SILVERLEAF RESORTS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

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

For the transition period from _____________ to _____________

Commission file number: 001-13003

SILVERLEAF RESORTS, INC.
(Exact name of registrant as specified in its charter)

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

1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)

214-631-1166
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Number of shares of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of August 13, 2003: 36,826,906

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EXPLANATORY NOTE

CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION
TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS
QUALIFIED BY THE WORDS "BELIEVE," "INTEND," "ANTICIPATE," "EXPECTS," AND WORDS
OF SIMILAR IMPORT, ARE "FORWARD-LOOKING STATEMENTS" AND ARE THUS PROSPECTIVE.
THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY REGARDING THE
COMPANY'S FUTURE PROFITABILITY, PROSPECTS, AND RESULTS OF OPERATIONS. ALL SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS,
UNCERTAINTIES, AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "CAUTIONARY
STATEMENTS" BEGINNING ON PAGE 20 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 2002. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS
OF THE DATE OF THIS REPORT ON FORM 10-Q AND THE COMPANY ASSUMES NO OBLIGATION TO
UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS WHY ACTUAL
RESULTS COULD DIFFER FROM THE PROJECTIONS IN THE FORWARD-LOOKING STATEMENTS.

1

SILVERLEAF RESORTS, INC.

INDEX

Page
----

PART I. FINANCIAL INFORMATION (Unaudited)

Item 1. Condensed Consolidated Statements of Income for the three months
and six months ended June 30, 2003 and 2002......................... 3

Condensed Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002................................................... 4

Condensed Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 2003...................................... 5

Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002................................. 6

Notes to the Condensed Consolidated Financial Statements............ 7

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 16

Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 24

Item 4. Controls and Procedures............................................. 25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................... 25

Item 5. Other Information................................................... 26

Item 6. Exhibits and Reports on Form 8-K.................................... 27

Signatures.......................................................... 28

2

PART I: FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------

REVENUES:
Vacation Interval sales $ 32,480 $ 30,148 $ 61,037 $ 59,587
Sampler sales 401 875 886 2,198
-------------- -------------- -------------- --------------
Total sales 32,881 31,023 61,923 61,785

Interest income 8,650 9,182 17,418 19,567
Management fee income 476 783 947 948
Other income 1,463 1,280 2,670 2,051
-------------- -------------- -------------- --------------

Total revenues 43,470 42,268 82,958 84,351

COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 5,618 5,485 10,661 11,005
Sales and marketing 17,104 16,793 33,402 32,548
Provision for uncollectible notes 6,495 6,028 41,161 11,916
Operating, general and administrative 7,018 8,819 13,909 17,602
Depreciation and amortization 1,163 1,281 2,345 2,549
Interest expense and lender fees 4,221 6,114 8,628 13,082
-------------- -------------- -------------- --------------

Total costs and operating expenses 41,619 44,520 110,106 88,702

OTHER INCOME:
Gain on sale of notes receivable 898 4,484 2,832 4,484
Gain on early extinguishment of debt - 17,885 1,257 17,885
-------------- -------------- -------------- --------------

Total other income 898 22,369 4,089 22,369

Income (loss) before provision for income taxes 2,749 20,117 (23,059) 18,018
Provision for income taxes (59) (40) (72) (41)
-------------- -------------- -------------- --------------

NET INCOME (LOSS) $ 2,690 $ 20,077 $ (23,131) $ 17,977
============== ============== ============== ==============

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: $ 0.07 $ 0.71 $ (0.63) $ 0.87
============== ============== ============== ==============

WEIGHTED AVERAGE BASIC SHARES OUTSTANDING: 36,826,906 28,409,327 36,826,906 20,692,245
============== ============== ============== ==============

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING: 37,143,564 28,445,156 36,826,906 20,692,245
============== ============== ============== ==============

See notes to condensed consolidated financial statements.

3

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

June 30, December 31,
2003 2002
------------ ------------

ASSETS

Cash and cash equivalents $ 4,902 $ 1,153
Restricted cash 1,540 3,624
Notes receivable, net of allowance for uncollectible notes of
$51,887 and $28,547, respectively 183,767 233,237
Accrued interest receivable 2,076 2,325
Investment in Special Purpose Entity 6,820 6,656
Amounts due from affiliates 776 750
Inventories 103,923 102,505
Land, equipment, buildings, and utilities, net 32,025 33,778
Land held for sale 1,956 4,545
Prepaid and other assets 10,517 9,672
------------ ------------

TOTAL ASSETS $ 348,302 $ 398,245
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Accounts payable and accrued expenses $ 7,480 $ 7,394
Accrued interest payable 1,271 1,269
Amounts due to affiliates 1,954 2,221
Unearned revenues 3,899 3,410
Notes payable and capital lease obligations 210,145 236,413
Senior subordinated notes 45,065 45,919
------------ ------------

Total Liabilities 269,814 296,626
------------ ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 37,249,006 shares issued, and
36,826,906 shares outstanding 372 372
Additional paid-in capital 116,999 116,999
Retained deficit (33,884) (10,753)
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
------------ ------------

Total Shareholders' Equity 78,488 101,619
------------ ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 348,302 $ 398,245
============ ============

See notes to condensed consolidated financial statements.

4

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

Common Stock
---------------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ------------------------
Issued Value Capital Deficit Shares Cost Total
------------ ------------ ------------ ------------ -------- ----------- -----------

January 1, 2003 37,249,006 $ 372 $ 116,999 $ (10,753) (422,100) $ (4,999) $ 101,619

Net loss - - - (23,131) - - (23,131)
------------ ------------ ------------ ------------ -------- ----------- -----------

June 30, 2003 37,249,006 $ 372 $ 116,999 $ (33,884) (422,100) $ (4,999) $ 78,488
============ ============ ============ ============ ======== =========== ===========

See notes to condensed consolidated financial statements.

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

Six Months Ended
June 30,
-----------------------------
2003 2002
------------ ------------

OPERATING ACTIVITIES:
Net income (loss) $ (23,131) $ 17,977
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for uncollectible notes 41,161 11,916
Gain on sale of notes receivable (2,832) (4,484)
Gain on early extinguishment of debt (1,257) (17,885)
Gain on sale of land held for sale (273) -
Depreciation and amortization 2,345 2,549
Increase (decrease) in cash from changes in assets and liabilities:
Restricted cash 2,084 1,624
Notes receivable (15,726) (12,810)
Accrued interest receivable 249 383
Investment in Special Purpose Entity (164) (4,482)
Amounts due to/from affiliates, net (293) 1,259
Inventories (3,386) 1,703
Prepaid and other assets (845) (1,150)
Accounts payable and accrued expenses 86 (2,769)
Accrued interest payable 2 1,141
Unearned revenues 489 (1,108)
------------ ------------
Net cash used in operating activities (1,491) (6,136)
------------ ------------

INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (592) (832)
Proceeds from sale of land held for sale 2,862 -
------------ ------------
Net cash provided by (used in) investing activities 2,270 (832)
------------ ------------

FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 45,415 45,374
Payments on borrowings to unaffiliated entities (71,280) (90,464)
Proceeds from sales of notes receivable 28,835 48,389
------------ ------------
Net cash provided by financing activities 2,970 3,299
------------ ------------

Net change in cash and cash equivalents 3,749 (3,669)

CASH AND CASH EQUIVALENTS:
Beginning of period 1,153 6,204
------------ ------------

End of period $ 4,902 $ 2,535
============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 8,006 $ 9,794

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock $ - $ 7,899
Issuance of senior subordinated debt $ - $ 28,467
Retirement of senior subordinated debt $ - $ 56,934

See notes to condensed consolidated financial statements.

6

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BACKGROUND

These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries (the "Company") presented herein do not include certain
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.

These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the
Company's Form 10-K/A for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission. The accounting policies used in preparing
these condensed consolidated financial statements are the same as those
described in such Form 10-K/A.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES SUMMARY

Principles of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, excluding the
Company's special purpose entity ("SPE"). 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. The Company recognizes the sale of
a Vacation Interval under the accrual method after a binding sales contract has
been executed, the buyer has made a down payment of at least 10%, and the
statutory rescission period has expired. If all accrual method criteria are met
except that construction is not substantially complete, revenues are recognized
on the percentage-of-completion basis. Under this method, the portion of revenue
applicable to costs incurred, as compared to total estimated construction and
direct selling costs, is recognized in the period of sale. The remaining amount
is deferred and recognized as the remaining costs are incurred. The deferral of
sales and costs related to the percentage-of-completion method is not
significant.

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

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

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

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

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

The Company receives fees for management services provided to the Clubs. These
revenues are recognized on an

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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 Entity -- The Company is party to a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
an off-balance-sheet SPE. Sales of notes receivable from the Company to its SPE
that meet certain underwriting criteria occur on a periodic basis. The SPE funds
these purchases through advances under a credit agreement arranged for this
purpose. The gain or loss on the sale is determined based on the proceeds
received, the fair value assigned to the investment in SPE, and the recorded
value of notes receivable sold. The fair value of the investment in the SPE is
estimated based on the present value of future expected cash flows back to the
Company from the notes receivable sold. The Company utilized the following key
assumptions to estimate the fair value of such cash flows: customer prepayment
rate - 4.3%; expected accounts paid in full as a result of upgrades - 6.2%;
expected credit losses - 8.1%; discount rate - 19%; base interest rate - 4.4%;
agent fee - 2%; and loan servicing fees - 1%. The Company's assumptions are
based on experience with its notes receivable portfolio, available market data,
estimated prepayments, the cost of servicing, and net transaction costs. Such
assumptions are assessed quarterly and, if necessary, adjustments are made to
the carrying value of the investment in SPE. The carrying value of the
investment in SPE represents the Company's maximum exposure to loss regarding
its involvement with the SPE.

Provision for Uncollectible Notes -- Such provision is recorded at an amount
sufficient to maintain the allowance for uncollectible notes at a level
management considers adequate to provide for anticipated losses resulting from
customers' failure to fulfill their obligations under the terms of their notes.
Such allowance for uncollectible notes is adjusted based upon periodic analysis
of the notes receivable portfolio, historical credit loss experience, and
current economic factors. Credit losses take three forms. The first is the full
cancellation of the note, whereby the customer is relieved of the obligation and
the Company recovers the underlying inventory. The second form is a deemed
cancellation, whereby the Company records the cancellation of all notes that
become 90 days delinquent, net of notes that are no longer 90 days delinquent.
The third form is the note receivable reduction that occurs when a customer
trades a higher value product for a lower value product. In estimating the
allowance, the Company projects future cancellations, net of recovery of the
related inventory, for each sales year by using historical cancellations
experience.

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

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

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

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The Company estimates the total cost to complete all amenities at each resort.
This cost includes both costs incurred to date and expected costs to be
incurred. The Company allocates the estimated total amenities cost to cost of
Vacation Interval sales based on Vacation Intervals sold in a given period as a
percentage of total Vacation Intervals expected to sell over the life of a
particular resort project.

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

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

Prepaid and Other Assets -- Prepaid and other assets consists primarily of
prepaid insurance, prepaid postage, intangibles, commitment fees, debt issuance
costs, novelty inventories, deposits, and miscellaneous receivables. Commitment
fees and debt issuance costs are amortized over the life of the related debt.
Intangibles are amortized over their useful lives, which do not exceed ten
years.

Income Taxes -- Deferred income taxes are recorded for temporary differences
between the bases of assets and liabilities as recognized by tax laws and their
carrying value as reported in the 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.

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.

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, the 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 and the future sales
plan used to allocate certain inventories to cost of sales.

Recent Accounting Pronouncements--

SFAS No. 146 - In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. The adoption of SFAS No.
146 in the first quarter of 2003 did not have any immediate effect on the
Company's results of operations, financial position, or cash flows.

FIN No. 45 - In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 requires that a guarantor recognize a liability for certain
guarantees and enhance disclosures for such guarantees. The recognition
provisions of FIN No. 45 are applicable on

9

a prospective basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN No. 45 are effective for financial statements
for periods ending after December 15, 2002. The adoption of FIN No. 45 did not
have a material impact on the Company's results of operations, financial
position, or cash flows.

FIN No. 46 - In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires existing unconsolidated variable interest entities, as
defined, to be consolidated by their primary beneficiaries if the variable
interest entities do not effectively disperse risks among parties involved. FIN
No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. FIN No. 46 applies to financial statements
beginning after June 15, 2003, related to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not expect the adoption of FIN No. 46 will have a material
impact on its results of operations, financial position, or cash flows.

SFAS No. 149 - In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 is
not expected to have a material impact on the Company's results of operations,
financial position, or cash flows.

SFAS No. 150 - In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of these financial instruments were classified as
equity. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period after June 15, 2003. The adoption of SFAS No. 150 is not
expected to have a material impact on the Company's results of operations,
financial position, or cash flows.

NOTE 3 - DEBT RESTRUCTURING

While the Company announced the completion of its restructuring and refinancing
transactions on May 2, 2002, the Company's ability to continue as a going
concern is dependent on other factors as well, including improving the Company's
operations. Among other aspects of these revised arrangements, the Company will
be required to operate within certain parameters of a revised business model and
satisfy the financial covenants set forth in the Amended Senior Credit
Facilities, including maintaining a minimum tangible net worth of $100 million
or greater, as defined, sales and marketing expenses as a percentage of sales
below 52.5%, notes receivable delinquency rate below 25%, a minimum interest
coverage ratio of 1.25 to 1.0, and a minimum net income. However, such results
cannot be assured.

Due to the results of the quarter ended March 31, 2003, the Company is not in
compliance with three of the financial covenants described above. First, sales
and marketing expense for the quarter ended March 31, 2003 was 56.1% of sales,
compared to a maximum threshold of 52.5%. Second, the interest coverage ratio
for the twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a
minimum requirement of 1.25 to 1.0. And third, net loss for the two consecutive
quarters ended March 31, 2003 was $24.9 million, compared to a minimum
requirement of $1.00 net income. Also, due to the results for the six months
ended June 30, 2003, the Company is in default of two of the financial covenants
described above. First, the interest coverage ratio for the twelve months ended
June 30, 2003 was 0.13 to 1.0, compared to a minimum requirement of 1.25 to 1.0.
Second, net loss for the two consecutive quarters ended June 30, 2003 was $23.1
million, compared to a minimum requirement of $1.00 net income. Management
notified its secured lenders that it was not in compliance with the financial
covenants, and has begun discussions regarding waivers of the defaults and/or
modifications to loan agreements, which would bring the Company back into
compliance. As of August 13, 2003, the secured lenders have not waived the
covenant defaults but have continued to fund and have not declared a default.
Management is attempting to negotiate waivers and or modifications of its loan
agreements, however, it cannot give any assurances that it will be successful in
these negotiations. Although the Company believes that it will receive relief
from its lenders and that its lenders will continue to fund the Company's
operations until negotiations can be completed, there can be no assurance that
the Company's lenders will continue to fund its operations. A refusal by its
lenders to continue funding will have a material and adverse effect on the
Company's operations.

10

Due to uncertainties similar to those mentioned above, including a history of
losses and negative operating cash flows in 2000, 2001, and 2002, the
independent auditors report on the Company's financial statements for the period
ended December 31, 2002 contains an explanatory paragraph concerning the
Company's ability to continue as a going concern.

As a result of the loss for the quarter ended March 31, 2003, the Company's SPE
was in default of financial covenants with its lender. The lender has
subsequently waived the defaults as of March 31, 2003 and modified its agreement
with the SPE whereby there were no defaults for the quarter ended June 30, 2003.

If the Company is able to resolve the existing covenant compliance issues,
future compliance with these covenants will require that improvements be made in
two significant aspects of the Company's operations. They are to reduce sales
and marketing expense as a percentage of sales and to improve customer credit
quality, which the Company believes will result in reduced credit losses. The
Company has already implemented changes in its sales and marketing operations,
which resulted in compliance with the sales and marketing ratio covenant for the
quarter ended June 30, 2003. However, there is no assurance that the Company
will remain in compliance with the sales and marketing expense ratio covenant in
future periods. The Company has also implemented changes in its sales policies,
which resulted in improved customer credit quality for customers purchasing
Vacation Intervals in 2003, as compared to customers who purchased in 2002 and
before. Management believes that soliciting customers with this level of credit
quality will result in compliance with the interest coverage and minimum net
income covenants. However, there is no assurance that the Company will remain in
compliance with these two covenants as well.

Management believes that if the improvements to its operations are successful,
the Company will be able to improve its operating results to achieve compliance
with the financial covenants during the term of the Amended Senior Credit
Facilities. However, the Company's plan to utilize certain of its assets,
predominantly inventory, extends for periods of up to fifteen years.
Accordingly, the Company will need to either extend the Amended Senior Credit
Facilities or obtain new sources of financing through the issuance of other
debt, equity, or collateralized mortgage-backed securities, the proceeds of
which would be used to refinance the debt under the Amended Senior Credit
Facilities, finance mortgages receivable, or for other purposes. The Company may
not have these additional sources of financing available to it at the times when
such financings are necessary.

NOTE 4 - EARNINGS PER SHARE

The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three and six months ended June 30,
2003 and 2002:

Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------

Weighted average shares outstanding - basic 36,826,906 28,409,327 36,826,906 20,692,245
Issuance of shares from stock options exercisable 2,540,863 230,000 - -
Repurchase of shares from stock options proceeds (2,224,205) (194,171) - -
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 37,143,564 28,445,156 36,826,906 20,692,245
---------- ---------- ---------- ----------

For the six months ended June 30, 2003 and 2002, the weighted average shares
outstanding assuming dilution was non-dilutive. Outstanding stock options
totaling 3,745,479 and 1,403,000 at June 30, 2003 and 2002, respectively, were
excluded from the computation of diluted earnings per share for these periods
because including such stock options would have been non-dilutive.

NOTE 5 - NOTES RECEIVABLE

The Company provides financing to the purchasers of Vacation Intervals, which
are collateralized by their interest in such Vacation Intervals. The notes
receivable generally have initial terms of seven to ten years. The average yield
on outstanding notes receivable at June 30, 2003 was approximately 14.7%. In
connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$1.3 million and $1.4 million at June 30, 2003 and 2002, respectively, and are
non-interest bearing.

11

The activity in gross notes receivable is as follows for the three and six-month
periods ended June 30, 2003 and 2002 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------

Balance, beginning of period..................... $240,002 $325,275 $261,784 $333,336
Sales............................................ 26,738 27,973 49,998 52,886
Collections...................................... (15,493) (14,767) (28,730) (34,171)
Receivables charged off.......................... (4,107) (3,722) (12,298) (17,292)
Sold notes receivable............................ (11,486) (58,618) (35,100) (58,618)
-------- -------- -------- --------
Balance, end of period........................... $235,654 $276,141 $235,654 $276,141
======== ======== ======== ========

The Company considers accounts over 60 days past due to be delinquent. As of
June 30, 2003, $1.6 million of notes receivable, net of accounts charged off,
were considered delinquent. An additional $51.0 million of notes, approximately
22% of total gross notes receivable, would have been considered to be delinquent
had the Company not granted payment concessions to the customers at some point
since the inception of these notes. The activity in the allowance for
uncollectible notes is as follows for the three and six months ended June 30,
2003 and 2002 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------

Balance, beginning of period..................... $ 51,303 $ 47,062 $ 28,547 $ 54,744
Provision for credit losses...................... 6,495 6,028 41,161 11,916
Receivables charged off.......................... (4,107) (3,722) (12,298) (17,292)
Allowance related to notes sold.................. (1,804) (9,864) (5,523) (9,864)
-------- -------- -------- --------
Balance, end of period........................... $ 51,887 $ 39,504 $ 51,887 $ 39,504
======== ======== ======== ========

During the six months ended June 30, 2003, the Company sold $35.1 million of
notes receivable and recognized pre-tax gains of $2.8 million. The SPE funded
these purchases through advances under a credit agreement arranged for this
purpose. In connection with these sales, the Company received cash consideration
of $28.8 million, which was used to pay down borrowings under its revolving loan
facilities.

NOTE 6 - DEBT

Notes payable, capital lease obligations, and senior subordinated notes as of
June 30, 2003 and December 31, 2002 (in thousands):

JUNE 30, DECEMBER 31,
2003 2002
------------ ------------

$60 million loan agreement, which contains certain financial covenants, due
August 2003, 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 3.55% (additional draws are no longer available under
this facility)................................................................. $ -- $ 9,836
$70 million loan agreement, capacity reduced by amounts outstanding under the
$10 million inventory loan agreement, which contains certain financial
covenants, due August 2004, 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% (additional draws are no longer
available under this facility)................................................. 21,188 25,549
$10 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% (advances under this facility
are limited to $9 million)..................................................... 7,300 8,536
$56.9 million 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 3% with a 6% floor (maximum advances under
this facility are limited to the difference between $63.9 million and the
outstanding balance under the $15.1 million term loan described below)......... 43,144 46,078
$15.1 million term loan, 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
8%............................................................................. 14,287 14,665
$56.1 million 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 3% with a 6% floor (maximum advances under
this facility are limited to the difference between $63.0 million and the
outstanding balance under the $14.9 million term loan described below)......... 42,157 44,288

12

$14.9 million term loan, 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
8%............................................................................. 14,089 14,461
$8.1 million 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 Prime plus 3% with a 6% floor (maximum advances under
this facility are limited to the difference between $9.1 million and the
outstanding balance under the $2.1 million term loan described below).......... 5,914 6,493
$2.1 million term loan, 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
8%............................................................................. 2,024 2,078
$38 million 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 Federal Funds plus 2.75% with a 6% floor................... 28,964 31,128
$10 million term loan, 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
8%............................................................................. 8,225 9,465
$10 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest rate of
LIBOR plus 3.50%............................................................... 9,696 9,936
$10 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest rate of
LIBOR plus 3.25%............................................................... 9,375 9,375

Various notes, due from January 2003 through February 2009, collateralized by
various assets with interest rates ranging from 0.9% to 12.0%.................. 1,826 2,035
------------ ------------
Total notes payable..................................................... 208,189 233,923
Capital lease obligations......................................................... 1,956 2,490
------------ ------------
Total notes payable and capital lease obligations....................... 210,145 236,413
6.0% 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............................................... 28,467 28,467
10 1/2% 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................................................................... 9,766 9,766
Interest on the 6.0% 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............................ 6,832 7,686
------------ ------------

Total senior subordinated notes......................................... 45,065 45,919
------------ ------------

Total................................................................... $ 255,210 $ 282,332
============ ============

At June 30, 2003, LIBOR rates were from 1.28% to 1.34%, and the Prime rate was
4.25%. At December 31, 2002, LIBOR rates were from 1.76% to 1.82%, and the Prime
rate was 4.25%.

In March 2003, the Company paid off the remaining $8.8 million balance of its
$60 million loan agreement, due August 2003, and recognized a $1.3 million gain
on early extinguishment of debt.

The Company is not in compliance with certain financial covenants due to the
results of the quarter ended March 31, 2003. See Note 3 for a description of
these covenant issues.

NOTE 7 - SUBSIDIARY GUARANTEES

As of June 30, 2003, all subsidiaries of the Company, except the SPE, have
guaranteed the $45.1 million of senior subordinated notes. Separate financial
statements and other disclosures concerning each guaranteeing subsidiary (each,
a "Guarantor Subsidiary") are not presented herein because the guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several, and each
Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together
comprise all direct and indirect subsidiaries of the Company.

The Guarantor Subsidiaries had no operations for the six months ended June 30,
2003 and 2002. Combined summarized balance sheet information as of June 30, 2003
for the Guarantor Subsidiaries is as follows (in thousands):

June 30,
2003
--------

Other assets $ 1
--------
Total assets $ 1
========
Investment by parent (include equity
and amounts due to parent) $ 1
--------
Total liabilities and equity $ 1

13

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
al, Circuit Court of Christian County, Missouri. The homeowners' associations of
three condominium projects that a former subsidiary of the Company constructed
in Missouri filed separate actions of unspecified amounts against the Company
alleging construction defects and breach of management agreements. This
litigation has been ongoing for several years. Discovery continued in the
lawsuit during the period ended June 30, 2003, but is still far from complete.
Among other things, the plaintiffs have not yet turned over the reports of their
expert witnesses and the Company is unclear as to exactly what damages are being
claimed by the Plaintiffs. At this time, a majority of the Company's legal fees
and costs of litigation are being paid by two insurance carriers, subject to a
reservation of rights by these insurers. Since the Company does not know what
damages are being claimed, and cannot predict the final outcome of these claims,
it cannot estimate the additional costs it could incur, or whether its insurance
carriers will continue to cover its costs in connection with these claims.

Bennett et. al. v. Silverleaf Resorts, Inc., District Court, 22nd Judicial
District, Comal County, Texas. A purported class action was filed against the
Company on October 19, 2001, by Plaintiffs who each purchased Vacation Intervals
from the Company. The Plaintiffs alleged that the Company violated the Texas
Deceptive Trade Practices Act and the Texas Timeshare Act by failing to deliver
to them complete copies of the contracts for the purchase of the Vacation
Intervals as they did not receive a complete legal description of the Hill
Country Resort as attached to the Declaration of Restrictions, Covenants, and
Conditions of the Resort. The Plaintiffs also claimed that the Company violated
various provisions of the Texas Deceptive Trade Practices Act with respect to
the maintenance fees charged by the Company to its Vacation Interval owners. In
November 2002, the Court denied the Plaintiffs' request for class certification.
In March 2003, additional Plaintiffs joined the case, and a Fourth Amended
Petition was filed against the Company and Silverleaf Club alleging additional
violations of the Texas Deceptive Trade Practices Act, breach of fiduciary duty,
negligent misrepresentation, and fraud. The class allegations were also deleted
from the amended Petition. In their Fourth Amended Petition, the Plaintiffs
sought damages in the amount of $1.5 million, plus reasonable attorneys fees and
court costs. The Plaintiffs also sought rescission of their original purchase
contracts with the Company. The Company, Silverleaf Club, and the Plaintiffs
have agreed to a mediated settlement of Plaintiffs' claims and have executed a
definitive settlement agreement. Under the terms of the settlement, the Company
and Silverleaf Club paid the Plaintiffs an aggregate sum of $130,000, and the
Plaintiffs conveyed their Vacation Intervals back to the Company and dismissed
the action against the Company and Silverleaf Club with prejudice.

Huizar et al v. Silverleaf Resorts, Inc., District Court, 73rd Judicial
District, Bexar County, Texas. A further purported class action was filed
against the Company on February 26, 2002, by a couple who purchased a Vacation
Interval from the Company. The Plaintiffs alleged that the Company violated the
Texas Government Code by charging a document preparation fee in regard to
instruments affecting title to real estate. Alternatively, the Plaintiffs
alleged that the $275 document preparation fee constituted a partial prepayment
that should have been credited against their note and sought a declaratory
judgment. The petition asserted Texas class action allegations and sought
recovery of the document preparation fee and treble damages on behalf of both
the Plaintiffs and the alleged class they purported to represent, and an
injunctive relief preventing the Company from engaging in the unauthorized
practice of law in connection with the sale of its Vacation Intervals in Texas.
The Company and the Plaintiffs have executed a Stipulation and Agreement of
Compromise ("Settlement"), which has been preliminarily approved by the court.
The court has also certified the class for settlement purposes. The court will
hold a fairness hearing in September 2003 to determine if the Settlement is a
fair, reasonable, and adequate settlement of the class claims. In accordance
with the Settlement, the Company will refund all amounts paid by the named
Plaintiffs who will convey their Vacation Interval back to the Company.
Additionally, the Company will issue to each timeshare owner who is a member of
the class a $275 certificate, which can be used for an upgrade, as a credit on
the purchase of an additional Vacation Interval, or for a limited stay at one of
the Company's resorts. The Company estimates that there are approximately 16,400
members of the class. The Settlement also provides for payment of the named
Plaintiffs' attorney fees in the amount of $400,000, plus expenses. Upon the
entry of the final order by the court that the Settlement is fair, the Company
will be released from all liability with respect to the settled claims, and the
action will be dismissed by the named Plaintiffs and the class with prejudice.

In January 2003, a group of eight related individuals and entities who were then
holders of certain of the Company's 10 1/2% senior subordinated notes due 2008
(the "10 1/2% Notes") made oral claims against the Company and a number of its
present and former officers and directors concerning the claimants' open market
purchases of 10 1/2% Notes during 2000 and 2001. The 10 1/2% Notes were
allegedly purchased by the eight claimants for an aggregate purchase price of

14

$3.7 million. One of the eight claimants previously owned common stock in the
Company acquired between 1998 and 2000 and also made claims against the Company
with regard to approximately $598,000 in losses allegedly suffered in connection
with open market purchases and sales of the Company's common stock. In February
2003, these eight claimants, the Company, and certain of its former officers and
directors entered into a tolling agreement for the purposes of preserving the
claimants' rights during the term of the agreement by tolling applicable
statutes of limitations while negotiations between the claimants and the Company
take place. The 10 1/2% Notes were not in default and the Company denied all
liability with regard to the alleged claims of these eight claimants. No
litigation was filed against the Company or any of its affiliates by these eight
claimants; however, on February 27, 2003, these eight claimants did file suit in
state district court in Dallas, Texas, against the Company's former auditors,
Deloitte & Touche, LLP, alleging violation by Deloitte & Touche of the Texas
Securities Act, common law fraud, negligent misrepresentation, fraud in a stock
transaction, and accounting malpractice. The claims against Deloitte & Touche
arise from the same purchases of the Company's 10 1/2% Notes and common stock
that formed the basis for the tolling agreement. In order to resolve this issue
with these eight claimants, the Company agreed on June 16, 2003 to rescind the
purchases of the 10 1/2% Notes held by the claimants. Under the terms of the
settlement, which was closed on July 10, 2003, the Company acquired all the 10
1/2% Notes held by the eight claimants. Additionally, the Company received a
full and complete release of any claims which the eight claimants alleged to
hold against the Company, or any of its present or former officers, directors,
or affiliates, regarding purchases of the 10 1/2% Notes or common stock of the
Company. Additionally, the eight claimants agreed to release their alleged
claims against Deloitte & Touche and to dismiss with prejudice the
above-described lawsuit which the eight claimants filed against Deloitte &
Touche in February 2003. On July 23, 2003, the Company cancelled all the 10 1/2%
Notes acquired from these eight claimants. The face amount of the cancelled 10
1/2% Notes was $7,620,000. The Company paid a cash settlement to the claimants
of $2,393,383, which resulted in a one-time gain to the Company of approximately
$5.1 million for early extinguishment of debt. This gain will be recognized by
the Company in its quarter ending September 30, 2003. As a part of the
settlement, the Company also agreed to pay $75,000 towards the eight claimants'
legal fees.

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

During 2001, Silverleaf Club entered into a loan agreement for $1.8 million,
whereby the Company guaranteed such debt with certain of its aircraft or related
sales proceeds. As of June 30, 2003, Silverleaf Club's related note payable
balance was $1.2 million.

NOTE 9 - STOCK-BASED COMPENSATION

The Company accounts for stock options using the intrinsic value method. Had
compensation cost for the Company's stock option grants been determined based on
the fair value at the date of said grants, the Company's net income (loss) and
net income (loss) per share would have been the following pro-forma amounts for
the six months ended June 30, 2003 and 2002:

JUNE 30, JUNE 30,
2003 2002
------------ ------------

Net income (loss), as reported $ (23,131) $ 17,977
Stock-based compensation expense recorded
under the intrinsic value method -- --
Pro forma stock-based compensation expense
computed under the fair value method
(248) (580)
------------ ------------
Pro forma net income (loss) $ (23,379) $ 17,397
============ ============

Net income (loss) per share, basic and
diluted
As reported $ (0.63) $ 0.87
Pro forma $ (0.63) $ 0.84

The fair value of the stock options granted during the six months ended June 30,
2003 and 2002 were $0.32 and $0.29, respectively. 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 145.3% to 211.1% for all grants, risk-free interest
rates which vary for each grant and range from 4.2% to 6.2%,

15

expected life of 7 years for all grants, and no distribution yield for all
grants.

NOTE 10 - SUBSEQUENT EVENTS

In July 2003, the Company recognized a gain on early extinguishment of debt of
$5.1 million, related to the early extinguishment of $7.6 million of 10 1/2%
senior subordinated notes due 2008.

In July 2003, the Company recognized a pre-tax loss of approximately $44,000
related to the sale of its management rights and unsold timeshare inventory in
seven timeshare resorts the Company had managed since 1998. In conjunction with
this sale, the Company received approximately $1.3 million in cash, notes, and
other consideration, $1 million of which will be received over the next
twenty-four months. Due to liquidity concerns announced by the Company in the
first quarter of 2001, the Company discontinued its efforts to sell timeshare
intervals in these seven resorts in 2001. The Company pursued a sale of its
rights in these seven managed resorts so that it could concentrate its
development, sales, and marketing efforts at the resorts it owns in Texas,
Missouri, Illinois, Massachusetts, and Georgia. The proceeds of this sale will
be used by the Company to pay down borrowings under its revolving loan
facilities.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain matters discussed throughout this Form 10-Q filing are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed in the Company's Form 10-K/A
for the year ended December 31, 2002.

As of June 30, 2003, the Company owned and/or operated 19 resorts in various
stages of development. These resorts offer a wide array of country club-like
amenities, such as golf, swimming, horseback riding, boating, and many organized
activities for children and adults. The Company represents an owner base of over
131,000. The condensed consolidated financial statements of the Company include
the accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly-owned.

16

RESULTS OF OPERATIONS

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

Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----

As a percentage of total revenues:
Vacation Interval sales 74.7% 71.3% 73.6% 70.7%
Sampler sales 0.9% 2.1% 1.1% 2.6%
----- ----- ----- -----
Total sales 75.6% 73.4% 74.7% 73.3%

Interest income 19.9% 21.7% 21.0% 23.2%
Management fee income 1.1% 1.9% 1.1% 1.1%
Other income 3.4% 3.0% 3.2% 2.4%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%

As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 17.3% 18.2% 17.5% 18.5%
Provision for uncollectible notes 20.0% 20.0% 67.4% 20.0%

As a percentage of total sales:
Sales and marketing 52.0% 54.1% 53.9% 52.7%

As a percentage of total revenues:
Operating, general and administrative 16.1% 20.9% 16.8% 20.9%
Depreciation and amortization 2.7% 3.0% 2.8% 3.0%

As a percentage of interest income:
Interest expense and lender fees 48.8% 66.6% 49.5% 66.9%

As a percentage of total revenues:
Gain on sale of notes receivable 2.1% 10.6% 3.4% 5.3%
Gain on early extinguishment of debt 0.0% 42.3% 1.5% 21.2%

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002

Revenues

Revenues for the quarter ended June 30, 2003 were $43.5 million, representing a
$1.2 million or 2.8% increase from revenues of $42.3 million for the quarter
ended June 30, 2002. The increase is primarily due to increased Vacation
Interval sales.

Vacation Interval sales increased $2.3 million to $32.5 million during the
second quarter of 2003, up from $30.1 million in the same period of 2002. For
the quarter ended June 30, 2003, the number of Vacation Intervals sold,
exclusive of in-house Vacation Intervals, increased 2.2% to 1,832 from 1,792 in
the second quarter of 2002. The average price per interval, excluding upgrades,
decreased to $9,838 in the second quarter of 2003 versus $11,062 for the second
quarter of 2002 due to a shift in sales mix to less expensive intervals in 2003.
Total Vacation Interval sales for the second quarter of 2003 included 188
biennial intervals (counted as 94 Vacation Intervals) compared to 250 (125
Vacation Intervals) in the second quarter of 2002. During the second quarter of
2003, 1,153 upgrade in-house Vacation Intervals were sold at an average price of
$6,663, compared to 2,045 upgrade in-house Vacation Intervals sold at an average
price of $4,898 during the comparable 2002 period. In 2003, the Company's
in-house sales force also sold 889 second Vacation Intervals to existing owners
at an average sales price of $7,620, which when combined with upgrade sales
generated an increase of $4.1 million in in-house sales.

17

Sampler sales decreased $474,000 to $401,000 for the quarter ended June 30,
2003, compared to $875,000 for the same period in 2002. Sampler sales are not
recognized as revenue until the Company's obligation has elapsed, which often
does not occur until the sampler contract expires eighteen months after the sale
is consummated. Hence, a significant portion of sampler sales recognized in the
second quarter of 2002 relate to 2000 sales, when the Company had significantly
higher sales volume.

Interest income decreased 5.8% to $8.7 million for the quarter ended June 30,
2003, from $9.2 million for the same period of 2002. This decrease primarily
resulted from a decrease in notes receivable, net of allowance for doubtful
notes, in 2003 compared to 2002, primarily due to sales of notes receivable to
the SPE.

Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income decreased $307,000 to $476,000 for the second quarter of
2003, versus $783,000 for the second quarter of 2002, due to cash reserves left
at the management clubs at June 30, 2003 to fund future refurbishments.

Other income consists of water and utilities income, marina income, golf course
and pro shop income, and other miscellaneous items. Other income increased
$183,000 to $1.5 million for the second quarter of 2003 compared to $1.3 million
for the same period of 2002. The increase primarily relates to increased water
and utilities income.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 17.3%
during the second quarter of 2003 versus 18.2% for the same period of 2002
primarily due to increased sales prices of upgrades in 2003 compared to 2002.
Overall, the $133,000 increase in cost of sales in the second quarter of 2003
compared to the second quarter of 2002 was primarily due to the increase in
Vacation Interval sales.

Sales and Marketing

Sales and marketing costs as a percentage of total sales decreased to 52.0% for
the quarter ended June 30, 2003, from 54.1% for the same period of 2002. The
percentage decrease resulted from an increase in upgrade sales prices in 2003
without a proportionate increase in sales and marketing expense. The $311,000
overall increase in sales and marketing expense is primarily attributable to the
development of new upgrade and second-week ownership marketing programs in 2003
that did not exist in 2002.

Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales
remained unchanged at 20.0% for the second quarters of both 2003 and 2002.

Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues
decreased to 16.1% for the second quarter of 2003, from 20.9% for the same
period of 2002. Overall, operating, general and administrative expense decreased
by $1.8 million for the second quarter of 2003, as compared to the same period
of 2002. This was partially due to $1.3 million of professional fees that were
incurred in the second quarter of 2002 associated with the restructuring of the
Company. No such fees were incurred in the second quarter of 2003.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues
decreased to 2.7% for the quarter ended June 30, 2003 versus 3.0% for the same
quarter of 2002. Overall, depreciation and amortization expense decreased
$118,000 for the second quarter of 2003, as compared to 2002, primarily due to a
general reduction in capital expenditures since 2000.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income decreased to
48.8% for the second quarter of 2003, from 66.6% for the same period of 2002.
This decrease is primarily the result of decreased borrowings against pledged
notes receivable and decreased senior subordinated notes due to the debt
restructuring completed in May

18

2002, offset by decreased interest income as described above. Also, the
Company's weighted average cost of borrowing decreased to 6.1% in the second
quarter of 2003 compared to 6.4% in the second quarter of 2002.

Gain on Sale of Notes Receivable

Gain on sale of notes receivable was $898,000 for the second quarter of 2003,
compared to $4.5 million in the same period of 2002. The gain in the quarter
ended June 30, 2003 resulted from the sale of $11.5 million of notes receivable
to the SPE. The gain in the same quarter of 2002 resulted from the sale of $58.7
million of notes receivable to the SPE.

Gain on Early Extinguishment of Debt

Gain on early extinguishment of debt was $0 for the quarter ended June 30, 2003,
compared to $17.9 million in the same period of 2002. The gain in 2002 resulted
from the early extinguishment of $56.9 million of 10 1/2% senior subordinated
notes in connection with the restructuring of the Company's debt, completed in
May 2002.

Income before Provision for Income Taxes

Income before provision for income taxes decreased to $2.7 million for the
quarter ended June 30, 2003, as compared to $20.1 million for the quarter ended
June 30, 2002, as a result of the above mentioned operating results.

Provision for Income Taxes

Provision for income taxes as a percentage of income before provision for income
taxes was 2.1% in the second quarter of 2003, as compared to 0.2% for the second
quarter of 2002. The effective income tax rate is the result of the 2002 and
2003 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

Net income decreased to $2.7 million for the quarter ended June 30, 2003, as
compared to $20.1 million for the quarter ended June 30, 2002, as a result of
the above mentioned operating results.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

Revenues

Revenues for the six months ended June 30, 2003 were $83.0 million, representing
a $1.4 million or 1.7% decrease from revenues of $84.4 million for the six
months ended June 30, 2002. The decrease is primarily due to reduced sampler
sales and interest income, partially offset by increased Vacation Interval sales
and other income.

Vacation Interval sales increased $1.5 million to $61.0 million during the first
six months of 2003, up from $59.6 million in the same period of 2002. For the
six months ended June 30, 2003, the number of Vacation Intervals sold, exclusive
of in-house Vacation Intervals, decreased 11.8% to 3,261 from 3,696 in the first
six months of 2002. The average price per interval decreased to $10,355 in the
first six months of 2003 versus $10,553 for the first six months of 2002. Total
Vacation Interval sales for the first six months of 2003 included 435 biennial
intervals (counted as 218 Vacation Intervals) compared to 762 (381 Vacation
Intervals) in the first six months of 2002. During the first two quarters of
2003, 2,201 upgrade in-house Vacation Intervals were sold at an average price of
$6,386, compared to 4,231 upgrade in-house Vacation Intervals sold at an average
price of $4,792 during the comparable 2002 period. In the first half of 2003,
the Company's in-house sales force also sold 1,652 second Vacation Intervals to
existing owners at an average sales price of $7,999, which when combined with
upgrade sales generated an increase of $6.7 million in in-house sales.

Sampler sales decreased $1.3 million to $886,000 for the six months ended June
30, 2003, compared to $2.2 million for the same period in 2002. Sampler sales
are not recognized as revenue until the Company's obligation has elapsed, which
often does not occur until the sampler contract expires eighteen months after
the sale is consummated. Hence, a significant portion of sampler sales
recognized in the first half of 2002 relate to 2000 sales, when the Company had
significantly higher sales volume.

19

Interest income decreased 11.0% to $17.4 million for the six months ended June
30, 2003, from $19.6 million for the same period of 2002. This decrease
primarily resulted from a decrease in notes receivable, net of allowance for
doubtful notes, in 2003 compared to 2002, primarily due to sales of notes
receivable to the SPE.

Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income remained constant at $947,000 for the six months ended
June 30, 3003 compared to $948,000 for the same period of 2002.

Other income consists of water and utilities income, marina income, golf course
and pro shop income, and other miscellaneous items. Other income increased
$619,000 to $2.7 million for the first six months of 2003 compared to $2.1
million for the same period of 2002. The increase primarily relates to a
$273,000 gain associated with the sale of land located in Las Vegas, Nevada, as
well as increased water and utilities income.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 17.5%
during the first half of 2003 versus 18.5% for the same period of 2002 primarily
due to increased sales prices of upgrades in 2003 compared to 2002. The overall
decrease of $344,000 in cost of sales in the first six months of 2003 compared
to the same period of 2002 was due to a decline in Vacation Intervals sold in
those comparative periods.

Sales and Marketing

Sales and marketing costs as a percentage of total sales increased to 53.9% for
the six months ended June 30, 2003, from 52.7% for the same period of 2002. The
percentage increase resulted from a $854,000 increase of sales and marketing
expense from 2002 to 2003, which generated only a $1.5 million increase in
Vacation Interval sales from 2002 to 2003. The $854,000 increase in sales and
marketing expense is primarily attributable to the development of new upgrade
and second-week ownership marketing programs in 2003 that did not exist in 2002.
In addition, it appears that job uncertainty and the global unrest that existed
throughout the first half of 2003 had a negative impact on touring families
willingness to purchase Vacation Intervals, as the number of sales presentations
made in the first half of 2003 was approximately 1.5% lower than in 2002, but
11.8% fewer Vacation Intervals were purchased.

Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales
increased substantially in the first half of 2003 to 67.4% compared to 20.0% for
the first half of 2002. 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 quarter ended March 31, 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 $4.7 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 22.0% of gross notes receivable as of June
30, 2003 compared to 10.9% at

20

December 31, 2002. Management will continue its current collection programs and
seek new programs to reduce note defaults and improve the credit quality of its
customers. However, there can be no assurance that these efforts will be
successful.

Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues
decreased to 16.8% for the first half of 2003, from 20.9% for the same period of
2002. Overall, operating, general and administrative expense decreased by $3.7
million for the first half of 2003, as compared to the same period of 2002. This
was partially due to $2.0 million of professional fees that were incurred in the
first six months of 2002 associated with the restructuring of the Company. In
addition, the Company incurred $1.0 million of audit fees in the first half of
2002 related to the completion of the 2000 audit. No such fees were incurred in
the first six months of 2003.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues
decreased to 2.8% in the first half of 2003 compared to 3.0% in the first half
of 2002. Overall, depreciation and amortization expense decreased $204,000 for
the first six months of 2003, as compared to 2002, primarily due to a general
reduction in capital expenditures since 2000.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income decreased to
49.5% for the first half of 2003, from 66.9% for the same period of 2002. This
decrease is primarily the result of decreased borrowings against pledged notes
receivable and decreased senior subordinated notes due to the debt restructuring
completed in May 2002, offset by decreased interest income as described above.
Also, the Company's weighted average cost of borrowing decreased to 6.1% in the
first half of 2003 compared to 6.5% in the same period of 2002.

Gain on Sale of Notes Receivable

Gain on sale of notes receivable was $2.8 million for the first six months of
2003, compared to $4.5 million in the same period of 2002. The gain in the first
half of 2003 resulted from the sale of $35.1 million of notes receivable to the
SPE in the first six months of 2003. The gain in the same period of 2002
resulted from the sale of $58.7 million of notes receivable to the SPE.

Gain on Early Extinguishment of Debt

Gain on early extinguishment of debt was $1.3 million for the six months ended
March 31, 2003, compared to $17.9 million in the same period of 2002. The gain
in 2003 resulted from the early extinguishment of the $8.8 million remaining
balance of the Company's $60 million loan agreement, which would have been due
August 2003. The gain in 2002 resulted from the early extinguishment of $56.9
million of 10 1/2% senior subordinated notes in connection with the
restructuring of the Company's debt, completed in May 2002.

Income (Loss) before Provision for Income Taxes

Income (loss) before provision for income taxes decreased to a loss of $23.1
million for the six months ended June 30, 2003, as compared to income of $18.0
million for the six months ended June 30, 2002, as a result of the above
mentioned operating results.

Provision for Income Taxes

Provision for income taxes as a percentage of income (loss) before provision for
income taxes was 0.3% in the first half of 2003, as compared to 0.2% for the
same period of 2002. The effective income tax rate is the result of the 2002 and
2003 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.

21

Net Income (Loss)

Net income (loss) decreased to a loss of $23.1 million for the six months ended
June 30, 2003, as compared to income of $18.0 million for the six months ended
June 30, 2002, as a result of the above mentioned operating results.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL COVENANTS. Due to the results of the quarter ended March 31, 2003, the
Company is not in compliance with three of the financial covenants described
above. First, sales and marketing expense for the quarter ended March 31, 2003
was 56.1% of sales, compared to a maximum threshold of 52.5%. Second, the
interest coverage ratio for twelve months ended March 31, 2003 was 1.02 to 1.0,
compared to a minimum requirement of 1.25 to 1.0. And third, net loss for the
two consecutive quarters ended March 31, 2003 was $24.9 million, compared to a
minimum requirement of $1.00 net income. Also, due to the results for the six
months ended June 30, 2003, the Company is in default of two of the financial
covenants described above. First, the interest coverage ratio for the twelve
months ended June 30, 2003 was 0.13 to 1.0, compared to a minimum requirement of
1.25 to 1.0. Second, net loss for the two consecutive quarters ended June 30,
2003 was $23.1 million, compared to a minimum requirement of $1.00 net income.
Management notified its secured lenders that it was not in compliance with the
financial covenants, and has begun discussions regarding waivers of the defaults
and/or modifications to loan agreements which would bring the Company back into
compliance. As of August 13, 2003, the secured lenders have not waived the
covenant defaults but have continued to fund and have not declared a default.
Management is attempting to negotiate waivers and or modifications of its loan
agreements, however, it cannot give any assurances that it will be successful in
these negotiations. Although the Company believes that it will receive relief
from its lenders and that its lenders will continue to fund the Company's
operations until negotiations can be completed, there can be no assurance that
the Company's lenders will continue to fund its operations. A refusal by its
lenders to continue funding will have a material and adverse effect on the
Company's operations.

SOURCES OF CASH. The Company generates cash primarily from the cash received
from the sale of Vacation Intervals, the financing of customer notes receivable
from Silverleaf Owners, the sale of notes receivable to the SPE, management
fees, sampler sales, and resort and utility operations. The Company typically
receives a 10% down payment on sales of Vacation Intervals and finances the
remainder by receipt of a seven-year to ten-year customer promissory note. The
Company generates cash from customer notes receivable by (i) borrowing at an
advance rate of up to 75% of eligible customer notes receivable, (ii) selling
notes receivable, and (iii) from the spread between interest received on
customer notes receivable and interest paid on related borrowings. Because the
Company uses significant amounts of cash in the development and marketing of
Vacation Intervals, but collects cash on customer notes receivable over a
seven-year to ten-year period, borrowing against receivables has historically
been a necessary part of normal operations. During the six months ended June 30,
2003, the Company's operating activities reflected cash used in operating
activities of $1.5 million. During the same period of 2002, the Company's
operating activities reflected cash used in operating activities of $6.1
million. In 2003, the decrease in cash used in operating activities was
primarily the result of an increase in waterfall payments from the SPE and a
decrease in operational payments due to timing.

During the six months ended June 30, 2003, net cash provided by financing
activities was $3.0 million compared to $3.3 million in the comparable 2002
period. The decrease in cash provided by financing activities was the result of
decreased proceeds from sales of notes receivable of $19.6 million in 2003
versus 2002, partially offset by a $19.2 million reduction in payments on
borrowings against pledged notes receivable. At June 30, 2003, the Company's
revolving credit facilities provided for loans of up to $232.4 million of which
approximately $207.4 million of principal and interest related to advances under
the credit facilities was outstanding. For the six months ended June 30, 2003,
the weighted average cost of funds for all borrowings, including the senior
subordinated debt, was 6.1%. Customer defaults have a significant impact on cash
available to the Company from financing customer notes receivable in that notes
more than 60 days past due are not eligible as collateral. As a result, the
Company must repay borrowings against such delinquent notes.

Effective October 30, 2000, the Company entered into a $100 million revolving
credit agreement to finance Vacation Interval notes receivable through an
off-balance-sheet SPE, formed on October 16, 2000. The agreement presently has a
term of 5 years. However, on April 30, 2004, the second anniversary date of the
amended facility, the SPE's lender under the credit agreement has the right to
put, transfer, and assign to the SPE all of its rights, title, and interest in
and to all of the assets securing the facility at a price equal to the then
outstanding principal balance under the facility. At June 30, 2003, the SPE held
notes receivable totaling $120.2 million, with related borrowings of

22

$97.8 million. The Company is not obligated to repurchase defaulted or any other
contracts sold to the SPE. It is anticipated, however, that the Company will
place bids in accordance with the terms of the conduit agreement to repurchase
some defaulted contracts in public auctions to facilitate the re-marketing of
the underlying collateral.

During the six months ended June 30, 2003, the Company sold $35.1 million of
notes receivable and recognized pre-tax gains of $2.8 million. The SPE funded
these purchases through advances under a credit agreement arranged for this
purpose. In connection with these sales, the Company received cash consideration
of $28.8 million, which was used to pay down borrowings under its revolving loan
facilities.

For regular federal income tax purposes, the Company reports substantially all
of the Vacation Interval sales it finances under the installment method. Under
this method, income on sales of Vacation Intervals is not recognized until cash
is received, either in the form of a down payment or as installment payments on
customer notes receivable. The deferral of income tax liability conserves cash
resources on a current basis. Interest is imposed, however, on the amount of tax
attributable to the installment payments for the period beginning on the date of
sale and ending on the date the payment is received. If the Company is otherwise
not subject to tax in a particular year, no interest is imposed since the
interest is based on the amount of tax paid in that year. The consolidated
financial statements do not contain an accrual for any interest expense that
would be paid on the deferred taxes related to the installment method as the
interest expense is not estimable. In addition, the Company is subject to
current alternative minimum tax ("AMT") as a result of the deferred income that
results from the installment sales treatment, although due to existing AMT loss
carryforwards, it is anticipated that no such current AMT liability exists.
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. In 1998, the Internal Revenue Service
approved a change in the method of accounting for installment sales effective as
of January 1, 1997. As a result, the Company's alternative minimum taxable
income for 1997 through 1999 was increased each year by approximately $9.0
million for the pre-1997 adjustment, which resulted in the Company paying
substantial additional federal and state taxes in those years. Subsequent to
December 31, 2000, the Company applied for and received refunds of $8.3 million
and $1.6 million during 2001 and 2002, respectively, as the result of the
carryback of its 2000 AMT loss to 1999, 1998, and 1997. Accordingly, no minimum
tax credit exists currently.

The net operating losses ("NOLs") expire between 2012 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.
Management currently does not believe that it will be able to utilize its NOL
from normal operations. At present, future NOL utilization is expected to be
limited to the temporary differences creating deferred tax liabilities. If
necessary, management could implement a strategy to accelerate income
recognition for federal income tax purposes to utilize the existing NOL. The
amount of the deferred tax asset considered realizable could be decreased if
estimates of future taxable income during the carryforward period are reduced.

Due to the restructuring completed in May 2002, an ownership change within the
meaning of Section 382(g) of the Internal Revenue Code ("the Code") occurred. As
a result, a portion of the Company's NOL is subject to an annual limitation for
taxable years beginning after the date of the exchange ("change date"), and a
portion of the taxable year which includes the change date. The annual
limitation will be equal to the value of the stock of the Company immediately
before the ownership change, multiplied by the long-term tax-exempt rate (i.e.,
the highest of the adjusted Federal long-term rates in effect for any month in
the three-calendar-month period ending with the calendar month in which the
change date occurs). This annual limitation may be increased for any recognized
built-in gain to the extent allowed in Section 382(h) of the Code. The ownership
change may also limit, as described above, the use of the Company's minimum tax
credit, if any, as provided in Section 383 of the Code.

Given its current economic condition, the Company's access to capital and other
financial markets is anticipated to be limited. However, to finance the
Company's growth, development, and any future expansion plans, the Company may
at some time be required to consider the issuance of other debt, equity, or
collateralized mortgage-backed securities, the proceeds of which would be used
to finance future acquisitions, refinance debt, finance mortgage receivables, or
for other purposes. Any debt incurred or issued by the Company may be secured or
unsecured, have fixed or variable rate interest, and may be subject to such
terms as management deems prudent.

Due to the uncertainties mentioned above, the independent auditors report on the
Company's financial statements for the period ended December 31, 2002 contains
an explanatory paragraph concerning the Company's ability to continue as a going
concern.

USES OF CASH. Investing activities typically reflect a net use of cash due to
capital additions. However, net cash

23

provided by investing activities for the six months ended June 30, 2003 was $2.3
million compared to net cash used in investing activities of $832,000 during the
same period of 2002. The increase in net cash provided by investing activities
relates to proceeds from the sale of land held for sale of $2.9 million in 2003
and a reduction in equipment purchases in 2003. The Company evaluates sites for
additional new resorts or acquisitions on an ongoing basis. Certain debt
agreements include restrictions on the Company's ability to pay dividends based
on minimum levels of net income and cash flow.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of and for the six months ended June 30, 2003, the Company had no significant
derivative financial instruments or foreign operations. Interest on the
Company's notes receivable portfolio, senior subordinated debt, capital leases,
and miscellaneous notes is fixed, whereas interest on the Company's primary loan
agreements, which totaled $206.4 million at June 30, 2003, is variable. The
impact of a one-point interest rate change on the outstanding balance of
variable-rate financial instruments at June 30, 2003, on the Company's results
of operations for the first six months of 2003 would be approximately $1.0
million, or approximately $0.03 per share.

At June 30, 2003, the carrying value of the Company's notes receivable portfolio
approximates fair value because the weighted average interest rate on the
portfolio approximates current interest rates received on similar notes. If
interest rates on the Company's notes receivable are increased or perceived to
be above market rates, the fair market value of the Company's fixed-rate notes
will decline, which may negatively impact the Company's ability to sell new
notes. The impact of a one-point interest rate change on the portfolio could
result in a fair value impact of $5.5 million or approximately $0.15 per share.

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

The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers generally make a down payment of at least 10% of
the purchase price and deliver a promissory note to the Company for the balance.
The promissory notes generally bear interest at a fixed rate, are payable over a
seven-year to ten-year period, and are secured by a first mortgage on the
Vacation Interval. The Company bears the risk of defaults on these promissory
notes, and this risk is heightened inasmuch as the Company generally does not
verify the credit history of its customers and will provide financing if the
customer is presently employed and meets certain household income criteria.

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

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

Availability of Funding Sources -- The Company funds substantially all of the
notes receivable, timeshare inventories, and land inventories which it
originates or purchases with borrowings through its financing facilities, sales
of notes receivable, internally generated funds, and proceeds from public debt
and equity offerings. Borrowings are in turn repaid with the proceeds received
by the Company from repayments of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Company's results of operations, cash flows, and financial
condition.

Geographic Concentration -- The Company's notes receivable are primarily
originated in Texas, Missouri, Illinois,

24

Massachusetts, and Georgia. The risk inherent in such concentrations is
dependent upon regional and general economic stability, which affects property
values and the financial stability of the borrowers. The Company's Vacation
Interval inventories are concentrated in Texas, Missouri, Illinois,
Massachusetts, and Georgia. The risk inherent in such concentrations is in the
continued popularity of the resort destinations, which affects the marketability
of the Company's products and the collection of notes receivable.

ITEM 4. CONTROLS AND PROCEDURES

As of the period covered by this report, management, including the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures. Based on, and as of the
date of, that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized, and reported as and when required.

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls during the
period covered by this report.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
al, Circuit Court of Christian County, Missouri. The homeowners' associations of
three condominium projects that a former subsidiary of the Company constructed
in Missouri filed separate actions of unspecified amounts against the Company
alleging construction defects and breach of management agreements. This
litigation has been ongoing for several years. Discovery continued in the
lawsuit during the period ended June 30, 2003, but is still far from complete.
Among other things, the plaintiffs have not yet turned over the reports of their
expert witnesses and the Company is unclear as to exactly what damages are being
claimed by the Plaintiffs. At this time, a majority of the Company's legal fees
and costs of litigation are being paid by two insurance carriers, subject to a
reservation of rights by these insurers. Since the Company does not know what
damages are being claimed, and cannot predict the final outcome of these claims,
it cannot estimate the additional costs it could incur, or whether its insurance
carriers will continue to cover its costs in connection with these claims.

Bennett et. al. v. Silverleaf Resorts, Inc., District Court, 22nd Judicial
District, Comal County, Texas. A purported class action was filed against the
Company on October 19, 2001, by Plaintiffs who each purchased Vacation Intervals
from the Company. The Plaintiffs alleged that the Company violated the Texas
Deceptive Trade Practices Act and the Texas Timeshare Act by failing to deliver
to them complete copies of the contracts for the purchase of the Vacation
Intervals as they did not receive a complete legal description of the Hill
Country Resort as attached to the Declaration of Restrictions, Covenants, and
Conditions of the Resort. The Plaintiffs also claimed that the Company violated
various provisions of the Texas Deceptive Trade Practices Act with respect to
the maintenance fees charged by the Company to its Vacation Interval owners. In
November 2002, the Court denied the Plaintiffs' request for class certification.
In March 2003, additional Plaintiffs joined the case, and a Fourth Amended
Petition was filed against the Company and Silverleaf Club alleging additional
violations of the Texas Deceptive Trade Practices Act, breach of fiduciary duty,
negligent misrepresentation, and fraud. The class allegations were also deleted
from the amended Petition. In their Fourth Amended Petition, the Plaintiffs
sought damages in the amount of $1.5 million, plus reasonable attorneys fees and
court costs. The Plaintiffs also sought rescission of their original purchase
contracts with the Company. The Company, Silverleaf Club, and the Plaintiffs
have agreed to a mediated settlement of Plaintiffs' claims and have executed a
definitive settlement agreement. Under the terms of the settlement, the Company
and Silverleaf Club paid the Plaintiffs an aggregate sum of $130,000, and the
Plaintiffs conveyed their Vacation Intervals back to the Company and dismissed
the action against the Company and Silverleaf Club with prejudice.

Huizar et al v. Silverleaf Resorts, Inc., District Court, 73rd Judicial
District, Bexar County, Texas. A further purported class action was filed
against the Company on February 26, 2002, by a couple who purchased a Vacation
Interval from the Company. The Plaintiffs alleged that the Company violated the
Texas Government Code by charging a document preparation fee in regard to
instruments affecting title to real estate. Alternatively, the Plaintiffs
alleged that the $275 document preparation fee constituted a partial prepayment
that should have been credited against their note and sought a declaratory
judgment. The petition asserted Texas class action allegations

25

and sought recovery of the document preparation fee and treble damages on behalf
of both the Plaintiffs and the alleged class they purported to represent, and an
injunctive relief preventing the Company from engaging in the unauthorized
practice of law in connection with the sale of its Vacation Intervals in Texas.
The Company and the Plaintiffs have executed a Stipulation and Agreement of
Compromise ("Settlement"), which has been preliminarily approved by the court.
The court has also certified the class for settlement purposes. The court will
hold a fairness hearing in September 2003 to determine if the Settlement is a
fair, reasonable, and adequate settlement of the class claims. In accordance
with the Settlement, the Company will refund all amounts paid by the named
Plaintiffs who will convey their Vacation Interval back to the Company.
Additionally, the Company will issue to each timeshare owner who is a member of
the class a $275 certificate, which can be used for an upgrade, as a credit on
the purchase of an additional Vacation Interval, or for a limited stay at one of
the Company's resorts. The Company estimates that there are approximately 16,400
members of the class. The Settlement also provides for payment of the named
Plaintiffs' attorney fees in the amount of $400,000, plus expenses. Upon the
entry of the final order by the court that the Settlement is fair, the Company
will be released from all liability with respect to the settled claims, and the
action will be dismissed by the named Plaintiffs and the class with prejudice.

In January 2003, a group of eight related individuals and entities who were then
holders of certain of the Company's 10 1/2% senior subordinated notes due 2008
(the "10 1/2% Notes") made oral claims against the Company and a number of its
present and former officers and directors concerning the claimants' open market
purchases of 10 1/2% Notes during 2000 and 2001. The 10 1/2% Notes were
allegedly purchased by the eight claimants for an aggregate purchase price of
$3.7 million. One of the eight claimants previously owned common stock in the
Company acquired between 1998 and 2000 and also made claims against the Company
with regard to approximately $598,000 in losses allegedly suffered in connection
with open market purchases and sales of the Company's common stock. In February
2003, these eight claimants, the Company, and certain of its former officers and
directors entered into a tolling agreement for the purposes of preserving the
claimants' rights during the term of the agreement by tolling applicable
statutes of limitations while negotiations between the claimants and the Company
take place. The 10 1/2% Notes were not in default and the Company denied all
liability with regard to the alleged claims of these eight claimants. No
litigation was filed against the Company or any of its affiliates by these eight
claimants; however, on February 27, 2003, these eight claimants did file suit in
state district court in Dallas, Texas, against the Company's former auditors,
Deloitte & Touche, LLP, alleging violation by Deloitte & Touche of the Texas
Securities Act, common law fraud, negligent misrepresentation, fraud in a stock
transaction, and accounting malpractice. The claims against Deloitte & Touche
arise from the same purchases of the Company's 10 1/2% Notes and common stock
that formed the basis for the tolling agreement. In order to resolve this issue
with these eight claimants, the Company agreed on June 16, 2003 to rescind the
purchases of the 10 1/2% Notes held by the claimants. Under the terms of the
settlement, which was closed on July 10, 2003, the Company acquired all the 10
1/2% Notes held by the eight claimants. Additionally, the Company received a
full and complete release of any claims which the eight claimants alleged to
hold against the Company, or any of its present or former officers, directors,
or affiliates, regarding purchases of the 10 1/2% Notes or common stock of the
Company. Additionally, the eight claimants agreed to release their alleged
claims against Deloitte & Touche and to dismiss with prejudice the
above-described lawsuit which the eight claimants filed against Deloitte &
Touche in February 2003. On July 23, 2003, the Company cancelled all the 10 1/2%
Notes acquired from these eight claimants. The face amount of the cancelled 10
1/2% Notes was $7,620,000. The Company paid a cash settlement to the claimants
of $2,393,383, which resulted in a one-time gain to the Company of approximately
$5.1 million for early extinguishment of debt. This gain will be recognized by
the Company in its quarter ending September 30, 2003. As a part of the
settlement, the Company also agreed to pay $75,000 towards the eight claimants'
legal fees.

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

ITEM 5. OTHER INFORMATION

National Do-Not-Call Rules -- The Company relies heavily on telemarketing
activities to arrange tours of its 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 the Company's telemarketing activities.
The FCC will implement, in conjunction with the Federal Trade

26

Commission ("FTC"), a national do-not-call list, which will apply to both
interstate and intrastate commercial telemarketing calls. The FTC expects that
approximately 60 million telephone numbers will be registered on the national
do-not-call list by mid-2004, which could sharply limit the number of contacts
the Company will be able to make through its telemarketing activities. The
Company will continue to telemarket to individuals who do not place their
telephone numbers on a do-not-call list and those with whom the Company has an
established business relationship. The Company's use of autodialers to call
potential customers in its database could also be restricted by new call
abandonment standards specified in the FCC rules and regulations. The Company
cannot currently determine the impact that these new regulations could have on
the Company's sales; however, wide-spread registration of telephone numbers on
the national do-not-call list and the restrictions on the use of autodialers by
the Company could negatively affect the Company's sales and marketing efforts
and require the Company to use less effective, more expensive alternative
marketing methods. Various telemarketing industry trade groups have filed
lawsuits against the FCC seeking relief from the implementation of these rules
and regulations by the FCC. The Company cannot predict what success these
lawsuits may have.

Disposition of Managed Resort Assets -- In July 2003, the Company sold its
management rights and unsold timeshare inventory in seven timeshare resorts the
Company has managed since 1998. In connection with this sale, the Company will
receive consideration of approximately $1.3 million in cash, notes, and other
consideration over the next twenty-four months. The seven timeshare resorts
included in this sale of management rights and timeshare inventory are (i)
Alpine Bay located in Alpine, Alabama, (ii) Beach Mountain Lakes located in
Drums, Pennsylvania, (iii) Treasure Lake located in Dubois, Pennsylvania, (iv)
Foxwood Hills located in Westminister, South Carolina, (v) Hickory Hills located
in Gautier, Mississippi, (vi) Lake Tansi Village located in Crossville,
Tennessee, and (vii) Westwood Manor located in Bridgeport, Texas. The Company
originally acquired the management rights and unsold inventory of timeshare
intervals in these seven resorts from Crown Resorts Co., LLC in May 1998. Due to
liquidity concerns announced by the Company in the first quarter of 2001, the
Company discontinued its efforts to sell timeshare intervals in these seven
resorts in 2001. The Company pursued a sale of its rights in these seven managed
resorts so that it could concentrate its development, sales, and marketing
activities at the resorts it owns in Texas, Missouri, Illinois, Massachusetts,
and Georgia. The proceeds of this sale related to these seven managed resorts
will be used by the Company to repay debt to senior lenders.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed herewith.

10.1 Contract of Sales dated August 17, 2002 between the Registrant
and Fairfield Resorts, Inc.

10.2 First Amendment To Contract Of Sale dated November 27, 2002
between the Registrant and Fairfield Resorts, Inc.

10.3 First Amendment to Contract of Sale dated December 23, 2002
between the Registrant and Fairfield Resorts, Inc.

10.4 Second Amendment and Waiver Agreement dated as of June 19,
2003 to the Amended and Restated Receivables Loan and Security
Agreement dated as of April 30, 2002, among Silverleaf Finance
I, Inc.; the Registrant; Autobahn Funding Company LLC; DZ Bank
AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main;
U.S. Bank Trust National Association; and Wells Fargo Bank
Minnesota, National Association

10.5 Contract of Sale dated June 17, 2003 between the Registrant,
Richard W. Dickson and Robert G. Garner

31.1 Certification of Chief Executive Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

- -------

(b) Reports on Form 8-K

The Company filed the following Current Reports on Form 8-K with the
SEC during the quarter ended June 30, 2003:

None.

27

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: August 13, 2003 By: /s/ ROBERT E. MEAD
-----------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer

Dated: August 13, 2003 By: /s/ HARRY J. WHITE, JR.
-----------------------
Harry J. White, Jr.
Chief Financial Officer

28

INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------

10.1 Contract of Sales dated August 17, 2002 between the Registrant
and Fairfield Resorts, Inc.

10.2 First Amendment To Contract Of Sale dated November 27, 2002
between the Registrant and Fairfield Resorts, Inc.

10.3 First Amendment to Contract of Sale dated December 23, 2002
between the Registrant and Fairfield Resorts, Inc.

10.4 Second Amendment and Waiver Agreement dated as of June 19,
2003 to the Amended and Restated Receivables Loan and Security
Agreement dated as of April 30, 2002, among Silverleaf Finance
I, Inc.; the Registrant; Autobahn Funding Company LLC; DZ Bank
AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main;
U.S. Bank Trust National Association; and Wells Fargo Bank
Minnesota, National Association

10.5 Contract of Sale dated June 17, 2003 between the Registrant,
Richard W. Dickson and Robert G. Garner

31.1 Certification of Chief Executive Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

29