus 51.0% for the same period of 2005.
      In accordance with SFAS No. 152 and as discussed in sampler sales above, $2.9
      million of sampler revenues were recorded as a reduction to sales and marketing
      expense since the incremental costs of our sampler sales exceeded incremental
      sampler revenue. Had sales and marketing expense not been reduced by sampler
      sales, sales and marketing expense would have been 51.7% of Vacation Interval
      sales for the year ended December 31, 2006. The increase compared to the
      previous year is due to our costs associated with our newly opened off-site
      sales centers as well as the investment in securing additional personnel and
      processes ahead of the expected growth for which we are planning.




Provision
      for Uncollectible Notes





The
      provision for uncollectible notes as a percentage of Vacation Interval sales
      was
      reported as 0% in the provision expense line for 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% for 2006. Our provision
      for uncollectible notes as a percentage of Vacation Interval sales was 16.2%
      during 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 2006, which compares favorably
      to
      16.2% for 2005. The net percentage improvement is due to the improved
      performance of notes originated in 2003 through 2006 as compared to notes
      originated in earlier years, before we implemented programs focused on selling
      to customers with a higher quality of credit. We will continue our current
      collection programs and seek new programs to reduce note defaults and improve
      the credit quality of our customers. However, there can be no assurance that
      these efforts will be successful.





Operating,
      General and Administrative





Operating,
      general and administrative expenses as a percentage of total revenues increased
      to 15.6% in 2006 from 13.9% in 2005. Overall, operating, general and
      administrative expenses increased $4.3 million during 2006 as compared to 2005,
      primarily due to increased professional fees of $1.9 million and increased
      salaries of $1.5 million. Excluding
      the impact of SFAS No. 152 on our revenues during 2006 as described above,
      operating, general and administrative expenses as a percentage of total revenues
      would have been 13.3% during 2006.





Depreciation





Depreciation
      expense as a percentage of total revenues decreased to 1.2% in 2006 from 1.3%
      in
      2005. Overall, depreciation expense decreased $184,000 for the year of 2006
      versus the same period of 2005.





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income increased to 46.8%
      for the year ended December 31, 2006, compared to 45.2% for the same period
      of
      2005. Overall, interest expense and lender fees increased $4.4 million for
      2006
      versus 2005, primarily due to a larger average debt balance outstanding during
      2006, net of a decrease in our weighted average cost of borrowings from 8.1%
      for
      the year ended December 31, 2005 to 7.9% for same period of 2006.




56


Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      income of $37.4 million for the year ended December 31, 2006, as compared to
      $32.2 million for the year ended December 31, 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 a provision of 38.5% for 2006, as compared to 30.2%
      for 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 for all of 2006.





Income
      from Continuing Operations





Income
      from continuing operations increased to $23.0 million for the year ended
      December 31, 2006, as compared to $22.4 million for the year ended December
      31,
      2005, as a result of the above-mentioned operating results.





Income
      from Discontinued Operations





Income
      from discontinued operations was $741,000, net of income taxes, during the
      year
      ended December 31, 2005, compared to $0 during the same period of 2006. We
      recognized a gain on sale of discontinued operations, net of income taxes,
      of
      $613,000 during 2005 related to the sale of our water distribution and waste
      water treatment utilities assets at eight of our timeshare resorts. We sold
      these assets during the first quarter of 2005, thus there has been no income
      (loss) from discontinued operations since that time.





Net
      Income





Net
      income was $23.0 million for the year ended December 31, 2006, as compared
      to
      $23.2 million for the year ended December 31, 2005, as a result of the
      above-mentioned operating results.





***Results
      of Operations for the Years Ended December 31, 2005 and December 31,
      2004***





Revenues ******





Revenues
      in 2005 were $201.9 million, representing an $18.2 million, or 9.9%, increase
      compared to revenues of $183.7 million for the year ended December 31, 2004.
      This increase primarily relates to increased Vacation Interval sales, discussed
      below, and to a lesser extent, gain on sales of notes receivable and other
      income.





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





**2004**
            
            **2005****$
                Sales**
            
            **Units**
            
            **Average**
                **Price**
            
            **$
                Sales**
            
            **Units**
            
            **Average**
                  **Price**Interval
                Sales to New Customers
            
            $
            65,697
            
            
            5,713
            
            $
            11,500
            
            $
            65,601
            
            
            5,364
            
            $
            12,230Upgrade
                Interval Sales to Existing Customers
            
            
            33,416
            
            
            4,816
            
            
            6,938
            
            
            53,734
            
            
            6,576
            
            
            8,171Additional
                Interval Sales to Existing Customers
            
            
            38,933
            
            
            4,718
            
            
            8,252
            
            
            27,081
            
            
            2,968
            
            
            9,124Total
            
            $
            138,046
            
            
            
            
            
            
            
            $
            146,416





Overall,
      Vacation Interval sales increased 6.1% in 2005 versus 2004. The number of
      interval sales to new customers decreased 6.1% as a result of our marketing
      strategy to improve the sales margin by increasing the proportion of sales
      to
      existing customers over sales to new customers. Average prices of sales to
      new
      customers increased 6.3% however, resulting in relatively no change in interval
      sales to new customers in 2005 versus 2004. The number of interval sales to
      existing customers increased 0.1% in 2005 versus 2004, and average prices
      increased 11.6%, resulting in an 11.7% net increase in the sales amount to
      existing customers during the year ended December 31, 2005 versus the year
      ended
      December 31, 2004.





Sampler
      sales increased to $2.6 million in 2005 compared to $2.2 million in 2004.
      Sampler sales were not recognized as revenue until our obligation had elapsed,
      which often did not occur until the sampler contract expired eighteen months
      after the sale was consummated. Hence, a significant portion of sampler sales
      recognized in 2005 relate to 2003 and 2004 sales activity.




57





Interest
      income increased 0.8% to $38.2 million for the year ended December 31, 2005
      from
      $37.8 million for 2004. The average yield on our outstanding notes receivable
      at
      December 31, 2005 was approximately 15.3%, compared to 15.1% at December 31,
      2004.





Management
      fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
      income increased $655,000 in the year ended December 31, 2005 from the same
      period of 2004, due primarily to increased profitability of the resorts’
management clubs during 2005 versus 2004.





Gain
      on
      sales of notes receivable was $6.5 million during 2005, resulting from the
      sale
      of $8.0 million and $132.8 million of notes receivable to SF-I and SF-III,
      respectively, and recognizing pre-tax gains of $669,000 and $5.8 million,
      respectively. In connection with the sale to SF-I, we received cash
      consideration of $6.0 million, which was used to pay down borrowings under
      our
      senior revolving loan facilities. In connection with the sale to SF-III, we
      received gross cash consideration of $108.7 million, which was used to pay
      off
      in full the credit facility of SF-I and to pay down borrowings under our senior
      revolving loan facilities. The $1.9 million gain during 2004 resulted from
      the
      sale of $27.4 million of notes receivable to SF-I.





Other
      income consists of marina income, golf course and pro shop income, and other
      miscellaneous items. Other income increased $3.9 million to $6.4 million for
      the
      year ended December 31, 2005, compared to $2.5 million for the year ended
      December 31, 2004. The increase is primarily due to a $3.6 million gain on
      the
      sale of undeveloped land located in Pennsylvania during 2005. In addition,
      condo
      rentals at our Orlando Breeze resort, acquired in the fourth quarter of 2004,
      contributed to the increase.





Cost
      of Vacation Interval Sales





Cost
      of
      sales as a percentage of Vacation Interval sales decreased to 16.0% in 2005,
      from 18.1% in 2004, primarily due to selling a much higher percentage of our
      lower cost inventory during 2005 versus selling primarily our higher cost
      inventory during 2004. Higher average sales prices during 2005 compared to
      2004
      also contributed to the reduction in cost of sales as a percentage of Vacation
      Interval sales. The $1.5 million decrease in cost of sales during 2005 compared
      to 2004 is primarily due to increased sales of lower cost inventory. Cost of
      sales as a percentage of Vacation Interval sales is expected to increase in
      future periods as we continue to deplete our inventory of low-cost Vacation
      Intervals and shift our sales mix to more recently constructed units, which
      were
      built at higher average costs.





Sales
      and Marketing





Sales
      and
      marketing expense as a percentage of Vacation Interval sales decreased to 51.0%
      for the year ended December 31, 2005 versus 52.1% for the same period of 2004.
      This reduction is the result of our marketing strategy to improve the sales
      margin and increase the proportion of sales to existing customers over sales
      to
      new customers, as sales to existing customers require less sales and marketing
      expense. For the year ended December 31, 2005, sales to existing customers
      increased to 55.2% of Vacation Interval sales, up from 52.4% during 2004. The
      $2.8 million overall increase in sales and marketing expense is primarily
      attributable to the overall increase in Vacation Interval sales during 2005
      versus 2004.





Provision
      for Uncollectible Notes





Provision
      for uncollectible notes as a percentage of Vacation Interval sales decreased
      to
      16.2% for the year ended December 31, 2005 from 19.4% for 2004. The decrease
      from 2004 to 2005 was due to improved performance of notes originated in 2003,
      2004, and 2005 as compared to notes originated in earlier years, before we
      focused on selling to customers with a higher quality of credit. The allowance
      for doubtful accounts was 22.8% and 21.1% of gross notes receivable as of
      December 31, 2005 and December 31, 2004, respectively. 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 decreased
      to 13.9% in 2005 from 14.0% in 2004. Overall, operating, general and
      administrative expenses increased $2.4 million during 2005 as compared to 2004,
      primarily due to increased salaries and professional fees.





Depreciation





Depreciation
      expense as a percentage of total revenues decreased to 1.3% in 2005 from 2.0%
      in
      2004. Overall, depreciation expense decreased $865,000 in 2005 versus 2004
      due
      to a general reduction in capital expenditures since 2000. In addition,
      depreciation of our water distribution and waste water treatment utilities
      assets was ceased effective December 31, 2004 due to the assets being designated
      as held for sale.




58





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income remained fairly
      constant at 45.2% for the year ended December 31, 2005, compared to 46.6% for
      the year ended December 31, 2004.





Income
      before Provision for Income Taxes and Discontinued Operations





Income
      before provision for income taxes and discontinued operations increased to
      $32.2
      million for the year ended December 31, 2005, as compared to $13.2 million
      for
      the year ended December 31, 2004, as a result of the above-mentioned operating
      results.





Provision
      for Income Taxes





Provision
      for income taxes as a percentage of income before provision for income taxes
      and
      discontinued operations was 30.2% for 2005, as compared to 0.2% for 2004. The
      higher effective income tax rate during 2005 was the result of utilizing enough
      of the NOL carryforward and other deferred tax assets during the year, causing
      us to move into a net deferred tax liability position at year-end. The low
      effective income tax rate during the same period of 2004 was the result of
      being
      in a net deferred tax asset position for our 2004 year-end, which was offset
      by
      a valuation allowance, which reduced the net deferred tax assets to zero due
      to
      the unpredictability of recovery.





Income
      from Continuing Operations





Income
      from continuing operations increased to $22.4 million for the year ended
      December 31, 2005, as compared to $13.1 million for the year ended December
      31,
      2004, as a result of the above-mentioned operating results.





Income
      from Discontinued Operations





Income
      from discontinued operations increased to $741,000 during the year ended
      December 31, 2005, compared to $624,000 during the same period of 2004. We
      recognized a gain on sale of discontinued operations, net of income taxes,
      of
      $613,000 during 2005 related to the sale of our water distribution and waste
      water treatment utilities assets at eight of our timeshare resorts. We sold
      these assets 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 income of $23.2 million for the year ended December 31,
      2005, as compared to $13.8 million for the year ended December 31, 2004, as
      a
      result of the above-mentioned operating results.





**Contractual
      Obligations and Commitments**





The
      following table summarizes our scheduled contractual commitments as of December
      31, 2006 (in thousands):





**2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**Long-term
                debt
            
            $
            28,888
            
            $
            46,829
            
            $
            19,987
            
            $
            63,542
            
            $
            74,700
            
            $
            195,642Capital
                leases
            
            
            592
            
            
            585
            
            
            505
            
            
            115
            
            
            114
            
            
            —Operating
                leases
            
            
            2,619
            
            
            2,260
            
            
            1,731
            
            
            857
            
            
            360
            
            
            88Other
                purchase obligations:Construction
                commitments
            
            
            21,843
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Employment
                agreements
            
            
            1,335
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            55,277
            
            $
            49,674
            
            $
            22,223
            
            $
            64,514
            
            $
            75,174
            
            $
            195,730





Long
      term
      debt includes $145.3 million of future interest and capital leases include
      $192,000 of future interest, using an approximate interest rate of 7.9%, which
      is our weighted average cost of borrowing at December 31, 2006. We also have
      a
      $15.7 million demand note with SF-II, our wholly owned on-balance sheet conduit
      financing subsidiary that is not included in long-term debt, since the note
      represents only a potential, future cash outlay, and in addition, is eliminated
      on a consolidated basis.




59





**Inflation**





Inflation
      and changing prices have not had a material impact on our revenues, operating
      income, and net income during any of the three most recent fiscal years.
      However, to the extent inflationary trends affect short-term interest rates,
      a
      portion of our debt service costs may be affected as well as the rates we charge
      on our customer notes receivable.





**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 Statement No. 133, Accounting
      for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and Financial
      Accounting Standards Board Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities. 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 SFAS 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. This
      statement shall be effective for all financial instruments acquired, issued,
      or
      subject to a remeasurement (new basis) event occurring after the beginning
      of an
      entity's first fiscal year that begins after September 15, 2006. The fair value
      election provided for in paragraph
      4(c)
      of
      this Statement may also be applied upon adoption of this Statement for hybrid
      financial instruments that had been bifurcated under paragraph
      12 of Statement 133prior to
      the adoption of this Statement. Earlier adoption is permitted as of the
      beginning of an entity's fiscal year, provided the entity has not yet issued
      financial statements, including financial statements for any interim period
      for
      that fiscal year. The adoption of SFAS No. 155 is not expected to have a
      material impact on our consolidated financial condition 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 the adoption of SFAS No. 156 will have on our consolidated
      financial condition 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 condition and
      results of operations.





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





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




60





*SFAS
      No. 159* ***-*** ** In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
      No. 159”), which allows an irrevocable election to measure certain financial
      assets and financial liabilities at fair value on an instrument-by-instrument
      basis, with unrealized gains and losses recognized currently in earnings. Under
      SFAS No. 159, the fair value option may only be elected at the time of initial
      recognition of a financial asset or financial liability or upon the occurrence
      of certain specified events. Additionally, SFAS No. 159 provides that
      application of the fair value option must be based on the fair value of an
      entire financial asset or financial liability and not selected risks inherent
      in
      those assets or liabilities. SFAS No. 159 requires that assets and liabilities
      which are measured at fair value pursuant to the fair value option be reported
      in the financial statements in a manner that separates those fair values from
      the carrying amounts of similar assets and liabilities which are measured using
      another measurement attribute. SFAS No. 159 also provides expanded disclosure
      requirements regarding the effects of electing the fair value option on the
      financial statements. SFAS No. 159 is effective prospectively for fiscal years
      beginning after November 15, 2007, with early adoption permitted for fiscal
      years in which interim financial statements have not been issued, provided
      that
      all of the provisions of SFAS No. 157 are early adopted as well. We are
      currently assessing the financial impact the adoption of SFAS No. 159 will
      have
      on our consolidated financial condition and results of operations.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Interest
      on our notes receivable portfolio, senior subordinated debt, capital leases,
      and
      miscellaneous notes is fixed, whereas interest on our primary loan agreements
      which had a total facility amount of $509.6 million at December 31, 2006, have
      a
      fixed-to-floating debt ratio of 62% fixed rate debt to 38% floating rate debt.
      The impact of a one-point effective interest rate change on the $92.8 million
      balance of variable-rate financial instruments at December 31, 2006, on our
      annual results of operations would be approximately $928,000, or approximately
      $0.02 per diluted share.





At
      December 31, 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 December 31, 2006 could result in
      a
      fair value impact of approximately $9.9 million over the 6.75 year weighted
      average remaining life of our notes receivable portfolio.





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





We
      offer
      financing to the buyers of Vacation Intervals at our resorts. These buyers
      generally make a down payment of at least 10% of the purchase price and deliver
      a promissory note to us for the balance. The promissory notes generally bear
      interest at a fixed rate, are payable over a seven-year to ten-year period,
      and
      are secured by a first mortgage on the Vacation Interval. We bear the risk
      of
      default 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 operating activities because
      the interest rates we charge our customers who finance the purchase of their
      Vacation Intervals have exceeded the interest rates we pay to our senior
      lenders. Because 38% of our indebtedness bears interest at variable rates and
      our customer receivables bear interest at fixed rates, increases in interest
      rates will erode the income that we have historically obtained due to this
      spread and could cause the rate on our borrowings to exceed the rate at which
      we
      provide financing to our customers.





To
      partially offset an increase in interest rates, we have engaged in two interest
      rate hedging transactions, or derivatives, related to our conduit loan with
      SF-II, for a notional amount of $39.3 million at December 31, 2006, that expires
      between September 2011 and March 2014. Our VFN with SF-IV also acts as an
      interest rate hedge since it contains a provision for an interest rate cap,
      however there are no amounts outstanding under this line of credit at December
      31, 2006.




61





In
      addition, the Series 2005-A Notes related to our off-balance sheet special
      purpose finance subsidiary, SF-III, with a balance of $52.3 million at December
      31, 2006, bear interest at a blended fixed rate of 5.4%, and the Series 2006-A
      Notes related to SF-V bear interest at a blended fixed rate of 6.7%.





*Availability
      of Funding Sources —* We
      fund
      substantially all of our notes receivable, timeshare inventories, and land
      inventories which we originate or purchased 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 position.





In
      the
      first quarter of 2007, we consolidated our debt with Textron Financial
      Corporation into one revolving loan. As a result of the amended and restated
      loan and security agreement, the funding period on the consolidated debt has
      been extended from June 2008 to January 2010, with revised maturity dates of
      January 31, 2013 for the receivables component and January 31, 2012 on both
      the
      acquisition and inventory components. In addition, the interest rates previously
      charged have been reduced. This transaction is described in more detail under
      the heading “Subsequent Events” in Note 17 to our Consolidated Financial
      Statements beginning on page F-1.





*Geographic
      Concentration —* Our
      notes
      receivable are primarily originated in Texas (where approximately 61% of
      Vacation Interval sales took place in 2006), 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
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**


See
          the
          information set forth on Index to Consolidated Financial Statements appearing
          on
          page F-1 of this report on Form 10-K.


**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL** **DISCLOSURE**





None.





**ITEM
      9A. 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 the Chief Financial
      Officer concluded that, as of the end of the period covered by this report,
      those disclosure controls and procedures are effective. There were no changes
      made in our internal control over financial reporting (as defined in Rules
      13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the
      fourth quarter of 2006 that materially affected or are reasonably likely to
      materially affect our internal control over financial reporting.





**ITEM
      9B. OTHER INFORMATION**





There
      is
      no other information that we were required to disclose in a report on Form
      8-K
      during the quarter ended December 31, 2006 that was not reported.




62


**PART
      III**





**MANAGEMENT**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE**





The
      information required by this Item 10 is set forth in our proxy statement
      relating to our 2007 meeting of annual shareholders under the headings “Section
      16(a) Beneficial Ownership Reporting Compliance”, “Directors and Executive
      Officers” and “Executive Compensation,” and this information is incorporated by
      reference to such proxy statement.





The
      information with respect to our audit committee financial expert is contained
      under the caption “Directors and Executive Officers” in our proxy statement for
      our 2007 annual meeting of shareholders and is incorporated by reference to
      such
      proxy statement.





The
      following table sets forth certain information concerning each person who was
      a
      director or executive officer of the Company as of December 31,
      2006.





**Name**
            
            **Age**
            
            **Position**Robert
                E. Mead
            
            60
            
            Chairman
                of the Board and Chief Executive OfficerSharon
                K. Brayfield
            
            46
            
            PresidentDavid
                T. O'Connor
            
            64
            
            Executive
                Vice President — SalesJoe
                W. Conner
            
            49
            
            Chief
                Operating OfficerHarry
                J. White, Jr.
            
            52
            
            Chief
                Financial Officer and TreasurerEdward
                L. Lahart
            
            42
            
            Executive
                Vice President — OperationsThomas
                J. Morris
            
            41
            
            Senior
                Vice President — Capital MarketsSandra
                G. Cearley
            
            45
            
            Corporate
                SecretaryJames
                B. Francis, Jr.
            
            58
            
            DirectorJ.
                Richard Budd, III
            
            54
            
            DirectorHerbert
                B. Hirsch
            
            70
            
            DirectorRebecca
                Janet Whitmore
            
            52
            
            Director







The
      term
      of office of the officers is from the date of their election until their
      successor shall have been elected and qualified. Our directors serve annual
      terms, which expire at our next annual meeting of shareholders following the
      date of election of each director. Our five directors were last elected by
      the
      shareholders at our 2006 annual meeting on May 9, 2006.





The
      following table sets forth certain information concerning other officers of
      the
      Company as of December 31, 2006.




**Name**
            
            **Age**
            
            **Position**Michael
                D. Jones
            
            40
            
            Vice
                President — Information SystemsRobert
                G. Levy
            
            58
            
            Vice
                President — Resort OperationsDarla
                Cordova
            
            42
            
            Vice
                President — Sales AdministrationHerman
                Jay Hankamer
              
              Barbara
                L. Lewis
              
              Michael
                P. Lowrey
              
              Lelori
                (“Buzz”) Marconi
            
            67
              
              42
              
              48
              
              54
            
            Vice
                President — Resort Development
              
              Vice
                President — Financial Services
              
              Vice
                President — Call Center Operations
              
              Vice
                President — Preview Center MarketingPhillip
                B. Davis
            
            36
            
            Vice
                President — Finance









**ITEM
      11. EXECUTIVE COMPENSATION**





The
      information contained under the captions “Director Compensation” and “Executive
      Compensation” in our proxy statement for our 2007 annual meeting of shareholders
      is incorporated herein by reference to such proxy statement.




63


**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





**Equity
      Compensation Plan Information**





The
      following table sets forth information about our equity compensation plans
      as of
      December 31, 2006:





******Plan
                Category**
            
            **Number
                of Securities to be Issued Upon Exercise of Outstanding
                Options,****Warrants, and Rights**
            
            **Weighted
                Average Exercise Price of Outstanding Options,****Warrants,
                and Rights**
            
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation****Plans**Equity
                Compensation Plans Approved by Security Holders
            
            
            2,823,807
            
            $
            4.63
            
            
            4,559Equity
                Compensation Plans Not Approved by Security Holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            2,823,807
            
            $
            4.63
            
            
            4,559





There
      are
      a combined 4,559 options remaining available of the 1,600,000 approved options
      under our 1997 Stock Option Plan and the 2,209,614 approved options under our
      2003 Stock Option Plan.





**Security
      Ownership of Certain Beneficial Owners and Management**





The
      information concerning (a) persons that have reported beneficial ownership
      of
      more than 5 percent of our common stock, and (b) the ownership of our common
      stock by the Chief Executive Officer and the four other most highly compensated
      executive officers and directors as a group, that is contained under the caption
      “Security Ownership of Certain Beneficial Owners and Management” in our proxy
      statement for our 2007 annual meeting, is incorporated herein by reference
      to
      such proxy statement.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





The
      information contained under the caption “Certain Relationships and Related
      Transactions, and Director Independence” in our proxy statement for our 2007
      annual meeting of shareholders is incorporated herein by reference to such
      proxy
      statement.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      information with respect to principal accountant fees and services contained
      under the caption “Proposal to Ratify Appointment of Independent Auditors” in
      our proxy statement for our 2007 annual meeting of shareholders is incorporated
      herein by reference to such proxy statement.





**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
      8-K**





**** (a)  The
      following documents are filed as part of this report:


**Exhibit**
                **Number**
              
              
              **Description**3.1
              
              —
              Third
                  Amended and Restated Articles of Incorporation of the Registrant
                  dated
                  December 17, 2003 (incorporated by reference to Exhibit 3.1 to
                  Registrant's Form 8-K filed December 29, 2003).3.2
              
              —
              Articles
                  of Correction dated February 9, 2004 to Articles of Incorporation
                  of the
                  Registrant (incorporated by reference to Exhibit 3.2 of Registrant’s Form
                  10-K for year ended December 31, 2003).3.3
              
              —
              Second
                  Amended and Restated Bylaws of Silverleaf Resorts, Inc. (incorporated
                  by
                  reference to Exhibit 3.1 to Registrant’s Form 10-Q for quarter ended
                  September 30, 2005).3.4
              
              —
              Amended
                  and Restated Certificate of Incorporation of Silverleaf Finance
                  II, Inc.
                  dated December 23, 2003 (incorporated by reference to Exhibit 3.2
                  to
                  Registrant's Form 8-K filed December 29, 2003).4.1
              
              —
              Form
                  of Stock Certificate of Registrant (incorporated by reference to
                  Exhibit
                  4.1 to Amendment No. 1 dated May 16, 1997 to Registrant's Registration
                  Statement on Form S-1, File No. 333-24273).4.2
              
              —
              Amended
                  and Restated Indenture dated May 2, 2002, between the Company,
                  Wells Fargo
                  Bank Minnesota, National Association, as Trustee, and the Subsidiary
                  Guarantors for the Company's 101⁄2% Senior Subordinated Notes due 2008
                  (incorporated by reference to Exhibit 4.1 to Registrant's Form
                  10-Q for
                  the quarter ended June 30, 2002).4.3
              
              —
              Certificate
                  No. 001 of 101⁄2% Senior Subordinated Notes due 2008 in the amount of
                  $75,000,000 (incorporated by reference to Exhibit 4.2 to Registrant’s Form
                  10-Q for quarter ended March 31,
                  1998).
  64
  4.4
              
              —
              Subsidiary
                  Guarantee dated April 8, 1998 by Silverleaf Berkshires, Inc.; Bull’s Eye
                  Marketing, Inc.; Silverleaf Resort Acquisitions, Inc.; Silverleaf
                  Travel,
                  Inc.; Database Research, Inc.; and Villages Land, Inc. (incorporated
                  by
                  reference to Exhibit 4.3 to Registrant’s Form 10-Q for the quarter ended
                  March 31, 1998).4.5
              
              —
              Indenture
                  dated May 2, 2002, between the Company, Wells Fargo Bank Minnesota,
                  National Association, as Trustee, and the Subsidiary Guarantors
                  for the
                  Company's 6% Senior Subordinated Notes due 2007 (incorporated by
                  reference
                  to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended
                  June 30,
                  2002).4.6
              
              —
              Certificate
                  No. 001 of 6% Senior Subordinated Notes due 2007 in the amount
                  of
                  $28,467,000 (incorporated by reference to Exhibit 4.3 to Registrant's
                  Form
                  10-Q for the quarter ended June 30, 2002).4.7
              
              —
              Subsidiary
                  Guarantee dated May 2, 2002 by Awards Verification Center, Inc.,
                  Silverleaf Travel, Inc., Silverleaf Resort Acquisitions, Inc.,
                  Bull's Eye
                  Marketing, Inc., Silverleaf Berkshires, Inc., and eStarCommunications,
                  Inc. (incorporated by reference to Exhibit 4.4 to Registrant's
                  Form 10-Q
                  for the quarter ended June 30, 2002).4.8
              
              —
              Indenture
                  dated June 7, 2004 by and among the Company, the Subsidiary Guarantors,
                  and Wells Fargo Bank, National Association for the Company’s 8% Senior
                  Subordinated Notes due 2010 (incorporated by reference to Exhibit
                  4.1 of
                  Registrant’s Form 10-Q for the quarter ended June 30,
                  2004).4.9
              
              —
              Certificate
                  No. 001 dated June 7, 2004 of 8% Senior Subordinated Notes due
                  2010 in the
                  amount of $24,761,000 (incorporated by reference to Exhibit 4.2
                  of
                  Registrant’s Form 10-Q for the quarter ended June 30,
                  2004).4.10
              
              —
              Subsidiary
                  Guarantee dated June 7, 2004 by Awards Verification Center, Inc.,
                  Silverleaf Travel, Inc., Silverleaf Resort Acquisition, Inc., Bull’s Eye
                  Marketing, Inc., Silverleaf Berkshires, Inc., eStarCommunications,
                  Inc.,
                  People Really Win Sweepstakes, Inc., and SLR Research, Inc. (incorporated
                  by reference to Exhibit 4.3 of Registrant’s Form 10-Q for the quarter
                  ended June 30, 2004).9.1
              
              —
              Voting
                  Trust Agreement dated November 1, 1999 between Robert E. Mead and
                  Judith
                  F. Mead (incorporated by reference to Exhibit 9.1 of the Registrant’s Form
                  10-K for the year ended December 31, 1999).10.1
              
              —
              Form
                  of Registration Rights Agreement between Registrant and Robert
                  E. Mead
                  (incorporated by reference to Exhibit 10.1 to Amendment No. 1 dated
                  May
                  16, 1997 to Registrant's Registration Statement on Form S-1, File
                  No.
                  333-24273).10.2
              
              —
              1997
                  Stock Option Plan of Registrant (incorporated by reference to Exhibit
                  10.3
                  to Amendment No. 1 dated May 16, 1997 to Registrant's Registration
                  Statement on Form S-1, File No. 333-24273).10.3
              
              —
              Silverleaf
                  Club Agreement between the Silverleaf Club and the resort clubs
                  named
                  therein (incorporated by reference to Exhibit 10.4 to Registrant's
                  Registration Statement on Form S-1, File No.
                  333-24273).10.4
              
              —
              Management
                  Agreement between Registrant and the Silverleaf Club (incorporated
                  by
                  reference to Exhibit 10.5 to Registrant's Registration Statement
                  on Form
                  S-1, File No. 333-24273).10.5
              
              —
              Form
                  of Indemnification Agreement (between Registrant and all officers,
                  directors, and proposed directors) (incorporated by reference to
                  Exhibit
                  10.18 to Registrant's Registration Statement on Form S-1, File
                  No.
                  333-24273).10.6
              
              —
              Resort
                  Affiliation and Owners Association Agreement between Resort Condominiums
                  International, Inc., Ascension Resorts, Ltd., and Hill Country
                  Resort
                  Condoshare Club, dated July 29, 1995 (similar agreements for all
                  other
                  Existing Owned Resorts) (incorporated by reference to Exhibit 10.19
                  to
                  Registrant's Registration Statement on Form S-1, File No.
                  333-24273).10.7
              
              —
              First
                  Amendment to Silverleaf Club Agreement, dated March 28, 1990, among
                  Silverleaf Club, Ozark Mountain Resort Club, Holiday Hills Resort
                  Club,
                  the Holly Lake Club, The Villages Condoshare Association, The Villages
                  Club, Piney Shores Club, and Hill Country Resort Condoshare Club
                  (incorporated by reference to Exhibit 10.22 to Amendment No. 1
                  dated May
                  16, 1997 to Registrant's Registration Statement on Form S-1, File
                  No.
                  333-24273).10.8
              
              —
              First
                  Amendment to Management Agreement, dated January 1, 1993, between
                  Master
                  Endless Escape Club and Ascension Resorts, Ltd. (incorporated by
                  reference
                  to Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to Registrant's
                  Registration Statement on Form S-1, File No.
                  333-24273).10.9
              
              —
              Silverleaf
                  Club Agreement dated September 25, 1997, between Registrant and
                  Timber
                  Creek Resort Club (incorporated by reference to Exhibit 10.13 to
                  Registrant's Form 10-Q for quarter ended September 30,
                  1997).10.10
              
              —
              Second
                  Amendment to Management Agreement, dated December 31, 1997, between
                  Silverleaf Club and Registrant (incorporated by reference to Exhibit
                  10.33
                  to Registrant’s Annual Report on Form 10-K for year Ended December 31,
                  1997).10.11
              
              —
              Silverleaf
                  Club Agreement, dated January 5, 1998, between Silverleaf Club
                  and Oak N'
                  Spruce Resort Club (incorporated by reference to Exhibit 10.34
                  to
                  Registrant’s Annual Report on Form 10-K for year ended December 31,
                  1997).10.12
              
              —
              Master
                  Club Agreement, dated November 13, 1997, between Master Club and
                  Fox River
                  Resort Club (incorporated by reference to Exhibit 10.43 to Registrant’s
                  Annual Report on Form 10-K for year ended December 31,
                  1997).10.13
              
              —
              Management
                  Agreement dated October 13, 1998, by and between the Company and
                  Eagle
                  Greens, Ltd. (incorporated by reference to Exhibit 10.6 to Registrant’s
                  Form 10-Q for quarter ended September 30, 1998).10.14
              
              —
              First
                  Amendment to 1997 Stock Option Plan for Silverleaf Resorts, Inc.,
                  effective as of May 20, 1998 (incorporated by reference to Exhibit
                  4.1 to
                  the Company’s Form 10-Q for the quarter ended June 30,
                  1998).10.15
              
              —
              Second
                  Amendment to 1997 Stock Option Plan dated November 19, 1999 (incorporated
                  by reference to Exhibit 10.46 to Registrant's Form 10-K for the
                  year ended
                  December 31, 1999).10.16
              
              —
              Eighth
                  Amendment to Management Agreement, dated March 9, 1999, between
                  the
                  Registrant and the Silverleaf Club (incorporated by reference to
                  Exhibit
                  10.47 to Registrant's Form 10-K for the year ended December 31,
                  1999).10.17
              
              —
              Developer
                  Transfer Agreement dated as of December 19, 2003 between the Registrant
                  and Silverleaf Finance II, Inc. (incorporated by reference to Exhibit
                  10.1
                  of Registrant’s Form 8-K filed on December 29, 2003).10.18
              
              —
              2003
                  Stock Option Plan of the Registrant (incorporated by reference
                  to Exhibit
                  10.55 to Registrant's Form 10-K for year ended December 31,
                  2003).10.19
              
              —
              Asset
                  Purchase Agreement dated August 29, 2004 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 (incorporated by
                  reference
                  to Exhibit 10.1 to Registrant's Form 8-K dated March 16,
                  2005).10.20
              
              —
              First
                  Amendment dated as of October 12, 2004 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 (incorporated by reference to Exhibit 10.2 to Registrant's
                  Form 8-K
                  dated March 16, 2005).10.21
              
              —
              Second
                  Amendment dated as of October 20, 2004 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 (incorporated by reference to Exhibit 10.3 to Registrant's
                  Form 8-K
                  dated March 16, 2005).
  65
  10.22
              
              —
              Third
                  Amendment dated as of November 10, 2004 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 (incorporated by reference to Exhibit 10.4 to Registrant's
                  Form 8-K dated March 16, 2005).10.23
              
              —
              Fourth
                  Amendment dated as of November 12, 2004 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 (incorporated by reference to Exhibit 10.5 to Registrant's
                  Form 8-K dated March 16, 2005).10.24
              
              —
              Fifth
                  Amendment dated as of November 16, 2004 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 (incorporated by reference to Exhibit 10.6 to Registrant's
                  Form 8-K dated March 16, 2005).10.25
              
              —
              Sixth
                  Amendment dated as of November 30, 2004 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 (incorporated by reference to Exhibit 10.7 to Registrant's
                  Form 8-K dated March 16, 2005).10.26
              
              —
              Seventh
                  Amendment dated as of January 2005 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 (incorporated by reference to Exhibit 10.8 to Registrant's
                  Form 8-K
                  dated March 16, 2005).10.27
              
              —
              Eighth
                  Amendment dated as of February 22, 2005 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 (incorporated by reference to Exhibit 10.9 to Registrant's
                  Form 8-K dated March 16, 2005).10.28
              
              —
              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 (incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-Q
                  for the period ended June 30, 2006).10.29
              
              —
              Services
                  Agreement dated as of March 8, 2005 between the Company, Algonquin
                  Water
                  Resources of Texas, LLC, Algonquin Water Resources of America,
                  Inc.; and
                  Algonquin Power Income Fund (incorporated by reference to Exhibit
                  10.10 to
                  Registrant's Form 8-K dated March 16, 2005).10.30
              
              —
              Amendment
                  No. 1 to Developer Transfer Agreement dated as of March 28, 2005
                  between the Registrant and Silverleaf Finance II, Inc. (incorporated
                  by
                  reference to Exhibit 10.1 to Registrant's Form 8-K filed on March
                  31,
                  2005).10.31
              
              —
              Receivables
                  Loan and Security Agreement between the Registrant and CapitalSource
                  Finance, LLC dated as of April 29, 2005 (incorporated by reference to
                  Exhibit 10.2 to Registrant's Form 8-K filed May 5,
                  2005).10.32
              
              —
              Hypothecation
                  Loan Agreement between the Registrant and Resort Funding LLC dated
                  May 20, 2005 (incorporated by reference to Exhibit 10.1 to
                  Registrant's Form 8-K filed July 6, 2005).10.33
              
              —
              Indenture
                  dated as of July 1, 2005 between Silverleaf Finance III, LLC, as
                  Issuer, the Registrant, as Servicer, and Wells Fargo Bank, National
                  Association, as Indenture Trustee, Backup Servicer, Custodian and
                  Account
                  Intermediary (incorporated by reference to Exhibit 10.1 to Registrant's
                  Form 8-K filed July 28, 2005).10.34
              
              —
              Standard
                  Definitions to Indenture and Transfer Agreement (incorporated by
                  reference
                  to Exhibit 10.2 to Registrant's Form 8-K filed July 28,
                  2005).10.35
              
              —
              Transfer
                  Agreement dated as of July 1, 2005 between the Registrant and
                  Silverleaf Finance III, LLC . (incorporated by reference to Exhibit
                  10.3
                  to Registrant's Form 8-K filed July 28, 2005).10.36
              
              —
              Contract
                  of Sale dated June 8, 2005 between the Company and Crystal Ridge,
                  L.L.P., a New Jersey limited liability partnership (incorporated
                  by
                  reference to Exhibit 10.1 to Registrant's Form 8-K filed October
                  5,
                  2005).10.37
              
              —
              First
                  Amendment to Contract of Sale dated June 8, 2005 between the Company
                  and Crystal Ridge, L.L.P., a New Jersey limited liability partnership
                  (incorporated by reference to Exhibit 10.2 to Registrant's Form
                  8-K filed
                  October 5, 2005).10.38
              
              —
              First
                  Amendment to Inventory Loan and Security Agreement dated October
                  5, 2005
                  between the Registrant and CapitalSource Finance LLC (incorporated
                  by
                  reference to Exhibit 10.1 to Registrant's Form 10-Q for the quarter
                  ended
                  September 30, 2005).10.39
              
              —
              First
                  Amendment to Loan and Security Agreement-Inventory dated as of
                  October 6 ,
                  2006, between the Registrant and Wells Fargo Foothill, Inc.10.40
              
              —
              Loan
                  and Security Agreement--Receivables between the Registrant and
                  Well Fargo
                  Foothill, Inc., dated as of December 16, 2005 (incorporated by
                  reference
                  to Exhibit 10.2 to Registrant's Form 8-K filed on December 23,
                  2005).10.41
              
              —
              First
                  Amendment to Loan and Security Agreement-Receivables dated as of
                  October
                  6, 2006, between the Registrant and Wells Fargo Foothill,
                  Inc.10.42
              
              —
              Contract
                  of Sale dated May 31, 2005 between the Registrant and Virgil M.
                  Casey,
                  Trustee of the Casey Family Trust dated June 3, 1992 (incorporated
                  by
                  reference to Exhibit 10.84 to Registrant’s Form 10-K for year ended
                  December 31, 2005).10.43
              
              —
              Contract
                  of Sale dated June 23, 2005 between the Registrant and Joe Wang,
                  Trustee
                  (incorporated by reference to Exhibit 10.85 to Registrant’s Form 10-K for
                  year ended December 31, 2005).10.44
              
              —
              Indenture
                  dated as of March 2, 2006 by and among Silverleaf Finance IV, LLC,
                  UBS
                  Real Estate Securities Inc. and Wells Fargo Bank, National Association,
                  as
                  Trustee (incorporated by reference to Exhibit 10.2 to Registrant’s Form
                  8-K filed on March 8, 2006).10.45
              
              —
              First
                  Supplement to Indenture dated as of December 22, 2006 by and among
                  Silverleaf Finance IV, LLC, UBS Real Estate Securities Inc. and
                  Wells
                  Fargo Bank, National Association, as Trustee (incorporated by reference
                  to
                  Exhibit 10.2 to Registrant’s Form 8-K filed on December 29,
                  2006).10.46
              
              —
              Amended
                  and Restated Sale and Servicing Agreement dated as of December
                  22, 2006
                  between the Registrant, Silverleaf Finance IV, LLC and Wells Fargo
                  Bank,
                  National Association, as Backup Servicer, Trustee and Account Intermediary
                  (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed
                  on December 29, 2006).10.47
              
              —
              Annex
                  A—Amended and Restated Defined Terms to Indenture and Amended and
                  Restated
                  Sale and Servicing Agreement dated as of December 22, 2006 (incorporated
                  by reference to Exhibit 10.3 to Registrant’s Form 8-K filed on December
                  29, 2006).
  66
  10.48
              
              —
              Asset
                  Purchase and Sale Agreement between the Company and The Fitzpatrick
                  Family
                  Limited Partnership (incorporated by reference to Registrant’s Exhibit
                  10.1 to Form 10-Q for the period ended March 31, 2006).10.49
              
              —
              First
                  Amendment to Asset Purchase and Sale Agreement between the Company
                  and The
                  Fitzpatrick Family Limited Partnership (incorporated by reference
                  to
                  Registrant’s Exhibit 10.2 to Form 10-Q for the period ended March 31,
                  2006).10.50
              
              —
              Ratification
                  of Asset Purchase and Sale Agreement between the Company and Fitzpatrick
                  Land Company, LLC (incorporated by reference to Registrant’s Exhibit 10.3
                  to Form 10-Q for the period ended March 31, 2006).10.51
              
              —
              Amended,
                  Extended and Restated Employment Agreement between the Company
                  and Robert
                  E. Mead (incorporated by reference to Annex A of the Proxy Statement
                  on
                  Schedule 14A filed with the SEC on April 6, 2006)10.52
              
              —
              First
                  Amendment to Loan and Security Agreement dated as of April 28,
                  2006
                  between CapitalSource Finance LLC and the Company (incorporated
                  by
                  reference to Registrant’s Exhibit 10.7 to Form 10-Q for the period ended
                  March 31, 2006).10.53
              
              —
              Amended
                  and Restated Inventory Loan and Security Agreement dated as of
                  April 28,
                  2006 between CapitalSource Finance LLC and the Company (incorporated
                  by
                  reference to Registrant’s Exhibit 10.8 to Form 10-Q for the period ended
                  March 31, 2006).10.54
              
              —
              Form
                  of Securities Purchase Agreement, dated May 24, 2006, by and among
                  the
                  Registrant, the selling shareholders and the investors (incorporated
                  by
                  reference to Exhibit 10.1 to Registrant’s Form 8-K filed on May 26,
                  2006)10.55
              
              —
              First
                  Supplement to Indenture dated as of February 8, 2006 between the
                  Company,
                  Silverleaf Finance III, LLC and Wells Fargo Bank, National Association
                  (incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for
                  the period ended June 30, 2006).10.56
              
              —
              Second
                  Supplement to Indenture dated as of July 14, 2006 between the Company,
                  Silverleaf Finance III, LLC and Wells Fargo Bank, National Association
                  (incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q for
                  the period ended June 30, 2006).10.57
              
              —
              Employment
                  Agreement dated March 8, 2007 between the Registrant and Sharon
                  K.
                  Brayfield (incorporated by reference to Exhibit 10.1 to Registrant’s Form
                  8-K filed on March 12, 2007).10.58
              
              —
              Employment
                  Agreement dated March 8, 2007 between the Registrant and Harry
                  J. White,
                  Jr. (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K
                  filed on March 12, 2007).10.59
              
              —
              Employment
                  Agreement dated March 8, 2007 between the Registrant and Joe W.
                  Conner
                  (incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K filed
                  on March 12, 2007).10.60
              
              —
              Employment
                  Agreement dated March 8, 2007 between the Registrant and David
                  T. O’Connor
                  (incorporated by reference to Exhibit 10.4 to Registrant’s Form 8-K filed
                  on March 12, 2007).*10.61
              
              —
              Consolidated,
                  Amended and Restated Loan and Security Agreement dated as of February
                  21,
                  2007 between the Company and Textron Financial Corporation.*10.62
              
              —
              Letter
                  Agreement dated March 1, 2007 between the Registrant and Wells
                  Fargo
                  Foothill, Inc., Individually and as Agent14.1
              
              —
              Code
                  of Ethics adopted by the Registrant on December 16, 2003 (incorporated
                  by
                  reference to Exhibit 14.1 to Registrant's Form 10-K for year ended
                  December 31, 2003).*21.1
              
              —
              Subsidiaries
                  of Silverleaf Resorts, Inc.*23.1
              
              —
              Consent
                  of BDO Seidman, LLP.*31.1
              
              —
              Certification
                  of Chief Executive Officer Pursuant to Rule 15d-14(a) of the Securities
                  Exchange Act of 1934, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*31.2
              
              —
              Certification
                  of Chief Financial Officer Pursuant to Rule 15d-14(a) of the Securities
                  Exchange Act of 1934, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*32.1
              
              —
              Certification
                  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.*32.2
              
              —
              Certification
                  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  *filed
                  herewith




(b)
            Reports
                on Form 8-K





We
      filed
      the following Current Reports on Form 8-K with the SEC during the quarter ended
      December 31, 2006:




Current
      report on Form 8-K filed with the SEC on October 12, 2006 relating to amendments
      to two loan agreements with Wells Fargo Foothill, Inc.





Current
      report on Form 8-K filed with the SEC on October 31, 2006 relating to press
      release announcing the scheduled release of financial results for the three-
      and
      nine-month periods ended September 30, 2006.





Current
      report on Form 8-K filed with the SEC on November 3, 2006 relating to earnings
      release for the three- and nine-months ended September 30, 2006.





Current
      report on Form 8-K filed with the SEC on December 29, 2006 relating to the
      amendment of a revolving credit facility through its wholly-owned and fully
      consolidated special purpose finance subsidiary Silverleaf Finance IV, LLC.





(c)
            The
                exhibits required by Item 601 of Regulation S-K have been listed
                in Item
                15(a) above. The exhibits listed in Item 15(a) above are either (a)
                filed
                with this report, or (b) have previously been filed with the SEC
                and are
                incorporated herein by reference to the particular previous
                filing.





67


(d)
            Financial
                Statement Schedules





None.
      Schedules are omitted because of the absence of the conditions under which
      they
      are required or because the information required by such omitted schedules
      is
      set forth in the consolidated financial statements or the notes
      thereto.




68


**SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) 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 in the City of Dallas, State of
        Texas,
        on March 15, 2007.
  SILVERLEAF
                  RESORTS, INC.By:
              /s/
                ROBERT E. MEADName:
                  Robert E. Mead
                Title:
                  Chairman of the Board andChief
                  Executive Officer
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, this report has been signed below on behalf of the Registrant in the
        capacities and on the dates indicated.
 **Signature**
                
                **Title**
                
                **Date**/s/
                    ROBERT E. MEAD
                  
                  Robert
                    E. Mead
                
                Chairman
                    of the Board and Chief Executive Officer
                  (Principal
                    Executive Officer)
                
                March
                    15, 2007/s/
                    HARRY J. WHITE, JR,
                  Harry
                    J. White, Jr.
                
                Chief
                    Financial Officer(Principal
                    Financial
                    and
                        Accounting Officer)
                
                March
                    15, 2007/s/
                    J. RICHARD BUDD, III
                  J.
                    Richard Budd, III
                
                Director
                
                March
                    15, 2007/s/
                    JAMES B. FRANCIS, JR.
                  James
                    B. Francis, Jr.
                
                Director
                
                March
                    15, 2007/s/
                    HERBERT B. HIRSCH
                  Herbert
                    B. Hirsch
                
                Director
                
                March
                    15, 2007/s/
                    REBECCA JANET WHITMORE
                    Rebecca
                    Janet Whitmore
                
                Director
                
                March
                    15, 2007




69




**INDEX
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Page**Report
                    of Independent Registered Public Accounting Firm
                
                F-2Financial
                    StatementsConsolidated
                    Balance Sheets as of December 31, 2005 and 2006
                
                F-3Consolidated
                    Statements of Operations for the years ended December 31, 2004,
                    2005, and
                    2006..
                
                F-4Consolidated
                    Statements of Shareholders' Equity for the years ended December
                    31, 2004,
                    2005, and 2006
                
                F-5Consolidated
                    Statements of Cash Flows for the years ended December 31, 2004,
                    2005, and
                    2006
                
                F-6Notes
                    to the Consolidated Financial Statements
                
                F-7
 
 F-1
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
          the
          Board of Directors and Shareholders of
 Silverleaf
          Resorts, Inc. and Subsidiaries
 Dallas,
          Texas
  We
          have
          audited the accompanying consolidated balance sheets of Silverleaf Resorts,
          Inc.
          and subsidiaries as of December 31, 2006 and 2005 and the related consolidated
          statements of operations, shareholders’ equity, and cash flows for each of the
          three years in the period ended December 31, 2006. These financial statements
          are the responsibility of the Company’s management. Our responsibility is to
          express an opinion on these financial statements based on our
          audits.
  We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. The Company is not required
          to
          have, nor were we engaged to perform, an audit of its internal control
          over
          financial reporting. Our audit included consideration of internal control
          over
          financial reporting as a basis for designing audit procedures that are
          appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting. Accordingly, we express no such opinion. An audit also includes
          examining, on a test  basis,
          evidence supporting the amounts and disclosures in the financial statements,
          assessing the accounting principles used and significant estimates made
          by
          management, as well as evaluating the overall financial statement presentation.
          We believe that our audits provide a reasonable basis for our
          opinion.
  In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial condition of Silverleaf Resorts,
          Inc.
          and subsidiaries at December 31, 2006 and 2005, and the results of its
          operations and its cash flows for each of the three years in the period
          ended
          December 31, 2006, in conformity with accounting principles generally accepted
          in the United States of America.
  As
          discussed in Note 2 to the financial statements, in 2006 the Company changed
          its
          accounting for real estate time-sharing transactions in connection with
          the
          adoption of Statement of Financial Accounting Standards No. 152, “Accounting for
          Real Estate Time-Sharing Transactions,” changed its accounting for stock-based
          compensation in connection with the adoption of FASB Statement No. 123(R),
          “Share-Based Payment” and has retroactively presented the operating and
          investing portions of the cash flows attributable to its discontinued
          operations, which in prior periods were reported on a combined basis as
          a single
          amount.
  /s/
                  BDO Seidman,
                  LLPDallas, TexasMarch 13, 2007
  F-2
 
 **SILVERLEAF
          RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          BALANCE SHEETS**
 **(in
          thousands, except share and per share amounts)**
  **December
                    31,****2005**
                
                **2006**ASSETSCash
                    and cash equivalents
                
                $
                10,990
                
                $
                11,450Restricted
                    cash
                
                
                4,893
                
                
                15,771Notes
                    receivable, net of allowance for uncollectible notes of$52,479
                    and $68,118, respectively
                
                
                177,572
                
                
                229,717Accrued
                    interest receivable
                
                
                2,243
                
                
                2,936Investment
                    in special purpose entity
                
                
                22,802
                
                
                13,008Amounts
                    due from affiliates
                
                
                680
                
                
                1,251Inventories
                
                
                117,597
                
                
                147,759Land,
                    equipment, buildings, and leasehold improvements, net
                
                
                10,441
                
                
                28,040Land
                    held for sale
                
                
                495
                
                
                205Prepaid
                    and other assets
                
                
                14,083
                
                
                24,393TOTAL
                    ASSETS
                
                $
                361,796
                
                $
                474,530LIABILITIES
                    AND SHAREHOLDERS' EQUITYLIABILITIES
                  Accounts
                    payable and accrued expenses
                
                $
                9,556
                
                $
                14,192Accrued
                    interest payable
                
                
                1,354
                
                
                1,792Amounts
                    due to affiliates
                
                
                544
                
                
                246Unearned
                    samplers
                
                
                5,310
                
                
                6,245Income
                    taxes payable
                
                
                1,268
                
                
                163Deferred
                    income taxes
                
                
                8,485
                
                
                17,683Notes
                    payable and capital lease obligations
                
                
                177,269
                
                
                254,550Senior
                    subordinated notes
                
                
                33,175
                
                
                31,467Total
                    Liabilities
                
                
                236,961
                
                
                326,338COMMITMENTS
                    AND CONTINGENCIES (Note 9)SHAREHOLDERS'
                    EQUITYPreferred
                    stock, 10,000,000 shares authorized, none issued and
                    outstanding
                
                
                —
                
                
                —Common
                    stock, par value $0.01 per share, 100,000,000 shares authorized,37,494,304
                    and 37,808,154 shares issued and outstanding at December 31,
                    2005 and
                    2006, respectively
                
                
                375
                
                
                378Additional
                    paid-in capital
                
                
                112,207
                
                
                112,555Retained
                    earnings
                
                
                12,253
                
                
                35,259Total
                    Shareholders' Equity
                
                
                124,835
                
                
                148,192TOTAL
                    LIABILITIES AND SHAREHOLDERS' EQUITY
                
                $
                361,796
                
                $
                474,530
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 F-3
 
 **SILVERLEAF
          RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(in
          thousands, except share and per share amounts)**
 
 **Year
                    Ended December 31,****2004**
                
                **2005**
                
                **2006****Revenues:**Vacation
                    Interval sales
                
                $
                138,046
                
                $
                146,416
                
                $
                187,481Estimated
                    uncollectible revenueEstimated uncollectible revenue
                
                
                —
                
                
                —
                
                
                (32,491
                )Sampler
                    sales
                
                
                2,150
                
                
                2,623
                
                
                —Net
                    sales
                
                
                140,196
                
                
                149,039
                
                
                154,990Interest
                    income
                
                
                37,843
                
                
                38,154
                
                
                46,248Management
                    fee income
                
                
                1,201
                
                
                1,856
                
                
                1,861Gain
                    on sale of notes receivable
                
                
                1,915
                
                
                6,457
                
                
                —Other
                    income
                
                
                2,522
                
                
                6,402
                
                
                3,785Total
                    revenues
                
                
                183,677
                
                
                201,908
                
                
                206,884**Costs
                    and Operating Expenses:**Cost
                    of Vacation Interval sales
                
                
                24,964
                
                
                23,427
                
                
                19,003Sales
                    and marketing
                
                
                71,890
                
                
                74,667
                
                
                93,957Provision
                    for uncollectible notes
                
                
                26,811
                
                
                23,649
                
                
                —Operating,
                    general and administrative
                
                
                25,639
                
                
                28,038
                
                
                32,315Depreciation
                
                
                3,588
                
                
                2,723
                
                
                2,539Interest
                    expense and lender fees
                
                
                17,627
                
                
                17,253
                
                
                21,662Total
                    costs and operating expenses
                
                
                170,519
                
                
                169,757
                
                
                169,476Income
                    before provision for income taxes
                  and
                    discontinued operations
                
                
                13,158
                
                
                32,151
                
                
                37,408Provision
                    for income taxes
                
                
                23
                
                
                9,725
                
                
                14,402**Income
                    from continuing operations**
                
                
                13,135
                
                
                22,426
                
                
                23,006**Discontinued
                    Operations**Gain
                    on sales of discontinued operations (net of taxes)
                
                
                —
                
                
                613
                
                
                —Income
                    from discontinued operations (net of taxes)
                
                
                624
                
                
                128
                
                
                —**Income
                    from discontinued operations**
                
                
                624
                
                
                741
                
                
                —**Net
                    Income**
                
                $
                13,759
                
                $
                23,167
                
                $
                23,006**Basic
                    income per share:**Income
                    from continuing operations
                
                $
                0.35
                
                $
                0.61
                
                $
                0.61Income
                    from discontinued operations
                
                $
                0.02
                
                $
                0.02
                
                $
                —Net
                    income
                
                $
                0.37
                
                $
                0.63
                
                $
                0.61**Diluted
                    income per share:**Income
                    from continuing operations
                
                $
                0.33
                
                $
                0.57
                
                $
                0.59Income
                    from discontinued operations
                
                $
                0.02
                
                $
                0.02
                
                $
                —Net
                    income
                
                $
                0.35
                
                $
                0.59
                
                $
                0.59**Weighted
                    average basic common shares issued****and
                    outstanding**
                
                
                36,852,133
                
                
                36,986,926
                
                
                37,579,462**Weighted
                    average diluted common shares issued****and
                    outstanding**
                
                
                38,947,854
                
                
                39,090,921
                
                
                39,261,652
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-4
  **SILVERLEAF
          RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY**
 **(in
          thousands, except share amounts)**
 
 **Common
                    Stock****Number
                    of**
                
                **$0.01**
                
                **Additional**
                
                **Retained****Shares**
                
                **Par**
                
                **Paid-in**
                
                **Earnings**
                
                **Treasury
                    Stock****Issued**
                
                **Value**
                
                **Capital**
                
                **(Deficit)**
                
                **Shares**
                
                **Cost**
                
                **Total**January
                    1, 2004
                
                
                37,249,006
                
                $
                372
                
                $
                116,999
                
                $
                (24,673
                )
                
                422,100
                
                $
                (4,999
                )
                $
                87,699Exercise
                    of stock options
                
                
                —
                
                
                —
                
                
                (385
                )
                
                —
                
                
                (33,332
                )
                
                395
                
                
                10Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                13,759
                
                
                —
                
                
                —
                
                
                13,759December
                    31, 2004
                
                
                37,249,006
                
                
                372
                
                
                116,614
                
                
                (10,914
                )
                
                388,768
                
                
                (4604
                )
                
                101,468Exercise
                    of stock options
                
                
                245,298
                
                
                3
                
                
                (4,407
                )
                
                —
                
                
                (388,768
                )
                
                4,604
                
                
                200Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                23,167
                
                
                —
                
                
                —
                
                
                23,167December
                    31, 2005
                
                
                37,494,304
                
                
                375
                
                
                112,207
                
                
                12,253
                
                
                —
                
                
                —
                
                
                124,835Stock-based
                    compensation
                
                
                —
                
                
                —
                
                
                252
                
                
                —
                
                
                —
                
                
                —
                
                
                252Exercise
                    of stock options
                
                
                313,850
                
                
                3
                
                
                96
                
                
                —
                
                
                —
                
                
                —
                
                
                99Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                23,006
                
                
                —
                
                
                —
                
                
                23,006December
                    31, 2006
                
                
                37,808,154
                
                $
                378
                
                $
                112,555
                
                $
                35,259
                
                
                —
                
                $
                —
                
                $
                148,192
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 F-5
  **SILVERLEAF
          RESORTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(in
          thousands)**
 
 **Year
                    Ended December 31,****2004**
                
                **2005**
                
                **2006**Revised
                    -
                  see
                    Note 2
                
                Revised
                    -
                  see
                    Note 2OPERATING
                    ACTIVITIES:Net
                    income
                
                $
                13,759
                
                $
                23,167
                
                $
                23,006Adjustments
                    to reconcile net income to net cash provided by (used in) operating
                    activities:Income
                    from discontinued operations
                
                
                (624
                )
                
                (741
                )
                
                —Estimated
                    uncollectible revenue / provision for uncollectible notes
                
                
                26,811
                
                
                23,649
                
                
                32,491Deferred
                    income taxes
                
                
                —
                
                
                8,485
                
                
                9,198Depreciation
                
                
                3,588
                
                
                2,723
                
                
                2,539Gain
                    on sale of notes receivable
                
                
                (1,915
                )
                
                (6,457
                )
                
                —Gain
                    on sale of land held for sale
                
                
                —
                
                
                (3,635
                )
                
                (499
                )Proceeds
                    from sale of notes receivable, net
                
                
                20,587
                
                
                104,193
                
                
                —Stock-based
                    compensation
                
                
                —
                
                
                —
                
                
                252Cash
                    effect from changes in operating assets and liabilities:Restricted
                    cash
                
                
                699
                
                
                (1,153
                )
                
                (663
                )Notes
                    receivable
                
                
                (47,733
                )
                
                (51,579
                )
                
                (96,422
                )Accrued
                    interest receivable
                
                
                (38
                )
                
                (36
                )
                
                (693
                )Investment
                    in special purpose entity
                
                
                880
                
                
                (17,629
                )
                
                9,794Amounts
                    due from / to affiliates
                
                
                1,618
                
                
                (914
                )
                
                (869
                )Inventories
                
                
                (8,741
                )
                
                (8,824
                )
                
                (18,376
                )Prepaid
                    and other assets
                
                
                (1,899
                )
                
                936
                
                
                (10,310
                )Accounts
                    payable and accrued expenses
                
                
                1,275
                
                
                1,500
                
                
                4,636Accrued
                    interest payable
                
                
                215
                
                
                52
                
                
                438Unearned
                    samplers
                
                
                922
                
                
                676
                
                
                935Income
                    taxes payable
                
                
                —
                
                
                1,268
                
                
                (1,105
                )Net
                    cash provided by (used in) operating activities
                
                
                9,404
                
                
                75,681
                
                
                (45,648
                )INVESTING
                    ACTIVITIES:Purchases
                    of land, equipment, buildings, and leasehold
                  improvements
                
                
                (1,334
                )
                
                (761
                )
                
                (14,347
                )Proceeds
                    from sale of discontinued operations
                
                
                —
                
                
                13,101
                
                
                —Proceeds
                    from sale of land held for sale
                
                
                —
                
                
                6,131
                
                
                789Net
                    cash (used in) provided by investing activities
                
                
                (1,334
                )
                
                18,471
                
                
                (13,558
                )FINANCING
                    ACTIVITIES:Proceeds
                    from borrowings from unaffiliated entities
                
                
                111,767
                
                
                150,666
                
                
                320,341Payments
                    on borrowings to unaffiliated entities
                
                
                (110,502
                )
                
                (244,651
                )
                
                (250,559
                )Restricted
                    cash for repayment of debt
                
                
                (2,503
                )
                
                (312
                )
                
                (10,215
                )Proceeds
                    from exercise of stock options
                
                
                10
                
                
                200
                
                
                99Net
                    cash provided by (used in) financing activities
                
                
                (1,228
                )
                
                (94,097
                )
                
                59,666Net
                    change in cash and cash equivalents
                
                
                6,842
                
                
                55
                
                
                460CASH
                  AND CASH EQUIVALENTS:Beginning
                    of period
                
                
                4,093
                
                
                10,935
                
                
                10,990End
                    of period
                
                $
                10,935
                
                $
                10,990
                
                $
                11,450SUPPLEMENTAL
                    CASH FLOW INFORMATION:Interest
                    paid, net of amounts capitalized
                
                $
                16,557
                
                $
                15,532
                
                $
                19,192Income
                    taxes paid
                
                
                —
                
                
                1,200
                
                
                7,500SUPPLEMENTAL
                    DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Land,
                    equipment, buildings and leasehold improvements acquiredunder
                    capital leases
                
                
                99
                
                
                62
                
                
                1,691Land,
                    equipment, buildings, and leasehold improvements acquiredthrough
                    financing
                
                
                —
                
                
                —
                
                
                4,100Notes
                    receivable, net of allowance for uncollectible notes, acquired
                    from
                    SPE
                
                
                —
                
                
                62,884
                
                
                —Notes
                    payable acquired from SPE
                
                
                —
                
                
                50,386
                
                
                —Other
                    assets, liabilities, and equity acquired from SPE
                
                
                —
                
                
                12,498
                
                
                —
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-6
 
 **SILVERLEAF
          RESORTS, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **For
          the Years Ended December 31, 2004, 2005, and 2006**
  **1.**  **NATURE
          OF BUSINESS**
 
 Silverleaf
          Resorts, Inc., a Texas Corporation (the “Company,” “Silverleaf,” “we,” or “our”)
          is in the business of marketing and selling vacation intervals (“Vacation
          Intervals”). Our principal activities, in this regard, consist of (i) developing
          and acquiring timeshare resorts; (ii) marketing and selling one-week annual
          and
          biennial Vacation Intervals to new owners; (iii) marketing and selling
          upgrade
          and additional week Vacation Intervals to existing Silverleaf owners
          (“Silverleaf Owners”); (iv) providing financing for the purchase of Vacation
          Intervals; and (v) operating timeshare resorts under management agreements.
          We
          have in-house sales, marketing, financing, and property management capabilities
          and coordinate the operation of our 13 owned resorts (the “Existing Resorts”)
          and our one hotel property, Pinnacle Lodge, as of December 31, 2006, and
          the
          development of any new timeshare resort, including site selection, design,
          and
          construction. Sales of Vacation Intervals are marketed to individuals primarily
          through direct mail and telephone solicitation.
 
 Each
          Existing Resort has a timeshare owners’ association (a “Club”). Each Club (other
          than Orlando Breeze) operates through a centralized organization to manage
          the
          Existing Resorts on a collective basis. The principal of such organization
          is
          Silverleaf Club. Orlando Breeze has its own club, Orlando Breeze Resort
          Club,
          which operates independently of Silverleaf Club; however, we supervise
          the
          management and operation of the Orlando Breeze Resort Club under the terms
          of a
          written agreement. Silverleaf Club has contracted with us to perform the
          supervisory, management, and maintenance functions at the Existing Resorts.
          All
          costs of operating the Existing Resorts, including management fees to the
          Company, are to be covered by monthly dues paid by Silverleaf Owners to
          their
          respective Clubs as well as income generated by the operation of certain
          amenities and revenue-producing assets at the Existing Resorts. Subject
          to
          availability of funds from the Clubs, we are entitled to a management fee
          to
          compensate us for the services provided. We evaluate the Clubs in accordance
          with FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
          FIN No. 46. We are not the primary beneficiaries, therefore consolidation
          is not
          necessary.
 
 In
          addition to Vacation Interval sales revenues, we generate revenue from
          interest
          income derived from operating activities, management fees received from
          Silverleaf Club, selling notes receivable to special purpose entities,
          and other
          sources. All of the operations are directly related to the resort real
          estate
          development industry.
 
 Our
          consolidated financial statements as of and for the years ended December
          31,
          2004, 2005, and 2006 reflect the operations of the Company and its wholly-owned
          subsidiaries, Silverleaf Travel, Inc., Awards Verification Center, Inc.,
          Silverleaf Resort Acquisitions, Inc., Bull’s Eye Marketing, Inc., Silverleaf
          Berkshires, Inc., eStarCommunications, Inc., People Really Win Sweepstakes,
          Inc., SLR Research, Inc., Silverleaf Finance II, Inc., (“SF-II”), Silverleaf
          Finance IV, LLC, (“SF-IV”) and Silverleaf Finance V, L.P., (“SF-V”). SF-II,
          SF-IV and SF-V are all described in more detail under the heading “Debt” in Note
          8. Silverleaf Resort Acquisitions, Inc. and eStarCommunications, Inc. were
          both
          dissolved during the fourth quarter of 2004. Bull’s Eye Marketing, Inc. was
          dissolved during the third quarter of 2005. Historical operations of these
          dissolved entities are insignificant.
 
 **2.**  **SIGNIFICANT
          ACCOUNTING POLICIES SUMMARY**
 
 *Basis
          of Presentation —* The
          accompanying consolidated financial statements have been prepared in conformity
          with accounting policies generally accepted in the United States of America.
          In
          our opinion, the accompanying consolidated financial statements contain
          all
          material adjustments, consisting only of normal recurring adjustments necessary
          to present fairly our financial position, our results of operations and
          changes
          in our cash flows.
 
 *Principles
          of Consolidation —* The
          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 consolidated financial
          statements.
 
 *Adoption
          of SFAS No. 152 —* In
          December 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards No. 152, “Accounting for Real Estate Time-Sharing
          Transactions” (“SFAS No. 152”). SFAS No. 152 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. However, we did not have
          a
          cumulative effect of a change in accounting principle as our adoption of
          SFAS
          No. 152 had an immaterial impact on our prior years’ results. 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.
  F-7
  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.
 
 ·
                The
                    estimated uncollectible revenue on Vacation Interval sales excludes
                    an
                    estimate for the value of inventory recoveries. Prior to SFAS
                    No. 152 we
                    included a reduction to our provision for uncollectible notes
                    for our
                    estimate of inventory recoveries.
 
 ·
                The
                    estimated uncollectible revenue (i.e. provision for uncollectible
                    notes)
                    is recorded as a reduction to Vacation Interval sales rather
                    than as an
                    expense, as it was previously recorded prior to SFAS No.
                    152.
 
 ·
                Revenues
                    related to sampler contracts, which entitle the prospective owner
                    to
                    sample a resort during certain periods, have been and will continue
                    to be
                    deferred until the customer uses the stay or allows the contract
                    to
                    expire. Effective January 1, 2006, sampler sales and related
                    costs are
                    accounted for as incidental operations, whereby incremental costs
                    in
                    excess of incremental revenue are charged to expense as incurred
                    and the
                    operations are presented as a net expense in the consolidated
                    statement of
                    operations. Conversely, incremental revenue in excess of incremental
                    costs
                    is recorded as a reduction of inventory in the consolidated balance
                    sheet.
                    Incremental costs include costs that would not have been incurred
                    had we
                    not sold samplers. During the year ended December 31, 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 to complete the development
          of the
          phase. The remaining amount is deferred and recognized as the remaining
          costs
          are incurred. There were no sales deferred at December 31, 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 evaluate the estimated cost of sales percentage, using updated
          information for 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.
  F-8
  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.
 
 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 Silverleaf Club and Orlando
          Breeze Resort Club. These revenues are recognized on an accrual basis in
          the
          period the services are provided if collection is deemed probable.
 
 Services
          and other income are recognized on an accrual basis in the period 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.
 
 In
          August
          2005, 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 Statement of Financial Accounting Standards No.
          140, Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities (“SFAS No. 140”), EITF 99-20, Recognition of
          Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
          Interests That Continue to be Held by a Transferor in Securitized Financial
          Assets, and Statement of Financial Accounting Standards No.115, Accounting
          for Certain Investments in Debt and Equity Securities, as applicable. 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 21.5%; base interest rate - 5.37%; and loan servicing fees - 1.75%.
          Our
          assumptions are based on experience with our notes receivable portfolio,
          available market data, estimated prepayments, the cost of servicing, and
          net
          transaction costs. Such assumptions are assessed quarterly and, if necessary,
          adjustments are made to the carrying value of the investment in 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.
  F-9
  At
          December 31, 2006, the sensitivity of the current fair value of residual
          cash
          flows to immediate 10 percent and 20 percent adverse changes to key assumptions
          are as follows (in thousands):
 
 Customer
                    Prepayment Rate (including accounts paidin
                    full as a result of upgrades):Impact
                    on fair value of a 10% adverse change
                
                $
                235Impact
                    on fair value of a 20% adverse change
                
                $
                478Expected
                    Credit Losses Rate:Impact
                    on fair value of a 10% adverse change
                
                $
                478Impact
                    on fair value of a 20% adverse change
                
                $
                1,033Discount
                    Rate:Impact
                    on fair value of a 10% adverse change
                
                $
                248Impact
                    on fair value of a 20% adverse change
                
                $
                489
  *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 market value. Cost includes amounts
          for land,
          construction materials, amenities and common costs, direct labor and overhead,
          taxes, and capitalized interest incurred in the construction or through
          the
          acquisition of resort dwellings held for timeshare sale. Timeshare unit
          costs
          are capitalized as inventory and are allocated to cost of Vacation Interval
          sales 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
          December 31, 2006, the estimated costs not yet incurred, which are expected
          to
          complete promised amenities was $2.1 million. We allocate the estimated
          promised
          and completed amenities cost to cost of Vacation Interval sales based on
          Vacation Intervals sold in a given period as a percentage of total Vacation
          Intervals expected to sell over the life of a particular resort
          project.
 
 The
          relative sales value method of recording Vacation Interval cost of sales
          has
          been amended by SFAS No. 152 beginning January 1, 2006 to include estimated
          future defaults of uncollectible sales and the subsequent resale of the
          recovered Vacation Intervals reacquired on future cancelled sales in our
          total
          estimate of revenues we expect to earn on a project. We periodically review
          the
          carrying value of our inventory on an individual project basis for impairment,
          to ensure that the carrying value does not exceed market value.
 
 *Land,
          Equipment, Buildings, and Leasehold Improvements* —
Land,
          equipment (including equipment under capital lease), buildings, and leasehold
          improvements are stated at cost. When assets are disposed of, the cost
          and
          related accumulated depreciation are removed, and any resulting gain or
          loss is
          reflected in income for the period. Maintenance and repairs are charged
          to
          expense as incurred; significant betterments and renewals, which extend
          the
          useful life of a particular asset, are capitalized. Depreciation is calculated
          for all fixed assets, other than land, using the straight-line method over
          the
          estimated useful life of the assets, 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.
  F-10
 *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.
 
 *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 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, Accounting for
          Derivative Instruments and Hedging Activities (“SFAS 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.
 
 *Earnings
          Per Share* (“EPS”)
— 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.
 
 Outstanding
          stock options totaling 2,777,147; 2,270,657 and 1,996,807 were dilutive
          securities that were included in the computation of diluted EPS at December
          31,
          2004, 2005 and 2006, respectively. Outstanding stock options totaling 874,500,
          867,000 and 827,000 were not dilutive at December 31, 2004, 2005 and 2006,
          respectively, because the exercise price for such options exceeded the
          market
          price for our common shares.
 
 *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. We recognized $252,000 of stock-based
          compensation expense for the year ended December 31, 2006.
 
 See
          Note
          10 under
          the
          heading “Equity” for a table that 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 outstanding stock option
          grants as
          of the years ended December 31, 2004 and 2005, prior to the adoption of
          SFAS No.
          123R.
  F-11
  There
          were no stock options granted during 2004. There were 267,000 stock options
          granted during 2005 with an exercise price of $1.62 per share and a fair
          value
          of $1.59 per share. The fair value of the stock options granted is estimated
          on
          the date of grant using the Black-Scholes option-pricing model with the
          following weighted average assumptions: expected volatility ranging from
          143.2%
          to 264.4% for all grants, risk-free interest rates which vary for each
          grant and
          range from 4.1% to 12.2%, expected life of 7 years for all grants, and
          no
          distribution yield for all grants.
 
 There
          were no stock options granted, forfeited, or expired during 2006. There
          were
          313,850 stock options exercised during 2006 at a weighted average exercise
          price
          of $0.315 per share. At December 31, 2006 there is $230,000 of unamortized
          compensation expense related to the stock option grants during 2005, which
          will
          be fully recognized by August 2008.
 
 *Use
          of Estimates* —
The
          preparation of the 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 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, estimates for
          taxes,
          valuation of SF-III, and the future sales plan and estimated recoveries
          used to
          allocate certain costs to inventory phases 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 and in
          2004 we
          previously disclosed net cash provided by operating activities of $389,000
          pertaining to discontinued operations. In addition, we have revised both
          the
          2005 and 2004 Statements of Cash Flows to reflect cash restricted for repayment
          of debt as a financing activity rather than an operating activity, in the
          amounts of $312,000 and $2.5 million, respectively.
 
 Our
          2005
          and 2004 Statements of Cash Flows presentation have been adjusted as follows
          to
          reflect these revisions (in thousands):
 
 **Cash
                    Provided**
                
                **Cash
                    Provided by (Used in)**
                
                **Cash
                    Provided by (Used in)****By
                    Operating**
                
                **Investing**
                
                **Financing********Activities**
                
                ******Activities**
                
                ******Activities**2005,
                    as previously reported
                
                $
                76,150
                
                $
                18,531
                
                $
                (93,785
                )2005,
                    revised
                
                $
                75,681
                
                $
                18,471
                
                $
                (94,097
                )2004,
                    as previously reported
                
                $
                5,748
                
                $
                (570
                )
                $
                1,2752004,
                    revised
                
                $
                9,404
                
                $
                (1,334
                )
                $
                (1,228
                )
 
 *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 SFAS No. 133 and SFAS No. 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 SFAS 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.
          This
          statement shall be effective for all financial instruments acquired, issued,
          or
          subject to a remeasurement (new basis) event occurring after the beginning
          of an
          entity's first fiscal year that begins after September 15, 2006. The fair
          value
          election provided for in paragraph
          4 (c)
          of
          this Statement may also be applied upon adoption of this Statement for
          hybrid
          financial instruments that had been bifurcated under paragraph
          12 of Statement 133 prior to
          the adoption of this Statement. Earlier adoption is permitted as of the
          beginning of an entity's fiscal year, provided the entity has not yet issued
          financial statements, including financial statements for any interim period
          for
          that fiscal year. The adoption of SFAS No. 155 is not expected to have
          a
          material impact on our consolidated financial condition 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 the adoption of SFAS No. 156 will have on our consolidated
          financial condition and results of operations.
  F-12
  *FIN
          No. 48*  **-** In
          July
          2006, the Financial Accounting Standards Board issued FASB Interpretation
          No.
          48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48
          clarifies the accounting for uncertainty in income taxes recognized in
          an
          enterprise’s financial statements in accordance with FASB Statement No. 109,
          Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold
          and
          measurement attribute for the financial statement recognition and measurement
          of
          a tax position taken or expected to be taken in a tax return. It also provides
          guidance on derecognition, classification, interest and penalties, accounting
          in
          interim periods, disclosure, and transition. FIN No. 48 is effective for
          fiscal
          years beginning after December 15, 2006. We are still evaluating the impact
          the
          adoption of FIN No. 48 will have on our consolidated financial condition
          and
          results of operations.
 
 *SFAS
          No. 157*  **-** In
          September 2006, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards No. 157, Fair Value Measurements ** (“SFAS
          No. 157”), which clarifies that the term fair value is intended to mean a
          market-based measure, not an entity-specific measure, and gives the highest
          priority to quoted prices in active markets in determining fair value. 
SFAS No. 157 requires disclosures about (1) the extent to which companies
          measure assets and liabilities at fair value, (2) the methods and assumptions
          used to measure fair value, and (3) the effect of fair value measures on
          earnings.  SFAS No. 157 is effective for fiscal years beginning after
          November 15, 2007.  We are still evaluating the impact the adoption of SFAS
          No. 157 will have on our consolidated financial condition and results of
          operations.
 
 *SAB
          108*  **-**  In
          September 2006, the Securities and Exchange Commission issued Staff Accounting
          Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
          Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).
          SAB 108 provides interpretive guidance on how the effects of prior-year
          uncorrected misstatements should be considered when quantifying misstatements
          in
          the current year financial statements. SAB 108 requires registrants to
          quantify
          misstatements using both an income statement (“rollover”) and balance sheet
          (“iron curtain”) approach and evaluate whether either approach results in a
          misstatement that, when all relevant quantitative and qualitative factors
          are
          considered, is material. If prior year errors that had been previously
          considered immaterial now are considered material based on either approach,
          no
          restatement is required so long as management properly applied its previous
          approach and all relevant facts and circumstances were considered. If prior
          years are not restated, the cumulative effect adjustment is recorded in
          opening
          accumulated earnings as of the beginning of the fiscal year of adoption.
          SAB 108 is effective for fiscal years ending on or after November 15,
          2006, with earlier adoption encouraged. The adoption of SAB 108 did not
          have a
          material impact on our consolidated financial condition or results of
          operations.
 
 *SFAS
          No. 159*  **-** In
          February 2007, the FASB issued Statement of Financial Accounting Standards
          No.
          159, The Fair Value Option for Financial Assets and Financial Liabilities
          (“SFAS
          No. 159”), which allows an irrevocable election to measure certain financial
          assets and financial liabilities at fair value on an instrument-by-instrument
          basis, with unrealized gains and losses recognized currently in earnings.
          Under
          SFAS No. 159, the fair value option may only be elected at the time of
          initial
          recognition of a financial asset or financial liability or upon the occurrence
          of certain specified events. Additionally, SFAS No. 159 provides that
          application of the fair value option must be based on the fair value of
          an
          entire financial asset or financial liability and not selected risks inherent
          in
          those assets or liabilities. SFAS No. 159 requires that assets and liabilities
          which are measured at fair value pursuant to the fair value option be reported
          in the financial statements in a manner that separates those fair values
          from
          the carrying amounts of similar assets and liabilities which are measured
          using
          another measurement attribute. SFAS No. 159 also provides expanded disclosure
          requirements regarding the effects of electing the fair value option on
          the
          financial statements. SFAS No. 159 is effective prospectively for fiscal
          years
          beginning after November 15, 2007, with early adoption permitted for fiscal
          years in which interim financial statements have not been issued, provided
          that
          all of the provisions of SFAS No. 157 are early adopted as well. We are
          currently assessing the financial impact the adoption of SFAS No. 159 will
          have
          on our consolidated financial condition and results of operations.
 
 **3.**  **CONCENTRATIONS
          OF RISK**
 
 *Credit
          Risk* —
We
          are
          exposed to credit risk related to our notes receivable.
 
 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-year to ten-year period,
          and
          are secured by a first mortgage on the Vacation Interval. We bear the risk
          of
          default on these promissory notes. Although we prescreen prospects by credit
          scoring them in the early stages of the marketing and sales process, we
          generally do not perform a detailed credit history review of our
          customers.
 
 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 not generally pursued this remedy.
 
 *Interest
          Rate Risk —* We
          have
          historically derived net interest income from our operating activities
          because
          the interest rates we charge our customers who finance the purchase of
          their
          Vacation Intervals exceed the interest rates we pay to our senior lenders.
          Because 38% of our indebtedness bears interest at variable rates and our
          customer receivables bear interest at fixed rates, increases in interest
          rates
          will erode the spread in interest rates that we have historically obtained
          and
          could cause the rate on our borrowings to exceed the rate at which we provide
          financing to our customers. Therefore, any increase in interest rates,
          particularly if sustained, could have a material adverse effect on our
          results
          of operations, cash flows, and financial condition.
  F-13
  To
          partially offset an increase in interest rates, we have engaged in two
          interest
          rate hedging transactions, or derivatives, related to our conduit loan
          with
          SF-II, for a notional amount of $39.3 million at December 31, 2006, that
          expires
          between September 2011 and March 2014. Our variable funding note (“VFN”) with
          SF-IV also acts as an interest rate hedge since it contains a provision
          for an
          interest rate cap, however there are no amounts outstanding under this
          line of
          credit at December 31, 2006.
 
 In
          addition, the Series 2005-A Notes related to our off-balance sheet special
          purpose finance subsidiary, SF-III, with a balance of $52.3 million at
          December
          31, 2006, bear interest at a blended fixed rate of 5.4%, and the Series
          2006-A
          Notes related to SF-V bear interest at a blended fixed rate of 6.7%.
 
 *Availability
          of Funding Sources —* We
          fund
          substantially all of our 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 position.
 
 *Geographic
          Concentration —* Our
          notes
          receivable are primarily originated in Texas (where approximately 61% of
          Vacation Interval sales took place in 2006), 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, and Georgia. 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.
 
 **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 December 31, 2006 and 2005 was approximately
          15.7% and 15.3%, respectively, with individual rates ranging from 0% to
          17.5%.
          The Vacation Interval notes receivable with interest rates of 0% originated
          between 1997 and 2003, and have an outstanding balance at December 31,
          2006 of
          approximately $156,000. In connection with the sampler program, we routinely
          enter into notes receivable with terms of 10 months. Notes receivable from
          sampler sales were $2.3 million and $3.1 million at December 31, 2005 and
          2006,
          respectively, and are non-interest bearing.
 
 We
          ceased
          accruing interest on delinquent notes of $30.3 million and $38.2 million
          as of
          December 31, 2005 and 2006, respectively, as collection of interest on
          such
          notes was deemed improbable.
 
 Notes
          receivable are scheduled to mature as follows at December 31, 2006 (in
          thousands):
 
 2007
                
                $
                37,0682008
                
                
                35,8112009
                
                
                38,0402010
                
                
                38,8582011
                
                
                40,690Thereafter
                
                
                107,368297,835Less
                    allowance for uncollectible notes
                
                
                (68,118
                )Notes
                    receivable, net
                
                $
                229,717
  There
          were no notes sold with recourse during the years ended December 31, 2004,
          2005,
          and 2006.
 
 We
          sold
          $27.4 million and $8.0 million, respectively, of notes receivable to SF-I
          and
          recognized pre-tax gains of $1.9 million and $669,000, respectively, during
          the
          years ended December 31, 2004 and 2005. In conjunction with these sales,
          we
          received cash consideration of $20.6 million and $6.0 million, respectively,
          for
          the years ended December 31, 2004 and 2005, which was primarily used to
          pay down
          borrowings under our revolving loan facilities. SF-I funded all of these
          purchases through advances under a credit agreement arranged for this purpose.
 
 During
          the third quarter of 2005, we closed a term securitization transaction
          with
          SF-III, which is a qualified special purpose entity formed for the purpose
          of
          issuing $108.7 million of its Series 2005-A Notes in a private placement
          through
          UBS Securities LLC (“UBS”). 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 ranging from Class A through Class D notes
          with a
          blended fixed rate of 5.4%.
  F-14
  The
          Series 2005-A Notes are secured by timeshare receivables sold to SF-III
          by us
          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, and recognized a pre-tax gain of $5.8 million.
          In
          connection with this sale, we received gross 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.
          Simultaneous with the sale of the timeshare receivables to SF-III, SF-I
          was
          dissolved, and notes receivable net of allowance for uncollectible notes
          of
          $62.9 million and notes payable of $50.4 million were assumed from SF-I,
          along
          with other assets, liabilities, and equity of $12.5 million. 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.
 
 At
          December 31, 2006, SF-III held notes receivable totaling $62.7 million,
          with
          related borrowings of $52.3 million. W e
          are responsible
          for servicing the timeshare receivables pursuant to the terms of the Indenture
          and will receive a fee for our services equal to 1.75% of eligible receivables
          held by the facility. Such fees were $1.1 million and $1.5 million for
          the years
          ended December 31, 2005 and 2006, respectively. We also serviced notes
          receivable sold to SF-I for a fee of 1% of eligible receivables held by
          SF-I. We
          received fees of $684,000 and $355,000 for the years ended December 31,
          2004 and
          2005, respectively, for servicing those receivables. 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.
 
 Except
          for the repurchase of timeshare receivables 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 years ended December 31,
          2005
          and 2006, we paid approximately $386,000 and $2.1 million, respectively,
          to
          repurchase the Vacation Intervals securing defaulted contracts to facilitate
          the
          re-marketing of those Vacation Intervals. We had a similar arrangement
          in place
          with SF-I in regard to repurchasing the Vacation Intervals securing defaulted
          contracts. For the years ended December 31, 2004 and 2005, we paid approximately
          $2.5 million and $988,000, respectively, at public auction to repurchase
          defaulted Vacation Intervals from SF-I.
  In
          the
          event cash flows from the notes receivable held by the special purpose
          entities
          are sufficient to pay all debt service obligations, fees, and expenses,
          we may
          receive distributions from the special purpose entities. For the year ended
          December 31, 2005, we received $4.3 million in cash distributions from
          SF-I. We
          received distributions of $1.6 million and $16.6 million from SF-III during
          2005
          and 2006, respectively.
 
 We
          consider accounts over 60 days past due to be delinquent. As of December
          31,
          2006, $4.7 million of notes receivable, net of accounts charged off, were
          considered delinquent. An additional $27.5 million of notes, of which $24.7
          million is pledged to senior lenders, would have been considered to be
          delinquent, had we not granted payment concessions to the customers, which
          brings a delinquent note current and extends the maturity date if two
          consecutive payments are made.
 
 The
          activity in gross notes receivable is as follows for the years ended December
          31, 2005 and 2006 (in thousands):
 **December
                      31,****2005**
                  
                  **2006**Balance,
                      beginning of period
                  
                  $
                  248,972
                  
                  $
                  230,051Sales
                  
                  
                  142,984
                  
                  
                  164,208Collections
                  
                  
                  (64,640
                  )
                  
                  (67,786
                  )Receivables
                      charged off, gross
                  
                  
                  (30,108
                  )
                  
                  (28,638
                  )Receivables
                      received via dissolution of SF-I
                  
                  
                  73,687
                  
                  
                  —Sold
                      notes receivable
                  
                  
                  (140,844
                  )
                  
                  —Balance,
                      end of period
                  
                  $
                  230,051
                  
                  $
                  297,835
  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.
  F-15
  The
          activity in the allowance for uncollectible notes is as follows for the
          years
          ended December 31, 2004, 2005, and 2006 (in thousands):
 
 **December
                    31,****2004**
                
                **2005**
                
                **2006**Balance,
                    beginning of period
                
                $
                48,372
                
                $
                52,506
                
                $
                52,479Reclassification
                    of estimated inventory recoveries on future charge offsuture
                    charge
                    offs
                
                
                —
                
                
                —
                
                
                11,786Estimated
                    uncollectible revenueEstimated
                    uncollectible revenue
                
                
                —
                
                
                —
                
                
                32,491Provision
                    for uncollectible notes
                
                
                26,811
                
                
                23,649
                
                
                —Receivables
                    charged off, gross
                
                
                (36,941
                )
                
                (30,108
                )
                
                (28,638
                )Receivables
                    charged off, inventory recoveries
                
                
                13,023
                
                
                9,390
                
                
                —Receivables
                    charged off, sales provision
                
                
                4,073
                
                
                2,629
                
                
                —Allowance
                    received via dissolution of SF-I
                
                
                —
                
                
                10,803
                
                
                —Allowance
                    related to notes sold
                
                
                (2,832
                )
                
                (16,390
                )
                
                —Balance,
                    end of period
                
                $
                52,506
                
                $
                52,479
                
                $
                68,118
 
 The
          allowance for uncollectible notes was 22.8% and 22.9% of gross notes receivable
          as of December 31, 2005 and 2006, respectively. 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.
 
 **5.**  **INVENTORIES**
 
 Inventories
          consist of the following at December 31, 2005 and 2006 (in
          thousands):
 
 **December
                    31,****2005**
                
                **2006**Timeshare
                    units
                
                $
                54,553
                
                $
                82,892Amenities
                
                
                41,867
                
                
                48,001Land
                
                
                11,833
                
                
                16,132Recovery
                    of canceled and traded intervals
                
                
                9,174
                
                
                —Other
                
                
                170
                
                
                734Total
                
                $
                117,597
                
                $
                147,759
 
 Realization
          of inventories is dependent upon execution of our long-term sales plan
          for each
          resort, which extends for up to fifteen years. Such sales plans depend
          upon our
          ability to obtain financing to facilitate the build-out of each resort
          and
          marketing of the Vacation Intervals over the planned time period.
 
 **6.**  **LAND,
          EQUIPMENT, BUILDINGS, AND LEASEHOLD IMPROVEMENTS**
 
 Land,
          equipment, buildings, and leasehold improvements consist of the following
          at
          December 31, 2005 and 2006 (in thousands):
 
 **December
                    31,****2005**
                
                **2006**Land
                
                $
                1,989
                
                $
                2,734Vehicles
                    and equipment
                
                
                4,211
                
                
                9,457Office
                    equipment and furniture
                
                
                28,992
                
                
                34,091Buildings
                    and leasehold improvements
                
                
                10,425
                
                
                19,45445,617
                
                
                65,736Less
                    accumulated depreciation
                
                
                (35,176
                )
                
                (37,696
                )Land,
                    equipment, buildings, and leasehold improvements
                
                $
                10,441
                
                $
                28,040
 
 Depreciation
          expense for the years ended December 31, 2004, 2005, and 2006 was $3.6
          million,
          $2.7 million, and $2.5 million, respectively, which includes amortization
          of
          equipment acquired under capital leases.
  F-16
  **7.**  **INCOME
          TAXES**
 
 Income
          tax expense from continuing operations consists of the following components
          for
          the years ended December 31, 2004 2005, and 2006 (in thousands):
 
 **2004**
                
                **2005**
                
                **2006**Current
                    income tax expense - Federal
                
                $
                —
                
                $
                —
                
                $
                5,025Current
                    income tax expense - State
                
                
                23
                
                
                201
                
                
                179Total
                    current income tax expense
                
                
                23
                
                
                201
                
                
                5,204Deferred
                    income tax expense - Federal
                
                
                —
                
                
                8,658
                
                
                7,811Deferred
                    income tax expense - State
                
                
                —
                
                
                866
                
                
                1,387Total
                    deferred income tax expense
                
                
                —
                
                
                9,524
                
                
                9,198Total
                    income tax expense
                
                $
                23
                
                $
                9,725
                
                $
                14,402
 
 A
          reconciliation of income tax expense on reported pre-tax income from continuing
          operations at statutory rates to actual income tax expense for the years
          ended
          December 31, 2004, 2005, and 2006 is as follows (in thousands):
 
 **2004**
                
                **2005**
                
                **2006****Dollars**
                
                **Rate**
                
                **Dollars**
                
                **Rate**
                
                **Dollars**
                
                **Rate**Income
                    tax expense at statutory rates
                $
                4,824
                
                
                35.0
                %
                $
                11,253
                
                
                35.0
                %
                $
                13,093
                
                
                35.0
                %State
                    income taxes, net of Federalincome
                    tax benefit
                
                427
                
                
                3.1
                %
                
                1,125
                
                
                3.5
                %
                
                1,309
                
                
                3.5
                %Deferred
                    tax asset reserve
                
                (7,376
                )
                
                (53.5
                )%
                
                —
                
                
                0.0
                %
                
                —
                
                
                0.0
                %Reconciliation
                    to prior year tax return
                
                1,464
                
                
                10.6
                %
                
                —
                
                
                0.0
                %
                
                (527
                )
                
                (1.5
                )%Permanent
                    differences
                
                —
                
                
                0.0
                %
                
                (3,094
                )
                
                (9.7
                )%
                
                96
                
                
                0.3
                %Other
                
                684
                
                
                5.0
                %
                
                441
                
                
                1.4
                %
                
                431
                
                
                1.2
                %Total
                    income tax expense
                $
                23
                
                
                0.2
                %
                $
                9,725
                
                
                30.2
                %
                $
                14,402
                
                
                38.5
                %
 
 Deferred
          income tax assets and liabilities as of December 31, 2005 and 2006 are
          as
          follows (in thousands):
 
 **2005**
                
                **2006**Deferred
                    tax liabilities:Depreciation
                
                $
                71
                
                $
                —Installment
                    sales income
                
                
                79,524
                
                
                88,689Other
                
                
                484
                
                
                —Total
                    deferred tax liabilities
                
                
                80,079
                
                
                88,689Deferred
                    tax assets:Net
                    operating loss carryforward - pre exchange offer
                
                
                22,257
                
                
                13,939Net
                    operating loss carryforward - post exchange offer
                
                
                46,419
                
                
                48,578AMT
                    tax credit
                
                
                2,918
                
                
                8,489Total
                    deferred tax assets
                
                
                71,594
                
                
                71,006Net
                    deferred tax liability
                
                $
                8,485
                
                $
                17,683
 
 We
          report
          substantially all Vacation Interval sales, which we finance, on the installment
          method for federal income tax purposes. Under the installment method, we
          do not
          recognize income on sales of Vacation Intervals until we receive the down
          payment or installment payment on customer receivables. 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 otherwise not subject to tax in a particular year,
          no
          interest is imposed since the interest is based on the amount of tax paid
          in
          that year. The 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. The amount of interest expense is not estimable as
          of
          December 31, 2006.
 
 We
          have
          been subject to Alternative Minimum Tax (“AMT”) as a result of the deferred
          income that results from the installment sales treatment of Vacation Interval
          sales for regular tax purposes. The AMT liability creates a deferred tax
          asset
          in the form of a minimum tax credit, which, unless otherwise limited, reduces
          any future tax liability from regular federal income tax. This deferred
          tax
          asset has an unlimited carryover period. We estimate our AMT liability
          for 2006
          is approximately $7.2 million, with the result that we will have total
          minimum
          tax credits of approximately $8.5 million as of December 31, 2006. We also
          anticipate that we will pay significant AMT in future years.
 
 We
          applied for and received refunds of AMT of $8.3 million and $1.6 million
          during
          2001 and 2002, respectively, as the result of the carryback of our 2000
          AMT loss
          to 1999, 1998, and 1997. Due to AMT losses, including carryforwards, we
          did not
          have any AMT liability in 2001 and 2002. Therefore, our current minimum
          tax
          credits are not limited by the ownership change discussed below.
 
 The
          federal net operating losses (“NOL”) expire between 2019 through 2021.
          Realization of the deferred tax assets arising from the NOL is dependent
          on
          generating sufficient taxable income prior to the expiration of the loss
          carryforwards.
  F-17
 
 Due
          to a
          restructuring in 2002, an ownership change within the meaning of Section
          382(g)
          of the Internal Revenue Code (“the Code”) occurred. As a result, our NOL is
          subject to an annual limitation for the current and future taxable years.
          This
          annual limitation may be increased for any recognized built-in gain to
          the
          extent allowed in Section 382(h) of the Code. There is an annual limitation
          of
          approximately $768,000, which was the value of our stock immediately before
          the
          ownership change, multiplied by the applicable long term tax exempt rate.
          We
          believe that approximately $36.2 million of our net operating loss carryforwards
          as of December 31, 2006, are subject to the Section 382 limitations.
 
 The
          following are the expiration dates and the approximate net operating loss
          carryforwards at December 31, 2006 (in thousands):
 
 **Expiration
                    Dates**2019
                
                $
                2,6502020
                
                
                132,2782021
                
                
                27,455$
                162,383
 
 **8.**  **DEBT**
 
 The
          following table summarizes our notes payable, capital lease obligations,
          and
          senior subordinated notes at December 31, 2005 and 2006 (in
          thousands):
 
 **December
                    31,**
                
                **Revolving**
                
                
                
                **Interest********2005**
                
                ******2006**
                
                **Term**
                
                **Maturity**
                
                **Rate**$100
                    million Textron receivable-based revolver(the loan agreement
                    is currently
                    limited to $60 million of availability).
                
                $
                53,661
                
                $
                28,903
                
                
                6/30/08
                
                
                6/30/11
                
                
                Prime
                    + 1.00%$50
                    million CapitalSource receivable-based revolver
                
                
                28,800
                
                
                22,831
                
                
                4/29/08
                
                
                4/29/08
                
                
                Prime
                    + 0.75%$35
                    million Wells Fargo Foothill receivable-based revolver
                
                
                —
                
                
                93
                
                
                12/31/08
                
                
                12/31/11
                
                
                Prime
                    + 0.50%$125
                    million SF-IV receivable-based revolver
                
                
                —
                
                
                —
                
                
                12/3/08
                
                
                12/3/10
                
                
                LIBOR+1.25%$25
                    million Resort Funding receivable-based revolver
                
                
                —
                
                
                —
                
                
                5/20/07
                
                
                5/20/10
                
                
                Prime
                    + 1.50%$66.4
                    million Textron receivable-based non-revolving conduit
                    loan
                
                
                37,224
                
                
                25,090
                
                
                —
                
                
                3/22/14
                
                
                7.035%$26.3
                    million Textron receivable-based non-revolving conduit
                    loan
                
                
                20,839
                
                
                14,210
                
                
                —
                
                
                9/22/11
                
                
                7.90%$128
                    million SF-V receivable-based non-revolver
                
                
                —
                
                
                113,138
                
                
                —
                
                
                7/16/18
                
                
                6.70%$10
                    million Textron inventory loan agreement
                
                
                10,000
                
                
                10,000
                
                
                8/31/08
                
                
                8/31/10
                
                
                LIBOR+3.25%$6
                    million Textron inventory loan agreement
                
                
                —
                
                
                5,000
                
                
                8/31/08
                
                
                8/31/10
                
                
                Prime
                    + 3.00%$5
                    million Textron inventory loan agreement
                
                
                3,335
                
                
                1,115
                
                
                —
                
                
                3/31/07
                
                
                Prime
                    + 3.00%$30
                    million CapitalSource inventory loan agreement
                
                
                15,000
                
                
                18,876
                
                
                4/29/09
                
                
                4/29/11
                
                
                Prime
                    + 1.50%$15
                    million Wells Fargo Foothill inventory loan agreement
                
                
                6,000
                
                
                5,985
                
                
                12/31/08
                
                
                12/31/10
                
                
                Prime
                    + 2.00%Various
                    notes, due from January 2009 through August 2016, collateralizedby
                    various assets with interest rates ranging from 6.0% to
                    8.5%
                
                
                2,282
                
                
                7,590
                
                
                —
                
                
                various
                
                
                variousTotal
                    notes payable
                
                
                177,141
                
                
                252,831Capital
                    lease obligations
                
                
                128
                
                
                1,719
                
                
                —
                
                
                various
                
                
                variousTotal
                    notes payable and capital lease obligations
                
                
                177,269
                
                
                254,5506.0%
                    senior subordinated notes, due 2007
                
                
                3,796
                
                
                3,796
                
                
                —
                
                
                4/1/07
                
                
                6.00%101⁄2%
                    senior subordinated notes, due 2008
                
                
                2,146
                
                
                2,146
                
                
                —
                
                
                4/1/08
                
                
                10.50%8.0%
                    senior subordinated notes, due 2010
                
                
                24,671
                
                
                24,671
                
                
                —
                
                
                4/1/10
                
                
                8.00%Interest
                    on the 6.0% senior subordinated notes, due 2007
                
                
                2,562
                
                
                854
                
                
                —
                
                
                4/1/07
                
                
                6.00%Total
                    senior subordinated notes
                
                
                33,175
                
                
                31,467Total
                
                $
                210,444
                
                $
                286,017
 
 We
          have
          $264.3 million available funding under our current debt facilities. At
          December
          31, 2006, the LIBOR rates on our senior credit facilities were 5.32% (1
          month)
          and 5.37% (3 month) and the Prime rate on these facilities was
          8.25%.
 
 **Financial
          Covenants Under Senior Credit Facilities.**
 
 The
          Company’s senior credit facilities discussed above provide certain financial
          covenants that we must satisfy. Any failure to comply with the financial
          covenants in any single loan agreement will result in a cross default under
          the
          various facilities. Certain of the above debt agreements include restrictions
          on
          the Company's ability to pay dividends based on minimum levels of net income
          and
          cash flow. The debt agreements contain covenants including requirements
          that the
          Company (i) preserve and maintain the collateral securing the loans; (ii)
          pay
          all taxes and other obligations relating to the collateral; and (iii) refrain
          from selling or transferring the collateral or permitting any encumbrances
          on
          the collateral. The debt agreements also contain restrictive covenants,
          which
          include (i) restrictions on liens against and dispositions of collateral,
          (ii)
          restrictions on distributions to affiliates and prepayments of loans from
          affiliates, (iii) restrictions on changes in control and management of
          the
          Company, (iv) restrictions on sales of substantially all of the assets
          of the
          Company, and (v) restrictions on mergers, consolidations, or other
          reorganizations of the Company. Under certain credit facilities, a sale
          of all
          or substantially all of the assets of the Company, a merger, consolidation,
          or
          reorganization of the Company, or other changes of control of the ownership
          of
          the Company, would constitute an event of default and permit the senior
          lenders
          to accelerate the maturity thereof.
  F-18
 
 Such
          credit facilities also contain operating covenants as of December 31, 2006,
          requiring us to (i) maintain a minimum tangible net worth, the most restrictive
          being to maintain a minimum tangible net worth at all times greater than
          the
          tangible net worth as of December 31, 2004, or $132.1 million, plus 50%
          of the
          aggregate amount of net income after December 31, 2004, sales and marketing
          expenses as a percentage of sales below 55.0% for the latest rolling 12
          months,
          maintain notes receivable delinquency rate below 10%, maintain a minimum
          interest coverage ratio of 1.25 to 1 for the latest rolling 12 months,
          maintain
          positive net income for each year end, and for any two consecutive fiscal
          quarters, maintain a leverage ratio of at least 6.0 to 1, and maintain
          a minimum
          weighted average FICO Credit Bureau Score of 640 for all fiscal calendar
          quarter
          sales with respect to which a FICO score can be obtained; (ii) maintain
          our
          legal existence and be in good standing in any jurisdiction where we conduct
          business; (iii) maintain our management agreement with our Resorts; and
          (iv)
          refrain from modifying or terminating certain timeshare documents. The
          credit
          facilities also include customary events of default, including, without
          limitation (i) failure to pay principal, interest, or fees when due, (ii)
          untruth of any representation of warranty, (iii) failure to perform or
          timely
          observe covenants, (iv) defaults under other indebtedness, and (v)
          bankruptcy.
 
 In
          December 2003, we closed a $66.4 million conduit term loan transaction
          through a
          wholly-owned financing subsidiary, Silverleaf Finance II, Inc. This conduit
          loan
          was arranged through one of our existing senior lenders. Under the terms
          of the
          conduit loan, we sold approximately $78.1 million of our Vacation Interval
          receivables to our subsidiary SF-II for an amount equal to the aggregate
          principal balances of the receivables. The purchase of these receivables
          was
          financed by the existing senior lender through a one-time advance to SF-II
          of
          $66.4 million, which is approximately 85% of the outstanding balance of
          the
          receivables SF-II purchased from us. All customer receivables that we
          transferred to SF-II have been pledged as security to the senior lender.
          The
          senior lender also received as additional collateral a pledge of all of
          our
          equity interest in SF-II and a $15.7 million demand note from us to SF-II
          under
          which payment may be demanded if SF-II defaults on its loan from the senior
          lender. There is no additional recourse to the Company other than SF-II
          and the
          demand note. Proceeds from the sale of the receivables to SF-II were used
          to pay
          down approximately $65.5 million of amounts outstanding under our senior
          revolving credit facilities. The senior lender's conduit loan to SF-II
          will
          mature in 2014 and bears interest at a fixed annual rate of 7.035%.
 
 In
          June
          2004, we completed an offer to exchange $24.7 million in principal amount
          of our
          6% senior subordinated notes due 2007 for $24.7 million in principal amount
          of
          our 8% senior subordinated notes due 2010 and a cash payment of approximately
          $271,000, representing accrued, unpaid interest from April 1, 2004 through
          June
          6, 2004.
 
 During
          2005, we entered into a $26.3 million amendment and expansion of our conduit
          term loan agreement with SF-II. Under the terms of the amendment, we sold
          approximately $31.0 million of notes receivable and received cash proceeds
          of
          approximately $26.3 million. The new conduit term loan with SF-II will
          mature in
          2011 and bears interest at a fixed annual rate of 7.9%. We also entered
          into
          receivables and inventory loan agreements with three new senior lenders
          during
          2005. These new loan agreements contain a cumulative borrowing capacity
          of $155
          million, are due between April 2008 and December 2011, and bear interest
          at
          rates ranging from Prime plus 0.5% to Prime plus 2%. We also consolidated,
          amended, and restated the receivable facilities with another senior lender,
          and
          paid in full the $20.7 million of term loans and $6.0 million under one
          inventory loan we had outstanding with that same senior lender. We also
          paid in
          full the aggregate outstanding balance of $37.8 million we had outstanding
          under
          receivables and inventory loans with two other senior lenders.
 
 During
          the first quarter of 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, a Delaware limited liability
          company. SF-IV was formed for the purpose of issuing a $100 million variable
          funding note to UBS. During the fourth quarter of 2006 the facility was
          amended
          to increase the availability from $100 million to $125 million. The funding
          period was originally scheduled to end in March 2007 but was extended to
          December 2008, and the interest rate on advances by UBS to SF-IV was reduced
          from the initial rate of LIBOR plus 1.5% to LIBOR plus 1.25%. The revised
          facility will mature in December 2010. The VFN is secured by customer notes
          receivable sold to SF-IV. Proceeds from the sale of customer notes receivable
          to
          SF-IV are used to fund normal business operations and for general working
          capital purposes. The VFN was issued pursuant to the terms and conditions
          of an
          indenture between SF-IV, UBS, and Wells Fargo Bank, National Association,
          as
          indenture trustee. We will service the customer notes receivable sold to
          SF-IV
          under the terms of an agreement with the indenture trustee and
          SF-IV.
 
 In
          August
          2006, we closed a $128 million term securitization transaction through
          a
          newly-formed, wholly-owned and consolidated special purpose finance subsidiary,
          Silverleaf Finance V, L.P., a Delaware limited partnership. SF-V was formed
          for
          the purpose of issuing approximately $128.0 million of its Timeshare Loan-Backed
          Notes Series 2006-A in a private offering and sale through UBS. The Series
          2006-A Notes were issued pursuant to the terms and conditions of an indenture
          between ourselves as servicer, SF-V, as issuer, Silverleaf Finance V, LLC,
          as
          general partner of SF-V, and Wells Fargo Bank, National Association, as
          indenture trustee, custodian, backup servicer, and account intermediary.
          The
          Series 2006-A Notes were issued in seven classes ranging from Class A through
          Class G notes with a blended fixed rate of 6.7%, and have a final maturity
          of
          July 2018.
 
 The
          Series 2006-A Notes are secured by customer notes receivable sold to SF-V
          by
          SF-IV and Silverleaf in three separate transactions from August 2006 to
          November
          2006. The original amount of notes receivable purchased by SF-V to secure
          the
          Series 2006-A Notes was $155.1 million and the balance of eligible notes
          receivable pledged as collateral at December 31, 2006 was $132.2 million.
          The
          proceeds from the sale of the customer notes receivable to SF-V were primarily
          used to pay down consolidated indebtedness to senior lenders. All customer
          notes
          receivable purchased by SF-V are being acquired without recourse, except
          in the
          case of breaches of customary representations and warranties made in connection
          with the sale of the notes. We will continue to service the customer notes
          receivable sold to SF-V under the terms of the indenture and will receive
          a fee
          for our services.
  F-19
 
 Notes
          payable secured by customer notes receivable require that collections from
          customers be remitted to the senior lenders upon receipt. In addition,
          we are
          required to calculate the appropriate “Borrowing Base” for each note payable
          monthly. Such Borrowing Base determines whether the loans are collateralized
          in
          accordance with the applicable loan agreements and whether additional amounts
          can be borrowed. In preparing the monthly Borrowing Base reports for the
          senior
          lenders, we have classified certain notes as eligible for Borrowing Base
          that
          might be considered ineligible in accordance with the loan agreements.
          A
          significant portion of the potentially ineligible notes relates to cancelled
          notes from customers who have upgraded to a higher value product and notes
          that
          have been subject to payment concessions.
 
 We
          have
          developed programs under which customers may be granted payment concessions
          in
          order to encourage delinquent customers to make additional payments. The
          effect
          of these concessions is to extend the term of the customer notes. Upon
          granting
          a concession, we consider the customer account to be current. Under our
          notes
          payable agreements, customer notes that are less than 60 days past due
          are
          considered eligible as Borrowing Base. As of December 31, 2005 and 2006,
          a total
          of $28.3 million and $24.8 million of customer notes, respectively, have
          been
          considered eligible for Borrowing Base purposes which would have been considered
          ineligible had payment concessions and the related reclassification as
          current
          not been granted. In addition, as of December 31, 2005 and 2006, approximately
          $125,000 and $349,000, respectively, of cancelled notes from customers
          who have
          upgraded to a different product have been treated as eligible for Borrowing
          Base
          purposes.
 
 Principal
          maturities of notes payable, capital lease obligations, and senior subordinated
          notes are as follows at December 31, 2006 (in thousands):
 
 2007
                
                $
                7,9902008
                
                
                27,2652009
                
                
                1,2082010
                
                
                46,0082011
                
                
                62,460Thereafter
                
                
                141,086Total
                
                $
                286,017
 
 Total
          interest expense and lender fees for the years ended December 31, 2004,
          2005,
          and 2006 was $17.6 million, $17.3 million, and $21.7 million, respectively.
          Interest of $322,000, $1.1 million, and $869,000 was capitalized to inventory
          during the years ended December 31, 2004, 2005, and 2006,
          respectively.
 
 As
          of
          December 31, 2006, eligible customer notes receivable with a face amount
          of
          $263.3 million and interval inventory of $41.0 million were pledged as
          collateral.
 
 **9.**  **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 position.
 
 Various
          legal actions and claims may be instituted or asserted in the future against
          us
          and our subsidiaries, including those arising out of our sales and marketing
          activities and contractual arrangements. Some of the matters may involve
          claims,
          which, if granted, could be materially adverse to our financial
          position.
 
 Litigation
          is subject to many uncertainties, and the outcome of individual litigated
          matters is not predictable with assurance. We will establish reserves from
          time
          to time when deemed appropriate under generally acceptable accounting
          principles. However, the outcome of a claim for which we have not deemed
          a
          reserve to be necessary may be decided unfavorably against us and could
          require
          us to pay damages or make other expenditures in amounts or a range of amounts
          that could be materially adverse to our business, results of operations,
          or
          financial position.
  F-20
 
 We
          have
          entered into noncancelable operating leases covering office and storage
          facilities and equipment, which will expire at various dates through 2012.
          The
          total rental expense incurred during the years ended December 31, 2004,
          2005,
          and 2006 was $2.3 million, $2.2 million, and $2.7 million, respectively.
          We have
          also acquired equipment by entering into capital leases.
 
 The
          following table summarizes our scheduled contractual commitments as of
          December
          31, 2006 (in thousands):
 
 **2007**
                
                **2008**
                
                **2009**
                
                **2010**
                
                **2011**
                
                **Thereafter**Capital
                    leases
                
                $
                592
                
                $
                585
                
                $
                505
                
                $
                115
                
                $
                114
                
                $
                —Operating
                    leases
                
                
                2,619
                
                
                2,260
                
                
                1,731
                
                
                857
                
                
                360
                
                
                88Other
                    purchase obligations:Construction
                    commitments
                
                
                21,843
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Employment
                    agreements
                
                
                1,335
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Total
                
                $
                26,389
                
                $
                2,845
                
                $
                2,236
                
                $
                972
                
                $
                474
                
                $
                88
 Capital
          leases include $192,000 of future interest, using an approximate interest
          rate
          of 5.4%, which is our weighted average cost of borrowings on our capital
          lease
          obligations at December 31, 2006. We also have a $15.7 million demand note
          with
          SF-II, our wholly owned on-balance sheet conduit financing subsidiary that
          is
          not included, since the note represents only a potential, future cash outlay,
          and in addition, is eliminated on a consolidated basis.
  Equipment
          acquired under capital leases consists of the following at December 31,
          2005 and
          2006 (in thousands):
 
 **2005**
                
                **2006**Amount
                    of equipment under capital leases
                
                $
                2,643
                
                $
                2,006Less
                    accumulated depreciation
                
                
                (2,408
                )
                
                (237
                )$
                235
                
                $
                1,769
 
 At
          December 31, 2006, we had notes receivable (including notes unrelated to
          Vacation Intervals) in the approximate principal amount of $297.8 million
          with
          an allowance for uncollectible notes of approximately $68.1 million.
 
 Periodically,
          we enter into employment agreements with certain executive officers, which
          provide for minimum annual base salaries and other fringe benefits as determined
          by our Board of Directors. Certain of these agreements provide for bonuses
          based
          on our operating results. The agreements have varying terms of up to three
          years
          and typically can be terminated by either party upon 30 days notice, subject
          to
          severance provisions. Certain employment agreements provide that such person
          will not directly or indirectly compete with the Company in any county
          in which
          it conducts its business or markets its products for a period of two years
          following the termination of the agreement. These agreements also provide
          that
          such persons will not influence any employee or independent contractor
          to
          terminate its relationship with us or disclose any of our confidential
          information.
 
 **10.**  **EQUITY**
  Our
          stock
          option plans provide for the award of nonqualified stock options to directors,
          officers, and key employees, and the grant of incentive stock options to
          salaried key employees. Nonqualified stock options provide for the right
          to
          purchase common stock at a specified price which may be less than or equal
          to
          fair market value on the date of grant (but not less than par value).
          Nonqualified stock options may be granted for any term and upon such conditions
          determined by our Board of Directors. We have reserved 3.8 million shares
          of
          common stock for issuance pursuant to our stock option plans.
 
 Outstanding
          options have a graded vesting schedule, with equal installments of shares
          vesting up through three years from the original grant date. These options
          are
          exercisable at prices ranging from $0.29 to $25.50 per share and expire
          10 years
          from the date of grant.
 
 Stock
          option transactions during 2004, 2005 and 2006 are summarized as follows:
 
 **2004**
                
                **2005**
                
                **2006****Number**
                  **of
                    Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price
                    per Share**
                
                **Number**
                  **of
                    Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price
                    per Share**
                
                **Number**
                  **of
                    Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price
                    per Share**Options
                    outstanding, beginning of year
                
                
                3,704,979
                
                $
                3.64
                
                
                3,651,647
                
                $
                3.60
                
                
                3,137,657
                
                $
                4.20Granted
                
                
                —
                
                $
                —
                
                
                267,000
                
                $
                1.62
                
                
                —
                
                $
                —Exercised
                
                
                (33,332
                )
                $
                0.32
                
                
                (634,066
                )
                $
                0.32
                
                
                (313,850
                )
                $
                0.32Expired
                
                
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                
                —
                
                $
                —Forfeited
                
                
                (20,000
                )
                $
                16.74
                
                
                (146,924
                )
                $
                1.33
                
                
                —
                
                $
                —Options
                    outstanding, end of year
                
                
                3,651,647
                
                $
                3.60
                
                
                3,137,657
                
                $
                4.20
                
                
                2,823,807
                
                $
                4.63Exercisable,
                    end of year
                
                
                1,953,549
                
                $
                6.45
                
                
                2,356,105
                
                $
                5.34
                
                
                2,645,807
                
                $
                4.83
  F-21
  For
          stock
          options outstanding at December 31, 2006:
 
 **Range
                    of Exercise Prices**
                
                **Number
                    of Options****Outstanding**
                
                **Weighted**
                  **Average**
                  **Exercise
                    Price****per Option**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Life
                    in Years**
                
                **Number
                    of**
                  **Options****Exercisable**
                
                **Weighted
                    Average Exercise Price of Options****Exercisable**$16.00
                    - $25.50
                
                
                643,500
                
                $
                16.71
                
                
                1.5
                
                
                643,500
                
                $
                16.71$7.31
                    - $7.31
                
                
                148,500
                
                
                7.31
                
                
                3.0
                
                
                148,500
                
                
                7.31$3.59
                    - $3.69
                
                
                75,000
                
                
                3.64
                
                
                4.0
                
                
                75,000
                
                
                3.64$1.62
                    - $1.62
                
                
                267,000
                
                
                1.62
                
                
                9.0
                
                
                89,000
                
                
                1.62$0.29
                    - $0.32
                
                
                1,689,807
                
                
                0.31
                
                
                6.7
                
                
                1,689,807
                
                
                0.31Total
                
                
                2,823,807
                
                
                
                
                
                
                
                
                2,645,807
 
 The
          aggregate intrinsic value of our outstanding and exercisable options at
          December
          31, 2006 is $7.9 million and $7.3 million, respectively, with weighted
          average
          remaining lives of 6.9 years and 6.7 years, respectively. The intrinsic
          value of
          stock options exercised during each of the three years ended December 31,
          2004,
          2005 and 2006 was $31,000, $1.1 million and $1.1 million,
          respectively.
 
 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. The fair value of the stock options
          granted
          is estimated using the following weighted average assumptions: expected
          volatility ranging from 143.2% to 264.4% for all grants, risk-free interest
          rates which vary for each grant and range from 4.1% to 12.2%, expected
          life of 7
          years for all grants, and no distribution yield for all grants.
 
 Compensation
          cost will be recognized for any stock option grants issued, modified,
          repurchased, or canceled after December 31, 2005. We recognized $252,000
          of
          stock-based compensation expense for the year ended December 31, 2006. 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
          outstanding stock option grants as of December 31, 2004 and 2005, prior
          to the
          adoption of SFAS No. 123R (in thousands, except per share amounts):
 
 **Year
                    Ended**
                  **December
                    31,**
                  **2004**
                
                **Year
                    Ended**
                  **December
                    31,**
                  **2005**Net
                    income — as reported
                
                $
                13,759
                
                $
                23,167Deduct:
                    Stock-based compensation expense computedunder
                    the fair value method, net of tax
                
                
                (297
                )
                
                (278
                )Net
                    income — pro forma
                
                $
                13,462
                
                $
                22,889Net
                    income per share, basicAs
                    reported
                
                $
                0.37
                
                $
                0.63Pro
                    forma
                
                $
                0.37
                
                $
                0.62Net
                    income per share, dilutedAs
                    reported
                
                $
                0.35
                
                $
                0.59Pro
                    forma
                
                $
                0.35
                
                $
                0.59
 
 The
          fair
          value of the stock options granted during 2005 was $1.59. There were no
          stock
          options granted during 2004 or 2006.
 
 **11.**  **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.
  F-22
  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.
          During
          February 2007, the deadline for obtaining approval from the Texas regulatory
          agencies was extended another 90 days from March 2007 to June 2007. If
          the
          Purchasers do not receive required approvals from Texas regulators relating
          to
          the utility assets in Texas (the “Texas Assets”) by June 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
          condensed consolidated statements of operations for discontinued operations
          are
          summarized as follows (in thousands):
 
 **Year
                    Ended December 31,****2004**
                
                **2005**REVENUES:Gain
                    on sale of discontinued operations
                
                $
                —
                
                $
                879Other
                    income
                
                
                2,860
                
                
                438Total
                    revenues
                
                
                2,860
                
                
                1,317COSTS
                    AND OPERATING EXPENSES:Other
                    expense
                
                
                1,376
                
                
                278Depreciation
                
                
                859
                
                
                —Interest
                    expense
                
                
                1
                
                
                —Total
                    costs and operating expenses
                
                
                2,236
                
                
                278Income
                    from discontinued operations
                
                
                624
                
                
                1,039Provision
                    for income taxes
                
                
                —
                
                
                (298
                )Income
                    from discontinued operations
                
                $
                624
                
                $
                741
 There
          were no discontinued operations during the year ended December 31,
          2006.
 
 **12.**  **RELATED
          PARTY TRANSACTIONS**
 
 Each
          timeshare owners’ association (except for the Club at Orlando Breeze) has
          entered into a management agreement with Silverleaf Club, which authorizes
          the
          Clubs to manage the resorts. Silverleaf Club has in turn entered into a
          management agreement with the Company, whereby we supervise the management
          and
          operations of the resorts. Pursuant to the management agreement with Silverleaf
          Club, we earn a maximum management fee equal to 15% of gross revenues of
          Silverleaf Club, but our right to receive such a fee on an annual basis
          is
          limited to the amount of Silverleaf Club's net income. However, if we do
          not
          receive the maximum fee, such deficiency is deferred for payment to succeeding
          years, subject again to the annual net income limitation. The Silverleaf
          Club
          management agreement is effective through March 2010, and will continue
          year-to-year thereafter unless cancelled by either party. During the years
          ended
          December 31, 2004, 2005, and 2006, we recorded management fees of $1.2
          million,
          $1.9 million, and $1.9 million, respectively, in management fee
          income.
 
 Orlando
          Breeze has its own Club, Orlando Breeze Resort Club, which operates
          independently of Silverleaf Club; however, we supervise the management
          and
          operation of the Orlando Breeze Resort Club under the terms of a written
          agreement. The management agreement with Orlando Breeze Resort Club provides
          for
          a maximum annual management fee equal to 15% of gross revenues of Orlando
          Breeze
          Resort Club, but our right to receive such a fee on an annual basis is
          limited
          to the amount of Orlando Breeze Resort Club’s net income. However, if we do not
          receive the maximum fee, such deficiency is deferred for payment to succeeding
          years, subject again to the annual net income limitation. As of December
          31,
          2006, we have not received payment of management fees from Orlando Breeze
          Resort
          Club.
 
 The
          direct expenses of operating the resorts are paid by the Clubs. To the
          extent
          the Clubs provide payroll, administrative, and other services that directly
          benefit the Company, we are charged a separate allocation by the Clubs.
          During
          the years ended December 31, 2004, 2005, and 2006, we incurred $252,000,
          $266,000, and $312,000, respectively, of expenses under these agreements.
          Likewise, to the extent we provide payroll, administrative, and other services
          that directly benefit the Clubs, we charge a separate allocation to the
          Clubs.
          During the years ended December 31, 2004, 2005, and 2006, we charged the
          Clubs
          $3.3 million, $3.3 million, and $3.3 million, respectively, under these
          agreements.
 
 F-23
  The
          following schedule represents amounts due from and to affiliates at December
          31,
          2005 and 2006 (in thousands):
 
 **December
                    31,****2005**
                
                **2006**Timeshare
                    owners associations and other, net
                
                $
                511
                
                $
                880Amount
                    due from Silverleaf Club
                
                
                169
                
                
                371Total
                    amounts due from affiliates
                
                $
                680
                
                $
                1,251Amount
                    due to special purpose entities
                
                $
                544
                
                $
                246Total
                    amounts due to affiliates
                
                $
                544
                
                $
                246
 
 During
          2001, Silverleaf Club entered into a loan agreement for $1.8 million, whereby
          we
          guaranteed such debt with certain of our assets. Silverleaf Club’s related note
          payable balance of $161,000 was paid in full during November 2005.
 
 At
          December 31, 2005 and 2006, the amount due to our special purpose entities
          primarily relates to upgrades of sold notes receivable. Upgrades represent
          sold
          notes that are replaced by new notes when holders of said notes upgrade
          to a
          more valuable Vacation Interval.
 
 The
          William H. Francis Trust (the “Trust”), a trust for which one of our directors
          serves as trustee, is entitled to a 10% net profits interest from sales
          of
          certain land in Mississippi. The net profits interest was granted to the
          Trust
          pursuant to a Net Profits Agreement dated July 20, 1995, between the Trust
          and a
          subsidiary of the Company, which was dissolved after its assets and liabilities,
          including the Net Profits Agreement, were acquired by the Company. Pursuant
          to
          the Net Profits Agreement, the affiliate agreed to provide consulting services
          to us. During 2006, we paid the Trust $58,744 under the Net Profits Agreement
          due to the sale of land subject to the net profits interest. As of December
          31,
          2006, we own less than 2 acres of developable land that is subject to this
          net
          profits interest.
 
 As
          a 2003
          bonus to Mr. Mead, the Compensation Committee approved assigning to him
          approximately 449 acres of flood plain land owned by the Company. We also
          agreed
          to quitclaim to Mr. Mead all of our rights, including reversionary rights
          from
          the Sabine River Authority (“SRA”), in two other tracts of flood plain land of
          approximately 619 and 466 acres each, which were owned by the SRA but held
          by
          the Company and a homeowner's association under a long term ground lease.
          The
          Compensation Committee determined that the aggregate market value at December
          31, 2003 of our ownership interests and other rights in these three tracts
          of
          flood plain land was approximately $73,000. This determination of market
          value
          was based upon an independent appraisal from an independent appraisal firm
          retained by the Compensation Committee. Our basis in these three tracts
          of flood
          plain land was zero, and we had an offsetting gain of approximately $73,000
          in
          adjusting it to fair value at December 31, 2003. Subsequently, in February
          2005
          the Board of Directors (with Mr. Mead abstaining) approved a correction
          of the
          2003 bonus transaction to make a county road the dividing line between
          the
          properties. This involved a conveyance of approximately 25 acres back to
          us, the
          conveyance of approximately 42 acres to Mr. Mead, and a cash payment by
          Mr. Mead
          for the 17 acre difference based on market value, as previously determined
          by
          the independent appraiser retained by the Compensation Committee.
 
 During
          2004, we retained the services of Francis Enterprises, Inc., a government
          affairs consulting firm owned by Mr. Francis, to advise us with respect
          to
          certain regulatory actions taken by the Federal Trade Commission and the
          Federal
          Communications Commission in implementing the national do-not-call list.
          We paid
          Mr. Francis' firm $75,000 during 2004 for such services. No payments were
          made
          to Francis Enterprises, Inc. during 2005 or 2006.
 
 During
          2005, we retained the services of TradeMark Consulting, Co. (“TradeMark”), a
          consulting company owned and operated by Thomas J. Morris, who became one
          of our
          executive officers in August 2005. Mr. Morris entered into an employment
          agreement with us which provided that the Independent Contractor Consulting
          Agreement (“Consulting Agreement”) we had with Trademark would not be affected
          by the employment agreement and that Mr. Morris’ operation of such company would
          not be a violation of the noncompetition provisions of his employment agreement.
          The Consulting Agreement provided for certain bonuses to be paid upon
          Silverleaf’s completion of specified financing transactions. Pursuant to the
          Consulting Agreement, as amended, with TradeMark, we paid TradeMark $375,324
          in
          fees and other contractual payments as provided for by the Consulting Agreement.
          These fees and payments were for services rendered before Mr. Morris became
          one
          of our executive officers in August 2005. We paid Mr. Morris’ company a
          bonus of $100,000 in 2006 as a result of the completion of a financing
          transaction on March 2, 2006. The Consulting Agreement terminated on March
          15,
          2006.
 
 **13.**  **FAIR
          VALUE OF FINANCIAL INSTRUMENTS**
 
 The
          carrying value of cash and cash equivalents, other receivables, amounts
          due from
          or to affiliates, and accounts payable and accrued expenses approximates
          fair
          value due to the relatively short-term nature of the financial instruments.
          The
          carrying value of the notes receivable approximates fair value because
          the
          weighted average interest rate on the portfolio of notes receivable approximates
          current interest rates to be received on similar current notes receivable.
          The
          carrying value of notes payable and capital lease obligations approximates
          their
          fair value because the interest rates on these instruments are adjustable
          or
          approximate current interest rates charged on similar current borrowings.
  F-24
 
 We
          had
          senior subordinated notes of $33.2 million and $31.5 million as of December
          31,
          2005 and 2006, respectively. The estimated fair value of these senior
          subordinated notes at December 31, 2005 and 2006 was approximately $20.8
          million
          and $19.7 **** million,
          respectively, based on the market value of notes exchanged in the Exchange
          Offer
          in 2002. However, these notes were not traded on a regular basis and were
          therefore subject to large variances in offer prices. Accordingly, the
          estimated
          fair value may not be indicative of the amount at which a transaction could
          be
          completed.
 
 Considerable
          judgment is required to interpret market data to develop the estimates
          of fair
          value. Accordingly, the estimates presented herein are not necessarily
          indicative of the amounts we could realize in a current market exchange.
          The use
          of different market assumptions and estimation methodologies may have a
          material
          effect on the estimated fair value amounts.
 
 **14.**  **SUBSIDIARY
          GUARANTEES**
 
 All
          subsidiaries of the Company, except SF-II, SF-III, SF-IV, and SF-V have
          guaranteed the $31.5 million of senior subordinated notes. Separate financial
          statements and other disclosures concerning each guaranteeing subsidiary
          (each,
          a “Guarantor Subsidiary”) are not presented herein because the guarantee of each
          Guarantor Subsidiary is full and unconditional and joint and several, and
          each
          Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together
          comprise all of our direct and indirect subsidiaries.
  The
          Guarantor Subsidiaries had no operations for the years ended December 31,
          2004,
          2005, and 2006. Combined summarized balance sheet information of the Guarantor
          Subsidiaries as of December 31, 2005 and 2006, is as follows (in
          thousands):
 
 **December
                    31,****2005**
                
                **2006**Other
                    assets
                
                $
                2
                
                $
                2Total
                    assets
                
                $
                2
                
                $
                2Investment
                    by parent (includes equity and amounts due to parent)
                
                $
                2
                
                $
                2Total
                    liabilities and equity
                
                $
                2
                
                $
                2
  **15.**  **401(k)
          PLAN**
 
 Our
          401(k) plan (the “Plan”), a qualified defined contribution retirement plan,
          covers employees 21 years of age or older who have completed six months
          of
          service. The Plan allows eligible employees to defer receipt of up to 15%
          of
          their compensation and contribute such amounts to various investment funds.
          The
          employee contributions vest immediately. We are not required by the Plan
          to
          match employee contributions, however, we may do so on a discretionary
          basis. We
          incurred nominal administrative costs related to maintaining the Plan and
          made
          no contributions to the Plan during the years ended December 31, 2004,
          2005, and
          2006.
 
 F-25
  **16.**  **SELECTED
          QUARTERLY FINANCIAL DATA (UNAUDITED)**
 
 Selected
          quarterly financial data for 2005 and 2006 is set forth below (in thousands,
          except per share amounts):
 ****
 First
                
                Second
                
                Third
                
                FourthQuarter
                
                Quarter
                
                Quarter
                
                QuarterTotal
                    revenues2006
                
                $
                45,672
                
                $
                53,033
                
                $
                56,100
                
                $
                52,0782005
                
                $
                42,080
                
                $
                49,355
                
                $
                62,305
                
                $
                48,168Total
                    costs and operating expenses2006
                
                $
                35,566
                
                $
                42,041
                
                $
                46,264
                
                $
                45,6032005
                
                $
                39,088
                
                $
                42,839
                
                $
                44,749
                
                $
                43,082Income
                    from continuing operations2006
                
                $
                6,215
                
                $
                6,760
                
                $
                6,049
                
                $
                3,9822005
                
                $
                2,394
                
                $
                4,231
                
                $
                12,250
                
                $
                3,550Income
                    from discontinued operations2006
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —2005
                
                $
                128
                
                $
                —
                
                $
                613
                
                $
                —Net
                    income2006
                
                $
                6,215
                
                $
                6,760
                
                $
                6,049
                
                $
                3,9822005
                
                $
                2,522
                
                $
                4,231
                
                $
                12,863
                
                $
                3,550Income
                    per common share from continuing operations: basic2006
                
                $
                0.17
                
                $
                0.18
                
                $
                0.16
                
                $
                0.112005
                
                $
                0.07
                
                $
                0.11
                
                $
                0.33
                
                $
                0.10Income
                    per common share from discontinued operations: basic2006
                
                $
                0.00
                
                $
                0.00
                
                $
                0.00
                
                $
                0.002005
                
                $
                0.00
                
                $
                0.00
                
                $
                0.02
                
                $
                0.00Net
                    income per common share: basic2006
                
                $
                0.17
                
                $
                0.18
                
                $
                0.16
                
                $
                0.112005
                
                $
                0.07
                
                $
                0.11
                
                $
                0.35
                
                $
                0.10Income
                    per common share from continuing operations: diluted2006
                
                $
                0.16
                
                $
                0.17
                
                $
                0.15
                
                $
                0.102005
                
                $
                0.06
                
                $
                0.11
                
                $
                0.31
                
                $
                0.09Income
                    per common share from discontinued operations: diluted2006
                
                $
                0.00
                
                $
                0.00
                
                $
                0.00
                
                $
                0.002005
                
                $
                0.00
                
                $
                0.00
                
                $
                0.02
                
                $
                0.00Net
                    income per common share: diluted2006
                
                $
                0.16
                
                $
                0.17
                
                $
                0.15
                
                $
                0.102005
                
                $
                0.06
                
                $
                0.11
                
                $
                0.33
                
                $
                0.09
 
 As
          discussed under the heading “Significant Accounting Policies Summary” in Note 2,
          in 2006 we changed our accounting for real estate time-sharing transactions
          in
          connection with the adoption of Statement of Financial Accounting Standards
          No.
          152, Accounting for Real Estate Time-Sharing Transactions, and changed
          our
          accounting for stock-based compensation in connection with the adoption
          of FASB
          Statement No. 123(R), Share-Based Payment. As a result, some of the amounts
          for
          2005 may not be comparable to 2006.
 
 **17.**  **SUBSEQUENT
          EVENTS**
 
 We
          entered into a consolidated, amended and restated loan and security agreement
          (the “Agreement”) with Textron Financial Corporation effective February 21,
          2007. Our current receivables and inventory financing arrangements were
          consolidated into one facility, with a reduction in the interest rate on
          the
“receivables component” from Prime Rate plus 1% to Prime Rate. The interest rate
          on advances under the “acquisition component” and the “inventory component” of
          the consolidated debt are now Prime Rate plus 1%. The interest rates charged
          under our prior inventory loan agreements with Textron were the Prime Rate
          plus
          3% and LIBOR plus 3.25%. The funding period has been extended from June
          2008 to
          January 2010. The receivables component matures on January 31, 2013, and
          the
          acquisition and inventory component each mature on January 31, 2012.
  F-26