Ryland 8-K Financial Statements and Exhibits

Exhibit 99.1

THE RYLAND GROUP

Consolidated Statements of Earnings

				YEAR ENDED DECEMBER 31,
(in thousands, except share data)				2003		2002		2001
REVENUES
	HOMEBUILDING			$	3,355,450	$	2,805,055	$	2,684,116
	FINANCIAL SERVICES				88,679		72,158		63,075
		TOTAL REVENUES			3,444,129		2,877,213		2,747,191
EXPENSES
	HOMEBUILDING
		Cost of sales			2,615,975		2,216,059		2,181,619
		Selling, general and administrative			333,726		281,049		261,078
		Interest			6,032		6,826		18,229
		Expenses related to early retirement of debt			5,086		—		7,244
			Total homebuilding expenses		2,960,819		2,503,934		2,468,170
	FINANCIAL SERVICES
		General and administrative			24,339		21,299		22,532
		Interest			1,491		2,565		5,423
			Total financial services expenses		25,830		23,864		27,955
	CORPORATE EXPENSES				61,263		40,075		32,730
		TOTAL EXPENSES			3,047,912		2,567,873		2,528,855
Earnings before taxes					396,217		309,340		218,336
Tax expense					154,525		123,736		86,243
NET EARNINGS				$	241,692	$	185,604	$	132,093
Preferred dividends				$	—	$	—	$	308
Net earnings available to common stockholders				$	241,692	$	185,604	$	131,785
NET EARNINGS PER COMMON SHARE
	Basic			$	4.86	$	3.51	$	2.47
	Diluted			$	4.56	$	3.32	$	2.32
AVERAGE COMMON SHARES OUTSTANDING
	Basic				49,718,032		52,842,620		53,330,900
	Diluted				53,044,404		55,918,286		57,022,716
DIVIDENDS DECLARED PER COMMON SHARE				$	0.08	$	0.04	$	0.04
See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

Consolidated Balance Sheets

					DECEMBER 31,
(in thousands, except share data)					2003		2002
ASSETS
	HOMEBUILDING
		Cash and cash equivalents			$	314,518	$	266,577
		Housing inventories
			Homes under construction			734,280		575,794
			Land under development and improved lots			602,504		524,218
			Consolidated inventory not owned			59,868		—
				Total inventories		1,396,652		1,100,012
		Property, plant and equipment				40,853		40,479
		Purchase price in excess of net assets acquired				18,185		18,185
		Other assets				59,432		58,252
						1,829,640		1,483,505
	FINANCIAL SERVICES
		Cash and cash equivalents				2,186		2,868
		Mortgage-backed securities and notes receivable				26,260		42,583
		Other assets				39,824		38,163
						68,270		83,614
	OTHER ASSETS
		Net deferred taxes				37,443		36,830
		Other				72,237		53,802
			TOTAL ASSETS			2,007,590		1,657,751
LIABILITIES
	HOMEBUILDING
		Accounts payable and other liabilities				366,131		300,168
		Long-term debt				540,500		490,500
						906,631		790,668
	FINANCIAL SERVICES
		Accounts payable and other liabilities				23,376		23,718
		Short-term notes payable				26,254		43,145
						49,630		66,863
	OTHER LIABILITIES					170,136		120,141
			TOTAL LIABILITIES			1,126,397		977,672
MINORITY INTEREST						56,651		—
STOCKHOLDERS’ EQUITY
	Common stock, $1.00 par value:
		Authorized — 80,000,000 shares
		Issued — 48,552,494 shares (50,520,686 for 2002)				48,552		50,521
	Retained earnings					774,859		628,200
	Accumulated other comprehensive income					1,131		1,358
			TOTAL STOCKHOLDERS’ EQUITY			824,542		680,079
			TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,007,590	$	1,657,751

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

Consolidated Statements of Stockholders’ Equity

															ACCUMULATED
															OTHER			TOTAL
			PREFERRED			COMMON			PAID-IN			RETAINED			COMPREHENSIVE			STOCKHOLDERS’
(in thousands, except share data)			STOCK			STOCK			CAPITAL			EARNINGS			INCOME			EQUITY
BALANCE AT JANUARY 1, 2001			$	1,180		$	52,996		$	19,903		$	379,006		$	544		$	453,629
Comprehensive income:
	Net earnings												132,093						132,093
	Other comprehensive income, net of tax:
		Unrealized gains on mortgage-backed securities, net of taxes of $601														920			920
	Total comprehensive income																		133,013
Preferred stock dividends (per share $0.28)													(308	)					(308	)
Common stock dividends (per share $0.04)													(2,124	)					(2,124	)
Repurchase of common stock							(4,008	)		(41,348	)		(137	)					(45,493	)
Conversions and retirements of preferred stock				(1,180	)		1,180			149									149
Reclassification of preferred paid-in capital										1,309									1,309
Employee stock plans and related income tax benefit							2,700			19,987									22,687
BALANCE AT DECEMBER 31, 2001				—			52,868			—			508,530			1,464			562,862
Comprehensive income:
	Net earnings												185,604						185,604
	Other comprehensive income, net of tax:
		Unrealized losses on mortgage-backed securities, net of taxes of $(67)														(106	)		(106	)
	Total comprehensive income																		185,498
Common stock dividends (per share $0.04)													(2,134	)					(2,134	)
Repurchase of common stock							(4,612	)		(27,504	)		(63,800	)					(95,916	)
Employee stock plans and related income tax benefit							2,265			27,504									29,769
BALANCE AT DECEMBER 31, 2002				—			50,521			—			628,200			1,358			680,079
Comprehensive income:
	Net earnings												241,692						241,692
	Other comprehensive income, net of tax:
		Unrealized losses on mortgage-backed securities, net of taxes of $(139)														(227	)		(227	)
	Total comprehensive income																		241,465
Common stock dividends (per share $0.08)													(3,966	)					(3,966	)
Repurchase of common stock							(3,996	)		(35,876	)		(91,067	)					(130,939	)
Employee stock plans and related income tax benefit							2,027			35,876									37,903
BALANCE AT DECEMBER 31, 2003			$	—		$	48,552		$	—		$	774,859		$	1,131		$	824,542

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows

			YEAR ENDED DECEMBER 31,
(in thousands)			2003			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
	Net earnings		$	241,692		$	185,604		$	132,093
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization		36,436			32,670			37,068
	Changes in assets and liabilities:
		Increase in inventories		(239,989	)		(200,623	)		(10,984	)
		Net change in other assets, payables and other liabilities		86,629			52,331			16,443
	Tax benefit from exercise of stock options			17,120			12,103			8,337
	Other operating activities, net			913			5,095			(6,182	)
	Net cash provided by operating activities			142,801			87,180			176,775
CASH FLOWS FROM INVESTING ACTIVITIES
	Net additions to property, plant and equipment			(32,541	)		(36,547	)		(30,883	)
	Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral			18,672			25,314			33,215
	Net cash (used for) provided by investing activities			(13,869	)		(11,233	)		2,332
CASH FLOWS FROM FINANCING ACTIVITIES
	Cash proceeds of long-term debt			150,000			—			250,000
	Repayment of long-term debt			(100,000	)		—			(209,500	)
	Decrease in short-term notes payable			(16,891	)		(18,974	)		(20,444	)
	Common and preferred stock dividends			(2,020	)		(2,148	)		(2,605	)
	Common stock repurchases			(130,939	)		(95,916	)		(45,493	)
	Proceeds from stock option exercises			15,190			11,382			12,888
	Other financing activities, net			2,987			844			(7,844	)
	Net cash used for financing activities			(81,673	)		(104,812	)		(22,998	)
	Net increase (decrease) in cash and cash equivalents			47,259			(28,865	)		156,109
	Cash and cash equivalents at beginning of year			269,445			298,310			142,201
CASH AND CASH EQUIVALENTS AT END OF YEAR			$	316,704		$	269,445		$	298,310
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash paid for interest (net of capitalized interest)		$	12,738		$	14,275		$	33,177
	Cash paid for income taxes			132,731			101,939			72,662
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
	Consolidated inventory not owned		$	56,651		$	—		$	—

     See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its wholly owned subsidiaries (“the Company”). Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2003 presentation.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments and cash held in escrow to be cash equivalents. Cash equivalents totaled $309.5 million and $257.0 million at December 31, 2003 and 2002, respectively.

Per Share Data

Basic net earnings per common share is computed by dividing net earnings, after considering preferred stock dividend requirements, by the weighted-average number of common shares outstanding. Additionally, diluted net earnings per common share gives effect to dilutive common stock equivalent shares.

Stock Split

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the 2004 and 2002 two-for-one stock splits. (See Note J.)

Homebuilding Revenues

Homebuilding revenues are recognized when home sales are closed and title and possession are transferred to the buyer.

Housing Inventories

Housing inventories consist principally of homes under construction, land under development and improved lots. Inventories to be held and used are stated at cost, unless a community is determined to be impaired, in which case the impaired inventories are written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and sales of comparable assets. Inventories to be disposed of are stated at either the lower of cost or fair value less cost to sell and are reported net of valuation reserves. Write-downs of impaired inventories to fair value are recorded as adjustments to the cost basis of the respective inventory. Valuation reserves related to inventories to be disposed of amounted to $1.5 million at December 31, 2003, and $5.3 million at December 31, 2002. The net carrying values of the related inventories amounted to $795,000 and $5.6 million at December 31, 2003 and 2002, respectively.

     Costs of inventory include direct costs of land and land development; material acquisition; home construction; and related direct overhead expenses. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. Interest and taxes are capitalized during the land development stage.

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THE RYLAND GROUP

The following table is a summary of capitalized interest:

(in thousands)	2003			2002
Capitalized interest at January 1	$	40,824		$	33,291
Interest capitalized		42,602			39,695
Interest amortized to cost of sales		(38,263	)		(32,162	)
Capitalized interest at December 31	$	45,163		$	40,824

Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity (VIE) to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities and/or entitled to receive a majority of the VIE’s residual returns. FIN 46 also requires disclosures about VIEs that the Company is not required to consolidate but in which it has a significant, though not primary, variable interest.

     The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003. For VIEs created before January 31, 2003, the consolidation requirements apply in the first interim period ending after March 15, 2004 (the Company’s fiscal quarter ending March 31, 2004). Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established. The Company adopted the consolidation requirements of FIN 46 for VIEs created after January 31, 2003, during 2003. The Company will adopt the consolidation requirements for VIEs created before January 31, 2003, during the quarter ending March 31, 2004. The Company is currently in the process of evaluating these contracts and does not believe that such adoption will have a material impact on its financial condition or results of operations.

     The Company routinely enters into joint ventures for the purpose of developing land. The Company’s investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. Additionally, in the ordinary course of business, the Company enters into lot option purchase contracts in order to procure land for the construction of homes. Under such lot option purchase contracts, the Company funds stated deposits in consideration for the right to purchase lots at a future point in time, usually at predetermined prices. In accordance with the requirements of FIN 46, certain of the Company’s lot option purchase contracts may result in the creation of a variable interest with a VIE holding the land parcel under option.

     Using the framework outlined in FIN 46, the Company evaluated its option contracts and the joint venture agreement it entered into after January 31, 2003. Based on its evaluation, the Company determined that, in some cases, it had the primary variable interest in certain VIEs subject to lot option contracts. While the Company may not have had legal title to the optioned land or guaranteed the seller’s debt associated with that property, under FIN 46 it had the primary variable interest and was required to consolidate the particular VIE’s assets under option at fair value. As a result, the Company consolidated $59.9 million of inventory not owned as of December 31, 2003. This represents the fair value of the optioned property. Additionally, to reflect the fair value of the inventory consolidated under FIN 46, the Company eliminated $3.2 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned. Minority interest totaling $56.7 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs. At December 31, 2003, the Company had cash deposits and letters of credit totaling $6.4 million, representing the Company’s current maximum exposure to loss, relating to lot option contracts that were consolidated. Creditors of these VIEs, if any, have no recourse against the Company.

     At December 31, 2003, the Company had cash deposits and/or letters of credit totaling $27.2 million which were associated with lot option purchase contracts entered into subsequent to January 31, 2003, having an aggregate purchase price of $440.5 million and related to VIEs in which it did not have a primary variable interest.

Service Liabilities

Service, warranty and completion costs are estimated and accrued at the time a home closes.

Investments in Unconsolidated Joint Ventures

The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures, based in Atlanta, Dallas, Denver, Orlando, Phoenix and Washington, D.C., are engaged in the development of land. At December 31, 2003 and 2002, the Company’s investment in unconsolidated joint ventures amounted to $14.0 million and $14.9 million, respectively. The Company’s equity in losses of these unconsolidated joint ventures was $94,000 for the year ended December 31, 2003, compared to equity in earnings of $2.7 million for the same period in 2002 and $26,000 for the same period in 2001. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $47.3 million and $61.0 million at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the aggregate

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debt of the unconsolidated joint ventures in which the Company participated was $21.1 million and $31.9 million, respectively. The Company does not guarantee the debt of its unconsolidated joint ventures.

Property, Plant and Equipment

Property, plant and equipment, which includes model home furnishings, are carried at cost less accumulated depreciation and amortization. Depreciation is provided for, principally, by the straight-line method over the estimated useful lives of the assets. Model home furnishings, which are amortized over the life of the community as homes are closed, are included in cost of sales.

Purchase Price in Excess of Net Assets Acquired

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and other intangible assets no longer be amortized but be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity-method investments no longer be amortized.

     The Company adopted the provisions of SFAS 142 on January 1, 2002, and performs impairment tests of its goodwill annually. The Company tests goodwill for impairment by using the two-step process prescribed in SFAS 142. The first step is used to identify potential impairment, while the second step measures the amount of impairment. The Company had no impairment in the years ended December 31, 2003 and 2002.

     The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in 2003 and 2002. Results reported for the year ended December 31, 2001, included an after-tax goodwill amortization expense of $1.1 million, or $0.02 per diluted share.

Income Taxes

The Company files a consolidated federal income tax return. Certain items of income and expense are included in one period for financial reporting purposes and in another for income tax purposes. Deferred income taxes are provided in recognition of these differences. Deferred tax assets and liabilities are determined based on enacted tax rates and are subsequently adjusted for changes in these rates. A change in deferred tax assets or liabilities results in a charge or credit to deferred tax expense.

Stock-Based Compensation

The Company has elected to follow the intrinsic value method to account for compensation expense, which is related to the award of stock options, and to furnish the pro forma disclosures required under Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-based Compensation,” as amended. Since stock option awards are granted at prices no less than the fair market value of the shares at the date of grant, no compensation expense is recognized.

     Had compensation expense been determined based on fair value at the grant date for stock option awards, consistent with the provisions of SFAS 123, the Company’s net earnings and earnings per share in 2003, 2002 and 2001 would have been reduced to the pro forma amounts indicated in the following table:

	YEAR ENDED DECEMBER 31,
(in thousands, except share data)	2003			2002			2001
Net earnings, as reported	$	241,692		$	185,604		$	132,093
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		—			—			—
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(3,991	)		(3,455	)		(2,599	)
Pro forma net earnings	$	237,701		$	182,149		$	129,494
Earnings per share:
Basic — as reported	$	4.86		$	3.51		$	2.47
Basic — pro forma		4.78			3.45			2.43
Diluted — as reported		4.56			3.32			2.32
Diluted — pro forma		4.48			3.26			2.27

     The fair value of each option grant is estimated on the grant date by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants in 2003, 2002 and 2001, respectively: a risk-free interest rate of 2.1 percent, 4.0 percent and 4.7 percent; an expected volatility factor for the market price of the Company’s com-

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mon stock of 37.6 percent, 36.8 percent and 37.5 percent; a dividend yield of 0.3 percent, 0.2 percent and 0.3 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted in 2003, 2002 and 2001 were $7.28, $6.57 and $5.07, respectively.

Mortgage-Backed Securities and Notes Receivable

Mortgage-backed securities and notes receivable consist of GNMA certificates, FNMA mortgage pass-through certificates, FHLMC participation certificates, notes receivable secured by mortgage-backed securities, whole loans and funds held by a trustee. Mortgage-backed securities were classified as available-for-sale and carried in the consolidated balance sheets at fair value, with unrealized gains and losses net of applicable taxes recorded as a component of accumulated other comprehensive income in stockholders’ equity. The estimated fair value of these securities was determined based on current market quotations.

Loan Origination Fees, Costs, Mortgage Discounts and Loan Sales

Loan origination fees, net of related direct origination costs and loan discount points, are recognized in current earnings upon the sale of the related mortgage loans. Gains or losses on the sales of mortgage loans and related servicing rights are recognized when the Company transfers title to the purchaser.

Derivative Instruments

In the normal course of business and pursuant to its risk-management policy, the Company enters, as an end user, into derivative instruments, including forward-delivery contracts for loans and mortgage-backed securities; options on forward-delivery contracts; futures contracts; and options on futures contracts, to minimize the impact of movements in market interest rates on interest rate lock commitments (IRLCs) and mortgage loans held-for-sale. The Company elected not to use hedge accounting treatment with respect to its economic hedging activities. Accordingly, all derivative instruments used as economic hedges are carried in the consolidated balance sheets at fair value, with changes in value recorded in current earnings. The Company’s mortgage pipeline includes IRLCs, which represent commitments that have been extended by the Company to those borrowers who have applied for loan funding and have met certain defined credit and underwriting criteria. The Company determined that its IRLCs meet the definition of derivatives under Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivatives and Hedging Activities,” as amended.

Comprehensive Income

Comprehensive income consists of net income and the increase or decrease of unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $241.5 million, $185.5 million and $133.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

New Accounting Pronouncements

SFAS 149

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as “derivatives”) and for hedging activities under SFAS 133. This statement is effective for contracts entered into or modified after June 30, 2003. Management does not believe that the implementation of SFAS 149 will have a material impact on the Company’s financial condition or results of operations.

SFAS 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments having characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the start of the first interim period beginning after June 15, 2003. Application of SFAS 150 to noncontrolling interests in limited-life subsidiaries has been deferred indefinitely. Management does not believe that the implementation of SFAS 150 will have a material impact on the Company’s financial condition or results of operations.

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NOTE B: SEGMENT INFORMATION

The Company is a leading national homebuilder and mortgage-related financial services firm. As one of the largest single-family on-site homebuilders in the United States, it builds homes in 27 markets. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The Company’s financial services segment provides loan origination, title, escrow and insurance brokerage services, and maintains a portfolio of mortgage-backed securities and notes receivable.

     The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings. The accounting policies of the segments are the same as those described in Note A, Summary of Significant Accounting Policies. Certain corporate expenses are allocated to the homebuilding and financial services segments.

			YEAR ENDED DECEMBER 31,
(in thousands)			2003			2002			2001
REVENUES
	Homebuilding		$	3,355,450		$	2,805,055		$	2,684,116
	Financial services			88,679			72,158			63,075
		Total	$	3,444,129		$	2,877,213		$	2,747,191
PRETAX EARNINGS
	Homebuilding		$	394,631		$	301,121		$	215,946
	Financial services			62,849			48,294			35,120
	Corporate			(61,263	)		(40,075	)		(32,730	)
		Total	$	396,217		$	309,340		$	218,336
DEPRECIATION AND AMORTIZATION
	Homebuilding		$	30,448		$	27,901		$	32,011
	Financial services			922			819			709
	Corporate			5,066			3,950			4,348
		Total	$	36,436		$	32,670		$	37,068
IDENTIFIABLE ASSETS
	Homebuilding		$	1,829,640		$	1,483,505		$	1,325,598
	Financial services			68,270			83,614			92,847
	Corporate and other			109,680			90,632			92,424
		Total	$	2,007,590		$	1,657,751		$	1,510,869

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NOTE C: EARNINGS PER SHARE RECONCILIATION

The following table sets forth the computation of basic and diluted earnings per share:

			YEAR ENDED DECEMBER 31,
(in thousands, except share data)			2003		2002		2001
NUMERATOR
	Net earnings		$	241,692	$	185,604	$	132,093
	Preferred stock dividends			—		—		(308	)
	Numerator for basic earnings per share — earnings available to common stockholders			241,692		185,604		131,785
	Effect of dilutive securities — preferred stock dividends			—		—		308
	Numerator for diluted earnings per share — earnings available to common stockholders		$	241,692	$	185,604	$	132,093
DENOMINATOR
	Denominator for basic earnings per share — weighted-average shares			49,718,032		52,842,620		53,330,900
	Effect of dilutive securities:
		Stock options		2,622,548		2,405,840		2,574,220
		Conversion of preferred shares		—		—		797,980
		Equity incentive plan		703,824		669,826		319,616
	Dilutive potential of common shares			3,326,372		3,075,666		3,691,816
	Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions			53,044,404		55,918,286		57,022,716
NET EARNINGS PER COMMON SHARE
	Basic		$	4.86	$	3.51	$	2.47
	Diluted			4.56		3.32		2.32

     The assumed conversion of preferred shares was dilutive for the year ended December 31, 2001.

NOTE D: FINANCIAL SERVICES’ SHORT-TERM NOTES PAYABLE

The financial services segment had outstanding borrowings at December 31 as follows:

(in thousands)		2003		2002
Repurchase agreement		$	12,007	$	20,303
Revolving credit agreement			14,247		22,842
	Total	$	26,254	$	43,145

     The repurchase agreement provided for short-term borrowings of $12.0 million and $20.3 million at December 31, 2003 and 2002, respectively, that were collateralized by mortgage loans and mortgage-backed securities. Outstanding collateral balances were $11.2 million and $18.9 million, with fair values of $12.0 million and $20.3 million, at December 31, 2003 and 2002, respectively.

     In 2003, the Company’s financial services segment renewed and extended a revolving credit facility used to finance mortgage investment portfolio securities. The facility, previously $35.0 million, was renewed for $25.0 million. The agreement matures in March 2004 and bears interest at market rates. The Company is currently in the process of extending the facility. Borrowings outstanding under this facility totaling $14.2 million and $22.8 million, respectively, were collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries and had principal balances of $14.1 million and $22.6 million, with fair values of $14.9 million and $23.8 million, at December 31, 2003 and 2002, respectively.

     Weighted-average short-term borrowings during the period were $34.0 million, $51.5 million and $72.0 million for 2003, 2002 and 2001, respectively.

     Weighted-average interest rates at the end of the period on all short-term borrowings were 2.0 percent and 1.9 percent for 2003 and 2002, respectively. Weighted-average interest rates during the period on all short-term borrowings were 1.8 percent, 2.3 percent and 4.8 percent for 2003, 2002 and 2001, respectively.

     The repurchase agreement and revolving credit agreement contain certain financial covenants. The Company was in compliance with these covenants at December 31, 2003.

10

THE RYLAND GROUP

NOTE E: DERIVATIVE INSTRUMENTS

The Company, which uses financial instruments in its normal course of operations, has no derivative financial instruments that are held for trading purposes.

     The contract or notional amounts of these financial instruments at December 31 were as follows:

(in thousands)		2003		2002
Interest rate lock commitments		$	73,590	$	63,487
Hedging contracts:
	Forward-delivery contracts	$	84,491	$	96,000
	Other		20,000		15,000

     IRLCs represent loan commitments with customers at market rates up to 120 days before settlement. IRLCs expose the Company to market risk as a result of increases in mortgage interest rates. IRLCs had interest rates ranging from 4.9 percent to 10.2 percent at December 31, 2003, and 5.0 percent to 10.3 percent at December 31, 2002.

     Hedging contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movements in interest rates on IRLCs and mortgage loans held-for-sale. The selection of these hedging contracts is based upon the Company’s secondary marketing strategy, which establishes a risk-tolerance level. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with IRLCs and mortgage loans held-for-sale.

     The Company is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. The Company manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits.

NOTE F: FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated by using either present value or other valuation techniques. Estimated fair values are significantly affected by the assumptions used, including discount rates and estimates of cash flows. In that regard, derived fair value estimates cannot always be substantiated by comparison to independent markets and, in some cases, cannot be realized in immediate settlement of the instruments.

     The table below sets forth the carrying values and fair values of the Company’s financial instruments at December 31. It excludes nonfinancial instruments, and, accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

			2003						2002
			CARRYING			FAIR			CARRYING			FAIR
(in thousands)			VALUE			VALUE			VALUE			VALUE
HOMEBUILDING
	Liabilities
		Senior notes	$	397,000		$	427,141		$	247,000		$	262,392
		Senior subordinated notes		143,500			160,519			243,500			255,924
FINANCIAL SERVICES
	Assets
		Mortgage loans held-for-sale1	$	21,920		$	22,234		$	19,411		$	19,795
		Mortgage-backed securities and notes receivable		26,260			27,304			42,583			44,208
	Other Financial Instruments
		Interest rate lock commitments		1,625			1,625			1,472			1,472
		Forward-delivery contracts		(124	)		(124	)		(1,208	)		(1,208	)
		Other		(19	)		(19	)		30			30
OTHER ASSETS
	Collateral for bonds payable of the limited-purpose subsidiaries		$	9,188		$	9,241		$	12,011		$	12,045
OTHER LIABILITIES
	Bonds payable of the limited-purpose subsidiaries		$	8,011		$	8,721		$	10,378		$	10,893

¹Mortgage loans held-for-sale are reported in the balance sheet in Financial Services “Other assets.”

11

THE RYLAND GROUP

	The Company used the following methods and assumptions in estimating fair values:
•	Cash and cash equivalents; secured notes payable; and short-term notes payable. The carrying amounts reported in the balance sheet approximate fair values.
•	Senior notes; senior subordinated notes; mortgage loans held-for-sale; mortgage-backed securities and notes receivable; hedging contracts; and interest rate lock commitments. The fair values of these financial instruments are based on either quoted market prices or market prices for similar financial instruments.

NOTE G: LIMITED-PURPOSE SUBSIDIARIES

The Company’s limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, but they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Payments made on the bonds are on a scheduled basis in amounts relating to corresponding payments received on the underlying mortgage collateral. Bonds payable are reported in the balance sheet in “Other liabilities.”

     Collateral for bonds payable, which consists of mortgage-backed securities; notes receivable secured by mortgage-backed securities and mortgage loans; fixed-rate mortgage loans; and funds held by trustee, is reported in the balance sheet under “Other assets” in “Other.” Mortgage-backed securities consist of GNMA certificates, FNMA mortgage pass-through certificates and FHLMC participation certificates. All principal and interest on collateral is remitted directly to a trustee and is available for payment on the bonds.

     Neither the Company nor its homebuilding and financial services subsidiaries have guaranteed these nonrecourse bond issues.

     The following table sets forth information with respect to the limited-purpose subsidiaries’ bonds payable outstanding at December 31:

(in thousands)		2003			2002
Bonds payable, net of discounts:
	2003 — $242; 2002 — $408	$	8,011		$	10,378
Range of interest rates			7.25% - 11.65	%		7.25% - 11.65	%
Stated maturities			2009 - 2018			2009 - 2018

NOTE H: LONG-TERM DEBT

Long-term debt consists of the following at December 31:

(in thousands)		2003		2002
Senior subordinated notes		$	143,500	$	243,500
Senior notes			397,000		247,000
	Total	$	540,500	$	490,500

     The Company has a $400.0 million senior unsecured revolving credit facility with a three-year term. The agreement matures in August 2005 with an option for a one-year extension. The Company did not borrow against the revolving credit facility during 2003. In prior years, the Company used its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. Borrowings under this agreement bear interest at variable short-term rates. The effective interest rate was 4.8 percent for 2002 and 7.4 percent for 2001. There were no outstanding borrowings under this agreement at December 31, 2003 and 2002.

     In June 2003, the Company issued $150.0 million of 5.4 percent senior notes, which pay interest semiannually and will mature on June 1, 2008. In July 2003, the net proceeds from this offering were used to fully redeem the $100.0 million aggregate principal from the Company’s 8.3 percent senior subordinated notes due April 1, 2008, at a stated call price of 104.1 percent of the principal amount. The remaining proceeds were used for general corporate purposes. As a result of this redemption, the Company recorded a $5.1 million pretax loss associated with the early extinguishment of debt.

12

THE RYLAND GROUP

     At December 31, 2003, the Company had $143.5 million of 9.1 percent senior subordinated notes due June 2011, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after June 15, 2006. Senior subordinated notes are subordinated to all existing and future senior debt of the Company.

     At December 31, 2003, the Company had $150.0 million of 5.4 percent senior notes due June 2008, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time. Additionally, the Company had $100.0 million of 8.0 percent senior notes due August 2006, with interest payable semiannually, which may not be redeemed prior to maturity. Also outstanding at December 31, 2003, was $147.0 million of 9.8 percent senior notes due September 2010, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after September 1, 2005.

     Maturities of long-term debt are scheduled as follows:

(in thousands)
2006	$	100,000
2007		—
2008		150,000
After 2008		290,500
Total long-term debt	$	540,500

     The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. At December 31, 2003, the Company had $141.2 million of retained earnings available for dividends and was in compliance with these covenants.

NOTE I: INCOME TAXES

The Company’s expense for income taxes is summarized as follows:

			YEAR ENDED DECEMBER 31,
(in thousands)			2003			2002		2001
CURRENT
	Federal		$	137,108		$	106,722	$	75,822
	State			17,884			17,014		12,918
		Total current		154,992			123,736		88,740
DEFERRED
	Federal			(413	)		—		(2,134	)
	State			(54	)		—		(363	)
		Total deferred		(467	)		—		(2,497	)
Total expense			$	154,525		$	123,736	$	86,243

     The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate:

	YEAR ENDED DECEMBER 31,
	2003			2002			2001
Income taxes at federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		3.0			3.6			3.7
Other, net		1.0			1.4			0.8
Effective rate		39.0	%		40.0	%		39.5	%

13

THE RYLAND GROUP

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

     Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:

(in thousands)			2003			2002
DEFERRED TAX ASSETS
	Warranty, legal and other accruals		$	30,534		$	25,706
	Employee benefits			23,045			18,030
	Non-cash charge for impairment of long-lived assets			950			2,553
	Other			665			4,068
		Total deferred tax assets		55,194			50,357
DEFERRED TAX LIABILITIES
	Installment sales method and deferred gains			(7,439	)		(5,553	)
	Capitalized expenses			(8,036	)		(5,656	)
	Other			(2,276	)		(2,318	)
		Total deferred tax liabilities		(17,751	)		(13,527	)
Net deferred tax asset			$	37,443		$	36,830

     The Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total current tax liability of $34.9 million and $29.7 million at December 31, 2003 and 2002, respectively. These amounts are reported in the balance sheet in “Other liabilities.”

NOTE J: STOCKHOLDERS’ EQUITY

Preferred Stock

During 2001, Ryland called and redeemed all of its outstanding preferred stock, which was held within the Retirement Savings Opportunity Plan (RSOP) Trust. At the election of each individual preferred stockholder, and in accordance with the terms of the preferred stock, each share of preferred stock was either purchased at a per share price of $7.89 or converted into one share of Ryland common stock. A total of 1,011,148 shares of preferred stock was converted into an equivalent number of shares of common stock.

     Each share of preferred stock received a quarterly dividend of $0.14. During 2001, the Company paid $308,000 in dividends on its preferred stock. Each share of preferred stock entitled the holder to a number of votes equal to the shares into which the stock was convertible, and preferred stockholders voted together with common stockholders on all matters.

Common Share Purchase Rights

In 1996, the Company adopted a revised stockholder rights plan under which it distributed one common share purchase right for each share of common stock outstanding on January 13, 1997. Each right entitles the holder to purchase one share of common stock at an exercise price of $17.50. The rights become exercisable ten business days after any party acquires, or announces an offer to acquire, 20.0 percent or more of the Company’s common stock. The rights expire January 13, 2007, and are redeemable at $0.0025 per right at any time before ten business days following the time that any party acquires 20.0 percent or more of the Company’s common stock.

     In the event that the Company enters into a merger or other business combination, or if a substantial amount of its assets are sold after the time that the rights become exercisable, the holder will receive, upon exercise, shares of the common stock of the surviving or acquiring company having a market value of twice the exercise price. Until the earlier of the time that the rights become exercisable, are redeemed or expire, the Company will issue one right with each new share of common stock.

Stock Spilt

On October 10, 2004, the Company’s Board of Directors approved a two-for-one stock split of its common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock at the close of business on November 15, 2004, were entitled to one additional share for each share held at that time. The new shares were distributed on November 30, 2004.

On April 24, 2002, the Company’s Board of Directors approved a two-for-one stock split of its common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock at the close of business on May 15, 2002, were entitled to one additional share for each share held at that time. The new shares were distributed on May 30, 2002.

14

THE RYLAND GROUP

NOTE K: EMPLOYEE INCENTIVE AND STOCK PLANS

Retirement Savings Opportunity Plan (RSOP)

All full-time employees are eligible to participate in the RSOP following 30 days of employment. Part-time employees are eligible to participate in the RSOP following the completion of one thousand hours of service within the first 12 months of employment or within any plan year after the date of hire. Pursuant to Section 401(k) of the Internal Revenue Code, the plan permits deferral of a portion of a participant’s income into a variety of investment options. Total compensation expense related to the Company’s matching contributions for this plan amounted to $8.1 million, $7.2 million and $6.5 million in 2003, 2002 and 2001, respectively.

     Previously, the Company issued its preferred stock in connection with its matching contributions to those accounts. As a result of the redemption of the preferred stock, 506,864 and 572,734 shares of common stock were allocated to participants’ accounts at December 31, 2003 and 2002, respectively.

Employee Stock Purchase Plan (ESPP)

All full-time employees of the Company, with the exception of its executive officers, are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made for the purchase of shares. The Company matches a portion of the employee’s contribution by donating an additional 20.0 percent of the employee’s payroll deduction. Stock is purchased by a plan administrator on a regular monthly basis. All brokerage and transaction fees for purchasing the stock are paid for by the Company. The Company’s expense related to its matching contribution for this plan was $321,000, $258,000 and $192,000 in 2003, 2002 and 2001, respectively.

Supplemental Executive Retirement Plan

The Company has supplemental, nonqualified retirement plans which vest over five-year periods beginning January 1, 2003, and July 1, 2003, pursuant to which the Company will pay supplemental pension benefits to key employees upon retirement. In connection with these plans, the Company has purchased cost-recovery life insurance on the lives of certain employees. Insurance contracts associated with the plans are held by trusts, established as part of the plans to implement and carry out their provisions and finance their related benefits. The trusts are owners and beneficiaries of such contracts. The amount of coverage is designed to provide sufficient revenue to cover all costs of the plans if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. At December 31, 2003, the cash surrender value of these contracts was $6.1 million. The net periodic benefit cost for these plans for the year ended December 31, 2003, was $3.7 million, which included service costs of $3.7 million, interest costs of $290,000 and investment income of $324,000. The $4.0 million projected benefit obligation at December 31, 2003, was equal to the net liability recognized in the balance sheet at that date. For the year ended December 31, 2003, the weighted-average discount rate used for the plans was 7.8 percent.

Equity Incentive Plan and Other Related Plans

On April 24, 2002, the Company’s stockholders approved The Ryland Group, Inc. 2002 Equity Incentive Plan (“the Plan”), which permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, stock units or any combination of the foregoing to employees. This plan replaces the Company’s 1992 Equity Incentive Plan, which expired on April 15, 2002. The aggregate number of shares available for issuance under the Plan includes 30,864 shares carried over from the 1992 Equity Incentive Plan and 2.6 million new shares available under the terms of the Plan. Any shares of the Company’s common stock covered by an award (or portion of an award) granted under the Plan or the 1992 Equity Incentive Plan that are forfeited, expired or canceled without delivery of shares of common stock, or which are tendered to the Company as full or partial payment of the exercise price or related tax withholding obligations, will again be available for award under the Plan. The Plan will remain in effect until April 24, 2012, unless it is terminated by the Board of Directors at an earlier date. The options are exercisable at various dates over one- to ten-year periods. Stock options granted during 2003 generally have a maximum term of ten years and vest over three years. At December 31, 2003 and 2002, 1,540,584 and 2,220,672 stock options were available for grant, respectively.

     Under the Company’s 2000 Non-Employee Director Equity Plan, stock options are granted to directors for the purchase of shares at prices not less than the fair market value of the shares at the date of grant. At December 31, 2003 and 2002, 353,200 and 573,200 stock options were available for grant, respectively.

15

THE RYLAND GROUP

     The following is a summary of transactions relating to all stock option plans for each year ended December 31:

		2003					2002					2001
					WEIGHTED-					WEIGHTED-					WEIGHTED-
					AVERAGE					AVERAGE					AVERAGE
					EXERCISE					EXERCISE					EXERCISE
		SHARES			PRICE		SHARES			PRICE		SHARES			PRICE
Options outstanding at beginning of year			6,874,796		$	10.11		7,346,568		$	6.58		8,799,744		$	5.13
	Granted		1,032,300			26.08		1,574,400			21.48		1,531,000			12.33
	Exercised		(1,762,008	)		8.62		(1,939,230	)		5.87		(2,592,532	)		5.03
	Forfeited		(132,212	)		18.19		(106,942	)		11.94		(391,644	)		6.86
Options outstanding at end of year			6,012,876		$	13.11		6,874,796		$	10.11		7,346,568		$	6.58
Available for future grant			1,893,784					2,793,872					1,069,644
Total shares reserved			7,906,660					9,668,668					8,416,212
Options exercisable at December 31			3,788,128		$	7.76		3,997,936		$	6.26		4,096,732		$	5.22
Prices related to options exercised during the year		$	3.41 – $22.70				$	3.38 – $11.35				$	3.38 – $7.23

     A summary of stock options outstanding and exercisable at December 31, 2003, follows:

	OPTIONS OUTSTANDING						OPTIONS EXERCISABLE
			WEIGHTED-
RANGE OF			AVERAGE		WEIGHTED-				WEIGHTED-
EXERCISE	NUMBER		REMAINING		AVERAGE		NUMBER		AVERAGE
PRICES	OUTSTANDING		LIFE (YEARS)		EXERCISE PRICE		EXERCISABLE		EXERCISE PRICE
$3.19 to $5.97		1,673,602		4.02	$	4.01		1,673,602	$	4.01
$6.04 to $11.38		1,915,142		6.19	$	8.25		1,549,302	$	7.53
$16.68 to $24.44		2,197,132		8.62	$	21.07		565,224	$	19.49
$34.70 to $44.32		227,000		9.99	$	44.03		—		—

     The Company has made several restricted stock awards to senior executives under both the 1992 and 2002 Equity Incentive Plans. All restricted stock was awarded in the name of each participant, who had all the rights of other common stockholders subject to restrictions and forfeiture provisions. Accordingly, such restricted stock awards were considered common stock equivalents. Compensation expense recognized for such awards totaled $16.1 million, $9.8 million and $5.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

     The following is a summary of activity relating to restricted stock awards for each year ended December 31:

	2003			2002			2001
Restricted shares at January 1		904,200			500,000			360,000
Shares awarded		—			730,000			260,000
Shares vested		(265,600	)		(325,800	)		(120,000	)
Restricted shares at December 31		638,600			904,200			500,000

     At December 31, 2003, the outstanding restricted shares vest as follows: 2004 – 268,200; 2005 – 182,400; 2006 – 94,000; and 2007 – 94,000.

     All outstanding stock options and restricted stock awards have been granted in accordance with the terms of the 2002 Equity Incentive Plan, the 2000 Non-Employee Director Equity Plan and their respective predecessor plans, which were approved by the Company’s stockholders.

NOTE L: COMMITMENTS AND CONTINGENCIES

Commitments

In the normal course of business, the Company acquires rights under option agreements to purchase land for use in future homebuilding operations. At December 31, 2003, the Company had cash deposits and letters of credit outstanding of $87.6 million for land options and land purchase contracts having a total purchase price of $1,334.0 million. At December 31, 2003, the Company had commitments with respect to option contracts having specific performance provisions of approximately $51.5 million, compared to $68.0 million at December 31, 2002.

16

THE RYLAND GROUP

     Rent expense primarily relates to office facilities, model homes, and furniture and equipment.

	YEAR ENDED DECEMBER 31,
(in thousands)	2003			2002			2001
Total rent expense	$	17,937		$	20,058		$	21,591
Less income from subleases		(215	)		(1,233	)		(2,376	)
Net rental expense	$	17,722		$	18,825		$	19,215

     Future minimum rental commitments under noncancelable leases with remaining terms in excess of one year are as follows:

(in thousands)
2004	$	7,375
2005		5,866
2006		4,890
2007		3,303
2008 and thereafter		3,180
Subtotal	$	24,614
Less sublease income		(618	)
Total lease commitments	$	23,996

Contingencies

Contingent liabilities may arise from obligations incurred in the ordinary course of business or from the usual obligations of on-site housing producers for the completion of contracts. Some municipalities require the Company to issue development bonds or maintain letters of credit to assure completion of public facilities within a project. At December 31, 2003, total development bonds were $278.4 million and total deposits and letters of credit were $44.0 million.

     The Company provides product warranties to its customers covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years. The Company estimates and records warranty liabilities based upon historical experience and known risks at the time a home closes, and in the case of unexpected claims, upon identification and quantification of the obligations. Actual future warranty costs could differ from currently estimated amounts.

     Changes in the Company’s product liability during the period are as follows:

(in thousands)	2003			2002
Balance at January 1	$	29,860		$	26,664
Warranties issued		16,668			13,235
Settlements made		(16,201	)		(13,936	)
Changes in liability for pre-existing warranties		3,931			3,897
Balance at December 31	$	34,258		$	29,860

     The Company is party to various legal proceedings generally incidental to its businesses. Litigation reserves have been established based on discussions with counsel and the Company’s analysis of historical claims. The Company has, and requires the majority of its subcontractors to have, general liability insurance that protects the Company against a portion of its risk of loss and to cover construction-related claims. The Company establishes reserves to cover its self-insured retentions and deductible amounts under those policies. Due to the high degree of judgment required in determining these estimated reserve amounts, actual future litigation costs could differ from the Company’s currently estimated amounts.

17

NOTE M: SUBSEQUENT EVENT — SUPPLEMENTAL GUARANTOR INFORMATION

In December 2004, substantially all of the Company’s wholly-owned homebuilding subsidiaries (the “Guarantor Subsidiaries”), will be issuing guarantees, on a joint and several basis, related to the obligation to pay principal, premium, if any, and interest on the existing publicly traded senior notes issued by The Ryland Group, Inc. The Ryland Group, Inc.’s 8 percent senior notes due August 2006, 5.4 percent senior notes due June 2008 and the 9.8 percent senior notes due September 2010, will be guaranteed by the Guarantor Subsidiaries. Such guarantees will be full and unconditional.

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying condensed consolidating financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors and are therefore not presented.

The following condensed consolidating information presents the consolidating statements of earnings, cash flows and financial position for (i) the parent company and issuer, The Ryland Group, Inc. (“TRG, Inc.”), (ii) the Guarantor Subsidiaries, (iii) the Non-guarantor Subsidiaries, and (iv) the consolidation eliminations to arrive at the information for The Ryland Group, Inc. and subsidiaries on a consolidated basis.

18

Consolidating Statement Of Earnings

	YEAR ENDED DECEMBER 31, 2003
			GUARANTOR		NON-GUARANTOR		CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.		SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			TOTAL
REVENUES
HOMEBUILDING	$	2,153,561	$	1,317,300	$	—	$	(115,411	)	$	3,355,450
FINANCIAL SERVICES		—		—		88,679		—			88,679
TOTAL REVENUES		2,153,561		1,317,300		88,679		(115,411	)		3,444,129
EXPENSES
HOMEBUILDING
Cost of sales		1,671,666		1,059,627		93		(115,411	)		2,615,975
Selling, general and administrative		203,246		130,401		79		—			333,726
Interest		134		5,898		—		—			6,032
Expenses related to early retirement of debt		5,086		—		—		—			5,086
Total homebuilding expenses		1,880,132		1,195,926		172		(115,411	)		2,960,819
FINANCIAL SERVICES
General and administrative		—		—		24,339		—			24,339
Interest		—		—		1,491		—			1,491
Total financial services expenses		—		—		25,830		—			25,830
CORPORATE EXPENSES		15,378		45,885		—		—			61,263
TOTAL EXPENSES		1,895,510		1,241,811		26,002		(115,411	)		3,047,912
Earnings before taxes		258,051		75,489		62,677		—			396,217
Tax expense		100,640		29,441		24,444		—			154,525
Equity in net earnings of subsidiaries		84,281		—		—		(84,281	)		—
NET EARNINGS	$	241,692	$	46,048	$	38,233	$	(84,281	)	$	241,692

19

Consolidating Statement Of Earnings

	YEAR ENDED DECEMBER 31, 2002
				GUARANTOR		NON-GUARANTOR		CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			TOTAL
REVENUES
HOMEBUILDING	$	1,745,222		$	1,122,661	$	—	$	(62,828	)	$	2,805,055
FINANCIAL SERVICES		—			—		72,158		—			72,158
TOTAL REVENUES		1,745,222			1,122,661		72,158		(62,828	)		2,877,213
EXPENSES
HOMEBUILDING
Cost of sales		1,350,717			928,077		93		(62,828	)		2,216,059
Selling, general and administrative		167,428			113,543		78		—			281,049
Interest		(132	)		6,958		—		—			6,826
Total homebuilding expenses		1,518,013			1,048,578		171		(62,828	)		2,503,934
FINANCIAL SERVICES
General and administrative		—			—		21,299		—			21,299
Interest		—			—		2,565		—			2,565
Total financial services expenses		—			—		23,864		—			23,864
CORPORATE EXPENSES		11,383			28,692		—		—			40,075
TOTAL EXPENSES		1,529,396			1,077,270		24,035		(62,828	)		2,567,873
Earnings before taxes		215,826			45,391		48,123		—			309,340
Tax expense		86,330			18,157		19,249		—			123,736
Equity in net earnings of subsidiaries		56,108			—		—		(56,108	)		—
NET EARNINGS	$	185,604		$	27,234	$	28,874	$	(56,108	)	$	185,604

20

Consolidating Statement Of Earnings

	YEAR ENDED DECEMBER 31, 2001
			GUARANTOR		NON-GUARANTOR		CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.		SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			TOTAL
REVENUES
HOMEBUILDING	$	1,609,457	$	1,148,226	$	—	$	(73,567	)	$	2,684,116
FINANCIAL SERVICES		—		—		63,075		—			63,075
TOTAL REVENUES		1,609,457		1,148,226		63,075		(73,567	)		2,747,191
EXPENSES
HOMEBUILDING
Cost of sales		1,274,539		980,554		93		(73,567	)		2,181,619
Selling, general and administrative		150,022		110,991		65		—			261,078
Interest		774		17,455		—		—			18,229
Expenses related to early retirement of debt		7,244		—		—		—			7,244
Total homebuilding expenses		1,432,579		1,109,000		158		(73,567	)		2,468,170
FINANCIAL SERVICES
General and administrative		—		—		22,532		—			22,532
Interest		—		—		5,423		—			5,423
Total financial services expenses		—		—		27,955		—			27,955
CORPORATE EXPENSES		7,838		24,892		—		—			32,730
TOTAL EXPENSES		1,440,417		1,133,892		28,113		(73,567	)		2,528,855
Earnings before taxes		169,040		14,334		34,962		—			218,336
Tax expense		66,771		5,662		13,810		—			86,243
Equity in net earnings of subsidiaries		29,824		—		—		(29,824	)		—
NET EARNINGS	$	132,093	$	8,672	$	21,152	$	(29,824	)	$	132,093

21

Consolidating Balance Sheet

	DECEMBER 31, 2003
				GUARANTOR		NON-GUARANTOR			CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES			ELIMINATIONS			TOTAL
ASSETS
HOMEBUILDING
Cash and cash equivalents	$	34,434		$	278,767	$	1,317		$	—		$	314,518
Total housing inventories		821,971			518,030		56,651			—			1,396,652
Property, plant and equipment		25,478			15,375		—			—			40,853
Purchase price in excess of net assets acquired		15,383			2,802		—			—			18,185
Other assets		23,306			22,052		14,074			—			59,432
		920,572			837,026		72,042			—			1,829,640
FINANCIAL SERVICES
Cash and cash equivalents		—			—		2,186			—			2,186
Mortgage-backed securities and notes receivable		—			—		26,260			—			26,260
Other assets		—			—		39,824			—			39,824
		—			—		68,270			—			68,270
OTHER ASSETS
Net deferred taxes		41,857			—		(4,414	)		—			37,443
Other		59,798			—		12,439			—			72,237
Investment in subsidiaries		66,700			—		—			(66,700	)		—
		168,355			—		8,025			(66,700	)		109,680
TOTAL ASSETS		1,088,927			837,026		148,337			(66,700	)		2,007,590
LIABILITIES
HOMEBUILDING
Accounts payable and other liabilities		257,199			108,895		37			—			366,131
Debt		540,500			—		—			—			540,500
		797,699			108,895		37			—			906,631
FINANCIAL SERVICES
Accounts payable and other liabilities		—			—		23,376			—			23,376
Short-term notes payable		—			—		26,254			—			26,254
		—			—		49,630			—			49,630
OTHER LIABILITIES
Intercompany payable		(458,196	)		389,236		(74,800	)		143,760			—
Other liabilities		161,441			—		8,695			—			170,136
		(296,755	)		389,236		(66,105	)		143,760			170,136
TOTAL LIABILITIES		500,944			498,131		(16,438	)		143,760			1,126,397
MINORITY INTEREST		—			—		56,651			—			56,651
STOCKHOLDERS’ EQUITY		587,983			338,895		108,124			(210,460	)		824,542
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,088,927		$	837,026	$	148,337		$	(66,700	)	$	2,007,590

22

Consolidating Balance Sheet

	DECEMBER 31, 2002
				GUARANTOR		NON-GUARANTOR			CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES			ELIMINATIONS			TOTAL
ASSETS
HOMEBUILDING
Cash and cash equivalents	$	24,395		$	241,033	$	1,149		$	—		$	266,577
Total housing inventories		673,559			426,453		—			—			1,100,012
Property, plant and equipment		25,526			14,953		—			—			40,479
Purchase price in excess of net assets acquired		15,383			2,802		—			—			18,185
Other assets		21,835			22,349		14,068			—			58,252
		760,698			707,590		15,217			—			1,483,505
FINANCIAL SERVICES
Cash and cash equivalents		—			—		2,868			—			2,868
Mortgage-backed securities and notes receivable		—			—		42,583			—			42,583
Other assets		—			—		38,163			—			38,163
		—			—		83,614			—			83,614
OTHER ASSETS
Net deferred taxes		37,796			—		(966	)		—			36,830
Other		39,368			—		14,434			—			53,802
Investment in subsidiaries		48,232			—		—			(48,232	)		—
		125,396			—		13,468			(48,232	)		90,632
TOTAL ASSETS		886,094			707,590		112,299			(48,232	)		1,657,751
LIABILITIES
HOMEBUILDING
Accounts payable and other liabilities		206,253			93,881		34			—			300,168
Debt		490,500			—		—			—			490,500
		696,753			93,881		34			—			790,668
FINANCIAL SERVICES
Accounts payable and other liabilities		—			—		23,718			—			23,718
Short-term notes payable		—			—		43,145			—			43,145
		—			—		66,863			—			66,863
OTHER LIABILITIES
Intercompany payable		(362,891	)		320,862		(35,918	)		77,947			—
Other liabilities		108,712			—		11,429			—			120,141
		(254,179	)		320,862		(24,489	)		77,947			120,141
TOTAL LIABILITIES		442,574			414,743		42,408			77,947			977,672
STOCKHOLDERS’ EQUITY		443,520			292,847		69,891			(126,179	)		680,079
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	886,094		$	707,590	$	112,299		$	(48,232	)	$	1,657,751

23

Consolidating Statement of Cash Flows

	YEAR ENDED DECEMBER 31, 2003
				GUARANTOR				NON-GUARANTOR			CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES				SUBSIDIARIES			ELIMINATIONS			TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	241,692		$	46,048			$	38,233		$	(84,281	)	$	241,692
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		24,261			11,253				922			—			36,436
Changes in assets and liabilities:
Increase in inventories		(148,412	)		(91,577	)			—			—			(239,989	)
Net change in other assets, payables and other liabilities		(43,093	)		83,352		��		(37,911	)		84,281			86,629
Tax benefit from exercise of stock options		17,120			—				—			—			17,120
Other operating activities, net		913			—				—			—			913
Net cash provided by operating activities		92,481			49,076				1,244			—			142,801
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment		(20,266	)		(11,342	)			(933	)		—			(32,541	)
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral		—			—				18,672			—			18,672
Net cash (used for) provided by investing activities		(20,266	)		(11,342	)			17,739			—			(13,869	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds of long-term debt		150,000			—				—			—			150,000
Repayment of long-term debt		(100,000	)		—				—			—			(100,000	)
Decrease in short-term notes payable		—			—				(16,891	)		—			(16,891	)
Common and preferred stock dividends		(2,020	)		—				—			—			(2,020	)
Common stock repurchases		(130,939	)		—				—			—			(130,939	)
Proceeds from stock option exercises		15,190			—				—			—			15,190
Other financing activities, net		5,593			—				(2,606	)		—			2,987
Net cash used for financing activities		(62,176	)		—				(19,497	)		—			(81,673	)
Net increase (decrease) in cash and cash equivalents		10,039			37,734				(514	)		—			47,259
Cash and cash equivalents at beginning of period		24,395			241,033				4,017			—			269,445
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	34,434		$	278,767			$	3,503		$	—		$	316,704

24

Consolidating Statement Of Cash Flows

	FOR THE YEAR ENDED DECEMBER 31, 2002
				GUARANTOR			NON-GUARANTOR			CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	185,604		$	27,234		$	28,874		$	(56,108	)	$	185,604
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		20,020			11,831			819			—			32,670
Changes in assets and liabilities:
Increase in inventories		(139,594	)		(61,029	)		—			—			(200,623	)
Net change in other assets, payables and other liabilities		11,280			14,511			(29,568	)		56,108			52,331
Tax benefit from exercise of stock options		12,103			—			—			—			12,103
Other operating activities, net		5,095			—			—			—			5,095
Net cash provided by (used for) operating activities		94,508			(7,453	)		125			—			87,180
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment		(22,185	)		(13,191	)		(1,171	)		—			(36,547	)
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral		—			—			25,314			—			25,314
Net cash (used for) provided by investing activities		(22,185	)		(13,191	)		24,143			—			(11,233	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term notes payable		—			—			(18,974	)		—			(18,974	)
Common and preferred stock dividends		(2,148	)		—			—			—			(2,148	)
Common stock repurchases		(95,916	)		—			—			—			(95,916	)
Proceeds from stock option exercises		11,382			—			—			—			11,382
Other financing activities, net		6,284			—			(5,440	)		—			844
Net cash used for financing activities		(80,398	)		—			(24,414	)		—			(104,812	)
Net decrease in cash and cash equivalents		(8,075	)		(20,644	)		(146	)		—			(28,865	)
Cash and cash equivalents at beginning of period		32,470			261,677			4,163			—			298,310
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	24,395		$	241,033		$	4,017		$	—		$	269,445

25

Consolidating Statement Of Cash Flows

	YEAR ENDED DECEMBER 31, 2001
				GUARANTOR			NON-GUARANTOR			CONSOLIDATING			CONSOLIDATED
(amounts in thousands)	TRG, INC.			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	132,093		$	8,672		$	21,152		$	(29,824	)	$	132,093
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		22,088			14,271			709			—			37,068
Changes in assets and liabilities:
Increase in inventories		(64,288	)		53,304			—			—			(10,984	)
Net change in other assets, payables and other liabilities		(83,472	)		97,554			(27,463	)		29,824			16,443
Tax benefit from exercise of stock options		8,337			—			—			—			8,337
Other operating activities, net		(6,182	)		—			—			—			(6,182	)
Net cash provided by (used for) operating activities		8,576			173,801			(5,602	)		—			176,775
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment		(19,447	)		(10,499	)		(937	)		—			(30,883	)
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral		—			—			33,215			—			33,215
Net cash (used for) provided by investing activities		(19,447	)		(10,499	)		32,278			—			2,332
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds of long-term debt		250,000			—			—			—			250,000
Repayment of long-term debt		(209,500	)		—			—			—			(209,500	)
Decrease in short-term notes payable		—			—			(20,444	)		—			(20,444	)
Common and preferred stock dividends		(2,605	)		—			—			—			(2,605	)
Common stock repurchases		(45,493	)		—			—			—			(45,493	)
Proceeds from stock option exercises		12,888			—			—			—			12,888
Other financing activities, net		1,617			—			(9,461	)		—			(7,844	)
Net cash provided by (used for) financing activities		6,907			—			(29,905	)		—			(22,998	)
Net (decrease) increase in cash and cash equivalents		(3,964	)		163,302			(3,229	)		—			156,109
Cash and cash equivalents at beginning of period		36,434			98,375			7,392			—			142,201
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	32,470		$	261,677		$	4,163		$	—		$	298,310

26

THE RYLAND GROUP

Report of Independent Registered Public Accounting Firm

BOARD OF DIRECTORS AND STOCKHOLDERS

THE RYLAND GROUP, INC.

We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ryland Group, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

ERNST & YOUNG LLP
Los Angeles, California
January 20, 2004
except for Note M, as to which the date is December 16, 2004

Report of Management

Management of the Company is responsible for the integrity and accuracy of the financial statements and all other annual report information. The financial statements are prepared in conformity with generally accepted accounting principles and include amounts based on management’s judgments and estimates.

     The accounting systems, which record, summarize and report financial information, are supported by internal control systems designed to provide reasonable assurance, at an appropriate cost, that the assets are safeguarded and that transactions are recorded in accordance with Company policies and procedures. Proper selection, training and development of personnel also contribute to the effectiveness of the internal control systems. These systems are the responsibility of management and are regularly tested by the Company’s internal auditors. External auditors also review and test the effectiveness of these systems to the extent they deem necessary to express an opinion on the consolidated financial statements.

     The Audit Committee of the Board of Directors periodically meets with management, the internal auditors and the external auditors to review accounting, auditing and financial matters. Both internal auditors and external auditors have unrestricted access to the Audit Committee.

Gordon A. Milne
Executive Vice President and Chief
Financial Officer

David L. Fristoe
Senior Vice President, Controller,
Chief Information Officer and Chief Accounting Officer

27