Exhibit 13  Excerpt from Annual
Report to Shareholders for the Year Ended December 31, 2005  The following pages represent pages 42 through 88 of The Ryland Group,
Inc.'s Annual Report to Shareholders for the Year Ended
December 31, 2005, and include Selected Financial Data; Management's
Discussion and Analysis of Results of Operations and Financial Condition; Consolidated
Financial Statements and the related notes thereto; Report of Management;
Reports of Independent Registered Public Accounting Firm; and Quarterly
Financial Data and Common Stock Prices and Dividends.


The
  Ryland Group
  2005
  Annual Report
  Page 42Selected
  Financial Data       (in millions,
  except share data) unaudited
  
  2005
  
  2004
  
  2003
  
  2002
  
  2001ANNUAL RESULTSREVENUESHomebuilding
  
  $
  4,726
  
  $
  3,867
  
  $
  3,355
  
  $
  2,805
  
  $
  2,684Financial
  services
  
  92
  
  85
  
  89
  
  72
  
  63TOTAL REVENUES
  
  4,818
  
  3,952
  
  3,444
  
  2,877
  
  2,747Cost of sales
  
  3,538
  
  2,964
  
  2,616
  
  2,216
  
  2,182Selling, general
  and administrative expenses
  
  550
  
  466
  
  419
  
  342
  
  316Interest expense
  
  1
  
  1
  
  8
  
  10
  
  24Expenses related
  to early retirement of debt
  
  8
  
  
  
  5
  
  
  
  7Earnings before taxes
  
  721
  
  521
  
  396
  
  309
  
  218Tax expense
  
  274
  
  201
  
  154
  
  124
  
  86NET EARNINGS
  
  $
  447
  
  $
  320
  
  $
  242
  
  $
  185
  
  $
  132YEAR-END POSITIONASSETSCash and cash
  equivalents
  
  $
  461
  
  $
  88
  
  $
  317
  
  $
  269
  
  $
  298Housing
  inventories
  
  2,580
  
  2,024
  
  1,397
  
  1,100
  
  899Other assets
  
  346
  
  313
  
  294
  
  289
  
  314TOTAL ASSETS
  
  3,387
  
  2,425
  
  2,008
  
  1,658
  
  1,511LIABILITIESDebt
  
  922
  
  559
  
  574
  
  537
  
  557Other liabilities
  and minority interest
  
  1,089
  
  809
  
  609
  
  441
  
  391TOTAL LIABILITIES
  
  2,011
  
  1,368
  
  1,183
  
  978
  
  948STOCKHOLDERS
  EQUITY
  
  $
  1,376
  
  $
  1,057
  
  $
  825
  
  $
  680
  
  $
  563PER COMMON SHARE
  DATANET EARNINGSBasic
  
  $
  9.52
  
  $
  6.72
  
  $
  4.86
  
  $
  3.51
  
  $
  2.47Diluted
  
  9.03
  
  6.36
  
  4.56
  
  3.32
  
  2.32DIVIDENDS
  DECLARED
  
  $
  0.30
  
  $
  0.21
  
  $
  0.08
  
  $
  0.04
  
  $
  0.04STOCKHOLDERS
  EQUITY PER SHARE
  
  29.68
  
  22.32
  
  16.98
  
  13.46
  
  10.65OTHER FINANCIAL
  DATAEBITDA1
  
  $
  810
  
  $
  603
  
  $
  478
  
  $
  384
  
  $
  311EBITDA/interest
  incurred2
  
  12.2
  x
  11.3
  x
  9.5
  x
  7.8
  x
  5.6
  xReturn on
  beginning equity3
  
  42.3
  %
  38.9
  %
  35.5
  %
  33.0
  %
  29.1
  %Debt-to-total
  capital4
  
  40.1
  %
  34.6
  %
  41.0
  %
  44.1
  %
  49.7
  %  1EBITDA (earnings before interest, taxes, depreciation and
amortization) is a measure commonly used in the homebuilding industry and is
presented to assist in understanding the ability of the operations of The
Ryland Group, Inc. and its subsidiaries (the Company) to generate cash beyond
that which is needed to service existing interest requirements and ongoing tax
obligations. EBITDA equals net earnings before (a) interest expense; (b) previously
capitalized interest amortized to cost of sales;(c) income taxes; and (d) depreciation
and amortization. EBITDA is not a financial measure recognized in accordance
with generally accepted accounting principles (GAAP). EBITDA should neither be
considered an alternative to net earnings determined in accordance with GAAP as
an indicator of operating performance nor an alternative to cash flows from
operating activities determined in accordance with GAAP as a measure of
liquidity.  2EBITDA/interest incurred is calculated as EBITDA (defined above)
divided by total interest incurred, which is the sum of interest expense and
capitalized interest for the period.  3Return on beginning equity is calculated as net earnings divided by
total stockholders equity at the beginning of the period.  4Debt-to-total capital is calculated as debt divided by the sum of
debt and total stockholders equity.


The
  Ryland Group
  2005
  Annual Report
  Page 43Selected
  Financial Data       The following table sets forth the
computation of EBITDA for each period presented.  YEAR ENDED
  DECEMBER 31,(in
  thousands)
  
  2005
  
  2004
  
  2003
  
  2002
  
  2001Earnings before
  taxes
  
  $
  721,051
  
  $
  521,212
  
  $
  396,217
  
  $
  309,340
  
  $
  218,336Interest expense
  
  738
  
  1,227
  
  7,523
  
  9,391
  
  23,652Capitalized
  interest amortized to cost of sales
  
  45,483
  
  41,764
  
  38,263
  
  32,162
  
  31,878Depreciation and
  amortization
  
  43,166
  
  38,519
  
  36,436
  
  32,670
  
  37,068EBITDA
  
  $
  810,438
  
  $
  602,722
  
  $
  478,439
  
  $
  383,563
  
  $
  310,934  A reconciliation of EBITDA to net
cash provided by operations, the most directly comparable GAAP measure, is
provided below for each period presented.  YEAR ENDED
  DECEMBER 31,(in
  thousands)
  
  2005
  
  2004
  
  2003
  
  2002
  
  2001Net cash provided
  by (used for) operating activities
  
  $
  216,264
  
  $
  (78,471
  )
  $
  139,471
  
  $
  87,715
  
  $
  182,736Increase in
  inventory
  
  490,971
  
  585,562
  
  239,989
  
  200,623
  
  10,984Tax expense
  
  273,999
  
  200,667
  
  154,525
  
  123,736
  
  86,243Interest expense
  
  738
  
  1,227
  
  7,523
  
  9,391
  
  23,652Capitalized
  interest amortized to cost of sales
  
  45,483
  
  41,764
  
  38,263
  
  32,162
  
  31,878Net change in
  other assets, payables and other liabilities
  
  (194,220
  )
  (119,632
  )
  (83,299
  )
  (52,866
  )
  (22,404
  )Tax benefit from
  exercise of stock options and vesting of restricted stock
  
  (30,505
  )
  (17,475
  )
  (17,120
  )
  (12,103
  )
  (8,337
  )Other
  
  7,708
  
  (10,920
  )
  (913
  )
  (5,095
  )
  6,182EBITDA
  
  $
  810,438
  
  $
  602,722
  
  $
  478,439
  
  $
  383,563
  
  $
  310,934  Forward-looking Statements Note: Certain
statements in this annual report may be regarded as forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may qualify for the safe harbor provided for in Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
represent the Companys expectations and beliefs concerning future events, and
no assurance can be given that the results described in this annual report will
be achieved. These forward-looking statements can generally be identified by
the use of statements that include words such as anticipate, believe, estimate,
expect, foresee, goal, intend, likely, may, plan, project, should,
target, will or other similar words or phrases. All forward-looking statements
contained herein are based upon information available to the Company on the
date of this annual report. Except as may be required under applicable law, the
Company does not undertake any obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.  These
forward-looking statements are subject to risks, uncertainties and other
factors, many of which are outside of the Companys control, that could cause
actual results to differ materially from the results discussed in the
forward-looking statements. The factors and assumptions upon which any
forward-looking statements herein are based are subject to risks and
uncertainties which include, among others:  economic changes nationally or in
the Companys local markets, including volatility in interest rates, inflation,
changes in consumer confidence levels and the state of the market for homes in
general; the availability and cost of land; increased land development costs
on projects under development; shortages of skilled labor or raw
materials used in the production of houses; increased prices for labor, land
and raw materials used in the production of houses; increased competition; failure to anticipate or react to
changing consumer preferences in home design; increased costs and delays in
land development or home construction resulting from adverse weather
conditions; potential delays or increased
costs in obtaining necessary permits as a result of changes to laws, regulations
or governmental policies (including those that affect zoning, density, building
standards and the environment); delays in obtaining approvals
from applicable regulatory agencies and others in connection with the Companys
communities and land activities; the risk factors set forth in the
Companys most recent Annual Report on Form 10-K; and other factors over which the
Company has little or no control.


The
  Ryland Group
  2005
  Annual Report
  Page 44Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       With headquarters in Southern California, The Ryland
Group, Inc. and its subsidiaries (the Company) is one of the nations largest
homebuilders and a leading mortgage-finance company. The Company is a Fortune
500 company and is traded on the New York Stock Exchange (NYSE) under the
symbol RYL. Founded in 1967, the Company has built more than 250,000 homes
during its 38-year history. In addition, Ryland Mortgage Company (RMC), has
provided mortgage financing and related services for more than 210,000
homebuyers.  The Company consists of
two operating business segments: homebuilding and financial services. The
home-building operations are, by far, the most substantial part of its
business, comprising approximately 98 percent of consolidated revenues in
fiscal year 2005. The homebuilding segment generates nearly all of its revenues
from the sale of completed homes, with a lesser amount from the sale of land and
lots. The Companys operations span all significant aspects of the home buying
processfrom design, construction and sale to mortgage origination, title
insurance, escrow and homeowners insurance brokerage services. In addition to
building single-family detached homes, the Company also builds attached homes, such
as town homes and condominiums, including some mid-rise buildings, which share
common walls and roofs. It builds homes for entry-level buyers, as well as for
first- and second-time move-up buyers. The Companys prices range from $92,000
to more than $600,000, with the average price of a Ryland home closed during
2005 being $278,000.  Over the last 12 years, the
Company has concentrated on expanding its operations by investing its available
capital into both existing and new markets. It believes that measured organic
growth avoids the risk, debt, intangible assets and distractions associated
with external acquisitions.  The Company focuses on
achieving a high return on invested capital and profitable operations in every
one of its markets. New communities are evaluated based on return and
profitability benchmarks, and both senior and local management are incentivized
based on their ability to achieve such returns. Management continually monitors
the land acquisition process, sales revenues, margins and returns achieved in
each of the Companys markets as part of its evaluation of the use of its
capital.  The Company is highly
diversified throughout the United States, with no more than ten percent and 20
percent of its deployed capital allocated to any given market or geographic
area, respectively. The Company believes diversification minimizes exposure to
economic and market fluctuations and enhances growth potential. Capital is
strategically allocated to avoid concentration in any given geographic area and
to circumvent the accompanying risk associated with excessive dependence on
local market anomalies. Subject to economic conditions, the Company plans to
continue expanding in its existing markets and strives to be among the largest
builders in each of those markets. It also intends to continue diversification
by entering new markets, primarily through establishing start-up or satellite
operations in markets near its existing divisions.  The Companys national
scale has provided increased opportunities for negotiation of volume discounts
and rebates from national and regional material suppliers. Additionally, it has
greater access to a lower cost of capital due to the strength and transparency
of its balance sheet, as well as its lending and capital markets relationships.
The Companys economies of scale and diversification have contributed to
significant improvements in its operating margins.  Committed to product
innovation, the Company conducts ongoing research into consumer preferences and
trends. It is constantly adapting and improving house plans, design features,
customized options and mortgage programs. The Company strives to offer value, selection,
location and quality to all homebuyers.  The Company is dedicated
to building quality homes and customer relationships. With customer
satisfaction as a major priority, it continues to make innovative enhancements
designed to attract homebuyers. During 2005, the Company developed new training
programs for service representatives and on-line systems for tracking requests,
processing issues and improving customer interaction. In addition, the Company
entered into a contract with Eliant, an organization which analyzes customer
feedback, in order to better serve homebuyers needs.


The
  Ryland Group
  2005
  Annual Report
  Page 45Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       In addition to being an
added value to customers, RMC greatly enhances the Companys profitability
while limiting its risk. A competitively high capture rate for mortgage
financing allows the homebuilder to monitor its backlog and closing process. Risk
is further reduced because substantially all loans are sold on the day they
close to a third party, which the third party then services and manages.  The Company enters into
land development joint ventures from time to time as a means of building lot
positions, reducing its risk profile and enhancing its return on capital. It
often partners with developers, other homebuilders or financial investors to
develop finished lots for sale to the joint ventures members or other third
parties.  Ryland homes are built
on-site and marketed in three major geographic regions. At December 31,
2005, the Company operated in the following metropolitan areas:  REGION
  
  MAJOR
  MARKETS SERVEDNorth
  CentralNorth
  
  Baltimore, Chicago, Cincinnati, Delaware, Indianapolis,
  Minneapolis and Washington, D.C.Texas
  
  Austin, Dallas, Houston and San AntonioSoutheast
  
  Atlanta, Charleston, Charlotte, Fort Myers, Greensboro,
  Greenville, Jacksonville, Orlando and TampaWest
  
  Californias Central Valley, Californias Inland Empire,
  Denver, Las Vegas, Phoenix, Sacramento and the San Diego Area  The Company has
decentralized its operations to provide more flexibility to local division
presidents and management teams. Each of its 22 homebuilding divisions across
the country generally consists of a division president, a controller and other
management personnel focused on land entitlement, acquisition and development;
sales, construction, customer service, and purchasing; as well as accounting
and administrative personnel. The Companys operations in its homebuilding
markets may differ due to a number of market-specific factors. These factors
include regional economic conditions and job growth; land availability and
local land development; consumer preferences; competition from other
homebuilders; and home resale activity. The Company not only considers each of
these factors upon entering into new markets, but also in determining the
extent of its operations and capital allocation in existing markets. The
Companys local management teams are familiar with these factors and their
market experience and expertise are critical in making decisions regarding
local operations.  The Company provides
oversight and centralizes key elements of its homebuilding business through its
corporate and regional offices. Corporate is a non-operating business segment
whose purpose is to support operations. Corporate departments are responsible
for establishing operational policies and internal control standards; implementing
strategic initiatives; and monitoring compliance with policies and controls
throughout the Companys operations. Corporate acts as an internal source of
capital and provides financial, human resources, information technology, insurance,
legal, marketing, national purchasing and tax compliance services, as well as
performing the administrative functions associated with a publicly traded
entity. The Company has three regional offices, which generally consist of a
region president; a chief financial officer; real estate legal counsel; and
other management personnel focused on human resources, marketing and
operations. Regional offices provide oversight and standardization where
appropriate. The region staff monitors activities by using various operational
metrics in order to achieve Company return benchmarks.  Ryland markets attached
and detached single-family homes, which are generally targeted to entry-level
and first- and second-time move-up buyers. The Companys diverse product line
is tailored to the local styles and preferences found in each of its geographic
markets. The product line offered in a particular community is determined in
conjunction with the land acquisition process and is dependent upon a number of
factors, including consumer preferences, competitive product offerings and
development costs. Architectural services are generally outsourced to increase
creativity and to ensure that the Companys home designs are consistent with
local market preferences.


The
  Ryland Group
  2005
  Annual Report
  Page 46Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       Homebuyers are able to
customize certain features of their homes by selecting from numerous options
and upgrades displayed in the Companys model homes and design centers. These
design centers, which are conveniently located in most of the Companys
markets, also represented an increasing source of additional revenue and profit
for the Company. Custom options contributed in excess of 11 percent of revenues
in 2005 and significantly higher margins than base homes.  RESULTS OF OPERATIONS Earnings, revenues, new orders and deliveries of homes
reached record-breaking highs for the seventh consecutive year in 2005. These
trends were indicative of another year of favorable economic and demographic
environments, as well as of the Companys ability to deliver a competitive
product in superior locations while achieving higher relative economies through
cost-saving initiatives. In 2005, the Companys internally generated top- and
bottom-line growth was fueled by increased volume and operating profits. The
Company improved its Fortune 500 ranking and maintained its investment-grade
rating while lowering the average interest rate on its debt. The Company
continues to make significant investments in new marketing initiatives, product
development, customer service, training and technology, all of which are
critical to streamlining processes and improving the customers experience.    The Company reported
consolidated net earnings of $447.1 million, or $9.03 per diluted share, for
2005, compared to $320.5 million, or $6.36 per diluted share, for 2004 and
$241.7 million, or $4.56 per diluted share, for 2003. These net earnings
increases resulted from higher revenues, increased operating margins and
decreased expenses for its homebuilding operations.  The Companys revenues
reached a historical high of $4.8 billion for 2005, up 21.9 percent from $4.0
billion for 2004. Total revenues for 2004 exceeded 2003 levels by $507.7
million, or 14.7 percent. Homebuilding pretax operating margins increased to
15.6 percent for 2005, compared to 13.7 percent for 2004 and 11.8 percent for
2003.  EBITDA was $810.4 million
for the year ended December 31, 2005, compared to $602.7 million and $478.4
million for the same period in 2004 and 2003, respectively. The Companys ratio
of EBITDA to interest incurred improved to 12.2 for the year ended December 31,
2005, compared to 11.3 for 2004 and 9.5 for 2003.  The Company generated
significantly more cash flow from its operational growth and continued to
position itself for expansion in 2006 with a 24.5 percent increase in inventory
owned and 75,671 lots under control, or a projected four- to five-year supply. Its
balance sheet exemplifies strength, low risk and transparency. Goodwill of
$18.2 million was among the lowest in the industry. The Companys
debt-to-capital ratio was 40.1 percent at December 31, 2005, despite
adding $353.0 million of new low-rate financing during the year.


The
  Ryland Group
  2005
  Annual Report
  Page 47Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       Stockholders equity increased
30.2 percent, or $319.2 million, during 2005, compared to an increase of 28.2
percent, or $232.3 million, during 2004. As a result of balancing cash outlays
among achieving growth objectives, common stock repurchases and increasing
dividends, stockholders equity per share increased 33.0 percent, to $29.68 in
2005, compared to $22.32 in 2004. The Companys book value at December 31,
2005, was 98.7 percent tangible. The Company is not a significant participant
in off-balance sheet type financing outside of traditional option contracts
with land developers, and its investment in joint ventures represents less than
one percent of its total assets.    During 2005, the Company
continued to deliver superior returns to stockholders while maintaining its
strategically low-risk model. In addition, it has focused on developing
competitive advantages through training and technology initiatives. Revenues
grew 21.9 percent, net earnings increased 39.5 percent, diluted earnings per
share improved 42.0 percent, EBITDA increased 34.5 percent, return on beginning
equity was 42.3 percent, return on beginning capital5 was 29.4
percent and inventory was turned 1.5 times. Dividends declared were doubled for
the second time in two years. The Companys returns remained among the highest
in the industry and Fortune 500 companies. The Companys credit quality
continues to improve, and its financial position is stronger than at any time
in its history.  HOMEBUILDING New orders represent sales contracts that have been
signed by the homebuyer and approved by the Company, subject to cancellation. The
dollar value of new order contracts increased $702.5 million, or 15.8 percent, to
$5.1 billion at December 31, 2005, from $4.4 billion at December 31,
2004 and $3.6 billion at December 31, 2003. Unit orders increased 3.8
percent in 2005 and 11.1 percent in 2004. The Company continued to diversify
geographically as newer markets in the West and Southeast contributed more
significant gains during the year.    5Return on beginning capital is calculated by dividing
net earnings before tax-affected interest by the sum of beginning debt and
total stockholders equity.


The
  Ryland Group
  2005
  Annual Report
  Page 48Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       New orders for 2005
increased 12.2 percent in Texas and 12.4 percent in the Southeast, but
decreased 1.9 percent in the North and 7.2 percent in the West. In 2005, new
order trends were generally driven by historically low interest rates and
expansion plans but declined slightly in the fourth quarter in the California, Chicago,
Phoenix, Mid-Atlantic and Twin Cities markets, due, in part, to increased price
appreciation having a moderating effect on consumer demand, and in Las Vegas
due to product shortages resulting, in part, from delays in development, processing
and approval times for new projects. New orders for 2004 increased 0.8 percent
in the North, 5.0 percent in Texas, 7.8 percent in the Southeast and 37.4
percent in the West. Positive new order trends in 2004 were driven by low
interest rates and corresponding robust market conditions; expansion plans; a
renewed focus on Internet marketing and customer-relations management; and a
proactive approach to maintaining an adequate supply of competitively priced
product and lots.  NORTH
  
  TEXAS
  
  SOUTHEAST
  
  WEST
  
  TOTALNew orders (units)2005
  
  4,333
  
  3,702
  
  5,630
  
  3,852
  
  17,5172004
  
  4,419
  
  3,299
  
  5,009
  
  4,153
  
  16,8802003
  
  4,385
  
  3,141
  
  4,648
  
  3,023
  
  15,197Closings (units)2005
  
  4,367
  
  3,365
  
  4,887
  
  4,054
  
  16,6732004
  
  4,349
  
  3,116
  
  4,374
  
  3,262
  
  15,1012003
  
  4,393
  
  3,291
  
  4,216
  
  2,824
  
  14,724Average closing
  price (in thousands)2005
  
  $
  310
  
  $
  177
  
  $
  254
  
  $
  356
  
  $
  2782004
  
  288
  
  165
  
  230
  
  312
  
  2512003
  
  259
  
  159
  
  208
  
  270
  
  224Outstanding
  contracts at December 31Units2005
  
  1,774
  
  1,329
  
  3,601
  
  1,760
  
  8,4642004
  
  1,808
  
  992
  
  2,858
  
  1,962
  
  7,6202003
  
  1,738
  
  809
  
  2,223
  
  1,071
  
  5,841Dollars (in millions)2005
  
  $
  571
  
  $
  259
  
  $
  1,106
  
  $
  686
  
  $
  2,6222004
  
  568
  
  173
  
  725
  
  649
  
  2,1152003
  
  503
  
  142
  
  508
  
  320
  
  1,473Average price (in thousands)2005
  
  $
  322
  
  $
  195
  
  $
  307
  
  $
  390
  
  $
  3102004
  
  314
  
  175
  
  254
  
  331
  
  2782003
  
  289
  
  175
  
  229
  
  299
  
  252  The Company experiences
seasonal variations in its quarterly operating results and capital requirements.
Historically, new order activity is higher in the spring and summer months. As
a result, it typically has more homes under construction, closes more homes, and
has greater revenues and operating income in the third and fourth quarters of
its fiscal year. This is primarily due to the preference of many homebuyers to
act during those periods.  Outstanding contracts
denote the Companys backlog of homes sold but not closed, which are generally
built and closed, subject to cancellation, over the subsequent two quarters. At
December 31, 2005, the Company had outstanding contracts for 8,464 units, representing
the highest year-end backlog in its history and an 11.1 percent increase over
year-end 2004.


The
  Ryland Group
  2005
  Annual Report
  Page 49Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       The $2.6 billion value of
outstanding contracts increased 24.0 percent from December 31, 2004 due, in
part, to an 11.5 percent increase in average sales price. Average sales price
increases resulted, in part, from a change in mix that was weighted toward
higher-priced markets. Outstanding contracts at December 31, 2005,
represented over 45 percent of 2006 targeted closings.  Results of operations for
the homebuilding segment are summarized as follows:  (in
  thousands)
  
  2005
  
  2004
  
  2003Revenues
  
  $
  4,725,751
  
  $
  3,867,086
  
  $
  3,355,450Cost of sales
  
  3,537,603
  
  2,964,087
  
  2,615,975Gross profit
  
  1,188,148
  
  902,999
  
  739,475Selling, general
  and administrative expenses
  
  440,965
  
  372,660
  
  333,726Interest expense
  
  
  
  210
  
  6,032Expenses related
  to early retirement of debt
  
  8,277
  
  
  
  5,086Homebuilding
  pretax earnings
  
  $
  738,906
  
  $
  530,129
  
  $
  394,631  The homebuilding segment
reported pretax earnings of $738.9 million for 2005, compared to $530.1 million
for 2004 and $394.6 million for 2003. Homebuilding results in 2005 increased
from 2004, primarily due to higher average closing prices, gross profit margins
and closing volume. Homebuilding results in 2004 increased from 2003, primarily
due to these same factors.  HOMEBUILDING REVENUE BY REGION (in millions)    Homebuilding revenues
increased 22.2 percent for 2005, compared to 2004, due to a 10.4 percent
increase in closings and a 10.8 percent increase in average closing price. The
rise in closings in 2005 was due to a higher backlog at the beginning of the
year and a 3.8 percent increase in new home orders during the year.  Homebuilding revenues increased 15.3 percent
for 2004, compared to 2003, due to a 2.6 percent increase in closings and a
12.1 percent increase in average closing price. The increase in closings in
2004 was due to a higher backlog at the beginning of the year and an 11.1
percent increase in new home orders during the year.  Consistent with its policy
of managing land investments according to return and risk targets, the Company
executed several land and lot sales during the year. Homebuilding revenues for
the year ended December 31, 2005, included $96.9 million from land and lot
sales, compared to revenues of $74.2 million for 2004 and $56.0 million for
2003, which contributed net gains of $23.9 million, $25.2 million and $10.5
million to pretax earnings in 2005, 2004 and 2003, respectively.


The
  Ryland Group
  2005
  Annual Report
  Page 50Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition        Gross profit margins from
home sales averaged 25.2 percent for 2005, an increase from 23.2 percent for
2004 and 22.1 percent for 2003. The improvements were primarily attributable to
sales prices rising at a greater rate than costs, savings from purchasing
initiatives, and a change in closing-volume mix, with an increased percentage
of closings in higher-margin markets during 2005. The Company generated the
strongest gross margins in its Baltimore, California, Las Vegas, Orlando, Phoenix,
Tampa and Washington, D.C., markets, while its Dallas and Ohio Valley markets
were the most challenging.  Selling, general and
administrative expenses, as a percentage of revenue, were 9.3 percent for 2005,
9.6 percent for 2004 and 9.9 percent for 2003. Selling, general and
administrative expenses, as a percentage of revenue, decreased from prior year
levels for 2005 and 2004, primarily as a result of leverage obtained through a
substantial increase in closings in the Atlanta, Charlotte, Inland Empire, Jacksonville,
Las Vegas, Phoenix and Texas markets, which was accompanied by more modest
increases in marketing and general and administrative expenses, partially
offset by higher incentive compensation expense resulting from improved
earnings.  Interest expense for the
year ended December 31, 2004, was $0.2 million. Interest expense decreased
$5.8 million in 2004, compared to 2003. In 2005, the homebuilding segment
capitalized all interest incurred, resulting in no interest expense being
recorded during the period. The rise in capitalized interest resulted from
increased development activity. The Company ended the year with $461.4 million
in cash, no borrowings against its revolving credit facility and a lower cost
of funds.  In 2005, the Company
recorded expenses of approximately $8.3 million associated with the redemption
of its $150.0 million 9.8 percent senior notes due September 2010 at a
stated call price of 104.9 percent of the principal amount.  In 2003, the Company
recorded expenses of approximately $5.1 million associated with the redemption
of its $100.0 million 8.3 percent senior subordinated notes due April 2008
at a stated call price of 104.1 percent of the principal amount.  FINANCIAL SERVICES RMC provides mortgage-related products and services
primarily for the Companys homebuilding customers. By aligning its operations
with the Companys homebuilding segment, RMC leverages this relationship to
capture homebuyers loans. RMC focuses primarily on originating mortgage loans
and improving the profitability of these activities through increased
operational efficiencies.


The
  Ryland Group
  2005
  Annual Report
  Page 51Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       The Company arranges
various types of mortgage financing, including conventional, Federal Housing
Administration (FHA) and Veterans Administration (VA) mortgages, with various
fixed- and adjustable-rate features. The Company is approved to originate loans
that conform to the guidelines established by the Federal Home Loan Mortgage
Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). The
Company sells loans it originates, along with the related servicing rights, to
others.  In 2005, RMCs mortgage
origination operations consisted primarily of the Companys homebuilder loans,
which were originated in connection with the sale of the Companys homes. The
number of mortgage originations was 12,774 for 2005, compared to 11,920 for
2004 and 11,983 for 2003.  During 2005,
total dollar originations were approximately $3.1 billion, of which 99.5
percent was for purchases of homes built by the Company and 0.5 percent was for
purchases of homes built by others, purchases of existing homes or for the
refinancing of existing mortgage loans. The capture rate of mortgages
originated for customers of the home-building segment was 81.9 percent in 2005,
compared to 84.2 percent in 2004 and 85.4 percent in 2003.  Cornerstone Title Company,
a wholly-owned subsidiary of RMC doing business as Ryland Title Company,
provides title services and acts as a title insurance agent, primarily for the
Companys homebuyers. At December 31, 2005, Ryland Title Company had
offices in Arizona, Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Minnesota,
Nevada, North Carolina, Ohio, South Carolina, Texas and Virginia. The Company
also operates Ryland Escrow Company, which performs escrow and loan closing
functions for the Companys homebuyers in California. During 2005, Ryland Title
Company and Ryland Escrow Company provided these services to 96.9 percent of
the Companys homebuyers in the markets in which they operate, compared to 95.9
percent during 2004.  Ryland Insurance Services,
a wholly-owned subsidiary of RMC, provides insurance brokerage services
primarily to the Companys homebuyers. At December 31, 2005, Ryland
Insurance Services was licensed to operate in all of the states in which the
Companys homebuilding segment operates. During 2005, it provided insurance
brokerage services to 60.4 percent of the Companys homebuyers, compared to
58.7 percent during 2004.  The financial services
segment reported pretax earnings of $59.5 million for 2005, compared to $56.9
million for 2004 and $62.8 million for 2003. The increase in 2005 was primarily
due to a 7.2 percent increase in loans originated and a rise in average loan
size, as well as increased profitability from title, escrow and insurance
operations. The decrease in 2004 from 2003 was primarily due to lower gains on
the sale of mortgages and loan servicing rights, which resulted from an
increase in less profitable adjustable-rate mortgage product and a more
competitive marketplace, partially offset by an increase in average loan size
and a gain from the sale of a portion of the investment portfolio.  Revenues for the financial
services segment were $91.8 million for 2005, compared to $84.7 million for
2004. This increase was primarily attributable to increased revenues from loan
origination activities and title, escrow and insurance operations, partially
offset by reduced interest income from the declining investment portfolio. In
2004, revenues for the financial services segment decreased 4.4 percent to
$84.7 million from 2003 due to reduced gains on the sale of mortgages and loan
servicing rights, which resulted from an increase in less profitable
adjustable-rate mortgage product and a more competitive marketplace, partially
offset by increased revenues from title, escrow and insurance operations and a
gain from the sale of a portion of the investment portfolio.


The
  Ryland Group
  2005
  Annual Report
  Page 52Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       FINANCIAL SERVICES
STATEMENTS OF EARNINGS  YEAR ENDED
  DECEMBER 31,(in
  thousands)
  
  2005
  
  2004
  
  2003REVENUESNet gains on
  sales of mortgages and mortgage servicing rights
  
  $
  45,918
  
  $
  45,040
  
  $
  53,938Title/escrow/insurance
  
  28,489
  
  23,740
  
  18,651Net origination
  fees
  
  15,032
  
  10,768
  
  10,731InterestMortgage-backed
  securities and notes receivable
  
  1,375
  
  2,639
  
  4,274Other
  
  844
  
  935
  
  1,068Total interest
  
  2,219
  
  3,574
  
  5,342Other
  
  157
  
  1,613
  
  17TOTAL REVENUES
  
  91,815
  
  84,735
  
  88,679EXPENSESGeneral and
  administrative
  
  31,582
  
  26,825
  
  24,339Interest
  
  738
  
  1,017
  
  1,491TOTAL EXPENSES
  
  32,320
  
  27,842
  
  25,830PRETAX EARNINGS
  
  $
  59,495
  
  $
  56,893
  
  $
  62,849Ryland Homes
  origination capture rate
  
  81.9
  %
  84.2
  %
  85.4
  %Mortgage-backed
  securities and notes receivable average balance
  
  $
  7,365
  
  $
  18,603
  
  $
  33,000  BALANCE SHEETS DECEMBER 31,(in thousands)
  
  2005
  
  2004ASSETSCash
  
  $
  845
  
  $
  19,149Other assets
  
  42,080
  
  50,410TOTAL ASSETS
  
  42,925
  
  69,559LIABILITIESAccounts payable
  
  863
  
  2,779Accrued and other
  liabilities
  
  23,706
  
  37,588Debt
  
  
  
  10,490TOTAL LIABILITIES
  
  24,569
  
  50,857STOCKHOLDERS EQUITY
  
  18,356
  
  18,702TOTAL LIABILITIES
  AND STOCKHOLDERS EQUITY
  
  $
  42,925
  
  $
  69,559


The
  Ryland Group
  2005
  Annual Report
  Page 53Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition         General and administrative
expenses increased for the year ended December 31, 2005, compared to 2004,
primarily as a result of additional expenses incurred in supporting expansion
of both the Companys homebuilding operations and its title and insurance
operations. General and administrative expenses rose for the year ended December 31,
2004, compared to 2003, primarily as a result of these same factors.  Interest expense decreased
27.4 percent for the year ended December 31, 2005, compared to 2004, following
a continued decline in bonds payable and short-term notes payable, which
resulted from continued runoff of the underlying collateral and from the sale
and redemption of portions of the Companys mortgage-backed securities
portfolio. In 2004, interest expense decreased 31.8 percent, compared to 2003.
This was due, in part, to the sale of a portion of the investment portfolio in
2003, the proceeds from which were used to pay off the Companys repurchase
facility.  CORPORATE Corporate expenses were $77.4 million for 2005, $65.8
million for 2004 and $61.3 million for 2003. Corporate expenses for 2005 and
2004 rose primarily as a result of an increase in support and training costs
commensurate with anticipated growth; a rise in incentive compensation, which
was due to increases in the Companys results and financial performance; and
costs incurred as a result of the Companys compliance with Section 404 of
the Sarbanes-Oxley Act of 2002.  INVESTMENTS IN JOINT VENTURES At December 31, 2005, the Company had an interest
in 13 active joint ventures in the Atlanta, Chicago, Dallas, Denver, Las Vegas,
Orlando and Phoenix markets, three of which were consolidated. These joint
ventures exist for the purpose of acquisition and co-development of lots, which
are then sold to the Company, its joint venture partners or others, at market
prices. Depending on the number of joint ventures and the level of activity in
the entities, annual earnings from the Companys investment in joint ventures
will vary significantly. The Company recognized its proportionate share of
earnings, which totaled $315,000 from unconsolidated joint ventures in 2005, compared
to earnings of $5.8 million in 2004 and losses of $94,000 in 2003. The increase
in 2004 was primarily attributable to a $5.4 million gain on the sale of land
to a third party in one joint venture in Atlanta. The Companys investment in
unconsolidated joint ventures was $10.2 million at December 31, 2005,
compared to $2.5 million at December 31, 2004. (See Investments in Joint
Ventures in Note A, Summary of Significant Accounting Policies.)  INCOME TAXES Income taxes for fiscal years 2005, 2004 and 2003 were
provided at effective tax rates of 38.0 percent, 38.5 percent and 39.0 percent,
respectively. The decrease in the effective tax rate for 2005 was primarily due
to a new tax deduction on qualified production activities created by the
American Jobs Creation Act of 2004, while the 2004 decrease was primarily due
to a reduction in nondeductible compensation. (See Note G, Income Taxes.)


The
  Ryland Group
  2005
  Annual Report
  Page 54Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       Financial Condition and Liquidity Cash requirements for the Companys homebuilding and
financial services segments are generally provided from internally generated
funds and outside borrowings.  Net earnings provided cash
flows of $447.1 million in 2005, $320.5 million in 2004 and $241.7 million in
2003, primarily as a result of volume growth and increased operating margins.
Net proceeds from the issuance of long-term debt were $353.0 million during
2005. Additionally, net changes in other assets, payables and other liabilities
provided $194.2 million in 2005, $119.6 million in 2004 and $83.3 million in
2003. The cash provided was invested principally in inventory of $491.0
million, $585.6 million and $240.0 million in 2005, 2004 and 2003,
respectively, as well as in stock repurchases of $176.2 million, $118.3 million
and $130.9 million in 2005, 2004 and 2003, respectively. Dividends totaled
$0.30, $0.21 and $0.08 per share for the annual periods ending December 31,
2005, 2004 and 2003, respectively. Effective in the fourth quarter of 2005, the
Companys quarterly common stock dividend was increased to $0.12 per share from
the previous quarterly common stock dividend of $0.06 per share. During 2005,
stockholders equity rose $319.2 million, while debt increased $363.0 million, increasing
the Companys leverage.    Consolidated inventories
owned by the Company increased to $2.3 billion at December 31, 2005, from $1.9
billion at December 31, 2004. The Company attempts to maintain a projected
four- to five-year supply of land, with half or more controlled through
options. At December 31, 2005, the Company controlled 75,671 lots, with
30,201 lots owned and 45,470 lots, or 60.1 percent, under option. The Company
has historically funded the acquisition of land and exercise of land options
through a combination of operating cash flows, capital transactions and
borrowings under its revolving credit facility. The Company expects these
sources to continue to be adequate to fund future obligations with regard to
land acquisition and exercise of land options; therefore, it does not
anticipate that the exercise of land options will have a material adverse
effect on its liquidity. In an effort to increase liquidity, models have been sold
and leased back on a selective basis. The Company owned 80.7 percent of its
model homes at December 31, 2005.  The homebuilding segments
borrowings include senior notes, senior subordinated notes, an unsecured
revolving credit facility and nonrecourse secured notes payable. Senior and
senior subordinated notes outstanding totaled $893.5 million at December 31,
2005, compared to $540.5 million at December 31, 2004.  The Company used its
$500.0 million unsecured revolving credit facility to finance increases in its
home-building inventory and working capital, when necessary. There were no
borrowings under the facility at either December 31, 2005 or 2004. Under
this facility, the Company had letters of credit outstanding which totaled
$185.6 million at December 31, 2005, and $131.3 million at December 31,
2004. Unused borrowing capacity under this facility was $314.4 million and
$368.7 million at December 31, 2005 and 2004, respectively.


The
  Ryland Group
  2005
  Annual Report
  Page 55Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       On January 12, 2006,
the Company entered into a $750.0 million unsecured revolving credit facility.
The new credit agreement, which matures in January 2011, also provides
access to an additional $750.0 million of financing through an accordion
feature under which the aggregate commitment may be increased up to $1.5
billion, subject to the availability of additional lending commitments. The $750.0
million credit facility includes a $75.0 million swing line facility and a
$600.0 million sublimit for issuance of standby letters of credit. Amounts
borrowed under the credit agreement are guaranteed on a joint and several basis
by substantially all of the Companys wholly-owned homebuilding subsidiaries. Such
guarantees are full and unconditional. Interest rates on outstanding borrowings
are determined by reference to LIBOR, with margins determined based on changes
in its leverage ratio and credit ratings, or to an alternate base rate. The
credit agreement contains various customary affirmative, negative and financial
covenants. The credit agreement replaces the Companys prior $500.0 million
revolving credit facility and will be used for general corporate purposes. (See
Note F, Debt and Note L, Subsequent Event.)  In 2005, the Company
redeemed $150.0 million of 9.8 percent senior notes due September 2010, of
which it owned $3.0 million. The notes were redeemed at a price of $1,048.75
per $1,000 notes outstanding, plus accrued and unpaid semiannual interest of
$48.75 per $1,000 notes, for an aggregate of $164.6 million paid to holders of
record. The Company recorded $8.3 million of expenses related to the early
retirement of debt.  The $100.0 million of 8.0
percent senior notes due August 2006 and $143.5 million of 9.1 percent
senior subordinated notes due June 2011 contain various restrictive
covenants which include, among other things, limitations on additional
indebtedness; change of control; transactions with affiliates; liens and
guarantees; dividends and distributions; sale of assets; modification of debt
instruments; transactions with affiliates; and inventory. At December 31,
2005, the Company was in compliance with these covenants.  The $150.0 million of 5.4
percent senior notes due June 2008; the $250.0 million of 5.4 percent
senior notes due May 2012; and the $250.0 million of 5.4 percent senior
notes due January 2015 are subject to certain covenants which include, among
other things, restrictions on additional secured debt and the sale of assets. At
December 31, 2005, the Company was in compliance with these covenants.  In September 2005, the
Company entered into treasury interest rate locks (treasury locks) which
terminate in 2006 to facilitate the replacement of higher-rate senior and
senior subordinated debt in 2006. (See Note D, Derivative Instruments.)  To finance land purchases,
the Company may also use seller-financed nonrecourse secured notes payable. At December 31,
2005, such notes payable outstanding amounted to $28.5 million, compared to
$8.0 million at December 31, 2004.  The financial services
segment uses cash generated internally and from outside borrowing arrangements
to finance its operations. During the fourth quarter of 2005, the financial
services segment terminated its revolving credit facility, which was previously
used to finance investment portfolio securities. Accordingly, the financial
services segment had no borrowings outstanding at December 31, 2005.
Borrowings of the financial services segment outstanding under the agreement
were $10.5 million at December 31, 2004.  Although the Company no
longer issues mortgage-backed securities and mortgage-participation securities,
some of its limited-purpose subsidiaries continued to hold collateral for
previously issued mortgage-backed bonds in which the Company maintained a
residual interest. Revenues, expenses and portfolio balances declined as
mortgage collateral pledged to secure the bonds decreased due to scheduled payments
and prepayments, as well as to the sale and redemption of a majority of the
investment portfolio during 2005 and 2004.  The Ryland Group, Inc. did
not guarantee the debt of either its financial services segment or its
limited-purpose subsidiaries.


The
  Ryland Group
  2005
  Annual Report
  Page 56Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       The Company filed a shelf
registration statement with the U.S. Securities and Exchange Commission (SEC),
for up to $1.0 billion of the Companys debt and equity securities on April 11,
2005. At December 31, 2005, $850.0 million remained available under this
registration statement due to the issuance of $250.0 million of senior notes in
May 2005, of which $100.0 million was applied to the previous shelf
registration statement. The registration statement provides that securities may
be offered, from time to time, in one or more series and in the form of senior,
subordinated or convertible debt; preferred stock; preferred stock represented
by depository shares; common stock; stock purchase contracts; stock purchase
units; and warrants to purchase both debt and equity securities. In the future,
the Company intends to continue to maintain effective shelf registration
statements that will facilitate access to the capital markets. The timing and
amount of future offerings, if any, will depend on market and general business
conditions.    During 2005, the Company
repurchased approximately 2.6 million shares of its outstanding common stock at
a cost of approximately $176.2 million. At December 31, 2005, the Company
had existing authorization from its Board of Directors to purchase
approximately 381,000 additional shares and a new authorization for shares
totaling $250.0 million. The Companys stock repurchase program has been funded
primarily through internally generated funds.  The Company granted fewer
stock options in 2005 which, when combined with common stock repurchases,
lowered dilution.  The following table
provides a summary of the Companys contractual cash obligations and commercial
commitments at December 31, 2005, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.  CONTRACTUAL PAYMENTS DUE
  BY PERIOD(in
  thousands)
  
  TOTAL
  
  2006
  
  2007-2008
  
  2009-2010
  
  AFTER
  2010Debt, principal
  maturities
  
  $
  921,970
  
  $
  119,361
  
  $
  159,109
  
  $
  
  
  $
  643,500Interest on debt1
  
  303,121
  
  53,032
  
  91,361
  
  79,938
  
  78,790Operating leases
  
  50,476
  
  10,483
  
  18,579
  
  11,423
  
  9,991Land option
  contracts2
  
  57,616
  
  14,008
  
  27,648
  
  15,960
  
  Total at
  December 31, 2005
  
  $
  1,333,183
  
  $
  196,884
  
  $
  296,697
  
  $
  107,321
  
  $
  732,281  1Interest on variable rate obligations is based on
rates effective at December 31, 2005. 2Represents obligations under option contracts with
specific performance provisions, net of cash deposits.


The
  Ryland Group
  2005
  Annual Report
  Page 57Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       The Company believes that
its current cash position, cash generation capabilities, amounts available
under its revolving credit facility and its ability to access the capital
markets in a timely manner with its existing shelf registration statement are
adequate to meet its cash needs for the foreseeable future.  OffBalance Sheet
Arrangements In the ordinary course of business, the Company enters
into land and lot option purchase contracts in order to procure land or lots
for the construction of homes. Land and lot option contracts enable the Company
to control significant lot positions with a minimal capital investment and
substantially reduce the risks associated with land ownership and development. At
December 31, 2005, the Company had $188.5 million in cash deposits and
letters of credit to purchase land and lots with a total purchase price of $2.1
billion. Only $60.5 million of the $2.1 billion in land and lot option purchase
contracts contain specific performance provisions. Additionally, the Companys
liability is generally limited to forfeiture of the nonrefundable deposits, letters
of credit and other nonrefundable amounts incurred.  Pursuant to Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, the
Company consolidated $239.2 million of inventory not owned at December 31,
2005, $176.4 million of which pertained to land and lot option contracts and
$62.8 million of which pertained to three of the Companys homebuilding joint
ventures. (See Investments in Joint Ventures in Note A, Summary of
Significant Accounting Policies.)  At December 31, 2005,
the Company had outstanding letters of credit totaling $185.6 million and
development or performance bonds of $428.6 million, issued by third parties, to
secure performance under various contracts and land or municipal improvement
obligations. The Company expects that the obligations secured by these letters
of credit and performance bonds will generally be satisfied in the ordinary
course of business and in accordance with applicable contractual terms. To the
extent that the obligations are fulfilled, the related letters of credit and
performance bonds will be released, and the Company will not have any
continuing obligations.  The Company has no
material third-party guarantees other than those associated with its $750.0
million revolving credit facility, its senior notes, and its investments in
joint ventures. (See Investments in Joint Ventures in Note A, Summary of
Significant Accounting Policies and Note K, Supplemental Guarantor
Information.)  Critical Accounting Policies Preparation of the Companys consolidated financial
statements requires the use of judgment in the application of accounting
policies and estimates of inherently uncertain matters. Listed below are those
policies which management believes are critical and require the use of complex
judgment in their application.  Management has discussed
the critical accounting policies with the Audit Committee of its Board of
Directors and the Audit Committee has reviewed the disclosure. There are items
within the financial statements that require estimation but are not considered
critical.  USE OF ESTIMATES In budgeting land acquisitions, development and
homebuilding construction costs associated with real estate projects, the
Company evaluates market conditions; material and labor costs; buyer
preferences; construction timing; and provisions for insurance and warranty
obligations. The Company accrues its best estimate of the probable cost for
resolution of legal claims. Estimates, which are based on historical experience
and other assumptions, are reviewed continually, updated when necessary and
believed to be reasonable under the circumstances. Management believes that the
timing and scope of its evaluation procedures are proper and adequate. Changes
in assumptions relating to such factors, however, could have a material effect
on the Companys results of operations for a particular quarterly or annual
period.


The
  Ryland Group
  2005
  Annual Report
  Page 58Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       INCOME RECOGNITION Revenues and cost of sales are recorded at the time
each home or lot is closed and title and possession are transferred to the
buyer and there is no significant continuing involvement in accordance with
Statement of Financial Accounting Standards No. 66 (SFAS 66), Accounting
for Sales of Real Estate. In order to match revenues with related expenses, land,
land development, interest, taxes and other related costs (both incurred and
estimated to be incurred in the future) are allocated to the cost of homes
closed, based upon the relative sales value basis of the total number of homes
to be constructed in each community, in accordance with Statement of Financial
Accounting Standards No. 67 (SFAS 67), Accounting for Costs and Initial
Rental Operations of Real Estate Projects. Estimated land, common area
development and related costs of master planned communities (including the cost
of amenities) are allocated to individual parcels or communities on a relative
sales value basis. Changes to estimated costs, subsequent to the commencement
of the delivery of homes, are allocated to the remaining undelivered homes in
the community. Home construction and related costs are charged to the cost of
homes closed under the specific-identification method.  INVENTORY VALUATION Housing projects and land held for development
(inventory) and sale are stated at either the lower of cost or net realizable
value. Inventory includes land and development costs; direct construction
costs; capitalized indirect construction costs; capitalized interest; and real
estate taxes. It may take one to three years to develop, sell and deliver all
of the homes in a typical community. The Company assesses these assets for
recoverability in accordance with the provisions of Statement of Financial
Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 requires that long-lived assets and
assets held-for-sale be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of housing inventories 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. Assets held-for-sale
are carried at the lower of cost or fair value, less selling costs. These
evaluations for impairment are significantly impacted by estimates of revenues,
costs and expenses, as well as by other factors. In addition, land, or costs
related to future communities, whether owned or under option, is reviewed to
determine if the Company will proceed with development and if all related costs
are recoverable. If these assets are considered to be impaired, the impairment
loss is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets and is recognized within the same period
that it is identified. Management believes its processes are designed to
properly assess market values and carrying values of assets.  VARIABLE INTEREST ENTITIES FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to the majority of the
entitys expected losses and/or receives a majority of the entitys expected
returns as a result of ownership, contractual agreements or other financial
interests in the entity. FIN 46 also requires disclosure about variable
interest entities (VIEs) that the Company is not required to consolidate but in
which it has a significant, though not primary, variable interest. The Company
enters into joint ventures from time to time for the purpose of acquisition and
co-development of land parcels and lots. Its 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 in a VIE. The Company
believes the accounting for joint ventures and land option contracts using the
variable interest consolidation methodology is a critical accounting policy
because the application of FIN 46 requires the use of complex judgment in its
application.


The
  Ryland Group
  2005
  Annual Report
  Page 59Managements
  Discussion and
  Analysis of Results of Operations
  and Financial Condition       INCOME TAXES The Company calculates a provision for income taxes
using the asset and liability method, under which deferred tax assets and
liabilities are recognized by identifying the temporary differences arising from
the different treatment of items for tax and accounting purposes. In
determining the tax consequences of events that have been recognized in its
financial statements or tax returns, judgment is required. Differences between
the amounts recognized in its financial statements or tax returns and actual
outcomes may arise upon issuance of regulations and final guidance from federal
and state taxing authorities and could have a material impact on the Companys
consolidated results of operations or financial positions. (See FSP 109-1 under
New Accounting Pronouncements in Note A, Summary of Significant Accounting
Policies.)  Market Risk Summary The following table provides information about the
Companys significant financial instruments that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows
and related weighted-average interest rates by expected maturity dates. Weighted-average
variable rates are based on implied forward rates as of the reporting date.  INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY (in
  thousands)
  
  2006
  
  2007
  
  2008
  
  2009
  
  2010  THEREAFTER
  
  TOTAL
  
  FAIR
  VALUE
  12/31/05Senior notes and
  seniorsubordinated
  notes (fixed rate)
  
  $
  100,000
  
  
  
  $
  150,000
  
  
  
  $ 643,500
  
  $
  893,500
  
  $
  893,464Average interest
  rate
  
  8.0
  %
  
  
  5.4
  %
  
  
  6.2
  %
  6.3
  %Other financial
  instrumentsForward-delivery
  contracts:Notional amount
  
  $
  134,050
  
  
  
  
  
  
  
  
  
  $
  134,050
  
  $
  (109
  )Average interest
  rate
  
  5.8
  %
  
  
  
  
  
  
  
  
  5.8
  %Mortgage interest
  rate lock commitments:Notional amount
  
  $
  233,817
  
  
  
  
  
  
  
  
  
  $
  233,817
  
  $
  1,952Average interest
  rate
  
  6.5
  %
  
  
  
  
  
  
  
  
  6.5
  %Treasury interest
  rate locks:Notional amount
  
  $
  250,000
  
  
  
  
  
  
  
  
  
  $
  250,000
  
  $
  4,785Average interest
  rate
  
  4.1
  %
  
  
  
  
  
  
  
  
  4.1
  %  Interest rate risk is a
primary market risk facing the Company. Interest rate risk not only arises
principally in the Companys financial services segment, but also in respect to
the homebuilding segments revolving credit facility. The Company enters into
forward-delivery contracts and may, at times, use other hedging contracts to
mitigate its exposure to movements in interest rates on mortgage interest rate
lock commitments (IRLCs) and mortgage loans held-for-sale. The Company entered
into treasury locks during 2005 to facilitate replacement of debt in 2006. (See
Financial Condition and Liquidity and Note D, Derivative Instruments.) In
managing interest rate risk, the Company does not speculate on the direction of
interest rates.


The
  Ryland Group
  2005
  Annual Report
  Page 60Consolidated
  Statements of Earnings       YEAR ENDED
  DECEMBER 31,(in
  thousands, except share data)
  
  2005
  
  2004
  
  2003REVENUESHomebuilding
  
  $
  4,725,751
  
  $
  3,867,086
  
  $
  3,355,450Financial
  services
  
  91,815
  
  84,735
  
  88,679TOTAL REVENUES
  
  4,817,566
  
  3,951,821
  
  3,444,129EXPENSESCost of sales
  
  3,537,603
  
  2,964,087
  
  2,615,975Selling, general
  and administrative
  
  440,965
  
  372,660
  
  333,726Financial
  services
  
  31,582
  
  26,825
  
  24,339Corporate
  
  77,350
  
  65,810
  
  61,263Interest
  
  738
  
  1,227
  
  7,523Expenses related
  to early retirement of debt
  
  8,277
  
  
  
  5,086TOTAL EXPENSES
  
  4,096,515
  
  3,430,609
  
  3,047,912EARNINGSEarnings before
  taxes
  
  721,051
  
  521,212
  
  396,217Tax expense
  
  273,999
  
  200,667
  
  154,525NET EARNINGS
  
  $
  447,052
  
  $
  320,545
  
  $
  241,692NET EARNINGS PER
  COMMON SHAREBasic
  
  $
  9.52
  
  $
  6.72
  
  $
  4.86Diluted
  
  9.03
  
  6.36
  
  4.56AVERAGE COMMON
  SHARES OUTSTANDINGBasic
  
  46,966,317
  
  47,678,887
  
  49,718,032Diluted
  
  49,490,887
  
  50,378,840
  
  53,044,404DIVIDENDS
  DECLARED PER COMMON SHARE
  
  $
  0.30
  
  $
  0.21
  
  $
  0.08  See Notes to Consolidated Financial
Statements.


The
  Ryland Group
  2005
  Annual Report
  Page 61Consolidated
  Balance Sheets       DECEMBER 31,(in
  thousands, except share data)
  
  2005
  
  2004ASSETSCash and cash
  equivalents
  
  $
  461,383
  
  $
  88,388Housing
  inventoriesHomes under
  construction
  
  1,253,460
  
  1,002,214Land under
  development and improved lots
  
  1,087,016
  
  877,801Consolidated inventory
  not owned
  
  239,191
  
  144,118Total inventories
  
  2,579,667
  
  2,024,133Property, plant
  and equipment
  
  65,980
  
  50,258Net deferred
  taxes
  
  50,099
  
  45,708Purchase price in
  excess of net assets acquired
  
  18,185
  
  18,185Other
  
  211,559
  
  198,298TOTAL ASSETS
  
  3,386,873
  
  2,424,970LIABILITIESAccounts payable
  
  249,539
  
  200,611Accrued and other
  liabilities
  
  664,691
  
  500,808Debt
  
  921,970
  
  558,942TOTAL LIABILITIES
  
  1,836,200
  
  1,260,361MINORITY INTEREST
  
  174,652
  
  107,775STOCKHOLDERS
  EQUITYCommon stock, $1.00
  par value:Authorized 
  200,000,000 shares Issued  46,368,143 shares at December 31,2005
  (47,348,070 shares at December 31, 2004)
  
  46,368
  
  47,348Retained earnings
  
  1,326,689
  
  1,009,242Accumulated other
  comprehensive income
  
  2,964
  
  244TOTAL
  STOCKHOLDERS EQUITY
  
  1,376,021
  
  1,056,834TOTAL LIABILITIES
  AND STOCKHOLDERS EQUITY
  
  $
  3,386,873
  
  $
  2,424,970  See Notes to Consolidated Financial
Statements.


The
  Ryland Group
  2005
  Annual Report
  Page 62Consolidated
  Statementsof Stockholders
  Equity       (in
  thousands, except share data)
  
  COMMON
  STOCK
  
  PAID-IN
  CAPITAL
  
  RETAINED
  EARNINGS
  
  ACCUMULATED
  OTHER
  COMPREHENSIVE
  INCOME
  
  TOTAL
  STOCKHOLDERS
  EQUITYBALANCE AT
  JANUARY 1, 2003
  
  $
  50,521
  
  $
  
  
  $
  628,200
  
  $
  1,358
  
  $
  680,079Comprehensive
  income:Net earnings
  
  
  
  
  
  241,692
  
  
  
  241,692Other
  comprehensive income, net of tax:Change in net
  unrealized gain on mortgage-backed securities, net of taxes of $139
  
  
  
  
  
  
  
  (227
  )
  (227
  )Total
  comprehensive income
  
  
  
  
  
  
  
  
  
  241,465Common 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
  
  
  
  
  
  37,903BALANCE AT
  DECEMBER 31, 2003
  
  48,552
  
  
  
  774,859
  
  1,131
  
  824,542Comprehensive
  income:Net earnings
  
  
  
  
  
  320,545
  
  
  
  320,545Other
  comprehensive income, net of tax:Change in net
  unrealized gain on mortgage-backed securities, net of taxes of $542
  
  
  
  
  
  
  
  (887
  )
  (887
  )Total
  comprehensive income
  
  
  
  
  
  
  
  
  
  319,658Common stock
  dividends (per share $0.21)
  
  
  
  
  
  (10,064
  )
  
  
  (10,064
  )Repurchase of
  common stock
  
  (2,939
  )
  (39,259
  )
  (76,098
  )
  
  
  (118,296
  )Employee stock
  plans and related income tax benefit
  
  1,735
  
  39,259
  
  
  
  
  
  40,994BALANCE AT
  DECEMBER 31, 2004
  
  47,348
  
  
  
  1,009,242
  
  244
  
  1,056,834Comprehensive
  income:Net earnings
  
  
  
  
  
  447,052
  
  
  
  447,052Other
  comprehensive income, net of tax:Change in net
  unrealized gain on cash flow hedging instruments and mortgage-backed
  securities, net of taxes of $1,685
  
  
  
  
  
  
  
  2,720
  
  2,720Total
  comprehensive income
  
  
  
  
  
  
  
  
  
  449,772Common stock
  dividends (per share $0.30)
  
  
  
  
  
  (14,138
  )
  
  
  (14,138
  )Repurchase of
  common stock
  
  (2,558
  )
  (58,189
  )
  (115,467
  )
  
  
  (176,214
  )Employee stock
  plans and related income tax benefit
  
  1,578
  
  58,189
  
  
  
  
  
  59,767BALANCE AT
  DECEMBER 31, 2005
  
  $
  46,368
  
  $
  
  
  $
  1,326,689
  
  $
  2,964
  
  $
  1,376,021  See Notes to Consolidated Financial
Statements.


The
  Ryland Group
  2005
  Annual Report
  Page 63Consolidated
  Statementsof Cash Flows       YEAR ENDED
  DECEMBER 31,(in
  thousands)
  
  2005
  
  2004
  
  2003CASH FLOWS FROM
  OPERATING ACTIVITIESNet earnings
  
  $
  447,052
  
  $
  320,545
  
  $
  241,692Adjustments to
  reconcile net earnings to net cash provided by operating activities:Depreciation and
  amortization
  
  43,166
  
  38,519
  
  36,436Changes in assets
  and liabilities:Increase in
  inventories
  
  (490,971
  )
  (585,562
  )
  (239,989
  )Net change in
  other assets, payables and other liabilities
  
  194,220
  
  119,632
  
  83,299Tax benefit from
  exercise of stock options and vesting of restricted stock
  
  30,505
  
  17,475
  
  17,120Other operating
  activities, net
  
  (7,708
  )
  10,920
  
  913Net cash provided
  by (used for) operating activities
  
  216,264
  
  (78,471
  )
  139,471CASH FLOWS FROM
  INVESTING ACTIVITIESNet additions to
  property, plant and equipment
  
  (55,127
  )
  (47,131
  )
  (32,541
  )Principal
  reduction of mortgage-backed securities, notes receivable and mortgage
  collateral
  
  12,561
  
  19,336
  
  18,672Net cash used for
  investing activities
  
  (42,566
  )
  (27,795
  )
  (13,869
  )CASH FLOWS FROM
  FINANCING ACTIVITIESCash proceeds of
  long-term debt
  
  500,000
  
  
  
  150,000Repayment of
  long-term debt
  
  (147,000
  )
  
  
  (100,000
  )Increase
  (decrease) in short-term borrowings
  
  10,028
  
  (14,934
  )
  (13,561
  )Common stock
  dividends
  
  (11,383
  )
  (9,661
  )
  (2,020
  )Common stock
  repurchases
  
  (176,214
  )
  (118,296
  )
  (130,939
  )Proceeds from
  exercise of stock options
  
  20,911
  
  15,907
  
  15,190Other financing
  activities, net
  
  2,955
  
  4,934
  
  2,987Net cash provided
  by (used for) financing activities
  
  199,297
  
  (122,050
  )
  (78,343
  )Net increase
  (decrease) in cash and cash equivalents
  
  372,995
  
  (228,316
  )
  47,259Cash and cash
  equivalents at beginning of year
  
  88,388
  
  316,704
  
  269,445CASH AND CASH
  EQUIVALENTS AT END OF YEAR
  
  $
  461,383
  
  $
  88,388
  
  $
  316,704SUPPLEMENTAL DISCLOSURES
  OF CASH FLOW INFORMATIONCash paid for
  interest (net of capitalized interest)
  
  $
  1,846
  
  $
  763
  
  $
  7,652Cash paid for
  income taxes
  
  230,291
  
  177,449
  
  132,731SUPPLEMENTAL
  DISCLOSURES OF NON CASH ACTIVITIESIncrease in
  consolidated inventory not owned related to land options
  
  $
  64,563
  
  $
  41,919
  
  $
  56,651  See Notes to Consolidated Financial
Statements.


The
  Ryland Group
  2005
  Annual Report
  Page 64Notes to ConsolidatedFinancial
  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. Intercompany transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the 2005 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 $428.2 million and $61.7 million
at December 31, 2005 and 2004, respectively.  PER
SHARE DATA Basic net earnings
per common share is computed by dividing net earnings by the weighted-average
number of common shares outstanding.  Additionally,
diluted net earnings per common share give 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
two-for-one stock split.  (See Note H, Stockholders
Equity.)  HOMEBUILDING
REVENUES Homebuilding
revenues are recognized when home and lot sales are closed, title and
possession are transferred to the buyer and there is no significant continuing
involvement in accordance with SFAS 66. Sales incentives offset revenues and
are expensed as incurred.  HOUSING
INVENTORIES Housing inventories
consist principally of homes under construction, land under development and
improved lots. Inventory includes land and development costs; direct
construction costs; capitalized indirect construction costs; capitalized
interest; and real estate taxes. 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 $486,000 at December 31, 2005 and
$1.4 million at December 31, 2004. The net carrying values of the related
inventories amounted to $1.2 million and $31,000 at December 31, 2005 and
2004, respectively.  Costs
of inventory include direct costs of land and land development; material
acquisition; and home construction 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.  The
following table is a summary of capitalized interest:   (in
  thousands)
  
  2005
  
  2004Capitalized
  interest at January 1
  
  $
  55,414
  
  $
  45,163Interest
  capitalized
  
  65,959
  
  52,015Interest
  amortized to cost of sales
  
  (45,483
  )
  (41,764
  )Capitalized
  interest at December 31
  
  $
  75,890
  
  $
  55,414


The
  Ryland Group
  2005
  Annual Report
  Page 65Notes to ConsolidatedFinancial
  Statements       VARIABLE
INTEREST ENTITIES FIN 46 requires a
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
Company enters into joint ventures from time to time for the purpose of
acquisition and co-development of land parcels and lots.  Its 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 in a VIE.  In
compliance with the provisions of FIN 46, the Company consolidated $239.2
million of inventory not owned at December 31, 2005, $176.4 million of
which pertained to land and lot option contracts and $62.8 million of which
pertained to three of the Companys homebuilding joint ventures. (See further
discussion in Investments in Joint Ventures, below.) 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.  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 $13.3 million of its related cash deposits
for lot option contracts, which are included in consolidated inventory not
owned. Minority interest totaling $163.1 million was recorded with respect to
the consolidation of these contracts, representing the selling entities
ownership interests in these VIEs.  At December 31,
2005, the Company had cash deposits and letters of credit totaling $22.1
million relating to lot option contracts that were consolidated, representing
its current maximum exposure to loss. Creditors of these VIEs, if any, have no
recourse against the Company. At December 31, 2005, the Company had cash
deposits and/or letters of credit totaling $95.9 million that were associated
with lot option purchase contracts which had an aggregate purchase price of
$1.2 billion and that were 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 and
updated as experience requires.  INVESTMENTS
IN JOINT VENTURES The Company enters
into joint ventures from time to time for the purpose of acquisition and
co-development of land parcels and lots. 
Currently, the Company participates in homebuilding joint ventures in
the Atlanta, Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenix markets.  The Company participates in a number of joint
ventures in which it has less than a controlling interest.  At December 31, 2005 and 2004, the
Companys investments in its unconsolidated joint ventures totaled $10.2
million and $2.5 million, respectively, and were classified in the consolidated
balance sheets under Other assets.  The
Company recognizes its share of the respective joint ventures earnings from
the sale of lots to other homebuilders.  It
does not, however, recognize earnings from lots that it purchases from the
joint ventures. Instead, it reduces its cost basis in these lots by its share
of the earnings from the lots.  The
Companys equity in earnings of its unconsolidated joint ventures totaled
$315,000 for the year ended December 31, 2005, compared to earnings of
$5.8 million for the same period in 2004 and losses of $94,000 for the same
period in 2003.


The
  Ryland Group
  2005
  Annual Report
  Page 66Notes to
  ConsolidatedFinancial
  Statements       The
aggregate assets of the unconsolidated joint ventures in which the Company
participated were $581.4 million and $10.3 million at December 31, 2005
and 2004, respectively.  The aggregate
debt of the unconsolidated joint ventures in which the Company participated
totaled $394.0 million and $3.6 million at December 31, 2005 and 2004, respectively.  The
increase in aggregate joint venture assets and debt, year over year, is
primarily attributable to one new joint venture which had total assets of
$554.1 million and debt of $375.5 million at December 31, 2005. In this
joint venture, the Company and its partners provided guarantees of debt on a
pro rata basis.  The Company has a 3.3
percent pro rata interest on the debt, or $12.5 million, and a completion
guarantee related to project development. 
The guarantees apply if a joint venture partner defaults on its loan
arrangement and the fair value of the collateral (land and improvements) is
less than the loan balance.  At December 31,
2005 and 2004, three of the joint ventures in which the Company participated
were consolidated in accordance with the provisions of FIN 46, as the Company
was determined to have the primary variable interest in the entities.  In association with these consolidated joint
ventures, the Company recorded pretax earnings of $7,000 and $130,000 for 2005
and 2004, respectively.  Total assets of
$63.7 million and $34.4 million (including consolidated inventory not owned),
total liabilities of $43.3 million and $18.1 million, and minority interest of
$11.5 million and $9.2 million were consolidated at December 31, 2005 and
2004, respectively. In February 2006, the Company guaranteed up to 50.0
percent of a $55.0 million revolving credit facility for one of its
consolidated joint ventures.  PROPERTY,
PLANT AND EQUIPMENT Property, plant and
equipment, which included model home furnishings of $56.3 million and $43.2
million at December 31, 2005 and 2004, respectively, 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 Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets, requires that goodwill and certain 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 as of March 31. The
Company tests goodwill for impairment by using the two-step process prescribed
in SFAS 142. The first step identifies potential impairment, while the second
step measures the amount of impairment.  The
Company had no impairment in the years ended December 31, 2005 or 2004.  As a
result of the Companys application of the nonamortization provisions of SFAS
142, no amortization was recorded in 2005, 2004 or 2003.  Goodwill
is allocated to the reporting unit from which it originates.  At December 31, 2005, goodwill
attributable to the Companys homebuilding operations was $18.2 million, net of
$24.9 million of accumulated amortization.  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.


The
  Ryland Group
  2005
  Annual Report
  Page 67Notes to
  ConsolidatedFinancial
  Statements       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 2005, 2004 and 2003 would have been reduced to the pro forma amounts
indicated in the following table:  YEAR ENDED
  DECEMBER 31,(in thousands, except share
  data)
  
  2005
  
  2004
  
  2003Net earnings, as reported
  
  $
  447,052
  
  $
  320,545
  
  $
  241,692Add: 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
  
  (5,957
  )
  (5,662
  )
  (3,991
  )Pro forma net earnings
  
  $
  441,095
  
  $
  314,883
  
  $
  237,701Earnings per share:Basic  as
  reported
  
  $
  9.52
  
  $
  6.72
  
  $
  4.86Basic  pro forma
  
  9.39
  
  6.60
  
  4.78Diluted  as
  reported
  
  9.03
  
  6.36
  
  4.56Diluted  pro
  forma
  
  8.91
  
  6.25
  
  4.48  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 2005, 2004 and 2003, respectively: a risk-free interest
rate of 4.0 percent, 2.4 percent and 2.1 percent; an expected volatility factor
for the market price of the Companys common stock of 38.4 percent, 38.4
percent and 37.6 percent; a dividend yield of 0.5 percent, 0.5 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 2005, 2004 and 2003 were $18.99, $11.65 and $7.28, respectively. Beginning
in 2006, stock based compensation expense will be recorded based on the fair
value at the grant date. (See SFAS 123(R) and SAB 107 in New Accounting
Pronouncements.)  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 related mortgage loans. Gains
or losses on the sale 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 IRLCs and mortgage loans
held-for-sale.  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 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.  It manages this credit risk by
entering into


The
  Ryland Group
  2005
  Annual Report
  Page 68Notes to
  ConsolidatedFinancial
  Statements       agreements with
counterparties meeting its credit standards and by monitoring position limits.  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 in Other
assets or Accrued and other liabilities 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 Derivative Instruments and Hedging
Activities, as amended.  In September 2005,
the Company entered into treasury locks which terminate in 2006, to facilitate
the replacement of higher-rate senior and senior subordinated debt in 2006. (See
Note D, Derivative Instruments.)  ADVERTISING
COSTS The Company expenses
advertising costs as they are incurred.  Advertising
costs totaled $25.3 million, $21.6 million and $16.8 million in 2005, 2004 and
2003, respectively.  COMPREHENSIVE
INCOME Comprehensive
income consists of net income and the increase or decrease in unrealized gains
or losses on the Companys available-for-sale securities, as well as the
increase or decrease in unrealized gains or losses associated with the treasury
locks, net of applicable taxes.  Comprehensive
income totaled $449.8 million, $319.7 million and $241.5 million for the years
ended December 31, 2005, 2004 and 2003, respectively.  NEW
ACCOUNTING PRONOUNCEMENTS SFAS 123(R) AND SAB 107 In December 2004,
the Financial Accounting Standards Board (FASB), issued Statement of Financial
Accounting Standards No. 123 (revised 2004), (SFAS 123(R)), Share-Based
Payment, which is a revision of SFAS 123. SFAS 123(R) supercedes Accounting
Principles Board (APB) Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. While generally similar in approach to its predecessor statement, SFAS
123(R) requires that all share-based payments to employees, including grants of
employee stock options, be recognized in the financial statements based on
their fair values.  SFAS 123(R) permits
public companies to adopt its requirements by using either the modified
prospective method, in which compensation cost is recognized beginning with
the effective date (a) for all share-based payments granted after the
effective date and (b) for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective date; or by
using the modified-retrospective method, which includes the requirements of
the modified-prospective method described above and also permits entities to
restate, based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures, either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. SFAS 123(R) is effective for public
companies at the beginning of the first interim or annual period after December 15,
2005. As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees by using APB No. 25s intrinsic-value method and, as
such, generally recognizes no compensation cost for employee stock options.  The
Company will implement the provisions of SFAS 123(R) in the first quarter of
2006, which will have an impact on its financial statements but is not expected
to have a material impact on its overall financial position. The impact of
adoption of SFAS 123(R) cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future.  However, had the Company adopted SFAS 123(R)
in prior periods, the impact of that standard would have approximated the
impact of SFAS 123, which is described in the disclosure of pro forma net
income and earnings per share in Stock-Based Compensation.


The
  Ryland Group
  2005
  Annual Report
  Page 69Notes to
  ConsolidatedFinancial
  Statements       SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow rather than as an operating cash
flow.  This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption.  While the Company cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise their stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions
were $30.5 million, $17.5 million and $17.1 million in 2005, 2004 and 2003,
respectively.  In March 2005,
the SEC released Staff Accounting Bulletin No. 107 (SAB 107), Share-Based
Payment. SAB 107 presents the SECs staff position regarding the application
of SFAS 123(R). SAB 107 contains interpretive guidance related to the
interaction between SFAS 123(R) and SEC rules and regulations.  SAB 107 outlines the significance of
disclosures made regarding the accounting for share-based payments.  SFAS 154 In March 2005,
the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS
154), Accounting Changes and Error Corrections, which is a replacement of APB
Opinion No. 20, Accounting Changes, and Statement of Financial
Accounting Standards No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 amends requirements for reporting a change in
accounting principles.  The statement
requires a retrospective application of changes in accounting principle to
prior period financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change.  SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15, 2005.  The implementation of SFAS 154 will not have
a material effect on the Companys financial condition or results of
operations.  FSP 109-1 In December 2004,
the FASB issued Staff Position 109-1 (FSP 109-1), Application of FASB
Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004. The American Jobs Creation Act, which was signed into
law in October 2004, provides a tax deduction on qualified domestic production
activities.  When fully phased-in, the
deduction will be up to nine percent of the lesser of qualified production
activities income or taxable income. Based on the guidance provided by FSP 109-1,
this deduction should be accounted for as a special deduction under SFAS 109
and will reduce tax expense in the period or periods that the amounts are
deductible on the tax return.  The tax
benefit resulting from the new deduction was effective beginning in the Companys
fiscal year 2005. The Company currently estimates the reduction in its federal
income tax rate to be in the range of one half of one percent to one percent.  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 and
offers title, escrow and insurance brokerage services. Corporate is a
nonoperating business segment with the sole purpose of supporting operations.
Certain corporate expenses are allocated to the homebuilding and financial
services segments.  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.


The
  Ryland Group
  2005
  Annual Report
  Page 70Notes to
  ConsolidatedFinancial
  Statements       SELECTED SEGMENT INFORMATION  YEAR ENDED DECEMBER 31,(in thousands)
  
  2005
  
  2004
  
  2003REVENUESHomebuilding
  
  $
  4,725,751
  
  $
  3,867,086
  
  $
  3,355,450Financial services
  
  91,815
  
  84,735
  
  88,679Total
  
  $
  4,817,566
  
  $
  3,951,821
  
  $
  3,444,129PRETAX EARNINGSHomebuilding
  
  $
  738,906
  
  $
  530,129
  
  $
  394,631Financial services
  
  59,495
  
  56,893
  
  62,849Corporate
  
  (77,350
  )
  (65,810
  )
  (61,263
  )Total
  
  $
  721,051
  
  $
  521,212
  
  $
  396,217DEPRECIATION AND AMORTIZATIONHomebuilding
  
  $
  37,500
  
  $
  33,122
  
  $
  30,448Financial services
  
  1,119
  
  623
  
  922Corporate
  
  4,547
  
  4,774
  
  5,066Total
  
  $
  43,166
  
  $
  38,519
  
  $
  36,436IDENTIFIABLE ASSETSHomebuilding
  
  $
  3,187,550
  
  $
  2,217,589
  
  $
  1,829,640Financial services
  
  42,925
  
  69,559
  
  68,270Corporate and other
  
  156,398
  
  137,822
  
  109,680Total
  
  $
  3,386,873
  
  $
  2,424,970
  
  $
  2,007,590  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)
  
  2005
  
  2004
  
  2003NUMERATORNet earnings
  
  $
  447,052
  
  $
  320,545
  
  $
  241,692DENOMINATORBasic earnings per share  weighted-average shares
  
  46,966,317
  
  47,678,887
  
  49,718,032Effect of dilutive securities:Stock options
  
  2,140,200
  
  2,282,812
  
  2,622,548Equity incentive plan
  
  384,370
  
  417,141
  
  703,824Dilutive potential of common shares
  
  2,524,570
  
  2,699,953
  
  3,326,372Diluted earnings per share  adjusted
  weighted-average shares and assumed conversions
  
  49,490,887
  
  50,378,840
  
  53,044,404NET EARNINGS PER COMMON SHAREBasic
  
  $
  9.52
  
  $
  6.72
  
  $
  4.86Diluted
  
  9.03
  
  6.36
  
  4.56  Options to purchase
205,000 shares, 420,000 shares and 227,000 shares of common stock at various
prices were outstanding at December 31, 2005, 2004 and 2003, respectively,
but were not included in the computation of diluted earnings per share for
those annual periods because their effect would have been antidilutive since
the exercise prices were greater than the average market price of the common
shares.


The
  Ryland Group
  2005
  Annual Report
  Page 71Notes to
  ConsolidatedFinancial
  Statements       Note D: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)
  
  2005
  
  2004Mortgage interest
  rate lock commitments
  
  $
  233,817
  
  $
  94,809Hedging
  contracts:Treasury interest
  rate locks
  
  $
  250,000
  
  $
  Forward-delivery
  contracts
  
  134,050
  
  69,620  IRLCs represent
loan commitments with customers at market rates generally up to 180 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 1.0 percent to
12.6 percent at December 31, 2005, and 1.0 percent to 9.5 percent at
December 31, 2004.  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.  In
September 2005, the Company entered into a $150.0 million treasury lock at
4.1 percent which terminates on June 1, 2006, and a $100.0 million
treasury lock at 4.2 percent that terminates on September 1, 2006, to
facilitate the replacement of higher-rate senior and senior subordinated debt
in 2006. These hedges were evaluated and deemed to be highly effective at the
inception of the contracts.  In
accordance with SFAS 133, the Company accounted for the treasury locks as cash
flow hedges and records unrealized gains or losses, net of applicable taxes, resulting
from changes in fair value in the consolidated balance sheets under
Accumulated other comprehensive income in Stockholders equity.  Note E: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 the immediate settlement of
the instruments.


The
  Ryland Group
  2005
  Annual Report
  Page 72Notes to
  ConsolidatedFinancial
  Statements       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.   2005
  
  2004(in thousands)
  
  CARRYING
  VALUE
  
  FAIR
  VALUE
  
  CARRYING
  VALUE
  
  FAIR
  VALUEOTHER ASSETSMortgage loans held-for-sale
  
  $
  17,528
  
  $
  17,741
  
  $
  20,540
  
  $
  20,919Mortgage-backed securities and notes receivable
  
  3,387
  
  3,448
  
  10,220
  
  10,763Collateral for bonds payable of the limited-purpose
  subsidiaries
  
  93
  
  98
  
  6,082
  
  6,106OTHER LIABILITIESBonds payable of the limited-purpose subsidiaries
  
  $
  86
  
  $
  90
  
  $
  5,097
  
  $
  5,564DEBTSenior notes
  
  $
  750,000
  
  $
  741,340
  
  $
  397,000
  
  $
  421,954Senior subordinated notes
  
  143,500
  
  152,124
  
  143,500
  
  159,823OTHER FINANCIAL INSTRUMENTSTreasury interest rate locks
  
  $
  4,785
  
  $
  4,785
  
  $
  
  
  $
  Mortgage interest rate lock commitments
  
  1,952
  
  1,952
  
  1,770
  
  1,770Forward-delivery contracts
  
  (109
  )
  (109
  )
  (178
  )
  (178
  )  The carrying
amounts of cash and cash equivalents, secured notes payable and short-term
borrowings under various credit agreements are reported in the balance sheet
and approximate their fair values.  The
fair values of the senior notes; senior subordinated notes; mortgage loans
held-for-sale; mortgage-backed securities and notes receivable; forward-delivery
and other hedging contracts; treasury locks; and IRLCs are based on either
quoted market prices or market prices for similar financial instruments.  Note F:Debt Debt consists of the
following at December 31:  (in thousands)
  
  2005
  
  2004Senior notes
  
  $
  750,000
  
  $
  397,000Senior subordinated notes
  
  143,500
  
  143,500Secured notes payable
  
  28,470
  
  7,952Financial services revolving credit agreement
  
  
  
  10,490Total
  
  $
  921,970
  
  $
  558,942  Maturities of debt
are scheduled as follows:  (in thousands)2006
  
  $
  119,3612007
  
  2,9002008
  
  156,2092009-2010
  
  After 2010
  
  643,500Total debt
  
  $
  921,970  At December 31,
2005, the Company had outstanding (a) $100.0 million of 8.0 percent senior
notes due August 2006, with interest payable semiannually, which may not
be redeemed prior to maturity; (b) $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;


The
  Ryland Group
  2005
  Annual Report
  Page 73Notes to ConsolidatedFinancial
  Statements       (c) $250.0 million of
5.4 percent senior notes due May 2012, 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; and (d) $250.0 million of 5.4
percent senior notes due January 2015, with interest payable semiannually,
which may be redeemed at a stated redemption price, in whole or in part, at any
time.  Additionally, at
December 31, 2005, 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.  In 2004, the
Company executed an agreement for a $500.0 million unsecured revolving credit
facility. The agreement contained an accordion feature under which the
aggregate commitment could have been increased up to $650.0 million, subject to
the availability of additional commitments. 
Borrowings under this agreement bore interest at variable short-term
rates. In addition to the stated interest rates, the agreement required the
Company to pay certain fees.  The Company
used its unsecured revolving credit facility to finance increases in its
homebuilding inventory and working capital. 
There were no outstanding borrowings under this agreement at
December 31, 2005 or 2004. In January 2006, the Company replaced this
credit facility with a new $750.0 million credit facility. (See Note L, Subsequent
Event.)  In 2005, the
Company redeemed $150.0 million of outstanding 9.8 percent senior notes due
September 2010, of which it owned $3.0 million at the time of redemption,
and also recorded $8.3 million in expenses related to its early retirement.  At
December 31, 2005, the Companys obligations to pay principal, premium, if
any, and interest under its $500.0 million unsecured revolving credit facility;
8.0 percent senior notes due August 2006; 5.4 percent senior notes due
June 2008; 5.4 percent senior notes due May 2012; and 5.4 percent
senior notes due January 2015 are guaranteed on a joint and several basis
by substantially all of its wholly-owned homebuilding subsidiaries. Such
guarantees are full and unconditional. (See Note K, Supplemental Guarantor
Information.)  The senior and
senior subordinated note and indenture agreements, as well as the unsecured
revolving credit facility, contain numerous restrictive covenants.  At December 31, 2005, the Company had
$258.2 million of retained earnings available for dividends and was in
compliance with these covenants.  To finance land
purchases, the Company may also use seller-financed nonrecourse secured notes
payable. At December 31, 2005 and 2004, outstanding seller-financed
nonrecourse notes payable were $28.5 million and $8.0 million, respectively.  During the fourth
quarter of 2005, the financial services segment terminated its revolving credit
facility. The facility, which provided for borrowings of up to $10.0 million, was
used to finance mortgage investment portfolio securities and was collateralized
by mortgage obligations previously issued by the Companys limited-purpose
subsidiaries.  At December 31, 2004,
borrowings under this facility totaled $10.5 million with a related collateral
balance of $10.4 million, having a fair value of $11.0 million.  Weighted-average borrowings during the period
were $7.5 million, $12.3 million and $18.3 million for 2005, 2004 and 2003, respectively.
The interest rate was 2.8 percent at December 31, 2004. Weighted-average
interest rates during the period were 3.9 percent, 2.2 percent and 2.0 percent
for 2005, 2004 and 2003, respectively.  In 2004, the
financial services segment terminated its repurchase agreement.  The agreement, which provided for borrowings
of up to $80.0 million, was used to finance mortgage investment portfolio
securities and was collateralized by mortgage loans and mortgage-backed
securities.  During the third quarter of
2004, the underlying collateral was sold and proceeds from the sale were used
to pay off the facility.  As a result of
the sale, RMC no longer had a need for this borrowing facility.  Weighted-average borrowings during the period
were $6.4 million and $15.7 million for 2004 and 2003, respectively.  Weighted-average interest rates during the
period were 1.5 percent and 1.6 percent for 2004 and 2003, respectively.


The
  Ryland Group
  2005
  Annual Report
  Page 74Notes to
  ConsolidatedFinancial
  Statements       Note G:Income Taxes The Companys
expense for income taxes is summarized as follows:  YEAR ENDED DECEMBER 31,(in thousands)
  
  2005
  
  2004
  
  2003CURRENTFederal
  
  $
  243,220
  
  $
  181,426
  
  $
  137,108State
  
  36,852
  
  27,079
  
  17,884Total current
  
  280,072
  
  208,505
  
  154,992DEFERREDFederal
  
  (5,274
  )
  (6,820
  )
  (413
  )State
  
  (799
  )
  (1,018
  )
  (54
  )Total deferred
  
  (6,073
  )
  (7,838
  )
  (467
  )Total expense
  
  $
  273,999
  
  $
  200,667
  
  $
  154,525  The following table
reconciles the statutory federal income tax rate to the Companys effective
income tax rate:  YEAR ENDED DECEMBER 31,2005
  
  2004
  
  2003Income taxes at federal statutory rate
  
  35.0
  %
  35.0
  %
  35.0
  %State income taxes, net of federal tax
  
  3.2
  
  3.2
  
  3.0Other, net
  
  (0.2
  )
  0.3
  
  1.0Effective rate
  
  38.0
  %
  38.5
  %
  39.0
  %  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)
  
  2005
  
  2004DEFERRED TAX ASSETSWarranty, legal and other accruals
  
  $
  33,032
  
  $
  28,227Employee benefits
  
  39,297
  
  32,001Other
  
  2,277
  
  1,854Total deferred tax assets
  
  74,606
  
  62,082DEFERRED TAX LIABILITIESDeferred recognition of income and gains
  
  (6,870
  )
  (5,327
  )Capitalized expenses
  
  (13,738
  )
  (8,886
  )Other
  
  (3,899
  )
  (2,161
  )Total deferred tax liabilities
  
  (24,507
  )
  (16,374
  )Net deferred tax asset
  
  $
  50,099
  
  $
  45,708  The Company
determined that no valuation allowance for the deferred tax asset was required.
The Company had a total net current tax liability of $67.1 million and $48.4
million at December 31, 2005 and 2004, respectively.  These amounts are reported in the consolidated
balance sheets in Accrued and other liabilities.


The
  Ryland Group
  2005
  Annual Report
  Page 75Notes to
  ConsolidatedFinancial
  Statements       Note H:Stockholders
Equity 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
SPLIT 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.  Note I:Employee
Incentive and Stock Plans EQUITY
INCENTIVE PLAN AND OTHER RELATED PLANS The Ryland Group, Inc.
2005 Equity Incentive Plan (the Plan) 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 2002 Equity Incentive Plan (the 2002
Plan).  The aggregate number of shares
available for issuance under the Plan includes 769,576 shares carried over from
the 2002 Plan and 475,000 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 2002
Plan that are forfeited, expired or canceled without delivery of shares of
common stock, will again be available for award under the Plan. The Plan will
remain in effect until February 2015, unless it is terminated by the Board
of Directors at an earlier date.  Stock
options granted in accordance with this plan generally have a maximum term of
five years and vest over three years.  Outstanding
stock options granted under previous plans generally have a maximum term of ten
years and vest over three years.  At
December 31, 2005 and 2004, there were 659,263 and 765,408 stock options
or other awards or units available for grant under the Plan or the 2002 Plan, respectively.  The Ryland Group, Inc.
2004 Non-Employee Director Equity Plan (the Director Plan) provides for
automatic grants of nonstatutory stock options to directors for the purchase of
shares at prices not less than the fair market value of the shares at the date
of grant.  The Director Plan authorized
the issuance of one million shares of common stock, in addition to the 353,200
shares carried over from the 2000 Non-Employee Director Equity Plan.  All members of the Board of Directors who are
not employees of the Company participate in the Director Plan.  The Director Plan will remain in effect until
January 2014, unless it is terminated by the Compensation Committee of the
Board of Directors at an earlier date.  Stock
options fully vest and become exercisable six months after the date of grant
and have a maximum term of ten years.  Upon
termination of service from the Board of Directors, all stock options become
fully vested, immediately exercisable and expire three years after the date of
termination, regardless of their stated expiration dates.  At December 31, 2005 and 2004, there
were 953,200 and 1,153,200 stock options available for grant, respectively.


The
  Ryland Group
  2005
  Annual Report
  Page 76Notes to
  ConsolidatedFinancial
  Statements       The following is a
summary of transactions relating to all stock option plans for each year ended
December 31:  2005
  
  2004
  
  2003SHARES
  
  WEIGHTED-
  AVERAGE
  EXERCISE
  PRICE
  
  SHARES
  
  WEIGHTED-
  AVERAGE
  EXERCISE
  PRICE
  
  SHARES
  
  WEIGHTED-
  AVERAGE
  EXERCISE
  PRICEOptions outstanding at beginning of year
  
  5,535,398
  
  $
  19.15
  
  6,012,876
  
  $
  13.11
  
  6,874,796
  
  $
  10.11Granted
  
  569,750
  
  65.36
  
  1,016,400
  
  43.45
  
  1,032,300
  
  26.08Exercised
  
  (1,408,973
  )
  14.84
  
  (1,452,654
  )
  10.95
  
  (1,762,008
  )
  8.62Forfeited
  
  (41,605
  )
  42.52
  
  (41,224
  )
  25.13
  
  (132,212
  )
  18.19Options outstanding at end of year
  
  4,654,570
  
  $
  25.91
  
  5,535,398
  
  $
  19.15
  
  6,012,876
  
  $
  13.11Available for future grant
  
  1,612,463
  
  
  
  1,918,608
  
  
  
  1,893,784Total shares reserved
  
  6,267,033
  
  
  
  7,454,006
  
  
  
  7,906,660Options exercisable at end of year
  
  3,360,535
  
  $
  17.62
  
  3,676,991
  
  $
  12.11
  
  3,788,128
  
  $
  7.76Prices related to options exercised during the year
  
  
  
  $
  3.19-$57.54
  
  
  
  $
  3.38-$22.70
  
  
  
  $
  3.41-$22.70  A summary of stock
options outstanding and exercisable at December 31, 2005, follows:  OPTIONS OUTSTANDING
  
  OPTIONS EXERCISABLERANGE OF
  EXERCISE
  PRICES
  
  NUMBER
  OUTSTANDING
  
  WEIGHTED-
  AVERAGE
  REMAINING
  LIFE (YEARS)
  
  WEIGHTED-
  AVERAGE
  EXERCISE PRICE
  
  NUMBER
  EXERCISABLE
  
  WEIGHTED-
  AVERAGE
  EXERCISE PRICE$ 3.19 to   $6.38
  
  1,552,232
  
  2.97
  
  $
  5.46
  
  1,552,232
  
  $
  5.46$ 10.19 to $24.44
  
  1,448,151
  
  6.44
  
  19.19
  
  1,210,525
  
  18.83$ 34.70 to $57.54
  
  1,098,437
  
  8.27
  
  43.64
  
  597,778
  
  46.72$ 61.40 to $83.13
  
  555,750
  
  6.37
  
  65.46
  
  
  
    The Company has
made several restricted stock awards to senior executives under the Plan and
its predecessor 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 $18.8 million, $14.3 million and $16.1 million for the
years ended December 31, 2005, 2004 and 2003, respectively.  The following is a
summary of activity relating to restricted stock awards:  2005
  
  2004
  
  2003Restricted shares at January 1
  
  356,800
  
  638,600
  
  904,200Shares awarded
  
  253,000
  
  
  
  Shares vested
  
  (168,800
  )
  (281,800
  )
  (265,600
  )Restricted shares at December 31
  
  441,000
  
  356,800
  
  638,600  At
December 31, 2005, the outstanding restricted shares will vest as follows:
2006  138,336; 2007  138,328; 2008  84,336; 2009  40,000; and 2010 
40,000.  All outstanding
stock options and restricted stock awards have been granted in accordance with
the terms of the Plan, the Director Plan and their respective predecessor
plans, all of which were approved by the Companys stockholders.


The
  Ryland Group
  2005
  Annual Report
  Page 77Notes to
  ConsolidatedFinancial
  Statements       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 1,000 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 $11.0 million, $9.3
million and $8.1 million in 2005, 2004 and 2003, 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 $514,000, $390,000 and $321,000 in 2005, 2004
and 2003, respectively.  SUPPLEMENTAL
EXECUTIVE RETIREMENT PLANS The Company has
supplemental nonqualified retirement plans, which vest over five-year periods
beginning in 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, 2005 and 2004, the cash surrender value of these contracts
was $19.2 million and $13.0 million, respectively.  The net periodic benefit cost of these plans
for the year ended December, 31, 2005, was $2.8 million, which included service
costs of $3.1 million, interest costs of $117,000 and investment earnings of $423,000.  The net periodic benefit cost of these plans
for the year ended December 31, 2004, was $4.4 million, which included
service costs of $4.7 million, interest costs of $677,000 and investment
earnings of $1.0 million.  The $12.6
million and $9.4 million projected benefit obligations at December 31,
2005 and 2004, respectively, were equal to the net liability recognized in the
balance sheet at those dates. For the years ended December 31, 2005 and
2004, the weighted-average discount rates used for the plans were 7.5 percent
and 7.7 percent, respectively.  Note J:Commitments and
Contingencies COMMITMENTS In the normal course of
business, the Company acquires rights under option agreements to purchase land
or lots for use in future homebuilding operations.  At December 31, 2005, it had related
cash deposits and letters of credit outstanding of $188.5 million for land
options pertaining to land purchase contracts with an aggregate purchase price
of $2.1 billion.  At December 31,
2005, the Company had commitments with respect to option contracts having
specific performance provisions of approximately $60.5 million, compared to
$117.2 million at December 31, 2004.  Rent expense primarily
relates to office facilities, model homes, furniture and equipment.  YEAR ENDED DECEMBER 31,(in thousands)
  
  2005
  
  2004
  
  2003Total rent expense
  
  $
  17,050
  
  $
  16,934
  
  $
  17,937Less income from subleases
  
  (312
  )
  (295
  )
  (215
  )Net rent expense
  
  $
  16,738
  
  $
  16,639
  
  $
  17,722


The
  Ryland Group
  2005
  Annual Report
  Page 78Notes to
  ConsolidatedFinancial
  Statements       Future minimum
rental commitments under noncancelable leases with remaining terms in excess of
one year are as follows:  (in thousands)2006
  
  $
  10,4832007
  
  9,8062008
  
  8,7732009
  
  6,7852010
  
  4,638Thereafter
  
  9,991Less sublease income
  
  (632
  )Total lease commitments
  
  $
  49,844  CONTINGENCIES As an on-site housing
producer, the Company is often required by some municipalities to obtain
development or performance bonds and letters of credit in support of its
contractual obligations.  At
December 31, 2005, total development bonds were $428.6 million, while
total related deposits and letters of credit were $81.3 million.  In the event that any such bonds or letters
of credit are called, the Company would be required to reimburse the issuer; however,
it does not expect that any currently outstanding bonds or letters of credit
will be called.  At
December 31, 2005, one of the joint ventures in which the Company
participates had debt of $375.5 million. In this joint venture, the Company and
its partners provided guarantees of debt on a pro rata basis. The Company has a
3.3 percent pro rata interest on the debt, or $12.5 million, and a completion
guarantee related to project development. 
The guarantees apply if a joint venture partner defaults on its loan
arrangement and the fair value of the collateral (land and improvements) is
less than the loan balance.  In addition,
the Company guaranteed up to 50.0 percent of a $55.0 million revolving credit
facility in another of its joint ventures, in February 2006.  IRLCs represent
loan commitments with customers at market rates generally up to 180 days before
settlement.  At December 31, 2005, the
Company had outstanding IRLCs totaling $233.8 million.  Hedging contracts are utilized to mitigate
the risk associated with interest rate fluctuations on IRLCs.  (See Note D, Derivative Instruments.)  In 2005, the
Company entered into treasury locks which terminate in 2006, to facilitate the
replacement of higher-rate senior and senior subordinated debt in 2006.  As of December 31, 2005, the fair value
of the treasury locks was $4.8 million.  (See
Note D, Derivative Instruments.)  The Company
provides product warranties 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 current estimates.  Changes in the
Companys product liability reserve during the period are as follows:  (in thousands)
  
  2005
  
  2004Balance at January 1
  
  $
  33,090
  
  $
  34,258Warranties issued
  
  23,979
  
  16,621Settlements made
  
  (24,258
  )
  (21,287
  )Changes in liability for accruals related to
  pre-existing warranties
  
  8,836
  
  3,498Balance at December 31
  
  $
  41,647
  
  $
  33,090  The Company
requires substantially all of its subcontractors to have general liability
insurance (including construction defect coverage) and workmans compensation
insurance.  These insurance policies
protect the Company against a portion of its risk of loss from claims, subject
to certain self-insured retentions, deductibles


The
  Ryland Group
  2005
  Annual Report
  Page 79Notes to
  ConsolidatedFinancial
  Statements       and other coverage limits.  Over the past several years, general
liability insurance for the homebuilding industry has become more difficult to
obtain with fewer insurers participating. 
As a result, Ryland Homes Insurance Company, a wholly-owned subsidiary
of the Company, provides insurance services to the home-building segments
subcontractors in certain markets.  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 current estimates.  Note K:Supplemental
Guarantor Information As of December 31,
2005, the Companys obligations to pay principal, premium, if any, and interest
under its $500.0 million unsecured revolving credit facility (replaced in
January 2006 with a $750.0 million facility described in Note L, Subsequent
Event.); 8.0 percent senior notes due August 2006; 5.4 percent senior
notes due June 2008; 5.4 percent senior notes due May 2012; and 5.4
percent senior notes due January 2015 are guaranteed on a joint and
several basis by substantially all of its wholly-owned homebuilding subsidiaries
(the Guarantor Subsidiaries).Such guarantees are full and unconditional.  In lieu of
providing separate audited financial statements for the Guarantor Subsidiaries,
the accompanying condensed consolidating financial statements have been
included. Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors and are, therefore, not
presented.  The following
information presents the consolidating statements of earnings, financial
position and cash flows 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 used
to arrive at the consolidated information for The Ryland Group, Inc. and
subsidiaries.  CONSOLIDATING
STATEMENT OF EARNINGS  YEAR ENDED DECEMBER 31, 2005(in
  thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALREVENUESHomebuilding
  
  $
  2,777,565
  
  $
  2,064,488
  
  $
  
  
  $
  (116,302
  )
  $
  4,725,751Financial services
  
  
  
  
  
  91,815
  
  
  
  91,815TOTAL REVENUES
  
  2,777,565
  
  2,064,488
  
  91,815
  
  (116,302
  )
  4,817,566EXPENSESCost of sales
  
  2,118,187
  
  1,535,718
  
  
  
  (116,302
  )
  3,537,603Selling, general and administrative
  
  243,660
  
  197,259
  
  46
  
  
  
  440,965Financial services
  
  
  
  
  
  31,582
  
  
  
  31,582Corporate
  
  19,118
  
  58,232
  
  
  
  
  
  77,350Interest
  
  (8,320
  )
  8,320
  
  738
  
  
  
  738Expenses related to early retirement
  of debt
  
  8,277
  
  
  
  
  
  
  
  8,277TOTAL EXPENSES
  
  2,380,922
  
  1,799,529
  
  32,366
  
  (116,302
  )
  4,096,515Earnings before taxes
  
  396,643
  
  264,959
  
  59,449
  
  
  
  721,051Tax expense
  
  150,724
  
  100,684
  
  22,591
  
  
  
  273,999Equity in net earnings of subsidiaries
  
  201,133
  
  
  
  
  
  (201,133
  )
  NET EARNINGS
  
  $
  447,052
  
  $
  164,275
  
  $
  36,858
  
  $
  (201,133
  )
  $
  447,052


The
  Ryland Group
  2005
  Annual Report
  Page 80Notes to
  ConsolidatedFinancial
  Statements       CONSOLIDATING
STATEMENT OF EARNINGS  YEAR ENDED DECEMBER 31, 2004(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALREVENUESHomebuilding
  
  $
  2,403,614
  
  $
  1,551,529
  
  $
  1,341
  
  $
  (89,398
  )
  $
  3,867,086Financial services
  
  
  
  
  
  84,735
  
  
  
  84,735TOTAL REVENUES
  
  2,403,614
  
  1,551,529
  
  86,076
  
  (89,398
  )
  3,951,821EXPENSESCost of sales
  
  1,832,163
  
  1,219,981
  
  1,341
  
  (89,398
  )
  2,964,087Selling, general and administrative
  
  219,388
  
  153,160
  
  112
  
  
  
  372,660Financial services
  
  
  
  
  
  26,825
  
  
  
  26,825Corporate
  
  15,735
  
  50,075
  
  
  
  
  
  65,810Interest
  
  (5,484
  )
  5,694
  
  1,017
  
  
  
  1,227TOTAL EXPENSES
  
  2,061,802
  
  1,428,910
  
  29,295
  
  (89,398
  )
  3,430,609Earnings before taxes
  
  341,812
  
  122,619
  
  56,781
  
  
  
  521,212Tax expense
  
  131,597
  
  47,209
  
  21,861
  
  
  
  200,667Equity in net earnings of subsidiaries
  
  110,330
  
  
  
  
  
  (110,330
  )
  NET EARNINGS
  
  $
  320,545
  
  $
  75,410
  
  $
  34,920
  
  $
  (110,330
  )
  $
  320,545  CONSOLIDATING
STATEMENT OF EARNINGS  YEAR ENDED DECEMBER 31, 2003(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALREVENUESHomebuilding
  
  $
  2,153,561
  
  $
  1,317,300
  
  $
  
  
  $
  (115,411
  )
  $
  3,355,450Financial services
  
  
  
  
  
  88,679
  
  
  
  88,679TOTAL REVENUES
  
  2,153,561
  
  1,317,300
  
  88,679
  
  (115,411
  )
  3,444,129EXPENSESCost of sales
  
  1,671,666
  
  1,059,627
  
  93
  
  (115,411
  )
  2,615,975Selling, general and administrative
  
  203,246
  
  130,401
  
  79
  
  
  
  333,726Financial services
  
  
  
  
  
  24,339
  
  
  
  24,339Corporate
  
  15,378
  
  45,885
  
  
  
  
  
  61,263Interest
  
  134
  
  5,898
  
  1,491
  
  
  
  7,523Expenses related to early retirement of debt
  
  5,086
  
  
  
  
  
  
  
  5,086TOTAL EXPENSES
  
  1,895,510
  
  1,241,811
  
  26,002
  
  (115,411
  )
  3,047,912Earnings before taxes
  
  258,051
  
  75,489
  
  62,677
  
  
  
  396,217Tax expense
  
  100,640
  
  29,441
  
  24,444
  
  
  
  154,525Equity in net earnings of subsidiaries
  
  84,281
  
  
  
  
  
  (84,281
  )
  NET EARNINGS
  
  $
  241,692
  
  $
  46,048
  
  $
  38,233
  
  $
  (84,281
  )
  $
  241,692


The
  Ryland Group
  2005
  Annual Report
  Page 81Notes to
  ConsolidatedFinancial
  Statements       CONSOLIDATING
BALANCE SHEET  DECEMBER 31, 2005(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALASSETSCash and cash equivalents
  
  $
  81,895
  
  $
  359,709
  
  $
  19,779
  
  $
  
  
  $
  461,383Consolidated inventories owned
  
  1,382,900
  
  957,576
  
  
  
  
  
  2,340,476Consolidated inventories not owned
  
  6,681
  
  6,576
  
  225,934
  
  
  
  239,191Total inventories
  
  1,389,581
  
  964,152
  
  225,934
  
  
  
  2,579,667Purchase price in excess of net assets acquired
  
  15,383
  
  2,802
  
  
  
  
  
  18,185Investment in subsidiaries/
  intercompany balances
  
  1,188,956
  
  (608,086
  )
  18,557
  
  (599,427
  )
  Other assets
  
  238,325
  
  52,432
  
  36,881
  
  
  
  327,638TOTAL ASSETS
  
  2,914,140
  
  771,009
  
  301,151
  
  (599,427
  )
  3,386,873LIABILITIESAccounts payable and other accrued liabilities
  
  630,383
  
  178,194
  
  105,653
  
  
  
  914,230Debt
  
  907,736
  
  14,234
  
  
  
  
  
  921,970TOTAL LIABILITIES
  
  1,538,119
  
  192,428
  
  105,653
  
  
  
  1,836,200MINORITY INTEREST
  
  
  
  
  
  174,652
  
  
  
  174,652STOCKHOLDERS EQUITY
  
  1,376,021
  
  578,581
  
  20,846
  
  (599,427
  )
  1,376,021TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
  
  $
  2,914,140
  
  $
  771,009
  
  $
  301,151
  
  $
  (599,427
  )
  $
  3,386,873  CONSOLIDATING
BALANCE SHEET  DECEMBER 31, 2004(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALASSETSCash and cash equivalents
  
  $
  36,090
  
  $
  31,390
  
  $
  20,908
  
  $
  
  
  $
  88,388Consolidated inventories owned
  
  1,118,062
  
  761,953
  
  
  
  
  
  1,880,015Consolidated inventories not owned
  
  2,398
  
  9,298
  
  132,422
  
  
  
  144,118Total inventories
  
  1,120,460
  
  771,251
  
  132,422
  
  
  
  2,024,133Purchase price in excess of net assets acquired
  
  15,383
  
  2,802
  
  
  
  
  
  18,185Investment in subsidiaries/
  intercompany balances
  
  739,770
  
  (285,782
  )
  (18,194
  )
  (435,794
  )
  Other assets
  
  200,128
  
  39,756
  
  54,380
  
  
  
  294,264TOTAL ASSETS
  
  2,111,831
  
  559,417
  
  189,516
  
  (435,794
  )
  2,424,970LIABILITIESAccounts payable and other accrued liabilities
  
  507,385
  
  144,272
  
  49,762
  
  
  
  701,419Debt
  
  547,612
  
  840
  
  10,490
  
  
  
  558,942TOTAL LIABILITIES
  
  1,054,997
  
  145,112
  
  60,252
  
  
  
  1,260,361MINORITY INTEREST
  
  
  
  
  
  107,775
  
  
  
  107,775STOCKHOLDERS EQUITY
  
  1,056,834
  
  414,305
  
  21,489
  
  (435,794
  )
  1,056,834TOTAL LIABILITIES AND  STOCKHOLDERS EQUITY
  
  $
  2,111,831
  
  $
  559,417
  
  $
  189,516
  
  $
  (435,794
  )
  $
  2,424,970


The
  Ryland Group
  2005
  Annual Report
  Page 82Notes to
  ConsolidatedFinancial
  Statements       CONSOLIDATING
STATEMENT OF CASH FLOWS  YEAR ENDED DECEMBER 31, 2005(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING 
  ELIMINATIONS
  
  CONSOLIDATED 
  TOTALCASH FLOWS FROM OPERATING ACTIVITIESNet earnings
  
  $
  447,052
  
  $
  164,275
  
  $
  36,858
  
  $
  (201,133
  )
  $
  447,052Adjustments to reconcile net earnings to  net cash provided by operating activities:Depreciation and amortization
  
  25,880
  
  16,167
  
  1,119
  
  
  
  43,166Changes in assets and liabilities:Increase in inventories
  
  (269,121
  )
  (192,901
  )
  (28,949
  )
  
  
  (490,971
  )Net change in other assets, payables and other liabilities
  
  (355,096
  )
  354,270
  
  (6,087
  )
  201,133
  
  194,220Tax benefit from exercise of stock options and
  vesting of restricted stock
  
  30,505
  
  
  
  
  
  
  
  30,505Other operating activities, net
  
  (7,708
  )
  
  
  
  
  
  
  (7,708
  )Net cash (used for) provided by operating activities
  
  (128,488
  )
  341,811
  
  2,941
  
  
  
  216,264CASH FLOWS FROM INVESTING ACTIVITIESNet additions to property, plant and equipment
  
  (27,496
  )
  (26,886
  )
  (745
  )
  
  
  (55,127
  )Principal reduction of mortgage-backed securities,
  notes receivable and mortgage collateral
  
  
  
  
  
  12,561
  
  
  
  12,561Net cash (used for) provided by investing activities
  
  (27,496
  )
  (26,886
  )
  11,816
  
  
  
  (42,566
  )CASH FLOWS FROM FINANCING ACTIVITIESCash proceeds of long-term debt
  
  500,000
  
  
  
  
  
  
  
  500,000Repayment of long-term debt
  
  (147,000
  )
  
  
  
  
  
  
  (147,000
  )Increase (decrease) in short-term borrowings
  
  7,124
  
  13,394
  
  (10,490
  )
  
  
  10,028Common stock dividends
  
  (11,383
  )
  
  
  
  
  
  
  (11,383
  )Common stock repurchases
  
  (176,214
  )
  
  
  
  
  
  
  (176,214
  )Proceeds from exercise of stock options
  
  20,911
  
  
  
  
  
  
  
  20,911Other financing activities, net
  
  8,351
  
  
  
  (5,396
  )
  
  
  2,955Net cash provided by (used for) financing activities
  
  201,789
  
  13,394
  
  (15,886
  )
  
  
  199,297Net increase (decrease) in cash and cash
  equivalents
  
  45,805
  
  328,319
  
  (1,129
  )
  
  
  372,995Cash and cash equivalents at beginning of year
  
  36,090
  
  31,390
  
  20,908
  
  
  
  88,388CASH AND CASH EQUIVALENTS AT 
  END OF YEAR
  
  $
  81,895
  
  $
  359,709
  
  $
  19,779
  
  $
  
  
  $
  461,383


The
  Ryland Group
  2005
  Annual Report
  Page 83Notes to
  ConsolidatedFinancial
  Statements       CONSOLIDATING
STATEMENT OF CASH FLOWS  YEAR ENDED DECEMBER 31, 2004(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR
  SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALCASH FLOWS FROM OPERATING ACTIVITIESNet earnings
  
  $
  320,545
  
  $
  75,410
  
  $
  34,920
  
  $
  (110,330
  )
  $
  320,545Adjustments to reconcile net earnings to net cash
  provided by operating activities:Depreciation and amortization
  
  23,287
  
  14,609
  
  623
  
  
  
  38,519Changes in assets and liabilities:Increase in inventories
  
  (298,489
  )
  (253,221
  )
  (33,852
  )
  
  
  (585,562
  )Net change in other assets, payables and other
  liabilities
  
  57,067
  
  (63,878
  )
  16,113
  
  110,330
  
  119,632Tax benefit from exercise of stock options
  
  17,475
  
  
  
  
  
  
  
  17,475Other operating activities, net
  
  10,920
  
  
  
  
  
  
  
  10,920Net cash provided by (used for) operating activities
  
  130,805
  
  (227,080
  )
  17,804
  
  
  
  (78,471
  )CASH FLOWS FROM INVESTING ACTIVITIESNet additions to property, plant and equipment
  
  (26,370
  )
  (19,468
  )
  (1,293
  )
  
  
  (47,131
  )Principal reduction of mortgagebacked securities,
  notes receivable and mortgage collateral
  
  
  
  
  
  19,336
  
  
  
  19,336Net cash (used for) provided by investing activities
  
  (26,370
  )
  (19,468
  )
  18,043
  
  
  
  (27,795
  )CASH FLOWS FROM FINANCING ACTIVITIESIncrease (decrease) in short-term borrowings
  
  1,659
  
  (829
  )
  (15,764
  )
  
  
  (14,934
  )Common stock dividends
  
  (9,661
  )
  
  
  
  
  
  
  (9,661
  )Common stock repurchases
  
  (118,296
  )
  
  
  
  
  
  
  (118,296
  )Proceeds from exercise of stock options
  
  15,907
  
  
  
  
  
  
  
  15,907Other financing activities, net
  
  7,612
  
  
  
  (2,678
  )
  
  
  4,934Net cash used for financing activities
  
  (102,779
  )
  (829
  )
  (18,442
  )
  
  
  (122,050
  )Net increase (decrease) in cash  and cash
  equivalents
  
  1,656
  
  (247,377
  )
  17,405
  
  
  
  (228,316
  )Cash and cash equivalents at beginning of year
  
  34,434
  
  278,767
  
  3,503
  
  
  
  316,704CASH AND CASH EQUIVALENTS AT 
  END OF YEAR
  
  $
  36,090
  
  $
  31,390
  
  $
  20,908
  
  $
  
  
  $
  88,388


The
  Ryland Group
  2005
  Annual Report
  Page 84Notes to
  ConsolidatedFinancial
  Statements       CONSOLIDATING
STATEMENT OF CASH FLOWS  YEAR ENDED DECEMBER 31, 2003(in thousands)
  
  TRG, INC.
  
  GUARANTOR
  SUBSIDIARIES
  
  NON-
  GUARANTOR SUBSIDIARIES
  
  CONSOLIDATING
  ELIMINATIONS
  
  CONSOLIDATED
  TOTALCASH FLOWS FROM OPERATING ACTIVITIESNet earnings
  
  $
  241,692
  
  $
  46,048
  
  $
  38,233
  
  $
  (84,281
  )
  $
  241,692Adjustments to reconcile net earnings to net cash
  provided by operating activities:Depreciation and amortization
  
  24,261
  
  11,253
  
  922
  
  
  
  36,436Changes in assets and liabilities:Increase in inventories
  
  (148,412
  )
  (91,577
  )
  
  
  
  
  (239,989
  )Net change in other assets, payables and other
  liabilities
  
  (44,754
  )
  81,683
  
  (37,911
  )
  84,281
  
  83,299Tax benefit from exercise of stock options
  
  17,120
  
  
  
  
  
  
  
  17,120Other operating activities, net
  
  913
  
  
  
  
  
  
  
  913Net cash provided by operating activities
  
  90,820
  
  47,407
  
  1,244
  
  
  
  139,471CASH FLOWS FROM INVESTING ACTIVITIESNet 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
  
  
  
  18,672Net cash (used for) provided by investing activities
  
  (20,266
  )
  (11,342
  )
  17,739
  
  
  
  (13,869
  )CASH FLOWS FROM FINANCING ACTIVITIESCash proceeds of long-term debt
  
  150,000
  
  
  
  
  
  
  
  150,000Repayment of long-term debt
  
  (100,000
  )
  
  
  
  
  
  
  (100,000
  )Increase (decrease) in short-term borrowings
  
  1,661
  
  1,669
  
  (16,891
  )
  
  
  (13,561
  )Common stock dividends
  
  (2,020
  )
  
  
  
  
  
  
  (2,020
  )Common stock repurchases
  
  (130,939
  )
  
  
  
  
  
  
  (130,939
  )Proceeds from exercise of stock options
  
  15,190
  
  
  
  
  
  
  
  15,190Other financing activities, net
  
  5,593
  
  
  
  (2,606
  )
  
  
  2,987Net cash (used for) provided by  financing activities
  
  (60,515
  )
  1,669
  
  (19,497
  )
  
  
  (78,343
  )Net increase (decrease) in cash  and cash
  equivalents
  
  10,039
  
  37,734
  
  (514
  )
  
  
  47,259Cash and cash equivalents at beginning of year
  
  24,395
  
  241,033
  
  4,017
  
  
  
  269,445CASH AND CASH EQUIVALENTS AT 
  END OF YEAR
  
  $
  34,434
  
  $
  278,767
  
  $
  3,503
  
  $
  
  
  $
  316,704  Note L:Subsequent
Event On January 12, 2006,
the Company entered into a $750.0 million unsecured revolving credit facility. The
new credit agreement, which matures in January 2011, also provides access
to an additional $750.0 million of financing through an accordion feature under
which the aggregate commitment may be increased up to $1.5 billion, subject to
the availability of additional lending commitments. The $750.0 million credit
facility includes a $75.0 million swing line facility and a $600.0 million
sublimit for issuance of standby letters of credit.  Amounts borrowed under the credit agreement
are guaranteed on a joint and several basis by substantially all of the
Companys wholly-owned homebuilding subsidiaries. Such guarantees are full and
unconditional. Interest rates on outstanding borrowings are determined either by
reference to LIBOR, with margins determined based on changes in its leverage
ratio and credit ratings, or by reference to an alternate base rate. The credit
agreement contains various customary affirmative, negative and financial
covenants, replaces the Companys prior $500.0 million revolving credit
facility and will be used for general corporate purposes. (See Note F, Debt.)


The
  Ryland Group
  2005
  Annual Report
  Page 85Report 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.  Developing and maintaining these systems are
the responsibility of management.  Proper
selection, training and development of personnel also contribute to the
effectiveness of the internal control systems. 
For the purpose of evaluating and documenting its systems of internal
control, management elected to use the integrated framework promulgated by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Companys systems, evaluation and test
results were documented.  The Companys
internal auditors regularly test these systems. Based on its evaluation, management
believes that its systems of internal control over financial reporting were
effective and is not aware of any material weaknesses.  The Companys independent
registered public accounting firm also reviewed and tested the effectiveness of
these systems to the extent it deemed necessary to express an opinion on the
consolidated financial statements and systems of internal control; an
attestation report on managements assessment of the Companys internal control
over financial reporting was then issued.  The Audit Committee of the
Board of Directors periodically meets with management, the internal auditors
and the independent registered public accounting firm to review accounting,
auditing and financial matters. Both internal auditors and the independent
registered public accounting firm have unrestricted access to the Audit Committee.  /s/ Gordon A. MilneGordon A. MilneExecutive Vice President and
  Chief Financial Officer  /s/ David L. FristoeDavid L. FristoeSenior Vice President, Controller
  and
  Chief Accounting Officer


The
  Ryland Group
  2005
  Annual Report
  Page 86Reports of Independent RegisteredPublic 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, 2005
and 2004, and the related consolidated statements of earnings, stockholders
equity and cash flows for each of the three years in the period ended
December 31, 2005.  These financial
statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audits.  We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States).  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, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005,in conformity with U.S. generally
accepted accounting principles.  We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of The Ryland Group, Inc.s internal
control over financial reporting as of December 31, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 22, 2006 expressed an unqualified opinion thereon.  /s/ Ernst & Young LLPErnst & Young LLPLos Angeles, California
  February 22, 2006


The
  Ryland Group
  2005
  Annual Report
  Page 87Reports of Independent RegisteredPublic Accounting Firm       BOARD OF DIRECTORS AND
STOCKHOLDERS THE RYLAND GROUP, INC. We have audited managements assessment, included in
the accompanying Report of Management, that The Ryland Group, Inc. maintained
effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria).  The Ryland Group, Inc.s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting.  Our
responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal control over financial
reporting based on our audit.  We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included
obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. 
We believe that our audit provides a reasonable basis for our opinion.  A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.  A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.  Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements.  Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.  In our opinion, managements
assessment that The Ryland Group, Inc. maintained effective internal control
over financial reporting as of December 31, 2005 is fairly stated, in all
material respects, based on the COSO criteria. 
Also, in our opinion, The Ryland Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.  We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of The Ryland Group, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of earnings, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2005, and our
report dated February 22, 2006 expressed an unqualified opinion thereon.  /s/Ernst & Young LLPErnst & Young LLPLos Angeles, California
  February 22, 2006


The
  Ryland Group
  2005
  Annual Report
  Page 88Quarterly Financial Data andCommon Stock
  Prices and Dividends       QUARTERLY FINANCIAL DATA  (in thousands, except per share data) unaudited
  
  2005
  
  2004DEC. 31
  
  SEPT. 30
  
  JUN. 30
  
  MAR. 31
  
  DEC. 31
  
  SEPT. 30
  
  JUN. 30
  
  MAR. 31CONSOLIDATED RESULTSRevenue
  
  $
  1,500,518
  
  $
  1,231,112
  
  $
  1,135,744
  
  $
  858,377
  
  $
  1,244,379
  
  $
  1,034,322
  
  $
  918,521
  
  $
  754,599Earnings before taxes
  
  261,280
  
  190,313
  
  168,290
  
  101,168
  
  176,675
  
  134,908
  
  124,408
  
  85,221Tax expense
  
  99,288
  
  72,319
  
  63,950
  
  38,442
  
  68,020
  
  51,939
  
  47,898
  
  32,810Net earnings
  
  $
  161,992
  
  $
  117,994
  
  $
  104,340
  
  $
  62,726
  
  $
  108,655
  
  $
  82,969
  
  $
  76,510
  
  $
  52,411Net earnings per common
  share:Basic
  
  $
  3.48
  
  $
  2.52
  
  $
  2.22
  
  $
  1.32
  
  $
  2.29
  
  $
  1.75
  
  $
  1.60
  
  $
  1.09Diluted
  
  3.32
  
  2.39
  
  2.10
  
  1.25
  
  2.17
  
  1.66
  
  1.51
  
  1.03Weighted-average common
  shares outstanding:Basic
  
  46,540
  
  46,779
  
  47,057
  
  47,489
  
  47,481
  
  47,368
  
  47,918
  
  47,947Diluted
  
  48,860
  
  49,365
  
  49,625
  
  50,083
  
  50,026
  
  49,920
  
  50,561
  
  50,976  COMMON STOCK PRICES AND
DIVIDENDS The Ryland Group lists its common shares on the NYSE, trading
under the symbol RYL.  The latest reported sale
price of the Companys common stock on February 3, 2006, was $71.00, and
there were approximately 1,478 common stockholders of record.  The table below presents
high and low market prices and dividend information for the Company. (See Note
F, Debt for dividend restrictions.)  2005
  
  HIGH
  
  LOW
  
  DIVIDENDS
  DECLARED
  PER SHARE
  
  2004
  
  HIGH
  
  LOW
  
  DIVIDENDS
  DECLARED
  PER SHAREFirst quarter
  
  $
  71.81
  
  $
  53.97
  
  $
  0.06
  
  First quarter
  
  $
  46.30
  
  $
  36.07
  
  $
  0.05Second quarter
  
  76.37
  
  58.06
  
  0.06
  
  Second quarter
  
  44.25
  
  36.34
  
  0.05Third quarter
  
  83.13
  
  65.97
  
  0.06
  
  Third quarter
  
  46.95
  
  34.69
  
  0.05Fourth quarter
  
  76.97
  
  62.25
  
  0.12
  
  Fourth quarter
  
  57.63
  
  42.45
  
  0.06  NYSE CERTIFICATION The NYSE requires that the chief executive officers of
its listed companies certify annually to the NYSE that they are not aware of
violations by their companies of NYSE corporate governance listing standards.
The Company submitted a non-qualified certification by its Chief Executive
Officer to the NYSE last year in accordance with the NYSEs rules.  Further, the Company filed certifications by
its Chief Executive Officer and Chief Financial Officer with the SEC in
accordance with the Sarbanes-Oxley Act of 2002. 
These certifications were filed as exhibits to the Companys most recent
Annual Report on Form 10-K.