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

The following discussion of the Company's financial condition and results of operations includes certain forward-looking statements. When used in this Form 10-Q, the words "estimate," "projection," "intend," "anticipates," "expects," "may," "should," "believes" and similar terms are intended to identify forward-looking statements that relate to the Company's future performance. Such statements are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected, including, without limitation, the risks and uncertainties set forth below. Readers are cautioned not to place undue reliance on the forward-looking statements set forth below. The Company undertakes no obligation to publicly update or revise any of the forward-looking statements contained herein.

Overview

ILX Resorts Incorporated ("ILX" or the "Company") is one of the leading developers, marketers and operators of timeshare resorts in the western United States and Mexico. The Company's principal operations consist of (i) acquiring, developing and operating timeshare resorts marketed by the Company as vacation ownership resorts, (ii) marketing and selling vacation ownership interests in the timeshare resorts, which typically have entitled the buyers thereof to ownership of a fully-furnished unit for a one-week period on either an annual or an alternate year (i.e., bienniel) basis ("Vacation Ownership Interests"), and
(iii) providing purchase money financing to the buyers of Vacation Ownership Interests at its resorts. In addition, the Company receives revenues from the rental of unused or unsold inventory of units at its vacation ownership resorts, and from the sale of food, beverages and other services at such resorts. The Company's current portfolio of resorts consists of eight resorts in Arizona, one in Indiana, one in Colorado, one in San Carlos, Mexico, land in Puerto Penãsco (Rocky Point), Mexico and land in Sedona, Arizona (collectively, the "ILX Resorts"). One of the resorts in Arizona is not at this time registered with the Arizona Department of Real Estate nor is being marketed for sale as Vacation Ownership Interests, and is operated under a long-term lease arrangement. The Company also owns 2,233 Vacation Ownership Interests in a resort in Las Vegas, Nevada, all of which have been annexed into Premiere Vacation Club, 193 Vacation Ownership Interests in a resort in Pinetop, Arizona, all of which have been annexed into Premiere Vacation Club and 175 Vacation Ownership Interests in a resort in Phoenix, Arizona, 174 of which have been annexed into Premiere Vacation Club.

Significant Accounting Policies

Principles of Consolidation and Business Activities

The condensed consolidated financial statements include the accounts of ILX Resorts Incorporated, and its wholly owned subsidiaries ("ILX" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying condensed consolidated balance sheet as of December 31, 2007, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Registration S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The accompanying financial statements should be read in conjunction with the Company's most recent audited financial statements.

The Company's significant business activities include developing, operating, marketing and financing ownership interests ("Vacation Ownership Interests") in resort properties located in Arizona, Colorado, Indiana and Mexico.

Revenue Recognition

Revenue from sales of Vacation Ownership Interests is recognized in accordance with Statement of Financial Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions ("SFAS 152"). No sales are recognized until such time as a minimum of 10% of the purchase price and any incentives given at the time of sale has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company has been released of all future obligations for the Vacation Ownership Interest. Resort operating revenue represents daily room rentals (inclusive of homeowner's dues) and revenues from food and other resort services. Such revenues are recorded as the rooms are rented or the services are performed.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company as of January 1, 2008. In February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2); which extended the effective date for certain nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of the portions of SFAS 157 that were not postponed by FSP 157-2 did not have a material impact on the Company's consolidated financial statements. Adoption of the postponed portions of SFAS 157 is not anticipated to cause a material change in financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), which allows an irrevocable election to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with unrealized gains and losses recognized currently in earnings. Under SFAS 159, the fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. Additionally, SFAS 159 provides that application of the fair value option must be based on the fair value of an entire financial asset or financial liability and not selected risks inherent in those assets or liabilities. SFAS 159 requires that assets and liabilities which are measured at fair value pursuant to the fair value option be reported in the financial statements in a manner that separates those fair values from the carrying amounts of similar assets and liabilities which are measured using another measurement attribute. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 was effective prospectively for fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material effect on the Company's financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) Business Combinations (SFAS 141(R)) and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (SFAS 160). SFAS 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS 160 seeks to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact the adoption of these standards will have on the Company's financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008. Earlier adoption is encouraged. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations.

Results of Operations

Non-GAAP Financial Measures

The following table of certain operating information for the Company is presented with information both inclusive and exclusive of an adjustment to increase the allowance for uncollectible notes and write-off certain Customer Notes in the third quarter of 2008. See a discussion below of the allowance adjustment. In presenting these comparative operating results, the Company has included a column which excludes the effect of the allowance adjustment as the Company believes this information is reflective of the Company's operations for the three and nine months ended September 30, 2008. The following comparison of the three and nine months ended September 30, 2008 with the three and nine months ended September 30, 2007 is based on the results prior to the allowance adjustment.

                                            Three Months Ended                                               Nine Months Ended
                                              September 30,                                                    September 30,
                                          2008             2008                                            2008             2008
                                        Prior to         Allowance                                       Prior to         Allowance
                          2007         Adjustment       Adjustment         2008           2007          Adjustment       Adjustment         2008

As a percentage of
total revenues:
Sales of Vacation
Ownership Interests          50.8 %           47.3 %                        (119.8 )%        53.6 %            48.5 %                          88.2 %
Estimated
uncollectible revenue        (2.2 )%          (2.0 )%         360.5 %        358.5 %         (2.3 )%           (2.1 )%         (83.7 )%       (85.8 )%
Resort operating
revenue                      44.1 %           49.7 %                        (126.0 )%        41.3 %            47.3 %                          86.1 %
Interest and finance
income                        7.3 %            5.0 %                         (12.7 )%         7.4 %             6.3 %                          11.5 %
Total revenues              100.0 %          100.0 %                         100.0 %        100.0 %           100.0 %                         100.0 %
As a percentage of
sales of Vacation
Ownership
Interests(1):
Cost of Vacation
Ownership Interests
sold (recovered)             12.9 %           13.6 %          (34.1 )%       (26.9 )%        13.2 %            13.6 %         (296.1 )%      (293.7 )%
Sales and marketing          76.6 %           76.8 %                          36.9 %         75.3 %            76.2 %                       (2695.5 )%
Contribution margin
percentage from sale
of Vacation Ownership
Interests (2)                10.5 %            9.6 %                        (110.0 )%        11.6 %            10.2 %                       (2301.9 )%
As a percentage of
resort operating
revenue:
Cost of resort
operations                   87.5 %           88.4 %                          88.4 %         89.4 %            88.6 %                          88.6 %
As a percentage of
total revenues(1):
General and
administrative               13.4 %           16.2 %                          41.1 %         13.0 %            15.2 %                          27.6 %
Depreciation and
amortization                  3.0 %            2.6 %                           6.7 %          3.1 %             2.7 %                           5.0 %
Total operating
income (loss)                 1.5 %           (3.7 )%                       (282.9 )%         1.8 %            (2.4 )%                        (65.8 )%
Selected operating
data:
Vacation Ownership
Interests sold (3)
(4)                           244              207                             207            810               678                             678
Average sales price
per Vacation
Ownership Interest
sold (excluding
revenues from
Upgrades) (4)           $  17,976      $    16,845                       $  16,845      $  17,776      $     17,157                       $  17,157
Average sales price
per Vacation
Ownership Interest
sold (including
revenues from
Upgrades) (4)           $  24,432      $    23,281                       $  23,281      $  22,859      $     22,526                       $  22,526

Comparison of the Three and Nine Months Ended September 30, 2007 to the Three and Nine Months Ended September 30, 2008

During the third quarter of 2008, the Company recorded an increase in its estimated uncollectible revenue of $14,549,432 million and a reduction in cost of Vacation Ownership Interests owned in the amount of $3,281,615, the "allowance adjustment", to record the reduction in its expectation of collectability of both past due and currently performing Customer Notes and consumer notes sold with recourse and the recovered Vacation Ownership Interests as a result. In conjunction with these entries the Company wrote off Customer Notes in excess of 90 days delinquent in the amount of $16,420,471, increased resort property held for sale by $3,281,615 and recognized an income tax benefit of $4,507,127. The reduction in expectation of collectability is based upon recent economic, financial and credit conditions.

Sales of Vacation Ownership Interests exclusive of the allowance adjustment discussed above decreased 19.5% or $1,145,346 to $4,720,285 for the three months ended September 30, 2008, from $5,865,631 for the same period in 2007 and decreased 18.6% or $3,417,208 to $14,972,531 for the nine months ended September 30, 2008 from $18,389,739 for the same period in 2007. The decrease reflects reduced sales from the Rancho Maņana and Sedona sales offices due to the closure of the Rancho Maņana sales office in June 2007 and decreased tours in Sedona in large part as a result of major road construction, offset by increased sales at the Tucson sales office due to greater tours in 2008.

The average sales price per Vacation Ownership Interest sold (excluding revenues from Upgrades) decreased 6.3% or $1,131 to $16,845 for the three months ended September 30, 2008 from $17,976 for the same period in 2007 and decreased 3.5% or $619 to $17,157 for the nine months ended September 30, 2008 from $17,776 for the same period in 2007. The decrease in average sales price is due to a change in the product mix sold, including the introduction in March 2008 of a lower priced product with more limited use features in anticipation of and in response to decreased consumer disposable income due to economic conditions. The number of Vacation Ownership Interests sold decreased 15.2% from 244 in the three months ended September 30, 2007 to 207 for the same period in 2008 and decreased 16.3% from 810 for the nine months ended September 30, 2007 to 678 for the same period in 2008 primarily due to the closure of the Rancho Maņana sales office discussed above and decreased tours at the Sedona sales office. The three and nine months ended September 30, 2008 included 245 and 763 biennial Vacation Ownership Interests (counted as 122.5 and 381.5 annual Vacation Ownership Interests) compared to 241 and 766 biennial Vacation Ownership Interests (counted as 120.5 and 383 annual Vacation Ownership Interests) in the same period in 2007.

Upgrade revenue, included in Vacation Ownership Interest sales, decreased 15.5% to $1,328,976 for the three months ended September 30, 2008 from $1,572,193 for the same period in 2007 and decreased 11.7% to $3,637,212 for the nine months ended September 30, 2008 from $4,117,422 for the same period in 2007. The decrease in 2008 reflects the closure of the Rancho Maņana sales office which provided proximate access to many existing owners in the Phoenix area, offset by increased sales in other offices. The average sales price per Vacation Ownership Interest sold (including upgrades) decreased 4.7% or $1,151 to $23,281 for the three months ended September 30, 2008 from $24,432 in 2007 and decreased 1.5% or $333 to $22,526 for the three months ended September 30, 2008 from $22,859 in 2007. The decrease for the three and nine months ended September 30, 2008 is due to the combination of the decrease in average sales price per Vacation Ownership Interest sold (excluding Upgrades) described above and the reduction in Upgrade revenue.

Resort operating revenue decreased 2.5% to $5,188,714 for the three months ended September 30, 2008, from $5,324,324 for the same period in 2007 and increased 3.1% to $15,292,829 for the nine months ended September 30, 2008 from $14,831,125 for the same period in 2007. The decrease for the three months ended September 30, 2008 reflects decreased occupancy at certain of the Company's Sedona resorts. The increase for the nine months ended September 30, 2008 reflects revenue from the operation of the Sea of Cortez Premiere Vacation Club (which was previously operated by a third party and the net effect of revenue less expenses charged to revenue) beginning in July 2007, as well as increased revenue from Vacation Ownership Interest owners. Cost of resort operations as a percentage of resort operating revenue increased from 87.5% to 88.4% for the three months ended September 30, 2008 and decreased from 89.4% to 88.6% for the nine months ended September 30, 2008. The increase for the three months ended September 30, 2008 is due to the decreased occupancy discussed above. The decrease for the nine months ended September 30, 2008, reflects the increase in revenue from Vacation Ownership Interest owners.

Interest and finance income decreased 41.3% to $522,259 for the three months ended September 30, 2008 from $890,162 for the same period in 2007 and decreased 23.4% to $2,040,871 for the nine months ended September 30, 2008 from $2,665,790 for the same period in 2007, reflecting decreased Customer Note balances, a reduction in notes sold at a premium due to decreased sales and the expiration of the agreement in June 2008 with a financial institution to sell Customer Notes and a greater portion of Customer Notes being zero-interest one year maturities.

Cost of Vacation Ownerships recovered of $3,281,615 was recorded in the third quarter of 2008 in conjunction with the write off of consumer notes receivable discussed above.

Cost of Vacation Ownership Interests sold exclusive of the Vacation Ownerships recovered as a percentage of Vacation Ownership Interest sales increased from 12.9% for the three months ended September 30, 2007 to 13.6% for the three months ended September 30, 2008 and increased from 13.2% for the nine months ended September 30, 2007 to 13.6% for the nine months ended September 30, 2008, due to the introduction in March 2008 of a lower priced product and a decrease in the forecasted average sales price.

Sales and marketing as a percentage of sales of Vacation Ownership Interests was consistent at 76.8% and 76.6% for the three months ended September 30, 2008 and 2007, respectively and increased to 76.2% for the nine months ended September 30, 2008 from 75.3% for the same period in 2007. The increase for the nine months ended September 30, 2008 reflects lower average sales prices in the Sedona office net of the closure of the Rancho Maņana sales office in June 2007.

General and administrative expenses increased to 16.2% and 15.2% of total revenue for the three and nine months ended September 30, 2008, from 13.4% and 13.0% for the same periods in 2007. The percentage increases reflect the reduction in total revenue. The $225,000 increase for the nine months ended September 30, 2008 reflects a combination of the general and administrative expense reductions implemented in late 2007 and early 2008, net of certain non-recurring benefits in June 2007, expense for an allowance on a receivable amount from a third party, as well as redeployment of certain labor, previously utilized for construction activities and capitalized, to other activities.

Income from land and other, net increased to $9,115 for the three months ended September 30, 2008 from a loss of $14,364 for the three months ended September 30, 2007 and decreased to $55,293 for the nine months ended September 30, 2008 from $75,158 for the same period in 2007. The increase for the three months ended September 30, 2008 is the result of increased net revenue from the Company's Sedona Spa retail operations. The decrease for the nine months ended September 30, 2008 results from the second quarter 2007 gain of $29,327 on the sale of 253,589 shares of a third party's common stock.

Interest expense decreased 3.5% to $663,184 for the three months ended September 30, 2008 from $687,223 for the same period in 2007 and decreased 2.0% to $1,972,901 for the nine months ended September 30, 2008 from $2,013,570 for the same period in 2007. The decrease for the three and nine months ended September 30, 2008 reflects reductions in rate on variable rate borrowings, net of increased interest bearing obligations.

Liquidity and Capital Resources

Sources of Cash

The Company generates cash primarily from the sale of Vacation Ownership Interests (including Upgrades), from the financing of Customer Notes from such sales and from resort operations. For the nine months ended September 30, 2007, cash used in operations was $1,264,115 as compared to cash provided by operations of $200,685 for the nine months ended September 30, 2008. The decrease in cash used in operations reflects an increase in estimated uncollectible revenue due to the increased allowance for and write off of Customer Notes, a net decrease in resort property under development and resort property held for Vacation Ownership Interest sales due to greater additions in 2007 for the expansion of VCA South Bend, a smaller amount of cash paid for income taxes in 2008 and a decrease in other assets due to lower escrow balances resulting from the repayment of a note payable using escrow funds in 2007. These decreases are offset by the larger net loss and resultant income tax benefit, a decrease in accounts payable and a decrease in accrued liabilities due to timing differences in amounts related to homeowner's associations.

For regular federal income tax purposes, the Company reports substantially all of its non-factored financed Vacation Ownership Interest sales under the installment method. Under the installment method, the Company recognizes income on sales of Vacation Ownership Interests only when cash is received by the Company in the form of a down payment, as an installment payment, or from proceeds from the sale of the Customer Note. The deferral of income tax liability conserves cash resources on a current basis. Interest may be 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 related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The condensed 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.

At December 31, 2007, the Company's subsidiary, Genesis, had federal NOL carryforwards of approximately $205,000, which are limited as to usage because they arise from built in losses of an acquired company. In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,000 per year. Any unused Genesis NOLs will expire in 2008.

In addition, Section 382 of the Internal Revenue 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% change in ownership of a corporation within a three-year period. Such changes may result from new common stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commission of Schedules 13D and 13G by holders of more than 5% of the common stock, whether involving the acquisition or disposition of common stock. If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the NOL by the Company, which could result in the Company paying additional federal and state taxes.

Uses of Cash

Investing activities typically reflect a net use of cash because of capital . . .