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, 2005****or****o**
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE
                    SECURITIES EXCHANGE ACT OF
                    1934**
 
 **FOR
          THE TRANSITION PERIOD FROM _________ TO _________**
 
 **Commission
          File Number 001-13003**
 
 **Silverleaf
          Resorts, Inc.**
 (Exact
          Name of Registrant as Specified in its Charter)
 
 **Texas**
                **75-2259890**(State
                    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 voting stock held by non-affiliates of the
          Registrant, based upon the last sales price of the Common Stock on June
          30, 2005
          as reported on the OTC Bulletin Board operated by Nasdaq Stock Market,
          Inc., was
          approximately $18,744,635 (based on 13,200,447 shares held by non-affiliates).
          There were 36,954,948 shares of the Registrant's Common Stock, $.01 par
          value,
          outstanding at June 30, 2005.
 
 As
          of
          March 20, 2006 there were 37,494,304 shares of the Registrant’s Common Stock,
          $.01 par value, 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 2006
          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**
  **Item
                  Number**
              
              **Page****PART
                  I**Item
                  1.
              Business
              4Item
                  1A.
              Risk
                  Factors
              22Item
                  1B.
              Unresolved
                  Staff Comments
              31Item
                  2.
              Properties
              31Item
                  3.
              Legal
                  Proceedings
              42Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              42**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related
                  Stockholder Matters, and Issuer Purchases of Equity
                  Securities
              43Item
                  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
              60Item
                  8.
              Financial
                  Statements and Supplementary
                  Data
              61Item
                  9.
              Changes
                  In and Disagreements With Accountants on
                  Accounting and Financial Disclosure
              61Item
                  9A.
              Controls
                  and Procedures
              61Item
                  9B.
              Other
                  Information
              61**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the
                  Registrant
              61Item
                  11.
              Executive
                  Compensation
              62Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners
                  and Management
              62Item
                  13.
              Certain
                  Relationships and Related
                  Transactions
              62Item
                  14.
              Principal
                  Accountant Fees and
                  Services
              63**PART
                  IV**Item
                  15.
              Exhibits,
                  Financial Statement Schedules, and
                  Reports on Form 8-K
              63Index
                  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,
      2005, 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").





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 $10,361 for 2005 and $9,671 for
      2004.





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 new 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 2005 Events**





4





·
            During
                the fourth quarter of 2004, we completed the acquisition of 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. The property is comprised of 48 two and three bedroom units
                and
                provides resort amenities such as a heated outdoor swimming pool,
                fitness
                center, arcade, playground, sand volleyball and basketball courts.
                Our
                public offering statement filed with the Florida Bureau of Standards
                and
                Registrations was approved during the first quarter of 2005, granting
                us
                sales approval for 16 units encompassing 832 one-week Vacation Intervals.
                Since that time we have operated the property as a timeshare resort
                under
                the name “Orlando Breeze.” By December 31, 2005, we were granted sales
                approval for all of the 48 units at the resort, encompassing a total
                of
                2,496 one-week Vacation Intervals.





·
            During
                the first quarter of 2005, we sold the water distribution and waste
                water
                treatment utilities assets at eight of our timeshare resorts for
                an
                aggregate sales price of $13.2 million, which resulted in a pretax
                gain of
                $879,000 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 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 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 charge a rate set in accordance with the ratemaking
                procedures of the Texas Commission on Environmental Quality. The
                proceeds
                of the 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. If the Purchasers do not receive required approvals
      from Texas regulators relating to the utility assets in Texas (the “Texas
      Assets”) within eighteen months of closing, the Texas Assets will be reconveyed
      to 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.





·
            During
                the third quarter of 2005 we closed a term securitization transaction
                with
                a newly-formed, wholly-owned off-balance sheet special purpose finance
                subsidiary (“SF-III”), a Delaware limited liability company, 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. The Series 2005-A Notes were issued pursuant to an
                Indenture ("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 in four classes as follows:





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


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


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


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





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





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between SF-III and us. Under that agreement,
      we
      sold to SF-III approximately $132.8 million in timeshare receivables that were
      previously pledged as collateral under revolving credit facilities with our
      senior lenders and our wholly-owned, off-balance sheet subsidiary, Silverleaf
      Finance I, Inc. (“SF-I”), also a qualified special purpose entity. 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.





·
            During
                2005, we entered into receivablesand
                inventory loan agreements with three new senior lenders. We consolidated,
                amended, and restated the receivable facilities with another senior
                lender, and paid in full the term loans and one inventory loan we
                had
                outstanding with that same senior lender. We paid in full the aggregate
                outstanding balance of receivables and inventory loans with two other
                senior lenders, and we entered into an amendment and expansion of
                our
                conduit term loan agreement through our wholly-owned on-balance sheet
                financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”), which was
                formed in December 2003. All of these transactions are discussed
                further
                under the heading “Description Of Our Senior Credit Facilities At December
                31, 2005”.


5








·
            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.





·
            In
                December 2005, we announced plans to open our first showroom-style,
                off-site sales office. The showroom, which is centrally located in
                the
                Dallas/Fort Worth metroplex in Irving, Texas, opened in March 2006.
                We
                estimate that the new facility will generate annual sales to new
                members
                of $10 to $12 million.





**Certain
      Significant Events Subsequent to 2005**





·
            In
                January 2006, we purchased approximately 30 acres of undeveloped
                land
                contiguous to our Orlando Breeze resort in 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.





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





**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. Beginning in 2006, we will
      begin limited 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% of eligible customer receivables. At
      December 31, 2005 and 2004, we had a portfolio of approximately 30,293 and
      34,437 customer promissory notes, respectively, totaling approximately $230.5
      and $250.4 million, respectively, with an average yield of 15.3% and 15.1%
      per
      annum, respectively, which compares favorably to our weighted average cost
      of
      borrowings of 8.1% per annum at December 31, 2005. We cease recognition of
      interest income when collection is no longer deemed probable. At December 31,
      2005 and 2004, approximately $337,000 and $2.0 million in principal, or 0.1%
      and
      0.8%, respectively, of our loans to Silverleaf Owners were 61 to 120 days past
      due. As of December 31, 2005 and 2004, 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.


6








Each
      timeshare resort has a timeshare owners' association (a "Club"). At December
      31,
      2005, 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 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 all the Existing 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.





*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.





*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 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 16.0% 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 1.5% 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 low 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
      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 2005 and 2004. These upgrade and additional week programs
      have been well received by Silverleaf Owners and accounted for approximately
      55.2% and 52.4% of our gross revenues from Vacation Interval sales for the
      years
      ended December 31, 2005 and 2004, 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
      December 2005, we announced plans to open our first showroom-style, off-site
      sales office. The showroom, located in the Dallas/Fort Worth metroplex in
      Irving, Texas, opened in March 2006 and 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. Following the initial start-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.


7








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, 2005, we employed 459 sales representatives at our Existing
      Resorts.





**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 quarterly operating results
      could be negatively impacted by these factors.





**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 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
      22 of
      this report.





In
      2005
      we accrued 16.2% of the purchase price of Vacation Intervals as a provision
      for
      uncollectible notes. The allowance for doubtful accounts was 22.8% of gross
      notes receivable as of December 31, 2005 compared to 21.1% at December 31,
      2004.
      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.





For
      the
      year ended December 31, 2005, we decreased our sales by $2.6 million for
      customer returns (cancellations of sales transactions in which the customer
      fails to make the first installment payment). 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, 2005, we had notes receivable (including notes unrelated to
      Vacation Intervals) in the approximate principal amount of $230.1 million with
      an allowance for uncollectible notes of approximately $52.5 million.
      Approximately $69.0 million in principal amount of our total notes receivable
      remain outstanding under the conduit term loan between our consolidated finance
      subsidiary, SF-II, and Textron Financial Corporation.





Additionally,
      at December 31, 2005, our off-balance sheet finance subsidiary, SF-III, held
      notes receivable totaling $106.9 million, with related borrowings of $89.1
      million. Except for the repurchase of notes that fail to meet initial
      eligibility requirements, we are not obligated to repurchase defaulted or any
      other contracts sold to SF-III. As the Servicer of the notes receivable sold
      to
      SF-III, we are obligated by the terms of the conduit facility to foreclose
      upon
      the Vacation Interval securing a defaulted note receivable. We may, but are
      not
      obligated to, purchase the foreclosed Vacation Interval for an amount equal
      to
      the net fair market value of the Vacation Interval, 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, 2005, we paid approximately
      $386,000 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 $22.8 million at December 31,
      2005.


8








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 additional interest income ceases until collection
      is
      deemed probable.





We
      intend
      to borrow additional funds under our existing revolving credit facilities with
      our senior lenders to finance our operations. At December 31, 2005, we had
      borrowings under our senior credit facilities in the approximate principal
      amount of $174.9 million, of which $140.5 million of such facilities are
      receivables based and currently permit borrowings of 75% 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, 2005, we had a portfolio of approximately 30,293 Vacation Interval customer
      promissory notes in the approximate principal amount of $230.5 million, of
      which
      approximately $337,000 in principal amount was 61 days or more past due and
      therefore ineligible as collateral.





At
      December 31, 2005, our portfolio of customer notes receivable had an average
      yield of 15.3%. At such date, our borrowings, which primarily bear interest
      at
      variable rates, had a weighted average cost of 8.1%. We have historically
      derived net interest income from our financing activities because the interest
      rates we charge our customers who finance the purchase of their Vacation
      Intervals exceed the interest rates we pay our senior lenders. Because our
      existing indebtedness currently bears interest primarily 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
      position.





To
      partially offset an increase in interest rates, we have engaged in one interest
      rate hedging transaction related to our conduit loan through SF-II, with a
      balance of $58.1 million on December 31, 2005. In addition, the Series 2005-A
      Notes related to our off-balance sheet special purpose finance subsidiary,
      SF-III, had a balance of $89.1 million at December 31, 2005 and bear interest
      at
      fixed rates ranging from 4.857% to 6.756%.





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 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 financing activities.





We
      typically provide financing to customers over a seven-year to ten-year period.
      Our customer notes receivable had an average maturity of 5.5 years at December
      31, 2005. Our credit facilities have scheduled maturities between March 2007
      and
      March 2014. 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
      March
      2007, we are continuing to identify additional financing arrangements beyond
      such date.





**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.


9








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**





We
      have
      the right to appoint the directors of the Silverleaf Club through our right
      to
      supervise the management of the boards of directors of the individual clubs
      at
      each 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 808 in 2005 and 545 in 2004.
      Typically, we purchase at foreclosure all Vacation Intervals that are the
      subject of foreclosure proceedings instituted by the Club because of delinquent
      dues.





At
      December 31, 2005, 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, 2005, Silverleaf Club had 710 full-time employees and Orlando
      Breeze Resort Club had 10 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 $54.96 per month ($27.48
      for
      biennial owners) during 2005, except for certain members of Oak N’ Spruce
      Resort, who prepay dues at an annual rate of approximately $458. 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 provide 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 2005 management
      fees were subject to the annual net income limitation. Accordingly, for the
      year
      ended December 31, 2005, 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,
      2005, there were approximately 94,000 Vacation Interval owners who pay dues
      to
      Silverleaf Club and approximately 400 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.


10





**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.*** We also
      recognize revenues from sales of Samplers, which allow prospective Vacation
      Interval purchasers to sample a resort for a specified number of nights. A
      five-night Sampler package primarily sells for between $595 and $1,000. For
      the
      years ended December 31, 2005, 2004, and 2003, we recognized $2.6 million,
      $2.2
      million, and $1.8 million, respectively, in revenues from Sampler
      sales.





***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 $13.2 million, which
      resulted in a pretax gain of $879,000. Certain of the Purchasers 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 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 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 4 acres of this land during the first quarter of 2006 for
      approximately $733,000, which resulted in a pretax gain of approximately
      $400,000. ****





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.





11





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.





**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 selling the new Silverleaf Plus program. This program,
      administered through Silverleaf Club, includes all of the prior benefits to
      Silverleaf Club members plus enhanced vacation options through the Silverleaf
      exchange program. In addition to use of their owned weeks and bonus time,
      Silverleaf Club members who purchase with 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.*** As a
      convenience to Silverleaf Owners, each purchaser of a Silverleaf Vacation
      Interval has certain exchange privileges through the Silverleaf Club which
      may
      be used 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; and
      (ii)
      exchange an interval for the same interval of equal or lower rating at any
      other
      Existing Resort. These exchange rights are conditioned upon availability of
      the
      desired interval or resort.





***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, 2005, the Existing Resorts (except for Orlando Breeze) are
      registered with RCI, and approximately one-third 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, 2005, RCI’s designation of our units
      of red, white, and blue Vacation Intervals is approximately 57%, 19%, and 24%,
      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 $149 for domestic exchanges and $189 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”), Cendant Corporation, through its acquisition
      of Fairfield Resorts, Inc. (“Fairfield") and Trendwest Resorts, Inc.
      (“Trendwest”), 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.





Fairfield,
      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, we believe 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 Ownership Industry, 2005 United States Study
      (the
“ARDA Study”), which reported sales volume in the United States of $7.9 billion
      for 2004, compared to $3.7 billion in 1999 and $1.9 billion in 1995, equating
      to
      a 10-year compound annual growth rate exceeding 16 percent. The study estimated
      that 3.9 million households owned one or more U.S. timeshare intervals or
      points equivalent at January 1, 2005, representing a 13.8 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 position.





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 83 million telephone numbers
      had been registered on the National Do Not Call List Registry by the end of
      2004. 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 position. 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
      position.





14





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.





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
      include, 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 position.





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.





16





***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 $13.2 million, which resulted in a pretax gain of
      $879,000.





***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.





**Employees**





At
      December 31, 2005, we had 1,437 full and part-time employees and the Clubs
      collectively had 720 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 position. 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 Certain Indebtedness**





***Existing
      Indebtedness.*** The
      following table summarizes our credit agreements with our senior lenders and
      our
      off-balance sheet special purpose finance subsidiary as of December 31, 2005
      (in
      thousands):


**Facility**
              **Amount**
            
            **12/31/05**
              **Balance**Receivable
                Based Revolving Facilities
            
            $
            185,000
            
            $
            82,461Receivable
                Based Non-Revolving Facilities
            
            
            58,063
            
            
            58,063Inventory
                Loans
            
            
            49,335
            
            
            34,335Sub-Total
                On Balance Sheet
            
            
            292,398
            
            
            174,859Off-Balance
                Sheet Receivable Based Term Loan *
            
            
            89,113
            
            
            89,113Grand
                Total
            
            $
            381,511
            
            $
            263,972





*
      Through
      SF-III, our off-balance sheet qualified special purpose entity formed during
      the
      third quarter of 2005.





We
      use
      these credit agreements to finance the sale of Vacation Intervals, to finance
      construction, and for working capital needs. The loans mature between March
      2007
      and March 2014, 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. These credit facilities
      bear interest at variable rates tied to the prime rate, LIBOR, or the corporate
      rate charged by certain banks. The credit facilities secured by customer notes
      receivable allow advances up to 75% 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. Our payment and
      performance under these senior subordinated notes has been guaranteed by all
      of
      our present and future domestic restricted subsidiaries.


17





As
      of
      December 31, 2005, certain of our credit facilities include restrictions on
      our
      ability to pay dividends based on minimum levels of net income and cash flow.
      The credit agreements 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.





Our
      credit facilities also contain operating covenants requiring us to 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, maintain sales and marketing expenses as a
      percentage of sales below 55.0% for the latest rolling 12 months, maintain
      a
      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. In addition, our senior
      lenders have provided us with waivers and amended financial covenants whereby
      we
      exclude the $28.7 million increase in our allowance for uncollectable notes
      during the first quarter of 2003 from the calculation of our minimum required
      consolidated net income, and from the calculation of our minimum required
      interest coverage ratio of 1.25 to 1.0. We were also given a waiver for our
      failure to maintain our ratio of sales and marketing expense below the required
      standard in the first quarter of 2003. As of December 31, 2003, 2004, and
      2005, we were in compliance with these operating covenants. However, future
      compliance with these covenants cannot be assured. Nor is there any assurance
      that our lenders will be prepared to give us waivers in the future, as they
      have
      in the past, if we are unable to fully comply with one or more
      covenants.





The
      following table summarizes our notes payable, capital lease obligations, and
      senior subordinated notes at December 31, 2004 and 2005 (in
      thousands):




******December
                    31,___********2004**
                
                ******2005**
 $55.9
                    million loan agreement, which contains certain financial covenants,
                    due
                    March 2007, principal and interest payable from the proceeds
                    obtained on
                    customer notes receivable pledged as collateral for the note
                    (the loan
                    agreement was limited to a $44.6 million revolver with an interest
                    rate of
                    LIBOR plus 3% with a 6% floor, revolving through March 2006,
                    and a $11.3
                    million term loan with an interest rate of 8%; as of December
                    31, 2005 the
                    loan agreement has been terminated)
                
                $
                37,514
                
                $
                —$11.3
                    million term loan with an interest rate of 8%, due in March 2007
                
                
                9,991
                
                
                —$55.1
                    million loan agreement, which contains certain financial covenants,
                    due
                    March 2007, principal and interest payable from the proceeds
                    obtained on
                    customer notes receivable pledged as collateral for the note
                    (the loan
                    agreement was limited to a $44.1 million revolver with an interest
                    rate of
                    LIBOR plus 3% with a 6% floor, revolving through March 2006,
                    and a $11.0
                    million term loan with an interest rate of 8%; as of December
                    31, 2005 the
                    loan agreement has been terminated)
                
                
                37,039
                
                
                —$11.0
                    million term loan with an interest rate of 8%, due in March 2007
                
                
                9,852
                
                
                —$7.9
                    million loan agreement, which contains certain financial covenants,
                    due
                    March 2007, principal and interest payable from the proceeds
                    obtained on
                    customer notes receivable pledged as collateral for the note
                    (the loan
                    agreement was limited to a $6.2 million revolver with an interest
                    rate of
                    Prime plus 3% with a 6% floor, revolving through March 2006,
                    and a $1.7
                    million term loan with an interest rate of 8%; as of December
                    31, 2005 the
                    loan agreement has been terminated)
                
                
                5,250
                
                
                —$1.7
                    million term loan with an interest rate of 8%, due in March 2007
                
                
                1,415
                
                
                —$100.0
                    million revolving loan agreement, which contains certain financial
                    covenants, revolving through June 2008 and due June 2011, principal
                    and
                    interest payable from the proceeds obtained on customer notes
                    receivable
                    pledged as collateral for the note, at an interest rate of Prime
                    plus 1.0%
                    (the loan agreement is currently limited to $60 million of availability)
                
                
                —
                
                
                53,661
   18
  ******December
                        31,___********2004**
                    
                    ******2005**
 $66.4
                    million conduit loan, due March 2014, principal and interest
                    payable from
                    the proceeds obtained on customer notes receivable pledged as
                    collateral
                    for the note, at an interest rate of 7.035%
                
                $
                50,299
                
                $
                37,224$26.3
                    million conduit loan, due September 2011, principal and interest
                    payable
                    from the proceeds obtained on customer notes receivable pledged
                    as
                    collateral for the note, at an interest rate of 7.9%
                
                
                —
                
                
                20,839$40.4
                    million loan agreement, which contains certain financial covenants,
                    due
                    March 2009, principal and interest payable from the proceeds
                    obtained on
                    customer notes receivable pledged as collateral for the note
                    (as of
                    December 31, 2005 the loan agreement has been terminated)
                
                
                18,689
                
                
                —$50
                    million revolving loan agreement, which contains certain financial
                    covenants, revolving through and due April 2008, principal and
                    interest
                    payable from the proceeds obtained on customer notes receivable
                    pledged as
                    collateral for the note, at an interest rate of LIBOR plus 4.25%
                
                
                —
                
                
                28,800$25
                    million revolving loan agreement, which contains certain financial
                    covenants, revolving through May 2007, due May 2010, principal
                    and
                    interest payable from the proceeds obtained on customer notes
                    receivable
                    pledged as collateral for the note, at an interest rate of Prime
                    plus
                    1.5%, with a 6.5% floor
                
                
                —
                
                
                —$70
                    million loan agreement, capacity reduced by amounts outstanding
                    under the
                    $10 million inventory loan agreement and the $9 million supplemental
                    revolving loan agreement, which contains certain financial covenants,
                    due
                    February 2006, principal and interest payable from the proceeds
                    obtained
                    on customer notes receivable pledged as collateral for the note,
                    at an
                    interest rate of LIBOR plus 2.65% with a 6.0% floor (as of December
                    31,
                    2005 the loan agreement has been terminated)
                
                
                9,080
                
                
                —$9
                    million supplemental revolving loan agreement, which contains
                    certain
                    financial covenants, due March 2007, principal and interest payable
                    from
                    the proceeds obtained on customer notes receivable pledged as
                    collateral
                    for the note, at an interest rate of LIBOR plus 2.67% with a
                    6% floor (as
                    of December 31, 2005 the loan agreement has been terminated)
                
                
                5,735
                
                
                —$10
                    million revolving loan agreement, which contains certain financial
                    covenants, revolving through March 2006, due March 2009, collateralized
                    by
                    either notes receivable or inventory, interest payable monthly,
                    at an
                    interest rate of the higher of Prime plus 2% or Federal Funds
                    plus 4.75%
                    with a 6.0% floor (as of December 31, 2005 the loan agreement
                    has been
                    terminated)
                
                
                10,000
                
                
                —$10
                    million inventory loan agreement, which contains certain financial
                    covenants, revolving through August 2008, due August 2010, interest
                    payable monthly, at an interest rate of LIBOR plus 3.25%
                
                
                10,000
                
                
                10,000$6
                    million inventory loan agreement, which contains certain financial
                    covenants, revolving through August 2008, due August 2010, interest
                    payable monthly, at an interest rate of Prime plus 3% with a
                    6% floor
                
                
                6,000
                
                
                —$5
                    million inventory term loan agreement, which contains certain
                    financial
                    covenants, due March 2007, interest payable monthly, at an interest
                    rate
                    of Prime plus 3% with a 6% floor
                
                
                —
                
                
                3,335$15
                    million inventory loan agreement, which contains certain financial
                    covenants, revolving through and due April 2008, interest payable
                    monthly,
                    at an interest rate of Prime plus 3%
                
                
                —
                
                
                15,000$15
                    million inventory loan agreement, which contains certain financial
                    covenants, revolving through December 2008, due December 2010,
                    interest
                    payable monthly, at an interest rate of Prime plus 2%
                
                
                —
                
                
                6,000Various
                    notes, due from March 2006 through December 2009,
                    collateralized
                  by
                    various assets with interest rates ranging from 2.95% to 10.25%
                
                
                7,122
                
                
                2,282Total
                    notes payable
                
                
                217,986
                
                
                177,141Capital
                    lease obligations
                
                
                324
                
                
                128Total
                    notes payable and capital lease obligations
                
                
                218,310
                
                
                177,2698.0%
                    senior subordinated notes, due 2010, interest payable semiannually
                    on
                    April 1 and October 1, guaranteed by all of the Company’s present and
                    future domestic restricted subsidiaries
                
                
                24,671
                
                
                24,6716.0%
                    senior subordinated notes, due 2007, interest payable semiannually
                    on
                    April 1 and October 1, guaranteed by all of the Company’s present and
                    future domestic restricted subsidiaries
                
                
                3,796
                
                
                3,796101⁄2%
                    senior subordinated notes, subordinate to the 6.0% senior subordinated
                    notes above, due 2008, interest payable semiannually on April
                    1 and
                    October 1, guaranteed by all of the Company’s present and future domestic
                    restricted subsidiaries
                
                
                2,146
                
                
                2,146Interest
                    on the 6.0% senior subordinated notes, due 2007, and the 8.0%
                    senior
                    subordinated notes, due 2010, interest payable semiannually through
                    October 2007 on April 1 and October 1, guaranteed by all of the
                    Company’s
                    present and future domestic restricted subsidiaries
                
                
                4,270
                
                
                2,562Total
                    senior subordinated notes
                
                
                34,883
                
                
                33,175Total
                
                $
                253,193
                
                $
                210,444


19





At
      December 31, 2005, LIBOR rates on the Company’s senior credit facilities were
      from 4.26% to 4.49%, and the Prime rate on these facilities was 7.00%.





**DESCRIPTION
      OF OUR SENIOR CREDIT FACILITIES AT DECEMBER 31, 2005**





***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 current facilities with Textron Financial are as follows at
      December 31, 2005:





·
            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 August 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. During the first quarter of 2005,
                we also
                entered into a $5 million inventory term loan facility with Textron.
                The
                term loan 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 LIBOR plus 4.25%. We also entered into a $15 million inventory loan
      agreement with CapitalSource, which also matures in April 2008 and bears
      interest at a rate of Prime plus 3%.





***Resort
      Funding Facility.***  During
      the second quarter of 2005, we entered into a $25 million receivables loan
      agreement with Resort Funding, which matures in May 2010 and bears interest
      at a
      rate of Prime plus 1.5% with a 6.5% floor. We have not yet 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 matures in December 2011 and bears
      interest at a rate of Prime plus 0.5% with a 6% floor. We also entered into
      a
      $15 million inventory loan agreement with Wells Fargo Foothill, which matures
      in
      December 2010 and bears interest at a rate of Prime plus 2% with a 6% floor.
      As
      of December 31, 2005, we have borrowed against the inventory facility but have
      not yet borrowed against the receivables facility.





***Silverleaf
      Finance III Facility.*** During
      the third quarter of 2005 we closed a term securitization transaction with
      a
      newly-formed, wholly-owned off-balance sheet qualified special purpose finance
      subsidiary, SF-III, a Delaware limited liability company, which was formed
      for
      the purpose of issuing $108.7 million of its Series 2005-A Notes in a private
      placement through UBS Securities LLC. The Series 2005-A Notes were issued
      pursuant to an Indenture 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 as follows:


20





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


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


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


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





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





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between SF-III and us. Under that agreement,
      we
      sold to SF-III approximately $132.8 million in timeshare receivables that were
      previously pledged as collateral under revolving credit facilities with our
      senior lenders and 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.





We
      utilized the net cash proceeds from our 2005 fundings under our credit
      facilities for general
      working capital purposes to
      finance our existing operations, retire the aggregate balance outstanding under
      various non-revolving credit facilities and term loans, pay off in full the
      credit facility of SF-I, pay off in full the credit facility of another senior
      lender, and repay a portion of our revolving
      credit facilities with our existing senior lenders.





**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, 2005
      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. It also excludes the $28.7
      million increase in our allowance for uncollectible notes booked in the first
      quarter of 2003.





***Marketing
      and Sales Expenses Covenant.*** Our
      ratio of marketing expenses to total sales for the latest rolling 12 months
      then
      ending must not equal or exceed .55 to 1 as of the last day of any fiscal
      quarter. Two senior lenders have increased the ratio we are required to stay
      below to .57 to 1 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) EBITDA less capital expenditures (excluding the $28.7 million
      increase in our allowance for uncollectible notes booked in the first quarter
      of
      2003) 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, excluding the $28.7 million
      increase in our allowance for uncollectible notes booked in the first quarter
      of
      2003.





***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.





21


***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.





We
      received waivers under our old senior credit facilities of covenant defaults
      that occurred in the first quarter of 2003 due to our increase in our allowance
      for uncollectible notes and our failure to maintain a ratio of sales and
      marketing expense to total sales of no more than 52.5%. As a result of these
      amendments and waivers, we have been in full compliance with all of our credit
      facilities with our senior lenders since December 31, 2003.





**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.




**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:





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


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


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


o  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 solely within the timeshare industry. Our results of operations and
      financial position could be negatively affected by any of the following
      events:





o  An
      oversupply of timeshare units,


o  A
      reduction in demand for timeshare units,


o  Changes
      in travel and vacation patterns,


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


o  Governmental
      regulations or taxation of the timeshare industry, and


o  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.





22


**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.





We
      recorded 16.2% of the purchase price of Vacation Intervals as a provision for
      uncollectible notes for the year ended December 31, 2005. Our sales were
      decreased by $2.6 million for customer returns in 2005. 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 52% of Vacation Interval
      sales took place in 2005), 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, 2005, we had Vacation Interval customer notes receivable in the
      approximate principal amount of $230.5 million, and had an allowance for
      uncollectible notes of approximately $52.5 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, 2005, we owed approximately $174.9 million
      of
      principal to our senior lenders.





***Borrowing
      Base.*** We
      have
      receivable-based loan agreements with senior lenders to borrow up to
      approximately $243.1 million. We pledged our customer promissory notes and
      mortgages as security under these agreements. Our senior lenders typically
      lend
      us 75% 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, 2005, we had a portfolio
      of
      approximately 30,293 Vacation Interval customer notes receivable in the
      approximate principal amount of $230.5 million. Approximately $337,000 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, 2005, our portfolio of customer loans had a weighted average fixed
      interest rate of 15.3%. At such date, our borrowings (which bear interest
      predominantly at variable rates) against the portfolio had a weighted average
      cost of funds of 8.1%. We have historically derived net interest income from
      our
      financing activities because the interest rates we charge our customers who
      finance the purchase of their Vacation Intervals exceed the interest rates
      we
      pay to our senior lenders. Because 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 position. 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
      financing activities.





To
      partially offset an increase in interest rates, we have engaged in one interest
      rate hedging transaction related to our conduit loan through SF-II, with a
      balance of $58.1 million on December 31, 2005. In addition, the Series 2005-A
      Notes related to our off-balance sheet special purpose finance subsidiary,
      SF-III, had a balance of $89.1 million at December 31, 2005 and bear interest
      at
      fixed rates ranging from 4.857% to 6.756%.


23








***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 5.5 years at December
      31,
      2005. Our senior credit facilities have scheduled maturity dates between March
      2007 and March 2014. 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 2006 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. 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.





***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 earnings before interest, income
      taxes, depreciation and amortization to be insufficient to meet debt service
      requirements or satisfy financial covenants. We incurred net losses in one
      of
      the past three years and in two 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 earnings
      before interest, income taxes, depreciation and amortization to meet current
      or
      future debt service requirements and satisfy financial covenants are inherently
      difficult to predict. These factors include:


o
              the
                  number of sales of Vacation
                  Intervals;
 o
              the
                  average purchase price per
                  interval;
 o
                the
                    number of customer defaults;
 o
                our cost of borrowing;
 o
                our sales and marketing costs and other operating
                  expenses; and
 o
                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:





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


o
            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


o
            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 earnings before interest, income taxes,
      depreciation and amortization, 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.





24


**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 position 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:





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


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


o
            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 has 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. Operation of the utilities also subjects us to risk of
      liability in connection with both the quality of fresh water provided and the
      treatment and discharge of waste-water.





**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. Such costs are not expected to have a material effect on our
      results of operations, liquidity, and financial condition, but these costs
      could
      be substantial.





**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, 2005, 55% 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.


25








**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 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 position. 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, 2005,
      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.





**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 quarterly operating results
      could be negatively impacted by these factors.





26


**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 position could
      be
      adversely affected by such losses.





**We
      will continue to be leveraged.**




Our
      ability to finance customer notes receivable and develop our resorts will be
      financed through 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 position. 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:





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


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


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


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


o
            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


o
            increased
                interest expense will reduce earnings, if any.





**We
      could lose the right to supervise and 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:





o
            a
                centralized reservation system for all
                resorts;


o
            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;


o
            centralized
                management for the entire resort system;


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


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





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 percentage 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 the Club be owners of
      Vacation Intervals of that resort. The loss of control of the board of directors
      or governors of a Club could result in our being unable to unilaterally cause
      the renewal of the collective Management Agreement with that 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.





27


**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, 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 $80.1 million at December
      31, 2005, primarily attributable to this method of reporting Vacation Interval
      sales, before utilization of any available deferred tax benefits (up to $71.6
      million at December 31, 2005), 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 2005, we believe
      our
      AMT liability is approximately $2.2 million, with the result that we will have
      total AMT credit carryforwards of approximately $2.9 million as of December
      31,
      2005.





Due
      to
      the exchange offer described in the next paragraph, 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.





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




We
      had
      net operating loss ("NOL") carryforwards of approximately $178.4 million at
      December 31, 2005, 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 the meaning
      of
      Section 382(g) of the Code as of May 2, 2002 (the "change date"). As a result,
      a
      portion of our NOL is subject to an annual limitation for a portion of the
      taxable year, which includes the change date as well as the taxable years
      beginning after the change date. The annual limitation will be equal to the
      value of our stock immediately before the ownership change, multiplied by the
      long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term
      rates in effect for any month in the three-calendar-month period ending with
      the
      calendar month in which the change date occurs). This annual limitation is
      small
      in comparison to the size of the NOL carryforwards. However, the 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(h) of the Code.


28








We
      believe that the built-in gain associated with the installment sale gains as
      of
      the change date increases the Section 382 Limitation and will allow the
      utilization of most of the NOL as needed. Nevertheless, we cannot be certain
      that the limitations of Section 382 will not limit or deny our future
      utilization of the NOL. Such limitation or denial could require us to pay
      substantial additional federal and state taxes and interest for periods
      following the change date. As of December 31, 2005, we believe that the portion
      of our NOL subject to these limitations is approximately $57.8 million.





Moreover,
      we cannot be certain that future ownership changes will not limit or deny our
      future utilization of all of our NOL. 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 position.





**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 83 million telephone numbers had been registered
      on the National Do Not Call Registry by the end of 2004. 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.





**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.**


29





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
      $0.67 to a high of $4.29. 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.**





Only
      approximately 35% 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, 2006 was approximately 75,000 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
      65% 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 AMEX.**





Effective
      as of September 19, 2005, AMEX accepted our stock for trading. 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 AMEX. Our failure to comply with AMEX listing standards could result
      in the delisting of our common stock by AMEX, thereby limiting the ability
      of
      our shareholders to sell our common stock.





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





As
      of
      December 31, 2005, Robert E. Mead, our Chairman of the Board and Chief Executive
      Officer, beneficially owned approximately 30.3% of our outstanding common stock
      and two related entities, Grace Brothers, Ltd. and Grace Investments, Ltd.,
      (collectively “Grace”), beneficially owned 32.3% 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.





30


**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, NE, 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 requested 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 an off-site sales center in Irving, Texas,
      which opened in March 2006.





At
      December 31, 2005, we owned a total of 13 timeshare resorts. Each of these
      resorts was encumbered by various liens and security agreements at December
      31,
      2005 due to inventory from each resort being pledged as collateral under our
      inventory credit facilities with our senior lenders. See Footnote 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 2005 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 2005, we added 12
      new
      units at this resort.





***Continued
      Development of Piney Shores Resort.*** Piney
      Shores Resort, located near Conroe, Texas, north of Houston, has 178 existing
      units. We intend to develop approximately 114 additional units (5,928 Vacation
      Intervals) at this resort. During 2005, we did not add any 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 84 additional units (4,368 Vacation Intervals) at this
      resort. During 2005, we did not add any new units at this resort.





***Continued
      Development*** ** ***of
      Fox River Resort.*** Fox
      River
      Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 222
      existing units. We intend to develop approximately 228 additional units (11,856
      Vacation Intervals) at this resort. During 2005, we added 24 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 180 additional units
      (9,360 Vacation Intervals) at this resort. During 2005, 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
      136
      existing units. We intend to develop approximately 24 additional units (1,248
      Vacation Intervals) at this resort. During 2005, we did not add any new units
      at
      this resort.





31


***Continued
      Development*** ** ***of
      Holiday Hills Resort.*** Holiday
      Hills Resort, located two miles east of Branson, Missouri, in Taney County,
      has
      422 existing units. We intend to develop approximately 366 additional units
      (19,004 Vacation Intervals) at this resort. During 2005, we added 30 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 290 existing units. We intend to develop
      approximately 222 additional units (11,544 Vacation Intervals) at this resort.
      During 2005, 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 284 existing
      units. We intend to develop approximately 66 additional units (3,432 Vacation
      Intervals) at this resort in the future. During 2005, we added 12 new units
      at
      this resort.





***Continued
      Development*** ** ***of
      Silverleaf’s Seaside Resort.*** Silverleaf’s
      Seaside Resort, located in Galveston, Texas, has 96 existing units. We intend
      to
      develop approximately 186 additional units (9,672 Vacation Intervals) at this
      resort. During 2005, we added 12 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 2005, we did not add any new units
      at
      this resort. Our public offering statement filed with the Florida Bureau of
      Standards and Registrations was approved in February 2005, granting us timeshare
      sales approval for 16 units encompassing 832 one-week Vacation Intervals. By
      December 31, 2005, we were granted sales approval for all of the 48 existing
      units at the resort, encompassing a total of 2,496 one-week Vacation Intervals.





As
      of
      December 31, 2005, we had construction commitments of approximately $11.0
      million.





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;


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


·
            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.






32





***Substantial
      Internal Growth Capacity.*** At
      December 31, 2005, we had an inventory of 27,396 Vacation Intervals and a master
      plan to construct new units which will result in up to 82,028 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 sixteen years of experience in the timeshare
      industry.


33




**Resorts
      Summary**





The
      following tables set forth certain information regarding each of the Existing
      Resorts at December 31, 2005, unless otherwise indicated.




***Existing
        Resorts***
   **Units
                      at Resorts**
                  
                  **Vacation
                      Intervals at Resorts**
                  
                  
                  
                  **Vacation
                      Intervals Sold****Resort/Location**
                  
                  **Primary
                      Market****Served**
                  
                  **Inventory
                      At 12/31/05**
                  
                  **Planned
                      Expansion(b)**
                  
                  **Inventory
                      At 12/31/05**
                  
                  **Planned
                      Expansion**
                  
                  **Date
                      Sales Commenced**
                  
                  **Through**
                    **12/31/05
                      (c)**
                  
                  **In
                      2005 Only (a)**
                  
                  **Percentage
                      Through 12/31/05**
                  
                  **Avereage
                      Sales Price in 2005 (a)**
                  
                  **Amenities
                      / Activities(d)****Getaway
                      Resorts**Holly
                      Lake
                  
                  
                  Dallas-
                  
                  
                  130
                  
                  
                  —
                  
                  
                  1,833
                  
                  
                  —
                  
                  1982
                  
                  
                  4,667
                  
                  
                  687
                  
                  
                  71.8
                  %
                  $
                  9,065
                  
                  
                  B,F,G,H,M,S,THawkins,
                      TX
                  
                  
                  Ft.
                      Worth, TXThe
                      Villages
                  
                  
                  Dallas-
                  
                  
                  346
                  
                  
                  84
                  
                  
                  6,017
                  
                  
                  4,368
                      (g
                  )
                  1980
                  
                  
                  11,567
                  
                  
                  1,293
                  
                  
                  65.8
                  %
                  
                  10,022
                  
                  
                  B,F,H,M,S,TFlint,
                      TX
                  
                  
                  Ft.
                      Worth, TXLake
                      O' The Woods
                  
                  
                  Dallas-
                  
                  
                  64
                  
                  
                  —
                  
                  
                  685
                  
                  
                  —
                  
                  1987
                  
                  
                  2,515
                  
                  
                  716
                  
                  
                  78.6
                  %
                  
                  8,688
                  
                  
                  F,M,S,T(e)Flint,
                      TX
                  
                  
                  Ft.
                      Worth, TXPiney
                      Shores
                  
                  
                  Houston,
                      TX
                  
                  
                  178
                  
                  
                  114
                      (g
                  )
                  
                  2,911
                  
                  
                  5,928
                      (g
                  )
                  1988
                  
                  
                  6,153
                  
                  
                  855
                  
                  
                  67.9
                  %
                  
                  11,742
                  
                  
                  B,F,H,M,S,TConroe,
                      TXTimber
                      Creek
                  
                  
                  St.
                      Louis,
                  
                  
                  72
                  
                  
                  84
                      (g
                  )
                  
                  1,360
                  
                  
                  4,368
                      (g
                  )
                  1997
                  
                  
                  2,384
                  
                  
                  171
                  
                  
                  63.7
                  %
                  
                  13,384
                  
                  
                  B,F,G,M,S,TDeSoto,
                      MO
                  
                  
                  MOFox
                      River
                  
                  
                  Chicago,
                      IL
                  
                  
                  222
                  
                  
                  228
                      (g
                  )
                  
                  2,798
                  
                  
                  11,856
                      (g
                  )
                  1997
                  
                  
                  8,746
                  
                  
                  1,140
                  
                  
                  75.8
                  %
                  
                  12,898
                  
                  
                  B,F,G,M,S,TSheridan,
                      ILApple
                      Mountain
                  
                  
                  Atlanta,
                      GA
                  
                  
                  72
                  
                  
                  180
                      (g
                  )
                  
                  2,178
                  
                  
                  9,360
                      (g
                  )
                  1999
                  
                  
                  1,566
                  
                  
                  167
                  
                  
                  41.8
                  %
                  
                  15,032
                  
                  
                  G,M,S,TClarkesville,
                      GA**Destination
                      Resorts**Ozark
                      Mountain
                  
                  
                  Branson,
                  
                  
                  136
                  
                  
                  24
                      (g
                  )
                  
                  1,143
                  
                  
                  1,248
                      (g
                  )
                  1982
                  
                  
                  5,705
                  
                  
                  87
                  
                  
                  83.3
                  %
                  
                  9,124
                  
                  
                  B,F,M,S,TKimberling
                      City, MO
                  
                  
                  MOHoliday
                      Hills
                  
                  
                  Branson,
                  
                  
                  422
                  
                  
                  366
                      (g
                  )
                  
                  2,314
                  
                  
                  19,004
                      (g
                  )
                  1984
                  
                  
                  19,494
                  
                  
                  1,325
                  
                  
                  89.4
                  %
                  
                  8,781
                  
                  
                  G,S,T(e)Branson,
                      MO
                  
                  
                  MOHill
                      Country
                  
                  
                  Austin-San
                  
                  
                  290
                      (f
                  )
                  
                  222
                      (g
                  )
                  
                  2,059
                  
                  
                  11,544
                      (g
                  )
                  1984
                  
                  
                  12,649
                  
                  
                  1,715
                  
                  
                  86.0
                  %
                  
                  9,408
                  
                  
                  H,M,S,T(e)Canyon
                      Lake, TX
                  
                  
                  Antonio,
                      TXOak
                      N' Spruce
                  
                  
                  Boston,
                      MA-
                  
                  
                  284
                  
                  
                  66
                      (g
                  )
                  
                  1,607
                  
                  
                  3,432
                      (g
                  )
                  1998
                  
                  
                  13,161
                  
                  
                  1,343
                  
                  
                  89.1
                  %
                  
                  11,188
                  
                  
                  F,M,S,TSouth
                      Lee, MA
                  
                  
                  New
                      York, NYSilverleaf's
                      Seaside
                  
                  
                  Galveston,
                  
                  
                  96
                  
                  
                  186
                      (g
                  )
                  
                  473
                  
                  
                  9,672
                      (g
                  )
                  2000
                  
                  
                  4,519
                  
                  
                  652
                  
                  
                  90.5
                  %
                  
                  9,940
                  
                  
                  S,TGalveston,
                      TX
                  
                  
                  TXOrlando
                      Breeze
                  
                  
                  Orlando,
                  
                  
                  48
                  
                  
                  24
                      (g
                  )
                  
                  2,018
                  
                  
                  1,248
                      (g
                  )
                  2005
                  
                  
                  478
                  
                  
                  39
                  
                  
                  19.2
                  %
                  
                  14,246
                  
                  
                  SDavenport,
                      FL
                  
                  
                  FLTotal
                  
                  
                  
                  
                  
                  2,360
                  
                  
                  1,578
                  
                  
                  27,396
                  
                  
                  82,028
                  
                  
                  
                  
                  
                  93,604
                  
                  
                  10,190
                  
                  
                  77.4
                  %
                  $
                  10,361





34





(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, 2005, upgrade sales at
                the
                Existing Resorts were as follows:





**Resort**
            
            **Upgraded**
              **Vacation**
              **Intervals**
              **Sold**
            
            **Average
                Sales Price**
              **For
                the Year**
              **Ended
                12/31/05**
              **—
                Net of**
              **Exchanged
                Interval**Holly
                Lake
            
            
            69
            
            $
            5,657The
                Villages
            
            
            280
            
            
            7,514Lake
                O' The Woods
            
            
            40
            
            
            5,806Piney
                Shores
            
            
            240
            
            
            7,815Hill
                Country
            
            
            854
            
            
            8,319Timber
                Creek
            
            
            18
            
            
            5,248Fox
                River
            
            
            279
            
            
            7,896Ozark
                Mountain
            
            
            55
            
            
            9,307Holiday
                Hills
            
            
            1,240
            
            
            9,158Oak
                N’ Spruce
            
            
            424
            
            
            9,767Apple
                Mountain
            
            
            28
            
            
            5,773Silverleaf's
                Seaside
            
            
            667
            
            
            9,354Orlando
                Breeze
            
            
            451
            
            
            9,8174,645





The
                      average sales price for the 4,645 upgraded Vacation Intervals
                      sold was
                      $8,793 for the year ended December 31,
                      2005.





(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,
                2005:





**Land-Use**
              **Process**
              **Not
                Started**
            
            **Land-Use**
              **Process**
              **Pending**
            
            **Land-Use**
              **Process**
              **Complete**
            
            **Currently
                in**
              **Construction**
            
            **Total**The
                Villages
            
            
            —
            
            
            —
            
            
            84
            
            
            —
            
            
            84Piney
                Shores
            
            
            —
            
            
            —
            
            
            114
            
            
            —
            
            
            114Timber
                Creek
            
            
            —
            
            
            —
            
            
            84
            
            
            —
            
            
            84Fox
                River
            
            
            —
            
            
            —
            
            
            222
            
            
            6
            
            
            228Apple
                Mountain
            
            
            126
            
            
            —
            
            
            54
            
            
            —
            
            
            180Ozark
                Mountain
            
            
            —
            
            
            —
            
            
            12
            
            
            12
            
            
            24Holiday
                Hills
            
            
            —
            
            
            —
            
            
            354
            
            
            12
            
            
            366Hill
                Country
            
            
            —
            
            
            —
            
            
            222
            
            
            —
            
            
            222Oak
                N' Spruce
            
            
            —
            
            
            —
            
            
            42
            
            
            24
            
            
            66Silverleaf's
                Seaside
            
            
            —
            
            
            —
            
            
            162
            
            
            24
            
            
            186Orlando
                Breeze
            
            
            —
            
            
            —
            
            
            24
            
            
            —
            
            
            24126
            
            
            —
            
            
            1,374
            
            
            78
            
            
            1,578





"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.


35





(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.


**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 Club members a benefit
      not typically enjoyed by any other timeshare owners. In addition to the right
      to
      use a unit one week per year, the Bonus Time program allows all Silverleaf
      Club
      members, 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 selling the new Silverleaf Plus program. This program,
      administered through Silverleaf Club, includes all of the prior benefits to
      Silverleaf Club members plus enhanced vacation options through the Silverleaf
      exchange program. In addition to use of their owned weeks and bonus time,
      Silverleaf Club members who purchase with 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)
      at any other of the Existing Resorts. These exchange rights are a convenience
      we
      provide our members as an accommodation to them, and are conditioned upon
      availability of the desired interval or resort. Approximately 4,455 exchanges
      occurred in 2005. 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, 2005, 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 new 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.





36


**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 1,206
      acres within Holly Lake, of which approximately 1,133 acres may not be developed
      due to deed restrictions. At December 31, 2005, approximately 27 acres were
      developed. We have no future development plans.





At
      December 31, 2005, 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, 2005, the resort contained 6,500 Vacation Intervals, of which
      1,833
      intervals remained available for sale. We have no plans to build additional
      units. Vacation Intervals at the resort are currently priced from $8,000 to
      $12,300 for one-week stays. During 2005, 687 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 652 acres, of which approximately 379 may not be developed
      due to deed restrictions. At December 31, 2005, approximately 181 acres were
      developed and we plan to develop another 18 acres in the future.





At
      December 31, 2005, 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 new 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.





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.


37





At
      December 31, 2005, The Villages contained 17,584 total Vacation Intervals,
      of
      which 6,017 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, 2005, Lake O' The Woods contained 3,200 total Vacation
      Intervals, of which 685 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 $8,000 to $16,300 for one-week
      stays
      (and start at $6,250 for biennial intervals), while one-week "Presidents Harbor"
      intervals are priced at $9,900 to $22,500 depending on the value rating of
      the
      interval. During 2005, 1,293 and 716 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 113 acres. At December 31,
      2005, approximately 72 acres were developed and we plan to develop another
      11
      acres in the future.





At
      December 31, 2005, 178 units were completed and 114 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, 2005, the resort contained 9,064 Vacation Intervals, of which
      2,911
      remained available for sale. We intend to build 114 additional units, which
      would yield an additional 5,928 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $8,000 to $16,300 for one-week
      stays (and start at $6,250 for biennial intervals), while one-week “Presidents
      Cove” intervals are priced at $9,900 to $22,500 depending on the value rating of
      the interval. During 2005, 855 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 332 acres. At December
      31, 2005, approximately 180 acres were developed and we plan to develop another
      6 acres in the future.





At
      December 31, 2005, 72 units were completed and an additional 84 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, 2005, the resort contained 3,744 Vacation Intervals and 1,360
      Vacation Intervals remained available for sale. We plan to build 84 additional
      units, which would collectively yield 4,368 additional Vacation Intervals
      available for sale. Vacation Intervals at the resort are currently priced from
      $8,000 to $16,300 for one-week stays (and start at $6,250 for biennial
      intervals). During 2005, 171 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 372 acres. At December
      31,
      2005, approximately 156 acres were developed and we plan to develop another
      26
      acres in the future.





At
      December 31, 2005, 222 units are completed and 228 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.


38








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, 2005, the resort contained 11,544 Vacation Intervals and 2,798
      Vacation Intervals remained available for sale. We plan to build 228 additional
      units, which would collectively yield 11,856 additional Vacation Intervals
      available for sale. Vacation Intervals at the resort are currently priced from
      $8,000 to $16,300 for one-week stays (and start at $6,250 for biennial
      intervals), while one-week “Presidents River” intervals are priced at $9,900 to
      $24,000 depending on the value rating of the interval. During 2005, 1,140
      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, 2005, approximately 191 acres were developed and we plan to develop
      another 16 acres in the future.





At
      December 31, 2005, 72 units are completed and 180 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, 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, 2005, the resort contained 3,744 Vacation Intervals, of which
      2,178
      remained available for sale. We plan to build 180 additional “lodge-style”
units, which would yield an additional 9,360 Vacation Intervals available for
      sale. Vacation Intervals at the resort are currently priced from $8,000 to
      $16,300 for one-week stays (and start at $6,250 for biennial intervals). During
      2005, 167 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 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, 2005,
      approximately 116 acres were developed and we plan to develop one more acre
      in
      the future.





At
      December 31, 2005, 136 units are completed and 24 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.


39








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. Similarly, owners of Vacation Intervals are entitled to use certain
      amenities of these condominium developments, including a wellness center
      featuring a small pool, hot tub, sauna, and exercise equipment.





At
      December 31, 2005, the resort contained 6,848 Vacation Intervals, of which
      1,143
      remained available for sale. We plan to build 24 additional units, which would
      yield an additional 1,248 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $10,500 to $17,000 for
      one-week stays, while one-week "Presidents View" intervals are priced at $13,000
      to $25,000 depending on the value rating of the interval. During 2005, 87
      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 485 acres, including a 91-acre golf course. During 2005 we
      acquired 81 acres of land nearby the Holiday Hills Resort. At December 31,
      2005,
      approximately 301 acres were developed and we plan to develop another 127 acres
      in the future.





At
      December 31, 2005, 422 units were completed and an additional 366 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 Fairways” 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, 2005, the resort contained 21,808 Vacation Intervals, of which
      2,314 remained available for sale. We plan to build 366 additional units, which
      would yield an additional 19,004 Vacation Intervals available for sale. Vacation
      Intervals at the resort are currently priced from $9,500 to $17,000 for one-week
      stays (and start at $7,250 for biennial intervals), while one-week "Presidents
      Fairways" intervals are priced at $13,000 to $27,000 depending on the value
      rating of the interval. During 2005, 1,325 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, 2005, approximately 38 acres were developed and we plan to develop
      another 19 acres in the future.





At
      December 31, 2005, 290 units were completed and 222 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 new "lodge style.” 56 "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.


40








At
      December 31, 2005, the resort contained 14,708 Vacation Intervals, of which
      2,059 remained available for sale. We plan to build 222 additional units, which
      collectively would yield 11,544 additional Vacation Intervals available for
      sale. Vacation Intervals at the resort are currently priced from $8,000 to
      $17,000 for one-week stays (and start at $6,250 for biennial intervals), while
      one-week "Presidents Villas" intervals are priced at $9,900 to $27,000 depending
      on the value rating of the interval. During 2005, 1,715 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, 2005, approximately
      37 acres were developed and we plan to develop another 10 acres in the future.





At
      December 31, 2005, the resort had 284 units completed and 66 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, 2005, the resort contained 14,768 Vacation Intervals, of which
      1,607 remained available for sale. We plan to build 66 additional "lodge-style"
      units, which would yield an additional 3,432 Vacation Intervals available for
      sale. Vacation Intervals at the resort are currently priced from $7,500 to
      $19,000 for one-week stays (and start at $6,100 for biennial intervals), while
      one-week "Presidents Oak" intervals are priced at $9,900 to $25,000 depending
      on
      the value rating of the interval. During 2005, 1,343 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, 2005, approximately 50 acres were developed and we plan to develop
      another 37 acres in the future.





At
      December 31, 2005, the resort had 96 units and an additional 186 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, 2005, the resort contained 4,992 Vacation Intervals of which 473
      remained available for sale. We plan to build 186 additional units, which would
      yield an additional 9,672 Vacation Intervals for sale. Vacation Intervals at
      the
      resort are currently priced from $9,000 to $18,500 for one-week stays (and
      start
      at $6,250 for biennial intervals), while one-week "Presidents Seaside" intervals
      are priced at $12,900 to $29,900 depending on the value rating of the interval.
      During 2005, 652 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. Our public offering statement filed with the Florida
      Bureau of Standards and Registrations was approved in February 2005, granting
      us
      sales approval for 16 units encompassing 832 one-week Vacation Intervals. We
      plan to seek approval to sell the remaining 32 units, encompassing 1,664
      one-week Vacation Intervals in the future.





At
      December 31, 2005, 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.


41








At
      December 31, 2005, the resort contained 2,496 Vacation Intervals of which 2,018
      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 $22,500 to $28,500 for one-week stays. During
      2005, 39 Vacation Intervals were sold.





**ITEM
      3. LEGAL PROCEEDINGS**





*Holiday
      Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
      al* ,
      Circuit
      Court of Christian County, Missouri. The homeowners’ associations of five
      condominium projects that one of our former subsidiaries constructed in Missouri
      filed two separate actions against us in 1999 and 2000, respectively, alleging
      breach of warranty, construction defects and breach of management agreements.
      These two cases were consolidated. The plaintiffs filed an amended petition
      alleging actual damages in excess of $25,000 and punitive damages. We filed
      a
      counterclaim seeking contractual indemnification under the terms of management
      agreements with each of the plaintiffs. The parties mediated this matter in
      October 2005 and agreed upon the terms of a settlement. Pursuant to the
      terms of the settlement executed by the parties, we agreed to pay to the Holiday
      Hills Condominium Association $1.15 million, of which $1.1 million was paid
      by
      our insurers. The parties agreed to certain other terms, including our deeding
      of two non-timeshare condominium units to the plaintiffs, waiving amenities
      fees
      currently due and owing from the plaintiffs, and making repairs to a parking
      lot
      and other public areas of the condominium development. The settlement agreement
      further provided for each party to execute a general and mutual release of
      all
      claims and for the dismissal of the suit. The suit was dismissed in February
      2006.





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





We
      are
      currently subject to other 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.


42





**PART
      II**





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





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. Our Common Stock was traded on the
      NYSE until June 2001 when it was suspended from trading and subsequently
      delisted in August 2001. The suspension and subsequent delisting of our Common
      Stock by the NYSE was caused by a drop in the per share trading value of our
      stock on the NYSE that began in March 2001. This drop in per share trading
      value
      persisted and we ceased to meet NYSE listing criteria when our total market
      capitalization remained below $15 million and our minimum share price remained
      below $1 over a 30 trading-day period. After being delisted by the NYSE, our
      Common Stock was quoted on the Electronic Quotation Service of Pink Sheets
      LLC
      under the symbol SVLF until February 2004, when our shares began trading on
      the
      OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer
      prices, without retail mark-up, mark-down, or commission and may not necessarily
      represent actual transactions. The Common Stock prices from February 2004 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, 2004:First
                Quarter
            
            $
            1.50
            
            $
            .67Second
                Quarter
            
            
            1.45
            
            
            1.07Third
                Quarter
            
            
            1.45
            
            
            1.00Fourth
                Quarter
            
            
            1.54
            
            
            1.25Year
                Ended December 31, 2005:First
                Quarter
            
            $
            1.60
            
            $
            1.20Second
                Quarter
            
            
            1.58
            
            
            1.25Third
                Quarter
            
            
            2.05
            
            
            1.41Fourth
                Quarter
            
            
            4.29
            
            
            1.35





As
      of
      December 31, 2005, we believe that there were approximately 2,181 holders of
      our
      Common Stock, which is the only class of our equity securities outstanding.





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 of the payment of dividends,
      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.





**Year
                Ended December 31,****(in
                thousands, except share and per share amounts)****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****Statement
                of Income Data:**Revenues:Vacation
                Interval sales
            
            $
            139,359
            
            $
            122,805
            
            $
            123,585
            
            $
            138,046
            
            $
            146,416Sampler
                sales
            
            
            3,904
            
            
            3,634
            
            
            1,765
            
            
            2,150
            
            
            2,623Total
                sales
            
            
            143,263
            
            
            126,439
            
            
            125,350
            
            
            140,196
            
            
            149,039Interest
                income
            
            
            41,220
            
            
            37,537
            
            
            34,730
            
            
            37,843
            
            
            38,154Management
                fee income
            
            
            2,516
            
            
            1,920
            
            
            1,547
            
            
            1,201
            
            
            1,856Gain
                on sale of notes receivable
            
            
            —
            
            
            6,838
            
            
            3,205
            
            
            1,915
            
            
            6,457Other
                income
            
            
            2,392
            
            
            2,324
            
            
            2,834
            
            
            2,522
            
            
            6,402Total
                revenues
            
            
            189,391
            
            
            175,058
            
            
            167,666
            
            
            183,677
            
            
            201,908Costs
                and operating expenses:Cost
                of Vacation Interval sales
            
            
            27,377
            
            
            23,123
            
            
            22,657
            
            
            24,964
            
            
            23,427Sales
                and marketing
            
            
            78,597
            
            
            66,384
            
            
            65,775
            
            
            71,890
            
            
            74,667Provision
                for uncollectible notes
            
            
            30,311
            
            
            24,562
            
            
            53,673
            
            
            26,811
            
            
            23,649Operating,
                general and administrative
            
            
            34,378
            
            
            31,432
            
            
            26,209
            
            
            25,639
            
            
            28,038Depreciation
                and amortization
            
            
            5,939
            
            
            4,486
            
            
            3,806
            
            
            3,588
            
            
            2,723Interest
                expense and lender fees
            
            
            35,015
            
            
            22,192
            
            
            16,550
            
            
            17,627
            
            
            17,253Impairment
                loss of long-lived assets
            
            
            5,442
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                costs and operating expenses
            
            
            217,059
            
            
            172,179
            
            
            188,670
            
            
            170,519
            
            
            169,757Other
                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
            
            
            (27,668
            )
            
            20,764
            
            
            (14,628
            )
            
            13,158
            
            
            32,151(Benefit)
                provision for income taxes
            
            
            (99
            )
            
            (1,523
            )
            
            86
            
            
            23
            
            
            9,725Net
                income (loss) from continuing operations
            
            
            (27,569
            )
            
            22,287
            
            
            (14,714
            )
            
            13,135
            
            
            22,426Discontinued
                operations:Gain
                on sale of discontinued operations (net of tax)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            613Income
                from discontinued operations (net of tax)
            
            
            360
            
            
            506
            
            
            794
            
            
            624
            
            
            128Net
                income from discontinued operations (net of tax)
            
            
            360
            
            
            506
            
            
            794
            
            
            624
            
            
            741Net
                income (loss)
            
            $
            (27,209
            )
            $
            22,793
            
            $
            (13,920
            )
            $
            13,759
            
            $
            23,167Net
                income (loss) per share — Basic (a)Net
                income (loss) from continuing operations
            
            $
            (2.14
            )
            $
            0.77
            
            $
            (0.40
            )
            $
            0.35
            
            $
            0.61Income
                (loss) from discontinued operations
            
            
            0.03
            
            
            0.02
            
            
            0.02
            
            
            0.02
            
            
            0.02Net
                income (loss)
            
            $
            (2.11
            )
            $
            0.79
            
            $
            (0.38
            )
            $
            0.37
            
            $
            0.63Net
                income (loss) per share — Diluted (a)Net
                income (loss) from continuing operations
            
            $
            (2.14
            )
            $
            0.77
            
            $
            (0.40
            )
            $
            0.33
            
            $
            0.57Income
                (loss) from discontinued operations
            
            
            0.03
            
            
            0.02
            
            
            0.02
            
            
            0.02
            
            
            0.02Net
                income (loss)
            
            $
            (2.11
            )
            $
            0.79
            
            $
            (0.38
            )
            $
            0.35
            
            $
            0.59Weighted
                average number of sharesoutstanding
                — Basic
            
            
            12,889,417
            
            
            28,825,882
            
            
            36,826,906
            
            
            36,852,133
            
            
            36,986,926Weighted
                average number of sharesoutstanding
                — Diluted
            
            
            12,889,417
            
            
            28,825,882
            
            
            36,826,906
            
            
            38,947,854
            
            
            39,090,921








44





**December
                31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****(dollars
                in thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            6,204
            
            $
            1,153
            
            $
            4,093
            
            $
            10,935
            
            $
            10,990Notes
                receivable, net of allowance for uncollectible notes
            
            
            278,592
            
            
            233,237
            
            
            193,379
            
            
            196,466
            
            
            177,572Amounts
                due from affiliates
            
            
            2,234
            
            
            750
            
            
            150
            
            
            288
            
            
            680Inventories
            
            
            105,275
            
            
            102,505
            
            
            101,399
            
            
            109,303
            
            
            117,597Total
                assets
            
            
            458,100
            
            
            398,245
            
            
            351,787
            
            
            369,506
            
            
            361,796Amounts
                due to affiliates
            
            
            565
            
            
            2,221
            
            
            656
            
            
            929
            
            
            544Notes
                payable and capital lease obligations
            
            
            294,456
            
            
            236,413
            
            
            215,337
            
            
            218,310
            
            
            177,269Senior
                subordinated notes
            
            
            66,700
            
            
            45,919
            
            
            36,591
            
            
            34,883
            
            
            33,175Total
                liabilities
            
            
            387,173
            
            
            296,626
            
            
            264,088
            
            
            268,038
            
            
            236,961Shareholders'
                equity
            
            
            70,927
            
            
            101,619
            
            
            87,699
            
            
            101,468
            
            
            124,835






**Cash
                Flows Data:******Net
                cash provided by (used in) operating activities - continuing
                operations
            
            $
            (24,824
            )
            $
            56,085
            
            $
            22,419
            
            $
            5,748
            
            $
            76,150




**December
                31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****(dollars
                in thousands)****Other
                Operating Data:**Number
                of Existing Resorts at period end
            
            
            19
            
            
            19
            
            
            12
            
            
            12
            
            
            13Number
                of Vacation Intervals sold (excludingUpgrades)(b)
            
            
            9,741
            
            
            8,224
            
            
            9,560
            
            
            11,345
            
            
            10,190Number
                of in-house Vacation Intervals sold
            
            
            10,576
            
            
            7,746
            
            
            4,833
            
            
            4,088
            
            
            4,645Number
                of Vacation Intervals in inventory
            
            
            20,913
            
            
            24,121
            
            
            24,255
            
            
            22,857
            
            
            27,396Average
                price of Vacation Intervals sold (excludingUpgrades)(b)(c)
            
            $
            9,688
            
            $
            9,846
            
            $
            9,510
            
            $
            9,671
            
            $
            10,361Average
                price of upgraded Vacation Intervals sold(net
                of exchanged interval)
            
            $
            4,254
            
            $
            5,401
            
            $
            6,759
            
            $
            6,928
            
            $
            8,793





__________


(a)
                Net
                    income (loss) per share is based on the weighted average number
                    of shares
                    outstanding.
 (b)
              Vacation
                  Intervals sold during the years ended December 31, 2001, 2002,
                  2003, 2004,
                  and 2005, include 3,061 biennial intervals (counted as 1,531 annual
                  Vacation Intervals), 1,044 biennial intervals (counted as 522 annual
                  Vacation Intervals), 816 biennial intervals (counted as 408 annual
                  Vacation Intervals), 2,560 biennial intervals (counted as 1,280
                  annual
                  Vacation Intervals), and 1,392 biennial intervals (counted as 696
                  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, 2005. 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, 2005, 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.





The
      following economic or industry-wide factors are relevant to us:


45





·
            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.





·
              We
                  predominantly have variable rate credit facilities. An increase
                  in
                  interest rates above our floor rates 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 April 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.
 
 ·
                We
                    believe there are two areas which are particularly important
                    to our
                    success as a business:


v
              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.
 
 v
              The
                  second area is to keep marketing expenses at an acceptable level
                  to result
                  in a favorable percentage relationship between sales and marketing
                  expense
                  and total 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 2003,
                2004, and 2005. 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 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. These sales are presented on a separate line
                in the
                operating statement, and are therefore subtracted from total sales
                in
                order to calculate Vacation Interval sales. 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,****__****2003**
            
            **2004**
            
            **2005**Tours
                to potential new purchasers
            
            
            75,965
            
            
            73,065
            
            
            74,244Sales
                per tour
            
            $
            1,237
            
            $
            1,183
            
            $
            1,161Gross
                sales to new customers
            
            
            93,945
            
            
            86,466
            
            
            86,195Rescission
                of sales to new customers
            
            
            (24,948
            )
            
            (18,619
            )
            
            (17,932
            )Net
                sales to new customers
            
            
            68,997
            
            
            67,847
            
            
            68,263Gross
                sales to existing customers
            
            
            59,722
            
            
            77,010
            
            
            87,044Rescission
                of sales to existing customers
            
            
            (3,369
            )
            
            (4,661
            )
            
            (6,268
            )Net
                sales to existing customers
            
            
            56,353
            
            
            72,349
            
            
            80,776Total
                sales
            
            
            125,350
            
            
            140,196
            
            
            149,039Less
                sampler sales
            
            
            (1,765
            )
            
            (2,150
            )
            
            (2,623
            )Total
                Vacation Interval sales
            
            $
            123,585
            
            $
            138,046
            
            $
            146,416Rescission
                rate for new customers
            
            
            26.6
            %
            
            21.5
            %
            
            20.8
            %Rescission
                rate for existing customers
            
            
            5.6
            %
            
            6.1
            %
            
            7.2
            %Rescission
                rate for all customers
            
            
            18.4
            %
            
            14.2
            %
            
            14.0
            %





46





·
            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, commissions, and sales and marketing overhead,
                as
                detailed in the following table (dollars in thousands, except for
                cost per
                tour):




**Year
                Ended December 31,****__****2003**
            
            **2004**
            
            **2005**Tours
                to potential new purchasers
            
            
            75,965
            
            
            73,065
            
            
            74,244Cost
                per tour (rounded to nearest whole dollar)
            
            $
            422
            
            $
            431
            
            $
            463Cost
                of marketing to new purchasers
            
            
            32,050
            
            
            31,490
            
            
            34,378Cost
                of marketing to existing purchasers
            
            
            5,943
            
            
            7,885
            
            
            8,000Commissions
            
            
            19,613
            
            
            23,513
            
            
            23,178Sales
                and marketing overhead
            
            
            8,169
            
            
            9,002
            
            
            9,111Total
                sales and marketing expense
            
            $
            65,775
            
            $
            71,890
            
            $
            74,667As
                a percentage of total sales:Cost
                of marketing to new purchasers
            
            
            25.6
            %
            
            22.5
            %
            
            23.0
            %Cost
                of marketing to existing purchasers
            
            
            4.7
            %
            
            5.6
            %
            
            5.4
            %Commissions
            
            
            15.6
            %
            
            16.8
            %
            
            15.6
            %Sales
                and marketing overhead
            
            
            6.5
            %
            
            6.4
            %
            
            6.1
            %Total
                sales and marketing expense
            
            
            52.5
            %
            
            51.3
            %
            
            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
                2005****as
                a result of increasing the rate we charged our new customers by 1%
                in each
                of the years ending December 31, 2002 and
                2003.





·
            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.





·
            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 2003 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 in only one business segment, the timeshare industry. Further, we only
      operate in the United States. As of December 31, 2005, 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.





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.





**Closing
      of Exchange Offer and Debt Restructuring**





On
      May 2,
      2002, we completed an exchange offer (the “Exchange Offer”), commenced on March
      15, 2002, regarding our 101⁄2% senior subordinated notes due 2008 (the “Old
      Notes”). A total of $56,934,000 in principal amount of our Old Notes were
      exchanged for a combination of $28,467,000 in principal amount of our new class
      of 6.0% senior subordinated notes due 2007 (“Exchange Notes”) and 23,937,489
      shares of our common stock, representing approximately 65% of the common stock
      outstanding immediately following the Exchange Offer. As a result of the
      Exchange Offer, we recorded a pre-tax gain of $17.9 million in the second
      quarter of 2002. Under the terms of the Exchange Offer, tendering holders
      collectively received cash payments of $1,335,545 on May 16, 2002, and
      $334,455 on October 1, 2002. A total of $9,766,000 in principal amount of
      our Old Notes were not tendered and remain outstanding. As a condition of the
      Exchange Offer, we paid all past due interest to non-tendering holders of our
      Old Notes. Under the terms of the Exchange Offer, the acceleration of the
      maturity date on the Old Notes, which occurred in May 2001, was rescinded,
      and
      the original maturity date in 2008 was reinstated. Past due interest paid to
      non-tendering holders of the Old Notes was $1,827,806. The indenture under
      which
      the Old Notes were issued was also consensually amended as a part of the
      Exchange Offer.


47





We
      also
      completed amendments to our credit facilities with our principal senior lenders
      as well as amendments to our $100 million conduit facility through SF-I, our
      off-balance sheet, wholly-owned special purpose entity during 2002. Finalization
      of the Exchange Offer and the amendment of our principal credit facilities
      marked the completion of our debt restructuring announced on March 15,
      2002, which was necessitated by severe liquidity problems we first announced
      on
      February 27, 2001. As a part of the debt restructuring, our note-holders and
      senior lenders waived all previously declared events of default.





**Critical
      Accounting Policies**





*Revenues
      -* We
      generate revenues primarily from the sale and financing of Vacation Intervals,
      including upgraded intervals. Additional revenues are generated from management
      fees from Silverleaf Club, sampler sales, gain on sale of notes receivable,
      and
      other operations.





We
      recognize Vacation Interval sales revenues on the accrual method in accordance
      with Statement of Financial Accounting Standards No. 66, “Accounting for Sales
      of Real Estate,” and Staff Accounting Bulletin No. 104, “Revenue Recognition.” A
      sale is recognized after a binding sales contract has been executed, the buyer’s
      price is fixed, the buyer has made a down payment of at least 10%, the statutory
      rescission period has expired, and collectibility is reasonably assured. If
      all
      accrual method criteria are met except that construction is not substantially
      complete, revenues are recognized on the percentage-of-completion basis. Under
      this method, the portion of revenue applicable to costs incurred, as compared
      to
      total estimated construction and direct selling costs, is recognized in the
      period of sale. The remaining amount is deferred and recognized as Vacation
      Interval sales in future periods as the remaining costs are incurred. 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.





Sales
      of
      notes receivable to our special purpose entities that meet certain underwriting
      criteria occur on a periodic basis. We allocate the carrying amount between
      assets sold and retained interest based on their relative fair values at the
      date of sale. The gain or loss on the sale is determined based on the proceeds
      received and the recorded value of notes receivable sold. The investment in
      the
      special purpose entity is recorded at fair value. The fair value of the
      investment in the special purpose entity is estimated based on the present
      value
      of future expected cash flows of our residual interest in the notes receivable
      sold. We utilize the following key assumptions to estimate the fair value of
      such cash flows related to SF-III, our wholly-owned off-balance sheet qualified
      special purpose entity formed during 2005: customer prepayment rate (including
      expected accounts paid in full as a result of upgrades) - 15.9%; expected credit
      losses - 11.38%; discount rate - 15%; base interest rate - 5.37%; and loan
      servicing fees - 1.75%. 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. The carrying value of the investment in special
      purpose entities represents our maximum exposure to loss regarding our
      involvement with our special purpose entities. **





We
      recognize interest income as earned. Interest income is not recognized on notes
      receivable that are four-plus payments late. We recognize only 25% of accrued
      interest income for notes that are three payments late, 50% for notes that
      are
      two payments late, 75% for notes that are one payment late, and 90% for all
      current notes.





We
      earn a
      monthly management fee for supervising the management and operations of the
      resorts. The Management Agreement with Silverleaf Club provides the Company
      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. Prior to the sale of our managed, but not
      owned resorts, (“Crown Club”), during the third quarter of 2003, we had been
      recognizing a management fee ranging from 10% to 20% of Crown Club’s dues.





*Provision
      for Uncollectible Notes -* The
      provision for uncollectible notes is recorded at an amount sufficient to
      maintain the allowance for uncollectible notes at a level management considers
      adequate to provide for anticipated losses resulting from customers' failure
      to
      fulfill their obligations under the terms of their notes. The allowance for
      uncollectible notes takes into consideration notes held by us as well as those
      sold with recourse. Such allowance for uncollectible notes is adjusted based
      upon periodic analysis of the notes receivable portfolio, historical credit
      loss
      experience, and current economic factors. In estimating the allowance, we
      project future cancellations related to each sales year by using historical
      cancellations experience.





48


The
      allowance for uncollectible notes is reduced by actual cancellations and losses
      experienced, including losses related to previously sold notes receivable which
      became delinquent and were reacquired pursuant to the recourse obligations
      discussed herein. Actual cancellations and losses experienced represents all
      notes identified by management as being probable of cancellation. Recourse
      on
      sales of customer notes receivable is governed by the agreements between the
      purchasers and us.





We
      classify the components of the provision for uncollectible notes into the
      following two categories based on the nature of the item: credit losses and
      customer returns (cancellations of sales whereby the customer fails to make
      the
      first installment payment). The provision for uncollectible notes pertaining
      to
      credit losses and customer returns are classified in provision for uncollectible
      notes and Vacation Interval sales, respectively.





*Inventories
      -* Inventories
      are stated at the lower of cost or net realizable value. Cost includes amounts
      for land, construction materials, direct labor and overhead, taxes, and
      capitalized interest incurred in the construction or through the acquisition
      of
      resort dwellings held for timeshare sale. These costs are capitalized as
      inventory and are allocated to Vacation Intervals based upon their relative
      sales values. Upon sale of a Vacation Interval, these costs are charged to
      cost
      of sales on a specific identification basis. Vacation Intervals reacquired
      are
      placed back into inventory at the lower of their original historical cost basis
      or market value. 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**





In
      February 2001, we disclosed significant liquidity issues, which resulted in
      the
      violation of various financial covenants with our senior credit facilities.
      In
      negotiations with our senior lenders to restructure the credit facilities and
      to
      enable us to continue in business, it was determined that the senior lenders
      would not accept our proposals to make necessary amendments to the existing
      credit facilities, unless we were able to (i) substantially reduce the payment
      obligations to the holders of the Old Notes, (ii) convert a substantial portion
      of the debt represented by the Old Notes into our common stock, and (iii)
      substantially modify the Indenture which secures the Old Notes by the consent
      of
      the holders. Therefore, the underlying purpose of the Exchange Offer was to
      reorganize our capital structure in such a manner as to induce the senior
      lenders to restructure the credit facilities. We completed the restructuring
      in
      May 2002, which reduced the existing debt and provided liquidity to finance
      our operations. As a part of the debt restructuring, our note-holders and senior
      lenders waived all previously declared events of default, thus as of
      December 31, 2002, we were in compliance with our financial and operating
      covenants.





However,
      due to the results of the quarter ended March 31, 2003, we were not in
      compliance with various financial covenants throughout the first three quarters
      of 2003. In addition, our off-balance sheet special purpose entity, SF-I, was
      in
      default of financial covenants with its lender due to the results of the quarter
      ended March 31, 2003. The lender subsequently waived the defaults as of March
      31, 2003 and modified its agreement with SF-I whereby there were no defaults
      for
      the quarter ended June 30, 2003 or September 30, 2003. In November 2003, we
      entered into agreements with our three senior lenders to amend our senior credit
      facilities to modify the financial covenants under which we had been in default
      since the first quarter of 2003. We also received waivers of covenant defaults
      that occurred in the first quarter of 2003 under our senior credit facilities.
      As a result of these amendments and waivers, we were in full compliance with
      all
      of our financial covenants under our credit facilities with our senior lenders
      as of December 31, 2003, and have continued to be in full compliance with all
      of
      our financial covenants since that time.





The
      following table summarizes our credit agreements with our senior lenders and
      our
      off-balance sheet special purpose finance subsidiary as of December 31, 2005
      (in
      thousands):


**Facility**
              **Amount**
            
            **12/31/05**
              **Balance**Receivable
                Based Revolvers
            
            $
            185,000
            
            $
            82,461Receivable
                Based Non-Revolvers
            
            
            58,063
            
            
            58,063Inventory
                Loans
            
            
            49,335
            
            
            34,335Sub-Total
                On Balance Sheet
            
            
            292,398
            
            
            174,859Off-Balance
                Sheet Receivable Based Term Loan *
            
            
            89,113
            
            
            89,113Grand
                Total
            
            $
            381,511
            
            $
            263,972





49





*
      Through
      SF-III, our off-balance sheet qualified special purpose entity formed during
      the
      third quarter of 2005.





We
      use
      these credit agreements to finance the sale of Vacation Intervals, to finance
      construction, and for working capital needs. The loans mature between March
      2007
      and March 2014, 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. These credit facilities
      bear interest at variable rates tied to the prime rate, LIBOR, or the corporate
      rate charged by certain banks. The credit facilities secured by customer notes
      receivable allow advances up to 75% 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 up to 75% of eligible customer notes receivable, (ii) selling notes
      receivable, and (iii) from the spread between interest received on customer
      notes receivable and interest paid on related borrowings. Because 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, 2003, 2004,
      and
      2005, our operating activities reflected net cash provided by operating
      activities of $22.4 million, $5.7 million, and $76.2 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. In 2004,
      the decrease in cash provided by operating activities was primarily the result
      of decreased sales of notes receivable, and to a lesser extent, cash spent
      towards construction of new inventory.





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





***Uses
      of Cash.*** Investing activities typically reflect a net use of cash due to capital
      additions and property acquisitions. However, for the years ended 2003 and
      2005,
      net cash provided by investing activities was $4.4 million and $18.5 million,
      respectively. 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. The net cash provided by investing
      activities in 2003 was primarily due to our sale of land we owned in Las Vegas
      and Kansas City, which resulted in $4.7 million of proceeds. Net cash used
      in
      investing activities for the year ended December 31, 2004 was $570,000 due
      to
      equipment purchases. 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, 2003 and 2005
      was
      $24.0 million and $93.8 million, respectively. Net cash provided by financing
      activities was $1.3 million during the year ended December 31, 2004. During
      2005, the increase in cash used in financing activities was the result of
      increased payments on borrowings against pledged notes receivable. We paid
      in
      full the outstanding balance 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. The decrease in cash used by financing activities from 2003 to 2004
      was
      primarily the result of decreased payments on borrowings against pledged notes
      receivable due to lower sales of notes receivable, the proceeds of which are
      used to pay down borrowings.





At
      December 31, 2005, our senior credit facilities provided for loans of up to
      $292.4 million, of which approximately $174.9 million of principal related
      to
      advances under the credit facilities was outstanding. At December 31, 2005,
      the
      weighted average cost of funds for all borrowings was 8.1%. 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, 2005, $337,000 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.





50


*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 $904,000, $684,000, and $355,000 for the years ended
      December 31, 2003, 2004, and 2005, 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.





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





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


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


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


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





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





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between SF-III and us. Under that agreement,
      we
      sold to SF-III approximately $132.8 million in timeshare receivables that were
      previously pledged as collateral under revolving credit facilities with our
      senior lenders and SF-I, and recognized a pre-tax gain of 5.8 million. In
      connection with this sale, we received cash consideration of $108.7 million,
      which was primarily used to pay off in full the credit facility of SF-I and
      to
      pay down amounts we owed under credit facilities with our senior lenders. We
      dissolved SF-I simultaneously with the sale of the timeshare receivables to
      SF-III. The timeshare receivables we sold to SF-III are without recourse to
      us,
      except for breaches of certain representations and warranties at the time of
      sale. W e
      are responsible
      for servicing the timeshare receivables purchased by SF-III pursuant to the
      terms of the Indenture and will receive a fee for our services equal to 1.75%
      of
      eligible timeshare receivables held by the facility. Such fees were $1.1 million
      for the year ended December 31, 2005. 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, 2005, SF-III held notes receivable totaling
      $106.9 million, with related borrowings of $89.1 million. Except for the
      repurchase of notes that fail to meet initial eligibility requirements, we
      are
      not obligated to repurchase defaulted or any other contracts sold to SF-III.
      As
      the Servicer of the notes receivable sold to SF-III, we are obligated by the
      terms of the conduit facility to foreclose upon the Vacation Interval securing
      a
      defaulted note receivable. We may, but are not obligated to, purchase the
      foreclosed Vacation Interval for an amount equal to the net fair market value
      of
      the Vacation Interval if the net fair market value is no less than fifteen
      percent of the original acquisition price that the customer paid for the
      Vacation Interval. For the year ended December 31, 2005, we paid approximately
      $386,000 to repurchase the Vacation Intervals securing defaulted contracts
      to
      facilitate the re-marketing of those Vacation Intervals. Total investment in
      SF-III was valued at $22.8 million at December 31, 2005, which represents our
      maximum exposure to loss regarding our involvement with SF-III.





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





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


51





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 2005 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.





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





*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 and liabilities are summarized
      below (in thousands):





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





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 $13.2
      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. If the Purchasers do not receive required approvals
      from Texas regulators relating to the utility assets in Texas (the “Texas
      Assets”) within eighteen months of closing, the Texas Assets will be reconveyed
      to 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.





52


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





**Year
                Ended December 31,****2003**
            
            **2004**
            
            **2005**REVENUES:Gain
                on sale of discontinued operations
            
            $
            —
            
            $
            —
            
            $
            879Other
                income
            
            
            2,739
            
            
            2,860
            
            
            438Total
                revenues
            
            
            2,739
            
            
            2,860
            
            
            1,317COSTS
                AND OPERATING EXPENSES:Other
                expense
            
            
            1,184
            
            
            1,376
            
            
            278Depreciation
                and amortization
            
            
            760
            
            
            859
            
            
            —Interest
                expense
            
            
            1
            
            
            1
            
            
            —Total
                costs and operating expenses
            
            
            1,945
            
            
            2,236
            
            
            278Income
                from discontinued operations
            
            
            794
            
            
            624
            
            
            1,039Provision
                for income taxes
            
            
            —
            
            
            —
            
            
            (298
            )Net
                income from discontinued operations
            
            $
            794
            
            $
            624
            
            $
            741










**Results
      of Operations**





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





**Years
                Ended December 31,****2003**
            
            **2004**
            
            **2005**As
                a percentage of total revenues:Vacation
                Interval sales
            
            
            73.7
            %
            
            75.1
            %
            
            72.5
            %Sampler
                sales
            
            
            1.1
            
            
            1.2
            
            
            1.3Total
                sales
            
            
            74.8
            
            
            76.3
            
            
            73.8Interest
                income
            
            
            20.7
            
            
            20.6
            
            
            18.9Management
                fee income
            
            
            0.9
            
            
            0.7
            
            
            0.9Gain
                on sale of notes receivable
            
            
            1.9
            
            
            1.0
            
            
            3.2Other
                income
            
            
            1.7
            
            
            1.4
            
            
            3.2Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %As
                a percentage of Vacation Interval sales:Cost
                of Vacation Interval sales
            
            
            18.3
            %
            
            18.1
            %
            
            16.0
            %Provision
                for uncollectible notes
            
            
            43.4
            
            
            19.4
            
            
            16.2As
                a percentage of total sales:Sales
                and marketing
            
            
            52.5
            %
            
            51.3
            %
            
            50.1
            %As
                a percentage of total revenues:Operating,
                general and administrative
            
            
            15.6
            %
            
            14.0
            %
            
            13.9
            %Depreciation
                and amortization
            
            
            2.3
            
            
            2.0
            
            
            1.3Total
                costs and operating expenses
            
            
            112.5
            %
            
            92.8
            %
            
            84.1
            %As
                a percentage of interest income:Interest
                expense and lender fees
            
            
            47.7
            %
            
            46.6
            %
            
            45.2
            %








***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****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Units**
            
            **Price**
            
            **$
                Sales**
            
            **Units**
            
            **Price**Interval
                Sales to New Customers
            
            $
            65,697
            
            
            5,950
            
            $
            11,041
            
            $
            65,640
            
            
            5,808
            
            $
            11,302Upgrade
                Interval Sales to Existing Customers
            
            
            28,324
            
            
            4,088
            
            
            6,928
            
            
            40,843
            
            
            4,645
            
            
            8,793Additional
                Interval Sales to Existing Customers
            
            
            44,025
            
            
            5,395
            
            
            8,160
            
            
            39,933
            
            
            4,382
            
            
            9,113Total
            
            $
            138,046
            
            
            
            
            
            
            
            $
            146,416








53





Overall,
      Vacation Interval sales increased 6.1% in 2005 versus 2004. The number of
      interval sales to new customers decreased 2.4% 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 2.4% however, resulting in relatively no change in total
      sales to new customers in 2005 versus 2004. The number of interval sales to
      existing customers decreased 4.8% in 2005 versus 2004, but average prices
      increased 17.3%, resulting in an 11.6% net increase in the sales amount to
      existing customers during the year ended December 31, 2005 versus the year
      ended
      December 31, 2004.





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





·
            Opening
                new off site sales centers in major metropolitan areas. We believe
                the off
                site sales centers will result in more first time sales. These off
                site
                sales centers will be conveniently located in the major markets we
                serve,
                allowing touring families to save the time necessary to drive to
                and from
                the existing sales centers located at our getaway resorts. The off
                site
                sales centers will compliment the on site sales centers. Each off
                site
                sales center is estimated to cost approximately $1.0 million to $1.4
                million to construct. We opened our first such sales center in Irving,
                Texas in March 2006.





·
            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 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.





In
      large
      part due to the variables discussed above, we estimate our 2006 net income
      in
      the range of $17.0 million to $17.5 million.





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





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 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 Sales





Cost
      of
      sales as a percentage of Vacation Interval sales declined 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








54





Sales
      and
      marketing expense as a percentage of total sales decreased to 50.1% for the
      year
      ended December 31, 2005 versus 51.3% 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. The
      opening of new off site sales centers discussed in “Revenues” above could result
      in slightly higher sales and marketing expenses as a percentage of total sales
      in 2006 and later years. For the 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 is 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
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 1.3%
      in
      2005 from 2.0% in 2004. Overall, depreciation and amortization 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.





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
      (Loss) before (Benefit) Provision for Income Taxes and Discontinued
      Operations





Income
      (loss) before (benefit) provision for income taxes and discontinued operations
      increased to income of $32.2 million for the year ended December 31, 2005,
      as
      compared to income of $13.2 million for the year ended December 31, 2004, as
      a
      result of the aforementioned operating results.





(Benefit)
      Provision for Income Taxes





(Benefit)
      provision for income taxes as a percentage of income (loss) before (benefit)
      provision for income taxes and discontinued operations was a provision of 30.2%
      for 2005, as compared to a provision of 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.





Net
      Income (Loss) from Continuing Operations





Net
      income (loss) from continuing operations increased to income of $22.4 million
      for the year ended December 31, 2005, as compared to income of $13.1 million
      for
      the year ended December 31, 2004, as a result of the aforementioned operating
      results.





Net
      Income from Discontinued Operations








55





Net
      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 (Loss)





Net
      income (loss) increased to income of $23.2 million for the year ended December
      31, 2005, as compared to income of $13.8 million for the year ended December
      31,
      2004, as a result of the aforementioned operating results.





***Results
      of Operations for the Years Ended December 31, 2004 and December 31,
      2003***





Revenues ******





Revenues
      in 2004 were $183.7 million, representing a $16.0 million, or 9.5%, increase
      compared to revenues of $167.7 million for the year ended December 31, 2003.
      This increase primarily relates to increased Vacation Interval sales, discussed
      below.





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





**2003**
            
            **2004****Average**
            
            
            
            
            
            **Average****$
                Sales**
            
            **Units**
            
            **Price**
            
            **$
                Sales**
            
            **Units**
            
            **Price**Interval
                Sales to New Customers
            
            $
            67,232
            
            
            6,534
            
            $
            10,290
            
            $
            65,697
            
            
            5,950
            
            $
            11,041Upgrade
                Interval Sales to Existing Customers
            
            
            32,666
            
            
            4,833
            
            
            6,759
            
            
            28,324
            
            
            4,088
            
            
            6,928Additional
                Interval Sales to Existing Customers
            
            
            23,687
            
            
            3,026
            
            
            7,828
            
            
            44,025
            
            
            5,395
            
            
            8,160Total
            
            $
            123,585
            
            
            
            
            
            
            
            $
            138,046





Overall,
      Vacation Interval sales increased 11.7% in 2004 versus 2003. The number of
      interval sales to new customers decreased 8.9% and the number of upgrade
      interval sales to existing customers decreased 15.4% in 2004 versus 2003.
      However these decreases were offset by a 78.3% increase in units of additional
      interval sales to existing customers from 2003 to 2004. The increase in total
      sales to existing customers and decrease in sales to new customers is consistent
      with our strategy to increase the proportion of sales to existing customers,
      which have a lower related marketing expense, while decreasing proportionately
      the outside sales to new customers.





Sampler
      sales increased to $2.2 million in 2004 compared to $1.8 million in 2003.
      Sampler sales are not recognized as revenue until our obligation has elapsed,
      which often does not occur until the sampler contract expires eighteen months
      after the sale is consummated. Hence, a significant portion of sampler sales
      recognized in 2004 relate to 2002 and 2003 sales activity.





Interest
      income increased 9.0% to $37.8 million for the year ended December 31, 2004
      from
      $34.7 million for 2003. This increase primarily resulted from an increase in
      notes receivable, net of allowance for doubtful notes, in 2004 compared to
      2003,
      primarily due to the increase in Vacation Interval sales during 2004. The
      average yield on our outstanding notes receivable at December 31, 2004 was
      approximately 15.1%, compared to 14.9% at December 31, 2003.





Management
      fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
      income decreased $346,000 in the year ended December 31, 2004 from the same
      period of 2003, due primarily to the discontinuation of Crown Club management
      fees upon our sale of Crown Club in the third quarter of 2003.





Gain
      on
      sales of notes receivable was $1.9 million during 2004, resulting from the
      sale
      of $27.4 million of notes receivable to SF-I. The $3.2 million gain during
      2003
      resulted from the sale of $40.4 million of notes receivable to SF-I. Fewer
      sales
      of notes receivable took place during 2004 versus 2003 due primarily to the
      facility reduction with SF-I that took place during the fourth quarter of
      2003.





Other
      income consists of marina income, golf course and pro shop income, and other
      miscellaneous items. Other income decreased $312,000 to $2.5 million for the
      year ended December 31, 2004, compared to $2.8 million for the year ended
      December 31, 2003. The decrease primarily relates to gains of $498,000
      associated with the sale of land in Las Vegas, Nevada and Kansas City, Missouri
      in 2003, partially offset by increased marina and golf course pro shop income
      in
      2004 versus 2003.





Cost
      of Sales








56





Cost
      of
      sales as a percentage of Vacation Interval sales declined to 18.1% in 2004,
      from
      18.3% in 2003. In December of 2003, we charged cost of sales with $1.1 million
      for land and amenities due to a reduction in our master plan at one of our
      resorts. Cost of sales before this $1.1 million charge was 17.4% of Vacation
      Interval sales for 2003. The increase to 18.1% of Vacation Interval sales from
      17.4% during 2003 was primarily due to our selling a larger percentage of our
      inventory at lower margins during 2004. The increased percentage of additional
      interval sales to existing customers, which typically have a lower sales price
      and lower margin than interval sales to new customers, contributed to the
      increase from 2003 to 2004.





Sales
      and Marketing





Sales
      and
      marketing expense as a percentage of total sales decreased to 51.3% for the
      year
      ended December 31, 2004 versus 52.5% for the same period of 2003. 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, 2004, sales to existing customers increased to 52.4%
      of
      Vacation Interval sales, up from 45.6% during 2003. The $6.1 million overall
      increase in sales and marketing expense is primarily attributable to the overall
      increase in Vacation Interval sales during 2004 versus 2003.





Provision
      for Uncollectible Notes





Provision
      for uncollectible notes as a percentage of Vacation Interval sales decreased
      substantially to 19.4% for the year ended December 31, 2004 from 43.4% for
      2003.
      However, more than half of the 43.4% for 2003 was due to the $28.7 million
      first
      quarter increase described in detail below. Excluding the first quarter 2003
      increase in the provision, the percentage for 2003 would have been 20.0% of
      Vacation Interval sales. We observed
      that cancellations in the first quarter of 2003 significantly exceeded the
      level
      expected under our estimate for the December 31, 2002 allowance for
      uncollectible notes. Accordingly, the estimate was revised in the first quarter
      of 2003 as follows:





·
            the
                basis of the estimate of future cancellations was changed from Vacation
                Interval sales to incremental amounts financed, resulting in an increase
                of $1.6 million,


·
            certain
                historical cancellations from 2000 and 2001 that were previously
                excluded
                from predictive cancellations, as such cancellations were assumed
                to be
                uncharacteristically large as a result of our class action notices
                to all
                customers and announcements about our liquidity and possible bankruptcy
                issues in the first half of 2001, were included in predictive
                cancellations, resulting in an increase of $5.6 million,


·
            the
                estimate of cancellations in years 7, 8, and 9 after a sale were
                increased, resulting in an increase of $1.6
                million,


·
            the
                estimate of inventory recoveries resulting from cancellations was
                revised,
                resulting in an increase of
                $300,000,


·
            the
                ratio of the excess of cancellations in the first quarter over the
                estimated cancellations for the same period based on the weighted
                average
                rate of cancellations divided by the incremental amounts financed
                for the
                period 1997 through 2002, was applied to all future estimated
                cancellations, resulting in an increase of $15.0 million,
                and


·
            an
                estimate was added for current notes with customers who received
                payment
                or term concessions that would have been deemed cancellations were
                it not
                for the concessions, resulting in an increase of $4.6
                million.





The
      result of these revisions to the estimate was a $28.7 million increase from
      the
      original estimate for the provision for uncollectible notes in the first quarter
      of 2003. A further result of the revision to the estimate is that the allowance
      for doubtful accounts was 20.0% of gross notes receivable as of December 31,
      2003 compared to 10.9% at December 31, 2002. The allowance for doubtful accounts
      was 21.1% of gross notes receivable as of December 31, 2004. 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 14.0% in 2004 from 15.6% in 2003. Overall, operating, general and
      administrative expense remained fairly constant at $25.6 million for the year
      ended December 31, 2004 versus $26.2 million for the year ended December 31,
      2003.




Depreciation
      and Amortization





Depreciation
      and amortization expense as a percentage of total revenues decreased to 2.0%
      in
      2004 from 2.3% in 2003. Overall, depreciation and amortization expense decreased
      $218,000 in 2004 versus 2003 due to a general reduction in capital expenditures
      since 2000.








57





Interest
      Expense and Lender Fees





Interest
      expense and lender fees as a percentage of interest income remained fairly
      constant at 46.6% for the year ended December 31, 2004, compared to 47.7% for
      the year ended December 31, 2003.





Gain
      on Early Extinguishment of Debt





Gain
      on
      early extinguishment of debt was $0 during the year ended December 31, 2004,
      compared to $6.4 million during 2003. $5.1 million of the gain in 2003 resulted
      from the early extinguishment of $7.6 million of 10 1⁄2% senior subordinated notes
      due 2008. An additional $1.3 million resulted from the early extinguishment
      of
      the remaining $8.8 million balance of our $60 million loan agreement in the
      first quarter of 2003, which would have been due in August 2003.





Income
      (Loss) before (Benefit) Provision for Income Taxes and Discontinued
      Operations





Income
      (loss) before (benefit) provision for income taxes and discontinued operations
      increased to income of $13.2 million for the year ended December 31, 2004,
      as
      compared to a loss of $14.6 million for the year ended December 31, 2003, as
      a
      result of the aforementioned operating results.





(Benefit)
      Provision for Income Taxes





(Benefit)
      provision for income taxes as a percentage of income (loss) before (benefit)
      provision for income taxes and discontinued operations was a provision of 0.2%
      for 2004, as compared to a provision of 0.6% for 2003. The low effective income
      tax rate is the result of the 2003 and 2004 projected income tax benefits being
      reduced by the effect of a valuation allowance, which reduces the projected
      net
      deferred tax assets to zero due to the unpredictability of recovery.





Net
      Income (Loss) from Continuing Operations





Net
      income (loss) from continuing operations increased to income of $13.1 million
      for the year ended December 31, 2004, as compared to a loss of $14.7 million
      for
      the year ended December 31, 2003, as a result of the aforementioned operating
      results.





Net
      Income from Discontinued Operations





Net
      income from discontinued operations consists of the results of operations of
      our
      water and utility property assets and liabilities that have been designated
      as
      held for sale effective December 31, 2004. For the year ended December 31,
      2004,
      net income from discontinued operations decreased to $624,000, from $794,000
      during the same period of 2003. This decrease is primarily the result of
      increased operational expenses during 2004 versus 2003.





Net
      Income (Loss)





Net
      income (loss) increased to income of $13.8 million for the year ended December
      31, 2004, as compared to a loss of $13.9 million for the year ended December
      31,
      2003, as a result of the aforementioned operating results.





**Contractual
      Obligations and Commitments**





The
      following table summarizes our scheduled contractual commitments as of December
      31, 2005 (in thousands):





**2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**Long-term
                debt
            
            $
            16,080
            
            $
            26,098
            
            $
            59,784
            
            $
            12,091
            
            $
            51,145
            
            $
            123,616Capital
                leases
            
            
            42
            
            
            38
            
            
            32
            
            
            25
            
            
            1
            
            
            —Operating
                leases
            
            
            2,138
            
            
            2,008
            
            
            1,558
            
            
            1,083
            
            
            321
            
            
            —Other
                purchase obligations:Construction
                commitments
            
            
            10,974
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Employment
                agreements
            
            
            1,318
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            30,552
            
            $
            28,144
            
            $
            61,374
            
            $
            22,636
            
            $
            40,967
            
            $
            123,616





Long
      term
      debt includes $78.5 million of future interest and capital leases include
      $10,000 of future interest, using an approximate interest rate of 8.1%, which
      is
      our weighted average cost of borrowing at December 31, 2005. 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.





58








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





SFAS
      No.
      152 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate
      Time-Sharing Transactions” (“SFAS No. 152”). SFAS No. 152 amends FASB Statement
      No. 66, Accounting for Sales of Real Estate, to reference the financial
      accounting and reporting guidance for real estate time-sharing transactions
      that
      is provided in AICPA Statement of Position 04-2, Accounting for Real Estate
      Time-Sharing Transactions (“SOP 04-2”). This Statement also amends FASB
      Statement No. 67, Accounting for Costs and Initial Rental Operations of Real
      Estate Projects, to state that the guidance for (a) incidental operations and
      (b) costs incurred to sell real estate projects does not apply to real estate
      time-sharing transactions. The accounting for those operations and costs is
      subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial
      statements for fiscal years beginning after June 15, 2005, and is to be reported
      as a cumulative effect of a change in accounting principle. We do not believe
      the adoption of SFAS No. 152 will have a material impact on our results of
      operations, financial position, and future financial statements





SFAS
      No.
      123 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 123, Share-Based Payment,
      revised (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for
      share-based payments to employees, including grants of employee stock options.
      Under the new standard, companies will no longer be able to account for
      share-based compensation transactions using the intrinsic method in accordance
      with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead,
      companies will be required to account for such transactions using a fair-value
      method and recognize the expense in the consolidated statement of income. SFAS
      No. 123R will be effective for the next fiscal year beginning after June 15,
      2005 and allows, but does not require, companies to restate the fiscal year
      of
      2005 to reflect the impact of expensing share-based payments under SFAS No.
      123R. We have not yet determined which fair-value method and transitional
      provision we will follow. The adoption of SFAS No. 123R is not expected to
      have
      a material impact on our consolidated financial position or results of
      operations. See Stock-Based Compensation in Note 2 for the pro forma impact
      on
      net income and net income per share from calculating stock-based compensation
      costs under the fair value alternative of SFAS No. 123.





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





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





59











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





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





As
      of and
      for the year ended December 31, 2005, we had no significant derivative financial
      instruments or foreign operations. Interest on our notes receivable portfolio,
      senior subordinated debt, capital leases, and miscellaneous notes is fixed,
      whereas interest on our primary loan agreements, which totaled $174.9 million
      at
      December 31, 2005, is partially fixed and partially variable. The impact of
      a
      one-point effective interest rate change on the $116.8 million balance of
      variable-rate financial instruments at December 31, 2005, on our annual results
      of operations would be approximately $1.2 million, or approximately $0.03 per
      diluted share.





At
      December 31, 2005, 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 could result in a fair value impact of
      $4.7 million or approximately $0.12 per diluted share.





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





We
      offer
      financing to the buyers of Vacation Intervals at our resorts. These buyers
      generally make a down payment of at least 10% of the purchase price and deliver
      a promissory note to us for the balance. The promissory notes generally bear
      interest at a fixed rate, are payable over a seven-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 financing activities because
      the interest rates we charge our customers who finance the purchase of their
      Vacation Intervals exceeds the interest rates we pay to our senior lenders.
      Because our indebtedness bears interest at 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. We have engaged in one interest rate hedging transaction related
      to our conduit loan, with a balance of $58.1 million on December 31, 2005.
      Therefore, any increase in interest rates, particularly if sustained, could
      have
      a material adverse effect on our results of operations, cash flows, and
      financial position.





*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 condition.








60





*Geographic
      Concentration —* Our
      notes
      receivable are primarily originated in Texas (where approximately 52% of
      Vacation Interval sales took place in 2005), 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.




**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 those disclosure controls and procedures were effective
      to ensure that information we are required to disclose in the report we file
      or
      submit under the Exchange Act, is recorded, processed, summarized, and reported
      within the time periods specified in the Commission’s rules and forms. There
      were no changes made in our internal control over financial reporting during
      the
      fourth quarter of 2005 that materially affected or is 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, 2005 that was not reported.





**PART
      III**





**MANAGEMENT**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





The
      information required by this Item 10 is set forth in our proxy statement
      relating to our 2006 meeting of annual shareholders under the headings
“Compliance with Section 16(a) under the Securities Exchange Act of 1934” and
“Directors and Executive Officers”, 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 2006 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,
      2005.





61








**Name**
            
            **Age**
            
            **Position**Robert
                E. Mead
            
            59
            
            Chairman
                of the Board and Chief Executive OfficerSharon
                K. Brayfield
            
            45
            
            PresidentDavid
                T. O'Connor
            
            63
            
            Executive
                Vice President — SalesJoe
                W. Conner
            
            48
            
            Chief
                Operating OfficerHarry
                J. White, Jr.
            
            51
            
            Chief
                Financial Officer, TreasurerEdward
                L. Lahart
              Thomas
                J. Morris
            
            41
              40
            
            Executive
                Vice President — Operations
              Senior
                Vice President — Capital MarketsMichael
                Jones
            
            39
            
            Vice
                President — Information SystemsRobert
                G. Levy
            
            57
            
            Vice
                President — Resort OperationsDarla
                Cordova
            
            41
            
            Vice
                President — Employee and Marketing ServicesBarbara
                L. Lewis
            
            66
            
            Vice
                President — Resort DevelopmentHerman
                Jay Hankamer
            
            41
            
            Vice
                President — Financial ServicesMichael
                P. Lowrey
            
            47
            
            Vice
                President — Call Center OperationsLelori
                (“Buzz”) Marconi
            
            53
            
            Vice
                President — Preview Center MarketingSandra
                G. Cearley
            
            44
            
            Corporate
                SecretaryJames
                B. Francis, Jr.
            
            57
            
            DirectorJ.
                Richard Budd, III
            
            53
            
            DirectorHerbert
                B. Hirsch
            
            69
            
            DirectorRebecca
                Janet Whitmore
            
            51
            
            Director


____________________




The
      term
      of office of the above-listed 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 four directors were last elected
      by
      the shareholders at our 2005 annual meeting on May 19, 2005.





**ITEM
      11. EXECUTIVE COMPENSATION**





The
      information contained under the captions “Director Compensation” and “Executive
      Compensation” in our proxy statement for our 2006 annual meeting of shareholders
      is incorporated herein by reference to such proxy statement.





**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, 2005:





******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
            
            
            3,137,657
            
            $
            4.20
            
            
            4,559Equity
                Compensation Plans Not Approved by Security Holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            3,137,657
            
            $
            4.20
            
            
            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 2006 annual meeting, is incorporated herein by reference
      to
      such proxy statement.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information contained under the caption “Certain Relationships and Related
      Transactions” in our proxy statement for our 2006 annual meeting of shareholders
      is incorporated herein by reference to such proxy statement.








62





**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 2006 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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  Certificate
                      No. 001 of 10 1⁄2 % 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).4.4
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  Employment
                      Agreement with Harry J. White, Jr. (incorporated by Reference
                      to Exhibit
                      10.1 to Registrant’s Form 10-Q for quarter ended June 30,
                      1998).10.3
                  
                  3⁄4
                  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).10.4
                  
                  3⁄4
                  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).10.5
                  
                  3⁄4
                  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).10.6
                  
                  3⁄4
                  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).10.7
                  
                  3⁄4
                  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).
   63
 
 **Exhibit**
                    **Number**
                  
                  
                  **Description**10.8
                  
                  3⁄4
                  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).10.9
                  
                  3⁄4
                  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).10.10
                  
                  3⁄4
                  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).10.11
                  
                  3⁄4
                  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).10.12
                  
                  3⁄4
                  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).10.13
                  
                  3⁄4
                  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).10.14
                  
                  3⁄4
                  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).10.15
                  
                  3⁄4
                  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).10.16
                  
                  3⁄4
                  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).10.17
                  
                  3⁄4
                  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).10.18
                  
                  3⁄4
                  Amended
                      And Restated Loan, Security And Agency Agreement (Tranche A),
                      dated as of
                      April 30, 2002, by and among the Company, Textron Financial
                      Corporation,
                      as a Lender and as facility agent and collateral agent(incorporated
                      by reference to Exhibit 10.4 to Registrant's Form 10-Q for
                      the quarter
                      ended June 30, 2002).10.19
                  
                  3⁄4
                  Amended
                      And Restated Loan, Security And Agency Agreement (Tranche B),
                      dated as of
                      April 30, 2002, by and among the Company,
                      Textron Financial Corporation and Bank of Scotland, as Lenders
                      and Textron
                      Financial Corporation, asand collateral agent ("Agent")(incorporated
                      by reference to Exhibit 10.5 to Registrant's Form 10-Q for
                      the quarter
                      ended June 30, 2002).10.20
                  
                  3⁄4
                  First
                      Amendment To Loan And Security Agreement (Tranche C), dated
                      as of April
                      30, 2002, entered into by and between the Company and Textron
                      Financial
                      Corporation (incorporated by reference to Exhibit 10.6 to Registrant's
                      Form 10-Q for the quarter ended June 30, 2002).10.21
                  
                  3⁄4
                  Second
                      Amendment To Loan And Security Agreement dated as of April
                      30, 2002 by and
                      between the Company and Textron Financial Corporation (incorporated
                      by
                      reference to Exhibit 10.7 to Registrant's Form 10-Q for the
                      quarter ended
                      June 30, 2002).10.22
                  
                  3⁄4
                  Employment
                      Agreement dated April 18, 2002 between the Company and Sharon
                      K. Brayfield
                      (incorporated by reference to Exhibit 10.10 to Registrant's
                      Form 10-Q for
                      the quarter ended June 30, 2002).10.23
                  
                  3⁄4
                  Amendment
                      dated November 17, 2003 between the Company and Textron Financial
                      Corporation (Tranche A) (incorporated by reference to Exhibit
                      10.5 to
                      Registrant's Form 8-K filed December 29, 2003).10.24
                  
                  3⁄4
                  Amendment
                      dated November 17, 2003 between the Company and Textron Financial
                      Corporation (Tranche B) (incorporated by reference to Exhibit
                      10.6 to
                      Registrant's Form 8-K filed December 29, 2003).10.25
                  
                  3⁄4
                  Amendment
                      dated November 17, 2003 between the Company and Textron Financial
                      Corporation (Tranche C) (incorporated by reference to Exhibit
                      10.7 to
                      Registrant's Form 8-K filed December 29, 2003).10.26
                  
                  3⁄4
                  First
                      Amendment to Employment Agreement dated August 18, 2003 between
                      the
                      Company and Sharon K. Brayfield (incorporated by reference
                      to Exhibit 10.2
                      to Registrant's Form 10-Q for quarter ended September 30,
                      2003).10.27
                  
                  3⁄4
                  Amended
                      and Restated Loan and Security Agreement, dated as of March
                      5, 2004
                      between the Company and Textron Financial Corporation (incorporated
                      by
                      reference to Exhibit 10.50 to Registrant's Form 10-K for year
                      ended
                      December 31, 2003).10.28
                  
                  3⁄4
                  Amendment
                      dated March 5, 2004 between the Company and Textron Financial
                      Corporation
                      (Tranche A) (incorporated by reference to Exhibit 10.51 to
                      Registrant's
                      Form 10-K for year ended December 31, 2003).10.29
                  
                  3⁄4
                  Amendment
                      dated March 5, 2004 between the Company and Textron Financial
                      Corporation
                      (Tranche B) (incorporated by reference to Exhibit 10.52 to
                      Registrant's
                      Form 10-K for year ended December 31, 2003).10.30
                  
                  3⁄4
                  Amendment
                      dated March 5, 2004 between the Company and Textron Financial
                      Corporation
                      (Tranche C) (incorporated by reference to Exhibit 10.53 to
                      Registrant's
                      Form 10-K for year ended December 31, 2003).10.31
                  
                  3⁄4
                  Amendment
                      to Amended and Restated Loan and Security Agreement dated as
                      of March 5,
                      2004 by and between Borrower and Textron Financial Corporation
                      (Inventory
                      Loan) (incorporated by reference to Exhibit 10.54 to Registrant's
                      Form
                      10-K for year ended December 31, 2003).10.32
                  
                  3⁄4
                  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).10.33
                  
                  3⁄4
                  Contract
                      of Sale dated December 24, 2002 by and among the Company, FO
                      Ski Resorts,
                      LLC and Brodie Mountain Ski Resorts, Inc. (incorporated by
                      reference to
                      Exhibit 10.3 of Registrant’s Form 10-Q for the quarter ended June 30,
                      2004).10.34
                  
                  3⁄4
                  First
                      Amendment to Contract of Sale dated April 3, 2003 by and among
                      the
                      Company, FO Ski Resorts, LLC, and Brodie Mountain Ski Resorts,
                      Inc.
                      (incorporated by reference to Exhibit 10.4 of Registrant’s Form 10-Q for
                      the quarter ended June 30, 2004).10.35
                  
                  3⁄4
                  Second
                      Amendment to Contract of Sale dated March 17, 2004, by and
                      among the
                      Company, FO Ski Resorts, LLC, and Brodie Mountain Ski Resorts,
                      Inc
                      (incorporated by reference to Exhibit 10.5 of Registrant’s Form 10-Q for
                      the quarter ended June 30, 2004).
 64
 **Exhibit**
                    **Number**
                  
                  
                  **Description**10.36
                  
                  3⁄4
                  Third
                      Amendment to Contract of Sale dated May 14, 2004, by and among
                      the
                      Company, FO Ski Resorts, LLC, and Brodie Mountain Ski Resorts,
                      Inc.
                      (incorporated by reference to Exhibit 10.6 of Registrant’s Form 10-Q for
                      the quarter ended June 30, 2004).10.37
                  
                  3⁄4
                  Employment
                      Agreement dated June 3, 2004 to be effective January 1, 2004
                      between the
                      Company and Robert E. Mead (incorporated by reference to Company’s Proxy
                      Statement filed with the Commission on July 12, 2004).10.38
                  
                  3⁄4
                  Amendment
                      dated July 30, 2004 to Amended and Restated Loan and Security
                      Agreement
                      dated as of March 5, 2004 between the Company and Textron Financial
                      Corporation (incorporated by reference to Exhibit 10.3 to Registrant’s
                      Form 10-Q for the quarter ended September 30, 2004).10.39
                  
                  3⁄4
                  Amendment
                      dated July 30, 2004 to Loan and Security Agreement dated as
                      of April 17,
                      2001 between the Company and Textron Financial Corporation
                      (incorporated
                      by reference to Exhibit 10.4 to Registrant’s Form 10-Q for the quarter
                      ended September 30, 2004).10.40
                  
                  3⁄4
                  Amendment
                      to Amended and Restated Loan, Security and Agency Agreement
                      (Tranche B)
                      dated as of April 30, 2002 between the Company and Textron
                      Financial
                      Corporation (incorporated by reference to Exhibit 10.5 to Registrant’s
                      Form 10-Q for the quarter ended September 30, 2004).10.41
                  
                  3⁄4
                  Amendment
                      dated July 30, 2004 to Amended and Restated Loan, Security
                      and Agency
                      Agreement (Tranche B) dated as of April 30, 2002 between the
                      Company and
                      Textron Financial Corporation (incorporated by reference to
                      Exhibit 10.6
                      to Registrant’s Form 10-Q for the quarter ended September 30,
                      2004).10.42
                  
                  3⁄4
                  Amendment
                      dated July 30, 2004 to Amended and Restated Loan, Security
                      and Agency
                      Agreement (Tranche A) dated as of April 30, 2002 between the
                      Company and
                      Textron Financial Corporation (incorporated by reference to
                      Exhibit 10.7
                      to Registrant’s Form 10-Q for the quarter ended September 30,
                      2004).10.43
                  
                  3⁄4
                  Contract
                      of Sale dated February 12, 2004 between the Company and Cook,
                      Inc.
                      (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K dated
                      November 1, 2004).10.44
                  
                  3⁄4
                  First
                      Amendment to Contract of Sale dated March 18, 2004 between
                      the Company and
                      Cook, Inc. (incorporated by reference to Exhibit 10.2 to Registrant’s Form
                      8-K dated November 1, 2004).10.45
                  
                  3⁄4
                  Second
                      Amendment to Contract of Sale dated March 22, 2004 between
                      the Company and
                      Cook, Inc. (incorporated by reference to Exhibit 10.3 to Registrant’s Form
                      8-K dated November 1, 2004).10.46
                  
                  3⁄4
                  Third
                      Amendment to Contract of Sale dated April 27, 2004 between
                      the Company and
                      Cook, Inc. (incorporated by reference to Exhibit 10.4 to Registrant’s Form
                      8-K dated November 1, 2004).10.47
                  
                  3⁄4
                  Fourth
                      Amendment to Contract of Sale dated October 15, 2004 between
                      the Company
                      and Cook, Inc. (incorporated by reference to Exhibit 10.5 to
                      Registrant’s
                      Form 8-K dated November 1, 2004).10.48
                  
                  3⁄4
                  Amendment
                      to Contract of Sale dated October 21, 2004 between the Company
                      and Cook,
                      Inc. (incorporated by reference to Exhibit 10.6 to Registrant’s Form 8-K
                      dated November 1, 2004).10.49
                  
                  3⁄4
                  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).10.50
                  
                  3⁄4
                  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).10.51
                  
                  3⁄4
                  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).10.52
                  
                  3⁄4
                  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).10.53
                  
                  3⁄4
                  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).10.54
                  
                  3⁄4
                  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).10.55
                  
                  3⁄4
                  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).10.56
                  
                  3⁄4
                  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).10.57
                  
                  3⁄4
                  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).10.58
                  
                  3⁄4
                  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).10.59
                  
                  3⁄4
                  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).
  
 65
  
 **Exhibit**
                    **Number**
                  
                  
                  **Description**10.60
                  
                  3⁄4
                  Amendment
                      No. 1 to Loan and Security Agreement dated as of March 28, 2005
                      between Silverleaf Finance II, Inc. and Textron Financial Corporation
                      (incorporated by reference to Exhibit 10.2 to Registrant's
                      Form 8-K filed
                      on March 31, 2005).10.61
                  
                  3⁄4
                  Second
                      Amendment to Amended and Restated Loan, Security and Agency
                      Agreement
                      (Tranche A) dated as of February 28, 2005 by and among the
                      Registrant, Textron Financial Corporation and Textron Financial
                      Corporation (incorporated by reference to Exhibit 10.3 to Registrant's
                      Form 8-K filed on March 31, 2005).10.62
                  
                  3⁄4
                  Second
                      Amendment to Amended and Restated Loan, Security and Agency
                      Agreement
                      (Tranche B) dated as of February 28, 2005 by and among the
                      Registrant, Textron Financial Corporation and Textron Financial
                      Corporation (incorporated by reference to Exhibit 10.4 to Registrant's
                      Form 8-K filed on March 31, 2005).10.63
                  
                  3⁄4
                  Third
                      Amendment to Loan and Security Agreement (Tranche C) dated
                      as of
                      February 28, 2005 by and among the Registrant, Textron Financial
                      Corporation and Textron Financial Corporation (incorporated
                      by reference
                      to Exhibit 10.5 to Registrant's Form 8-K filed on March 31,
                      2005).10.64
                  
                  3⁄4
                  First
                      Amendment to Amended and Restated Loan and Security Agreement
                      (Inventory
                      Loan) between the Registrant and Textron Financial Corporation
                      (incorporated by reference to Exhibit 10.6 to Registrant's
                      Form 8-K filed
                      on March 31, 2005).10.65
                  
                  3⁄4
                  Inventory
                      Loan and Security Agreement between the Registrant and CapitalSource
                      Finance, LLC dated as of April 29, 2005 (incorporated by reference to
                      Exhibit 10.1 to Registrant's Form 8-K filed May 5,
                      2005).10.66
                  
                  3⁄4
                  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).10.67
                  
                  3⁄4
                  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).10.68
                  
                  3⁄4
                  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).10.69
                  
                  3⁄4
                  Standard
                      Definitions to Indenture and Transfer Agreement . (incorporated
                      by
                      reference to Exhibit 10.2to Registrant's Form 8-K filed July
                      28,
                      2005).10.70
                  
                  3⁄4
                  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).10.71
                  
                  3⁄4
                  Consolidated,
                      Amended and Restated Loan, Security and Agency Agreement, dated
                      as of
                      August 5, 2005, entered into by and among the Registrant and Textron
                      Financial Corporation (incorporated by reference to Exhibit
                      10.1 to
                      Registrant's Form 8-K filed September 16, 2005).10.72
                  
                  3⁄4
                  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).10.73
                  
                  3⁄4
                  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).10.74
                  
                  3⁄4
                  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).10.75
                  
                  3⁄4
                  Second
                      Amendment to Amended and Restated Loan and Security Agreement,
                      dated as of
                      October 26, 2005, between the Registrant and Textron Financial
                      Corporation
                      (incorporated by reference to Exhibit 10.2 to Registrant's
                      Form 10-Q for
                      the quarter ended September 30, 2005).10.76
                  
                  3⁄4
                  Loan
                      and Security Agreement--Inventory between the Registrant and
                      Well Fargo
                      Foothill, Inc., dated as of December 16, 2005 (incorporated
                      by reference
                      to Exhibit 10.1 to Registrant's Form 8-K filed on December
                      23,
                      2005).10.77
                  
                  3⁄4
                  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).10.78
                  
                  3⁄4
                  Amended,
                      Extended and Restated Employment Agreement with Silverleaf
                      Resorts, Inc.
                      dated April 14, 2005 between the Registrant and Robert E. Mead
                      (incorporated by reference to Annex B of the Registrant's Schedule
                      14A
                      filed April 14, 2005).10.79
                  
                  3⁄4
                  Employment
                      Agreement dated as of August 16, 2005 between the Registrant and
                      Thomas J. Morris (incorporated by reference to Exhibit 10.1
                      to
                      Registrant's 8-K filed on August 22, 2005).10.80
                  
                  3⁄4
                  Independent
                      Contractor Consulting Agreement dated as of November 1, 2002 between
                      Thomas J. Morris as predecessor to TradeMark Consulting, Co.
                      (incorporated
                      by reference to Exhibit 10.2 to Registrant's 8-K filed on August
                      22,
                      2005).10.81
                  
                  3⁄4
                  First
                      Amendment to Consulting Agreement dated February 19, 2004 between the
                      Registrant and Thomas J. Morris, individually and as president
                      of
                      TradeMark Consulting, Co. (incorporated by reference to Exhibit
                      10.3 to
                      Registrant's 8-K filed on August 22, 2005).10.82
                  
                  3⁄4
                  Second
                      Amendment to Consulting Agreement dated March 4, 2005 between the
                      Registrant and TradeMark Consulting, Co. (incorporated by reference
                      to
                      Exhibit 10.4 to Registrant's 8-K filed on August 22, 2005).10.83
                  
                  3⁄4
                  Third
                      Amendment to Consulting Agreement dated as of August 16, 2005 between
                      the Registrant and TradeMark Consulting, Co. (incorporated
                      by reference to
                      Exhibit 10.5 to Registrant's 8-K filed on August 22,
                      2005).*10.84
                  
                  3⁄4
                  Contract
                      of Sale dated May 31, 2005 between the Registrant and Virgil
                      M. Casey,
                      Trustee of the Casey Family Trust dated June 3, 1992.*10.85
                  
                  3⁄4
                  Contract
                      of Sale dated June 23, 2005 between the Registrant and Joe
                      Wang,
                      Trustee.14.1
                  
                  3⁄4
                  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
                  
                  3⁄4
                  Subsidiaries
                      of Silverleaf Resorts, Inc.*23.1
                  
                  3⁄4
                  Consent
                      of BDO Seidman, LLP.*31.1
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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
                  
                  3⁄4
                  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.







66
  ___________


*
            Filed
                herewith





(b)
      We
      filed the following reports on Form 8-K during the three-month period ended
      December 31, 2005:





Current
      report on Form 8-K filed with the SEC on December 6, 2005 relating to press
      release responding to unusually high trading volume in the Company's stock
      on
      AMEX.





Current
      report on Form 8-K filed with the SEC on December 14, 2005 relating to press
      releases announcing completion of evaluation of impact of accounting
      pronouncement and opening of show-room style sales office.





Current
      report on form 8-K filed with the SEC on December 23, 2005 relating to a new
      loan facility with Wells Fargo Foothill, Inc.





(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.





(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.





67





**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 20, 2006.


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
                  
                  Chairman
                      of the Board and
                  
                  March
                      20, 2006Robert
                      E. Mead
                  
                  Chief
                    Executive
                    Officer (Principal Executive Officer)/s/
                      HARRY J. WHITE, JR,
                  
                  Chief
                      Financial Officer
                  
                  March
                      20, 2006Harry
                      J. White, Jr.
                  
                  (Principal
                      Financialand
                      Accounting Officer)/s/
                      J. RICHARD BUDD, III
                  
                  Director
                  
                  March
                      20, 2006J.
                      Richard Budd, III/s/
                      JAMES B. FRANCIS, JR.
                  
                  Director
                  
                  March
                      20, 2006James
                      B. Francis, Jr./s/
                      HERBERT B. HIRSCH
                  
                  Director
                  
                  March
                      20, 2006Herbert
                      B. Hirsch/s/
                    REBECCA JANET WHITMORE
                  
                  Director
                  
                  March
                      20, 2006Rebecca
                      Janet Whitmore








68








**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Financial
                StatementsConsolidated
                Balance Sheets as of December 31, 2004 and 2005
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2003, 2004,
                and
                2005..
            F-4Consolidated
                Statements of Shareholders' Equity for the years ended December 31,
                2003,
                2004, and 2005
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2003, 2004,
                and
                2005
            F-6Notes
                to Consolidated Financial Statements
            F-7














**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders of


Silverleaf
      Resorts, Inc.


Dallas,
      Texas








We
      have
      audited the accompanying consolidated balance sheets of Silverleaf Resorts,
      Inc.
      as of December 31, 2005 and 2004 and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for each of the three years in
      the period ended December 31, 2005. 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 position of Silverleaf Resorts, Inc.
      at
      December 31, 2005 and 2004, and the results of its operations and its cash
      flows
      for each of the three years in the period ended December 31, 2005, in conformity
      with accounting principles generally accepted in the United States of
      America.








/s/
      BDO
      Seidman, LLP


Dallas,
      Texas


March
      3,
      2006











F-2





**SILVERLEAF
      RESORTS, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except share and per share amounts)**








**December
                31,**ASSETS
            
            **2004**
            
            **2005**Cash
                and cash equivalents
            
            $
            10,935
            
            $
            10,990Restricted
                cash
            
            
            3,428
            
            
            4,893Notes
                receivable, net of allowance for uncollectible notes of $52,506
                and $52,479, respectively
            
            
            196,466
            
            
            177,572Accrued
                interest receivable
            
            
            2,207
            
            
            2,243Investment
                in special purpose entity
            
            
            5,173
            
            
            22,802Amounts
                due from affiliates
            
            
            288
            
            
            680Inventories
            
            
            109,303
            
            
            117,597Land,
                equipment, buildings, and utilities, net
            
            
            24,375
            
            
            10,441Land
                held for sale
            
            
            2,991
            
            
            495Prepaid
                and other assets
            
            
            14,340
            
            
            14,083TOTAL
                ASSETS
            
            $
            369,506
            
            $
            361,796LIABILITIES
                AND SHAREHOLDERS' EQUITYLIABILITIES
              Accounts
                payable and accrued expenses
            
            $
            7,980
            
            $
            9,556Accrued
                interest payable
            
            
            1,302
            
            
            1,354Amounts
                due to affiliates
            
            
            929
            
            
            544Unearned
                revenues
            
            
            4,634
            
            
            5,310Taxes
                payable
            
            
            —
            
            
            1,268Deferred
                taxes payable, net
            
            
            —
            
            
            8,485Notes
                payable and capital lease obligations
            
            
            218,310
            
            
            177,269Senior
                subordinated notes
            
            
            34,883
            
            
            33,175Total
                Liabilities
            
            
            268,038
            
            
            236,961COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS'
                EQUITYPreferred
                stock, 10,000,000 shares authorized, none issued and
                outstanding
            
            
            —
            
            
            —Common
                stock, par value $0.01 per share, 100,000,000 shares authorized,
                37,494,304 shares issued, 36,860,238 shares outstanding at December
                31,
                2004, and 37,494,304 shares outstanding at December 31,
                2005
            
            
            372
            
            
            375Additional
                paid-in capital
            
            
            116,614
            
            
            112,207Retained
                earnings (deficit)
            
            
            (10,914
            )
            
            12,253Treasury
                stock, at cost, 388,768 shares at December 31, 2004 and no shares
                at
                December 31, 2005
            
            
            (4,604
            )
            
            —Total
                Shareholders' Equity
            
            
            101,468
            
            
            124,835TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            369,506
            
            $
            361,796





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,****2003**
            
            **2004**
            
            **2005**REVENUES:Vacation
                Interval sales
            
            $
            123,585
            
            $
            138,046
            
            $
            146,416Sampler
                sales
            
            
            1,765
            
            
            2,150
            
            
            2,623Total
                sales
            
            
            125,350
            
            
            140,196
            
            
            149,039Interest
                income
            
            
            34,730
            
            
            37,843
            
            
            38,154Management
                fee income
            
            
            1,547
            
            
            1,201
            
            
            1,856Gain
                on sale of notes receivable
            
            
            3,205
            
            
            1,915
            
            
            6,457Other
                income
            
            
            2,834
            
            
            2,522
            
            
            6,402Total
                revenues
            
            
            167,666
            
            
            183,677
            
            
            201,908COSTS
                AND OPERATING EXPENSES:Cost
                of Vacation Interval sales
            
            
            22,657
            
            
            24,964
            
            
            23,427Sales
                and marketing
            
            
            65,775
            
            
            71,890
            
            
            74,667Provision
                for uncollectible notes
            
            
            53,673
            
            
            26,811
            
            
            23,649Operating,
                general and administrative
            
            
            26,209
            
            
            25,639
            
            
            28,038Depreciation
                and amortization
            
            
            3,806
            
            
            3,588
            
            
            2,723Interest
                expense and lender fees
            
            
            16,550
            
            
            17,627
            
            
            17,253Total
                costs and operating expenses
            
            
            188,670
            
            
            170,519
            
            
            169,757OTHER
                INCOME:Gain
                on early extinguishment of debt
            
            
            6,376
            
            
            —
            
            
            —Total
                other income
            
            
            6,376
            
            
            —
            
            
            —Income
                (loss) before provision for income taxes and discontinued
                operations
            
            
            (14,628
            )
            
            13,158
            
            
            32,151Provision
                for income taxes
            
            
            86
            
            
            23
            
            
            9,725Net
                income (loss) from continuing operations
            
            
            (14,714
            )
            
            13,135
            
            
            22,426DISCONTINUED
                OPERATIONS:Gain
                on sale of discontinued operations (net of taxes)
            
            
            —
            
            
            —
            
            
            613Income
                from discontinued operations (net of taxes)
            
            
            794
            
            
            624
            
            
            128Net
                income from discontinued operations (net of taxes)
            
            
            794
            
            
            624
            
            
            741NET
                INCOME (LOSS)
            
            $
            (13,920
            )
            $
            13,759
            
            $
            23,167NET
                INCOME (LOSS) PER SHARE - BASIC:Net
                income (loss) from continuing operations
            
            $
            (0.40
            )
            $
            0.35
            
            $
            0.61Net
                Income from discontinued operations
            
            
            0.02
            
            
            0.02
            
            
            0.02Net
                income (loss)
            
            $
            (0.38
            )
            $
            0.37
            
            $
            0.63NET
                INCOME (LOSS) PER SHARE - DILUTED:Net
                income (loss) from continuing operations
            
            $
            (0.40
            )
            $
            0.33
            
            $
            0.57Net
                Income from discontinued operations
            
            
            0.02
            
            
            0.02
            
            
            0.02Net
                income (loss)
            
            $
            (0.38
            )
            $
            0.35
            
            $
            0.59WEIGHTED
                AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
            
            
            36,826,906
            
            
            36,852,133
            
            
            36,986,926Diluted
            
            
            36,826,906
            
            
            38,947,854
            
            
            39,090,921





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, 2003
            
            
            37,249,006
            
            $
            372
            
            $
            116,999
            
            $
            (10,753
            )
            
            422,100
            
            $
            (4,999
            )
            $
            101,619Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (13,920
            )
            
            —
            
            
            —
            
            
            (13,920
            )DECEMBER
                31, 2003
            
            
            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
            
            
            (4,604
            )
            
            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
            
            
            —
            
            $
            —
            
            $
            124,835





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,****2003**
            
            **2004**
            
            **2005**OPERATING
                ACTIVITIES:Net
                income (loss)
            
            $
            (13,920
            )
            $
            13,759
            
            $
            23,167Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Income
                from discontinued operations
            
            
            (794
            )
            
            (624
            )
            
            (741
            )Provision
                for uncollectible notes
            
            
            53,673
            
            
            26,811
            
            
            23,649Depreciation
                and amortization
            
            
            3,806
            
            
            3,588
            
            
            2,723Gain
                on sale of notes receivable
            
            
            (3,205
            )
            
            (1,915
            )
            
            (6,457
            )Gain
                on early extinguishment of debt
            
            
            (6,376
            )
            
            —
            
            
            —Gain
                on sale of land held for sale
            
            
            (498
            )
            
            —
            
            
            (3,635
            )Loss
                on sale of Crown management properties
            
            
            44
            
            
            —
            
            
            —Proceeds
                from sales of notes receivable
            
            
            31,796
            
            
            20,587
            
            
            104,193Cash
                effect from changes in assets and liabilities:Restricted
                cash
            
            
            2,000
            
            
            (1,804
            )
            
            (1,465
            )Notes
                receivable
            
            
            (40,811
            )
            
            (47,733
            )
            
            (51,579
            )Accrued
                interest receivable
            
            
            156
            
            
            (38
            )
            
            (36
            )Investment
                in Special Purpose Entity
            
            
            603
            
            
            880
            
            
            (17,629
            )Amounts
                due from affiliates
            
            
            (1,574
            )
            
            471
            
            
            (258
            )Inventories
            
            
            (489
            )
            
            (8,741
            )
            
            (8,824
            )Prepaid
                and other assets
            
            
            (2,094
            )
            
            (1,906
            )
            
            991Accounts
                payable and accrued expenses
            
            
            (572
            )
            
            1,276
            
            
            1,570Accrued
                interest payable
            
            
            (10
            )
            
            215
            
            
            52Unearned
                revenues
            
            
            684
            
            
            922
            
            
            676Income
                taxes payable
            
            
            —
            
            
            —
            
            
            9,753Net
                cash provided by operating activities - continuing
                operations
            
            
            22,419
            
            
            5,748
            
            
            76,150Net
                cash provided by (used in) operating activities - discontinued
                operations
            
            
            88
            
            
            389
            
            
            (841
            )INVESTING
                ACTIVITIES:Purchases
                of land, equipment, buildings, and utilities
            
            
            (232
            )
            
            (570
            )
            
            (701
            )Proceeds
                from sale of discontinued operations
            
            
            —
            
            
            —
            
            
            13,101Sale
                of land held for sale
            
            
            4,660
            
            
            —
            
            
            6,131Net
                cash provided by (used in) investing activities
            
            
            4,428
            
            
            (570
            )
            
            18,531FINANCING
                ACTIVITIES:Proceeds
                from borrowings from unaffiliated entities
            
            
            157,264
            
            
            111,767
            
            
            150,666Payments
                on borrowings to unaffiliated entities
            
            
            (181,259
            )
            
            (110,502
            )
            
            (244,651
            )Proceeds
                from exercise of stock options
            
            
            —
            
            
            10
            
            
            200Net
                cash provided by (used in) financing activities
            
            
            (23,995
            )
            
            1,275
            
            
            (93,785
            )NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            2,940
            
            
            6,842
            
            
            55CASH
                AND CASH EQUIVALENTS:
              BEGINNING
                OF PERIOD
            
            
            1,153
            
            
            4,093
            
            
            10,935END
                OF PERIOD
            
            $
            4,093
            
            $
            10,935
            
            $
            10,990SUPPLEMENTAL
                CASH FLOW INFORMATION:Interest
                paid, net of amounts capitalized
            
            $
            15,747
            
            $
            16,557
            
            $
            15,532Income
                taxes paid
            
            
            86
            
            
            —
            
            
            1,200SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Land
                and equipment acquired under capital leases
            
            
            —
            
            
            99
            
            
            62Notes
                receivable, net of allowance for uncollectible notes, acquired from
                SF-I
            
            
            —
            
            
            —
            
            
            62,884Notes
                payable acquired from SF-I
            
            
            —
            
            
            —
            
            
            50,386Other
                assets, liabilities, and equity acquired from SF-I
            
            
            —
            
            
            —
            
            
            12,498Note
                received from sale of Crown management properties
            
            
            1,000
            
            
            —
            
            
            —





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, 2003, 2004, and 2005**








**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")
      as
      of December 31, 2005, 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 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. Certain resorts, which were managed, but not owned by the
      Company, were operated through (“Crown Club”) until the third quarter of 2003,
      when we sold our management rights and unsold timeshare inventory in the seven
      timeshare resorts we had managed since we originally acquired these from Crown
      Resorts Co., LLC in May 1998. 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 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.





In
      addition to Vacation Interval sales revenues, interest income derived from
      financing activities, and management fees received from the Club, we generate
      additional revenue from leasing unsold intervals (i.e., sampler sales), 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,
      2003, 2004, and 2005 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., and Silverleaf Finance II, Inc., which was formed
      in
      December 2003 and described in more detail under the heading “Debt” in footnote
      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.





**2.
      SIGNIFICANT ACCOUNTING POLICIES SUMMARY**





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





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





*Revenue
      and Expense Recognition —* A
      substantial portion of Vacation Interval sales are made in exchange for mortgage
      notes receivable, which are secured by a deed of trust on the Vacation Interval
      sold. We recognize the sale of a Vacation Interval under the accrual method
      after a binding sales contract has been executed, the buyer has made a down
      payment of at least 10%, and the statutory rescission period has expired. If
      all
      accrual method criteria are met except that construction is not substantially
      complete, revenues are recognized on the percentage-of-completion basis. Under
      this method, the portion of revenue applicable to costs incurred, as compared
      to
      total estimated construction and direct selling costs, is recognized in the
      period of sale. The remaining amount is deferred and recognized as the remaining
      costs are incurred. The deferral of sales and costs related to the
      percentage-of-completion method is not significant.





F-7











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





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





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 additional interest income ceases until collection
      is
      deemed probable.





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





We
      receive fees for management services provided to the Clubs. These revenues
      are
      recognized on an accrual basis in the period the services are provided if
      collection is deemed probable.





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





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





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





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





*Investment
      in Special Purpose Entities* — ** 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 funds
      these purchases through advances under a credit agreement arranged for this
      purpose.





We
      closed
      a securitization transaction with SF-III during the third quarter of 2005,
      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. 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.





F-8








We
      account for and evaluate our investment in special purpose entities in
      accordance with SFAS 140, EITF 99-20, and SFAS 115, as applicable. The gain
      or
      loss on the sale is determined based on the proceeds received, the fair value
      assigned to the investment in special purpose entities, and the recorded value
      of notes receivable sold. The fair value of the investment in special purpose
      entities is estimated based on the present value of future cash flows we expect
      to receive from the notes receivable sold. We utilized the following key
      assumptions to estimate the fair value of such cash flows related to SF-I:
      customer prepayment rate - ranging from 2.3% to 4.3%; expected accounts paid
      in
      full as a result of upgrades - ranging from 5.8% to 6.2%; expected credit losses
      - ranging from 5.6% to 8.1%; discount rate - ranging from 13.5% to 19%; base
      interest rate - ranging from 3.3% to 4.4%; agent fee - ranging from 2% to 2.37%;
      and loan servicing fees - 1%. We utilized the following key assumptions to
      estimate the fair value of such cash flows related to SF-III: customer
      prepayment rate (including expected accounts paid in full as a result of
      upgrades) - 15.9%; expected credit losses - 11.38%; discount rate - 15%; 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. The carrying
      value of the investment in special purpose entities represents our maximum
      exposure to loss regarding our involvement with our special purpose
      entities.





At
      December 31, 2005, 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 paid in
                full as a result of upgrades):Impact
                on fair value of a 10% adverse change
            
            $
            266Impact
                on fair value of a 20% adverse change
            
            $
            252Expected
                Credit Losses Rate:Impact
                on fair value of a 10% adverse change
            
            $
            1,399Impact
                on fair value of a 20% adverse change
            
            $
            2,752Discount
                Rate:Impact
                on fair value of a 10% adverse change
            
            $
            502Impact
                on fair value of a 20% adverse change
            
            $
            984




*Provision
      for Uncollectible Notes —* Such
      provision is recorded at an amount sufficient to maintain the allowance for
      uncollectible notes at a level management considers adequate to provide for
      anticipated losses resulting from customers' failure to fulfill their
      obligations under the terms of their notes. Such allowance for uncollectible
      notes is adjusted based upon periodic analysis of the notes receivable
      portfolio, historical credit loss experience, and current economic factors.
      Credit losses take three forms. The first is the full cancellation of the note,
      whereby the customer is relieved of the obligation and 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, net
      of
      recovery of the related inventory, for each sales year by using historical
      cancellations experience.





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





We
      classify the components of the provision for uncollectible notes into the
      following two categories based on the nature of the item: credit losses and
      customer returns (cancellations of sales whereby the customer fails to make
      the
      first installment payment). The provision for uncollectible notes pertaining
      to
      credit losses and customer returns are classified in provision for uncollectible
      notes and Vacation Interval sales, respectively.





*Inventories
      —* Inventories
      are stated at the lower of cost or market value. Cost includes amounts for
      land,
      construction materials, direct labor and overhead, taxes, and capitalized
      interest incurred in the construction or through the acquisition of resort
      dwellings held for timeshare sale. Timeshare unit costs are capitalized as
      inventory and are allocated to Vacation Intervals based upon their relative
      sales values. Upon sale of a Vacation Interval, these costs are charged to
      cost
      of sales on a specific identification basis. Vacation Intervals reacquired
      are
      placed back into inventory at the lower of their original historical cost basis
      or market value.





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. As
      of
      December 31, 2005, we had construction commitments of approximately $11.0
      million. We allocate the estimated total amenities cost to cost of Vacation
      Interval sales based on Vacation Intervals sold in a given period as a
      percentage of total Vacation Intervals expected to sell over the life of a
      particular resort project.





F-9








We
      periodically review the carrying value of our inventory on an individual project
      basis to ensure that the carrying value does not exceed market
      value.





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





*Prepaid
      and Other Assets* —
Prepaid
      and other assets consists primarily of prepaid insurance, prepaid postage,
      commitment fees, debt issuance costs, 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, our wholly owned off-balance sheet
      qualified special purpose entity formed during 2005, since it is a disregarded
      entity for federal income tax purposes. We have a tax sharing agreement with
      SF-III.





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





For
      the
      year ended December 31, 2003, basic and diluted weighted average shares were
      equal. Outstanding stock options totaling 3,704,979 were potentially dilutive
      securities at December 31, 2003, but were not included in the computation of
      diluted EPS because to do so would have been anti-dilutive for the year ended
      December 31, 2003. Outstanding stock options totaling 2,777,147 were dilutive
      securities that were included in the computation of diluted EPS at December
      31,
      2004. Outstanding stock options totaling 874,500 were not dilutive at December
      31, 2004, because the exercise price for such options substantially exceeded
      the
      market price for the Company's shares. Outstanding stock options totaling
      2,270,657 were dilutive securities that were included in the computation of
      diluted EPS at December 31, 2005. Outstanding stock options totaling 867,000
      were not dilutive at December 31, 2005, because the exercise price for such
      options substantially exceeded the market price for the Company's shares.





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





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





F-10








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





**2003**
            
            **2004**
            
            **2005**Net
                income (loss), as reported
            
            $
            (13,920
            )
            $
            13,759
            
            $
            23,167Stock-based
                compensation expense recordedunder
                the intrinsic value method
            
            
            —
            
            
            —
            
            
            —Pro
                forma stock-based compensation expense
              Computed
                under the fair value method
            
            
            (468
            )
            
            (297
            )
            
            (278
            )Pro
                forma net income (loss)
            
            $
            (14,388
            )
            $
            13,462
            
            $
            22,889Net
                income (loss) per share, basicAs
                reported
            
            $
            (0.38
            )
            $
            0.37
            
            $
            0.63Pro
                forma
            
            $
            (0.39
            )
            $
            0.37
            
            $
            0.62Net
                income (loss) per share, dilutedAs
                reported
            
            $
            (0.38
            )
            $
            0.35
            
            $
            0.59Pro
                forma
            
            $
            (0.39
            )
            $
            0.35
            
            $
            0.59





The
      fair
      value of the stock options granted during
      2003 and 2005 were $0.29 and $1.59, respectively. There were no stock options
      granted during 2004. 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.





*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, valuation of SF-III,
      and the future sales plan used to allocate certain costs to inventories and
      cost
      of sales.





*Reclassifications* —
Certain
      reclassifications have been made to the 2003 and 2004 consolidated financial
      statements to conform to the 2005 presentation. These reclassifications had
      no
      effect on net income (loss). 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 have been designated as held for sale
      effective December 31, 2004. In accordance with the provisions of SFAS No.
      144,
      the results of operations of these properties are included in income from
      discontinued operations. Prior periods have been reclassified for comparability,
      as required.





*Recent
      Accounting Pronouncements* — **





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





SFAS
      No.
      152 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate
      Time-Sharing Transactions” (“SFAS No. 152”). SFAS No. 152 amends FASB Statement
      No. 66, Accounting for Sales of Real Estate, to reference the financial
      accounting and reporting guidance for real estate time-sharing transactions
      that
      is provided in AICPA Statement of Position 04-2, Accounting for Real Estate
      Time-Sharing Transactions (“SOP 04-2”). This Statement also amends FASB
      Statement No. 67, Accounting for Costs and Initial Rental Operations of Real
      Estate Projects, to state that the guidance for (a) incidental operations and
      (b) costs incurred to sell real estate projects does not apply to real estate
      time-sharing transactions. The accounting for those operations and costs is
      subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial
      statements for fiscal years beginning after June 15, 2005, and is to be reported
      as a cumulative effect of a change in accounting principle. We do not believe
      the adoption of SFAS No. 152 will have a material impact on our results of
      operations, financial position, and future financial statements





SFAS
      No.
      123 - In December 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 123, Share-Based Payment,
      revised (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for
      share-based payments to employees, including grants of employee stock options.
      Under the new standard, companies will no longer be able to account for
      share-based compensation transactions using the intrinsic method in accordance
      with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead,
      companies will be required to account for such transactions using a fair-value
      method and recognize the expense in the consolidated statement of income. SFAS
      No. 123R will be effective for the next fiscal year beginning after June 15,
      2005 and allows, but does not require, companies to restate the fiscal year
      of
      2005 to reflect the impact of expensing share-based payments under SFAS No.
      123R. We have not yet determined which fair-value method and transitional
      provision we will follow. The adoption of SFAS No. 123R is not expected to
      have
      a material impact on our consolidated financial position or results of
      operations. See Stock-Based Compensation in Note 2 for the pro forma impact
      on
      net income and net income per share from calculating stock-based compensation
      costs under the fair value alternative of SFAS No. 123.








F-11





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





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





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





**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,
      as
      is the case with most other timeshare developers.





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.








F-12





*Interest
      Rate Risk —* We
      have
      historically derived net interest income from our financing activities because
      the interest rates we charge our customers who finance the purchase of their
      Vacation Intervals exceed the interest rates we pay to our senior lenders.
      Because 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 position.





To
      partially offset an increase in interest rates, we have engaged in one interest
      rate hedging transaction related to our conduit loan through SF-II, with a
      balance of $58.1 million on December 31, 2005. In addition, the Series 2005-A
      Notes related to our off-balance sheet special purpose finance subsidiary,
      SF-III, had a balance of $89.1 million at December 31, 2005 and bear interest
      at
      fixed rates ranging from 4.857% to 6.756%.





*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 condition.





*Geographic
      Concentration —* Our
      notes
      receivable are primarily originated in Texas (where approximately 52% of
      Vacation Interval sales took place in 2005), 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, 2005 was approximately 15.3%,
      with individual rates ranging from 0% to 17.5%. In connection with the sampler
      program, we routinely enter into notes receivable with terms of 10 months.
      Notes
      receivable from sampler sales were $1.9 million and $2.3 million at December
      31,
      2004 and 2005, respectively, and are non-interest bearing.





We
      had a
      remaining note discount of $76,000 and $37,000 in aggregate as of December
      31,
      2004 and 2005, respectively, utilizing a 10% discount rate, in connection with
      promotional sales to certain customers whereby we entered into non-interest
      bearing notes receivable. In addition, we ceased accruing interest on delinquent
      notes of $32.7 million and $30.3 million as of December 31, 2004 and 2005,
      respectively, as collection of interest on such notes was deemed improbable.





Notes
      receivable are scheduled to mature as follows at December 31, 2005 (in
      thousands):





2006
            
            $
            30,7552007
            
            
            30,8052008
            
            
            31,6832009
            
            
            30,6992010
            
            
            29,0652011
            
            
            28,055Thereafter
            
            
            49,026230,088Less
                discounts on notes
            
            
            (37
            )Less
                allowance for uncollectible notes
            
            
            (52,479
            )Notes
                receivable, net
            
            $
            177,572





There
      were no notes sold with recourse during the years ended December 31, 2003,
      2004,
      and 2005.





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.








F-13





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. The Series
      2005-A Notes were issued pursuant to an Indenture ("Indenture") between
      Silverleaf, as servicer of the timeshare loans, SF-III, and Wells Fargo Bank,
      National Association, as Indenture Trustee, Custodian, Backup Servicer, and
      Account Intermediary. The Series 2005-A Notes were issued in four classes as
      follows:





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


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


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


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





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





The
      Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
      us
      pursuant to a transfer agreement between 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 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, 2005, SF-III held notes receivable totaling $106.9 million, with
      related borrowings of $89.1 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 for the year ended December
      31, 2005. 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 $904,000, $684,000,
      and
      $355,000 for the years ended December 31, 2003, 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 year ended December 31, 2005,
      we paid approximately $386,000 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 years ended
      December 31, 2004 and 2005, we received $12.0 million and $4.3 million,
      respectively, in cash distributions from SF-I. We did not receive distributions
      from SF-III during 2005.





We
      consider accounts over 60 days past due to be delinquent. As of December 31,
      2005, $337,000 of notes receivable, net of accounts charged off, were considered
      delinquent. An additional $32.6 million of notes, of which $28.3 million is
      pledged to senior lenders, would have been considered to be delinquent had
      we
      not granted payment concessions to the customers, which brings a delinquent
      note
      current and extends the maturity date if two consecutive payments are made.





The
      activity in gross notes receivable is as follows for the years ended December
      31, 2004 and 2005 (in thousands):





F-14








**December
                31,****2004**
            
            **2005**Balance,
                beginning of period
            
            $
            241,751
            
            $
            248,972Sales
            
            
            116,573
            
            
            130,965Collections
            
            
            (62,078
            )
            
            (64,640
            )Receivables
                charged off
            
            
            (19,845
            )
            
            (18,089
            )Receivables
                received via dissolution of SF-I
            
            
            —
            
            
            73,687Sold
                notes receivable
            
            
            (27,429
            )
            
            (140,844
            )Balance,
                end of period
            
            $
            248,972
            
            $
            230,051





The
      activity in the allowance for uncollectible notes is as follows for the years
      ended December 31, 2003, 2004, and 2005 (in thousands):


**December
                31,****2003**
            
            **2004**
            
            **2005**Balance,
                beginning of period
            
            $
            28,547
            
            $
            48,372
            
            $
            52,506Provision
                for credit losses
            
            
            53,673
            
            
            26,811
            
            
            23,649Receivables
                charged off
            
            
            (27,342
            )
            
            (19,845
            )
            
            (18,089
            )Allowance
                received via dissolution of SF-I
            
            
            —
            
            
            —
            
            
            10,803Allowance
                related to notes sold
            
            
            (6,506
            )
            
            (2,832
            )
            
            (16,390
            )Balance,
                end of period
            
            $
            48,372
            
            $
            52,506
            
            $
            52,479





The
      provision for customer returns, which are cancellations of sales whereby the
      customer fails to make the first installment payment, are recorded as a charge
      to Vacation Interval sales. For the years ended December 31, 2003, 2004, and
      2005, the provision for customer returns was $4.0 million, $4.1 million, and
      $2.6 million, respectively.





Management
      observed that cancellations in the first quarter of 2003 significantly exceeded
      the level expected under its estimate for the December 31, 2002 allowance for
      uncollectible notes. Accordingly, the estimate was revised in the first quarter
      of 2003 as follows:





·
            the
                basis of the estimate of future cancellations was changed from Vacation
                Interval sales to incremental amounts financed, resulting in an increase
                of $1.6 million,


·
            certain
                historical cancellations from 2000 and 2001 that were previously
                excluded
                from predictive cancellations, as such cancellations were assumed
                to be
                uncharacteristically large as a result of the Company’s class action
                notices to all customers and announcements about its liquidity and
                possible bankruptcy issues in the first half of 2001, were included
                in
                predictive cancellations, resulting in an increase of $5.6 million,


·
            the
                estimate of cancellations in years 7, 8, and 9 after a sale were
                increased, resulting in an increase of $1.6
                million,


·
            the
                estimate of inventory recoveries resulting from cancellations was
                revised,
                resulting in an increase of
                $300,000,


·
            the
                ratio of the excess of cancellations in the first quarter over the
                estimated cancellations for the same period based on the weighted
                average
                rate of cancellations divided by the incremental amounts financed
                for the
                period 1997 through 2002, was applied to all future estimated
                cancellations, resulting in an increase of $15.0 million,
                and


·
            an
                estimate was added for current notes with customers who received
                payment
                or term concessions that would have been deemed cancellations were
                it not
                for the concessions, resulting in an increase of $4.6
                million.





The
      result of these revisions to the estimate was a $28.7 million increase from
      the
      original estimate for the provision for uncollectible notes in the first quarter
      of 2003. A further result of the revision to the estimate is that the allowance
      for doubtful accounts was 20.0% of gross notes receivable as of December 31,
      2003 compared to 10.9% at December 31, 2002. The allowance for doubtful accounts
      was 21.1% and 22.8% of gross notes receivable as of December 31, 2004 and 2005,
      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, 2004 and 2005 (in
      thousands):





**December
                31,****2004**
            
            **2005**Timeshare
                units
            
            $
            50,169
            
            $
            54,553Amenities
            
            
            38,467
            
            
            41,867Land
            
            
            11,114
            
            
            11,833Recovery
                of canceled and traded intervals
            
            
            9,553
            
            
            9,174Other
            
            
            —
            
            
            170Total
            
            $
            109,303
            
            $
            117,597





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.








F-15





**6.
      LAND, EQUIPMENT, BUILDINGS, AND UTILITIES**





Land,
      equipment, buildings, and utilities consist of the following at December 31,
      2004 and 2005 (in thousands):





**December
                31,****2004**
            
            **2005**Land
            
            $
            2,276
            
            $
            1,989Vehicles
                and equipment
            
            
            4,291
            
            
            4,211Utility
                plant, buildings, and facilities
            
            
            15,902
            
            
            —Office
                equipment and furniture
            
            
            28,739
            
            
            28,992Improvements
            
            
            10,430
            
            
            10,42561,638
            
            
            45,617Less
                accumulated depreciation
            
            
            (37,263
            )
            
            (35,176
            )Land,
                equipment, buildings, and utilities, net
            
            $
            24,375
            
            $
            10,441





Depreciation
      and amortization expense for the years ended December 31, 2003, 2004, and 2005
      was $3.8 million, $3.6 million, and $2.7 million, respectively.





**7.
      INCOME TAXES**





Income
      tax expense consists of the following components for the years ended December
      31, 2003, 2004, and 2005 (in thousands):





**2003**
            
            **2004**
            
            **2005**Current
                income tax expense - Federal
            
            $
            —
            
            $
            —
            
            $
            —Current
                income tax expense - State
            
            
            86
            
            
            23
            
            
            201Deferred
                income tax expense - Federal
            
            
            —
            
            
            —
            
            
            8,658Deferred
                income tax expense - State
            
            
            —
            
            
            —
            
            
            866Total
                income tax expense
            
            $
            86
            
            $
            23
            
            $
            9,725





A
      reconciliation of income tax expense on reported pre-tax income (loss) at
      statutory rates to actual income tax expense for the years ended December 31,
      2003, 2004, and 2005 is as follows (in thousands):





**2003**
            
            **2004**
            
            **2005****Dollars**
            
            **Rate**
            
            **Dollars**
            
            **Rate**
            
            **Dollars**
            
            **Rate**Income
                tax expense (benefit) at statutory rates
            
            $
            (4,842
            )
            
            (35.0
            )%
            $
            4,824
            
            
            35.0
            %
            $
            11,253
            
            
            35.0
            %State
                income taxes, net of Federalincome
                tax benefit
            
            
            (429
            )
            
            (3.1
            )%
            
            427
            
            
            3.1
            %
            
            1,125
            
            
            3.5
            %Deferred
                tax asset reserve
            
            
            3,744
            
            
            27.0
            %
            
            (7,376
            )
            
            (53.5
            )%
            
            —
            
            
            0.0
            %Reconciliation
                to prior year tax return
            
            
            811
            
            
            5.9
            %
            
            1,464
            
            
            10.6
            %
            
            —
            
            
            0.0
            %Permanent
                differences
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,094
            )
            
            (9.7
            )%Other
            
            
            802
            
            
            5.8
            %
            
            684
            
            
            5.0
            %
            
            441
            
            
            1.4
            %Total
                income tax expense
            
            $
            86
            
            
            0.6
            %
            $
            23
            
            
            0.2
            %
            $
            9,725
            
            
            30.2
            %





Deferred
      income tax assets and liabilities as of December 31, 2004 and 2005 are as
      follows (in thousands):





**2004**
            
            **2005**Deferred
                tax liabilities:Depreciation
            
            $
            4,872
            
            $
            71Installment
                sales income
            
            
            80,383
            
            
            79,524Other
            
            
            —
            
            
            484Total
                deferred tax liabilities
            
            
            85,255
            
            
            80,079Deferred
                tax assets:Net
                operating loss carryforward - pre exchange offer
            
            
            49,097
            
            
            22,257Net
                operating loss carryforward - post exchange offer
            
            
            34,116
            
            
            46,419Impairment
                of long-lived assets
            
            
            4,698
            
            
            —AMT
                tax credit
            
            
            —
            
            
            2,918Other
            
            
            406
            
            
            —Total
                deferred tax assets
            
            
            88,317
            
            
            71,594Net
                deferred tax (asset) liability
            
            
            (3,062
            )
            
            8,485Deferred
                tax asset allowance
            
            
            3,062
            
            
            —Net
                deferred tax (asset) liability
            
            $
            —
            
            $
            8,485








F-16








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, 2005.





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 believe our AMT liability for 2005
      is approximately $2.2 million, with the result that we will have total minimum
      tax credits of approximately $2.9 million as of December 31, 2005. 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.





Due
      to
      the 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.
      The
      annual limitation will be equal to the value of our stock immediately before
      the
      ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest
      of the adjusted Federal long-term rates in effect for any month in the
      three-calendar-month period ending with the calendar month in which the change
      date occurs). This annual limitation may be increased for any recognized
      built-in gain to the extent allowed in Section 382(h) of the Code. We believe
      that approximately $57.8 million of our net operating loss carryforwards as
      of
      December 31, 2005, are subject to the Section 382 limitations.





The
      following are the expiration dates and the approximate net operating loss
      carryforwards at December 31, 2005 (in thousands):





**Expiration
                Dates**2019
            
            $
            18,6472020
            
            
            132,2782021
            
            
            27,455$
            178,380





**8.
      DEBT**





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




******December 31,___********2004**
            
            ******2005**




$55.9
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement was limited to a $44.6 million revolver with an interest
                rate of
                LIBOR plus 3% with a 6% floor, revolving through March 2006, and
                a $11.3
                million term loan with an interest rate of 8%; as of December 31,
                2005 the
                loan agreement has been terminated)
            
            $
            37,514
            
            $
            —$11.3
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            9,991
            
            
            —$55.1
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement was limited to a $44.1 million revolver with an interest
                rate of
                LIBOR plus 3% with a 6% floor, revolving through March 2006, and
                a $11.0
                million term loan with an interest rate of 8%; as of December 31,
                2005 the
                loan agreement has been terminated)
            
            
            37,039
            
            
            —$11.0
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            9,852
            
            
            —$7.9
                million loan agreement, which contains certain financial covenants,
                due
                March 2007, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (the
                loan
                agreement was limited to a $6.2 million revolver with an interest
                rate of
                Prime plus 3% with a 6% floor, revolving through March 2006, and
                a $1.7
                million term loan with an interest rate of 8%; as of December 31,
                2005 the
                loan agreement has been terminated)
            
            
            5,250
            
            
            —






F-17


******December 31,___********2004**
              
              ******2005**


$1.7
                million term loan with an interest rate of 8%, due in March
                2007
            
            
            1,415
            
            
            —$100.0
                million revolving loan agreement, which contains certain financial
                covenants, revolving through June 2008 and due June 2011, principal
                and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus 1.0%
                (the loan agreement is currently limited to $60 million of
                availability)
            
            
            —
            
            
            53,661$66.4
                million conduit loan, due March 2014, principal and interest payable
                from
                the proceeds obtained on customer notes receivable pledged as collateral
                for the note, at an interest rate of 7.035%
            
            
            50,299
            
            
            37,224$26.3
                million conduit loan, due September 2011, principal and interest
                payable
                from the proceeds obtained on customer notes receivable pledged as
                collateral for the note, at an interest rate of 7.9%
            
            
            —
            
            
            20,839$40.4
                million loan agreement, which contains certain financial covenants,
                due
                March 2009, principal and interest payable from the proceeds obtained
                on
                customer notes receivable pledged as collateral for the note (as
                of
                December 31, 2005 the loan agreement has been terminated)
            
            
            18,689
            
            
            —$50
                million revolving loan agreement, which contains certain financial
                covenants, revolving through and due April 2008, principal and interest
                payable from the proceeds obtained on customer notes receivable pledged
                as
                collateral for the note, at an interest rate of LIBOR plus
                4.25%
            
            
            —
            
            
            28,800$25
                million revolving loan agreement, which contains certain financial
                covenants, revolving through May 2007, due May 2010, principal and
                interest payable from the proceeds obtained on customer notes receivable
                pledged as collateral for the note, at an interest rate of Prime
                plus
                1.5%, with a 6.5% floor
            
            
            —
            
            
            —$70
                million loan agreement, capacity reduced by amounts outstanding under
                the
                $10 million inventory loan agreement and the $9 million supplemental
                revolving loan agreement, which contains certain financial covenants,
                due
                February 2006, principal and interest payable from the proceeds obtained
                on customer notes receivable pledged as collateral for the note,
                at an
                interest rate of LIBOR plus 2.65% with a 6.0% floor (as of December
                31,
                2005 the loan agreement has been terminated)
            
            
            9,080
            
            
            —$9
                million supplemental revolving loan agreement, which contains certain
                financial covenants, due March 2007, principal and interest payable
                from
                the proceeds obtained on customer notes receivable pledged as collateral
                for the note, at an interest rate of LIBOR plus 2.67% with a 6% floor
                (as
                of December 31, 2005 the loan agreement has been
                terminated)
            
            
            5,735
            
            
            —$10
                million revolving loan agreement, which contains certain financial
                covenants, revolving through March 2006, due March 2009, collateralized
                by
                either notes receivable or inventory, interest payable monthly, at
                an
                interest rate of the higher of Prime plus 2% or Federal Funds plus
                4.75%
                with a 6.0% floor (as of December 31, 2005 the loan agreement has
                been
                terminated)
            
            
            10,000
            
            
            —$10
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of LIBOR plus 3.25%
            
            
            10,000
            
            
            10,000$6
                million inventory loan agreement, which contains certain financial
                covenants, revolving through August 2008, due August 2010, interest
                payable monthly, at an interest rate of Prime plus 3% with a 6% floor
            
            
            6,000
            
            
            —$5
                million inventory term loan agreement, which contains certain financial
                covenants, due March 2007, interest payable monthly, at an interest
                rate
                of Prime plus 3% with a 6% floor
            
            
            —
            
            
            3,335$15
                million inventory loan agreement, which contains certain financial
                covenants, revolving through and due April 2008, interest payable
                monthly,
                at an interest rate of Prime plus 3%
            
            
            —
            
            
            15,000$15
                million inventory loan agreement, which contains certain financial
                covenants, revolving through December 2008, due December 2010, interest
                payable monthly, at an interest rate of Prime plus 2%
            
            
            —
            
            
            6,000Various
                notes, due from March 2006 through December 2009, collateralizedby
                various assets with interest rates ranging from 2.95% to
                10.25%
            
            
            7,122
            
            
            2,282Total
                notes payable
            
            
            217,986
            
            
            177,141Capital
                lease obligations
            
            
            324
            
            
            128Total
                notes payable and capital lease obligations
            
            
            218,310
            
            
            177,2698.0%
                senior subordinated notes, due 2010, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            24,671
            
            
            24,6716.0%
                senior subordinated notes, due 2007, interest payable semiannually
                on
                April 1 and October 1, guaranteed by all of the Company’s present and
                future domestic restricted subsidiaries
            
            
            3,796
            
            
            3,796101⁄2%
                senior subordinated notes, subordinate to the 6.0% senior subordinated
                notes above, due 2008, interest payable semiannually on April 1 and
                October 1, guaranteed by all of the Company’s present and future domestic
                restricted subsidiaries
            
            
            2,146
            
            
            2,146Interest
                on the 6.0% senior subordinated notes, due 2007, and the 8.0% senior
                subordinated notes, due 2010, interest payable semiannually through
                October 2007 on April 1 and October 1, guaranteed by all of the Company’s
                present and future domestic restricted subsidiaries
            
            
            4,270
            
            
            2,562Total
                senior subordinated notes
            
            
            34,883
            
            
            33,175Total
            
            $
            253,193
            
            $
            210,444








F-18








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





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.





Such
      credit facilities also contain operating covenants as of December 31, 2005,
      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.





As
      of
      December 31, 2002, we were in compliance with these operating covenants.
      However, due to the results of the quarter ended March 31, 2003, we were not
      in
      compliance with several of the financial covenants in place at that time. In
      November 2003, we entered into agreements with our three senior lenders whereby
      the covenant defaults were waived, and as a result, we were in compliance with
      these operating covenants as of December 31, 2003, and have been in compliance
      with all of our operating covenants since that time. However, such future
      results cannot be assured.





We
      recorded a gain on early extinguishment of debt of $6.4 million during 2003,
      of
      which $5.1 million resulted from the early extinguishment of $7.6 million of
      10
1⁄2% senior subordinated notes due 2008. An additional $1.3 million resulted from
      the early extinguishment of the remaining $8.8 million balance of our $60
      million loan agreement in the first quarter of 2003, which would have been
      due
      in August 2003.





In
      December 2003, we closed a $66.4 million conduit term loan transaction through
      a
      wholly-owned financing subsidiary, Silverleaf Finance II, Inc. ("SF-II"). 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%.





F-19








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 3%. 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.





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, 2004 and 2005, a
      total
      of $38.7 million and $28.3 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, 2004 and 2005, approximately
      $83,000 and $125,000, 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, 2005 (in thousands):





2006
            
            $
            1,0302007
            
            
            10,2382008
            
            
            46,5132009
            
            
            2672010
            
            
            40,672Thereafter
            
            
            111,724Total
            
            $
            210,444





Total
      interest expense and lender fees for the years ended December 31, 2003, 2004,
      and 2005 was $16.6 million, $17.6 million, and $17.3 million, respectively.
      Interest of $279,000, $322,000, and $1.1 million was capitalized to inventory
      during the years ended December 31, 2003, 2004, and 2005,
      respectively.





As
      of
      December 31, 2005, eligible customer notes receivable with a face amount of
      $198.2 million and interval inventory of $34.3 million were pledged as
      collateral.





**9.
      COMMITMENTS AND CONTINGENCIES**





*Holiday
      Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
      al* ,
      Circuit
      Court of Christian County, Missouri. The homeowners’ associations of five
      condominium projects that one of our former subsidiaries constructed in Missouri
      filed two separate actions against us in 1999 and 2000, respectively, alleging
      breach of warranty, construction defects and breach of management agreements.
      These two cases were consolidated. The plaintiffs filed an amended petition
      alleging actual damages in excess of $25,000 and punitive damages. We filed
      a
      counterclaim seeking contractual indemnification under the terms of management
      agreements with each of the plaintiffs. The parties mediated this matter in
      October 2005 and agreed upon the terms of a settlement. Pursuant to the
      terms of the settlement executed by the parties, we agreed to pay to the Holiday
      Hills Condominium Association $1.15 million, of which $1.1 million was paid
      by
      our insurers. The parties agreed to certain other terms, including our deeding
      of two non-timeshare condominium units to the plaintiffs, waiving amenities
      fees
      currently due and owing from the plaintiffs, and making repairs to a parking
      lot
      and other public areas of the condominium development. The settlement agreement
      further provided for each party to execute a general and mutual release of
      all
      claims and for the dismissal of the suit. The suit was dismissed in February
      2006.





F-20








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





We
      are
      currently subject to other 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.





We
      have
      entered into noncancelable operating leases covering office and storage
      facilities and equipment, which will expire at various dates through 2009.
      The
      total rental expense incurred during the years ended December 31, 2003, 2004,
      and 2005 was $2.4 million, $2.3 million, and $2.2 million, respectively. We
      have
      also acquired equipment by entering into capital leases.





The
      following table summarizes our scheduled contractual commitments as of December
      31, 2005 (in thousands):





**2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**Capital
                leases
            
            $
            42
            
            $
            38
            
            $
            32
            
            $
            25
            
            $
            1
            
            $
            —Operating
                leases
            
            
            2,138
            
            
            2,008
            
            
            1,558
            
            
            1,083
            
            
            321
            
            
            —Other
                purchase obligations:Construction
                commitments
            
            
            10,974
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Employment
                agreements
            
            
            1,318
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            14,472
            
            $
            2,046
            
            $
            1,590
            
            $
            1,108
            
            $
            322
            
            $
            —





Capital
      leases include $10,000 of future interest, using an approximate interest rate
      of
      8.1%, which is our weighted average cost of borrowing at December 31, 2005.
      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, 2004
      and
      2005 (in thousands):





**2004**
            
            **2005**Amount
                of equipment under capital leases
            
            $
            5,447
            
            $
            2,643Less
                accumulated depreciation
            
            
            (4,507
            )
            
            (2,408
            )$
            940
            
            $
            235





At
      December 31, 2005, we had notes receivable (including notes unrelated to
      Vacation Intervals) in the approximate principal amount of $230.1 million with
      an allowance for uncollectible notes of approximately $52.5 million.





F-21








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 2003, 2004, and 2005 are summarized as follows:





**2003**
            
            **2004**
            
            **2005****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
            
            
            1,402,000
            
            $
            9.76
            
            
            3,704,979
            
            $
            3.64
            
            
            3,651,647
            
            $
            3.60Granted
            
            
            4,550,958
            
            $
            0.32
            
            
            —
            
            $
            —
            
            
            267,000
            
            $
            1.62Exercised
            
            
            —
            
            $
            —
            
            
            (33,332
            )
            $
            0.32
            
            
            (634,066
            )
            $
            0.32Expired
            
            
            (2,175,479
            )
            $
            0.32
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Forfeited
            
            
            (72,500
            )
            $
            13.24
            
            
            (20,000
            )
            $
            16.74
            
            
            (146,924
            )
            $
            1.33Options
                outstanding, end of year
            
            
            3,704,979
            
            $
            3.64
            
            
            3,651,647
            
            $
            3.60
            
            
            3,137,657
            
            $
            4.20Exercisable,
                end of year
            
            
            990,250
            
            $
            12.69
            
            
            1,953,549
            
            $
            6.45
            
            
            2,356,105
            
            $
            5.34





For
      stock
      options outstanding at December 31, 2005:





**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
            
            
            2.5
            
            
            643,500
            
            $
            16.71$7.31
                - $7.31
            
            
            148,500
            
            
            7.31
            
            
            4.0
            
            
            148,500
            
            
            7.31$3.59
                - $3.69
            
            
            75,000
            
            
            3.64
            
            
            5.0
            
            
            75,000
            
            
            3.64$1.62
                - $1.62
            
            
            267,000
            
            
            1.62
            
            
            10.0
            
            
            —
            
            
            —$0.29
                - $0.32
            
            
            2,003,657
            
            
            0.31
            
            
            7.8
            
            
            1,489,105
            
            
            0.31Total
            
            
            3,137,657
            
            
            
            
            
            
            
            
            2,356,105





We
      have
      adopted the disclosure-only provisions of Statement of Financial Standards
      No.
      123, "Accounting for Stock- Based Compensation" ("SFAS No. 123"). We applied
      the
      accounting methods of Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued To Employees” ("APB No. 25"), and related Interpretations in
      accounting for our stock options. Accordingly, no compensation costs have been
      recognized for stock options. Had compensation costs for the options been
      determined based on the fair value at the grant date for the awards in 2003,
      2004, and 2005 consistent with the provisions of SFAS No. 123, our net income
      (loss) and net income (loss) per share would approximate the pro forma amounts
      indicated below (in thousands, except per share amounts):





**Year
                ended**
              **December
                31,**
              **2003**
            
            **Year
                ended**
              **December
                31,**
              **2004**
            
            **Year
                ended**
              **December
                31,**
              **2005**Net
                income (loss) — as reported
            
            $
            (13,920
            )
            $
            13,759
            
            $
            23,167Net
                income (loss) — pro forma
            
            
            (14,388
            )
            
            13,462
            
            
            22,889Net
                income (loss) per share — as reported: Basic
            
            
            (0.38
            )
            
            0.37
            
            
            0.63Net
                income (loss) per share — as reported: Diluted
            
            
            (0.38
            )
            
            0.35
            
            
            0.59Net
                income (loss) per share — pro forma: Basic
            
            
            (0.39
            )
            
            0.37
            
            
            0.62Net
                income (loss) per share — pro forma: Diluted
            
            
            (0.39
            )
            
            0.35
            
            
            0.59








F-22








The
      fair
      value of the stock options granted during 2003 and 2005 were $0.29 and $1.59,
      respectively. There were no stock options granted during 2004. 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.





**11.
      DISCONTINUED OPERATIONS**





As
      of
      December 31, 2004, the water and utility property assets and liabilities have
      been designated as held for sale. In accordance with the provisions of SFAS
      No.
      144, the results of operations of these properties are included in income from
      discontinued operations. The carrying amounts of the water and utility property
      assets and liabilities are summarized below (in thousands):





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





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 $13.2
      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. If the Purchasers do not receive required approvals
      from Texas regulators relating to the utility assets in Texas (the “Texas
      Assets”) within eighteen months of closing, the Texas Assets will be reconveyed
      to 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 of discontinued operations
      are
      summarized as follows (in thousands):





**Year
                Ended December 31,****2003**
            
            **2004**
            
            **2005**REVENUES:Gain
                on sale of discontinued operations
            
            $
            —
            
            $
            —
            
            $
            879Other
                income
            
            
            2,739
            
            
            2,860
            
            
            438Total
                revenues
            
            
            2,739
            
            
            2,860
            
            
            1,317COSTS
                AND OPERATING EXPENSES:Other
                expense
            
            
            1,184
            
            
            1,376
            
            
            278Depreciation
                and amortization
            
            
            760
            
            
            859
            
            
            —Interest
                expense
            
            
            1
            
            
            1
            
            
            —Total
                costs and operating expenses
            
            
            1,945
            
            
            2,236
            
            
            278Income
                from discontinued operations
            
            
            794
            
            
            624
            
            
            1,039Provision
                for income taxes
            
            
            —
            
            
            —
            
            
            (298
            )Net
                income from discontinued operations
            
            $
            794
            
            $
            624
            
            $
            741








F-23








**12.
      RELATED PARTY TRANSACTIONS**





Each
      timeshare owners’ association has entered into a management agreement, which
      authorizes the Clubs to manage the resorts. The Clubs (except for the Club
      at
      Orlando Breeze) have in turn entered into management agreements 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, 2003, 2004,
      and
      2005, we recorded management fees of $1.5 million, $1.2 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.





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, 2003, 2004, and 2005, we incurred $247,000,
      $252,000, and $266,000, 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, 2003, 2004, and 2005, we charged the Clubs
      $3.3 million, $3.3 million, and $3.3 million, respectively, under these
      agreements.





The
      following schedule represents amounts due from and to affiliates at December
      31,
      2004 and 2005 (in thousands):





**December
                31,****2004**
            
            **2005**Timeshare
                owners associations and other, net
            
            $
            153
            
            $
            511Amount
                due from Silverleaf Club
            
            
            135
            
            
            169Total
                amounts due from affiliates
            
            $
            288
            
            $
            680Amount
                due to special purpose entities
            
            $
            929
            
            $
            544Total
                amounts due to affiliates
            
            $
            929
            
            $
            544





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, 2004 and 2005, 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 2000, the affiliate was paid $49,637 under this agreement. During
      2001, we sold additional parcels of this land and accrued a liability of $10,614
      to the affiliate, which was paid in the first quarter of 2003. As of December
      31, 2005, we own approximately 11 acres of land that is subject to this net
      profits interest.





F-24








Prior
      to
      2003, we held ownership interests and other rights in several tracts of mostly
      flood plain land, which were unsuitable for residential or commercial
      development (“flood plain land”). These tracts are adjacent to our Holly Lake
      Ranch resort in Texas. In 1997, we entered into a ten-year hunting lease with
      Mr. Mead, who is a principal shareholder, officer and director of the Company.
      The hunting lease granted Mr. Mead the exclusive right to use for hunting
      purposes certain parts of the flood plain land for an annual payment equal
      to
      the property taxes attributable to the land. The lease also provided for up
      to
      four additional ten-year extensions of its term. The flood plain land is also
      partially encumbered by recreational use agreements in favor of certain
      surrounding homeowners and agreements with an unrelated third party governmental
      entity, the Sabine River Authority ("SRA"). We do not possess any of the mineral
      rights associated with this land. As a 2003 bonus to Mr. Mead, the Compensation
      Committee approved assigning to him the approximately 449 acres of this flood
      plain land actually owned by the Company. We also agreed to quitclaim to Mr.
      Mead all of our rights, including reversionary rights from the SRA, in two
      other
      tracts of flood plain land of approximately 619 and 466 acres each, which are
      owned by the SRA but currently held by the Company and a homeowner's association
      under a long term ground lease. If the SRA ever abandons its plans to create
      a
      reservoir involving these two tracts or fails to pay a prior owner for the
      tracts by December 31, 2009, title to these tracts will revert to Mr. Mead
      as a
      result of our quitclaim to him. 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 it 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 the Company 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.





**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.





We
      had
      senior subordinated notes of $34.9 million and $33.2 million as of December
      31,
      2004 and 2005, respectively. The estimated fair value of these senior
      subordinated notes at December 31, 2004 and 2005 was approximately $21.9 million
      and $20.8 **** 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/or estimation methodologies may have a
      material effect on the estimated fair value amounts.





**14.
      SUBSIDIARY GUARANTEES**





All
      subsidiaries of the Company, except SF-I, SF-II, and SF-III have guaranteed
      the
      $33.2 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, 2003,
      2004, and 2005. Combined summarized balance sheet information of the Guarantor
      Subsidiaries as of December 31, 2004 and 2005, is as follows (in
      thousands):





**December
                31,****2004**
            
            **2005**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, 2003, 2004,
      and
      2005.








F-25





**16.
      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**





Selected
      quarterly financial data for 2004 and 2005 is set forth below (in thousands,
      except per share amounts):




**First**
            
            **Second**
            
            **Third**
            
            **Fourth****Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**Total
                revenues2005
            
            $
            42,080
            
            $
            49,355
            
            $
            62,305
            
            $
            48,1682004
            
            $
            42,477
            
            $
            48,172
            
            $
            47,771
            
            $
            45,257Total
                costs and operating expenses2005
            
            $
            39,088
            
            $
            42,839
            
            $
            44,749
            
            $
            43,0822004
            
            $
            40,265
            
            $
            45,255
            
            $
            43,953
            
            $
            41,046Net
                income from continuing operations2005
            
            $
            2,394
            
            $
            4,231
            
            $
            12,250
            
            $
            3,5502004
            
            $
            2,215
            
            $
            2,892
            
            $
            3,818
            
            $
            4,211Income
                from discontinued operations2005
            
            $
            128
            
            $
            —
            
            $
            613
            
            $
            —2004
            
            $
            129
            
            $
            160
            
            $
            214
            
            $
            121Net
                income2005
            
            $
            2,522
            
            $
            4,231
            
            $
            12,863
            
            $
            3,5502004
            
            $
            2,344
            
            $
            3,052
            
            $
            4,032
            
            $
            4,332Net
                income per common share from continuing operations: basic2005
            
            $
            0.07
            
            $
            0.11
            
            $
            0.33
            
            $
            0.102004
            
            $
            0.06
            
            $
            0.07
            
            $
            0.10
            
            $
            0.12Income
                per common share from discontinued operations: basic2005
            
            $
            0.00
            
            $
            0.00
            
            $
            0.02
            
            $
            0.002004
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.00Net
                income per common share: basic2005
            
            $
            0.07
            
            $
            0.11
            
            $
            0.35
            
            $
            0.102004
            
            $
            0.06
            
            $
            0.08
            
            $
            0.11
            
            $
            0.12Net
                income per common share from continuing operations: diluted2005
            
            $
            0.06
            
            $
            0.11
            
            $
            0.31
            
            $
            0.092004
            
            $
            0.06
            
            $
            0.07
            
            $
            0.09
            
            $
            0.11Net
                income per common share from discontinued operations:
                diluted2005
            
            $
            0.00
            
            $
            0.00
            
            $
            0.02
            
            $
            0.002004
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.00Net
                income per common share: diluted2005
            
            $
            0.06
            
            $
            0.11
            
            $
            0.33
            
            $
            0.092004
            
            $
            0.06
            
            $
            0.08
            
            $
            0.10
            
            $
            0.11





Net
      income increased to $12.9 million during the third quarter of 2005 versus $4.0
      million for the same period of 2004, primarily due to a $5.8 million increase
      in
      gain on sales of notes receivable in regard to our transaction with SF-III
      during the third quarter of 2005, and to a lesser extent, a $3.7 million
      increase in other income due to a $3.6 million gain on the sale of land during
      the third quarter of 2005.





**17.
      SUBSEQUENT EVENTS**





In
      January 2006, we purchased approximately 30 acres of undeveloped land contiguous
      to our Orlando Breeze resort in 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 for timeshare
      operations.





In
      January 2006, we sold approximately 4 acres of land in Mississippi for
      approximately $733,000, which resulted in a pretax gain of approximately
      $400,000.





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











F-26