UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

For The Fiscal Year Ended December 31, 2004

or

FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission File Number 001-13003

Silverleaf Resorts, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

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

Common Stock, $.01 par value

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

None

     Indicate by check mark 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 þ No o

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

     The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the last sales price of the Common Stock on June 30, 2004 as reported on the OTC Bulletin Board operated by Nasdaq Stock Market, Inc., was approximately $18,131,312 (based on 12,950,937 shares held by non-affiliates). There were 36,860,238 shares of the Registrant’s Common Stock, $.01 par value, outstanding at June 30, 2004.

     As of March 25, 2005 there were 36,860,238 shares of the Registrant’s Common Stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement for the 2005 Annual Meeting of Shareholders, which will be mailed to shareholders within 120 days after the end of the fiscal year, are incorporated by reference into Part III hereof.

FORM 10-K INDEX

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     CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K UNDER ITEMS 1, 2, AND 7, IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-K, 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 ITS 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” IN PART I, ITEM 1, OF THIS REPORT. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS REPORT ON FORM 10-K 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.

PART I

ITEM 1. BUSINESS

Overview

     The principal business of Silverleaf Resorts, Inc. (“Silverleaf,” the “Company,” or “we”) is the development, marketing, and operation of “drive-to” and “destination” timeshare resorts. As of December 31, 2004, we own eight “drive-to resorts” in Texas, Missouri, Illinois, and Georgia (the “Drive-to Resorts”). We also own four “destination resorts” in Texas, Missouri, and Massachusetts (the “Destination Resorts”). In February 2005, we obtained approval to operate a fifth destination resort in Florida, which was acquired in October 2004. Also in 2005, we reclassified one of our Drive-to Resorts in Texas to a Destination Resort.

     The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable accommodations in locations convenient to their residences and are located near major metropolitan areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent “short-stay” getaways. We believe such short-stay getaways are growing in popularity as a vacation trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation environment. We believe our resorts offer our customers an economical alternative to commercial vacation lodging. The average price for an annual one-week vacation ownership (“Vacation Interval”) for a two-bedroom unit at the Existing Resorts was $9,671 for 2004 and $9,510 for 2003.

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

     Certain Significant 2004 Events

	•	We completed an offer on June 7, 2004 to exchange $24,671,000 of principal amount of our 6% senior subordinated notes due 2007 for $24,671,000 of principal amount of 8% senior subordinated notes due 2010 and a cash payment of $271,381, representing accrued, unpaid interest from April 1, 2004 through June 6, 2004. The primary purpose of this exchange offer was to extend the due date of the senior subordinated notes from 2007 to 2010.
	•	In July 2004, we completed the acquisition of a 500-acre tract of land located on Route 7 in Berkshire County, Massachusetts. The 500-acre site, formerly known as the Brodie Mountain Ski Resort, is approximately 25 miles from our existing Oak N’ Spruce Resort located in South Lee, Massachusetts. The property includes ski trails, ski lifts, a lodge, equipment rental shop, canteen, and restaurant. We have not yet finalized our future development plans for the site, however we believe that the site is suitable for development as an additional timeshare resort. Preliminary indications are that the site would accommodate up to 324 units encompassing 16,848 one-week vacation intervals.

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	•	In July 2004, we restructured our loan facility with one of our senior lenders whereby the existing $35 million revolving component was reduced to $25 million and the due date extended to March 2009, the existing $5.4 million term component was paid in full, and a new $10 million revolving component was established, due March 2009, collateralized by either notes receivable or inventory.
	•	In October 2004, we completed the acquisition of a 4.8 acre tract of land located in Davenport, Florida, just outside Orlando, Florida, for an aggregate purchase price of approximately $6.0 million. The site, formerly known as the Villas at Polo Park, is near the major Florida tourist attractions of Walt Disney World, Sea World, and Universal Studios. The property is comprised of 48 two and three bedroom units and provides resort amenities such as a heated outdoor swimming pool with whirlpool, fitness center, arcade, playground, sand volleyball and basketball courts. Our public offering statement filed with the Florida Bureau of Standards and Registrations was approved in February 2005, granting us sales approval for 16 units encompassing 832 one-week vacation intervals. We purchased this property in lieu of building units at our existing destination resorts, and we plan to operate the resort as a timeshare resort under the name “Orlando Breeze.”

     Certain Significant 2005 Events

     On March 11, 2005, we sold the water distribution and waste water treatment utilities assets at eight of our timeshare resorts for an aggregate purchase price of $13.2 million, which will result in a gain of approximately $1.0 million if all conditions of the sale are met. The purchasers of the utilities are Algonquin Water Resources, of Texas, LLC, a Texas limited liability company; Algonquin Water Resources of Missouri, LLC, a Missouri limited liability company; Algonquin Water Resources of Illinois, LLC, an Illinois limited liability company; Algonquin Water Resources of America, Inc., a Delaware corporation; and Algonquin Power Income Fund, an open-ended investment trust established under the laws of Ontario, Canada (collectively, the “Purchasers”). Certain of the Purchasers have entered into a services agreement to provide uninterrupted water supply and waste water treatment services to the eight timeshare resorts to which the transferred utility assets relate. The Purchasers will charge the timeshare resorts the tariffed rate for those utility services that are regulated by the states in which the resorts are located. For any unregulated utility services, the Purchasers will charge a rate set in accordance with the ratemaking procedures of the Texas Commission on Environmental Quality. The proceeds of the sale of these utility assets will be used to reduce senior debt in accordance with our loan agreements with our senior lenders.

     Notwithstanding the closing of this sale of utilities assets, the Agreement contains provisions relating to the required post-closing receipt of customary governmental approvals from utility regulators in Missouri and Texas. Specifically, if the Purchasers do not receive required approvals from Missouri regulators relating to the utility assets in Missouri (the “Missouri Assets”) within twelve months of closing, the Missouri Assets will be reconveyed to us, the transaction involving the Missouri Assets will be rescinded, and we will be obligated to return to the Purchasers approximately $3.8 million of the purchase price attributable to the Missouri Assets. Similarly, if the Purchasers do not receive required approvals from Texas regulators relating to the utility assets in Texas (the “Texas Assets”) within eighteen months of closing, the Texas Assets will be reconveyed to us, the transaction involving the Texas Assets will be rescinded, and we will be obligated to return to the Purchasers approximately $6.2 million of the purchase price attributable to the Texas Assets.

     Operations

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

	•	acquiring and developing timeshare resorts;
	•	marketing and selling one-week annual and biennial Vacation Intervals to prospective first-time owners;
	•	marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners;
	•	financing the purchase of Vacation Intervals; and
	•	managing timeshare resorts.

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

     We perform substantial marketing and sales functions internally. We have made significant investments in operating technology, including telemarketing and computer systems and proprietary software applications. We identify potential purchasers through internally developed marketing techniques and through cooperative arrangements with outside vendors. We sell Vacation Intervals

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through on-site sales offices located at certain of our resorts, which are located near major metropolitan areas. This practice provides us an alternative to marketing costs of subsidized airfare or lodging, which are typically associated with the timeshare industry.

     As part of the Vacation Interval sales process, we offer potential purchasers financing of up to 90% of the purchase price over a seven-year to ten-year period. We have historically financed our operations by borrowing from third-party lending institutions at an advance rate of 75% to 85% of eligible customer receivables. At December 31, 2004 and 2003, we had a portfolio of approximately 34,437 and 32,056 customer promissory notes, respectively, totaling approximately $250.4 and $242.3 million, respectively, with an average yield of 15.1% and 14.9% per annum, respectively, which compares favorably to our weighted average cost of borrowings of 6.8% per annum at December 31, 2004. We cease recognition of interest income when collection is no longer deemed probable. At December 31, 2004 and 2003, approximately $2.0 million and $3.9 million in principal, or 0.8% and 1.6%, respectively, of our loans to Silverleaf Owners were 61 to 120 days past due. As of December 31, 2004 and 2003, no loans were over 120 days past due. We continue collection efforts with regard to all notes until all collection techniques that we utilize have been exhausted. We provide for uncollectible notes by reserving an estimated amount which our management believes is sufficient to cover anticipated losses from customer defaults.

     Each timeshare resort has a timeshare owners’ association (a “Club”). At December 31, 2004, each Club operates through a centralized organization to manage its respective resort on a collective basis. This centralized organization is Silverleaf Club, a Texas not-for-profit corporation. Silverleaf Club is under contract with each Club for each of the Existing Resorts to manage their operations. In turn, we have a contract with Silverleaf Club, under which we perform the supervisory, management, and maintenance functions of all the Existing Resorts on a collective basis. All costs of operating the timeshare resorts, including management fees payable to us under the management agreements, are to be covered by monthly dues paid by the timeshare owners to their respective Clubs as well as income generated by the operation of certain amenities at the timeshare resorts.

     In February 2005, we were granted approval to operate our new resort in Florida, Orlando Breeze, as a timeshare resort. Orlando Breeze has its own club, which will be operated independently of Silverleaf Club.

Marketing and Sales

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

     Marketing. Our in-house marketing staff creates databases of new prospects, which are principally developed through cooperative arrangements with outside vendors to identify prospects who meet our marketing criteria. Using our automated dialing and bulk mailing equipment, in-house marketing specialists conduct coordinated telemarketing and direct mail procedures which invite prospects to tour one of our resorts and receive an incentive, such as a free gift. On a limited basis, we retain outside vendors to arrange tours at our resorts.

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

     Sales representatives receive commissions ranging from 2.0% to 14% of the sales price depending on established guidelines. Sales managers also receive commissions of 1.5% to 5.0% and are subject to commission chargebacks in the event the purchaser fails to make the first required payment. Sales directors also receive commissions of 1.0% to 3.5%, which are also subject to chargebacks.

     Prospects who are interested in a lower priced product are offered biennial (alternate year) intervals or other low priced products that entitle the prospect to sample a resort for a specified number of nights. The prospect may apply the cost of a lower priced product against the down payment on a Vacation Interval if purchased by a certain date. In addition, we actively market both on-site and off-site upgraded Vacation Intervals to existing Silverleaf Owners, as well as additional week sales to existing Silverleaf Owners. Although most upgrades and additional week sales are sold by our in-house sales staff, we have contracted with a third party to assist in offsite marketing of these at the Destination Resorts. We have been focusing on increasing the percentage mix of sales to existing customers in 2004 and 2003. These upgrade and additional week programs have been well received by Silverleaf Owners and accounted for approximately 52.4% and 45.6% of our gross revenues from

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Vacation Interval sales for the years ended December 31, 2004 and 2003, respectively. By offering lower priced products and upgraded and additional week Vacation Intervals, we believe we offer an affordable product for all prospects in our target market. Also, by offering products with a range of prices, we attempt to broaden our market with lower-priced products and gradually upgrade such purchasers over time.

     Our sales representatives are a critical component of our sales and marketing effort. We continually strive to attract, train, and retain a dedicated sales force. We provide intensive sales instruction and training, which assists the sales representatives in acquainting prospects with the resort’s benefits. Each sales representative is our employee and receives some employment benefits. At December 31, 2004, we employed 402 sales representatives at our Existing Resorts.

     Customer Financing

     We offer financing to buyers of Vacation Intervals at our resorts. These buyers typically make down payments of at least 10% of the purchase prices and deliver promissory notes for the balances. The promissory notes generally bear interest at a fixed rate, are generally payable over a seven-year to ten-year period, and are secured by a first mortgage on the Vacation Interval. We bear the risk of defaults on these promissory notes, and this risk is heightened inasmuch as we generally do not verify the credit history of our customers prior to purchase and will provide financing if the customer is presently employed and meets certain income and buyer profile criteria. There are a number of risks associated with financing customers’ purchases of Vacation Intervals. For an explanation of these risks, please see “Cautionary Statements” beginning on page 20 of this report.

     In 2004 we accrued 19.4% of the purchase price of Vacation Intervals as a provision for uncollectible notes. The allowance for doubtful accounts was 21.1% of gross notes receivable as of December 31, 2004 compared to 20.0% at December 31, 2003. 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.

     For the year ended December 31, 2004, the Company decreased sales by $4.1 million for customer returns (cancellations of sales transactions in which the customer fails to make the first installment payment). If a buyer of a Vacation Interval defaults, we generally must foreclose on the Vacation Interval and attempt to resell it; the associated marketing, selling, and administrative costs from the original sale are not recovered; and sales and marketing costs must be incurred again to resell the Vacation Interval. Although, in many cases, we may have recourse against a Vacation Interval buyer for the unpaid price, certain states have laws which limit or hinder our ability to recover personal judgments against customers who have defaulted on their loans. For example, under Texas law, if we pursue a post-foreclosure deficiency claim against a customer, the customer may file a court proceeding to determine the fair market value of the property foreclosed upon. In such event, we may not recover a personal judgment against the customer for the full amount of the deficiency, but may recover only to the extent that the indebtedness owed to the Company exceeds the fair market value of the property. Accordingly, we do not generally pursue this remedy because we have not found it to be cost effective.

     At December 31, 2004, we had notes receivable (including notes unrelated to Vacation Intervals) in the approximate principal amount of $249.0 million with an allowance for uncollectible notes of approximately $52.5 million. Approximately $58.9 million principal amount of notes receivable remain outstanding under our conduit term loan through our wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”), which was formed in December 2003.

     Additionally, at December 31, 2004, our wholly-owned, off-balance sheet subsidiary, Silverleaf Finance I, Inc. (“SF-I”), also known as our special purpose entity (“SPE”), held notes receivable totaling $84.5 million, with related borrowings of $64.1 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, we are not obligated to repurchase defaulted or any other contracts sold to the SPE. As the Servicer of the notes receivable sold to the SPE, we are obligated by the terms of the conduit facility to foreclose upon the Vacation Interval securing a defaulted note receivable. We may, but are not obligated to, purchase in a public sale the foreclosed Vacation Interval for an amount equal to the net fair market value of the Vacation Interval if the net fair market value is no less than fifteen percent of the original acquisition price that the customer paid for the Vacation Interval. We anticipate that we will place bids to repurchase the Vacation Intervals securing the defaulted contracts to facilitate the re-marketing of those Vacation Intervals. For the years ended December 31, 2004 and 2003, we paid approximately $2.5 million and $3.5 million, respectively, to repurchase such Vacation Intervals. Total investment in our SPE was valued at $5.2 million at December 31, 2004.

     We recognize interest income as earned. Interest income is not recognized on notes receivable that are four-plus payments late. We recognize only 25% of accrued interest income for notes that are three payments late, 50% for notes that are two payments late, 75% for notes that are one payment late, and 90% for all current notes. When inventory is returned to the Company, any unpaid note receivable balances are charged against the allowance for uncollectible notes net of the amount at which the Vacation Interval is restored to inventory.

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     We intend to borrow additional funds under our existing revolving credit facilities and sell notes to our SPE to finance our operations. At December 31, 2004, we had borrowings under our senior credit facilities in the approximate principal amount of $210.9 million, of which $184.9 million of such facilities are receivable based and thus currently permit, or permitted, borrowings of 75% to 85% of the principal amount of performing notes. Payments from Silverleaf Owners on such notes are credited directly to the lender and applied against our loan balance. At December 31, 2004, we had a portfolio of approximately 34,437 Vacation Interval customer promissory notes in the approximate principal amount of $250.4 million, of which approximately $2.0 million in principal amount was 61 days or more past due and therefore ineligible as collateral.

     At December 31, 2004, our portfolio of customer notes receivable had an average yield of 15.1%. At such date, our borrowings, which bear interest at variable rates, had a weighted average cost of 6.8%. We have historically derived net interest income from our financing activities because the interest rates we charge our customers who finance the purchase of their Vacation Intervals exceed the interest rates we pay our lenders. Because our existing indebtedness currently bears interest at variable rates and our customer notes receivable bear interest at fixed rates, increases in interest rates would erode the spread in interest rates that we have historically experienced and could cause our interest expense on borrowings to exceed our interest income on our portfolio of customer loans. We have engaged in one interest rate hedging transaction related to our conduit loan, with a balance of $50.3 million on December 31, 2004. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on our results of operations, liquidity, and financial position.

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

     We typically provide financing to customers over a seven-year to ten-year period. Our customer notes had an average maturity of 5.7 years at December 31, 2004. Our credit facilities have scheduled maturities between February 2006 and March 2009. Additionally, our revolving credit facilities could be declared immediately due and payable as a result of any default by us. Although it appears that we have adequate liquidity to meet our needs through March 2006 (the revolving maturity for the majority of our existing loan agreements), we are continuing to identify additional financing arrangements beyond such date.

Development and Acquisition Process

     We intend to develop at our Existing Resorts and/or acquire new resorts only to the extent the capital markets and the covenants of our existing credit facilities permit.

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

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

Clubs / Management Club

     We have the right to appoint the directors of the Silverleaf Club through our control of the boards of directors of the individual clubs at each of our resorts. Silverleaf Club is sometimes referred to as the “Management Club.” The Silverleaf Owners are obligated to pay monthly dues to their respective Clubs, which obligation is secured by a lien on their Vacation Interval in favor of the Club. If a Silverleaf Owner fails to pay his monthly dues, the Club may institute foreclosure proceedings regarding the delinquent Silverleaf

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Owner’s Vacation Interval. The number of foreclosures that occurred as a result of Silverleaf Owners failing to pay monthly dues were 545 in 2004 and 673 in 2003. Typically, we purchase at foreclosure all Vacation Intervals that are the subject of foreclosure proceedings instituted by the Club because of delinquent dues.

     At December 31, 2004, each timeshare resort has a Club that operates through a centralized organization provided by the Management Club to manage the resorts on a collective basis. The consolidation of resort operations through the Management Club permits: (i) a centralized reservation system for all resorts; (ii) substantial cost savings by purchasing goods and services for all resorts on a group basis, which generally results in a lower cost of goods and services than if such goods and services were purchased by each resort on an individual basis; (iii) centralized management for the entire resort system; (iv) centralized legal, accounting, and administrative services for the entire resort system; and (v) uniform implementation of various rules and regulations governing all resorts. All furniture, furnishings, recreational equipment, and other personal property used in connection with the operation of the Existing Resorts are owned by either that resort’s Club or the Silverleaf Club, rather than by us.

     In February 2005, we were granted approval to operate our new resort in Florida, Orlando Breeze, as a timeshare resort. Orlando Breeze has its own club, which will be operated independently of Silverleaf Club.

     At December 31, 2004, Silverleaf Club had 653 full-time employees and is solely responsible for their salaries. Silverleaf Club is also responsible for the direct expenses of operating the Existing Resorts, while we are responsible for the direct expenses of new development and all marketing and sales activities. To the extent the Management Club provides payroll, administrative, and other services that directly benefit the Company, we reimburse the Management Club for such services and vice versa.

     The Management Club collects dues from Silverleaf Owners, plus certain other amounts assessed against the Silverleaf Owners from time to time, and generates income by the operation of certain amenities at the Existing Resorts. Silverleaf Club dues are currently $54.98 per month ($27.49 for biennial owners), except for certain members of Oak N’ Spruce Resort, who prepay dues at an annual rate of approximately $350. Such amounts are used by the Management Club to pay the costs of operating the Existing Resorts and the management fees due to the Company pursuant to Management Agreements. These Management Agreements authorize the Company to manage and operate the resorts and provide for a maximum management fee equal to 15% of gross revenues for Silverleaf Club, but our right to receive such fee on an annual basis is limited to the amount of the Management Club’s net income. However, if the Company does not receive the maximum fee, such deficiency is deferred for payment to succeeding years, subject again to the net income limitation. Due to anticipated refurbishment of units at the Existing Resorts, together with the operational and maintenance expenses associated with the Company’s current expansion and development plans, our 2004 management fees were subject to the net income limitation. Accordingly, for the year ended December 31, 2004, management fees recognized were $1.2 million. For financial reporting purposes, management fees from the Management Club are recognized based on the lower of (i) the aforementioned maximum fees or (ii) the Management Club’s net income. The Silverleaf Club Management Agreement is effective through March 2010, and will continue year-to-year thereafter unless cancelled by either party. As a result of the performance of the Silverleaf Club, it is uncertain whether Silverleaf Club will consistently generate positive net income. Therefore, future income to the Company could be limited. At December 31, 2004, there were approximately 88,000 Vacation Interval owners who pay dues to Silverleaf Club. If we develop new resorts, their respective Clubs are expected to be added to the Silverleaf Club Management Agreement.

Other Operations

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

     Unit Leasing. We also recognize revenues from sales of Samplers, which allow prospective Vacation Interval purchasers to sample a resort for a specified number of nights. A five-night Sampler package currently sells for between $595 and $995. For the years ended December 31, 2004, 2003, and 2002, we recognized $2.2 million, $1.8 million, and $3.6 million, respectively, in revenues from Sampler sales.

     Utility Services. At December 31, 2004, we owned the water supply facilities at Piney Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills, Timber Creek, and Fox River resorts. We also owned the waste-water treatment facilities at The Villages, Piney Shores, Ozark Mountain, Holly Lake, Timber Creek, and Fox River resorts. We have permits to supply and charge third parties for the water supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark Mountain, Hill Country, Piney Shores, and Timber Creek resorts, and the waste-water facilities at the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and The

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Villages resorts. In March 2005, all of our utility services assets and liabilities were sold for an aggregate purchase price of $13.2 million, which will result in a gain of approximately $1.0 million if all conditions of the sale are met.

     Other Property. We own approximately 11 acres in Mississippi, and we are entitled to 85% of any profits from this land. An affiliate of a director of the Company owns a 10% net profits interest in this land.

     In December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia, Pennsylvania, for approximately $1.9 million. The property was intended to be developed as a Drive-to Resort (i.e., Beech Mountain Resort). We received regulatory approval to develop 408 units (21,216 Vacation Intervals), but we did not schedule dates for construction, completion of initial units, or commencement of marketing and sales efforts. In 2003, we determined that we would not develop this property as initially planned and thus we currently intend to sell this property.

Policies with Respect to Certain Activities

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

     We do not:

	•	invest in the securities of unaffiliated issuers for the purpose of exercising control;
	•	underwrite securities of other issuers;
	•	engage in the purchase and sale (or turnover) of investments sponsored by other issuers; or
	•	offer securities in exchange for property.

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

Investment Policies

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

Participation in Vacation Interval Exchange Networks

     Internal Exchanges. As a convenience to Silverleaf Owners, each purchaser of a Silverleaf Vacation Interval has certain exchange privileges which may be used to: (i) exchange an interval for a different interval (week) at the same resort so long as the desired interval is of an equal or lower rating; and (ii) exchange an interval for the same interval of equal or lower rating at any other Existing Resort. These intra-company exchange rights are conditioned upon availability of the desired interval or resort.

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     Exchanges. We believe that our Vacation Intervals are made more attractive by our participation in a Vacation Interval exchange network operated by RCI. At December 31, 2004, the Existing Resorts are registered with RCI, and approximately one-third of Silverleaf Owners participate in RCI’s exchange network. Membership in RCI allows participating Silverleaf Owners to exchange their occupancy right in a unit in a particular year for an occupancy right at the same time or a different time of the same or lower color rating in another participating resort, based upon availability and the payment of a variable exchange fee. A member may exchange a Vacation Interval for an occupancy right in another participating resort by listing the Vacation Interval as available with the exchange organization and by requesting occupancy at another participating resort, indicating the particular resort or geographic area to which the member desires to travel, the size of the unit desired, and the period during which occupancy is desired.

     RCI assigns a rating of “red,” “white,” or “blue” to each Vacation Interval for participating resorts based upon a number of factors, including the location and size of the unit, the quality of the resort, and the period during which the Vacation Interval is available, and attempts to satisfy exchange requests by providing an occupancy right in another Vacation Interval with a similar rating. For example, an owner of a red Vacation Interval may exchange his interval for a red, white, or blue interval. An owner of a white Vacation Interval may exchange only for a white or blue interval, and an owner of a blue interval may exchange only for a blue interval. At December 31, 2004, RCI’s designation of our units of red, white, and blue Vacation Intervals is approximately 55%, 15%, and 30%, respectively. If RCI is unable to meet the member’s initial request, it suggests alternative resorts based on availability. The annual membership fees in RCI, which are at the option and expense of the owner of the Vacation Interval, are currently $89. Exchange rights with RCI require an additional fee of approximately $149 for domestic exchanges and $189 for foreign exchanges. Silverleaf Club charges an exchange fee of $75 for each exchange through its internal exchange program. Resorts participating in the exchange networks are required to adhere to certain minimum standards regarding available amenities, safety, security, décor, unit supplies, maid service, room availability, and overall ambiance. See “Cautionary Statements” for a description of risks associated with the exchange programs.

     Orlando Breeze, our new destination resort in Florida, is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.

Competition

     The timeshare industry is highly fragmented and includes a large number of local and regional resort developers and operators. However, some of the world’s most recognized lodging, hospitality, and entertainment companies, such as Marriott Ownership Resorts (“Marriott”), The Walt Disney Company (“Disney”), Hilton Hotels Corporation (“Hilton”), Hyatt Corporation (“Hyatt”), and Four Seasons Resorts (“Four Seasons”) have entered the industry. Other companies in the timeshare industry, including Sunterra Corporation (“Sunterra”), Cendant Corporation, through its acquisition of Fairfield Resorts, Inc. (“Fairfield”) and Trendwest Resorts, Inc. (“Trendwest”), Starwood Hotels & Resorts Worldwide Inc. (“Starwood”), Ramada Vacation Suites (“Ramada”), and Bluegreen Corporation (“Bluegreen”) are, or are subsidiaries of, public companies with enhanced access to capital and other resources that public ownership implies.

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

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

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

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

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Governmental Regulation

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

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

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

     Most of the states where we currently operate have enacted laws and regulations which limit our ability to market our resorts through telemarketing activities. These states have enacted “do not call” lists that permit consumers to block telemarketing activities by registering their telephone numbers for a period of years for a nominal fee. We purchase these lists from the various states quarterly and do not contact those telephone numbers listed. Additionally, the federal “Do-Not-Call Implementation Act” (the “DNC Act”), which was enacted on March 11, 2003, provided for the establishment of a National Do Not Call Registry administered by the United States Federal Trade Commission (“FTC”) under its Telemarketing Sales Rule (“TSR”) and the Federal Communications Commission. The FTC began enforcement actions in October 2003 for violations of the TSR by telemarketers. Violations could result in penalties up to $11,000 per violation. The FTC recently reported that approximately 83 million telephone numbers had been registered on the National Do Not Call List Registry by the end of 2004. Since the introduction of state and federal Do-Not-Call legislation, we have become somewhat more reliant on direct mail solicitations as an alternative to some of the telemarketing techniques we have historically utilized. Existing and future restrictions on telemarketing practices could cause our sales to decline.

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

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     During the 1980’s and continuing through the present, the timeshare industry has been and continues to be afflicted with negative publicity and prosecutorial attention due to, among other things, marketing practices which were widely viewed as deceptive or fraudulent. Among the many timeshare companies which have been the subject of federal, state, and local enforcement actions and investigations in the past were certain of the partnerships and corporations that were merged into the Company prior to 1996 (the “Merged Companies,” or individually “Merged Company”). Some of the settlements, injunctions, and decrees resulting from litigation and enforcement actions (the “Orders”) to which certain of the Merged Companies consented purport to bind all successors and assigns, and accordingly binds the Company. In addition, at that time the Company was directly a party to one such Order issued in Missouri. No past or present officers, directors, or employees of the Company or any Merged Company were named as subjects or respondents in any of these Orders; however, each Order purports to bind generically unnamed “officers, directors, and employees” of certain Merged Companies. Therefore, certain of these Orders may be interpreted to be enforceable against the present officers, directors, and employees of the Company even though they were not individually named as subjects of the enforcement actions which resulted in these Orders. These Orders require, among other things, that all parties bound by the Orders, including the Company, refrain from engaging in deceptive sales practices in connection with the offer and sale of Vacation Intervals. In one particular case in 1988, a Merged Company pled guilty to deceptive uses of the mails in connection with promotional sales literature mailed to prospective timeshare purchasers and agreed to pay a judicially imposed fine of $1.5 million and restitution of $100,000. The requirements of the Orders are substantially what applicable state and federal laws and regulations mandate, but the consequence of violating the Orders may be that sanctions (including possible financial penalties and suspension or loss of licensure) may be imposed more summarily and may be harsher than would be the case if the Orders did not bind the Company. In addition, the existence of the Orders may be viewed negatively by prospective regulators in jurisdictions where the Company does not now do business, with attendant risks of increased costs and reduced opportunities.

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

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

     Environmental Matters. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and tort liability and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the

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contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation, or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner’s ability to sell such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removal or remediation of a release of hazardous or toxic substances at such disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site or from environmental regulatory violations. In connection with its ownership and operation of its properties, the Company may be potentially liable for such claims.

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

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

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

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

     The Company believes that its properties are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental

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authority or any third party, and is not otherwise aware, of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties.

     Utility Regulation. At December 31, 2004, we owned the water supply and waste-water treatment facilities at several of the Existing Resorts, which are regulated by various governmental agencies. The Texas Natural Resource Conservation Commission is the primary state umbrella agency regulating utilities at the resorts in Texas; and the Missouri Department of Natural Resources and Public Service Commission of Missouri are the primary state umbrella agencies regulating utilities at the resorts in Missouri. The Environmental Protection Agency, division of Water Pollution Control, and the Illinois Commerce Commission are the primary state agencies regulating water utilities in Illinois. These agencies regulate the rates and charges for the services (allowing a reasonable rate of return in relation to invested capital and other factors), the size and quality of the plants, the quality of water supplied, the efficacy of waste-water treatment, and many other aspects of the utilities’ operations. The agencies have approval rights regarding the entity owning the utilities (including its financial strength) and the right to approve a transfer of the applicable permits upon any change in control of the entity holding the permits. Other federal, state, regional, and local environmental, health, and other agencies also regulate various aspects of the provision of water and waste-water treatment services. In March 2005, all of our utility services assets and liabilities were sold for an aggregate purchase price of $13.2 million, which will result in a gain of approximately $1.0 million if all conditions of the sale are met.

     Other Regulation. Under various state and federal laws governing housing and places of public accommodation, we are required to meet certain requirements related to access and use by disabled persons. Many of these requirements did not take effect until after January 1, 1991. Although we believe that our facilities are generally in compliance with present requirements of such laws, we are aware of certain of our properties that are not in full compliance with all aspects of such laws. We are presently responding, and expect to respond in the future, to inquiries, claims, and concerns from consumers and regulators regarding our compliance with existing state and federal regulations affording the disabled access to housing and accommodations. It is our practice to respond positively to all such inquiries, claims and concerns and to work with regulators and consumers to resolve all issues arising under existing regulations concerning access and use of our properties by disabled persons. We believe that we will incur additional costs of compliance and/or remediation in the future with regard to the requirements of such existing regulations. Future legislation may also impose new or further burdens or restrictions on owners of timeshare resort properties with respect to access by the disabled. The ultimate cost of compliance with such legislation and/or remediation of conditions found to be non-compliant is not currently ascertainable, and while such costs are not expected to have a material effect on our business, such costs could be substantial. Limitations or restrictions on the completion of certain renovations may limit application of our growth strategy in certain instances or reduce profit margins on our operations.

Employees

     At December 31, 2004, we had 1,370 employees, and the Clubs collectively had 653 employees. Our employee relations are good, both at the Company and at the Clubs. None of our employees are represented by a labor union.

Insurance

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

Description of Certain Indebtedness

     Existing Indebtedness. The following table summarizes our credit agreements with our senior lenders and our off-balance sheet SPE as of December 31, 2004 (in thousands):

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     We use these credit agreements to finance the sale of Vacation Intervals, to finance construction, and for working capital needs. The loans mature between February 2006 and March 2009, and are collateralized (or cross-collateralized) by customer notes receivable, construction in process, land, improvements, and related equipment at certain of the Existing Resorts. These credit facilities bear interest at variable rates tied to the prime rate, LIBOR, or the corporate rate charged by certain banks. The credit facilities secured by customer notes receivable allow advances from 75% to 85% of the unpaid balance of certain eligible customer notes receivable. In addition, we have $3.8 million of senior subordinated notes due 2007, $2.1 million of senior subordinated notes due 2008, and $24.7 million of senior subordinated notes due 2010, with interest payable semi-annually on April 1 and October 1, guaranteed by all of our present and future domestic restricted subsidiaries.

     As of December 31, 2004, certain of our credit facilities include restrictions on our ability to pay dividends based on minimum levels of net income and cash flow. The debt agreements contain covenants including requirements that we (i) preserve and maintain the collateral securing the loans; (ii) pay all taxes and other obligations relating to the collateral; and (iii) refrain from selling or transferring the collateral or permitting any encumbrances on the collateral. The debt agreements also contain restrictive covenants which include (i) restrictions on liens against and dispositions of collateral, (ii) restrictions on distributions to affiliates and prepayments of loans from affiliates, (iii) restrictions on changes in control and management of the Company, (iv) restrictions on sales of substantially all of the assets of the Company, and (v) restrictions on mergers, consolidations, or other reorganizations of the Company. Under certain credit facilities, a sale of all or substantially all of the assets of the Company, a merger, consolidation, or reorganization of the Company, or other changes of control of the ownership of the Company, would constitute an event of default and permit the lenders to accelerate the maturity thereof.

     Our credit facilities also contain operating covenants requiring us to maintain a minimum tangible net worth of $100 million or greater, as defined, maintain sales and marketing expenses as a percentage of sales below 55.0% for the latest rolling 12 months, maintain notes receivable delinquency rate below 25%, maintain a minimum interest coverage ratio of 1.25 to 1 for the latest rolling 12 months, and maintain positive net income for each year end, and for any two consecutive fiscal quarters. In addition, our senior lenders have provided us with waivers and amended financial covenants whereby we exclude the $28.7 million increase in our allowance for uncollectable notes during the first quarter of 2003 from the calculation of our minimum required consolidated net income, and from the calculation of our minimum required interest coverage ratio of 1.25 to 1.0. We were also given a waiver for our failure to maintain our ratio of sales and marketing expense below the required standard in the first quarter of 2003. As of December 31, 2003 and 2004, we were in compliance with these operating covenants. However, such future results cannot be assured.

     The following table summarizes our notes payable, capital lease obligations, and senior subordinated notes at December 31, 2003 and 2004 (in thousands):

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     At December 31, 2004, LIBOR rates on the Company’s senior credit facilities were from 2.03% to 2.42%, and the Prime rate was 5.00%.

     DESCRIPTION OF OUR SENIOR CREDIT FACILITIES AT DECEMBER 31, 2004

Amended Agreements with Senior Lenders

     Textron Facility. We originally entered into a Loan and Security Agreement (the “Original Loan Agreement”) with Textron in August 1995 pursuant to which we borrowed $5 million. Since that time, the Original Loan Agreement has been amended various times. Effective December 2003, the Company and Textron entered into an amendment (the “Textron Amendment”) to the Original Loan Agreement.

     Pursuant to the Textron Amendment, the facility (the “Textron Tranche A Facility”) provides us with a revolving loan (“Revolving Loan Component”) in the amount of $44.6 million. The Textron Tranche A Facility also provides for a term loan (“Term Loan Component”) of $11.3 million. The interest rate on the Revolving Loan Component is a variable rate equal to LIBOR plus 3% per annum, but at no time less than 6% per annum. The rate on the Term Loan Component is a fixed rate equal to 8% per annum. The maturity date of the Revolving Loan Component of the Textron Tranche A Facility is the earlier of March 31, 2007 or the weighted

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average maturity date of the eligible consumer loans pledged as collateral as of the end of the Revolving Loan Term. The maturity date of the Term Loan Component is March 31, 2007.

     The Textron Amendment also provides for a Textron Tranche B Facility, with a revolving loan component of $44.1 million and a term loan component of $11.0 million. The Textron Tranche B Facility is substantially identical to the Textron Tranche A Facility. The maturity of the revolving loan component of the Textron Tranche B Facility is the earlier of March 31, 2007 or the weighted average maturity date of the eligible consumer loans pledged as collateral. The maturity date of the term loan component is also March 31, 2007.

     The Inventory Loan in the amount of $10 million which we initially entered into with Textron in December 1999, as amended in April 2001, was further amended to extend the final maturity date to March 31, 2007. In 2004 this facility was amended to increase the availability under it to $18.0 million, then further amended to decrease the availability to $16.0 million. The Inventory Loan is collateralized by a first priority security interest in certain of our inventory and a second priority security interest in the stock of SF-I and the customer notes receivable pledged as collateral under the other Textron loan agreements.

     In April 2001, we entered into another Loan and Security Agreement with Textron for a $10.2 million credit facility. The original note issued in April 2001 was replaced with a Revolving Loan Component Note equal to $6.2 million and a Term Loan Component Note equal to $1.7 million (“Textron Tranche C Facility”). The Textron Tranche C Facility is substantially identical to the Textron Tranche A Facility. The maturity date of the Revolving Loan Component Note is the earlier of March 31, 2007 or the weighted average maturity date of the eligible consumer loans pledged as collateral. The maturity date of the Term Loan Component Note is March 31, 2007.

     The Textron Amendment includes a “change of control” provision which provides that Textron would have no obligation to make any advances under the facilities if there is a change in more than fifty percent of the executive management of Silverleaf, as such management is designated in a schedule to the Textron Amendment, unless Textron determines that the replacement management personnel’s experience, ability and reputation is equal to or greater than that of the members of management specified. Additionally, Textron would have no obligation to make any additional advances under the facility if more than two of the five members of our Board of Directors are controlled by the holders of the Exchange Notes.

     In December 2003, we closed a $66.4 million conduit term loan transaction through SF-II. This conduit loan was arranged through Textron. Under the terms of the new conduit loan, we sold approximately $78.1 million of our Vacation Interval receivables to our subsidiary SF-II for an amount equal to the aggregate principal balances of the receivables. The purchase of these receivables was financed by Textron through a one-time advance to SF-II of $66.4 million, which is approximately 85% of the outstanding balance of the receivables SF-II purchased from us. All customer receivables that we transferred to SF-II have been pledged as security to Textron. Textron has also received as additional collateral a pledge of all of our equity interest in SF-II and a $15.7 million demand note from us to SF-II under which payment may be demanded if SF-II defaults on its loan from the lender. We used the proceeds from the sale of the receivables to SF-II to pay down approximately $65.5 million of amounts outstanding under our two senior revolving credit facilities with Textron and Sovereign. Textron’s new conduit loan to SF-II will mature in 2014 and bears interest at a fixed annual rate of 7.035%.

     As a result of the closing of the $66.4 million conduit loan, we obtained a two-year extension of our senior revolving credit facilities with Textron. These facilities now revolve through March 31, 2006, and are due in March 2007. The Textron senior facilities are now limited to, in aggregate, $118.9 million, with receivable-based revolvers of $95.0 million and term loans of $23.9 million.

     Sovereign Facility. Our Revolving Credit Agreement (“Sovereign Facility”) with a group of lenders led by Sovereign Bank (collectively, “Sovereign”) was amended effective December 2003 to provide a two-tranche receivables financing arrangement in an aggregate amount not to exceed $40.4 million. The first tranche (“Sovereign Tranche A”) is a revolving loan component of approximately $35.0 million. The Sovereign Tranche A maturity date is the earlier of March 30, 2007 or the weighted average maturity date of the eligible consumer loans pledged as collateral as of the Sovereign Tranche A Conversion Date. Sovereign Tranche A bears interest at a base rate equal to the higher of (i) a variable annual rate of interest equal to the prime rate charged by Sovereign or (ii) 2.75% above the rate established by the Federal Reserve Bank of New York on overnight federal funds transactions with members of the Federal Reserve System; provided, that in no event shall the base rate be less than 6%.

     The second tranche (“Sovereign Tranche B”) is a term loan component equal to approximately $5.4 million. Sovereign Tranche B shall be reduced automatically on a monthly basis as of the first day of each calendar month based on a 20-year amortization schedule. Sovereign Tranche B bears interest at the rate of 8% per annum. Interest is payable on the first day of each month. The Sovereign Tranche B maturity date is March 30, 2007. Sovereign Tranche B is secured by the same collateral pledged under Sovereign Tranche A.

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     During 2004, Sovereign Tranche A was reduced to a $25 million revolver, Sovereign Tranche B was paid in full, and a new $10 million revolving component was established, collateralized by either notes receivable or inventory. Both of the existing facilities with Sovereign are due in March 2009.

     Heller Facility. We originally entered into a Loan and Security Agreement (“Heller Receivables Loan”) with Heller in October 1994 pursuant to which we have pledged notes receivable as collateral. The Heller Receivables Loan has been amended several times to increase the amount of borrowing capacity to $70 million. We also entered into a Loan and Security Agreement (“Heller Inventory Loan”) in December 1999 for $10 million. The Heller Inventory Loan is secured by our unsold inventory of Vacation Intervals. In March 2001, we obtained a supplemental $10 million inventory and receivables loan (“Heller Supplemental Loan”).

     There is currently no availability under the Heller Receivables Loan. The Heller Receivables Loan will mature in February 2006.

     The Heller Inventory Loan was amended effective April 30, 2002 to extend the availability period to March 31, 2004 and the maturity date to March 31, 2007. During 2004, we reached an agreement with Heller and Textron whereby the amount outstanding under the Heller Inventory Loan agreement was paid off via an additional $8.0 million of availability under the Textron inventory loan agreement. The maturity date of the Heller Supplemental Loan was amended effective April 30, 2002 to extend the maturity to March 31, 2007.

Features Common to Amended Senior Credit Facilities with Textron, Sovereign, and Heller.

     The Amended Senior Credit Facilities with Textron, Sovereign and Heller described above provide for a first priority security interest in (i) substantially all of our customer notes receivable that have been pledged to one of the senior secured lenders previously, and the mortgages attached thereto, (ii) substantially all of our real and personal property, including the Company’s rights under the management agreements for the Existing Resorts, (iii) the stock of Silverleaf Finance, I, Inc., the SPE owned by us, and SF-II, (iv) the agreement with the Standby Manager (as defined below), (v) all books, records, reports, computer tapes, disks and software relating to the collateral pledged to Textron, Sovereign, and Heller; and (vi) all extensions, additions, improvements, betterments, renewals, substitutions and replacements of, for or to any of the collateral pledged to Textron, Sovereign, and Heller, together with the products, proceeds, issues, rents and profits thereof.

     The Amended Senior Credit Facilities with Textron, Sovereign, and Heller also provide that we shall retain, at our expense, a “Standby Manager” approved by the Senior Lenders who shall at any time that an event of default occurs and the Senior Lenders so direct, assume full control of the management of the Existing Resorts. We may also be replaced at the sole discretion of these Senior Lenders as servicing agent for the customer notes receivable pledged under the Amended Senior Credit Facilities. The Standby Manager designated by Textron, Sovereign and Heller under the Amended Senior Credit Facilities is J&J Limited, Inc. located in Windermere, Florida.

Financial Covenants Under Amended Senior Credit Facilities.

     The Amended Senior Credit Facilities with Heller, Textron and Sovereign provide certain financial covenants which we must satisfy. Any failure to comply with the financial covenants will result in a default under such Amended Senior Credit Facilities. In November 2003, we entered into agreements with our three senior lenders to amend our senior credit facilities to modify our financial covenants under which we had been in default since the first quarter of 2003. The amended covenants increase from 52.5% to 55% the maximum permitted ratio of sales and marketing expenses to total sales for each quarter beginning with the quarter ended March 31, 2003, exclude our $28.7 million increase in our allowance for uncollectible notes in the quarter ended March 31, 2003 from the calculation of our minimum required consolidated net income, and from the calculation of our minimum required interest coverage ratio of 1.25 to 1.0. In addition to the above amendments, we also received waivers under our senior credit facilities of covenant defaults which occurred in the first quarter of 2003 due to our increase in our allowance for uncollectible notes and our failure to maintain a ratio of sales and marketing expense to total sales of no more than 52.5%. As a result of these amendments and waivers, we have been in full compliance with all of our credit facilities with our senior lenders since December 31, 2003.

     The financial covenants are described below.

     Tangible Net Worth Covenant. We must maintain a Tangible Net Worth at all times equal to (i) the greater of (A) $100,000,000 or (B) an amount equal to 90% of the Tangible Net Worth of the Company as of September 30, 2001, plus (ii) (A) on a cumulative basis, 100% of the positive Consolidated Net Income after January 1, 2002, plus (B) 100% of the proceeds of (1) any sale by the Company of (x) equity securities issued by the Company or (y) warrants or subscriptions rights for equity securities issued by the Company or (2) any indebtedness incurred by the Company, other than the loans under the Heller Facility, the Textron Facility or the Sovereign Facility, in the case of each of (1) and (2) above occurring after January 1, 2002. For purposes of the three Amended Senior Credit Facilities, “Tangible

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Net Worth” is (i) the consolidated net worth of the Company and its consolidated subsidiaries, plus (ii) to the extent not otherwise included in the such consolidated net worth, unsecured subordinated indebtedness of the Company and its consolidated subsidiaries the terms and conditions of which are reasonably satisfactory to the required banks, minus (iii) the consolidated intangibles of the Company and its consolidated subsidiaries, including, without limitation, goodwill, trademarks, tradenames, copyrights, patents, patent applications, licenses and rights in any of the foregoing and other items treated as intangibles in accordance with generally accepted accounting principles. “Consolidated Net Income” is the consolidated net income of the Company and its subsidiaries, after deduction of all expenses, taxes, and other proper charges (but excluding any extraordinary profits or losses), determined in accordance with generally accepted accounting principles. It also excludes the $28.7 million increase in our allowance for uncollectible notes booked in the first quarter of 2003.

     Marketing and Sales Expenses Covenant. As of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2003, we will not permit the ratio of marketing expenses to total sales for the latest rolling 12 months then ending to equal or exceed .55 to 1.

     Minimum Loan Delinquency Covenant. We will not permit as of the last day of each fiscal quarter our over 30-day delinquency rate on our entire consumer loan portfolio to be greater than 25%. In the event that such delinquency rate is over 20% on the last day of the quarter, one or more Senior Lenders may conduct an audit of the Company. As part of our credit and collection process, we grant payment concessions on occasion to customers, whereby we bring a delinquent note current and extend the maturity date if two consecutive payments have been made.

     Debt Service. As of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2003, we will not permit the ratio of (i) EBITDA less capital expenditures (excluding the $28.7 million increase in our allowance for uncollectible notes booked in the first quarter of 2003) as determined in accordance with generally accepted accounting principles to (ii) the interest expense minus all non-cash items constituting interest expense for such period, for the latest rolling 12 months then ending to be less than 1.25 to 1.

     Profitable Operations Covenant. We will not permit Consolidated Net Income (i) for any fiscal year, commencing with the fiscal year ending December 31, 2002, to be less than $1.00 and (ii) for any two consecutive fiscal quarters (reviewed on an individual rather than on an aggregate basis) to be less than $1.00, excluding the $28.7 million increase in our allowance for uncollectible notes booked in the first quarter of 2003.

Amended DZ Bank Facility

     Effective as of October 30, 2000, we entered into a Receivables Loan and Security Agreement (the “RLSA”) with SF-I, as Borrower, and Autobahn Funding Company LLC (“Autobahn”), as Lender, DZ Bank, as Agent, and other parties. Pursuant to the DZ Bank facility, we service receivables which we sold to SF-I under a separate agreement and which SF-I pledged as collateral for funds borrowed from Autobahn. The facility (“DZ Bank Facility”) has a maximum borrowing capacity of $100 million, of which SF-I borrowed approximately $62.9 million during the year ended December 31, 2000. The RLSA established certain financial conditions which we must satisfy in order for SF-I to borrow additional funds under the facility.

     Effective April 30, 2002, the RLSA was amended and restated (the “Amended DZ Bank Facility”) with modifications to the term of the facility and the financial covenants imposed on us thereunder. The principal balance of the loan, which was originally scheduled to mature on October 30, 2005, will now mature on April 30, 2007. We must maintain financial covenants under the Amended DZ Bank Facility, including maintaining a minimum tangible net worth of $100 million and an Interest Coverage Ratio of 1.1 to 1 until April 30, 2003, with an increase to 1.25 to 1 thereafter. “Interest Coverage Ratio” is defined as “the ratio of (i) EBITDA for such period less Capital Expenditures for such period to (ii) the Cash Interest Expense for such period.” Additional amendments to the agreement with Autobahn include (i) a reduction in the borrowing limits on an eligible receivable from a range of 80.0% to 85.0% of the principal balance outstanding to a range of 73.0% to 75.0% of the principal balance outstanding, and (ii) the requirement that the receivables pledged by SF-I as collateral must have received a weighted average score of 650 and, individually, a minimum score of 500 under a nationally recognized credit rating developed by Fair, Isaac and Co. at the time the original obligor purchased the Vacation Interval related to the pledged receivable.

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

     As a result of the closing of the $66.4 million conduit loan through our new financing subsidiary, SF-II, we obtained an extension of our existing revolving credit facility through our SPE through March 31, 2006. In order to obtain the two-year extension of this

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facility, however, we agreed that the principal amount of the facility would be reduced from $100 million to $85 million effective December 2003, and from $85 million to $75 million effective March 31, 2005.

CAUTIONARY STATEMENTS

If our assumptions and estimates in our Business Model are wrong, we could be in default under our credit agreements.

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

	°	We estimated that we will sell our existing and planned inventory of Vacation Intervals within 15 years;
	°	We assumed that our level of sales and operating profits and costs can be maintained; and
	°	We assumed that we can raise the prices on our products and services as market conditions allow.

     These assumptions and estimates are subject to significant business, economic and competitive risks and uncertainties. If our assumptions and estimates are wrong, our future financial condition and results of operations may vary significantly from those projected in the business model. In that case, we would be in default under our credit facilities and our banks could cease all funding.

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

Changes in the timeshare industry could affect our operations.

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

	°	An oversupply of timeshare units,
	°	A reduction in demand for timeshare units,
	°	Changes in travel and vacation patterns,
	°	A decrease in popularity of our resorts with our consumers,
	°	Governmental regulations or taxation of the timeshare industry, and
	°	Negative publicity about the timeshare industry.

Changes in accounting procedures and standards could negatively impact our future financial statements.

     The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has released an AICPA Statement of Position (the “SOP”), which provides guidance on the accounting by a seller of all real estate timesharing transactions. The SOP is effective for fiscal years beginning after June 15, 2005, and is to be applied retroactively to financial statements by means of a cumulative effect of a change in accounting principle. The SOP provides guidance on a seller’s accounting for real estate time-sharing transactions, including, but not limited to, accounting guidance in the following areas:

	°	sales incentives,
	°	reload and upgrade sales transactions,
	°	credit losses,
	°	cost of sales and time-sharing inventory,
	°	costs incurred to sell time-shares,
	°	rental and other operations during holding periods (for inventory),
	°	sampler programs and mini-vacations,
	°	special purpose entities,
	°	points systems,
	°	vacation clubs, and
	°	owners associations.

     We are still evaluating the impact the adoption of the SOP will have on our results of operations, financial position, and future financial statements, and there can be no assurance that the SOP will not have a material impact on our consolidated financial position or results of operations.

We may not be able to obtain additional financing.

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

     Many of the factors that will determine whether or not we generate sufficient earnings before interest, income taxes, depreciation and amortization to meet current or future debt service requirements and satisfy financial covenants are inherently difficult to predict. These factors include:

	°	the number of sales of Vacation Intervals;
	°	the average purchase price per interval;
	°	the number of customer defaults;
	°	our cost of borrowing;
	°	our sales and marketing costs and other operating expenses; and
	°	the continued sale of notes receivable.

     Our current and planned expenses and debt repayment levels are and will be to a large extent fixed in the short term, and are based in part on past expectations as to future revenues and cash flows. We have previously reduced our costs of operations through a reduction in workforce and other cost-savings measures. We may be unable to further reduce spending in a timely manner to compensate for any past or future revenue or cash flow shortfall. It is possible that our revenue, cash flow or operating results may not meet the expectations of our business model, and may even result in our being unable to meet the debt repayment schedules or financial covenants contained in our loan agreements, including the Old and New Indentures.

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

     Our bank credit agreements may:

	°	require a substantial portion of our cash flow to be used to pay interest expense and principal;
	°	impair our ability to obtain on acceptable terms, if at all, additional financing that might be necessary for working capital, capital expenditures or other purposes; and
	°	limit our ability to further refinance or amend the terms of our existing debt obligations, if necessary or advisable.

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

We may be impacted by general economic conditions.

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

We are at risk for defaults by our customers.

     We offer financing to the buyers of Vacation Intervals at our resorts. These buyers make down payments of at least 10% of the purchase price and deliver promissory notes to us for the balances. The promissory notes generally bear interest at a fixed rate, are payable over a seven-year to ten-year period, and are secured by a first mortgage on the Vacation Interval. We bear the risk of defaults on these promissory notes. Although we prescreen prospects in the early stages of the marketing and sales process, we generally do not perform a detailed credit history review of our customers, as is the case with most other timeshare developers.

     We recorded 19.4% of the purchase price of Vacation Intervals as a provision for uncollectible notes for the year ended December 31, 2004. Our sales were decreased by $4.1 million for customer returns in 2004. When a buyer of a Vacation Interval defaults, we

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foreclose on the Vacation Interval and attempt to resell it. The associated marketing, selling, and administrative costs from the original sale are not recovered; and we will incur such costs again when we resell the Vacation Interval. Although we may have recourse against a Vacation Interval buyer for the unpaid price, certain states have laws which limit our ability to recover personal judgments against customers who have defaulted on their loans. For example, if we were to file a lawsuit to collect the balance owed to us by a customer in Texas (where approximately 45.0% of Vacation Interval sales took place in 2004), the customer could file a court proceeding to determine the fair market value of the property foreclosed upon. In such event, we may not recover a personal judgment against the customer for the full amount of the deficiency. We would only recover an amount that the indebtedness owed to us exceeds the fair market value of the property. Accordingly, we have generally not pursued this remedy.

     At December 31, 2004, we had Vacation Interval customer notes receivable in the approximate principal amount of $250.4 million, and had an allowance for uncollectible notes of approximately $52.5 million. We cannot be certain that this allowance is adequate.

We must borrow funds to finance our operations.

     Our business is dependent on our ability to finance customer notes receivable through our banks. At December 31, 2004, we owed approximately $210.9 million of principal to our senior lenders.

          Borrowing Base. We have receivable-based loan agreements with lenders to borrow up to approximately $209.0 million. We pledged our customer promissory notes and mortgages as security under these agreements. Our lenders typically lend us 75% to 85% of the principal amount of our customers’ notes, and payments from Silverleaf Owners on such notes are credited directly to the lender and applied against our loan balance. At December 31, 2004, we had a portfolio of approximately 34,437 Vacation Interval customer notes receivable in the approximate principal amount of $250.4 million. Approximately $2.0 million in principal amount of our customers’ notes were 61 days or more past due and, therefore, ineligible as collateral.

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

          Interest Rate Mismatch. At December 31, 2004, our portfolio of customer loans had a weighted average fixed interest rate of 15.1%. At such date, our borrowings (which bear interest predominantly at variable rates) against the portfolio had a weighted average cost of funds of 6.8%. We have historically derived net interest income from our financing activities because the interest rates we charge our customers who finance the purchase of their Vacation Intervals exceed the interest rates we pay to our lenders. Because our existing indebtedness currently bears interest at variable rates and our customer notes receivable bear interest at fixed rates, increases in interest rates charged by our lenders would erode the spread in interest rates that we have historically enjoyed and could cause the interest expense on our borrowings to exceed our interest income on our portfolio of customer notes receivable. We have engaged in one interest rate hedging transaction related to our conduit loan, with a balance of $50.3 million on December 31, 2004. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on our results of operations, liquidity, and financial position. To the extent interest rates decrease on loans available to our customers, we face an increased risk that customers will pre-pay their loans, which would reduce our income from financing activities.

          Maturity Mismatch. We typically provide financing to our customers over a seven-year to ten-year period. Our customer notes had an average maturity of 5.7 years at December 31, 2004. Our senior credit facilities have scheduled maturity dates between February 2006 and March 2009. Additionally, should our revolving credit facilities be declared in default, the amount outstanding could be declared to be immediately due and payable. Accordingly, there could be a mismatch between our anticipated cash receipts and cash disbursements in 2005 and subsequent periods. Although we have historically been able to secure financing sufficient to fund our operations, we do not presently have agreements with our lenders to extend the term of our existing funding commitments or to replace such commitments upon their expiration. If we are unable to refinance our existing loans, we could be required to sell our portfolio of customer notes receivable, probably at a substantial discount, or to seek other alternatives to enable us to continue in business. We cannot be certain that we will be able to obtain required financing in the future.

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

Our business is highly regulated.

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

We are dependent on our key personnel.

     During 2001, we were forced to downsize our staff, and we terminated many employees with extended in-depth experience. However, we retained key members of management. The loss of the services of the key members of management could have a material adverse effect on our operations. Should our business develop and expand again in the future, we would require additional management and employees. Inability to hire when needed, retain, and integrate needed new or replacement management and employees could have a material adverse effect on our results of operations, liquidity, and financial position in future periods.

We will incur costs for additional development and construction activities at our Existing Resorts.

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

	°	construction costs or delays at a property may exceed original estimates which could make the development uneconomical or unprofitable;
	°	sales of Vacation Intervals at a newly completed property may not be sufficient to make the property profitable; and
	°	financing may not be available on favorable terms for development of or the continued sales of Vacation Intervals at a property.

     We cannot be certain that we will have the liquidity and capital resources to develop and expand the Existing Resorts.

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

     Most of our resorts are located in rustic areas which often requires us to provide public utility water and sanitation services in order to proceed with development. This development is subject to permission and regulation by governmental agencies, the denial or conditioning of which could limit or preclude development. Operation of the utilities also subjects us to risk of liability in connection with both the quality of fresh water provided and the treatment and discharge of waste-water.

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

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

We may be vulnerable to regional conditions.

     Prior to August 1997, all of our operating resorts and substantially all of our customers and borrowers were located in Texas and Missouri. Since August 1997, we have expanded into other states. Our performance and the value of our properties are affected by regional factors, including local economic conditions (which may be adversely impacted by business layoffs or downsizing, industry

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slowdowns, changing demographics, and other factors) and the local regulatory climate. Our current geographic concentration could make us more susceptible to adverse events or conditions which affect these areas in particular.

We may be liable for environmental claims.

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

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

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

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

     The attractiveness of Vacation Interval ownership is enhanced by the availability of exchange networks that allow Silverleaf Owners to exchange in a particular year the occupancy right in their Vacation Interval for an occupancy right in another participating network resort. According to ARDA, the ability to exchange Vacation Intervals was cited by many buyers as an important reason for purchasing a Vacation Interval. Several companies, including RCI, provide broad-based Vacation Interval exchange services, and as of December 31, 2004, the Existing Resorts are qualified for participation in the RCI exchange network. We cannot be certain that we will be able to continue to qualify the Existing Resorts or any future resorts for participation in these networks or any other exchange network. If such exchange networks cease to function effectively, or if our resorts are not accepted as exchanges for other desirable resorts, our sales of Vacation Intervals could decline.

     Our new destination resort in Florida is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.

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

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

Our sales are seasonal in nature.

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

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We are not insured for certain types of losses.

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

We will continue to be highly leveraged.

     Our ability to finance customer notes receivable and develop our resorts will be financed through borrowed funds. The funds borrowed would be collateralized by substantially all of our assets. In addition, our loan agreements contain financial and other restrictive covenants that will limit our ability to borrow additional funds or invest in additional resorts. Failure by us to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our results of operations, liquidity, and financial position. Future loan agreements would likely contain similar restrictions.

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

Common Stock could be impacted by our indebtedness.

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

	°	a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness;
	°	our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited;
	°	our level of indebtedness could limit our flexibility in reacting to changes in the industry and economic conditions generally;
	°	some of our loans are at variable rates of interest, and a substantial increase in interest rates could adversely affect our ability to meet debt service obligations; and
	°	increased interest expense will reduce earnings, if any.

We could lose control over the Clubs.

     Each Existing Resort has a Club that operates through a centralized organization to manage the Existing Resorts on a collective basis. The consolidation of resort operations through the Silverleaf Club permits:

	°	a centralized reservation system for all resorts;
	°	substantial cost savings by purchasing goods and services for all resorts on a group basis, which generally results in a lower cost of goods and services than if such goods and services were purchased by each resort on an individual basis;
	°	centralized management for the entire resort system;
	°	centralized legal, accounting, and administrative services for the entire resort system; and
	°	uniform implementation of various rules and regulations governing all resorts.

     We currently have the right to unilaterally appoint the board of directors or governors of the Clubs until the respective control periods have expired (typically triggered by the percentage of sales of the planned development), unless otherwise provided by the bylaws of the association or under applicable law. Thereafter, the bylaws of certain of the Clubs require that a majority of the members of the board of directors or governors of the Club be owners of Vacation Intervals of that resort. The loss of control of the board of directors or governors of a Club could result in our being unable to unilaterally cause the renewal of the collective Management Agreement with that Club when it expires in 2010.

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

     Our Articles of Incorporation authorize the Board of Directors to issue up to 10,000,000 shares of Preferred Stock in one or more series and to establish the preferences and rights (including the right to vote and the right to convert into Common Stock) of any series

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of Preferred Stock issued. Such preferences and rights would likely grant to the holders of the Preferred Stock certain preferences in right of payment upon a dissolution of the Company and the liquidation of our assets that would not be available to the holders of our Common Stock. To the extent that our credit facilities would permit, the Board could also establish a dividend payable to the holders of the Preferred Stock that would not be available to the holders of the Common Stock.

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

     While we report sales of Vacation Intervals as income for financial reporting purposes at the time of the sale, for federal income tax purposes, we report substantially all Vacation Interval sales on the installment method. Under the installment method, we recognize income for regular federal income tax purposes on the sale of Vacation Intervals when cash is received in the form of a down payment and as payments on customer loans are received. Our liability for deferred taxes (i.e., taxes owed to taxing authorities in the future in consequence of income previously reported in the financial statements) was $85.8 million at December 31, 2004, primarily attributable to this method of reporting Vacation Interval sales, before utilization of any available deferred tax benefits (up to $89.1 million at December 31, 2004), including net operating loss carryforwards, limitations on the use of which are discussed below. These amounts do not include accrued interest on such deferred taxes which also could be payable when the taxes are due, the amount of which is not now reasonably ascertainable. In addition, the net deferred tax benefit is fully-reserved at December 31, 2004. If we should sell the installment notes or be required to factor them or if the notes were foreclosed on by one of our lenders or otherwise disposed of, the deferred gain would be reportable for regular federal tax purposes and the deferred taxes, including interest on the taxes for the period the taxes were deferred, as computed under Section 453 of the Internal Revenue Code of 1986, as amended (the “Code”), would become due. We cannot be certain that we would have sufficient cash resources to pay those taxes and interest nor can we be certain how the payment of such taxes may affect our operational liquidity needs. Furthermore, if our sales of Vacation Intervals should decrease in the future, our diminished operations may not generate either sufficient tax losses to offset taxable income or funds to pay the deferred tax liability from prior periods.

We will be subject to Alternative Minimum Taxes.

     For purposes of computing the 20% alternative minimum tax (“AMT”) imposed under Section 55 of the Code on our alternative minimum taxable income (“AMTI”), the installment sale method is generally not allowed. The Code requires an adjustment to our AMTI for a portion of our adjusted current earnings (“ACE”). Our ACE must be computed without application of the installment sale method. Prior to 1997, we used the installment method for the calculation of ACE for federal AMT purposes. In 1998, we received a ruling from the Internal Revenue Service granting our request for permission to change to the accrual method for this computation effective January 1, 1997. As a result, our AMTI for 1997 through 1999 was increased each year by approximately $9 million, which resulted in our paying substantial additional federal and state taxes in those years. As a result of this change, we paid $641,000, $4.9 million, and $4.3 million of federal AMT for 1997, 1998, and 1999, respectively. Due to losses incurred in 2000 and 2001, we received refunds totaling $8.3 million during 2001 and $1.6 million during 2002 as a result of the carryback of our 2000 and 2001 AMT losses to 1999, 1998, and 1997. Thus, while Section 53 of the Code provides that we will be allowed a credit (“minimum tax credit”) against our regular federal income tax liability for all or a portion of the AMT previously paid, these refunds have resulted in a refund of all such previously paid AMT. As a result, no minimum tax credit is available. We anticipate adequate AMT loss carryforwards to offset 90% of 2004 AMT taxes, resulting in a minimal AMT liability for the year. However, we further anticipate that any AMT loss carryforward remaining at the end of 2004 will be small and will be deductible in future years only to the extent of 90% of AMTI pursuant to Section 56(d) of the Code. Accordingly, we anticipate that we will have significant AMT liabilities in future years.

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

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

     We had net operating loss (“NOL”) carryforwards of approximately $224.8 million at December 31, 2004, for regular federal income tax purposes, related primarily to the immediate deduction of expenses and the simultaneous deferral of installment sale gains.

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In addition to the general limitations on the carryback and carryforward of NOLs under Section 172 of the Code, Section 382 of the Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50 percentage point change in ownership of a corporation within a three year period. The Exchange Offer resulted in an ownership change within the meaning of Section 382(g) of the Code as of May 2, 2002 (the “change date”). As a result, a portion of our NOL is subject to an annual limitation for a portion of the taxable year, which includes the change date as well as the taxable years beginning after the change date. The annual limitation will be equal to the value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This annual limitation is small in comparison to the size of the NOL carryforwards. However, the annual limitation may be increased for any recognized built-in gain, which existed as of the change date to the extent allowed in Section 382(h) of the Code.

     We anticipate that the built-in gain associated with the installment sale gains as of the change date will increase the Section 382 Limitation and allow the utilization of the NOL as needed. Nevertheless, we cannot be certain that the limitations of Section 382 will not limit or deny our future utilization of the NOL. Such limitation or denial would require us to pay substantial additional federal and state taxes and interest for any periods following a change in ownership as described above. Moreover, pursuant to Section 383 of the Code, an ownership change may also limit or deny our future utilization of certain carryover excess credits, including any unused minimum tax credit, if any, attributable to payment of alternative minimum taxes, as described above.

     Accordingly, we cannot be certain that these additional limitations will not limit or deny our future utilization of any NOL and/or excess tax credits. If we cannot utilize these NOL and/or excess tax credits, we will pay substantial additional federal and state taxes and interest for any periods following applicable changes in ownership as described above. Such tax and interest liabilities may adversely affect our liquidity.

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

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

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

     We rely heavily on telemarketing activities to arrange tours of our resorts to potential customers. On July 3, 2003, the Federal Communications Commission (“FCC”) released new rules and regulations promulgated under the Telephone Consumer Protection Act of 1991, which could have a negative impact on our telemarketing activities. The FCC has implemented, in conjunction with the Federal Trade Commission (“FTC”), a National Do Not Call Registry, which applies to both interstate and intrastate commercial telemarketing calls. The FTC recently reported that approximately 83 million telephone numbers had been registered on the National Do Not Call Registry by the end of 2004. This could sharply limit the number of contacts we will be able to make through our telemarketing activities. We will continue to telemarket to individuals who do not place their telephone numbers on a do-not-call list and those with whom we have an established business relationship. Our use of autodialers to call potential customers in our database could also be restricted by new call abandonment standards specified in the FCC rules and regulations. We cannot currently determine the impact that these new regulations could have on our sales; however, the large number of telephone numbers registered on the National Do Not Call Registry and the restrictions on our use of autodialers could negatively affect our sales and marketing efforts and require us to use less effective, more expensive alternative marketing methods. The new rules became effective on October 1, 2003 and we have experienced a decline in the number of telemarketing calls we are able to complete as a result of the changes in the rules relating to the use of automatic dialers. All companies involved in telemarketing expect some negative impact to their businesses as a result of the do-not-call rules and other federal and state legislation which seeks to protect the privacy of consumers from various types of marketing solicitations. Because of our historical dependence on telemarketing, we believe that these changes in the law will continue to have a material impact on our operations and will require us to modify our historical marketing practices in order to both remain compliant with the law and to achieve the levels of resort tours by consumers which are necessary for our profitable operation. We will continue to assess both the rules’ impact on operations and alternative methods of marketing, such as direct mail, that are not impacted by the new rules. In addition to the National Do Not Call List, various states have implemented Do Not Call legislation which also may affect our business.

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ITEM 2. PROPERTIES

     At December 31, 2004, we owned a total of 12 timeshare resorts. Each of these resorts was encumbered at December 31, 2004 due to inventory from each being pledged as collateral under our inventory credit facilities with our senior lenders. See Footnote 8 - Debt in the Notes to Consolidated Financial Statements for further explanation. Principal developmental activity which occurred during 2004 and future plans are summarized below.

     Continued Development of The Villages Resort. The Villages Resort, located approximately 100 miles east of Dallas, Texas, has 334 existing units. Silverleaf intends to develop approximately 96 additional units (4,992 Vacation Intervals) at this resort in the future. During 2004, we did not add units at this resort.

     Continued Development of Piney Shores Resort. Piney Shores Resort, located near Conroe, Texas, north of Houston, has 178 existing units. We intend to develop approximately 114 additional units (5,928 Vacation Intervals) at this resort. During 2004, we added six units at this resort.

     Continued Development of Hill Country Resort. Hill Country Resort, located near Canyon Lake in the hill country of central Texas between Austin and San Antonio, has 278 existing units. We intend to develop approximately 234 additional units (12,168 Vacation Intervals) at this resort. During 2004, we did not add units at this resort.

     Continued Development of Timber Creek Resort. Timber Creek Resort, located in Desoto, Missouri, has 72 existing units. We intend to develop approximately 84 additional units (4,368 Vacation Intervals) at this resort. During 2004, we did not add units at this resort.

     Continued Development of Fox River Resort. Fox River Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 198 existing units. We intend to develop approximately 252 additional units (13,104 Vacation Intervals) at this resort. During 2004, we did not add units at this resort.

     Continued Development of Apple Mountain Resort. Apple Mountain Resort, located approximately 125 miles north of Atlanta, Georgia, has 72 existing units. We intend to develop approximately 180 additional units (9,360 Vacation Intervals) at this resort. During 2004, we added 12 units at this resort.

     Continued Development of Holiday Hills Resort. Holiday Hills Resort, located two miles east of Branson, Missouri, in Taney County, has 392 existing units. We intend to develop approximately 396 additional units (20,564 Vacation Intervals) at this resort. During 2004, we added 12 units at this resort.

     Continued Development of Oak N’ Spruce Resort. Oak N’ Spruce Resort, located 134 miles west of Boston, Massachusetts, has 272 existing units. Silverleaf intends to develop approximately 78 additional units (4,056 Vacation Intervals) at this resort in the future. During 2004, we added 12 units at this resort.

     Continued Development of Silverleaf’s Seaside Resort. Silverleaf’s Seaside Resort, located in Galveston, Texas, has 84 existing units. We intend to develop approximately 198 additional units (10,296 Vacation Intervals) at this resort. During 2004, we did not add units at this resort.

     Acquisition of Orlando Breeze. In October 2004, we completed the acquisition of a 4.8 acre tract of land located in Davenport, Florida, just outside Orlando, Florida, for an aggregate purchase price of approximately $6.0 million. The site, formerly known as the Villas at Polo Park, is near the major Florida tourist attractions of Walt Disney World, Sea World, and Universal Studios. The property is comprised of 48 two and three bedroom units and provides resort amenities such as a heated outdoor swimming pool with whirlpool, fitness center, arcade, playground, sand volleyball and basketball courts. Our public offering statement filed with the Florida Bureau of Standards and Registrations was approved in February 2005, granting us sales approval for 16 units encompassing 832 one-week Vacation Intervals. We plan to seek approval to sell the remaining 32 units, encompassing 1,664 one-week Vacation Intervals in the future. We also intend to develop approximately 24 additional units (1,248 Vacation Intervals) at this resort in the future.

     As of December 31, 2004, we had construction commitments of approximately $9.6 million.

     In December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia, Pennsylvania, for approximately $1.9 million. The property was intended to be developed as a Drive-to Resort (i.e., Beech Mountain Resort). We received regulatory approval to develop 408 units (21,216 Vacation Intervals), but we did not schedule dates for construction, completion of initial units, or commencement of marketing and sales efforts. In 2003, we determined that we would not develop this property as initially planned.

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Future Growth Strategy

     Our credit facilities limit our ability to expand our resort system beyond a limited amount of development, as shown in the business model. As a result, we will continue to develop new or existing resorts within the limitations set forth in the business model by maintaining marketing, sales, and development activities at those resorts in accordance with our current business model. We will also continue to emphasize our secondary products, such as biennial (alternate year) intervals, to broaden our potential market with a wider price range of product. We will concentrate more on marketing to existing members, including sales of upgraded Vacation Intervals, second weeks, and existing owner referral programs.

Competitive Advantages

     We believe our business affords us the following competitive advantages:

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

     Substantial Internal Growth Capacity. At December 31, 2004, we had an inventory of 22,857 Vacation Intervals and a master plan to construct new units which will result in up to 84,836 additional Vacation Intervals at the Existing Resorts. Our master plan for construction of new units is contingent upon future sales at the Existing Resorts and the availability of financing, granting of governmental permits, and future land-planning and site-layout considerations.

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

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

     Centralized Property Management. We presently operate all of the Existing Resorts on a centralized and collective basis with operating and maintenance costs paid from Silverleaf Owners’ monthly dues. We believe that consolidation of resort operations benefits Silverleaf Owners by providing them with a uniform level of service, accommodations, and amenities on a standardized, cost-effective basis. Integration also facilitates our internal exchange program and the Bonus Time Program.

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

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Resorts Summary

     The following tables set forth certain information regarding each of the Existing Resorts at December 31, 2004, unless otherwise indicated.

Existing Resorts

     In February 2005, we obtained approval to operate a fifth destination resort, which was acquired in October 2004. Information for this resort is as follows:

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(a)

These totals do not reflect sales of upgraded Vacation Intervals to existing Silverleaf Owners. In this context, a sale of an “upgraded Vacation Interval” refers to an exchange of a lower priced interval for a higher priced interval in which the Silverleaf Owner is given credit for all principal payments previously made toward the purchase of the lower priced interval. For the year ended December 31, 2004, upgrade sales at the Existing Resorts were as follows:

	The average sales price for the 4,088 upgraded Vacation Intervals sold was $6,928 for the year ended December 31, 2004.
(b)	Represents units included in our master plan. This plan is subject to change based upon various factors, including consumer demand, the availability of financing, grant of governmental land-use permits, and future land-planning and site layout considerations. The following chart reflects the status of certain planned units at December 31, 2004:

	“Land-Use Process Pending” means that we have commenced the process which we believe is required under current law in order to obtain the necessary land-use authorizations from the applicable local governmental authority with jurisdiction, including submitting for approval any architectural drawings, preliminary plats, or other attendant items as may be required.
	“Land-Use Process Complete” means either that (i) we believe that we have obtained all necessary land-use authorizations under current law from the applicable local governmental authority with jurisdiction, including the approval and filing of any required preliminary or final plat and the issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of any required filing or other fees, we believe that we will under current law obtain such necessary authorizations without further process.
(c)	These totals are net of intervals received from upgrading customers and from intervals received from cancellations.
(d)	Principal amenities available to Silverleaf Owners at each resort are indicated by the following symbols: B — boating; F — fishing; G — golf; H — horseback riding; M — miniature golf; S — swimming pool; and T — tennis.
(e)	Boating is available near the resort.
(f)	Includes three units which have not been finished-out for accommodations and which are currently used for other purposes.

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

Features Common To Existing Resorts

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

     Bonus Time Program. Silverleaf Club’s Bonus Time Program offers Silverleaf Club members a benefit not typically enjoyed by any other timeshare owners. In addition to the right to use a unit one week per year, the Bonus Time Program allows all Silverleaf Club members, who are current on their dues and installment payments, to use vacant units for up to three nights at a time at any of our owned resorts. Sunday through Thursday night stays are currently without charge, while Friday through Saturday stays presently cost $39.95 per night payable to Silverleaf Club. The Bonus Time Program is limited based on the availability of units. Availability is created when a Silverleaf Owner does not use his or her owned week. Silverleaf Owners who have utilized the resort less frequently are given priority to use the program and may only use an interval with an equal or lower rating than their owned Vacation Interval. We believe this program is important as many vacationers prefer shorter two to three day vacations. Owners of unused intervals that are utilized by the Bonus Time Program are not compensated other than by their participation in the Bonus Time Program.

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

     Exchange Privileges. Each Silverleaf Owner has certain exchange privileges which may be used on an annual basis to (i) exchange an interval for a different interval (week) at the same resort so long as the desired interval is of an equal or lower rating; or (ii) exchange an interval for the same interval (week) at any other of the Existing Resorts. These intra-company exchange rights are a convenience we provide our members as an accommodation to them, and are conditioned upon availability of the desired interval or resort. Approximately 3,269 intra-company exchanges occurred in 2004. Silverleaf Owners pay an exchange fee of $75 to Silverleaf Club for each such internal exchange. In addition, most Silverleaf Owners may join the exchange program administered by RCI for an annual fee of $89. Our new destination resort in Florida, Orlando Breeze, is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.

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

     Management Club. Each of the Existing Resorts has a Club for the benefit of the timeshare owners. At December 31, 2004, the Clubs operate under Silverleaf Club to manage the Existing Resorts on a centralized and collective basis. We have contracted with Silverleaf Club to perform the supervisory, management, and maintenance functions granted by the Clubs. Costs of these operations are covered by monthly dues paid by timeshare owners to their respective Clubs together with income generated by the operation of certain amenities at each respective resort. Our new destination resort in Florida, Orlando Breeze, has its own club which will be operated independently of Silverleaf Club.

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

Description Of Timeshare Resorts Owned and Operated By Silverleaf

Drive-to Resorts

     Holly Lake Resort. Holly Lake is a family-oriented golf resort located in the Piney Woods of east Texas, approximately 105 miles east of Dallas, Texas. The timeshare portion of Holly Lake is part of a 4,300 acre mixed-use development of single-family lots and timeshare units with other third-party developers. We own approximately 1,206 acres within Holly Lake, of which approximately 1,133 acres may not be developed due to deed restrictions. At December 31, 2004, approximately 27 acres were developed. We have no future development plans.

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     At December 31, 2004, 130 units were completed and no additional units are planned for development. Three different types of units are offered at the resort: (i) two bedroom, two bath, vinyl siding, fourplexes; (ii) one bedroom, one bath, one sleeping loft, log construction duplexes; and (iii) two bedroom, two bath, log construction fourplexes. Each unit has a living room with sleeper sofa and full kitchen. Other amenities within each unit include whirlpool tub, color television, and vaulted ceilings. Certain units include interior ceiling fans, imported ceramic tile, over-sized sliding glass doors, and rattan and pine furnishings.

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

     At December 31, 2004, the resort contained 6,500 Vacation Intervals, of which 1,987 intervals remained available for sale. We have no plans to build additional units. Vacation Intervals at the resort are currently priced from $7,000 to $12,300 for one-week stays. During 2004, 237 Vacation Intervals were sold.

     The Villages and Lake O’ The Woods Resorts. The Villages and Lake O’ The Woods are sister resorts located on the shores of Lake Palestine, approximately 100 miles east of Dallas, Texas. The Villages, located approximately five miles northwest of Lake O’ The Woods, is an active sports resort popular for water-skiing and boating. Lake O’ The Woods is a quiet wooded resort where Silverleaf Owners can enjoy the seclusion of dense pine forests less than two hours from the Dallas-Fort Worth metroplex. The Villages is a mixed-use development of single-family lots and timeshare units, while Lake O’ The Woods has been developed solely as a timeshare resort. The two resorts contain approximately 652 acres, of which approximately 379 may not be developed due to deed restrictions. At December 31, 2004, approximately 181 acres were developed and 18 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 334 units were completed at The Villages and 64 units were completed at Lake O’ The Woods. An additional 96 units are planned for development at The Villages and no additional units are planned for development at Lake O’ The Woods. There are five different types of units at these resorts: (i) three bedroom, two and one-half bath, wood siding exterior duplexes and fourplexes (two units); (ii) two bedroom, two and one-half bath, wood siding exterior duplexes and fourplexes; (iii) two bedroom, two bath, brick and siding exterior fourplexes; (iv) two bedroom, two bath, wood and vinyl siding exterior fourplexes, sixplexes, twelveplexes and a sixteenplex; and (v) one bedroom, one bath with two-bed loft sleeping area, log construction duplexes. Amenities within each unit include full kitchen, whirlpool tub, and color television. Certain units include interior ceiling fans, ceramic tile, and/or a fireplace. “Presidents Harbor” units feature a larger, more spacious floor plan (1,255 square feet), back veranda, washer and dryer, and a more elegant decor.

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

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

     At December 31, 2004, The Villages contained 16,960 total Vacation Intervals, of which 5,383 remained available for sale. The Company plans to build 96 additional units at The Villages, which would yield an additional 4,992 Vacation Intervals available for sale. At December 31, 2004, Lake O’ The Woods contained 3,200 total Vacation Intervals, of which 1,079 remained available for sale. The Company has no plans to build additional units at Lake O’ The Woods. Vacation Intervals at The Villages and Lake O’ The Woods are currently priced from $7,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals), while one-week “Presidents Harbor” intervals are priced at $9,900 to $22,500 depending on the value rating of the interval. During 2004, 1,360 and 349 Vacation Intervals were sold at The Villages and Lake O’ The Woods, respectively.

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     Piney Shores Resort. Piney Shores Resort is a quiet, wooded resort ideally located for day-trips from metropolitan areas in the southeastern Gulf Coast area of Texas. Piney Shores Resort is located on the shores of Lake Conroe, approximately 40 miles north of Houston, Texas. The resort contains approximately 113 acres. At December 31, 2004, approximately 72 acres were developed and 11 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 178 units were completed and 114 units are planned for development at Piney Shores Resort. All units are two bedroom, two bath units and will comfortably accommodate up to six people. Amenities include a living room with sleeper, full kitchen, whirlpool tub, color television, and interior ceiling fans. Certain “lodge-style” units feature stone fireplaces, white-washed pine wall coverings, “age-worn” paint finishes, and antique furnishings. “Presidents Cove” units feature a larger, more spacious floor plan (1255 square feet) with a back veranda, washer and dryer, and a more elegant décor.

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

     At December 31, 2004, the resort contained 9,064 Vacation Intervals, of which 3,056 remained available for sale. We intend to build 114 additional units, which would yield an additional 5,928 Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $7,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals), while one-week “Presidents Cove” intervals are priced at $9,900 to $22,500 depending on the value rating of the interval. During 2004, 866 Vacation Intervals were sold.

     Hill Country Resort. Hill Country Resort is located near Canyon Lake in the hill country of central Texas between Austin and San Antonio. The resort contains approximately 110 acres. At December 31, 2004, approximately 38 acres were developed and 19 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 278 units were completed and 234 units are planned for development at Hill Country Resort. Some units are single story, while certain other units are two-story structures in which the bedrooms and baths are located on the second story. Each unit contains two bedrooms, two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities within each unit include whirlpool tub, color television, and interior design details such as vaulted ceilings. Certain units include interior ceiling fans, imported ceramic tile, over-sized sliding glass doors, rattan and pine furnishings, or fireplace. 122 units feature the Company’s new “lodge style.” 44 “Presidents Villas” units feature a larger, more spacious floor plan (1,255 square feet), back veranda, washer and dryer, and a more elegant decor.

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

     At December 31, 2004, the resort contained 14,084 Vacation Intervals, of which 2,205 remained available for sale. The Company plans to build 234 additional units, which collectively would yield 12,168 additional Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $7,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals), while one-week “Presidents Villas” intervals are priced at $9,900 to $23,500 depending on the value rating of the interval. During 2004, 1,823 Vacation Intervals were sold.

     Timber Creek Resort. Timber Creek Resort, in Desoto, Missouri, is located approximately 50 miles south of St. Louis, Missouri. The resort contains approximately 332 acres. At December 31, 2004, approximately 180 acres were developed and 6 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 72 units were completed and an additional 84 units are planned for future development at Timber Creek Resort. All units are two bedroom, two bath units. Amenities within each new unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units include a fireplace, ceiling fans, imported ceramic tile, French doors, and rattan or pine furniture.

     The primary recreational amenity available at the resort is a 40-acre fishing lake. Other amenities include a clubhouse, a five-hole par three executive golf course, swimming pool, two lighted tennis courts, themed miniature golf course, volleyball court,

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shuffleboard/multi-use sports court, fitness center, horseshoes, archery, a welcome center, playground, arcade, movie room, tanning bed, cedar sauna, sales and registration building, hook-ups for recreational vehicles, and boat docks. We are obligated to maintain and provide campground facilities for members of the previous owner’s campground system.

     At December 31, 2004, the resort contained 3,744 Vacation Intervals and 1,143 Vacation Intervals remained available for sale. We plan to build 84 additional units, which would collectively yield 4,368 additional Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $8,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals). During 2004, 940 Vacation Intervals were sold.

     Fox River Resort. Fox River Resort, in Sheridan, Illinois, is located approximately 70 miles southwest of Chicago, Illinois. The resort contains approximately 372 acres. At December 31, 2004, approximately 156 acres were developed and 26 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 198 units are completed and 252 units are planned for future development at Fox River Resort. All units are two bedroom, two bath units. Amenities within each unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units include ceiling fans, ceramic tile, and rattan or pine furniture. “Presidents Lakeside” units feature a larger, more spacious floor (1,288 square feet) with a back veranda, washer and dryer, and a more elegant decor.

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

     At December 31, 2004, the resort contained 10,296 Vacation Intervals and 1,747 Vacation Intervals remained available for sale. We plan to build 252 additional units, which would collectively yield 13,104 additional Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $8,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals), while one-week “Presidents Lakeside” intervals are priced at $9,900 to $24,000 depending on the value rating of the interval. During 2004, 1,157 Vacation Intervals were sold.

     Apple Mountain Resort. Apple Mountain Resort, in Clarkesville, Georgia, is located approximately 125 miles north of Atlanta, Georgia. The resort is situated on 285 acres of beautiful open pastures and rolling hills, with 150 acres being the resort’s golf course. At December 31, 2004, approximately 191 acres were developed and 16 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 72 units are completed and 180 units are planned for development at Apple Mountain Resort. The “lodge-style” units were the first units developed. Each unit is approximately 824 square feet with all units being two bedrooms, two full baths. Amenities within each unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units include ceiling fans, imported ceramic tile, electronic door locks, and rattan or pine furniture.

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

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

     At December 31, 2004, the resort contained 3,744 Vacation Intervals, of which 2,263 remained available for sale. We plan to build 180 additional “lodge-style” units, which would yield an additional 9,360 Vacation Intervals available for sale. Vacation

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Intervals at the resort are currently priced from $8,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals). During 2004, 6 Vacation Intervals were sold.

Destination Resorts

     Ozark Mountain Resort. Ozark Mountain Resort is a family-oriented resort located on the shores of Table Rock Lake, which features bass fishing. The resort is located approximately 15 miles from Branson, Missouri, a family music and entertainment center, 233 miles from Kansas City, and 276 miles from St. Louis. Ozark Mountain Resort is a mixed-use development of timeshare and condominium units. At December 31, 2004, the resort contained approximately 116 acres. We have no future development plans.

     At December 31, 2004, 136 units were completed and no additional units are planned for development. There are two types of units at the resort: (i) two bedroom, two bath, one-story fourplexes and (ii) two bedroom, two bath, three-story sixplexes. Each standard unit includes two large bedrooms, two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities within each unit include whirlpool tub, color television, and vaulted ceilings. Certain units contain interior ceiling fans, imported ceramic tile, oversized sliding glass doors, rattan or pine furnishings, or fireplace. “Presidents View” units feature a panoramic view of Table Rock Lake, a larger, more spacious floor plan (1,255 square feet), front and back verandas, washer and dryer, and a more elegant decor.

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

     At December 31, 2004, the resort contained 6,848 Vacation Intervals, of which 768 remained available for sale. The Company has no plans to build additional units. Vacation Intervals at the resort are currently priced from $9,500 to $17,000 for one-week stays, while one-week “Presidents View” intervals are priced at $13,000 to $25,000 depending on the value rating of the interval. During 2004, 570 Vacation Intervals were sold.

     Holiday Hills Resort. Holiday Hills Resort is a resort community located in Taney County, Missouri, two miles east of Branson, Missouri. The resort is 224 miles from Kansas City and 267 miles from St. Louis. The resort is heavily wooded by cedar, pine, and hardwood trees, and is favored by Silverleaf Owners seeking quality golf and nightly entertainment in nearby Branson. Holiday Hills Resort is a mixed-use development of single-family lots, condominiums, and timeshare units. The resort contains approximately 405 acres, including a 91-acre golf course. At December 31, 2004, approximately 301 acres were developed and 63 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, 392 units were completed and an additional 396 units are planned for future development. There are four types of timeshare units at this resort: (i) two bedroom, two bath, one-story fourplexes, (ii) one bedroom, one bath, with upstairs loft, log construction duplexes, (iii) two bedroom, two bath, two-story fourplexes, and (iv) two bedroom, two bath, three-story sixplexes and twelveplexes. Each unit includes a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units will include a fireplace, ceiling fans, imported tile, oversized sliding glass doors, vaulted ceilings, and rattan or pine furniture. “Presidents Fairways” units feature a larger, more spacious floor plan (1,255 square feet), back veranda, washer and dryer, and a more elegant décor.

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

     At December 31, 2004, the resort contained 20,248 Vacation Intervals, of which 1,175 remained available for sale. The Company plans to build 396 additional units, which would yield an additional 20,564 Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $9,500 to $17,000 for one-week stays (and start at $7,250 for biennial intervals), while one-week “Presidents Fairways” intervals are priced at $13,000 to $27,000 depending on the value rating of the interval. During 2004, 2,459 Vacation Intervals were sold.

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     Oak N’ Spruce Resort. In December 1997, we acquired the Oak N’ Spruce Resort in the Berkshire mountains of western Massachusetts. The resort is located approximately 134 miles west of Boston, Massachusetts, and 114 miles north of New York City. Oak N’ Spruce Resort is a mixed-use development which includes a hotel and timeshare units. The resort contains approximately 244 acres. At December 31, 2004, approximately 37 acres were developed and 10 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, the resort had 272 units completed and 78 units are planned for development. There are six types of existing units at the resort: (i) one-bedroom flat, (ii) one-bedroom townhouse, (iii) two-bedroom flat, (iv) two-bedroom townhouse, (v) two-bedroom, flex-time, and (vi) two-bedroom lodge style and Presidents style units. There is also a 21-room hotel at the resort which could be converted to timeshare use. Amenities within each new unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units include ceiling fans, ceramic tile, and rattan or pine furniture.

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

     At December 31, 2004, the resort contained 14,144 Vacation Intervals, of which 1,691 remained available for sale. We plan to build 78 additional “lodge-style” units, which would yield an additional 4,056 Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from $8,000 to $18,000 for one-week stays (and start at $6,100 for biennial intervals). During 2004, 1,104 Vacation Intervals were sold.

     Silverleaf’s Seaside Resort. Silverleaf’s Seaside Resort is located in Galveston, Texas, approximately 50 miles south of Houston, Texas. The resort contains approximately 87 acres. At December 31, 2004, approximately 50 acres were developed and 37 acres are currently planned by the Company to be used for future development.

     At December 31, 2004, the resort had 84 units and an additional 198 are planned for development. The two bedroom, two bath units are situated in three-story twelveplex buildings. Amenities within each unit include two large bedrooms, two bathrooms (one with a whirlpool tub), living room with sleeper sofa, full kitchen, color television, and electronic door locks.

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

     At December 31, 2004, the resort contained 4,368 Vacation Intervals of which 360 remained available for sale. We plan to build 198 additional units which would yield an additional 10,296 Vacation Intervals for sale. Vacation Intervals at the resort are currently priced from $9,000 to $18,500 for one-week stays (and start at $6,250 for biennial intervals). During 2004, 474 Vacation Intervals were sold.

     Orlando Breeze. In October 2004, we acquired a 4.8-acre tract of land located in Davenport, Florida, just outside Orlando, Florida, for an aggregate purchase price of approximately $6.0 million. The site, formerly known as the Villas at Polo Park, is near the major Florida tourist attractions of Walt Disney World, Sea World, and Universal Studios. Our public offering statement filed with the Florida Bureau of Standards and Registrations was approved in February 2005, granting us sales approval for 16 units encompassing 832 one-week vacation intervals.

     The resort has 48 two and three bedroom units, with eight two-bedroom units and eight three-bedroom units having been recently refurbished as of February 2005. Amenities within each refurbished unit include a living room with sleeper sofa, full kitchen, color television, ceiling fans, ceramic tile, Broyhill furniture, and aluminum patio furniture. Amenities at the resort include a heated outdoor swimming pool with whirlpool, fitness center, arcade, playground, sand volleyball and basketball courts.

     Vacation Intervals at the resort are currently priced from $19,500 to $26,500 for one-week stays.

ITEM 3. LEGAL PROCEEDINGS

     Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et al, Circuit Court of Christian County, Missouri. The homeowners’ associations of five condominium projects that a former subsidiary of the Company constructed in Missouri filed two separate actions against the Company in 1999 and 2000, respectively, alleging breach of warranty, construction defects and breach of management agreements. These two cases have been consolidated. The plaintiffs have filed an amended petition alleging actual damages in excess of $25,000 and punitive damages. A special master has been appointed by agreement of all the parties in

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this case. A special master is appointed by the court to assist the court with judicial duties. The special master will decide discovery disputes and make recommendations on substantive motions. Additionally, by agreement of the parties, the court has ordered that the special master will hear the lawsuit without a jury beginning on September 6, 2005 and make a recommendation for disposition of the case to the court. Discovery continued in the lawsuit during 2004, but is not yet complete. The Company has filed a counterclaim seeking contractual indemnification under the terms of management agreements with each of the plaintiffs. At this time, the Company’s legal fees and costs of litigation are being paid by its insurance carriers, subject to a reservation of rights by these insurers. The Company cannot predict the final outcome of these claims, nor can it estimate the additional costs it could incur, or whether its insurance carriers will continue to cover its costs in connection with these claims. The Company intends to vigorously defend this litigation.

     Ozark Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc., Circuit Court of Stone County, Missouri. The homeowners’ associations of three condominium projects that a former subsidiary of the Company constructed in Missouri filed an action against the Company in 2000 alleging construction defects, misrepresentation, breach of fiduciary duty, negligence, and breach of management agreements and seeking damages and certain other equitable relief. The plaintiffs seek actual and punitive damages in excess of $500,000, attorneys fees and costs. The Company has filed a counterclaim seeking contractual indemnification under the terms of management agreements with the plaintiffs. At this time, a majority of the Company’s legal fees and costs of litigation are being paid by its insurance carriers, subject to a reservation of rights by these insurers. The trial, which was rescheduled for March 21, 2005 has been continued and the parties, through their counsel have agreed to the terms of a settlement, which terms have not yet been reduced to a definitive settlement agreement and executed by all parties. If the settlement agreement is fully implemented, the Company estimates that its maximum future exposure will be limited to no more than $200,000. Should the settlement not be fully implemented, the Company intends to continue to vigorously defend this litigation.

     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 the lawsuits currently pending 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.

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

     Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves will be established from time to time by the Company when deemed appropriate under generally acceptable accounting principles. However, the outcome of a claim for which the Company has not deemed a reserve to be necessary may be decided unfavorably to the Company and could require the Company to pay damages or make other expenditures in amounts or a range of amounts that could be materially adverse to the Company.

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

     None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The following table sets forth the high and low closing prices of the Company’s Common Stock for the quarterly periods indicated, which correspond to the quarterly fiscal periods for financial reporting purposes. During 2003 and a portion of the first quarter of 2004, the prices for the Common Stock are closing bid prices as quoted on the Electronic Quotation Service of Pink Sheets LLC (“Pink Sheets”). Effective February 2004, the Company’s shares began trading on the OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. The Common Stock prices from that point forward are the closing bid prices as quoted on the OTC Bulletin Board.

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     The Company’s Common Stock was traded on the NYSE until June 2001 when it was suspended from trading and subsequently delisted in August 2001. The suspension and subsequent delisting of the Company’s Common Stock by the NYSE was caused by a drop in the per share trading value of the Company’s stock on the NYSE that began in March 2001. This drop in per share trading value persisted and the Company ceased to meet NYSE listing criteria when its total market capitalization remained below $15 million and its minimum share price remained below $1 over a 30 trading-day period. After being delisted by the NYSE, the Company’s Common Stock was quoted on the Pink Sheets under the symbol “SVLF” until February 2004, when the Company’s shares began trading on the OTC Bulletin Board.

     As of December 31, 2004, the Company believes that there were approximately 1,100 holders of its Common Stock, which is the only class of the Company’s equity securities outstanding.

     The Company’s stock option plans provide for the award of nonqualified stock options to directors, officers, and key employees, and the grant of incentive stock options to salaried key employees. Stock options provide for the right to purchase common stock at a specified price, which may be less than or equal to fair market value on the date of grant (but not less than par value). Stock options may be granted for any term and upon such conditions determined by the Board of Directors of the Company.

Dividend Policy

     The Company is, and will continue to be, restricted from paying dividends due to debt arrangements, and, therefore, does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain future earnings to finance its operations and fund the growth of its business. Any payment of future dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, the Company’s earnings, financial condition, capital requirements, level of indebtedness, contractual and other restrictions in respect of the payment of dividends, and other factors that the Company’s Board of Directors deems relevant.

Shares Authorized for Issuance under Equity Compensation Plans

     Please see “Security Ownership of Certain Beneficial Owners and Management” under item 12 of this annual report on Form 10-K for information regarding shares authorized under our equity compensation plans.

Recent Sales of Unregistered Securities

     There have been no recent sales of unregistered securities.

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ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Historical Financial and Operating Information

     The Selected Consolidated Historical Financial and Operating Information should be read in conjunction with the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this report on Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the “Selected Financial Data” and our Financial Statements and the notes thereto and other financial data included elsewhere herein. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements.

Executive Summary

     We are in the business of owning and operating twelve timeshare resorts as of December 31, 2004. In February 2005, we were granted approval to operate a thirteenth timeshare resort that we acquired in October 2004. Our income is derived principally from marketing and selling timeshare interests at our resorts in one-week intervals, and from the interest earned from financed sales of such timeshare interests. As of December 31, 2004, eight of our resorts are located within one and one half to two hours of major metropolitan areas (“drive-to resorts”), which are the primary market for timeshare sales to new purchasers. Four of our resorts are in destination resort areas located further from major metropolitan areas (“destination resorts”). In 2005, we reclassified one of our drive-to resorts in Texas to a destination resort. The principal purchasers of timeshare interests at the destination resorts are existing owners who are upgrading or buying additional interests.

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

	•	We sell a vacation and recreational product, predominantly to customers who drive to our locations. We believe that this type of usage is somewhat immune from issues that would affect the travel industry as a whole (i.e. the disruptions to the airline industry and destination resort industry after September 11, 2001), but major increases in gasoline prices or other issues that cause the U.S population to drive less could have a negative impact on us.
	•	Telemarketing is a very important element in the generation of tours to potential new customers of timeshare interests. We presently comply with state and national do not call regulations. Changes to existing regulations could have a negative impact on our ability to generate the necessary tours to sell timeshare interests.
	•	We finance the majority of our sales over seven to ten years. An economic downturn could negatively affect the ability of our customers to pay their principal and interest, which might result in additional provision for uncollectible notes.
	•	We predominantly have variable rate credit facilities. An increase in interest rates above our floor rates could have a negative impact on our profitability.
	•	Since we predominantly finance our sales of timeshare interests, we require credit facilities to have the liquidity necessary to fund our costs and expenses. We presently have adequate credit facilities to fund our operations through March 2006. A disruption in the availability of credit facilities would severely impact our ability to continue marketing and selling timeshare interests as we do today.
	•	We believe there are two areas which are particularly important to our success as a business:

§§

The first area is identifying potential customers who are likely to pay their principal and interest payments when due after purchasing timeshare intervals, thereby resulting in an acceptable provision for uncollectible notes.

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§§

The second area is to keep marketing expenses at an acceptable level to result in a favorable percentage relationship between sales and marketing expense and total sales.

We earn revenue and income and finance our operations as follows:

•

Our primary source of revenue is vacation interval sales. Vacation interval sales are a combination of sales to new customers and upgrade and/or additional week sales to existing customers. We have been focusing on increasing the percentage mix of sales to existing customers in 2002, 2003, and 2004. In addition we have been focusing on identifying potential new customers who have better credit characteristics that will ultimately be more likely to pay their principal and interest when due. To manage sales we assess separately sales to potential new customers and sales to existing customers. For sales to potential new customers we measure sales per tour in order to ascertain that our marketing programs are delivering the proper types of family tours to effectively and efficiently sell new customers. State law allows purchasers of timeshares to rescind their purchase within five to seven days depending on the state. We also measure rescission amounts and rates of new customers to ascertain that our marketing and sales programs continue effectively. The number of tours to existing customers is not meaningful. As a result, we begin our assessment of sales to existing customers by totaling gross sales to existing customers. Rescissions by existing customers are generally much lower than rescissions by new customers. We do measure rescission amounts and rates to calculate net sales to existing customers. We then combine net sales to new and existing customers to calculate total sales. One product that is sold to new customers is a Sampler, which gives the customer the right to use the resorts on an “as available” basis from Sunday to Thursday. These sales are presented on a separate line in the operating statement, and are therefore subtracted from total sales in order to calculate vacation interval sales. The following table shows the elements management considers important to assessing our vacation interval sales (dollars in thousands, except for sales per tour):

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In assessing the effectiveness of our sales and marketing programs, we believe it is also important to compare sales and marketing expenses to sales. The separate elements of sales and marketing expense that we assess are the cost of marketing to new purchasers, the cost of marketing to existing purchasers, commissions, and sales and marketing overhead, as detailed in the following table (dollars in thousands, except for cost per tour):

•	Our second most important source of revenue is interest income, which is predominantly earned on our notes receivable.

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Interest income as a percentage of notes receivable has increased each year from 2002 through 2004 as a result of increasing the rate we charged our new customers by 1% in each of the years ending December 31, 2002 and 2003.

•	We have three lesser revenue sources. They are management fees, predominantly from Silverleaf Club, gain on sale of notes receivable from our sale of notes receivable to our SPE, and other income.

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We generate cash from the collection of down payments, principal and interest from purchasers of timeshare interval sales, the sales of notes receivable and from management fees and other income. We also generated cash in 2002 and 2003 from the sale of undeveloped land at locations that had been previously acquired for the possible development of new resorts. Since the majority of our sales are financed, we have revolving credit facilities that are drawn on monthly to fund our costs, expenses and capital expenditures.

     We operate in only one business segment, the timeshare industry. Further, we only operate in the United States. As of December 31, 2004, we operate resorts in five states (Texas, Missouri, Illinois, Massachusetts and Georgia), and sell primarily to residents of those states, with limited sales to residents of nearby states. In February 2005, we obtained approval to operate our new resort in Florida, which was acquired in October 2004.

     Our principal short-term focus is on continuing to identify new and existing customers with acceptable credit characteristics that will allow us to profitably sell new timeshare intervals at existing resorts that will require minimal capital outlays. This focus has resulted in better early performance of notes receivable originated in 2003 and 2004 as compared to early performance of notes originated in 1998 through 2002. Long term, if the opportunities present themselves, we will consider adding resorts where timeshare intervals can be marketed and sold at a profit.

Closing of Exchange Offer and Debt Restructuring

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

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

Critical Accounting Policies

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

     We recognize Vacation Interval sales revenues on the accrual method in accordance with Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate,” and Staff Accounting Bulletin No. 101, “Revenue Recognition.” A sale is recognized after a binding sales contract has been executed, the buyer’s price is fixed, the buyer has made a down payment of at least 10%, the statutory rescission period has expired, and collectibility is reasonably assured. If all accrual method criteria are met except that construction is not substantially complete, revenues are recognized on the percentage-of-completion basis. Under this method, the portion of revenue applicable to costs incurred, as compared to total estimated construction and direct selling costs, is recognized in the period of sale. The remaining amount is deferred and recognized as Vacation Interval sales in future periods as the remaining costs are incurred. Certain Vacation Interval sales transactions are deferred until the minimum down payment has been received. We account for these transactions utilizing the deposit method. Under this method, the sale is not recognized, a receivable is not recorded,

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and inventory is not relieved. Any cash received is carried as a deposit until the sale can be recognized. When these types of sales are cancelled without a refund, deposits forfeited are recognized as income and the interest portion is recognized as interest income.

     Sales of notes receivable to our SPE that meet certain underwriting criteria occur on a periodic basis. We allocate the carrying amount between assets sold and retained interest based on their relative fair values at the date of sale. The gain or loss on the sale is determined based on the proceeds received and the recorded value of notes receivable sold. The investment in the SPE is recorded at fair value. The fair value of the investment in the SPE is estimated based on the present value of future expected cash flows of our residual interest in the notes receivable sold. We utilize the following key assumptions to estimate the fair value of such cash flows: customer prepayment rate – 4.3%; expected accounts paid in full as a result of upgrades – 6.2%; expected credit losses – 8.1%; discount rate – ranging from 13.5% to 19%; base interest rate – 4.4%; agent fee – 2%; and loan servicing fees — 1%. Our assumptions are based on experience with our notes receivable portfolio, available market data, estimated prepayments, the cost of servicing, and net transaction costs.

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

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

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

     Inventories are stated at the lower of cost or net realizable value. Cost includes amounts for land, construction materials, direct labor and overhead, taxes, and capitalized interest incurred in the construction or through the acquisition of resort dwellings held for timeshare sale. These costs are capitalized as inventory and are allocated to Vacation Intervals based upon their relative sales values. Upon sale of a Vacation Interval, these costs are charged to cost of sales on a specific identification basis. Vacation Intervals reacquired are placed back into inventory at the lower of their original historical cost basis or market value. Our management periodically reviews the carrying value of our inventory on an individual project basis to ensure that the carrying value does not exceed market value.

     Vacation Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu of foreclosure) and (ii) trade-in associated with the purchase of an upgraded or downgraded Vacation Interval. Vacation Intervals reacquired are recorded in inventory at the lower of their original cost or market value. Vacation Intervals that have been reacquired are relieved from inventory on a specific identification basis when resold. Inventory acquired several years ago through our program to reacquire Vacation Intervals owned but not actively used by Silverleaf Owners has a significantly lower average cost basis than recently constructed inventory, contributing significantly to historical operating margins. Newer inventory added through our construction and acquisition programs has a higher average cost than our older inventory.

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

     We earn a monthly management fee for providing management services to Silverleaf Club equal to the lesser of (a) 15% of the Club’s gross revenues for the year or (b) the amount by which gross revenues exceed expenses, with any shortfalls carried forward into subsequent years. Prior to the Crown Club sale in the third quarter of 2003, we had been recognizing a management fee ranging from 10% to 20% of Crown Club’s dues. For 2004, we recognized $1.2 million in management fee revenues from Silverleaf Club.

Liquidity and Capital Resources

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

     As of December 31, 2002, we were in compliance with our operating covenants. However, due to the results of the quarter ended March 31, 2003, we were not in compliance with three of our financial covenants as follows:

•	Sales and marketing expense for the quarter ended March 31, 2003 was 56.1% of sales, compared to a maximum threshold of 52.5%.
•	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.
•	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.
	Due to the results for the six months ended June 30, 2003, we were in default of two of the financial covenants as follows:
•	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.
•	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.

     Due to the results for the nine months ended September 30, 2003, we were in default of one of the financial covenants as follows:

•	The interest coverage ratio for the twelve months ended September 30, 2003 was 0.40 to 1.0, compared to a minimum requirement of 1.25 to 1.0.

     In addition, as a result of the loss for the quarter ended March 31, 2003, our SPE was in default of financial covenants with its lender. The lender 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 or September 30, 2003.

     In November 2003, we entered into agreements with our three senior lenders to amend our senior credit facilities to modify the financial covenants under which we had been in default since the first quarter of 2003. The amended covenants increased from 52.5% to 55% the maximum permitted ratio of sales and marketing expenses to total sales for each quarter beginning with the quarter ended March 31, 2003. They also exclude the $28.7 million increase in our allowance for uncollectible notes in the quarter ended March 31, 2003 from the calculation of our minimum required consolidated net income, and from the calculation of our minimum required interest coverage ratio of 1.25 to 1.0. In addition to the above amendments, we also received waivers of covenant defaults under our senior credit facilities which occurred in the first quarter of 2003 due to the increase in our allowance for uncollectible notes and our failure to maintain a ratio of sales and marketing expense to total sales of no more than 52.5%.

     As a result of these amendments and waivers we are now in full compliance with all of our financial covenants under our credit facilities with our senior lenders.

     In December 2003, we closed a $66.4 million conduit term loan transaction through a newly-formed wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”). This conduit loan was arranged through one of our existing senior lenders. Under the terms of the new conduit loan, we sold approximately $78.1 million of our Vacation Interval receivables to our subsidiary SF-II for an amount equal to the aggregate principal balances of the receivables. The purchase of these receivables was financed by the existing senior lender through a one-time advance to SF-II of $66.4 million, which is approximately 85% of the outstanding balance of the receivables SF-II purchased from us. All customer receivables that we transferred to SF-II have been pledged as security to the senior lender. The senior lender has also received as additional collateral a pledge of all of our equity interest in SF-II and a $15.7 million demand note from us to SF-II under which payment may be demanded if SF-II defaults on its loan from the lender. Proceeds from the sale of the receivables to SF-II were used to pay down approximately $65.5 million of amounts outstanding under our two senior revolving credit facilities. The senior lender’s new conduit loan to SF-II will mature in 2014 and bears interest at a fixed annual rate of 7.035%.

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     As a result of the closing of the $66.4 million conduit loan, we obtained a two-year extension of our senior revolving credit facilities with two of our senior lenders. The revolving period on these two facilities was extended through March 31, 2006. Additionally, we obtained an extension of our existing revolving credit facility through our SPE through March 31, 2006. In order to obtain the two-year extension of this facility, however, we agreed that the principal amount of the facility would be reduced from $100 million to $85 million.

     Sources of Cash. We generate cash primarily from the cash received on the sale of Vacation Intervals, the financing of customer notes receivable from Silverleaf Owners, the sale of notes receivable to the SPE, management fees, sampler sales, and resort and utility operations. We typically receive a 10% down payment on sales of Vacation Intervals and finance the remainder by receipt of a seven-year to ten-year customer promissory note. We generate cash from the financing of customer notes receivable by (i) borrowing at an advance rate of 75% to 85% of eligible customer notes receivable, (ii) selling notes receivable, and (iii) from the spread between interest received on customer notes receivable and interest paid on related borrowings. Because we use significant amounts of cash in the development and marketing of Vacation Intervals, but collect cash on customer notes receivable over a seven-year to ten-year period, borrowing against receivables has historically been a necessary part of normal operations. During the years ended December 31, 2002, 2003, and 2004, our operating activities reflected net cash provided by operating activities of $56.1 million, $22.4 million, and $5.7 million, respectively. In 2004, the decrease in cash provided by operating activities was primarily the result of decreased sales of notes receivable, and to a lesser extent, cash spent towards construction of new inventory. In 2003, the decrease in cash provided by operating activities was primarily the result of decreased sales of notes receivable.

     Although it appears the Company has adequate liquidity to meet its needs in 2005, it is continuing to identify additional financing arrangements into 2006 and beyond. 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. 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.

     Uses of Cash. Net cash used in investing activities for the years ended December 31, 2002 and 2004 was $497,000 and $570,000, respectively. Investing activities typically reflect a net use of cash due to capital additions and property acquisitions, which was the case in these two years. However in 2003, net cash provided by investing activities was $4.4 million. This was primarily due to our decision to sell land we owned in Las Vegas and Kansas City, which resulted in $4.7 million of proceeds, which was offset by $232,000 in purchases of capital additions. We evaluate sites for additional new resorts or acquisitions on an ongoing basis.

     Net cash used in financing activities for the years ended December 31, 2002 and 2003 was $60.8 million and $24.0 million, respectively. Net cash provided by financing activities was $1.3 million during the year ended December 31, 2004. The decrease in cash used in financing activities from 2002 to 2003 was primarily the result of increased borrowings against pledged notes receivable during 2003, largely due to the $66.4 million conduit term loan transaction through SF-II, partially offset by increased payments on borrowings against pledged notes receivable. The decrease in cash used by financing activities from 2003 to 2004 was primarily the result of decreased payments on borrowings against pledged notes receivable due to lower sales of notes receivable, the proceeds of which are used to pay down borrowings.

     At December 31, 2004, our senior credit facilities provided for loans of up to $232.4 million, of which approximately $210.9 million of principal related to advances under the credit facilities was outstanding. For the year ended December 31, 2004, the weighted average cost of funds for all borrowings, including senior subordinated debt, was 6.8%. Customer defaults have a significant impact on cash available to us from financing customer notes receivable in that notes more than 60 days past due are not eligible as collateral. As a result, we must repay borrowings against such delinquent notes. As of December 31, 2004, $2.0 million of notes were more than 60 days past due.

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

     Off-Balance Sheet Arrangements. We entered into a $100 million revolving credit agreement to finance Vacation Interval notes receivable through an off-balance sheet SPE during 2000. Due to the results of operations during the first quarter of 2003, our SPE was in default of financial covenants with its lender. The lender subsequently waived the defaults and modified its agreement with the SPE in June 2003. We also obtained an extension of our SPE’s existing revolving credit facility through March 2006. In connection with the two-year extension of this facility, however, we agreed that the principal amount of the facility would be reduced from $100 million to $85 million. Our SPE allows us to realize the benefit of an additional $85 million of revolving credit in addition to the on-balance-sheet credit arrangements we have with our senior lenders. We require credit facilities to have the liquidity necessary to fund our costs and expenses, therefore it is vitally important to our liquidity plan to have financing available to us in order to finance future

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sales, since we finance the majority of our timeshare sales over seven to ten years. Effective March 31, 2005, the principal amount of the facility will be reduced from $85 million to $75 million.

     During 2002, we sold $83.4 million of notes receivable to the SPE and recognized pre-tax gains of $6.8 million. In conjunction with these sales, we received cash consideration of $68.9 million, which was used to pay down borrowings under our revolving loan facilities. During 2003, we sold $40.4 million of notes receivable to the SPE and recognized pre-tax gains of $3.2 million. In conjunction with these sales, we received cash consideration of $31.8 million, which was primarily used to pay down borrowings under our revolving loan facilities. During 2004, we sold $27.4 million of notes receivable to the SPE and recognized pre-tax gains of $1.9 million. In conjunction with these sales, we received cash consideration of $20.6 million, which was used to pay down borrowings under our revolving loan facilities. The SPE funded all of these purchases through advances under a credit agreement arranged for this purpose. We receive fees for servicing sold notes, calculated based on 1% of eligible notes held by the facility. Such fees were $547,000, $904,000, and $684,000 for the years ended December 31, 2002, 2003, and 2004, respectively. Such fees received approximate our internal cost of servicing such notes. As a result, the related servicing asset or liability was estimated to be insignificant. At December 31, 2004, the SPE held notes receivable totaling $84.5 million, with related borrowings of $64.1 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, we are not obligated to repurchase defaulted or any other contracts sold to the SPE. It is anticipated, however, that we 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. The investment in the SPE was valued at $5.2 million at December 31, 2004, which represents our maximum exposure to loss regarding our involvement with the SPE.

     Taxes. For regular federal income tax purposes, we report substantially all of the Vacation Interval sales we finance under the installment method. Under this method, income on sales of Vacation Intervals is not recognized until cash is received, either in the form of a down payment or as installment payments on customer notes receivable. The deferral of income tax liability conserves cash resources on a current basis. Interest is imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the payment is received. If we otherwise are not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method as the interest expense is not estimable. In addition, we are subject to current alternative minimum tax (“AMT”) as a result of the deferred income that results from the installment sales treatment, although due to existing AMT loss carryforwards, it is anticipated that minimal 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, our 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 our paying substantial additional federal and state taxes in those years. Subsequent to December 31, 2000, we 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 our 2000 AMT loss to 1999, 1998, and 1997. Accordingly, no minimum tax credit exists currently.

     The federal net operating losses (“NOLs”) expire between 2018 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. We currently do not believe that we will be able to utilize our NOL from normal operations. At present, future NOL utilization is expected to be limited to the temporary differences creating deferred tax liabilities. If necessary, we 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 Exchange Offer that took place during 2002, an ownership change within the meaning of Section 382(g) of the Internal Revenue Code (“the Code”) occurred. As a result, a portion of our NOL is subject to an annual limitation for taxable years beginning after the date of the exchange (“change date”) and a portion of the taxable year which includes the change date. The annual limitation will be equal to the value of our Company stock immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This annual limitation may be increased for any recognized built-in gain to the extent allowed in Section 382(h) of the Code.

Discontinued Operations.

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

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Prior periods have been reclassified for comparability, as required. The net income from discontinued operations is summarized as follows (in thousands):

Results of Operations

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