United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

ýAnnual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")

For
the fiscal year ended December 31, 2008

or

o
Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act

For
the transition period from  to 
Commission File Number 001-08029

THE RYLAND GROUP, INC. (Exact name of registrant as specified in its charter)

Maryland

52-0849948(State or other jurisdiction
of incorporation or organization)

(I.R.S. employer identification no.)


24025 Park Sorrento, Suite 400, Calabasas, California 91302 (Address of principal executive offices)

Registrant's telephone number, including area code: (818) 223-7500

Securities
registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Name of each exchange on which registeredCommon stock, par value $1.00 per share

New York Stock ExchangePreferred stock purchase rights

New York Stock Exchange


Securities
registered pursuant to Section 12(g) of the Exchange Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o    No ý

The aggregate market value of the common stock of The Ryland Group, Inc. held by nonaffiliates of the registrant (41,666,759 shares) at June 30, 2008, was
$908,752,014. The number of shares of common stock of The Ryland Group, Inc. outstanding on February 12, 2009, was 42,872,897.

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DOCUMENTS INCORPORATED BY REFERENCE

Name of Document

Location in ReportProxy Statement for the 2009 Annual Meeting of Stockholders

Part III


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THE RYLAND GROUP, INC.
FORM 10-K
INDEX

ITEM NO.PART IItem 1.

Business

4Item 1A.

Risk Factors

9Item 1B.

Unresolved Staff Comments

12Item 2.

Properties

12Item 3.

Legal Proceedings

12Item 4.

Submission of Matters to a Vote of Security Holders

12PART IIItem 5.

Market For Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

12Item 6.

Selected Financial Data

14Item 7.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

16Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33Item 8.

Financial Statements and Supplementary Data

34Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

65Item 9A.

Controls and Procedures

65Item 9B.

Other Information

65PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

66Item 11.

Executive Compensation

67Item 12.

Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters

67Item 13.

Certain Relationships and Related Transactions, and Director Independence

67Item 14.

Principal Accounting Fees and Services

67PART IVItem 15.

Exhibits, Financial Statement Schedules

67SIGNATURES

72INDEX OF EXHIBITS

73


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PART I

Item 1.    Business

With headquarters in Southern California, The Ryland Group, Inc., a Maryland corporation (the "Company"), is one of the nation's largest
homebuilders and a mortgage-finance company. The Company is traded on the New York Stock Exchange ("NYSE") under the symbol "RYL." Founded in 1967, the Company has built more than 280,000 homes. In
addition, Ryland Mortgage Company and its subsidiaries ("RMC") have provided mortgage financing and related services for more than 235,000 homebuyers. The Company consists of six operating business
segments: four geographically determined homebuilding regions; financial services; and corporate.

The
Company's operations span all significant aspects of the homebuying processfrom design, construction and sale to mortgage origination, title insurance, escrow and insurance services.
The homebuilding operations are, by far, the most substantial part of its business, comprising approximately 97 percent of consolidated revenues in fiscal year 2008. The homebuilding segments
generate nearly all of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. In addition to building single-family detached homes, the homebuilding
segments also build attached homes, such as town homes, condominiums and some mid-rise buildings that share common walls and roofs. The Company builds homes for entry-level buyers, as well
as for first- and second-time move-up buyers. Its prices generally range from $100,000 to more than $500,000, with the average price of a home closed during 2008 being
$252,000. The financial services segment offers mortgage, title, escrow and insurance services to the Company's homeowners and subcontractors.

The
Company has traditionally concentrated on expanding its operations by investing its available capital in both existing and new markets. The Company focuses on achieving a high return on invested
capital and establishing profitable operations in every one of its markets. New and existing communities are evaluated based on return, profitability, and cash flow benchmarks, and both senior and
local management are incentivized based on their ability to achieve such returns. Management monitors the land acquisition process, sales revenues, margins and returns achieved in each of the
Company's markets as part of its capital evaluation process. (See discussion in Part I, Item 1A, "Risk Factors.")

The
Company is highly diversified throughout the United States and attempts to have no more than 10 percent of its deployed capital allocated to any given market. It believes diversification
not only minimizes its exposure to economic and market fluctuations, but also enhances its growth potential. Capital is strategically allocated to avoid concentration in any given geographic area and
to reduce the risk associated with excessive dependence on local market anomalies. Subject to macroeconomic and local market conditions, the Company generally tries to either manage its exposure or to
expand its presence in its existing markets in an effort to be among the largest builders in each of those markets. It may continue diversification by selectively entering new markets, primarily
through establishing start-up or satellite operations in markets near its existing divisions.

The
Company's national scale has provided opportunities for negotiation of volume discounts and rebates from material suppliers. Additionally, it has access to a lower cost of capital due to the
strength and transparency of its balance sheet, as well as to its banking and capital markets relationships. While the Company's operating margins have suffered significantly in the current economic
climate, the Company believes that economies of scale and diversification have contributed to improvements in its operating margins during periods of growth and mitigated its overall risk in most
periods of declining housing demand.

Committed
to product innovation, the Company conducts ongoing research into consumer preferences and trends. It is constantly adapting and improving its house plans, design features, customized
options and mortgage programs. It 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. The Company continues to develop its ability to collect customer feedback via its Web site, which includes online systems for tracking requests, processing issues and improving customer
interaction. In addition, it uses a third party to analyze customer feedback in order to better serve its homebuyers' needs.

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 periodically
partners with developers, other homebuilders or financial investors to develop finished lots for sale to the joint ventures' members or other third parties.

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Aside
from being an added value to customers, the financial services segment generates a profit for the Company while reducing its risk. A competitively high capture rate for mortgage financing and
other services allows the Company to monitor its backlog and closing process. Risk is further reduced because the majority of loans originated are sold within
one business day of the date they close. The third party purchaser then services and manages the loans, assuming nearly all of the credit risk of borrower default.

HomebuildingGeneral

The Company's homes are built on-site and marketed in four major geographic regions, or segments. The Company operated in the following
metropolitan areas at December 31, 2008:

Region/Segment

Major Markets ServedNorth

Baltimore, Chicago, Delaware, Indianapolis, Minneapolis and Washington, D.C.Southeast

Atlanta, Charleston, Charlotte, Jacksonville, Myrtle Beach, Orlando and TampaTexas

Austin, Dallas, Houston and San AntonioWest

California's Central Valley, California's Coachella Valley, California's Inland Empire, Denver, Las Vegas and Phoenix


The
Company has decentralized operations to provide more flexibility to its local division presidents and management teams. Its 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 each of 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. The Company has two regional offices, each generally consisting of
a region president; vice president of financial operations; and additional management personnel focused on human resources, real estate legal support, marketing and operations. Regional offices
provide oversight and standardization where appropriate. The staff in these offices monitors activities by using various operational metrics in order to achieve Company return benchmarks.

The
Company markets attached and detached single-family homes, which are generally targeted to entry-level and first- and second-time move-up buyers. Its 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 trends.

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 represent an increasing source of additional revenue and profit for the Company. Custom options contributed approximately
17.0 percent of revenues in 2008 and resulted in significantly higher margins in comparison to base homes.

Land Acquisition and Development

The Company's long-term objective is to control a portfolio of building lots sufficient to meet its anticipated homebuilding requirements for a
period of approximately four to five years. The Company acquires land only after completing due diligence and feasibility studies. The land acquisition process is controlled by a corporate land
approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both
direct acquisition and option contracts to control building lots for use in the sale and construction of homes. The Company's direct land acquisition activities include the purchase of finished lots
from developers and the purchase of undeveloped entitled land from third parties. The Company generally does not purchase unentitled or unzoned land.

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Although
control of lot inventory through the use of option contracts minimizes the Company's investment, such a strategy is not viable in certain markets due to the absence of third-party land
developers. In other markets, competitive conditions may prevent the Company from controlling quality lots solely through the use of option contracts. In such situations, the Company may acquire
undeveloped entitled land and/or finished lots on a bulk basis. The Company utilizes the selective development of land to gain access to prime locations, increase margins and position itself as a
leader in the area through its influence over a community's character, layout and amenities. After determining the size, style, price range, density, layout and overall design of a community, the
Company obtains governmental and other approvals necessary to begin the development process. Land is then graded; roads, utilities, amenities and other infrastructures are installed; and the
individual home sites are created.

Materials Costs

Substantially all materials used in construction are available from a number of sources but may fluctuate in price due to various factors. To
increase purchasing efficiencies, the Company not only standardizes certain building materials and products, but also acquires such products through national supply contracts. The Company has, on
occasion, experienced shortages of certain materials. If shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the
past.

Construction

Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a
competitive-bid basis. The Company generally requires a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company's production
team, which schedules and coordinates subcontractor work, monitors quality and ensures compliance with local zoning and building codes. The Company requires substantially all of its subcontractors to
have workmans compensation insurance and general liability insurance, including construction defect coverage. Construction time for homes depends on weather, availability of labor or subcontractors,
materials, home size, geological conditions and other factors. The duration of the
home construction process is generally between three and six months. The Company has an integrated financial and homebuilding management system that assists in scheduling production and controlling
costs. Through this system, the Company monitors construction status and job costs incurred for each home during each phase of construction. The system provides for detailed budgeting and allows the
Company to track and control actual costs, versus construction bids, for each community and subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If
shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the past.

The
Company, its subcontractors and its suppliers maintain insurance, subject to deductibles and self-insured amounts, to protect against various risks associated with homebuilding
activities, including, among others, general liability, "all-risk" property, workmans compensation, automobile and employee fidelity. The Company accrues for its expected costs associated
with the deductibles and self-insured amounts, when appropriate.

Marketing

The Company generally markets its homes to entry-level and first- and second-time move-up buyers through targeted product
offerings in each of the communities in which it operates. The Company's marketing strategy is determined during the land acquisition and feasibility stage of a community's development. Employees and
independent real estate brokers sell the Company's homes, generally by showing furnished models. A new order is reported when a customer's sales contract has been signed by the homebuyer, approved by
the Company and a deposit is taken, subject to cancellation. The Company normally starts construction of a home when a customer has selected a lot, chosen a floor plan and received preliminary
mortgage approval. However, construction may begin prior to this in order to satisfy market demand for completed homes and to facilitate construction scheduling and/or cost savings. Homebuilding
revenues are recognized when home sales are closed, title and possession are transferred to the buyer, and there is no significant continuing involvement from the homebuilder.

The
Company advertises directly to potential homebuyers through the internet and in newspapers and trade publications, as well as with marketing brochures and newsletters. It also uses billboards,
radio and television advertising, and its Web site to market the location, price range and availability of its homes. The Company also attempts to operate in conspicuously located communities that
permit it to take advantage of local traffic patterns. Model homes play a significant role in the Company's marketing efforts by not only creating an attractive atmosphere, but also by displaying
options and upgrades.

The
Company's sales contracts typically require an earnest money deposit. The amount of earnest money required varies between markets and communities. Additionally, buyers are generally required to
pay additional deposits when they select

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options
or upgrades for their homes. Most of the Company's sales contracts stipulate that when homebuyers cancel their contracts with the Company, it has the right to retain the homebuyers' earnest
money and option deposits; however, its operating divisions may choose to refund a portion of such deposits. The Company's sales contracts may also include contingencies that permit homebuyers to
cancel and receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified time period. The Company's contracts may also
include other contingencies, such as the sale of an existing home. The length of time between the signing of a sales contract for a home and delivery of the home to the buyer may vary, depending on
customer preferences, permit approval and construction cycles.

Customer Service and Warranties

The Company's operating divisions are responsible for pre-closing quality control inspections and responding to homebuyers'
post-closing needs. The Company believes that prompt and courteous acknowledgment of its homebuyers' needs during and after construction reduces post-closing repair costs;
enhances its reputation for quality and service; and ultimately leads to repeat and referral business.

The
Company provides each homeowner with product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years from the time
of closing. The Company believes its warranty program meets or exceeds terms customarily offered in the homebuilding industry. The subcontractors, who perform most of the actual construction, also
provide warranties on workmanship.

Seasonality

The Company experiences seasonal variations in its quarterly operating results and capital requirements. Historically, new order activity is higher
during the spring and summer months. This is primarily due to the preference of many homebuyers to act during those periods. As a result, the Company typically has more homes under construction;
closes more homes; and has greater revenues and better operating results in the third and fourth quarters of a fiscal year. However, historical results are not necessarily indicative of current or
future homebuilding activities.

Financial Services

The Company's financial services segment provides mortgage-related products and services, as well as title, escrow and insurance services to its
homebuyers. The Company's financial services segment includes RMC, RH Insurance Company, Inc. ("RHIC"), LPS Holdings Corporation and its subsidiaries ("LPS") and Columbia National Risk
Retention Group, Inc. ("CNRRG"). By aligning its operations with the Company's homebuilding segments, the financial services segment leverages this relationship to offer its lending services to
homebuyers. In addition to being a valuable asset to customers, the financial services segment generates a profit for the Company. Providing mortgage financing and other services to its customers
allows the Company to better monitor its backlog and closing process. The majority of loans originated are sold within one business day of the date they close. The third party purchaser then services
and manages the loans, assuming nearly all of the credit risk of borrower default. In 2008, the Company entered into a mortgage warehouse facility in order to finance its mortgage loans and increase
the number of investors to which it sells the loans it originates. The Company also provided construction-related insurance to subcontractors in its western markets through June 2008. Additionally,
the financial services segment also offers insurance for liability risks, specifically homeowners' structural warranty coverage, arising in connection with the homebuilding business of the Company.

Loan Origination

In 2008, 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. During the year, mortgage operations originated 5,634 loans, totaling $1.3 billion, of which 99.6 percent was for purchases of homes built by the Company and
the remaining amount was for either purchases of homes built by others, purchases of existing homes or the refinancing of existing mortgage loans.

RMC
arranges various types of mortgage financing, including conventional, Federal Housing Administration ("FHA") and Veterans Administration ("VA") mortgages, with various fixed- and
adjustable-rate features. RMC 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 the loans it originates, along with the related servicing rights, to others.

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Title and Escrow Services

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, 2008, it provided title services in Arizona, Colorado, Delaware, Florida, Illinois, Indiana, Maryland, Minnesota, Nevada,
Texas and Virginia. The Company also operated Ryland Escrow Company until February 2008, which performed escrow and closing functions for the Company's homebuyers in California. During 2008, Ryland
Title Company and Ryland Escrow Company provided these services to 97.3 percent of the Company's homebuyers in the markets in which they operate, compared to 96.8 percent during 2007.

Insurance Services

Ryland Insurance Services ("RIS"), a wholly-owned subsidiary of RMC, provides insurance services to the Company's homebuyers. At December 31,
2008, RIS was licensed to operate in all of the states in which the Company's homebuilding segments operate. During 2008, it provided insurance services to 49.5 percent of the Company's
homebuyers, compared to 54.2 percent during 2007.

RHIC
is a wholly-owned subsidiary of the Company that provided insurance services to the homebuilding segments' subcontractors in certain markets. RHIC ceased providing such services, effective
June 1, 2008. RHIC is registered and licensed under Section 431, Article 19 of the Hawaii Revised Statutes and is required to meet certain minimum capital and surplus
requirements. Additionally, no dividends may be paid without prior approval of the Hawaii Insurance Commissioner.

CNRRG
is a wholly-owned subsidiary of the Company and some of its affiliates. CNRRG was established to directly insure liability risks, specifically homeowners' structural warranty coverage, arising
in connection with the homebuilding business of the Company and its affiliates.

Corporate

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 resource, information technology, insurance, legal, marketing, national purchasing and tax compliance services. In
addition, it performs administrative functions associated with a publicly traded entity.

Real Estate and Economic Conditions

The Company is significantly affected by fluctuations in economic activity, interest rates and levels of consumer confidence. The effects of these
fluctuations differ among the various geographic markets in which the Company operates. Higher interest rates and the availability of homeowner financing may affect the ability of buyers to qualify
for mortgage financing and decrease demand for new homes. As a result, rising interest rates generally will decrease the Company's home sales and mortgage originations. In addition, a continued
decline in the availability of mortgage products, due to the continued tightening of credit standards, negatively impacted the Company's ability to attract homebuyers during 2008. The Company's
business is also affected by local economic conditions, such as employment rates, consumer confidence and housing demand, in the markets in which it operates. All of the Company's markets have
experienced a significant decline in housing demand.

Inventory
risk can be substantial for homebuilders. The market value of land, lots and housing inventories fluctuates as a result of changing market and economic conditions. The Company must
continuously locate and acquire land not only for expansion into new markets, but also for replacement and expansion of land inventory within current markets. The Company employs various measures
designed to control inventory risk, including a corporate land approval process and a continuous review by senior management. It cannot, however, assure that these measures will avoid or eliminate
this risk, and the Company has experienced substantial losses from inventory valuation adjustments and write-offs in recent periods.

Competition

The Company competes in each of its markets with a large number of national, regional and local homebuilding companies. The strength and expanded
presence of national homebuilders, plus the viability of regional and local homebuilders, impacts the level of competition in many markets. The Company also competes with other housing alternatives,
including existing homes and rental properties. Principal competitive factors in the homebuilding industry include price; design; quality; reputation; relationships with developers; accessibility of
subcontractors; availability and location of lots; and availability of customer financing. The Company's financial services segment competes with other mortgage bankers to arrange financing

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for
homebuyers. Principal competitive factors include interest rates, fees and other features of mortgage loan products available to the consumer.

Employees

At December 31, 2008, the Company had 1,303 employees. The Company considers its employee relations to be good. No employees are represented
by a collective bargaining agreement.

Web Site Access to Reports

The Company files annual, quarterly and special reports; proxy statements; and other information with the U.S. Securities and Exchange Commission
("SEC") under the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"). Any document the Company files may be read at the SEC's public reference room, Room 1580 at
100 F Street, NE, Washington, D.C. 20549. Please call the SEC toll-free at 1-800-SEC-0330 for information regarding its public reference room.
The Company files information electronically with the SEC. The Company's SEC filings are available from the SEC's Web site atwww.sec.gov. Reports,
proxy and information statements, and other information regarding issuers that file electronically are readily obtainable there.

Stockholders,
securities analysts and others seeking information about the Company's business operations and financial performance can receive copies of its 2008 Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other documents filed with the SEC,
without charge, by contacting the Company's Corporate Secretary's office at (818) 223-7500; by writing to The Ryland Group, Inc., Investor Relations, 24025 Park Sorrento,
Suite 400, Calabasas, California 91302; or via e-mail atinvestors@ryland.com. In addition, all filings with the SEC, news releases
and quarterly earnings announcements, including live audio and replays of the most recent quarterly earnings conference calls, can be accessed free of charge on the Company's Web site at www.ryland.com.
Information on the Company's Web site is not part of this report. The Company makes its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act available on its Web site as soon as possible after it electronically files such material with, or furnishes it to, the SEC. To retrieve any of this information, visit www.ryland.com,
select "Investors" and scroll down the page to "SEC Filings." The Company uses its Web site as one method for distributing information about the Company to the securities marketplace.

Item 1A.    Risk Factors

The homebuilding industry is cyclical in nature and has experienced downturns, which have in the past and may in the future cause the Company to incur losses in financial
and operating results.

The Company is affected by the cyclical nature of the homebuilding industry which is sensitive to many factors, including fluctuations in general and
local economic conditions, interest rates, housing demand, employment levels, levels of new and existing homes for sale, demographic trends, availability of homeowner financing and levels of consumer
confidence. In 2008, the markets served by the Company and the U.S. homebuilding industry as a whole continued to experience a significant and sustained decrease in demand for new homes and an
oversupply of new and existing homes available for sale. The homebuilding industry has been impacted by lack of consumer confidence, housing affordability and large supplies of resale and new home
inventories which has resulted in an industry-wide softening of demand for new homes. In addition, an oversupply of alternatives to new homes, such as rental properties and existing homes,
has depressed prices and reduced margins for the sale of new homes. These trends resulted in overall fewer home sales, greater cancellations of home purchase agreements by buyers, higher inventories
of unsold homes and the increased use by homebuilders of discounts, incentives, price concessions and other marketing efforts to close home sales in 2008 compared to the past several years. Reflecting
these demand and supply trends, the Company experienced a large drop in net orders, a decline in the selling price of new homes sold and a reduction in margins in 2008 relative to prior years. The
Company cannot predict how long these market conditions will continue and what affect they might have on the Company's financial and operating performance.

Because almost all of the Company's homebuyers finance the purchase of their homes, the terms and availability of mortgage financing can affect the demand for and the
ability to complete the purchase of a home as well as the Company's future operating and financial results.

The Company's business and earnings depend on the ability of its homebuyers to obtain financing for the purchase of their homes. Many of the
Company's homebuyers must sell their existing homes in order to buy a home from the Company. During 2008, the mortgage lending industry experienced significant instability due to, among other things,
defaults on subprime loans and a resulting decline in the market value of such loans. In light of these developments, lenders, investors, regulators and other third parties questioned the adequacy of
lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to tightened credit requirements and reduced

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liquidity.
Deterioration in credit quality among subprime and other nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not conform to
Fannie Mae, Freddie Mac, FHA or
VA standards. Fewer loan products and tighter loan qualifications in turn make it more difficult for some categories of borrowers to finance the purchase of new homes or the purchase of existing homes
from potential move-up buyers who wish to purchase one of the Company's homes. In general, these developments have resulted in a reduction in demand for the homes sold by the Company and
have delayed any general improvement in the housing market. Furthermore, they have resulted in a reduction in demand for the mortgage loans that the Company originates through RMC. If the Company's
potential homebuyers or the buyers of the homebuyers' existing homes cannot obtain suitable financing, the result will have an adverse effect on the Company's operating and financial results and
performance.

The Company is subject to inventory risk for its land, options for land, building lots and housing inventory.

The market value of the Company's land, building lots and housing inventories fluctuates as a result of changing market and economic conditions. In
addition, inventory carrying costs can result in losses in poorly performing projects or markets. Changes in economic and market conditions have caused the Company to dispose of land, options for land
and housing inventories on a basis that has resulted in a loss and required the Company to write down or reduce the carrying value of its inventory. During the 12-month period ended
December 31, 2008, the Company decided not to pursue development and construction in certain areas where it held land or had made option deposits, which resulted in $22.5 million in
recorded write-offs of option deposits and preacquisition costs. In addition, market conditions led to recorded land-related impairments on communities and land in the
aggregate amount of $257.4 million during the same period. The Company can provide no assurance that it will not need to record additional write-offs in the future.

In
the course of its business, the Company makes acquisitions of land. Although it employs various measures, including its land approval process and continued review by senior management designed to
manage inventory risks, the Company cannot assure that these measures will enable it to avoid or eliminate its inventory risk.

Construction costs can fluctuate and impact the Company's margins.

The homebuilding industry has from time to time experienced significant difficulties, including: shortages of qualified trades people; reliance on
local subcontractors who may be inadequately capitalized; shortages of materials; and volatile increases in the cost of materials, particularly increases in the price of lumber, drywall and cement,
which are significant components of home construction costs. The Company may not be able to recapture increased costs by raising prices either because of market conditions or because it fixes its
prices at the time home sales contracts are signed.

Fluctuations in interest rates can affect the Company's business and profitability.

Interest rates can significantly affect the Company's lines of business. Higher interest rates affect the ability of buyers to qualify for mortgage
financing and decrease demand for new homes. As a result, rising interest rates can decrease the Company's home sales and mortgage originations. Any of these factors could have an adverse impact on
the Company's results of operations or financial position.

Because the homebuilding industry is competitive, the business practices of other homebuilders can have an impact on the Company's financial results and cause these results
to decline.

The residential housing industry is highly competitive. The Company competes in each of its markets with a large number of national, regional and
local homebuilding companies. In 2008, this competition caused the Company to adjust selling prices in response to competitive conditions in the markets in which it operates and required the Company
to increase selling incentives. We cannot predict whether these measures will be successful or if additional incentives will be made in the future. The Company also competes with other housing
alternatives, including existing homes and rental housing. Principal competitive factors in homebuilding are home price, availability of customer financing, design, quality, reputation, relationship
with developers, accessibility of subcontractors, and availability and location of homesites. Any of the foregoing factors could have an adverse impact on the Company's financial performance and
results of operations.

The
Company's financial services segment competes with other mortgage bankers to arrange financing for homebuyers. Principal competitive factors include interest rates, fees and other features of
mortgage loan products available to the consumer.

Because the Company's business is subject to various regulatory and environmental limitations, it may not be able to conduct its business as planned.

The Company's homebuilding segments are subject to various local, state and federal laws, statutes, ordinances, rules and regulations concerning
zoning, building design, construction, stormwater permitting and discharge and similar matters, as well as open space, wetlands and environmentally protected areas. These include local regulations
that impose restrictive

10

---



zoning
and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area, as well as other municipal or city land planning restrictions,
requirements or limitations. The Company may also experience periodic delays in homebuilding projects due to regulatory compliance, municipal appeals and other government planning processes in any of
the areas in which it operates.

With
respect to originating, processing, selling and servicing mortgage loans, the Company's financial services segment is subject to the rules and regulations of the FHA, FHLMC, FNMA, VA and U.S.
Department of Housing and Urban Development. Mortgage origination activities are further subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and their associated regulations. These and other federal and state statutes and regulations, prohibit discrimination and establish underwriting guidelines which
include provisions for audits, inspections and appraisals, require credit reports on prospective borrowers, fix maximum loan amounts and require the disclosure of certain information concerning credit
and settlement costs. The Company is required to submit audited financial statements annually, and each agency or other entity has its own financial requirements. The Company's affairs are also
subject to examination by these entities at all times to assure compliance with applicable regulations, policies and procedures.

The Company's ability to grow the business and operations of the Company depends to a significant degree upon the Company's ability to access capital on favorable terms.

The ability to access capital on favorable terms is an important factor in growing the Company's business and operations in a profitable manner. In
December 2007, Moody's lowered the Company's debt rating to non-investment grade with a negative outlook, and Standard & Poor's also reduced the Company's investment grade rating to
non-investment grade in May 2008. The Company has received additional downgrades from these agencies and remains on negative watch. The loss of an investment grade rating affects the cost of
borrowing, capacity and covenants under the Company's revolving credit facility, and makes it more difficult and costly for the Company to access the debt capital markets for funds that may be
required to implement the Company's business plans and achieve growth objectives.

Natural disasters may have a significant impact on the Company's business.

The climates and geology of many of the states in which the Company operates present increased risks of natural disasters. To the extent that
hurricanes, severe storms, tornadoes, earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, its business in those states may be adversely affected.

The Company's net operating loss carryforwards could be substantially limited if it experiences an ownership change as defined in the Internal Revenue Code.

The Company has experienced and continue to experience substantial operating losses, including realized losses for tax purposes from sales of
inventory and land previously written down for financial statement purposes, which would produce net operating losses and unrealized losses that may reduce potential future federal income tax
obligations. It may also generate net operating loss carryforwards in future years.

Section 382
of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50.0
percent of its stock over a three-year period, to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the ownership change. These
rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5.0 percent or more of the stock of a company and any change in ownership arising from
a new issuance of stock by the company.

If
the Company undergoes an ownership change for purposes of Section 382 as a result of future transactions involving its common stock, including purchases or sales of stock between
5.0 percent stockholders, the Company's ability to use its net operating loss carryforwards and to recognize certain built-in losses would be subject to the limitations of
Section 382. Depending on the resulting limitation, a significant portion of the Company's net operating loss carryforwards could expire before it would be able to use them. The Company's
inability to utilize its net operating loss carryforwards could have a negative impact on its financial position and results of operations.

11

---



In
December 2008, the Company announced that its Board of Directors adopted a stockholder rights plan designed to preserve stockholder value and the value of certain tax assets primarily associated
with net loss carryforwards and built in losses under Section 382 of the Internal Revenue Code. The Company can provide no assurance that the rights plan will protect the Company's ability to
use its net operating losses and unrealized losses to reduce potential future federal income tax obligations. (See Note H, "Employee Incentive, Stock and Shareholder Rights Plans.")

Because this report contains forward-looking statements, it may not prove to be accurate.

This report and other Company releases and filings with the SEC may contain forward-looking statements. The Company generally identifies
forward-looking statements using words like "believe," "intend," "expect," "may," "should," "plan," "project," "contemplate," "anticipate," "target," "estimate," "foresee," "goal," "likely," "will" or
similar statements. Because these statements reflect its current views concerning future events, they involve risks, uncertainties and assumptions, including the risks and uncertainties identified in
this report. Actual results may differ significantly from the results discussed in these forward-looking statements. The Company does not undertake to update its forward-looking statements or risk
factors to reflect future events or circumstances.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

The Company leases office space for its corporate headquarters in Calabasas, California and for its IT Department and RMC's operations center in
Scottsdale, Arizona. In addition, the Company leases office space in the various markets in which it operates.

Item 3.    Legal Proceedings

Contingent liabilities may arise from obligations incurred in the ordinary course of business or from the usual obligations of on-site
housing producers for the completion of contracts.

The
Company is party to various other legal proceedings generally incidental to its businesses. Based on evaluation of these matters and discussions with counsel, management believes that liabilities
arising from these matters will not have a material adverse effect on the financial condition of the Company.

Item 4.    Submission of Matters to a Vote of Security Holders

During the fourth quarter of the fiscal year ended December 31, 2008, there were no matters submitted to a vote of security holders.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
               Securities

Market for Common Equity, Common Stock Prices and Dividends

The Company 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 12, 2009 was $17.49, and there were approximately 2,087 common stockholders of record.

The
table below presents high and low market prices and dividend information for the Company.

2008


HIGH


LOW


DIVIDENDS
DECLARED
PER SHARE

2007


HIGH


LOW


DIVIDENDS
DECLARED
PER SHAREFirst quarter

$
35.64

$
20.25

$
0.12

First quarter

$
60.13

$
41.96

$
0.12Second quarter


37.85


21.81


0.12

Second quarter


48.61


37.22


0.12Third quarter


30.00


18.11


0.12

Third quarter


39.33


20.19


0.12Fourth quarter


27.75


9.95


0.03

Fourth quarter


29.67


19.51


0.12


12

---



Issuer Purchases of Equity Securities

The Company did not purchase any of its own equity securities during the year ended December 31, 2008.

On
December 6, 2006, the Company announced that it had received authorization from its Board of Directors to purchase shares totaling $175.0 million, or approximately 3.1 million
shares, based on the Company's stock price on that date. During 2007, approximately 747,000 shares had been repurchased in accordance with this authorization. At December 31, 2008, there were
approximately 8.1 million additional shares available for purchase in accordance with this authorization based on the Company's stock price on that date. This authorization does not have an
expiration date.

Performance Graph

The following performance graph and related information shall not be deemed "soliciting material" or be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such
filing.

The
following graph compares the Company's cumulative total stockholder returns since December 31, 2003 to the Dow Jones U.S. Home Construction and S&P 500 indices for the calendar years
ending December 31:

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*Among The Ryland Group, Inc., The S&P 500 Index
And The Dow Jones U.S. Home Construction Index

GRAPHIC



Securities Authorized for Issuance Under Equity Compensation Plans

The Company's equity compensation plan information as of December 31, 2008, is summarized as follows:

PLAN CATEGORY

NUMBER OF SECURITIES TO
BE ISSUED UPON EXERCISE
OF OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS

WEIGHTED-AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
EQUITY COMPENSATION
PLANS (EXCLUDING
SECURITIES REFLECTED IN
COLUMN (a))(a)

(b)

(c)Equity compensation plans approved by stockholders

4,134,903

$    37.97

2,518,606Equity compensation plans not approved by stockholders1








13

---





Item 6.    Selected Financial Data

(in millions, except per share data) unaudited


2008


2007


2006


2005


2004ANNUAL RESULTSREVENUESHomebuilding

$
1,912

$
2,960

$
4,654

$
4,726

$
3,867Financial services


64


92


126


117


107TOTAL REVENUES


1,976


3,052


4,780


4,843


3,974Cost of sales


2,003


3,034


3,640


3,538


2,970(Earnings) loss from unconsolidated joint
ventures


44











(6
)Selling, general and administrative


334


438


565


576


489Expenses related to early retirement of debt


1





8


8


Earnings (loss) before taxes


(406
)

(420
)

567


721


521Tax expense (benefit)


(9
)

(86
)

207


274


201NET EARNINGS (LOSS)

$
(397
)
$
(334
)
$
360

$
447

$
320YEAR-END POSITIONASSETSCash and cash equivalents

$
423

$
244

$
215

$
461

$
88Housing inventories


1,096


1,813


2,772


2,580


2,024Other assets


344


494


430


346


313TOTAL ASSETS


1,863


2,551


3,417


3,387


2,425LIABILITIESDebt


790


839


950


922


559Other liabilities and minority interest


348


587


956


1,089


809TOTAL LIABILITIES


1,138


1,426


1,906


2,011


1,368STOCKHOLDERS' EQUITY

$
725

$
1,125

$
1,511

$
1,376

$
1,057PER COMMON SHARE DATANET EARNINGS (LOSS)Basic

$
(9.33
)
$
(7.92
)
$
8.14

$
9.52

$
6.72Diluted


(9.33
)

(7.92
)

7.83


9.03


6.36DIVIDENDS DECLARED

$
0.39

$
0.48

$
0.48

$
0.30

$
0.21STOCKHOLDERS' EQUITY

$
16.97

$
26.68

$
35.46

$
29.68

$
22.32OTHER FINANCIAL DATAAdjusted EBITDA1

$
33

$
260

$
744

$
814

$
604Adjusted EBITDA/interest incurred2


0.7
X

4.2
X

10.3
X

12.2
X

11.4
XReturn on beginning equity3


(35.3
)%

(22.1
)%

26.2
%

42.3
%

38.9
%Net debt-to-capital4


33.6
%

34.6
%

32.7
%

25.1
%

30.8
%


14

---



The following table sets forth the computation of Adjusted EBITDA for each period presented:

YEAR ENDED DECEMBER 31,(in thousands)


2008


2007


2006


2005


2004Earnings (loss) before taxes

$
(405,764
)
$
(420,098
)
$
567,108

$
721,051

$
521,212Inventory and other asset impairments and write-offs


325,480


583,363


81,314


3,798


1,588Interest expense


220


98


205


738


1,227Capitalized interest amortized to cost of sales


61,146


41,689


48,708


45,483


41,764Depreciation and amortization


52,215


54,494


46,731


43,166


38,519Adjusted EBITDA

$
33,297

$
259,546

$
744,066

$
814,236

$
604,310


A reconciliation of Adjusted 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)


2008


2007


2006


2005


2004Net cash provided by (used for) operating activities

$
248,426

$
228,140

$
14,637

$
216,264

$
(78,471
)(Decrease) increase in inventories


(383,237
)

(273,355
)

263,444


494,769


587,150Tax expense (benefit)


(9,179
)

(86,572
)

207,166


273,999


200,667Deferred tax valuation allowance


(143,784
)

(75,166
)







Interest expense


220


98


205


738


1,227Capitalized interest amortized to cost of sales


61,146


41,689


48,708


45,483


41,764Net change in other assets, payables and other liabilities


239,388


412,984


217,488


(175,358
)

(104,424
)Stock-based compensation expense


(9,048
)

(12,257
)

(25,593
)

(18,862
)

(15,208
)Excess tax benefit from exercise of stock options and vesting of restricted stock


3,138


6,714


14,632


(30,505
)

(17,475
)Other


26,227


17,271


3,379


7,708


(10,920
)Adjusted EBITDA

$
33,297

$
259,546

$
744,066

$
814,236

$
604,310


15

---





Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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 Exchange Act. 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:

Results of OperationsOverview

Operating conditions became progressively worse during 2008 as the economy's decline accelerated late in the year, extending the industry's downturn
which began in 2006. Since the latter half of 2007, a lack of availability of mortgage products resulting from an industry-wide increase in loan delinquency and foreclosure rates, as well
as the related tightening of credit standards, has impacted the housing industry and the Company's ability to attract qualified homebuyers. These factors have exacerbated already high inventory levels
of new and resale homes, increased cancellation levels and weakened consumer confidence. Demand pressure from foreclosures and unsettled credit markets continued through 2008 while rising unemployment
and declining consumer confidence slowed the decline in existing and new housing inventories. Consequently, the Company continued to report declines in the volume of homes sold, decreases in prices,
high sales contract cancellation rates and as a result, recorded additional valuation adjustments. In an effort to compensate for these developments, it has continued its operating strategy, focusing
on cash generation and debt reduction through increased sales price discounts and other incentives; opportunistic land sales; monetization of its deferred tax assets through consummation of
transactions creating loss carrybacks to 2006; reductions in excess inventory and existing commitments to purchase land through contract renegotiations and cancellations; controlled development
spending; renegotiations of contracts with subcontractors and suppliers; reductions in overhead expense to more closely match projected volume levels; and repayment or repurchase of debt at a
discount. As a result, the Company operated from 31.6 percent fewer active communities in 2008 than in 2007, and its inventory of lots controlled as of December 31, 2008 was down
41.0 percent from a year ago. The Company believes that access to traditional capital will be constrained in the early stages of a recovery and that lenders will migrate to homebuilders with
the strongest balance sheets. To insure that the Company participates in the initial stages of a recovery, it has formed a limited liability company with Oaktree Capital, the purpose of which will be
to jointly acquire and develop distressed and other residential real estate assets. The Company believes that its cash balances, low net debt-to-capital ratio, manageable
inventory pipelines, and early access to liquidity and land will allow it to ultimately take advantage of opportunities that may arise facilitating accelerated growth and market share as conditions
improve.

16

---



Due
to increased price reductions and sales incentives, evaluation of the Company's inventory through quarterly impairment analyses during 2008 resulted in $257.4 million of inventory valuation
adjustments. Charges of $22.5 million related to the abandonment of land purchase option contracts reflect the deterioration of specific related returns and the assumption that recent price
reductions are indicative of price levels for the foreseeable future. In addition, the Company recorded valuation allowances totaling $143.8 million against its deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." These assets were largely the result of inventory impairments taken
during the year and reflect uncertainty with regard to the duration of current conditions in housing markets. Should the Company generate significant taxable income in future years, it will reverse
the allowance in the form of a lower effective income tax rate. Additionally, the Company evaluated the recoverability of its goodwill, which resulted in a $2.8 million impairment charge during
2008. There was no remaining goodwill at December 31, 2008.

For
the year ended December 31, 2008, the Company reported a consolidated net loss of $396.6 million, or $9.33 per diluted share, compared to a net loss of $333.5 million,
or $7.92 per diluted share, for 2007 and earnings of $359.9 million, or $7.83 per diluted share, for 2006. The decrease in earnings over the past two years was due to a decline in revenues,
inventory valuation adjustments and other write-offs resulting from deteriorating market conditions, as well as from a more competitive sales environment in most markets.

Total
revenues were $2.0 billion for the year ended December 31, 2008, compared to $3.1 billion for the same period in 2007, a decrease of $1.1 billion, or
35.2 percent. This decrease was primarily due to a decline in closings, average closing price and mortgage originations. Total revenues for 2007 decreased from 2006 levels by
$1.7 billion, or 36.2 percent, primarily due to a decline in closing volume, average closing price and mortgage originations. Homebuilding pretax operating margins were negative
20.2 percent for 2008, compared to negative 14.4 percent for 2007 and 12.3 percent for 2006. The decreases in margins were primarily due to increased price concessions and sales
incentives in most markets, as well as to inventory and other valuation adjustments and write-offs.

Adjusted
EBITDA was $33.3 million for the year ended December 31, 2008, compared to $259.5 million and $744.1 million for the same periods in 2007 and 2006, respectively.
The Company's ratio of Adjusted EBITDA to interest incurred was 0.7 for the year ended December 31, 2008, compared to 4.2 for 2007 and 10.3 for 2006. In an effort to position itself for
competitive industry conditions in 2009, the Company generated cash flow from its operations, in part, by reducing land acquisitions, development activity and its obligations to take down land in the
future. At December 31, 2008, it had 16,345 fewer lots under control, or a 41.0 percent decrease from year-end 2007.

Consolidated
inventories owned by the Company, which include homes under construction; land under development and improved lots; and inventory held-for-sale, declined
37.8 percent to $1.1 billion at December 31, 2008, from $1.7 billion at December 31, 2007. Homes under construction decreased by 35.3 percent to
$464.8 million at December 31, 2008, compared to $718.0 million at December 31, 2007. Land under development and improved lots decreased by 42.4 percent to
$547.3 million at December 31, 2008, compared to $949.7 million at December 31, 2007. Inventory held-for-sale decreased 0.4 percent and totaled
$69.0 million at December 31, 2008, compared to $69.2 million at December 31, 2007.

The
Company's balance sheet continues to reflect its conservative strategy and transparency. The Company ended the year with $423.3 million in cash, $160.7 million in current taxes
receivable, no borrowings against its revolving credit facility and no debt maturities until 2012. In January 2009, it gained access to additional capital through the formation of a joint venture for
the acquisition and development of new projects. The Company was not a significant participant in offbalance sheet financing outside of traditional option contracts with land developers,
and its investments in joint ventures at December 31, 2008, was not significant. The Company's net debt-to-capital ratio was 33.6 percent at December 31,
2008, compared to 34.6 percent and 32.7 percent for the same periods in 2007 and 2006, respectively. As a result of the revaluation of a significant portion of inventory and deferred tax
assets, and balancing of cash flow with inventory management and leverage objectives,
stockholders' equity per share declined by 36.4 percent to $16.97 in 2008, compared to $26.68 in 2007 and $35.46 in 2006. The Company's book value at December 31, 2008, was
100.0 percent tangible.

17

---



Homebuilding Overview

The combined homebuilding operations reported pretax losses of $385.9 million and $425.0 million for 2008 and 2007, respectively,
compared to earnings of $573.1 million for 2006. Homebuilding results in 2008 improved from 2007 primarily due to lower inventory valuation adjustments and write-offs, partially
offset by a decline in closings and margins and higher losses from land sales. Homebuilding results in 2007 decreased from 2006 due to a decline in closings and margins and to the impact of inventory
valuation adjustments and write-offs.

STATEMENTS OF EARNINGS

YEAR ENDED DECEMBER 31,(in thousands, except units)


2008


2007


2006REVENUESHousing

$
1,856,647

$
2,937,435

$
4,545,594Land and other


54,984


22,759


108,326TOTAL REVENUES


1,911,631


2,960,194


4,653,920EXPENSESCost of salesHousing


1,642,389


2,434,774


3,481,882Land and other


80,833


20,589


83,536Valuation adjustments and write-offs


280,120


578,778


74,397Total cost of sales


2,003,342


3,034,141


3,639,815(Earnings) loss from unconsolidated joint ventures


43,900


(342
)

260Selling, general and administrative


250,278


351,376


440,702TOTAL EXPENSES


2,297,520


3,385,175


4,080,777PRETAX EARNINGS (LOSS)

$
(385,889
)
$
(424,981
)
$
573,143Closings (units)


7,352


10,319


15,392Housing gross profit margins


(3.2
)%

(0.4
)%

21.8
%Selling, general and administrative expense


13.1
%

11.9
%

9.5
%


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 orders
decreased $953.0 million, or 39.2 percent, to $1.5 billion for the year ended December 31, 2008, from $2.4 billion for the year ended December 31, 2007. The
dollar value of new orders declined by 24.3 percent to $2.4 billion in 2007 from $3.2 billion for the same period in 2006. This decrease in new orders was primarily attributable
to the softening of demand and to the higher existing and new home inventory levels in most markets that reflected a deteriorating economic environment. Additionally, market uncertainty and heightened
price competition among homebuilders led to rising cancellation rates by homebuyers and were a major factor in these declines. Cancellation rates totaled 35.0 percent, 37.0 percent and
37.1 percent for the years ended December 31, 2008, 2007 and 2006, respectively.
Unit orders decreased 32.7 percent to 6,042 new orders in 2008, compared to 8,982 new orders in 2007. Unit orders declined 19.3 percent to 8,982 new orders in 2007, compared to 11,134
new orders in 2006.

Homebuilding
revenues fell 35.4 percent for 2008, compared to 2007, due to a 28.8 percent decrease in closings and an 11.6 percent decrease in average closing price. As a
result of these same market trends, homebuilding revenues fell 36.4 percent for 2007, compared to 2006, due to a 33.0 percent decrease in closings and a 3.4 percent decrease in
average closing price.

In
order to manage risk and return of land investments, match land supply with anticipated volume levels and monetize marginal land positions through the carryback of tax losses, the Company executed
several land and lot sales during the year. Homebuilding revenues for the year ended December 31, 2008, included $55.0 million from land and lot sales, compared to $21.2 million
for 2007 and $94.3 million for 2006, which contributed a net loss of $25.8 million to pretax losses in 2008, compared to net gains of $2.2 million and $24.8 million to
pretax earnings in 2007 and 2006, respectively. Housing gross profit margins averaged negative 3.2 percent for 2008, a decrease from negative 0.4 percent for 2007 and 21.8 percent
for 2006. The decline in 2008 was primarily attributable to increased price concessions and sales incentives, as well as to price reductions that related to home deliveries. Housing gross profit
margins, excluding inventory and joint venture valuation adjustments and write-offs, were 11.6 percent, 17.1 percent and 23.4 percent for the years ended
December 31, 2008, 2007 and 2006, respectively. Gross profit margins from land sales were negative 47.0 percent for December 31, 2008, compared to 10.3 percent and
26.3 percent for the years ended December 31, 2007 and 2006, respectively. Price concessions and sales incentives, as a percentage of revenues, totaled 15.0 percent,
12.1 percent and 7.1 percent for the years ended December 31, 2008, 2007 and 2006, respectively. The effect of price declines, valuation

18

---



adjustments
and write-offs was partially offset by the amortization of valuation allowances based on home closings, which impacted housing gross profit margins by 6.7 percent,
1.7 percent and 0.1 percent for the years ended December 31, 2008, 2007 and 2006, respectively.

In
accordance with Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," inventory is reviewed
for potential write-downs on an ongoing basis. SFAS 144 requires that, in the event that impairment indicators are present, impairment charges are required to be recorded if the fair value of
such assets is less than their carrying amounts. For inventory held and used, undiscounted cash flow projections are generated at a community level based on estimates of revenues, costs and other
factors. The Company's analysis of these communities generally assumes current revenues equal to current sales orders for particular or comparable communities. The Company's determination of fair
value is primarily based on discounting the estimated cash flows at a rate commensurate with inherent risks that are associated with assets and related estimated cash flow streams. When determining
the value of inventory held-for-sale, the Company considers recent offers, comparable sales and/or estimated cash flows. Valuation adjustments are recorded against homes
completed or under construction, land under development and improved lots when events or circumstances indicate that the carrying values are greater than the fair values. Due to continued pressure on
home prices symptomatic of excess home inventories in many markets, the Company recorded inventory impairment charges of $257.4 million, $504.0 million and $62.9 million during
the years ended December 31, 2008, 2007 and 2006, respectively, in order to reduce the carrying value of the impaired communities to their estimated fair value. Approximately 92 percent
of these impairment charges were recorded to residential land and lots and land held for development, while approximately 8 percent of these charges were recorded to residential construction in
progress and finished homes in inventory. At December 31, 2008, the fair value of the Company's inventory subject to valuation adjustments of $257.4 million during the year, net of
impairments, was $222.8 million. There were 112 communities with write-downs in 2008, compared to 101 communities in 2007. Inventory and other impairment charges and write-offs of
deposits and acquisition costs reduced total housing gross profit margins by 14.8 percent in 2008, 17.5 percent in 2007 and 1.6 percent in 2006. Should market conditions
deteriorate or costs increase, it is possible that the Company's estimates of undiscounted cash flows from its communities could decline, resulting in additional future inventory impairment charges.

The
Company periodically writes off earnest money deposits and feasibility costs related to land and lot option contracts that it no longer plans to pursue. During the year ended December 31,
2008, the Company wrote off $21.7 million of earnest money deposits and $795,000 of feasibility costs. For the same period in 2007, write-offs of earnest money deposits and
feasibility costs related to land purchase option contracts that the Company would not pursue were $72.6 million and $4.6 million, respectively. For the same period in 2006,
write-offs of earnest money deposits and feasibility costs were $10.9 million and $6.9 million, respectively. Should weak homebuilding market conditions persist and the
Company be unsuccessful in its efforts to renegotiate certain land option purchase contracts, it may write off additional earnest money deposits and feasibility costs in future periods.

Selling,
general and administrative expenses, as a percentage of revenue, were 13.1 percent for 2008, 11.9 percent for 2007 and 9.5 percent for 2006. The percentage increase for
2008, compared to 2007, was mainly attributable to a decline in revenues, as well as to severance, relocation, model abandonment and goodwill impairment costs and charges that collectively totaled
$25.9 million, partially offset by lower marketing and advertising costs per unit. Excluding these costs, selling, general and administrative expenses, as a percentage of revenue, were
11.7 percent, 11.0 percent and 9.4 percent for the years ended December 31, 2008, 2007 and 2006, respectively. Exclusive of the aforementioned one-time charges,
the percentage increase for 2007, compared to 2006, was mainly attributable to lower overhead leverage due to lower volume levels and to higher marketing and advertising costs per unit, partially
offset by reduced incentive compensation expense. Selling, general and administrative expense dollars decreased $101.1 million for the year ended December 31, 2008, versus the same
period in 2007, and $89.3 million for the year ended December 31, 2007, versus the same period in 2006.

Interest,
which was incurred principally to finance land acquisitions, land development and home construction, totaled $46.9 million, $62.0 million and $71.8 million in 2008, 2007
and 2006, respectively. In 2008, 2007 and 2006, the homebuilding segments capitalized all interest incurred, except $604,000 in charges related to the reduction of commitments for the Company's
revolving credit facility in 2008, due to continued development and construction activity. (See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies.")

19

---



Homebuilding Segment Information

The Company's homebuilding operations consist of four geographically determined regional reporting segments: North, Southeast, Texas and West.

Conditions
have continued to be most challenging in geographical areas that have previously experienced the highest price appreciation, such as the California, Chicago, Florida, Las Vegas, Phoenix and
Washington, D.C., markets. As a result of declining affordability, decreased demand and changes in buyer perception, the excess supply of housing inventory has been greater in these areas. In an
attempt to maintain market share and reduce inventory investment to better match current sales volume levels, the Company has increased its use of sales discounting and incentives. As a result, it had
to take additional inventory impairment charges in many markets. Of the Company's total lots or homes with valuation adjustments during 2008, 28.9 percent of total lots were impaired in the
North, 21.4 percent in the Southeast, 2.7 percent in Texas and 47.0 percent in the West.

The
following table provides a summary of the Company's inventory and other impairments taken for the years ended December 31, 2008, 2007 and 2006:

(in thousands)


2008


2007


2006NORTHInventory valuation adjustments

$
99,037

$
86,957

$
3,694Option deposit and feasibility cost write-offs


4,906


27,337


3,853Joint venture and other* impairments


35,903





71Total


139,846


114,294


7,618SOUTHEASTInventory valuation adjustments


74,813


112,721


1,789Option deposit and feasibility cost write-offs


5,834


25,250


5,868Joint venture and other* impairments


3,390


2,073


438Total


84,037


140,044


8,095TEXASInventory valuation adjustments


11,126


2,744


100Option deposit and feasibility cost write-offs


11,319


775


248Joint venture and other* impairments


227


31


Total


22,672


3,550


348WESTInventory valuation adjustments


72,413


301,533


57,327Option deposit and feasibility cost write-offs


392


23,805


7,886Joint venture and other* impairments


8,922


15,520


40Total


81,727


340,858


65,253TOTALInventory valuation adjustments


257,389


503,955


62,910Option deposit and feasibility cost write-offs


22,451


77,167


17,855Joint venture and other* impairments


48,442


17,624


549Total

$
328,282

$
598,746

$
81,314


New Orders

New order dollars decreased 39.2 percent for the year ended December 31, 2008, compared to 2007. New orders for 2008 decreased
29.1 percent in the North, 33.4 percent in the Southeast, 27.9 percent in Texas and 44.1 percent in the West. New orders for 2007 decreased 16.4 percent in the
North, 22.2 percent in the Southeast, 27.1 percent in Texas and 4.6 percent in the West. In 2008 and 2007, the decline in new orders was primarily due to a softening of demand and
consumer confidence; rising levels of foreclosures and overall housing inventory; increasing competition for a diminished number of buyers; and declining community counts resulting from project
abandonment and low land acquisition activity in most markets. The cancellation rate was 35.0 percent for the year ended December 31, 2008, versus 37.0 percent and
37.1 percent for 2007 and 2006, respectively.

20

---



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, the
Company 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. However, historical results
are not necessarily indicative of current or future homebuilding activities.

The
following table is a summary of the Company's new orders (units and aggregate sales value) for the years ended December 31, 2008, 2007 and 2006:

2008


% CHG


2007


% CHG


2006


% CHGUNITSNorth


1,770


(29.1
)%

2,496


(16.4
)%

2,987


(31.1
)%Southeast


1,640


(33.4
)

2,461


(22.2
)

3,164


(43.8
)Texas


1,701


(27.9
)

2,359


(27.1
)

3,237


(12.6
)West


931


(44.1
)

1,666


(4.6
)

1,746


(54.7
)Total


6,042


(32.7
)%

8,982


(19.3
)%

11,134


(36.4
)%DOLLARS(in millions)North

$
471


(38.5
)%
$
765


(21.1
)%
$
970


(28.4
)%Southeast


403


(38.4
)

653


(29.1
)

921


(43.2
)Texas


368


(25.5
)

494


(24.3
)

653


(3.9
)West


235


(54.6
)

518


(22.2
)

666


(55.0
)Total

$
1,477


(39.2
)%
$
2,430


(24.3
)%
$
3,210


(37.5
)%


The following table provides the Company's cancellation percentages for the years ended December 31, 2008, 2007 and 2006:

YEAR ENDED DECEMBER 31,2008


2007


2006North


36.1
%

34.8
%

31.5
%Southeast


32.0


39.7


39.0Texas


33.4


35.1


32.2West


40.1


38.3


48.3Total


35.0
%

37.0
%

37.1
%


The cancellation rate for the year ended December 31, 2008, was 35.0 percent, compared to 37.0 percent and 37.1 percent for the
years ended 2007 and 2006, respectively.

Closings

The following table provides the Company's closings and average closing prices for the years ended December 31, 2008, 2007 and 2006:

2008


% CHG


2007


% CHG


2006


% CHGUNITSNorth


2,162


(19.5
)%

2,687


(25.4
)%

3,604


(17.5
)%Southeast


2,187


(30.7
)

3,154


(38.5
)

5,126


4.9Texas


1,908


(29.4
)

2,703


(23.8
)

3,546


5.4West


1,095


(38.3
)

1,775


(43.0
)

3,116


(23.1
)Total


7,352


(28.8
)%

10,319


(33.0
)%

15,392


(7.7
)%AVERAGE PRICE(in thousands)North

$
281


(11.6
)%
$
318


(0.6
)%
$
320


3.2
%Southeast


253


(13.4
)

292


(0.3
)

293


15.4Texas


216


2.9


210


8.8


193


9.0West


258


(23.0
)

335


(13.0
)

385


8.1Total

$
252


(11.6
)%
$
285


(3.4
)%
$
295


6.1
%


21

---



Outstanding Contracts

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, 2008, the Company had outstanding contracts for 1,559 units, representing a 45.7 percent decrease from year end 2007. The
$407.1 million value of outstanding contracts at December 31, 2008, represented a decrease of 48.2 percent from December 31, 2007, primarily due to a 32.7 percent
decline in unit orders. Average sales price decreases resulted primarily from slowing market trends, high inventory levels for new and resale housing, and a more competitive sales environment.

DECEMBER 31, 2008

DECEMBER 31, 2007

DECEMBER 31, 2006UNITS


DOLLARS(in millions)


AVERAGE
PRICE(in thousands)


UNITS


DOLLARS (in millions)


AVERAGE
PRICE (in thousands)


UNITS


DOLLARS (in millions)


AVERAGE
PRICE (in thousands)North


574

$
161

$
280


966

$
298

$
307


1,157

$
387

$
334Southeast


399


107


267


946


257


272


1,639


526


321Texas


469


111


238


676


155


230


1,020


228


224West


117


28


242


281


76


269


390


153


391Total


1,559

$
407

$
261


2,869

$
786

$
274


4,206

$
1,294

$
308


22

---



STATEMENTS OF EARNINGS

The
following summary provides results for the homebuilding segments for the years ended December 31, 2008, 2007 and 2006:

(in thousands)


2008


2007


2006NORTHRevenues

$
639,814

$
857,448

$
1,196,335ExpensesCost of sales


689,455


806,851


917,804(Earnings) loss from unconsolidated joint ventures


35,448


(902
)

Selling, general and administrative expenses


71,069


88,576


107,895Total expenses


795,972


894,525


1,025,699Pretax earnings (loss)

$
(156,158
)
$
(37,077
)
$
170,636Housing gross profit margins


(11.6
)%

5.9
%

23.7
%SOUTHEASTRevenues

$
558,194

$
929,168

$
1,522,123ExpensesCost of sales


577,451


886,763


1,128,636(Earnings) loss from unconsolidated joint ventures





(28
)

(215
)Selling, general and administrative expenses


76,192


101,852


140,582Total expenses


653,643


988,587


1,269,003Pretax earnings (loss)

$
(95,449
)
$
(59,419
)
$
253,120Housing gross profit margins


(0.1
)%

4.7
%

25.9
%TEXASRevenues

$
415,761

$
571,689

$
695,356ExpensesCost of sales


383,243


479,826


564,107(Earnings) loss from unconsolidated joint ventures


(289
)

(24
)

(104
)Selling, general and administrative expenses


52,635


64,789


71,499Total expenses


435,589


544,591


635,502Pretax earnings (loss)

$
(19,828
)
$
27,098

$
59,854Housing gross profit margins


8.8
%

16.1
%

18.5
%WESTRevenues

$
297,862

$
601,889

$
1,240,106ExpensesCost of sales


353,193


860,701


1,029,268(Earnings) loss from unconsolidated joint ventures


8,741


612


579Selling, general and administrative expenses


50,382


96,159


120,726Total expenses


412,316


957,472


1,150,573Pretax earnings (loss)

$
(114,454
)
$
(355,583
)
$
89,533Housing gross profit margins


(8.8
)%

(33.1
)%

16.8
%TOTALRevenues

$
1,911,631

$
2,960,194

$
4,653,920ExpensesCost of sales


2,003,342


3,034,141


3,639,815(Earnings) loss from unconsolidated joint ventures


43,900


(342
)

260Selling, general and administrative expenses


250,278


351,376


440,702Total expenses


2,297,520


3,385,175


4,080,777Pretax earnings (loss)

$
(385,889
)
$
(424,981
)
$
573,143Housing gross profit margins


(3.2
)%

(0.4
)%

21.8
%


Homebuilding Segments 2008 versus 2007

NorthHomebuilding revenues decreased by 25.4 percent to $639.8 million in 2008 from $857.4 million in 2007
primarily due to a 19.5 percent decline in the number of homes delivered and an 11.6 percent decrease in average closing price. Gross margins on home sales were negative
11.6 percent in 2008, compared to 5.9 percent in 2007. This decrease was primarily attributable to inventory and other valuation adjustments and write-offs of
$136.2 million, as well as to increased price concessions and sales incentives that totaled 18.6 percent in 2008, versus 13.2 percent in 2007. As a result, the North region
incurred $156.2 million of pretax losses in 2008, compared to $37.1 million of pretax losses in 2007.

23

---



SoutheastHomebuilding
revenues were $558.2 million in 2008, compared to $929.2 million in 2007, a decrease of 39.9 percent, primarily due to a 30.7 percent
decline in the number of homes delivered and a 13.4 percent decrease in average closing price. Gross margins on home sales were negative 0.1 percent in 2008, compared to
4.7 percent in 2007. This decrease was primarily attributable to inventory valuation adjustments and write-offs of $69.7 million, as well as to increased price concessions
and sales incentives that totaled 13.3 percent in 2008, versus 12.2 percent in 2007. In addition, selling, general and administrative costs were 13.6 percent of revenues in 2008,
compared
to 11.0 percent in 2007 due, in part, to a $2.8 million goodwill impairment charge. As a result, the Southeast region incurred $95.4 million of pretax losses in 2008, compared to
$59.4 million of pretax losses in 2007.

TexasHomebuilding
revenues decreased by 27.3 percent to $415.8 million in 2008 from $571.7 million in 2007 primarily due to a 29.4 percent decline in the
number of homes delivered, partially offset by a 2.9 percent increase in average sales price. Gross margins on home sales were 8.8 percent in 2008, compared to 16.1 percent in
2007. This decrease was primarily attributable to the mix of product delivered during the year, as well as to inventory valuation adjustments and write-offs of $21.9 million, and to
increased price concessions and sales incentives that totaled 9.6 percent of revenues in 2008, versus 7.4 percent in 2007. As a result, the Texas region incurred $19.8 million of
pretax losses in 2008, compared to $27.1 million of pretax earnings in 2007.

WestHomebuilding
revenues decreased by $304.0 million, or 50.5 percent, to $297.9 million in 2008, compared to $601.9 million in 2007, primarily due to a
38.3 percent decline in the number of homes delivered and to a 23.0 percent decrease in average closing price. Gross margins on home sales were negative 8.8 percent in 2008,
compared to negative 33.1 percent in 2007. This change was primarily attributable to lower inventory valuation adjustments and write-offs that totaled $46.7 million in 2008,
compared to $260.7 million in 2007, partially offset by a rise in price concessions and sales incentives that totaled 17.3 percent of revenues in 2008, compared to 14.7 percent in
2007. As a result, the West region incurred $114.5 million of pretax losses in 2008, compared to $355.6 million of pretax losses in 2007.

Homebuilding Segments 2007 versus 2006

NorthHomebuilding revenues decreased by 28.3 percent to $857.4 million in 2007 from $1.2 billion in 2006 primarily
due to a 25.4 percent decline in the number of homes delivered. Gross margins on home sales were 5.9 percent in 2007, compared to 23.7 percent in 2006. This decrease was primarily
attributable to inventory valuation adjustments and write-offs of $111.7 million, as well as to increased price concessions and sales incentives that totaled 13.2 percent of
revenues in 2007, versus 7.9 percent in 2006. As a result, the North region incurred $37.1 million of pretax losses in 2007, compared to $170.6 million of pretax earnings in 2006.

SoutheastHomebuilding
revenues were $929.2 million in 2007, compared to $1.5 billion in 2006, a decrease of 39.0 percent, primarily due to a 38.5 percent
decline in the number of homes delivered. Gross margins on home sales were 4.7 percent in 2007, compared to 25.9 percent in 2006. This decrease was primarily due to inventory valuation
adjustments and write-offs of $138.9 million, as well as to increased price concessions and sales incentives that totaled 12.2 percent of revenues in 2007, versus
5.6 percent in 2006. As a result, the Southeast region incurred $59.4 million of pretax losses in 2007, compared to $253.1 million of pretax earnings in 2006.

TexasHomebuilding
revenues decreased by 17.8 percent to $571.7 million in 2007 from $695.4 million in 2006 primarily due to a 23.8 percent decline in the
number of homes delivered, partially offset by an 8.8 percent increase in average sales price. Gross margins on home sales decreased to 16.1 percent in 2007, compared to
18.5 percent in 2006, primarily due to the mix of product delivered during the year, as well as to inventory valuation adjustments and write-offs of $3.2 million and
increased price concessions and sales incentives that totaled 7.4 percent of revenues in 2007, versus 6.3 percent in 2006. As a result, the Texas region generated $27.1 million of
pretax earnings in 2007, compared to $59.9 million of pretax earnings in 2006.

WestHomebuilding
revenues decreased $638.2 million, or 51.5 percent, to $601.9 million in 2007, compared to $1.2 billion in 2006, primarily due to a
43.0 percent decline in the number of homes delivered and to a 13.0
percent decrease in average closing price. Gross margins on home sales were negative 33.1 percent in 2007, compared to 16.8 percent in 2006. Gross margins on home sales decreased
in 2007 due to inventory valuation adjustments and write-offs of $260.7 million, as well as to increased price concessions and sales incentives that totaled 14.7 percent of
revenues in 2007, compared to 8.7 percent in 2006. In addition, selling, general and administrative costs were 16.0 percent of revenues in 2007, compared to 9.7 percent in 2006,
due to declining leverage, severance and relocation costs, and feasibility cost write-offs. As a result, the West region incurred $355.6 million of pretax losses in 2007, compared
with $89.5 million of pretax earnings in 2006.

24

---



Financial Services

The Company's financial services segment provides mortgage-related products and services, as well as title, escrow and insurance services, to its
homebuyers. By aligning its operations with the Company's homebuilding segments, the financial services segment leverages this relationship to offer its lending services to homebuyers. In addition to
being a valuable asset to customers, the financial services segment generates a profit for the Company. Providing mortgage financing and other services to its customers allows the Company to better
monitor its backlog and closing process. The majority of loans originated are sold within one business day of the date they close. The third party purchaser then services and manages the loans,
assuming nearly all of the credit risk of borrower default. The Company also provided construction-related insurance to subcontractors in its western markets through June 2008. Additionally, the
financial services segment also offers insurance for liability risks, specifically homeowners' structural warranty coverage, arising in connection with the homebuilding business of the Company.

STATEMENTS OF EARNINGS

YEAR ENDED DECEMBER 31,(in thousands, except units)


2008


2007


2006REVENUESNet gains on sales of mortgages

$
28,556

$
31,126

$
44,231Origination fees


16,997


25,678


39,589Title/escrow/insurance


17,440


33,734


41,086Interest and other


1,500


1,143


1,427TOTAL REVENUES


64,493


91,681


126,333EXPENSES


41,466


50,754


58,638PRETAX EARNINGS

$
23,027

$
40,927

$
67,695Originations(units)


5,634


7,653


11,744Ryland Homes origination capture rate


82.2
%

78.8
%

81.9
%Mortgage-backed securities and notes receivable average balance

$
370

$
446

$
1,707


In 2008, RMC's mortgage origination operations consisted primarily of mortgage loans originated in connection with the sale of the Company's homes. The number
of mortgage originations was 5,634 for 2008, compared to 7,653 for 2007 and 11,744 for 2006. During 2008, total dollar originations were $1.3 billion, of which 99.6 percent was for
purchases of homes built by the Company and the remaining amount was for either purchases of homes built by others, purchases of existing homes or refinancing of existing mortgage loans. The capture
rate of mortgages originated for customers of the Company's homebuilding operations was 82.2 percent in 2008, compared to 78.8 percent in 2007 and 81.9 percent in 2006.

The
financial services segment reported pretax earnings of $23.0 million for 2008, compared to $40.9 million for 2007 and $67.7 million for 2006. The decrease in 2008, compared to
2007, was primarily attributable to a 26.4 percent decline in the number of mortgages originated due to a slowdown in the homebuilding markets, a 10.1 percent decrease in average loan
size and a $2.5 million decline in sales of its insurance renewal rights in 2008, compared to 2007, partially offset by the recognition of a $1.7 million gain related to the 2008
implementation of Staff Accounting Bulletin No. 109 ("SAB 109"), "Written Loan Commitments Recorded at Fair Value Through Earnings," which requires that servicing rights related to
interest rate lock commitments be recorded at fair value. The decrease in 2007, compared to 2006, was primarily attributable to a 34.8 percent decline in the number of mortgages originated due
to a slowdown in the homebuilding markets, a decline in the availability of mortgage products and a 1.8 percent decrease in loan size, partially offset by a $4.4 million gain on the sale
of the segment's insurance renewal rights in 2007.

Revenues
for the financial services segment declined 29.7 percent to $64.5 million for 2008, compared to $91.7 million for 2007. The decrease was primarily attributable to a
26.4 percent decline in the number of mortgages originated and sold due to a slowdown in the homebuilding markets and to the midyear cessation of the subcontractor insurance program. In 2007,
revenues for the financial services segment declined 27.4 percent to $91.7 million from $126.3 million in 2006. The decrease in 2007, compared to 2006, was primarily attributable
to a 34.8 percent decline in the number of mortgages originated and sold due to a slowdown in the homebuilding markets.

25

---



General
and administrative expenses decreased to $41.5 million for the year ended December 31, 2008, from $50.8 million for the year ended December 31, 2007, primarily due
to personnel reductions made in an effort to align overhead with lower production volumes and lower reserves for the subcontractor insurance program that was terminated midyear, partially offset by an
increase of $3.7 million in indemnification expense. General and administrative expenses decreased for the year ended December 31, 2007, compared to 2006, primarily due to personnel
reductions made in an effort to align overhead with lower production volumes, partially offset by an increase of $1.6 million in mortgage indemnification expense.

In
2007, increased delinquencies of primarily "subprime" mortgages in secondary markets resulted in a significant decrease in the availability of these mortgage products. During 2008, RMC did not
originate mortgage loans that would be classified as "subprime" or "Alt-A." All of the mortgage loans originated by RMC during the year were either "government" or "prime" mortgage loans.
"Prime" mortgage loans are generally defined as agency loans (FNMA/FHLMC) and any nonconforming loans that would otherwise meet agency criteria. Generally, they are borrowers with FICO scores that
exceed 620. Approximately 86 percent of the mortgage loans originated by RMC during 2008 were sold to Countrywide Financial Corporation ("Countrywide") pursuant to their loan purchase agreement
with the Company. The remaining loans were sold to investors, such as U.S. Bank Corporation, CitiMortgage, Wells Fargo and Freddie Mac, or to specialized state bond loan programs. Except in rare
circumstances, RMC is not required to repurchase mortgage loans. Generally, the Company is required to indemnify Countrywide, or another investor to which mortgage loans are sold, if there are losses
due to origination errors caused by RMC, when it is shown that there has been undiscovered fraud on the part of the borrower, or if the borrower does not make his first payment. The Company paid
$3.2 million and $375,000 in indemnification expense during 2008 and 2007, respectively, and held reserves of $5.4 million and $2.7 million for future losses as of
December 31, 2008 and 2007, respectively.

Corporate

Corporate expenses were $42.3 million for 2008, $35.6 million for 2007 and $66.0 million for 2006. Corporate expenses for 2008,
compared to 2007, increased primarily due to a $5.7 million rise in losses within the market value of investments included in the Company's benefit plans. Corporate expenses for 2007, compared
to 2006, declined primarily due to lower incentive compensation expense that resulted from declining earnings and stock price.

In
2008, the Company recorded an expense of approximately $604,000 that was associated with the reduction of commitments for its revolving credit facility. In 2007, the Company recorded an aggregate
expense of approximately $490,000 that was associated with the early redemption of $100.0 million of its 5.4 percent senior notes due June 2008. The Company redeemed $75.0 million
and $25.0 million at stated call prices of 100.2 percent and 100.8 percent of the principal amount of the notes in August and December of 2007, respectively. In 2006, the Company
recorded an expense of $7.7 million that was associated with the early redemption of $150.0 million of its 9.1 percent senior subordinated notes due June 2011, of which it owned
$6.5 million, at a stated call price of 104.6 percent of the principal amount.

Investments in Joint Ventures

At December 31, 2008, the Company participated in six active joint ventures in the Austin, Chicago, Dallas, Denver and Orlando markets. These
joint ventures exist for the purpose of acquisition and co-development of land parcels and 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's investments
in its unconsolidated joint ventures totaled $12.5 million at December 31, 2008, compared to $30.8 million at December 31, 2007. The Company's
equity in losses from unconsolidated joint ventures in 2008 totaled $43.9 million, compared to earnings of $342,000 in 2007 and losses of $260,000 in 2006. (See "Investments in Joint Ventures"
within Note A, "Summary of Significant Accounting Policies.")

Income Taxes

The Company's provision for income tax presented an effective income tax benefit rate of 2.3 percent for the year ended December 31,
2008, compared to an effective income tax benefit rate of 20.6 percent for the same period in 2007 and an effective income tax provision rate of 36.5 percent for the same period in 2006.
The decrease in the effective tax rate for 2008, compared to 2007, was primarily due to noncash tax charges in 2008 totaling $143.8 million for the Company's valuation allowance related to its
deferred tax assets. The decrease in the effective tax rate for 2007, compared to 2006, was primarily due to a noncash tax charge of $75.2 million for a valuation allowance related to the
Company's deferred tax assets, in accordance with SFAS 109, and to the impact of lower pretax earnings for the year. (See Note G, "Income Taxes.")

26

---





Financial Condition and Liquidity

The Company has historically funded its homebuilding and financial services operations with cash flows from operating activities, borrowings under
its revolving credit facilities and the issuance of new debt securities. In light of market conditions in 2008, the Company continued its efforts toward generating cash, reducing debt levels and
strengthening its balance sheet by selling excess or marginal land inventory; monetizing tax losses; paying off a maturing senior note; terminating or renegotiating land option contracts;
consolidating or exiting underperforming markets; and downsizing and restructuring operating groups. As a result of this strategy, the Company lowered its total debt in 2008 by $48.7 million,
ending the year with $423.3 million in cash and cash equivalents and $160.7 million in current taxes receivable.

(in millions)


STOCKHOLDERS'
EQUITY


DEBT


NET
DEBT-TO-CAPITAL
RATIO2006

$
1,511

$
950


32.7
%2007

$
1,125

$
839


34.6
%2008

$
725

$
790


33.6
%


At December 31, 2008, the Company's net debt-to-capital ratio was 33.6 percent, a decrease from 34.6 percent at
December 31, 2007. This decrease was primarily due to debt repayments in 2008 and an increase in cash. The Company remains focused on maintaining its liquidity so that it can be flexible in
reacting to changing market conditions.

The
following table summarizes the Company's cash flow activities for the years ended December 31, 2008, 2007 and 2006:

(in thousands)


2008


2007


2006Operating activities

$
248,426

$
228,140

$
14,637Investing activities


(9,826
)

(31,397
)

(51,589
)Financing activities


(58,955
)

(168,166
)

(209,394
)Net increase (decrease) in cash and cash equivalents

$
179,645

$
28,577

$
(246,346
)


During 2008, the Company generated $248.4 million of cash from its operations. The Company invested $9.9 million in property, plant and equipment
and used $59.0 million in financing activities, including debt repayments of $70.8 million and dividends of $20.5 million, partially offset by borrowings of $22.1 million
from credit facilities. The net cash flow generated during the year ended December 31, 2008 was $179.6 million.

During
2007, the Company generated $228.1 million of cash from its operations. The Company invested $32.1 million in property, plant and equipment and used $168.2 million in
financing activities, including debt repayments of $111.0 million, stock repurchases of $59.3 million and dividends of $20.4 million. The net cash flow generated during the year
ended December 31, 2007 was $28.6 million.

During
2006, the Company generated $14.6 million of cash from its operations. The Company invested $53.8 million in property, plant and equipment and used $209.4 million in
financing activities, including net debt proceeds of $28.1 million, outflows for stock repurchases of $250.1 million and dividends of $21.7 million. The net cash used during the
year ended December 31, 2006 was $246.3 million.

During
the fourth quarter of 2008, the Board of Directors approved a reduction of the Company's common stock dividend by 75.0 percent to $0.03 per share from $0.12 per share in the previous
quarters. Dividends declared totaled $0.39, $0.48 and $0.48 per share for the annual periods ended December 31, 2008, 2007 and 2006, respectively.

Consolidated
inventories owned by the Company decreased by 37.8 percent to $1.1 billion at December 31, 2008, from $1.7 billion at December 31, 2007. The Company
attempts to maintain a projected four- to five-year supply of land. At December 31, 2008, it controlled 23,555 lots, with 19,239 lots owned and
4,316 lots, or 18.3 percent, under option. As a result of its efforts to match controlled inventory with current unit volume levels, lots controlled declined by 41.0 percent at
December 31, 2008, compared to 39,900 lots under control at December 31, 2007. (See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies.") The Company
continues to evaluate its option contracts for changes in the viability of communities and abandonment potential. In an effort to increase liquidity, models have been sold and leased back on a
selective basis for generally 3 to 18 months. The Company owned 86.5 percent and 76.1 percent of its model homes at December 31, 2008 and 2007, respectively.

27

---



The
homebuilding segments' borrowings include senior notes, an unsecured revolving credit facility and nonrecourse secured notes payable.

Senior Notes

Senior notes outstanding totaled $746.0 million and $800.0 million at December 31, 2008 and 2007, respectively. During 2008, the
Company's $50.0 million of 5.4 percent senior notes matured, and were repaid and the Company repurchased $4.0 million of its 5.4 percent senior notes due January 2015. (See
Note F, "Debt.")

During
the first quarter of 2009, the Company repurchased $47.6 million of its senior notes for $35.9 million in the open market. (See Note L, "Subsequent Events.")

The
Company redeemed $75.0 million and $25.0 million of its 5.4 percent senior notes due June 2008 in August and December 2007, respectively. The redemption prices were
100.2 percent and 100.8 percent of the principal amount of the notes outstanding, respectively, plus accrued interest as of the redemption dates. The Company recognized an aggregate loss
of approximately $490,000 related to the early retirement of these notes in 2007.

The
$250.0 million of 5.4 percent senior notes due May 2012; the $250.0 million of 6.9 percent senior notes due June 2013; and the $246.0 million of
5.4 percent senior notes due January 2015 are subject to certain covenants that include, among other things, restrictions on additional secured debt and the sale of assets. At
December 31, 2008, the Company was in compliance with these covenants.

Unsecured Revolving Credit Facility

In February and June of 2008, the Company amended its unsecured revolving credit facility. The credit facility is used for general corporate purposes
and contains affirmative, negative and financial covenants, including a minimum consolidated tangible net worth requirement; a permitted leverage ratio; and limitations on unsold home units, unsold
land, lot inventory, investments and senior debt. The amendments included, among other things:a)a
decrease in the Company's borrowing availability from $750.0 million to $550.0 million;b)a reduction in the base amount for the
minimum consolidated tangible net worth covenant;c)an increase in the pricing grid, which is based on the Company's leverage ratio and public
debt rating;d)an adjustment in the permitted leverage ratio to no less than 55.0 percent for the fourth quarter of 2008 and the first
quarter of 2009, 52.5 percent for the second, third and fourth quarters of 2009 and 50.0 percent thereafter;e)an increase in the
borrowing base by adding restricted cash up to $300.0 million;f)a change in the definition of material indebtedness to
$20.0 million; andg)a change in the restriction of the Company's book value of unsold land to 1.15x its consolidated tangible net worth.

In
January 2009, the Company entered into the Fourth Amendment to Credit Agreement (the "Amendment"), among the Company, J.P. Morgan Chase Bank, N.A., as Agent, and the lenders listed therein, which
further amended its $550.0 million unsecured revolving credit facility. The Amendment, among other things:a)decreased the Company's
borrowing availability from $550.0 million to $200.0 million, subject to further reduction if the consolidated tangible net worth is less than $400.0 million; b)changed the
adjustments used to determine compliance with the definition of consolidated tangible net worth covenant and reduced the base
amount for the minimum consolidated tangible net worth covenant default limit to $300.0 million;c)amended the leverage ratio restriction
to be no more than 55.0 percent;d)agreed to establish certain liquidity reserve accounts in the event the Company fails to satisfy an
interest coverage test and an adjusted cash flow from operations to interest incurred test;e)changed the restriction of the Company's book
value of unsold land to 1.20x its consolidated tangible net worth;f)changed the borrowing base to allow for 100.0 percent use of
unrestricted cash in excess of $25.0 million, less any drawn balances on the revolving credit facility;g)established a requirement for
the Company to cash collateralize a pro rata share of a defaulting lender's letter of credit and swing line exposure;h)established an annual
common stock cash dividend limit of $10.0 million; andi)increased the pricing grid, which is based on the Company's leverage ratio and
public debt rating, as well as the interest coverage ratio. The credit facility's maturity date of January 2011 remains unchanged, and the accordion feature has been reduced to a maximum of
$300.0 million, subject to the availability of additional lending commitments. The revolving credit facility includes a $75.0 million swing-line facility and the ability to
issue 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 100 percent-owned homebuilding
subsidiaries. Such guarantees are full and unconditional. Interest rates on outstanding borrowings under the amended facility are determined either by reference to LIBOR or an alternative base rate,
with margins determined based on changes in the Company's leverage ratio and credit ratings, plus, if the Company's interest coverage ratio is less than 2.0 to 1.0, an interest premium is determined
based on changes in the Company's interest coverage ratio. The Company uses its unsecured revolving credit facility to finance

28

---



increases
in its homebuilding inventory and working capital, when necessary. (See Note F, "Debt," and Note L, "Subsequent Events.")

There
were no borrowings outstanding under the facility at December 31, 2008 or 2007. Under the facility, the Company had letters of credit outstanding that totaled $95.7 million and
$157.8 million at December 31, 2008 and 2007, respectively. Unused borrowing capacity under the facility, as then in effect, totaled $454.3 million and $592.2 million at
December 31, 2008 and 2007, respectively. At December 31, 2008, the $550.0 million facility, then in effect, was subject to a borrowing base limitation covenant that restricted
its borrowing capacity to $338.1 million, of which $242.4 million was available. The Company was in compliance with its covenants at December 31, 2008. The reduction in the
revolving credit facility's commitments during 2008 resulted in an expense of $604,000, which represented a write-off of a pro rata portion of unamortized debt costs and is included within
"Expenses related to early retirement of debt" in the Consolidated Statement of Earnings. (See Note F, "Debt.")

Nonrecourse Secured Notes Payable

To finance its land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2008, such notes
payable outstanding amounted to $22.3 million, compared to $39.1 million at December 31, 2007.

Finance Subsidiaries

In January 2008, RMC entered into a mortgage warehouse line of credit agreement with Guaranty Bank (the "RMC Credit Agreement"). The RMC Credit
Agreement matured in January 2009 and provided for borrowings up to $40.0 million to fund RMC's mortgage loan origination operations. It was secured by underlying mortgage loans and by other
assets of RMC. Facility balances were repaid as loans funded under the agreement were sold to third parties. The RMC Credit Agreement's interest rate was set at LIBOR plus 0.9 percent, with a
commitment fee of 0.125 percent on the unused portion of the facility. The RMC Credit Agreement contained representations, warranties, covenants and provisions defining events of default. The
covenants required RMC to maintain a minimum net worth and certain financial ratios. The Company was in compliance with these covenants and outstanding borrowings against this credit facility totaled
$22.1 million at December 31, 2008.

In
January 2009, RMC entered into the RMC Repurchase Facility, a $60.0 million repurchase facility, with Guaranty Bank and Buyers. The facility became effective January 15, 2009 and
replaces the RMC Credit Agreement that expired in January 2009. The agreement contains an initial interest rate of LIBOR plus a margin of 1.75 percent, subject to a LIBOR floor of
2.0 percent. The facility contains representations, warranties, covenants and provisions defining events of default. The covenants require RMC to maintain a minimum net worth and certain
financial ratios. (See Note L, "Subsequent Events.")

Other

On February 6, 2009, the Company filed a shelf registration with the SEC. 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. The Company's previous shelf registration statement expired in 2008 pursuant to the provisions of the SEC's
Securities Offering Reform. As of the date of this Annual Report on Form 10-K, the Company has not issued any securities under its shelf registration statement. 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. (See Note L, "Subsequent Events.")

During
2008, the Company did not repurchase any shares of its outstanding common stock. The Company had existing authorization from its Board of Directors to purchase approximately
8.1 million additional shares at a cost of $142.3 million, based on the Company's stock price at December 31, 2008. Outstanding shares were 42,754,467 and 42,151,085 at
December 31, 2008 and 2007, respectively, an increase of 1.4 percent.

29

---



The
following table provides a summary of the Company's contractual cash obligations and commercial commitments at December 31, 2008, and the effect such obligations are expected to have on its
future liquidity and cash flow.

CONTRACTUAL PAYMENTS DUE BY PERIOD(in thousands)


TOTAL


2009


20102011


20122013


AFTER
2013Debt, principal maturities

$
790,399

$
32,716

$
11,683

$
500,000

$
246,000Interest on debt


201,865


43,848


87,695


56,549


13,773Operating leases


35,650


9,594


15,793


5,916


4,347Land option contracts1


5,659


5,659








Total at December 31, 2008

$
1,033,573

$
91,817

$
115,171

$
562,465

$
264,120


While the Company expects challenging economic conditions to continue, it is focused on managing overhead, land acquisitions, development and construction
activity in order to generate cash flow and maintain debt levels commensurate with its business. Absent a more severe deterioration in market conditions, the Company believes that it will be able to
continue to fund its homebuilding and financial services operations, plus any future cash needs (including debt maturities), through its existing cash resources 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 purchase contracts enable the Company to control significant lot positions with a minimal capital investment, thereby reducing the risks associated with land
ownership and development. At December 31, 2008, the Company had $31.0 million in cash deposits and letters of credit to purchase land and lots with an aggregate purchase price of
$276.5 million. Only $5.7 million of the $276.5 million 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," as amended, the Company consolidated $15.2 million of inventory not owned at
December 31, 2008, of which $14.4 million pertained to land and lot option purchase contracts, representing the fair value of the optioned property, and $799,000 pertained to one of its
homebuilding joint ventures. (See "Variable Interest Entities" and "Investments in Joint Ventures" within Note A, "Summary of Significant Accounting Policies.")

At
December 31, 2008 and 2007, the Company had outstanding letters of credit under its revolving credit facility totaling $95.7 million and $157.8 million, respectively.
Additionally, it had development or performance bonds totaling $199.0 million at December 31, 2008, issued by third parties, to secure performance under various contracts and obligations
relating to land or municipal improvements, compared to $313.2 million at December 31, 2007. 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 revolving credit facility, senior notes and investments in joint ventures. (See "Investments in Joint Ventures"
within 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 that 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.

30

---



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.

Income Recognition

In accordance with SFAS 66, revenues and cost of sales are recorded at the time each home or lot is closed; title and possession are
transferred to the buyer; and there is no significant continuing involvement from the homebuilder. 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 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 SFAS 144. 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 that asset or by
the sales of comparable assets. Assets held-for-sale are carried at the lower of cost or fair value less cost to sell. 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, are 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 the market and
carrying values of assets.

Warranty Reserves

The Company's homes are sold with limited third-party warranties. Warranty reserves are established as homes close on a
house-by-house basis in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. Certain factors are considered in
determining the reserves, including the historical range of amounts paid per house; experience with respect to similar home designs and geographical areas; the historical amount paid as a percentage
of home construction costs; any warranty expenditures not considered to be normal and recurring; and conditions that may affect certain subdivisions. Improvements in quality control and construction
techniques expected to impact future warranty expenditures are also considered. Accordingly, the process of determining the Company's warranty reserves balance necessarily requires estimates
associated with various assumptions, each of which can positively or negatively impact this balance.

Generally,
warranty reserves are reviewed monthly to determine the reasonableness and adequacy of both the aggregate reserve and the per unit reserve amount originally included in home cost of sales,
as well as the timing of any reversals of the original reserve. General warranty reserves not utilized for a particular house are evaluated for reasonableness in the aggregate on both a
market-by-market and consolidated basis. Warranty payments for an individual house may exceed the related reserve. Payments in excess of the reserve are evaluated in the
aggregate to determine if an adjustment to the warranty reserve should be recorded, which could result in a corresponding adjustment to home cost of sales.

31

---



The
Company continues to evaluate the adequacy of its warranty reserves and believes that its existing estimation process is materially accurate. Because the Company's warranty reserves can be
impacted by a significant number of factors, it is possible that changes to the Company's assumptions could have a material impact on its warranty reserve balances.

Variable Interest Entities ("VIE")

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 disclosure about VIEs that the Company is not obligated 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 purchase contracts using the variable interest consolidation methodology is a critical accounting policy because compliance with
FIN 46 requires the use of complex judgment in its application.

Income Taxes

The Company calculates a provision for its income taxes by 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. The Company evaluates its deferred tax assets on a quarterly basis to
determine whether a valuation allowance is required. In accordance with SFAS 109, the Company assesses whether a valuation allowance should be established based on its determination of whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future
taxable income during the periods in which those temporary differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in the
Company's consolidated financial statements and/or tax returns. Differences between the amounts recognized in its financial statements and/or tax returns and actual outcomes may arise upon issuance of
regulations and final guidance from federal and state taxing authorities. These differences could have a material impact on the Company's consolidated results of operations or financial position.

Share-Based Payments

Effective January 1, 2006, the Company follows the provisions of Statement of Financial Accounting Standards No. 123(R)
("SFAS 123(R)"), "Share-Based Payment," which requires that compensation expense be measured and recognized at an amount equal to the fair value of share-based payments granted under
compensation arrangements. The Company calculates the fair value of stock options by using the Black-Scholes-Merton option-pricing model. The determination of the fair value of share-based awards at
the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, expected stock-price volatility over the term of the
awards, expected dividend yield and expected stock option exercise behavior. Additionally, judgment is also required in estimating the number of share-based awards that are expected to forfeit. If
actual results differ significantly from these estimates, stock-based compensation expense and the Company's consolidated results of operations could be materially impacted. The Company believes the
accounting for stock-based compensation is a critical accounting policy because it requires the use of complex judgment in its application.

Outlook

In 2008, the Company experienced a decline in sales orders for new homes, compared to the same period last year, due to severe economic conditions
and broader market trends that contributed to soft demand for residential housing, as well as to a lower number of active communities resulting from Company initiatives to react to such trends. Nearly
all markets have been affected by reductions in the affordability of homes, the availability of mortgage products and consumer demand for homes, leading to persistent high levels of new and resale
home inventories. The Company is prepared for prices and margins to remain under pressure for an extended period of time, knowing that additional volume declines, inventory impairments and land option
contract abandonment could result, though potentially less in magnitude. At December 31, 2008, the Company's backlog of orders for new homes totaled 1,559 units, or a projected dollar value of
$407.1 million, reflecting a 48.2 percent decrease in dollar value from December 31, 2007. Recent activity by the federal government designed to stimulate the economy could
improve demand, but the Company is unable to predict when or whether this will occur. As long as the imbalance of housing supply and demand continues, the Company will not only remain focused on its

32

---



liquidity
and balance sheet, while seeking to optimize its operating performance, but also on positioning itself for a return to a more favorable economic environment.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

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. For other financial instruments, weighted-average rates are based on
implied forward rates as of the reporting date.

Interest Rate Sensitivity
Principal Amount by Expected Maturity

(in thousands)


2009


2010-2012


2013


THERE-
AFTER


TOTAL


FAIR
VALUE
12/31/2008Senior notes (fixed rate)

$


$
250,000

$
250,000

$
246,000

$
746,000

$
559,851Average interest rate



%

5.4
%

6.9
%

5.4
%

5.9
%

5.9
%Other financial instrumentsMortgage interest rate lock commitments:Notional amount

$
88,824

$


$


$


$
88,824

$
2,175Average interest rate


5.6
%










5.6
%Forward-delivery contracts:Notional amount


103,435











103,435


(1,400
)Average interest rate


5.4
%










5.4
%Options on futures contracts:Notional amount


9,000











9,000


121Investor financing commitments (optional):Notional amount


1,489











1,489


19


Interest rate risk is a primary market risk facing the Company. Interest rate risk arises principally in the Company's financial services segment and also in
respect to the homebuilding segments' 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"). In managing interest rate risk, the Company does not speculate on the direction of interest rates. (See Note D,
"Derivative Instruments.")

33

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Item 8.    Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF EARNINGS

YEAR ENDED DECEMBER 31,(in thousands, except share data)


2008


2007


2006REVENUESHomebuilding

$
1,911,631

$
2,960,194

$
4,653,920Financial services


64,493


91,681


126,333TOTAL REVENUES


1,976,124


3,051,875


4,780,253EXPENSESCost of sales


2,003,342


3,034,141


3,639,815(Earnings) loss from unconsolidated joint ventures


43,900


(342
)

260Selling, general and administrative


250,278


351,376


440,702Financial services


41,466


50,754


58,638Corporate


42,298


35,554


66,035Expenses related to early retirement of debt


604


490


7,695TOTAL EXPENSES


2,381,888


3,471,973


4,213,145EARNINGS (LOSS)Earnings (loss) before taxes


(405,764
)

(420,098
)

567,108Tax expense (benefit)


(9,179
)

(86,572
)

207,166NET EARNINGS (LOSS)

$
(396,585
)
$
(333,526
)
$
359,942NET EARNINGS (LOSS) PER COMMON SHAREBasic

$
(9.33
)
$
(7.92
)
$
8.14Diluted


(9.33
)

(7.92
)

7.83AVERAGE COMMON SHARES OUTSTANDINGBasic


42,496,796


42,136,315


44,228,502Diluted


42,496,796


42,136,315


45,944,448DIVIDENDS DECLARED PER COMMON SHARE

$
0.39

$
0.48

$
0.48


See Notes to Consolidated Financial Statements.

34

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CONSOLIDATED BALANCE SHEETS

DECEMBER 31,(in thousands, except share data)


2008


2007ASSETSCash and cash equivalents

$
423,259

$
243,614Housing inventoriesHomes under construction


464,810


717,992Land under development and improved lots


547,318


949,726Inventory held-for-sale


68,971


69,225Consolidated inventory not owned


15,218


76,734Total housing inventories


1,096,317


1,813,677Property, plant and equipment


41,558


75,538Current taxes receivable


160,681


9,141Net deferred taxes





158,065Other


141,173


251,285TOTAL ASSETS


1,862,988


2,551,320LIABILITIESAccounts payable


73,464


114,050Accrued and other liabilities


259,947


404,545Debt


790,399


839,080TOTAL LIABILITIES


1,123,810


1,357,675MINORITY INTEREST


13,816


68,919STOCKHOLDERS' EQUITYPreferred stock, $1.00 par value:Authorized10,000 shares Series A JuniorParticipating Preferred, none outstanding





Common stock, $1.00 par value:Authorized199,990,000 sharesIssued42,754,467 shares at December 31, 2008(42,151,085 shares at December 31, 2007)


42,754


42,151Retained earnings


679,317


1,078,521Accumulated other comprehensive income


3,291


4,054TOTAL STOCKHOLDERS' EQUITY


725,362


1,124,726TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,862,988

$
2,551,320


See Notes to Consolidated Financial Statements.

35

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except per share data)


COMMON
STOCK


RETAINED
EARNINGS


ACCUMULATED
OTHER
COMPREHENSIVE
INCOME


TOTAL
STOCKHOLDERS'
EQUITYBALANCE AT JANUARY 1, 2006

$
46,368

$
1,326,689

$
2,964

$
1,376,021Comprehensive income:Net earnings





359,942





359,942Other comprehensive income, net of tax:Change in net unrealized gain on cash flow hedging instruments and mortgage-backed securities net of taxes of $1,154








1,863


1,863Total comprehensive income











361,805Common stock dividends (per share $0.48)





(21,214
)




(21,214
)Repurchase of common stock


(4,700
)

(245,418
)




(250,118
)Stock-based compensation and related income tax benefit


944


43,728





44,672BALANCE AT DECEMBER 31, 2006


42,612


1,463,727


4,827


1,511,166Comprehensive income (loss):Net earnings (loss)





(333,526
)




(333,526
)Other comprehensive income (loss), net of tax:Change in net unrealized gain on cash flow hedging instruments and available-for-sale securities, net of taxes of $479








(773
)

(773
)Total comprehensive income (loss)











(334,299
)Common stock dividends (per share $0.48)





(20,286
)




(20,286
)Repurchase of common stock


(1,265
)

(58,016
)




(59,281
)Stock-based compensation and related income tax benefit


804


26,622





27,426BALANCE AT DECEMBER 31, 2007


42,151


1,078,521


4,054


1,124,726Comprehensive income (loss):Net earnings (loss)





(396,585
)




(396,585
)Other comprehensive income (loss), net of tax:Change in net unrealized gain on cash flow hedging instruments and available-for-sale securities, net of taxes of $473








(763
)

(763
)Total comprehensive income (loss)











(397,348
)Common stock dividends (per share $0.39)





(16,719
)




(16,719
)Stock-based compensation and related income tax benefit


603


14,100





14,703BALANCE AT DECEMBER 31, 2008

$
42,754

$
679,317

$
3,291

$
725,362


See Notes to Consolidated Financial Statements.

36

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,(in thousands)


2008


2007


2006CASH FLOWS FROM OPERATING ACTIVITIESNet earnings (loss)

$
(396,585
)
$
(333,526
)
$
359,942Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:Depreciation and amortization


52,215


54,494


46,731Stock-based compensation expense


9,048


12,257


25,593Inventory and other asset impairments and write-offs


325,480


583,363


81,314Deferred tax valuation allowance


143,784


75,166


Changes in assets and liabilities:Decrease (increase) in inventories


383,237


273,355


(263,444
)Net change in other assets, payables and other liabilities


(239,388
)

(412,984
)

(217,488
)Excess tax benefits from stock-based compensation


(3,138
)

(6,714
)

(14,632
)Other operating activities, net


(26,227
)

(17,271
)

(3,379
)Net cash provided by operating activities


248,426


228,140


14,637CASH FLOWS FROM INVESTING ACTIVITIESAdditions to property, plant and equipment


(9,866
)

(32,147
)

(53,839
)Other investing activities, net


40


750


2,250Net cash used for investing activities


(9,826
)

(31,397
)

(51,589
)CASH FLOWS FROM FINANCING ACTIVITIESCash proceeds of long-term debt








250,000Repayment of long-term debt


(54,000
)

(100,000
)

(243,500
)Net borrowings against revolving credit facilities


22,125





(Decrease) increase in short-term borrowings


(16,806
)

(11,037
)

21,647Common stock dividends


(20,510
)

(20,365
)

(21,666
)Common stock repurchases





(59,281
)

(250,118
)Issuance of common stock under stock-based compensation


7,098


15,803


19,611Excess tax benefits from stock-based compensation


3,138


6,714


14,632Net cash used for financing activities


(58,955
)

(168,166
)

(209,394
)Net increase (decrease) in cash and cash equivalents


179,645


28,577


(246,346
)Cash and cash equivalents at beginning of period


243,614


215,037


461,383CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
423,259

$
243,614

$
215,037SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest, net of capitalized interest

$
76

$
1,097

$
1,295Cash paid (refunds received) for income taxes


(20,111
)

25,569


258,205SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES(Decrease) increase in consolidated inventory not owned related to land options

$
(54,283
)
$
(104,415
)
$
9,139


See Notes to Consolidated Financial Statements.

37

---



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 2008 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

At December 31, 2008, the Company had cash and cash equivalents of $423.3 million, of which $30.0 million was restricted. The
Company considers all highly liquid short-term investments and cash held in escrow to be cash equivalents. Cash equivalents totaled $364.6 million and $193.6 million at
December 31, 2008 and 2007, 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. For the years ended December 31, 2008 and 2007, the effect of outstanding restricted stock units
and stock options was not included in the diluted earnings per share calculation as their effect would have been antidilutive due to the Company's net loss for the year.

Stock-Based Compensation

Effective January 1, 2006, the Company complies with the fair value recognition provisions of SFAS 123(R) by using the
modified-prospective transition method. Under that transition method, compensation cost recognized in 2008, 2007 and 2006 includes: (a) compensation
cost for all share-based payments granted prior to January 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," and (b) compensation cost for
all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

Homebuilding Revenues

In accordance with SFAS 66, 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 from the homebuilder. Sales incentives offset revenues and are expensed when homes are closed.

Housing Inventories

Housing inventories consist principally of homes under construction; land under development and improved lots; and inventory
held-for-sale. Inventory includes land and development costs; direct construction costs; capitalized indirect construction costs; capitalized interest; and real estate taxes.
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 active
development and construction. 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.
Inventories held-for-sale are stated at the lower of cost or fair value less cost to sell. 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 these assets is measured by comparing the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by that asset or by the sales of comparable assets. For inventory held and used, undiscounted cash flow projections are generated at a community level based on
estimates of revenues, costs and other factors. The Company's analysis of these communities generally assumes current revenues equal to current sales orders for particular or comparable communities.
The Company's determination of fair value is primarily based on discounting estimated cash flows at a rate commensurate with inherent risks that are associated with assets and related estimated cash
flow streams. When determining the value of inventory held-for-sale, the Company considers recent offers, comparable sales and/or estimated cash flows. Inventories to be held
and used or disposed of 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 impaired inventories amounted to $445.2 million and $488.1 million at December 31, 2008 and 2007, respectively. The net carrying values of

38

---



the
related inventories amounted to $378.6 million and $388.3 million at December 31, 2008 and 2007, respectively. Inventory costs 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 and construction stages.

The
following table is a summary of capitalized interest:

(in thousands)


2008


2007Capitalized interest at January 1

$
119,267

$
98,932Interest capitalized


46,889


62,024Interest amortized to cost of sales


(61,146
)

(41,689
)Capitalized interest at December 31

$
105,010

$
119,267


The following table summarizes each reporting segment's total number of lots owned and lots controlled under option
agreements:

DECEMBER 31, 2008

DECEMBER 31, 2007LOTS
OWNED


LOTS
OPTIONED


TOTAL


LOTS
OWNED


LOTS
OPTIONED


TOTALNorth


4,381


2,755


7,136


5,999


5,787


11,786Southeast


7,969


749


8,718


9,957


3,192


13,149Texas


4,833


440


5,273


5,784


3,434


9,218West


2,056


372


2,428


4,907


840


5,747Total


19,239


4,316


23,555


26,647


13,253


39,900


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 obligated 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 $15.2 million of inventory not owned at December 31, 2008, of which $14.4 million pertained to land
and lot option purchase contracts, representing the fair value of the optioned property, and $799,000 pertained to one of its homebuilding joint ventures. (See further discussion that follows under
"Investments in Joint Ventures.") 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. Additionally, to reflect the fair value of the inventory consolidated under
FIN 46, the Company eliminated $845,000 of its related cash deposits for lot option purchase contracts, which are included in "Consolidated inventory not owned." Minority interest totaling
$13.6 million was recorded with respect to the consolidation of these contracts, representing the selling entities' ownership interests in these VIEs. At December 31, 2008, the Company
had cash deposits and letters of credit totaling $2.1 million relating to lot option purchase 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, 2008, the Company had cash deposits and/or letters of credit totaling $20.4 million that were associated with
lot option purchase contracts having an aggregate purchase price of $184.6 million and related to VIEs in which it did not have a primary variable interest.

Service Liabilities

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

39

---



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 six active homebuilding joint ventures in the Austin, Chicago, Dallas, Denver and Orlando markets. It participates in a number of joint ventures in which it has
less than a controlling interest. The Company recognizes its share of the respective joint ventures' earnings or losses from the sale of lots to other homebuilders. It does not, however, recognize
earnings or losses 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
following table summarizes each reporting segment's total estimated share of lots owned and controlled by the Company under its joint ventures:

DECEMBER 31, 2008

DECEMBER 31, 2007LOTS
OWNED


LOTS
OPTIONED


TOTAL


LOTS
OWNED


LOTS
OPTIONED


TOTALNorth


578





578


681





681Southeast











45





45Texas


145





145


189





189West


166


1,209


1,375


410


1,209


1,619Total


889


1,209


2,098


1,325


1,209


2,534


At December 31, 2008 and 2007, the Company's investments in its unconsolidated joint ventures totaled $12.5 million and $30.8 million,
respectively, and were classified in the consolidated balance sheets under "Other" assets. For the year ended December 31, 2008, the Company's equity in losses from unconsolidated joint
ventures totaled $43.9 million, compared to earnings of $342,000 and losses of $260,000 for the same periods in 2007 and 2006, respectively. The increased loss in 2008, compared to 2007, was
primarily attributable to an $8.7 million impairment of inventory within two joint ventures in the West region and a $35.8 million impairment of inventory within a joint venture in the
Company's North region, partially offset by earnings from its other unconsolidated joint ventures. The aggregate debt of the unconsolidated joint ventures in which the Company participated totaled
$1.3 million and $508.4 million at December 31, 2008 and 2007, respectively.

One
of the Company's unconsolidated joint ventures had recorded assets of $644.2 million and debt of $435.3 million at December 31, 2007. During 2008, the debt related to this
joint venture was declared in default, and the administrative agent for the lenders foreclosed on the real estate securing the loan in a non-judicial foreclosure proceeding. The Company
and its partners in the joint venture provided a limited Repayment Guarantee of the outstanding debt that can only be pursued upon the occurrence of certain bankruptcy events with respect to the joint
venture, which have not occurred. In addition, a Completion Guarantee was also provided that pertained to development and improvement costs estimated by the banks at $358.0 million, certain
interest and other obligations. The Company has a 3.3 percent interest in this joint venture, and its obligation with respect to the Repayment Guarantee and Completion Guarantee is limited to
its pro rata percentage of the guarantee and/or costs, as applicable. The administrative agent, under the loan documents, filed a
complaint against the Company and certain other partners in the joint venture during the fourth quarter of 2008 seeking enforcement of the Completion Guarantees, including a damage claim for an
alleged failure of performance. The Company wrote off its $7.2 million investment in this joint venture during the first quarter of 2008.

The
Company had an interest in another joint venture in which the Company had an investment of $2.9 million and $13.0 million at December 31, 2008 and 2007, respectively. The
decrease was primarily due to a $35.9 million impairment of the Company's share of inventory within the venture. In addition, during 2008, an appraisal generated a lender demand for repayment
of debt in the amount of $39.3 million, of which the Company paid its pro rata share of $19.6 million. At December 31, 2008 and 2007, the actual borrowings against the revolving
credit facility for this joint venture were $1.3 million and $50.6 million, respectively, of which the Company's pro rata share of debt under a payment guarantee was $646,000 and
$25.3 million, respectively.

At
December 31, 2008, one of the joint ventures in which the Company participated was consolidated in accordance with the provisions of FIN 46, as the Company was determined to have the
primary variable interest in this entity. In association with this consolidated joint venture, the Company eliminates any pretax earnings or losses if any sales are made by the joint venture to the
Company. The Company did not record any pretax earnings or losses for the year ended December 31, 2008, in association with this consolidated joint venture. For the year ended
December 31, 2007, the Company recorded pretax earnings of $108,000 in connection with its consolidated joint ventures. The Company consolidated approximately

40

---



$810,000
of assets, which included $799,000 of consolidated inventory not owned, $968,000 of total liabilities and approximately $242,000 of minority interest at December 31, 2008. Total assets
of approximately $782,000, including consolidated inventory not owned, and minority interest of $1.1 million were consolidated at December 31, 2007.

Property, Plant and Equipment

Property, plant and equipment, which included model home furnishings of $38.6 million and $69.6 million at December 31, 2008 and
2007, 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 selling, general and administrative expenses.

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.
SFAS 142 also requires that goodwill included in the carrying value of equity-method investments no longer be amortized.

Goodwill
is allocated to the reporting unit from which it originates. The Company performs impairment tests of its goodwill annually as of March 31, or as needed. 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
evaluated the recoverability of its goodwill at December 31, 2008, which resulted in an impairment of its remaining goodwill that totaled $2.8 million, and reported it under "Selling,
general and administrative expenses." This impairment related to the 1998 acquisition of The Regency Organization, Inc. in the Company's Southeast region. There was no goodwill remaining at
December 31, 2008.

The
Company recorded a $15.4 million goodwill impairment charge, which was reported under "Selling, general and administrative expenses," during the first quarter of 2007. This impairment was
related to the 1986 acquisition of MJ Brock & Sons, a California homebuilder based in the Company's West region.

As
a result of the Company's application of the nonamortization provisions of SFAS 142, no amortization of goodwill was recorded in 2008, 2007 or 2006.

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. An allowance against the Company's deferred tax assets may be established if it is more likely than not that all or some portion of
the deferred tax assets will not be realized. A change in deferred tax assets or liabilities results in a charge or credit to deferred tax expense. (See Note G, "Income Taxes.")

Loan Origination Fees, Costs, Mortgage Discounts and Loan Sales

Loan origination fees, net of loan discount points, were recognized in earnings upon the sale of related mortgage loans prior to January 2008, in
accordance with Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and
Statement of Financial Accounting Standards No. 91 ("SFAS 91"), "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Beginning January 2008, upon the implementation of Statement of Financial Accounting Standards No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and Financial
Liabilities," loan origination fees, net of loan discount points, were recognized in earnings upon the origination of related mortgage loans, in accordance with SFAS 159.

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; options on forward-delivery contracts; futures contracts; and options on futures contracts, to minimize the impact of movements in market
interest rates on IRLCs. 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

41

---



is
in a net unrealized gain position. It manages this credit risk by entering into 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. Additionally, RMC periodically purchases investor
financing commitments ("IFCs") from a third party. These commitments enable RMC to sell loans at a fixed rate for a stipulated period of time. The Company determined that its IRLCs and IFCs meet the
definition of derivatives under Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended.

Advertising Costs

The Company expenses advertising costs as they are incurred. Advertising costs totaled $14.4 million, $28.7 million and
$34.9 million in 2008, 2007 and 2006, respectively.

Comprehensive Income

Comprehensive income consists of net earnings or losses and the increase or decrease in unrealized gains or losses on the Company's
available-for-sale securities, as well as the decrease in unrealized gains associated with the treasury locks, net of applicable taxes. Comprehensive losses totaled
$397.3 million, compared to losses of $334.3 million and income of $361.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

New Accounting PronouncementsSFAS 157

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair-Value Measurements." SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair-value measurements. SFAS 157 is
effective as of the beginning of an entity's fiscal year that begins after November 15, 2007. In February 2008, the FASB issued Staff Position No. FAS 157-2, which partially
defers the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis,
until fiscal years beginning after November 15, 2008. The partial adoption of SFAS 157 did not have a material impact on the Company's consolidated financial statements. The Company is
currently evaluating the impact of adopting the remaining provisions of SFAS 157; however, it is not expected to have a material effect on the Company's consolidated financial statements.

SFAS 158

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 ("SFAS 158"), "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plansan Amendment of FASB Statements No. 87, 88, 106 and 132(R)." SFAS 158 requires that the funded status of defined benefit pension plans and other
postretirement plans be recognized in the balance sheet, along with a corresponding after-tax adjustment to stockholders' equity. The recognition of the funded status provision of
SFAS 158 applies prospectively and is effective December 31, 2007. SFAS 158 also requires measurement of plan assets and benefit obligations at the entity's fiscal
year-end, effective December 31, 2008. SFAS 158 did not and is not expected to have a material effect on the Company's financial condition or results of operations.

SFAS 160

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51." SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent;
the amount of net income attributable to the parent and to the noncontrolling interest; changes in a parent's ownership interest; and the valuation of any retained noncontrolling equity investment
when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is required to be adopted prospectively for the first annual reporting period beginning after December 15, 2008. The Company is currently reviewing this
statement and has not yet determined the impact, if any, on its consolidated financial statements.

42

---



SFAS 161

In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 ("SFAS 161"), "Disclosures About Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133." SFAS 161 expands the disclosure requirements in Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 161 is effective for the Company's fiscal year beginning January 1, 2009. The Company does not expect the adoption of
SFAS 161 to have a material effect on its consolidated financial statements.

SFAS 162

In
May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles."
SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that
are presented in conformity with GAAP. SFAS 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company does not expect the adoption of SFAS 162 to have a material impact
on its consolidated financial position, results of operations or cash flows.

SFAS 163

In
May 2008, the FASB issued Statement of Financial Accounting Standards No. 163 ("SFAS 163"), "Accounting for Financial Guarantee Insurance
Contractsan Interpretation of FASB Statement No. 60." SFAS 163 requires that an insurance entity recognize a claim liability prior to an event of default (insured event)
when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 also clarifies the application of SFAS 60, "Accounting and Reporting by
Insurance Enterprises," to financial guarantee insurance contracts and expands disclosure requirements surrounding such contracts. SFAS 163 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008. The Company is currently reviewing this statement and has not yet determined the impact, if any, on its consolidated
financial statements.

FSP 157-3

In
October 2008, the FASB issued FASB Staff Position No. 157-3 ("FSP 157-3"), "Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active." The staff position clarifies the application of SFAS 157 to a market that is not active. FSP 157-3 became effective upon issuance, including prior
periods for which financial statements have not been issued. The Company adopted FSP 157-3 as of September 30, 2008, and it did not have a material impact on its consolidated
financial position, results of operations or cash flows.

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 operates in 15
states and 19 homebuilding divisions across the country. The Company consists of six segments: four geographically determined homebuilding regions; financial services; and corporate. The Company's
homebuilding operations consist of four regional reporting segments, referred to as North, Southeast, Texas and West. The homebuilding segments specialize in the sale and construction of single-family
attached and detached housing. Its financial services segment includes RMC, RHIC, LPS and CNRRG. The Company's financial services segment provides loan origination and offers mortgage, title,
escrow and insurance 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, while certain assets relating to employee benefit plans are attributed to other segments in order to best reflect the Company's financial position and results of operations.

The
Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings and risk. The accounting policies of the segments are the same as those
described in Note A, "Summary of Significant Accounting Policies."

43

---



Selected Segment Information

YEAR ENDED DECEMBER 31,(in thousands)


2008


2007


2006REVENUESHomebuildingNorth

$
639,814

$
857,448

$
1,196,335Southeast


558,194


929,168


1,522,123Texas


415,761


571,689


695,356West


297,862


601,889


1,240,106Financial services


64,493


91,681


126,333Total

$
1,976,124

$
3,051,875

$
4,780,253EARNINGS (LOSS) BEFORE TAXESHomebuildingNorth

$
(156,158
)
$
(37,077
)
$
170,636Southeast


(95,449
)

(59,419
)

253,120Texas


(19,828
)

27,098


59,854West


(114,454
)

(355,583
)

89,533Financial services


23,027


40,927


67,695Corporate and unallocated


(42,902
)

(36,044
)

(73,730
)Total

$
(405,764
)
$
(420,098
)
$
567,108DEPRECIATION AND AMORTIZATIONHomebuildingNorth

$
10,079

$
9,080

$
9,620Southeast


16,566


8,252


10,913Texas


8,589


6,856


7,366West


15,415


27,552


15,981Financial services


361


1,054


1,225Corporate and unallocated


1,205


1,700


1,626Total

$
52,215

$
54,494

$
46,731




DECEMBER 31,(in thousands)


2008


2007IDENTIFIABLE ASSETSHomebuildingNorth

$
520,969

$
724,105Southeast


476,633


693,532Texas


378,625


421,359West


197,814


379,640Financial services


98,540


93,200Corporate and unallocated


190,407


239,484Total

$
1,862,988

$
2,551,320


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)


2008


2007


2006NUMERATORNet earnings (loss)

$
(396,585
)
$
(333,526
)
$
359,942DENOMINATORBasic earnings per shareweighted-average shares


42,496,796


42,136,315


44,228,502Effect of dilutive securities:Stock options








1,294,237Equity incentive plan








421,709Dilutive potential of common shares








1,715,946Dilutive earnings per shareadjusted weighted-average shares and assumed conversions


42,496,796


42,136,315


45,944,448NET EARNINGS (LOSS) PER COMMON SHAREBasic

$
(9.33
)
$
(7.92
)
$
8.14Diluted


(9.33
)

(7.92
)

7.83


44

---



For the years ended December 31, 2008 and 2007, the effect of outstanding restricted stock units and stock options was not included in the diluted earnings per share calculation as their effect
would have been antidilutive due to the Company's net loss for the year. Options to purchase 1.1 million shares of common stock at various prices were outstanding at December 31, 2006
but were not included in the computation of diluted earnings per share because their effect would have been antidilutive since their exercise prices were greater than the average market price of the
common shares.

Note D: Derivative Instruments

The
Company, which uses derivative 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)


2008


2007Mortgage interest rate lock commitments

$
88,824

$
66,126Hedging contracts:Forward-delivery contracts


103,435


47,500Options on futures contracts


9,000


21,000Investor financing commitments


1,489


32,534


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 generally ranging from 5.0 to 7.0 percent at December 31, 2008 and 2007.

Hedging
contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movements in interest rates on IRLCs. 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. 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.

During
the second quarter of 2006, the Company terminated its $100.0 million treasury lock at 4.2 percent and its $150.0 million treasury lock at 4.1 percent. These hedges
were entered into to facilitate the replacement of higher-rate senior and senior subordinated debt in 2006, which were evaluated and deemed to be highly effective at the inception of the
contracts. The Company accounted for the treasury locks as cash flow hedges, in accordance with SFAS 133. As a result of changes in the timing of the Company's debt issuance and in the term of
debt issued in the second quarter of 2006, a gain of $9.2 million was recognized during that period, reflecting the ineffective portion of those cash flow hedges. For the year ended 2006, the
Company recognized pretax gains of $9.9 million from the termination of these treasury locks. The $8.4 million effective portion of the settlement value of the $150.0 million
treasury lock was recorded, net of income tax effect, in "Accumulated other comprehensive income" and will be amortized over the seven-year life of the related debt instrument. The Company
recorded amortization of $1.2 million for the years ended December 31, 2008 and 2007, and approximately $704,000 for the year ended December 31, 2006, related to the effective
portion of this termination.

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 using
other valuation techniques. Estimated fair values are significantly affected by the assumptions used.

45

---



The
table below sets forth the carrying values and fair values of the Company's financial instruments at December 31, 2008 and 2007. It excludes nonfinancial instruments, and accordingly, the
aggregate fair value amounts presented do not represent the underlying value of the Company.

2008

2007(in thousands)


CARRYING
VALUE


FAIR
VALUE


CARRYING
VALUE


FAIR
VALUEOTHER ASSETSMortgage loans held-for-sale

$
26,291

$
26,291

$
12,557

$
12,813DEBTSenior notes

$
746,000

$
559,851

$
800,000

$
751,885OTHER FINANCIAL INSTRUMENTSMortgage interest rate lock commitments

$
2,175

$
2,175

$
298

$
298Forward-delivery contracts


(1,400
)

(1,400
)

(181
)

(181
)Options on futures contracts


121


121


298


298Investor financing commitments


19


19


15


15


The carrying amounts of cash and cash equivalents and secured notes payable are reported in the balance sheet and approximate their fair values. The fair values
of the senior notes, mortgage loans held-for-sale, forward-delivery contracts and IRLCs are based on either quoted market prices or market prices for similar financial
instruments. Beginning in 2008, the fair values of the IRLCs include amounts associated with the future servicing of loans in accordance with SAB 109.

The
fair values of financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by
assumptions used. SFAS 157 categorizes fair value measurements as level 1, level 2 or level 3, based on the type of inputs used in estimating fair value. The table below
sets forth information regarding the Company's fair value measurement methods and values.

DECEMBER 31, 2008FAIR VALUE(in thousands)


LOWER OF
COST OR
MARKET *


QUOTED
PRICES
IN ACTIVE
MARKETS
(LEVEL 1)


VALUATION
UTILIZES
OBSERVABLE
INPUTS
(LEVEL 2)


VALUATION
UTILIZES
UNOBSERVABLE
INPUTS
(LEVEL 3)


TOTALMortgage loans held-for-sale

$
195

$


$
26,096

$


$
26,291Mortgage interest rate lock commitments











2,175


2,175Forward-delivery contracts








(1,400
)




(1,400
)Options on futures contracts





121








121Investor financing commitments











19


19


Options on futures contracts are exchange-traded and are valued based on quoted market exit prices (level 1). Loans held-for-sale
and forward delivery contracts are based on quoted market prices of similar instruments (level 2). As of December 31, 2008, contractual principal amounts of loans
held-for-sale totaled $25.8 million. IRLCs are valued at their aggregate market price premium or deficit, plus servicing premium, multiplied by the projected close
ratio. The market price premium or deficit is based on quoted market prices of similar instruments (level 2); the servicing premium is based on contractual investor guidelines for each product
(level 2); and the projected close ratio is determined utilizing an external modeling system used widely within the industry to estimate customer behavior at an individual loan level
(level 3). Investor financing commitments are valued based on their intrinsic value, which is determined with reference to movements in market interest rates (level 2), plus a time value
factor that is extrapolated from current market prices of similar contracts (level 3).

In
2008, the Company implemented SAB 109, which revises and rescinds portions of Staff Accounting Bulletin No. 105 ("SAB 105"), "Loan Commitments Accounted for as Derivative
Instruments," and requires that expected net future cash flows related to the associated servicing of a loan be included in the measurement of all written loan commitments that are accounted for at
fair value through earnings. The provisions of SAB 109 were applicable to written loan commitments issued or modified beginning on January 1, 2008, when SAB 109 was adopted. At
December 31, 2008, servicing rights of $1.7 million were included in net gains on the sale of mortgages and mortgage servicing rights in accordance with SAB 109.

46

---



The
Company adopted SFAS 159 on a prospective basis for mortgage loans held-for-sale, effective January 1, 2008. Accordingly, mortgage loans
held-for-sale that originated subsequent to January 1, 2008, are measured at fair value. Loans originated prior to that date are held at the lower of cost or market on
an aggregate basis, in accordance with Statement of Financial Accounting Standard No. 65, "Accounting for Certain Mortgage Banking Activities." The application of SFAS 159 to loans
held-for-sale improves the consistency of loan valuation between the date of borrower lock and the date of loan sale. As of December 31, 2008, the difference between the
aggregate fair value and the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value was $704,000. Consequently, this amount has been recognized as a gain in current
earnings within financial services revenues. The Company held two loans with payments 90 days or more past due, as of December 31, 2008, that had an aggregate carrying value of $145,000.

While
recorded fair values represent management's best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, among other factors, could
have a material impact on the value of these items.

The
following table represents a reconciliation of changes in fair values of level 3 items included in revenues under "Financial services" within the Consolidated Statements of Earnings:

(in thousands)


IRLCs


IFCsFair value at January 1, 2008

$
298

$
15(Gain) loss recognized on conversion to loans


(6,475
)

Additions


9,346


1,497Change in valuation of items held


(994
)

(1,493
)Fair value at December 31, 2008

$
2,175

$
19


Note F: Debt

Debt
consisted of the following at December 31:

(in thousands)


2008


2007Senior notes

$
746,000

$
800,000Secured notes payable


22,274


39,080RMC warehouse line of credit


22,125


Total debt

$
790,399

$
839,080


At December 31, 2008, maturities of debt are scheduled as follows:

(in thousands)2009

$
32,7162010


6,1302011


5,5532012


250,000After 2012


496,000Total debt

$
790,399


At December 31, 2008, the Company had outstanding(a)$250.0 million of 5.4 percent
senior notes due May 2012;(b)$250.0 million of 6.9 percent senior notes due June 2013; and (c)$246.0 million of
5.4 percent senior notes due January 2015. Each of the senior notes pays interest semiannually and may be
redeemed at a stated redemption price, at the option of the Company, in whole or in part, at any time.

During
2008, the Company's $50.0 million of 5.4 percent senior notes due June 2008 matured, and were repaid and the Company repurchased $4.0 million of its 5.4 percent
senior notes due January 2015. (See Management's Discussion and Analysis of Financial Condition and Results of Operations, "Financial Condition and Liquidity.")

The
senior notes and indenture agreements are subject to certain covenants that include, among other things, restrictions on additional secured debt and the sale of assets. The Company was in
compliance with these covenants at December 31, 2008.

47

---



In
February and June of 2008, the Company amended its unsecured revolving credit facility. The credit facility is used for general corporate purposes and contains affirmative, negative and financial
covenants, including a minimum consolidated tangible net worth requirement; a permitted leverage ratio; and limitations on unsold home units, unsold land, lot inventory, investments and senior debt.
The amendments included, among other things:a)a decrease in the Company's borrowing availability from $750.0 million to
$550.0 million;b)a reduction in the base amount for the minimum consolidated tangible net worth covenant; c)an increase in the pricing
grid, which is based on the Company's leverage ratio and public debt rating; d)an adjustment in the permitted leverage ratio to no less than 55.0 percent for the fourth quarter of 2008 and
the first
quarter of 2009, 52.5 percent for the second, third and fourth quarters of 2009 and 50.0 percent thereafter;e)an increase in the
borrowing base by adding restricted cash up to $300.0 million;f)a change in the definition of material indebtedness to
$20.0 million; andg)a change in the restriction of the Company's book value of unsold land to 1.15x its consolidated tangible net worth.

In
January 2009, the Company entered into the Fourth Amendment to Credit Agreement (the "Amendment"), among the Company, J.P. Morgan Chase Bank, N.A., as Agent, and the lenders listed therein, which
further amended its $550.0 million unsecured revolving credit facility. The Amendment, among other things:a)decreased the Company's
borrowing availability from $550.0 million to $200.0 million, subject to further reduction if the consolidated tangible net worth is less than $400.0 million; b)changed the
adjustments used to determine compliance with the definition of consolidated tangible net worth covenant and reduced the base
amount for the minimum consolidated tangible net worth covenant default limit to $300.0 million;c)amended the leverage ratio restriction
to be no more than 55.0 percent;d)agreed to establish certain liquidity reserve accounts in the event the Company fails to satisfy an
interest coverage test and an adjusted cash flow from operations to interest incurred test;e)changed the restriction of the Company's book
value of unsold land to 1.20x its consolidated tangible net worth;f)changed the borrowing base to allow for 100.0 percent use of
unrestricted cash in excess of $25.0 million, less any drawn balances on the revolving credit facility;g)established a requirement for
the Company to cash collateralize a pro rata share of a defaulting lender's letter of credit and swing line exposure;h)established an annual
common stock cash dividend limit of $10.0 million; andi)increased the pricing grid, which is based on the Company's leverage ratio and
public debt rating, as well as the interest coverage ratio. The credit facility's maturity date of January 2011 remains unchanged, and the accordion feature has been reduced to a maximum of
$300.0 million, subject to the availability of additional lending commitments. The revolving credit facility includes a $75.0 million swing-line facility and the ability to
issue 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 100 percent-owned homebuilding
subsidiaries. Such guarantees are full and unconditional. Interest rates on outstanding borrowings under the amended facility are determined either by reference to LIBOR or an alternative base rate,
with margins determined based on changes in the Company's leverage ratio and credit ratings, plus, if the Company's interest coverage ratio is less than 2.0 to 1.0, an interest premium is determined
based on changes in the Company's interest coverage ratio. (See Note L, "Subsequent Events.")

There
were no borrowings outstanding under the facility at December 31, 2008 or 2007. Letters of credit aggregating $95.7 million and $157.8 million were outstanding under the
facility at December 31, 2008 and 2007, respectively. Under the facility, the unused borrowing capacity, as then in effect, totaled $454.3 million and $592.2 million at
December 31, 2008 and 2007, respectively. At December 31, 2008, the $550.0 million facility, then in effect, was subject to a borrowing base limitation covenant, which restricted
its borrowing capacity to $338.1 million, of which $242.4 million was available. The Company was in compliance with its covenants at December 31, 2008. The reduction in the
facility's commitments during 2008 resulted in an expense of $604,000, which represented the write-off of a pro rata portion of unamortized debt costs and is included within "Expenses
related to early retirement of debt" in the Consolidated Statement of Earnings. (See Management's Discussion and Analysis of Financial Condition and Results of Operations, "Financial Condition and
Liquidity.")

At
December 31, 2008, the Company's obligations to pay principal, premium, if any, and interest under its unsecured revolving credit facility; 5.4 percent senior notes due May 2012;
6.9 percent senior notes due June 2013; and 5.4 percent senior notes due January 2015 are guaranteed on a joint and several basis by substantially all of its 100 percent-owned
homebuilding subsidiaries. Such guarantees are full and unconditional. (See Note K, "Supplemental Guarantor Information.")

To
finance its land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2008 and 2007, outstanding seller-financed nonrecourse notes payable
were $22.3 million and $39.1 million, respectively.

48

---



RMC
had a mortgage warehouse line of credit with Guaranty Bank, which matured in January 2009 and provided for borrowings up to $40.0 million to fund RMC's mortgage loan origination operations.
The RMC Credit Agreement is secured by underlying mortgage loans and by other assets of RMC. Facility balances were repaid as loans funded under the agreement were sold to third parties. The RMC
Credit Agreement's interest rate was set at LIBOR plus 0.9 percent, with a commitment fee of 0.125 percent. The RMC Credit Agreement contained representations, warranties, covenants and
provisions defining events of default. The covenants required RMC to maintain certain financial ratios, including a tangible net worth minimum of $13.0 million; an adjusted tangible net worth
minimum of $5.0 million; a ratio of total indebtedness to adjusted tangible net worth of 12:1; and consolidated net income for the four preceding fiscal quarters. The Company was in compliance
with these covenants, and outstanding borrowings against this credit facility totaled $22.1 million at December 31, 2008. (See Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Financial Condition and Liquidity.")

In
January 2009, RMC entered into the RMC Repurchase Facility, a $60.0 million repurchase facility, with Guaranty Bank and Buyers. The facility became effective January 15, 2009 and
replaces the RMC Credit Agreement that expired in January 2009. The agreement contains an initial interest rate of LIBOR plus a margin of 1.75 percent, subject to a LIBOR floor of
2.0 percent. The facility contains representations, warranties, covenants and provisions defining events of default. The covenants require RMC to maintain a minimum net worth and certain
financial ratios.

Note G: Income Taxes

Deferred
tax assets are recognized for estimated tax effects that are attributable to deductible temporary differences and tax carryforwards related to tax credits and operating losses. They are
realized when existing temporary differences are carried back to profitable year(s) and/or carried forward to future years having taxable income. Deferred tax assets are reduced by a valuation
allowance if an assessment of their components indicates that it is more likely than not that some portion of the deferred tax asset will not be realized. This assessment considers, among other
things, the nature, frequency and severity of current and cumulative losses; forecasts of future profitability; the duration of the statutory carryforward periods; the Company's experience with loss
carryforwards not expiring unused; and tax planning alternatives. The Company generated additional deferred tax assets in 2008 and 2007 due to inventory impairments. In light of these additional
impairments, the continued downturn in the housing market and the uncertainty as to its duration, which limits the Company's ability to predict future taxable income, the Company determined that an
allowance against its deferred tax assets was required. Therefore, in accordance with SFAS 109, the Company recorded valuation allowances totaling $143.8 million and $75.2 million
against its deferred tax assets during 2008 and 2007, respectively, which were reflected as noncash charges to income tax expense. The valuation allowance taken in 2008 was comprised of
$13.3 million of net state taxes and $130.5 million of federal taxes, which related to tax benefits generated in 2008. The valuation allowance taken in 2007 was comprised of net state
taxes of $21.7 million and federal taxes of $53.5 million. For the year ended December 31, 2006, no valuation allowance for the deferred tax asset was required. The net increase
in the valuation allowance was $143.8 million and the balance of the deferred tax valuation allowance was $219.0 million as of December 31, 2008. For federal purposes, net
operating losses can be carried forward 20 years and, for state purposes, can generally be carried forward 10 to 15 years depending on the taxing jurisdiction. To the extent that the Company generates
sufficient taxable income in the future to utilize the tax benefits of related deferred tax assets, it expects to experience a reduction in its effective tax rate as the valuation allowance is
reversed.

As
a result of the noncash tax charges, the Company's effective income tax benefit rate was 2.3 percent for the year ended December 31, 2008, compared to an effective income tax benefit
rate of 20.6 percent and an effective provision rate of 36.5 percent for the years ended 2007 and 2006, respectively. The decrease in effective income tax benefit rate in 2008, compared
to 2007, was primarily due to its noncash tax charges that related to its deferred tax assets. The decrease in the effective tax rate for 2007, compared to 2006, was primarily due to a noncash tax
charge of $75.2 million for a valuation allowance related to its deferred tax assets and the impact of lower pretax earnings for 2007. The Company had a net current tax receivable of
$160.7 million and $9.1 million at December 31, 2008 and 2007, respectively.

49

---



The
following table reconciles the statutory federal income tax rate to the Company's effective income tax rate for the years ended December 31, 2008, 2007 and 2006:

2008


2007


2006Income taxes at federal statutory rate


35.0
%

35.0
%

35.0
%State income taxes, net of federal tax


3.2


3.2


3.2Domestic production activity deduction








(0.9
)Resolution of tax contingency





2.0


(1.0
)Goodwill


(0.3
)

(1.4
)

Deferred tax asset allowance


(35.4
)

(17.8
)

Other


(0.2
)

(0.4
)

0.2Effective tax rate


2.3
%

20.6
%

36.5
%


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)


2008


2007DEFERRED TAX ASSETSWarranty, legal and other accruals

$
21,813

$
23,801Employee benefits


28,678


48,574Noncash charge for impairment of long-lived assets


170,517


187,385Joint ventures


12,725


154State net operating loss carryforwards


17,560


1,755Other


1,418


4,281Total


252,711


265,950Valuation allowance


(218,950
)

(75,166
)Total deferred tax assets


33,761


190,784DEFERRED TAX LIABILITIESDeferred recognition of income and gains


(3,065
)

(2,224
)Capitalized expenses


(27,708
)

(27,605
)Other


(2,988
)

(2,890
)Total deferred tax liabilities


(33,761
)

(32,719
)NET DEFERRED TAX ASSET

$


$
158,065


The Company's expense for income taxes for the years ended December 31, 2008, 2007 and 2006, is summarized as follows:

(in thousands)


2008


2007


2006CURRENT EXPENSE (BENEFIT)Federal

$
(167,244
)
$
(14,323
)
$
206,635State





1,617


32,799Total current expense (benefit)


(167,244
)

(12,706
)

239,434DEFERRED EXPENSE (BENEFIT)Federal


158,065


(84,872
)

(27,848
)State





11,006


(4,420
)Total deferred expense (benefit)


158,065


(73,866
)

(32,268
)Total expense (benefit)

$
(9,179
)
$
(86,572
)
$
207,166


The Company accounts for unrecognized tax benefits under Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." The
Company accounts for interest and penalties on unrecognized tax benefits through its provision for income taxes. As of December 31, 2008, the Company's liability for gross unrecognized tax
benefits was $7.0 million, of which $4.7 million, if recognized, will affect the Company's effective tax rate. The Company had $5.8 million and $2.6 million in accrued
interest and penalties at January 1 and December 31, 2008, respectively. As of December 31, 2007, the Company's liability for gross unrecognized tax benefits was
$11.8 million, of which $8.3 million, if recognized, will affect the Company's effective tax rate. The Company estimates that, within 12 months, $2.0 million of gross state
unrecognized tax benefits will reverse due to the anticipated expiration of time to assess tax.

50

---



The
Company's summary of accounting for tax uncertainties at December 31, 2008 and 2007, and for the periods then ended follows:

(in thousands)


2008


2007Balance at January 1

$
11,844

$
15,555Additions related to current year positions


634


1,947(Reductions) additions related to prior year positions


(2,448
)

1,898Reductions due to settlements


(1,017
)

(300
)Reductions due to expiration of the statute of limitations


(2,059
)

(7,256
)Balance at December 31

$
6,954

$
11,844


As of December 31, 2008, the 2005 through 2008 tax years remain open for examination.

Note H: Employee Incentive, Stock and Shareholder Rights Plans

Retirement Savings Opportunity Plan ("RSOP")

All full-time employees are eligible to participate in the RSOP. 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 $6.9 million, $10.0 million and $12.0 million in 2008, 2007 and 2006, 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 approximately $233,000, $354,000 and $495,000 in 2008, 2007 and 2006, respectively.

Supplemental Executive Retirement Plans

The Company has supplemental nonqualified retirement plans, which generally vest over five-year periods beginning in 2003, pursuant to
which it 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, 2008 and 2007, the cash surrender value of these contracts was $23.8 million and
$28.5 million, respectively, and is included in "Other" assets. The net periodic benefit cost of these plans for the year ended December 31, 2008, was $13.9 million and included
service costs of $4.1 million, interest costs of $1.9 million and investment losses of $7.9 million. The net periodic benefit cost of these plans for the year ended
December 31, 2007, was $5.7 million and included service costs of $4.5 million, interest costs of $1.4 million and investment earnings of $217,000. The $29.7 million
and $24.0 million projected benefit obligations at December 31, 2008 and 2007, respectively, were equal to the net liability recognized in the balance sheet at those dates. The
weighted-average discount rate used for the plans was 7.8 and 7.7 percent for 2008 and 2007, respectively.

Shareholder Rights Plan

On December 23, 2008, the Company announced that the Board of Directors adopted a shareholder rights plan (the "Rights Plan") designed to
preserve shareholder value and the value of certain tax assets primarily associated with net operating loss carryforwards ("NOLs") under Section 382 of the Internal Revenue Code. The Company's
ability to use its NOLs would be limited if there was an "ownership change" under Section 382. This would occur if stockholders owning, or deemed under Section 382 to own,
5.0 percent or more of the Company's stock increased their collective ownership of the aggregate amount of outstanding shares of the Company by more than 50.0 percentage points over a
defined period of time. The Rights Plan was adopted to reduce the likelihood of an "ownership change" occurring as defined by Section 382.

51

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The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9 percent or more of the Company's outstanding common stock (an "Acquiring Person") without the approval of
its Board of Directors. Under the Rights Plan, one right was distributed for each share of common stock outstanding as of the close of business on December 29, 2008. The rights initially are
attached to and trade with the Company's common stock. Subject to the terms, provisions and conditions of the Rights Plan, if the rights become exercisable, each right would initially represent the
right to purchase from the Company one ten-thousandth of a share of its Series A Junior Participating Preferred Stock for a purchase price of $90.00 (the "Purchase Price"). After
the rights become exercisable and there is an Acquiring Person, each holder of a right, other than rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter
have the right to receive, upon exercise of a right and payment of the Purchase Price, that number of shares of common stock, as the case may be, having a market value of two times the Purchase Price.

Existing
stockholders who currently own 4.9 percent or more of the outstanding shares of common stock will trigger a dilutive event only if they acquire additional shares. The Company's Board
of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Rights Plan. The Rights Plan may be terminated by the Board at any time,
prior to the rights being triggered. The Rights Plan will continue in effect until December 18, 2018, unless it is terminated or redeemed earlier by the Board of Directors. The Company plans to
submit the continuation of the Rights Plan to a stockholder vote at its 2009 Annual Meeting of Stockholders, and the failure to obtain this approval will result in termination of the Rights Plan on
December 18, 2009.

Note I: Stock-Based Compensation

The
Ryland Group, Inc. 2008 Equity Incentive Plan (the "Plan") permits the granting of stock options, restricted stock awards, stock units or any combination of the foregoing to employees.
Stock options granted in accordance with the Plan generally have a maximum term of five years and vest in equal annual installments over three years. Certain outstanding stock options granted under
predecessor plans have a maximum term of ten years. Outstanding restricted stock units granted under predecessor plans generally vest in three equal annual installments or a one year period with
performance
criteria. At December 31, 2008 and 2007, stock options or other awards or units available for grant totaled 2,446,606 and 1,587,725, respectively.

The
Ryland Group, Inc. 2006 Non-Employee Director Stock Plan (the "Director Plan") provides for a stock award of 3,000 shares to each non-employee director on
May 1 of each year. New non-employee directors will receive a pro-rata stock award 30 days after their date of appointment or election based on the remaining
portion of the plan year in which they are appointed or elected. Stock awards are fully vested and non-forfeitable on their applicable award dates. At December 31, 2008 and 2007,
there were 72,000 and 93,000 stock awards available for future grant in accordance with the Director Plan, respectively. Previously, The Ryland Group, Inc. 2004 Non-Employee
Director Equity Plan and its predecessor plans provided for automatic grants of non-statutory stock options to directors. These stock options are fully vested and have a maximum term of
ten years.

All
outstanding stock options, stock awards and restricted stock awards have been granted in accordance with the terms of the applicable Plan, Director Plan and their respective predecessor plans, all
of which were approved by the Company's stockholders. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans).

The
Company recorded $9.0 million, $12.3 million and $25.6 million of stock-based compensation expense for the years ended December 31, 2008, 2007 and 2006, respectively.
Stock-based compensation expenses have been allocated to the Company's reportable segments and are reported in "Corporate," "Financial services" and "Selling, general and administrative" expenses.

SFAS 123(R)
requires cash flows attributable to tax benefits resulting from tax deductions in excess of compensation cost recognized for those stock options ("excess tax benefits") be
classified as financing cash flows. Excess tax benefits of $3.1 million, $6.7 million and $14.6 million for the 12 months ended December 31, 2008, 2007 and 2006,
respectively, have been classified as financing cash inflows in the Consolidated Statements of Cash Flows.

52

---



A
summary of stock option activity in accordance with the Company's plans as of December 31, 2008, 2007 and 2006, and changes for the years then ended follows:

SHARES


WEIGHTED-
AVERAGE
EXERCISE
PRICE


WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE(in years)


AGGREGATE
INTRINSIC
VALUE (in thousands)Options outstanding at January 1, 2006


4,654,570

$
25.91


5.7Granted


374,500


62.31Exercised


(798,218
)

12.34Forfeited


(66,710
)

56.83Options outstanding at December 31, 2006


4,164,142

$
31.29


5.0

$
106,250Available for future grant


360,645Total shares reserved


4,524,787Options exercisable at December 31, 2006


3,365,335

$
25.54


5.0

$
102,729Options outstanding at January 1, 2007


4,164,142

$
31.29


5.0Granted


658,500


43.60Exercised


(638,232
)

12.62Forfeited


(150,244
)

53.07Options outstanding at December 31, 2007


4,034,166

$
35.44


4.3

$
23,744Available for future grant


1,680,725Total shares reserved


5,714,891Options exercisable at December 31, 2007


3,103,087

$
31.22


4.4

$
23,744Options outstanding at January 1, 2008


4,034,166

$
35.44


4.3Granted


503,000


31.88Exercised


(541,720
)

8.25Forfeited


(340,545
)

46.21Options outstanding at December 31, 2008


3,654,901

$
37.97


3.8

$
4,347Available for future grant


2,518,606Total shares reserved


6,173,507Options exercisable at December 31, 2008


2,719,574

$
37.53


3.8

$
4,347


A summary of stock options outstanding and exercisable at December 31, 2008 follows:

OPTIONS OUTSTANDING

OPTIONS EXERCISABLERANGE OF
EXERCISE
PRICES


NUMBER
OUTSTANDING


WEIGHTED-
AVERAGE
REMAINING
LIFE(in years)


WEIGHTED-
AVERAGE
EXERCISE
PRICE


NUMBER
EXERCISABLE


WEIGHTED-
AVERAGE
EXERCISE
PRICE$      4.11 to $    18.30


596,340


2.0

$
10.41


596,340

$
12.05$    20.99 to $    27.38


600,903


4.0


22.39


495,903


21.39$    33.14 to $    40.12


903,741


4.7


36.94


473,741


39.81$    44.32 to $    57.54


863,918


4.1


45.18


546,599


56.28$    61.40 to $    83.13


689,999


3.3


65.06


606,991


65.41


The total intrinsic values of stock options exercised during the years ended December 31, 2008, 2007 and 2006, were $9.3 million,
$17.8 million and $38.5 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the
option.

The
Company has determined the grant-date fair value of stock options using the Black-Scholes-Merton option-pricing formula. Expected volatility is based upon the historical volatility of
the Company's common stock. The expected dividend yield is based on an annual dividend rate of $0.48 per common share. The risk-free interest rate for periods within the contractual life
of the stock option award is based upon the zero-coupon U.S. Treasury bond on the date the stock option is granted, with a maturity equal to the expected option life of the stock option
granted. The expected option life is derived from historical experience under the Company's share-based payment plans and represents the period of time that stock option awards granted are expected to
be outstanding.

53

---



The
following table presents the weighted-average inputs used and fair values determined for stock options granted during the years ended December 31, 2008, 2007 and 2006:

2008


2007


2006Expected volatility


44.4
%

35.8
%

38.0
%Expected dividend yield


1.5
%

1.1
%

0.8
%Expected term(in years)


3.9


3.4


3.2Risk-free rate


2.8
%

4.6
%

5.0
%Weighted-average grant-date fair value

$
10.60

$
12.70

$
19.17


The Company recorded stock-based compensation expense related to stock options of $4.5 million, $4.9 million and $10.4 million for the
years ended December 31, 2008, 2007 and 2006, respectively.

A
summary of the Company's non-vested options as of and for the years ended December 31, 2008, 2007 and 2006, follows:

2008

2007

2006SHARES


WEIGHTED
AVERAGE
GRANT-DATE
FAIR VALUE


SHARES


WEIGHTED-
AVERAGE
GRANT-DATE
FAIR VALUE


SHARES


WEIGHTED-
AVERAGE
GRANT-DATE
FAIR VALUENonvested options outstanding at January 1


931,079

$
14.67


798,807

$
16.40


1,294,035

$
13.40Granted


503,000


10.60


658,500


12.70


374,500


19.17Vested


(344,002
)

15.22


(375,984
)

14.57


(803,018
)

12.82Forfeited


(154,750
)

15.16


(150,244
)

15.54


(66,710
)

16.82Nonvested options outstanding at December 31


935,327

$
12.19


931,079

$
14.67


798,807

$
16.40


As of December 31, 2008, there was $7.4 million of total unrecognized compensation cost related to nonvested stock option awards granted under the
Company's plans. That cost is expected to be recognized over the next 2.8 years.

The
Company has made several restricted stock awards to senior executives under the Plan and its predecessor plans. Compensation expense recognized for such awards was $3.9 million,
$6.1 million and $13.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The
following is a summary of activity relating to restricted stock awards:

2008


2007


2006Restricted shares at January 1


242,000


435,664


441,000Shares awarded


370,000


25,000


133,000Shares vested


(81,331
)

(182,664
)

(138,336
)Shares forfeited


(50,667
)

(36,000
)

Restricted shares at December 31


480,002


242,000


435,664


At December 31, 2008, the outstanding restricted shares will vest as follows: 2009246,672; 2010136,665; and
201196,665.

The
Company has granted stock awards to its non-employee directors pursuant to the terms of the Director Plan. The Company recorded stock-based compensation expense related to such grants
in the amount of $700,000, $1.2 million and $1.9 million during the years ended December 31, 2008, 2007 and 2006, 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, 2008 and 2007, it had cash deposits and letters of credit outstanding that totaled $31.0 million and $74.7 million, respectively, for land options
pertaining to land purchase contracts with an aggregate purchase price of $276.5 million and $721.4 million, respectively. At December 31, 2008, the Company had

54

---



commitments
with respect to option contracts having specific performance provisions of approximately $5.7 million, compared to $24.2 million at December 31, 2007.

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

YEAR ENDED DECEMBER 31,(in thousands)


2008


2007


2006Total rent expense

$
22,270

$
26,760

$
23,232Less income from subleases


(681
)

(246
)

(950
)Net rent expense

$
21,589

$
26,514

$
22,282


At December 31, 2008, future minimum rental commitments under noncancelable leases with remaining terms in excess of one year are as follows:

(in thousands)2009

$
9,5942010


9,0442011


6,7492012


4,3142013


1,602Thereafter


4,347Less sublease income


(1,606
)Total lease commitments

$
34,044


RMC purchases IFCs from third parties for the purpose of mitigating its exposure to movements in interest rates on customer-financing commitments. RMC pays the
investor a fixed one-time premium for these commitments. In return, RMC receives the option of selling a loan at a fixed rate in the commitment for a stipulated period of time. IFCs are
non-transferable, and RMC's risk is limited to the initial premium paid. IFCs are valued based on their intrinsic value, which is determined with reference to movements in market interest
rates, plus a time value factor that is extrapolated from current market prices of similar contracts. The outstanding commitments at December 31, 2008 and 2007 were $1.5 million and
$32.5 million, respectively, with fair values of approximately $19,000 and $15,000, respectively.

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, 2008, total development bonds were $199.0 million, while performance-related cash deposits and letters of
credit were $54.3 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.

One
of the Company's unconsolidated joint ventures had recorded assets of $644.2 million and debt of $435.3 million at December 31, 2007. During 2008, the debt related to this
joint venture was declared in default, and the administrative agent for the lenders foreclosed on the real estate securing the loan in a non-judicial foreclosure proceeding. The Company
and its partners in the joint venture provided a limited Repayment Guarantee of the outstanding debt that can only be pursued upon the occurrence of certain bankruptcy events with respect to the joint
venture, which have not occurred. In addition, a Completion Guarantee was also provided that pertained to development and improvement costs estimated by the banks at $358.0 million, certain
interest and other obligations. The Company has a 3.3 percent interest in this joint venture, and its obligation with respect to the Repayment Guarantee and Completion Guarantee is limited to
its pro rata percentage of the guarantee and/or costs, as applicable. The administrative agent, under the loan documents, filed a complaint against the Company and certain other partners in the joint
venture during the fourth quarter of 2008 seeking enforcement of the Completion Guarantees, including a damage claim for an alleged failure of performance. The Company wrote off its
$7.2 million investment in this joint venture during the first quarter of 2008.

The
Company had an interest in another joint venture in which the Company had an investment of $2.9 million and $13.0 million at December 31, 2008 and 2007, respectively. The
decrease was primarily due to a $35.9 million impairment of the Company's share of inventory within the venture. In addition, during 2008, an appraisal generated a lender demand for repayment
of debt in the amount of $39.3 million, of which the Company paid its pro rata share of $19.6 million. At December 31, 2008 and 2007, the actual borrowings against the revolving
credit facility for this joint venture were

55

---



$1.3 million
and $50.6 million, respectively, of which the Company's pro rata share of debt under a payment guarantee was $646,000 and $25.3 million, respectively.

IRLCs
represent loan commitments with customers at market rates generally up to 180 days before settlement. The Company had outstanding IRLCs totaling $88.8 million and
$66.1 million at December 31, 2008 and 2007, respectively. Hedging contracts are utilized to mitigate the risk associated with interest rate fluctuations on IRLCs. (See Note D,
"Derivative Instruments.")

Under
certain circumstances, RMC is required to indemnify loan investors for losses incurred on sold loans. In general, this obligation arises if the losses are due to origination errors made by RMC;
if the borrower does not make their first payment; or if there is undiscovered fraud on the part of the borrower. Reserves for losses related to future indemnification or repurchase of sold and held
loans were $5.4 million and $2.7 million at December 31, 2008 and 2007, respectively. Aggregate indemnification and repurchase expense was $5.9 million and
$2.2 million at December 31, 2008 and 2007, respectively.

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)


2008


2007Balance at January 1

$
36,557

$
44,102Warranties issued


5,693


11,820Settlements made


(12,473
)

(19,365
)Balance at December 31

$
29,777

$
36,557


The Company requires substantially all of its subcontractors to have general liability insurance, which includes 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 and other
coverage limits. However, with fewer insurers participating, general liability insurance for the homebuilding industry had become more difficult to obtain over the past several years. As a result,
RHIC provided insurance services to the homebuilding segments' subcontractors in certain markets. RHIC ceased providing such services, effective June 1, 2008. At December 31, 2008, RHIC
had $37.1 million in cash and cash equivalents, of which $28.5 million was restricted as collateral for letters of credit for the same amount, and $28.3 million in subcontractor
product liability reserves, which are included in the consolidated balance sheet under "Cash and cash equivalents" and "Accrued and other liabilities," respectively. At December 31, 2007, RHIC
had $34.1 million in cash and cash equivalents, of which $13.5 million was restricted, and $28.3 million in subcontractor product liability reserves, which are included in the
consolidated balance sheet.

Changes
in the Company's insurance reserves during the period are as follows:

(in thousands)


2008


2007Balance at January 1

$
28,293

$
22,521Insurance expense provisions


40


5,772Balance at December 31

$
28,333

$
28,293


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 to protect it against a portion of its
risk of loss and cover it against 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 and the inherent variability in predicting future settlements and judicial decisions, actual future litigation costs
could differ from the Company's current estimates. At December 31, 2008 and 2007, the Company had legal reserves of $15.2 million and $15.3 million, respectively. (See
Item 3, "Legal Proceedings.")

56

---



Note K: Supplemental Guarantor Information

The
Company's obligations to pay principal, premium, if any, and interest under its $550.0 million unsecured revolving credit facility; 5.4 percent senior notes due May 2012;
6.9 percent senior notes due June 2013; and 5.4 percent senior notes due January 2015 are guaranteed on a joint and several basis by substantially all of its 100 percent-owned
homebuilding subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full and unconditional.

In
lieu of providing separate financial statements for the Guarantor Subsidiaries, the accompanying condensed consolidating financial statements have been included. Management does not believe that
separate financial statements for 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 (a) the parent company and
issuer, The Ryland Group, Inc. ("TRG, Inc."); (b) the Guarantor Subsidiaries;
(c) the non-Guarantor Subsidiaries; and (d) the consolidation eliminations
used to arrive at the consolidated information for The Ryland Group, Inc. and subsidiaries.

CONSOLIDATING STATEMENTS OF EARNINGS

YEAR ENDED DECEMBER 31, 2008(in thousands)


TRG, INC.


GUARANTOR
SUBSIDIARIES


NON-
GUARANTOR
SUBSIDIARIES


CONSOLIDATING
ELIMINATIONS


CONSOLIDATED
TOTALREVENUES

$
1,158,775

$
784,712

$
64,493

$
(31,856
)
$
1,976,124EXPENSESCorporate, general and administrative


1,441,054


930,620


41,466


(31,856
)

2,381,284Expenses related to early retirement of debt


604











604TOTAL EXPENSES


1,441,658


930,620


41,466


(31,856
)

2,381,888Earnings (loss) before taxes


(282,883
)

(145,908
)

23,027





(405,764
)Tax expense (benefit)


(11,782
)

(6,077
)

8,680





(9,179
)Equity in net earnings (loss) of subsidiaries


(125,484
)







125,484


NET EARNINGS (LOSS)

$
(396,585
)
$
(139,831
)
$
14,347

$
125,484

$
(396,585
)


YEAR ENDED DECEMBER 31, 2007REVENUES

$
1,863,482

$
1,147,957

$
93,282

$
(52,846
)
$
3,051,875EXPENSESCorporate, general and administrative


2,034,125


1,437,849


52,355


(52,846
)

3,471,483Expenses related to early retirement of debt


490











490TOTAL EXPENSES


2,034,615


1,437,849


52,355


(52,846
)

3,471,973Earnings (loss) before taxes


(171,133
)

(289,892
)

40,927





(420,098
)Tax expense (benefit)


(37,985
)

(64,344
)

15,757





(86,572
)Equity in net earnings (loss) of subsidiaries


(200,378
)







200,378


NET EARNINGS (LOSS)

$
(333,526
)
$
(225,548
)
$
25,170

$
200,378

$
(333,526
)


YEAR ENDED DECEMBER 31, 2006REVENUES

$
2,859,744

$
1,908,416

$
140,379

$
(128,286
)
$
4,780,253EXPENSESCorporate, general and administrative


2,450,382


1,810,670


72,684


(128,286
)

4,205,450Expenses related to early retirement of debt


7,695











7,695TOTAL EXPENSES


2,458,077


1,810,670


72,684


(128,286
)

4,213,145Earnings before taxes


401,667


97,746


67,695





567,108Tax expense


145,125


36,655


25,386





207,166Equity in net earnings of subsidiaries


103,400








(103,400
)

NET EARNINGS

$
359,942

$
61,091

$
42,309

$
(103,400
)
$
359,942


57

---



CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2008(in thousands)


TRG, INC.


GUARANTOR
SUBSIDIARIES


NON-
GUARANTOR
SUBSIDIARIES


CONSOLIDATING
ELIMINATIONS


CONSOLIDATED
TOTALASSETSCash and cash equivalents

$
12,021

$
349,082

$
62,156

$


$
423,259Consolidated inventories owned


705,365


375,734








1,081,099Consolidated inventories not owned


140


705


14,373





15,218Total inventories


705,505


376,439


14,373





1,096,317Investment in subsidiaries/intercompany receivables


738,127





3,194


(741,321
)

Other assets


247,629


58,868


36,915





343,412TOTAL ASSETS


1,703,282


784,389


116,638


(741,321
)

1,862,988LIABILITIESAccounts payable and other accrued liabilities


209,684


71,941


51,786





333,411Debt


768,236


39


22,124





790,399Intercompany payables





438,119





(438,119
)

TOTAL LIABILITIES


977,920


510,099


73,910


(438,119
)

1,123,810MINORITY INTEREST








13,816





13,816STOCKHOLDERS' EQUITY


725,362


274,290


28,912


(303,202
)

725,362TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,703,282

$
784,389

$
116,638

$
(741,321
)
$
1,862,988


DECEMBER 31, 2007ASSETSCash and cash equivalents

$
12,908

$
172,363

$
58,343

$


$
243,614Consolidated inventories owned


1,166,824


570,119








1,736,943Consolidated inventories not owned


1,179


6,940


68,615





76,734Total inventories


1,168,003


577,059


68,615





1,813,677Investment in subsidiaries/intercompany receivables


758,282








(758,282
)

Other assets


362,697


95,239


36,093





494,029TOTAL ASSETS


2,301,890


844,661


163,051


(758,282
)

2,551,320LIABILITIESAccounts payable and other accrued liabilities


342,090


114,842


61,663





518,595Debt


835,074


4,006








839,080Intercompany payables





311,692


4,428


(316,120
)

TOTAL LIABILITIES


1,177,164


430,540


66,091


(316,120
)

1,357,675MINORITY INTEREST








68,919





68,919STOCKHOLDERS' EQUITY


1,124,726


414,121


28,041


(442,162
)

1,124,726TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
2,301,890

$
844,661

$
163,051

$
(758,282
)
$
2,551,320


58

---



CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2008(in thousands)


TRG, INC.


GUARANTOR
SUBSIDIARIES


NON-
GUARANTOR
SUBSIDIARIES


CONSOLIDATING
ELIMINATIONS


CONSOLIDATED
TOTALCASH FLOWS FROM OPERATING ACTIVITIESNet operating earnings (loss)

$
(396,585
)
$
(139,831
)
$
14,347

$
125,484

$
(396,585
)Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities


410,777


118,764


986





530,527Changes in assets and liabilities


214,476


80,909


(26,052
)

(125,484
)

143,849Other operating activities, net


(29,365
)










(29,365
)Net cash provided by (used for) operating activities


199,303


59,842


(10,719
)




248,426CASH FLOWS FROM INVESTING ACTIVITIESNet additions to property, plant and equipment


(4,272
)

(5,583
)

(11
)




(9,866
)Other investing activities, net








40





40Net cash (used for) provided by investing activities


(4,272
)

(5,583
)

29





(9,826
)CASH FLOWS FROM FINANCING ACTIVITIES(Decrease) increase in debt


(66,839
)

(3,967
)

22,125





(48,681
)Common stock dividends, repurchases and
stock-based compensation and other


(10,274
)










(10,274
)Intercompany balances


(118,805
)

126,427


(7,622
)




Net cash (used for) provided by financing activities


(195,918
)

122,460


14,503





(58,955
)Net (decrease) increase in cash and cash equivalents


(887
)

176,719


3,813





179,645Cash and cash equivalents at beginning of year


12,908


172,363


58,343





243,614CASH AND CASH EQUIVALENTS AT END OF YEAR

$
12,021

$
349,082

$
62,156

$


$
423,259


YEAR ENDED DECEMBER 31, 2007CASH FLOWS FROM OPERATING ACTIVITIESNet operating earnings (loss)

$
(333,526
)
$
(225,548
)
$
25,170

$
200,378

$
(333,526
)Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities


439,486


284,210


1,584





725,280Changes in assets and liabilities


26,332


63,056


(28,639
)

(200,378
)

(139,629
)Other operating activities, net


(23,985
)










(23,985
)Net cash provided by (used for) operating activities


108,307


121,718


(1,885
)




228,140CASH FLOWS FROM INVESTING ACTIVITIESNet additions to property, plant and equipment


(17,939
)

(14,256
)

48





(32,147
)Other investing activities, net








750





750Net cash (used for) provided by investing activities


(17,939
)

(14,256
)

798





(31,397
)CASH FLOWS FROM FINANCING ACTIVITIESDecrease in debt


(106,025
)

(5,012
)







(111,037
)Common stock dividends, repurchases and
stock-based compensation and other


(57,124
)




(5
)




(57,129
)Intercompany balances


42,560


(59,166
)

16,606





Net cash (used for) provided by financing activities


(120,589
)

(64,178
)

16,601





(168,166
)Net (decrease) increase in cash and cash equivalents


(30,221
)

43,284


15,514





28,577Cash and cash equivalents at beginning of year


43,129


129,079


42,829





215,037CASH AND CASH EQUIVALENTS AT END OF YEAR

$
12,908

$
172,363

$
58,343

$


$
243,614


59

---



CONSOLIDATING STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2006(in thousands)


TRG, INC.


GUARANTOR
SUBSIDIARIES


NON-
GUARANTOR
SUBSIDIARIES


CONSOLIDATING
ELIMINATIONS


CONSOLIDATED
TOTALCASH FLOWS FROM OPERATING ACTIVITIESNet operating earnings

$
359,942

$
61,091

$
42,309

$
(103,400
)
$
359,942Adjustments to reconcile net earnings to
net cash provided by operating activities


62,606


89,040


1,992





153,638Changes in assets and liabilities


(438,743
)

(116,944
)

(28,645
)

103,400


(480,932
)Other operating activities, net


(18,011
)










(18,011
)Net cash (used for) provided by operating activities


(34,206
)

33,187


15,656





14,637CASH FLOWS FROM INVESTING ACTIVITIESNet additions to property, plant and equipment


(31,280
)

(21,372
)

(1,187
)




(53,839
)Other investing activities, net








2,250





2,250Net cash (used for) provided by investing activities


(31,280
)

(21,372
)

1,063





(51,589
)CASH FLOWS FROM FINANCING ACTIVITIESIncrease (decrease) in debt


33,363


(5,216
)







28,147Common stock dividends, repurchases and
stock-based compensation and other


(237,493
)




(48
)




(237,541
)Intercompany balances


230,850


(237,229
)

6,379





Net cash provided by (used for) financing activities


26,720


(242,445
)

6,331





(209,394
)Net (decrease) increase in cash and cash equivalents


(38,766
)

(230,630
)

23,050





(246,346
)Cash and cash equivalents at beginning of year


81,895


359,709


19,779





461,383CASH AND CASH EQUIVALENTS AT END OF YEAR

$
43,129

$
129,079

$
42,829

$


$
215,037


60

---



Note L: Subsequent Events

In
January 2009, RMC entered into the RMC Repurchase Facility, a $60.0 million repurchase facility, with Guaranty Bank and Buyers. The facility became effective January 15, 2009 and
replaces the RMC Credit Agreement that expired in January 2009. The agreement contains an initial interest rate of LIBOR plus a margin of 1.75 percent, subject to a LIBOR floor of
2.0 percent. The facility contains representations, warranties, covenants and provisions defining events of default. The covenants require RMC to maintain a minimum net worth and certain
financial ratios.

In
January 2009, the Company entered into the Fourth Amendment to Credit Agreement (the "Amendment"), among the Company, J.P. Morgan Chase Bank, N.A., as Agent, and the lenders listed therein, which
further amended its $550.0 million unsecured revolving credit facility. The Amendment, among other things:a)decreased the Company's
borrowing availability from $550.0 million to $200.0 million, subject to further reduction if the consolidated tangible net worth is less than $400.0 million; b)changed the
adjustments used to determine compliance with the definition of consolidated tangible net worth covenant and reduced the base
amount for the minimum consolidated tangible net worth covenant default limit to $300.0 million;c)amended the leverage ratio restriction
to be no more than 55.0 percent;d)agreed to establish certain liquidity reserve accounts in the event the Company fails to satisfy an
interest coverage test and an adjusted cash flow from operations to interest incurred test;e)changed the restriction of the Company's book
value of unsold land to 1.20x its consolidated tangible net worth;f)changed the borrowing base to allow for 100.0 percent use of
unrestricted cash in excess of $25.0 million, less any drawn balances on the revolving credit facility;g)established a requirement for
the Company to cash collateralize a pro rata share of a defaulting lender's letter of credit and swing line exposure;h)established an annual
common stock cash dividend limit of $10.0 million; andi)increased the pricing grid, which is based on the Company's leverage ratio and
public debt rating, as well as the interest coverage ratio. The credit facility's maturity date of January 2011 remains unchanged, and the uncommitted accordion feature has been reduced to a maximum
of $300.0 million.

During
the first quarter of 2009, the Company repurchased $47.6 million of its senior notes for $35.9 million in the open market.

In
January 2009, the Company and Oaktree Capital formed a limited liability company (the "Venture") to acquire and develop residential real estate projects. Combining the Company's operational
proficiency as a production homebuilder with Oaktree's expertise in investing in distressed assets allows the Venture to take advantage of the current dislocation in the residential real estate
market. An executive committee, comprised of representatives from both firms, will make purchase decisions. The Venture will then provide the improvements and permits necessary to ultimately sell the
projects as finished lots. The Company will have the right to option all lots sold by the Venture.

Supplementary Data

QUARTERLY FINANCIAL DATA

2008

2007(in thousands, except share data) unaudited


DEC. 31


SEPT. 30


JUN. 30


MAR. 31


DEC. 31


SEPT. 30


JUN. 30


MAR. 31CONSOLIDATED RESULTSRevenues

$
528,233

$
543,844

$
487,881

$
416,166

$
859,790

$
737,237

$
743,734

$
711,114Earnings (loss) before taxes


(89,148
)

(80,679
)

(189,771
)

(46,166
)

(206,111
)

(94,521
)

(88,825
)

(30,641
)Tax expense (benefit)


(29,236
)

(14,961
)

51,868


(16,850
)

(4,201
)

(39,781
)

(36,394
)

(6,196
)Net earnings (loss)

$
(59,912
)
$
(65,718
)
$
(241,639
)
$
(29,316
)
$
(201,910
)
$
(54,740
)
$
(52,431
)
$
(24,445
)Net earnings (loss) per common share:Basic

$
(1.40
)
$
(1.54
)
$
(5.70
)
$
(0.69
)
$
(4.80
)
$
(1.30
)
$
(1.25
)
$
(0.58
)Diluted


(1.40
)

(1.54
)

(5.70
)

(0.69
)

(4.80
)

(1.30
)

(1.25
)

(0.58
)Weighted-average common shares outstanding:Basic


42,726


42,607


42,422


42,232


42,096


41,958


42,011


42,485Diluted


42,726


42,607


42,422


42,232


42,096


41,958


42,011


42,485


61

---



Report of Management

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

The
accounting systems, which record, summarize and report financial information, are supported by internal control systems designed to provide reasonable assurance, at an appropriate cost, that the
assets are safeguarded and that transactions are recorded in accordance with Company policies and procedures. 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.

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. Milne Executive Vice President and
Chief Financial Officer

/s/ David L. FristoeDavid L. Fristoe Senior Vice President, Controller and
Chief Accounting Officer

62

---



Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
The Ryland Group, Inc.

We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We
conducted our audits 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 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Ryland Group, Inc.'s internal control over financial reporting as of
December 31, 2008, 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 23, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLPErnst & Young LLP
Los Angeles, California
February 23, 2009

63

---



Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
The Ryland Group, Inc.

We have audited The Ryland Group, Inc.'s internal control over financial reporting as of December 31, 2008, 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 included in the accompanying Report of
Management. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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, The Ryland Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2008, and our report dated February 23, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLPErnst & Young LLP
Los Angeles, California
February 23, 2009

64

---





Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

The Company has procedures in place for accumulating and evaluating information that enable it to prepare and file reports with the SEC. At the end
of the period covered by the report on Form 10-K, an evaluation was performed by the Company's management, including the CEO and CFO, of the effectiveness of the Company's
disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008.

The
Company has a committee consisting of key officers, including the chief accounting officer and general counsel, to ensure that all information required to be disclosed in the Company's reports is
accumulated and communicated to those individuals responsible for the preparation of the reports, as well as to all principal executive and financial officers, in a manner that will allow timely
decisions regarding required disclosures.

The
Company's management, including the CEO and CFO, has evaluated any changes in the Company's internal control over financial reporting that occurred during the quarterly period ended
December 31, 2008, and has concluded that there was no change during this period that has materially affected, or is reasonably likely to materially affect, the Company's internal control over
financial reporting.

At
December 31, 2008, the Company completed a detailed evaluation of its internal control over financial reporting, including the assessment, documentation and testing of its controls, as
required by the Sarbanes-Oxley Act of 2002. No material weaknesses were identified. The Company's management summarized its assessment process and documented its conclusions in the Report of
Management, which appears in Part II, Item 8, "Financial Statements and Supplementary Data."

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 files certifications by its Chief Executive Officer and Chief Financial Officer with the SEC in accordance with the Sarbanes-Oxley Act of 2002. These
certifications are filed as exhibits to this Annual Report on Form 10-K.

Item 9B.    Other Information

None.

65

---



PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Executive Officers of the Company

The following sets forth certain information regarding the executive officers of the Company:

Name

Age

Position(date elected to position)Prior Business ExperienceR. Chad Dreier

61

Chairman of the Board of Directors (since 1994); President of the Company (1993-2008); Chief Executive Officer of the Company (since 1993)Larry T. Nicholson

51

President of the Company (since 2008); Chief Operating Officer of the Company (since 2007); Senior Vice President of the Company
and President of the Southeast Region of Ryland Homes (2005-2007); President of the Orlando Division of Ryland Homes (1999-2005)Gordon A. Milne

57

Executive Vice President and Chief Financial Officer of the Company (since 2002); Senior Vice President and Chief Financial
Officer of the Company (2000-2002)Keith E. Bass

44

Senior Vice President of the Company and President of the South Region of Ryland Homes (since 2008); Senior Vice President of the
Company and President of the Southeast Region of Ryland Homes (2007-2008); President of the Orlando Division of Ryland Homes (2004-2007); Vice President of Land Resources for the Southeast Region of Ryland Homes (2003-2004)Robert J. Cunnion, III

53

Senior Vice President, Human Resources of the Company (since 1999)Eric E. Elder

51

Senior Vice President, Marketing and Communications of the Company (since 2000)David L. Fristoe

52

Senior Vice President, Controller and Chief Accounting Officer of the Company (since 2005); Senior Vice President, Controller,
Chief Accounting Officer and Chief Information Officer of the Company (2000-2005)Timothy J. Geckle

56

Senior Vice President, General Counsel and Secretary of the Company (since 1997)Daniel G. Schreiner

51

Senior Vice President of the Company (since 1999); President of Ryland Mortgage Company (since 1998)Peter G. Skelly

45

Senior Vice President of the Company and President of the North/West Region of Ryland Homes (since 2008); Senior Vice President
of the Company and President of the North Region of Ryland Homes (2006-2008); President of the Chicago Division of Ryland Homes (1999-2006)


66

---



The
Board of Directors elects all officers.

There
are no family relationships between any director or executive officer, or arrangements or understandings pursuant to which the officers listed above were elected. For a description of the
Company's employment and severance arrangements with certain of its executive officers, see the Company'sProxy Statement for the 2009 Annual Meeting of
Stockholders(the "2009 Proxy Statement"), which is filed pursuant to Regulation 14A under the Exchange Act.

Information
as to the Company's directors, executive officers and corporate governance is incorporated by reference from the Company's2009 Proxy
Statement, including the determination by the Board of Directors, with respect to the Audit Committee's financial expert, and the identity of each member of the Audit Committee
of the Board of Directors.

The
Company has adopted a code of ethics that is applicable to its senior officers, directors and employees. To retrieve the Company's code of ethics, visit www.ryland.com, select "Investors" and scroll
down the page to "Code of Ethics."

Item 11.    Executive Compensation

The information required by this item is incorporated by reference from the2009 Proxy Statement. The
Compensation Committee Report to be included in the2009 Proxy Statementshall be deemed furnished in this Annual Report on Form 10-K
and shall not be incorporated by reference into any filing under the Securities Act or the Exchange Act as a result of such furnishing in this Item 11.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is set forth on page 13 of this Annual Report on Form 10-K and is incorporated by
reference from the2009 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference from the2009 Proxy Statement.

Item 14.    Principal Accounting Fees and Services

The information required by this item is incorporated by reference from the2009 Proxy Statement.

PART IV

Item 15.    Exhibits, Financial Statement Schedules

Page No.(a)


1.

Financial StatementsConsolidated Statements of Earningsyears ended December 31, 2008, 2007 and 2006


34Consolidated Balance SheetsDecember 31, 2008 and 2007


35Consolidated Statements of Stockholders' Equityyears ended December 31, 2008, 2007 and 2006


36Consolidated Statements of Cash Flowsyears ended December 31, 2008, 2007 and 2006


37Notes to Consolidated Financial Statements


382.

Financial Statement ScheduleSchedule IIValuation and Qualifying Accounts


71Schedules not listed above have been omitted either because they are inapplicable or because the required
information has been provided in the financial statements or notes thereto.


67

---





3.


ExhibitsThe following exhibits are included with this report or incorporated herein by reference as indicated below:3.1

Articles of Restatement of The Ryland Group, Inc., as amended
(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2005)3.2

Bylaws of The Ryland Group, Inc., as amended
(Incorporated by reference from Form 10-K for the year ended December 31, 1996)4.1

Senior Notes, dated as of January 11, 2005
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-121469)4.2

Articles Supplementary of The Ryland Group, Inc.
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-157170)4.3

Senior Notes, dated as of May 9, 2005
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-124000)4.4

Senior Notes, dated as of May 30, 2006
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-124000)4.5

Rights Agreement, dated as of December 18, 2008, between The Ryland Group,
 Inc. and American
Stock Transfer & Trust Company, LLC
(Incorporated by reference from Form 8-A, filed December 29, 2008)10.1

Credit Agreement, dated as of January 12, 2006, between The Ryland Group, Inc. and certain financial institutions
(Incorporated by reference from Form 8-K, filed January 13, 2006)10.2

First Amendment to Credit Agreement, dated October 17, 2007, between The Ryland Group, Inc. and certain financial
institutions
(Incorporated by reference from Form 8-K, filed October 17, 2007)10.3

Second Amendment to Credit Agreement, dated February 15, 2008, between The Ryland Group, Inc. and certain financial
institutions
(Incorporated by reference from Form 8-K, filed February 15, 2008)10.4

Third Amendment to Credit Agreement, dated June 27, 2008, between The Ryland Group, Inc. and certain financial
institutions
(Incorporated by reference from Form 8-K, filed July 2, 2008)10.5

Fourth Amendment to Credit Agreement, dated January 22, 2009, between The Ryland Group, Inc. and certain financial
institutions
(Filed herewith)10.6

Credit Agreement, dated January 24, 2008, between Ryland Mortgage Company and Guaranty Bank
(Incorporated by reference from Form 8-K, filed January 29, 2008)10.7

RMC Repurchase Agreement, dated December 31, 2008,
 between Ryland Mortgage Company and
Guaranty Bank and Buyers
(Incorporated by reference from Form 8-K, filed January 15, 2009)10.8

2002 Equity Incentive Plan of The Ryland Group, Inc.
(Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002)10.9

Amendment and Restatement of 2005 Equity Incentive Plan of The Ryland Group, Inc.
(Filed herewith)10.10

Amendment and Restatement of The Ryland Group, Inc. 2007 Equity Incentive Plan
(Filed herewith)10.11

Amendment and Restatement of The Ryland Group, Inc. 2008 Equity Incentive Plan
(Filed herewith)


68

---



3.


Exhibits,continued10.12

Form of Non-Qualified Stock Option Agreement
(Incorporated by reference from Form 8-K, filed April 29, 2005)10.13

Form of Amended and Restated Stock Unit Agreement
(Incorporated by reference from Form 8-K, filed April 18, 2006)10.14

Form of Stock Unit Agreement for Executive Officers
(Incorporated by reference from Form 8-K, filed April 30, 2008)10.15

Amendment No. 1 to Form of Stock Unit Agreement for Executive Officers
(Filed herewith)10.16

Non-Employee Directors' Stock Unit Plan, effective January 1, 2005
(Filed herewith)10.17

2000 Non-Employee Director Equity Plan of The Ryland Group, Inc., as amended
(Incorporated by reference from Form 10-K for the year ended December 31, 2000)10.18

2004 Non-Employee Director Equity Plan of The Ryland Group, Inc.
(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2004)10.19

Non-Employee Director Stock Plan, effective April 26, 2006
(Incorporated by reference from Form 8-K, filed April 27, 2006)10.20

Amended and Restated Employment Agreement, dated as of April 20, 2005, between The Ryland Group, Inc. and R. Chad
Dreier
(Incorporated by reference from Form 8-K/A, filed May 4, 2005)10.21

Amendment No. 1 to the Amended and Restated Employment Agreement, by and between The Ryland Group, Inc. and R. Chad
Dreier, effective January 1, 2005
(Filed herewith)10.22

The Ryland Group, Inc. Dreier Supplemental Executive Retirement Plan
(Incorporated by reference from Form 10-Q for the quarter ended September 30, 2003)10.23

Amendment and Restatement of The Ryland Group, Inc. Dreier Supplemental Executive Retirement Plan II
(Filed herewith)10.24

Form of Stock Unit Agreement for R. Chad Dreier
(Incorporated by reference from Form 8-K, filed April 30, 2008)10.25

Amendment and Restatement of The Ryland Group,
 Inc. Senior Executive Supplemental Retirement
Plan
(Filed herewith)10.26

Form of Senior Executive Severance Agreement between The Ryland Group, Inc. and
certain executive officers of the Company
(Incorporated by reference from Form 10-Q for the quarter ended September 30, 2000)10.27

Form of Amendment No. 1 to Senior Executive Severance Agreement between The Ryland Group, Inc. and certain executive
officers of the Company
(Filed herewith)10.28

Form of 2007 Senior Executive Severance Agreement between The Ryland Group,
 Inc. and certain
executive officers of the Company
(Incorporated by reference from Form 10-K for the year ended December 31, 2006)10.29

Form of Amendment No. 1 to 2007 Senior Executive Severance Agreement between The Ryland Group, Inc. and certain executive
officers of the Company
(Filed herewith)


69

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3.


Exhibits,continued10.30

The Ryland Group, Inc. Executive and Director Deferred Compensation Plan II, effective
January 1, 2005
(Filed herewith)10.31

TRG Incentive Plan, as amended and restated, effective January 1, 2005
(Filed herewith)10.32

The Ryland Group, Inc. Performance Award Program
(Incorporated by reference from Form 8-K, filed April 30, 2008)10.33

Amendment No. 1 to The Ryland Group, Inc. Performance Award Program
(Filed herewith)10.34

The Ryland Group, Inc. Senior Executive Performance Plan
(Incorporated by reference from Form 8-K, filed April 30, 2008)10.35

Amendment No. 1 to The Ryland Group, Inc. Senior Executive Performance Plan
(Filed herewith)10.36

Lease Agreement, dated as of December 29, 1999, by and between The Ryland Group, Inc. and
Kilroy Realty Group
(Incorporated by reference from Form 10-K for the year ended December 31, 1999)10.37

First Amendment to Office Building Lease, dated August 26, 2005, by and between
The Ryland Group, Inc. and Kilroy Realty, L.P.
(Incorporated by reference from Form 10-K for the year ended December 31, 2005)10.38

Lease Agreement, dated February 28, 2006, by and between The Ryland Group, Inc. and
PCCP HC Kierland, LLC
(Incorporated by reference from Form 8-K, filed March 6, 2006)12.1

Computation of Ratio of Earnings to Fixed Charges
(Filed herewith)21

Subsidiaries of the Registrant
(Filed herewith)23

Consent of Independent Registered Public Accounting Firm
(Filed herewith)24

Power of Attorney
(Filed herewith)31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)31.2

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)32.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)32.2

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)


70

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The Ryland Group, Inc. and Subsidiaries
Schedule IIValuation and Qualifying Accounts

(in thousands)


BALANCE AT
BEGINNING
OFPERIOD


CHARGED TO
COSTS AND
EXPENSES


DEDUCTIONS
AND
TRANSFERS


BALANCE AT
END OF
PERIODValuation allowances:Homebuilding inventories2008

$
488,106

$
257,389

$
(300,307
)
$
445,1882007


59,735


503,955


(75,584
)

488,1062006


486


62,910


(3,661
)

59,735Other real estate assets2008

$
2,381

$
45,640

$
(14,451
)
$
33,5702007


670


2,241


(530
)

2,3812006


263


549


(142
)

670Deferred tax assets2008

$
75,166

$
143,784

$


$
218,9502007





75,166





75,166


71

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Signatures

Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

The Ryland Group, Inc.By:/s/ R. Chad DreierR. Chad Dreier
Chairman and Chief Executive Officer
(Principal Executive Officer)



February 25, 2009Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.Principal Executive Officer:/s/ R. Chad DreierR. Chad Dreier
Chairman and Chief Executive Officer



February 25, 2009Principal Financial Officer:/s/ Gordon A. MilneGordon A. Milne
Executive Vice President and
Chief Financial Officer



February 25, 2009Principal Accounting Officer:/s/ David L. FristoeDavid L. Fristoe
Senior Vice President, Controller and
Chief Accounting Officer



February 25, 2009A majority of the Board of Directors: R. Chad Dreier, Leslie M. Frécon, Roland A. Hernandez, William L. Jews, Ned Mansour, Robert E. Mellor, Norman J. Metcalfe and Charlotte St. MartinBy:/s/ Timothy J. GeckleTimothy J. Geckle
As Attorney-in-Fact



February 25, 2009


72

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Index of Exhibits

10.5

Fourth Amendment to Credit Agreement, dated January 22, 2009, between The Ryland Group, Inc. and certain financial institutions10.9

Amendment and Restatement of 2005 Equity Incentive Plan of The Ryland Group, Inc.10.10

Amendment and Restatement of The Ryland Group, Inc. 2007 Equity Incentive Plan10.11

Amendment and Restatement of The Ryland Group, Inc. 2008 Equity Incentive Plan10.15

Amendment No. 1 to Form of Stock Unit Agreement for Executive Officers10.16

Non-Employee Directors' Stock Unit Plan, effective January 1, 200510.21

Amendment No. 1 to the Amended and Restated Employment Agreement, by and between The Ryland Group, Inc. and R. Chad Dreier, effective January 1, 200510.23

Amendment and Restatement of The Ryland Group, Inc. Dreier Supplemental Executive Retirement Plan II10.25

Amendment and Restatement of The Ryland Group, Inc. Senior Executive Supplemental Retirement Plan10.27

Form of Amendment No. 1 to Senior Executive Severance Agreement between The Ryland Group, Inc. and certain executive officers of the Company10.29

Form of Amendment No. 1 to 2007 Senior Executive Severance Agreement between The Ryland Group, Inc. and certain executive officers of the Company10.30

The Ryland Group, Inc. Executive and Director Deferred Compensation Plan II, effective January 1, 200510.31

TRG Incentive Plan, as amended and restated, effective January 1, 200510.33

Amendment No. 1 to The Ryland Group, Inc. Performance Award Program10.35

Amendment No. 1 to The Ryland Group, Inc. Senior Executive Performance Plan12.1

Computation of Ratio of Earnings to Fixed Charges21

Subsidiaries of the Registrant23

Consent of Independent Registered Public Accounting Firm24

Power of Attorney31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


73

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