**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-K/A**

**Amendment No. 1**

**x   AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

For the fiscal year ended December 31, 2005

or

**o    TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

For the transition period from ____ to ____

Commission File Number1-8029

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

| Maryland                           | 52-0849948                            |
|------------------------------------|---------------------------------------|
| (State or other  jurisdiction      | (I.R.S. Employer  Identification No.) |
| of incorporation  or organization) |                                  |

 

24025 Park Sorrento, Suite 400, Calabasas, California91302 (Address of principal executive offices)

Registrant’stelephone number, including area code: (818) 223-7500

Securitiesregistered pursuant to Section 12(b) of the Act:

| Title of each class                                          | Name of each exchange on which registered |
|--------------------------------------------------------------|-------------------------------------------|
| Common stock,  par value $1.00 per share                     | New York Stock Exchange                   |
| Common share purchase  rights                                | New York Stock Exchange                   |
| Securities  registered pursuant to Section 12(g) of the Act: | None                                      |

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.
|  | Yes  x | No  o | ** ** |   |
|--|------------------|-----------------|------------|--------|

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.
|  | Yes  o | No  x | ** ** |   |
|--|------------------|-----------------|------------|--------|

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
|  | Yes  x | No  o | ** ** |   |
|--|------------------|-----------------|------------|--------|

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference 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 alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer  x | Accelerated  filer  o | Non-accelerated filer  o |
|--------------------------------------|---------------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).
|  | Yes  o | No  x | ** ** |   |
|--|------------------|-----------------|------------|--------|

 

The aggregatemarket value of the common stock of The Ryland Group, Inc. held bynonaffiliates of the registrant (46,176,085 shares) at June 30, 2005, was$3,503,379,569.

 

The number ofshares of common stock of The Ryland Group, Inc. outstanding onFebruary 13, 2006, was 46,043,293.

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** **
| **DOCUMENTS INCORPORATED BY REFERENCE**                        |               |
|----------------------------------------------------------------|--------------------|
|                                                           |               |   |   |
| Name of Document                                               | Location in Report |   |
|                                                           |               |   |   |
| *Proxy  Statement for the 2006 Annual Meeting of Stockholders* |               | Parts I, III |   |
|                                                           |               |   |   |

** **

**Explanatory Paragraph**

ThisForm 10-K/A is being filed to provide additional segment reportingfootnote disclosure related to the Company’s homebuilding operations.  The Company has restated the accompanyingconsolidated financial statements with revisions to its segment disclosure forall periods presented in order to disaggregate its homebuilding operations intoregional reporting segments.  See reviseddisclosures in Note B, “Segment Information,” to the Consolidated FinancialStatements.  Unless otherwise indicated,no information in this Form 10-K/A has been updated from the originalfiling for any subsequent information or events.

For theconvenience of the reader, this Form 10-K/A sets forth the entire 2005Form 10-K.  However, thisForm 10-K/A amends and restates only *“PartI. Financial Information, Items 1., 7., 8. and 9A.”* of the 2005Form 10-K, in each case solely to be responsive to a disclosure comment,indicating a preference for additional segment reporting, received from theDivision of Corporation Finance of the Securities and Exchange Commission.  Information previously incorporated byreference from Exhibit 13 to the Form 10-K has been included in this Form10-K/A and cross-references to such information have been adjusted.  The aforementioned changes to theconsolidated financial statements have no effect on the Company’s financialposition as of December 31, 2005 and 2004, or its results of operationsand cash flows for the fiscal years ended December 31, 2005, 2004 and 2003.

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**THERYLAND GROUP, INC.**

**FORM10-K/A**

**INDEX**
| **ITEM NO.**          |       |                                                                                                                |       |       |       |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART I**            |       |                                                                                                                |       |       |       |
| Item 1.               |       | Business                                                                                                            |       | 4          |       |
| Item 1A.              |       | Risk Factors                                                                                                        |       | 10         |       |
| Item  1B.             |       | Unresolved Staff Comments                                                                                           |       | 12         |       |
| Item 2.               |       | Properties                                                                                                          |       | 12         |       |
| Item 3.               |       | Legal Proceedings                                                                                                   |       | 12         |       |
| Item  4.              |       | Submission of Matters to a Vote of Security Holders                                                                 |       | 13         |       |
|                  |       |                                                                                                                |       |       |       |
| **PART II**           | ** ** | ** **                                                                                                          | ** ** | ** ** | ** ** |
|                  |       |                                                                                                                |       |       |       |
| Item  5.              |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities |       | 14         |       |
| Item 6.               |       | Selected Financial  Data                                                                                            |       | 15         |       |
| Item 7.               |       | Management’s  Discussion and Analysis of Financial Condition and  Results of Operations                        |       | 17         |       |
| Item 7A.              |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 32         |       |
| Item 8.               |       | Financial  Statements and Supplementary Data                                                                        |       | 33         |       |
| Item 9.               |       | Changes in and  Disagreements with Accountants on Accounting and  Financial Disclosure                              |       | 65         |       |
| Item 9A.              |       | Controls and  Procedures                                                                                            |       | 65         |       |
| Item 9B.              |       | Other Information                                                                                                   |       | 66         |       |
|                  |       |                                                                                                                |       |       |       |
| **PART III**          | ** ** | ** **                                                                                                          | ** ** | ** ** | ** ** |
|                  |       |                                                                                                                |       |       |       |
| Item 10.              |       | Directors and  Executive Officers of the Registrant                                                                 |       | 66         |       |
| Item 11.              |       | Executive  Compensation                                                                                             |       | 66         |       |
| Item 12.              |       | Security  Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 66         |       |
| Item 13.              |       | Certain  Relationships and Related Transactions                                                                     |       | 66         |       |
| Item 14.              |       | Principal  Accountant Fees and Services                                                                             |       | 66         |       |
|                  |       |                                                                                                                |       |       |       |
| **PART IV**           | ** ** | ** **                                                                                                          | ** ** | ** ** | ** ** |
|                  |       |                                                                                                                |       |       |       |
| Item 15.              |       | Exhibits and  Financial Statement Schedules                                                                         |       | 67         |       |
| ** **            |       | ** **                                                                                                          |       |       |       |
| ** **            |       | ** **                                                                                                          |       |       |       |
| **SIGNATURES**        |       | 73                                                                                                                  |       |
| ** **            |       |                                                                                                                |       |
| **INDEX OF EXHIBITS** |       | 74                                                                                                                  |       |

 

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**PART I**

**Item 1.**                          Business

*Withheadquarters in Southern California, The Ryland Group, Inc., a Marylandcorporation (the “Company”), is one of the nation’s largest homebuilders and aleading mortgage-finance company.  TheCompany is a Fortune 500 company and is traded on the New York Stock Exchangeunder the symbol “RYL.”  Founded in 1967,the Company has built more than 250,000 homes during its 38-year history.  In addition, Ryland Mortgage Company and itssubsidiaries (RMC) has provided mortgage financing and related services formore than 210,000 homebuyers.  TheCompany consists of six segments: four geographically-determined homebuildingregions; financial services; and corporate.*

*TheCompany’s operations span all significant aspects of the homebuying process – fromdesign, construction and sale to mortgage origination, title insurance, escrowand insurance services.  The homebuildingoperations are by far the most substantial part of its business, comprisingapproximately 98 percent of consolidated revenues in fiscal year 2005.  The homebuilding segments generate nearly allof their revenues from the sale of completed homes, with a lesser amount fromthe sale of land and lots.  In additionto building single-family detached homes, the Company’s homebuilding segmentsalso build attached homes, such as town homes and condominiums, including somemid-rise buildings, which share common walls and roofs.  The Company builds homes for entry-levelbuyers, as well as for first- and second-time move-up buyers.  The Company’s prices range from $92,000 tomore than $600,000, with the average price of a Ryland home closed during 2005being $278,000.  The financial servicessegment offers mortgage, title, escrow and insurance services to its homeownersand subcontractors.*

*Overthe last 12 years, the Company has concentrated on expanding its operations byinvesting its available capital into both existing and new markets.  It believes that measured “organic” growthavoids the risk, debt, intangible assets and distractions associated withexternal acquisitions.  The Companyfocuses on achieving a high return on invested capital and profitableoperations in every one of its markets. New communities are evaluated based on return and profitabilitybenchmarks, and both senior and local management are incentivized based ontheir ability to achieve such returns. Management continually monitors the land acquisition process, salesrevenues, margins and returns achieved in each of the Company’s markets as partof its evaluation of the use of its capital.*

*TheCompany is highly diversified throughout the United States, with no more than10 percent and 20 percent of its deployed capital allocated to any given marketor geographic area, respectively.  TheCompany believes diversification minimizes exposure to economic and marketfluctuations and enhances growth potential. Capital is strategically allocated to avoid concentration in any givengeographic area and to circumvent the accompanying risk associated withexcessive dependence on local market anomalies. Subject to economic conditions, the Company plans to continue expandingin its existing markets and strives to be among the largest builders in each ofthose markets.  It also intends to continuediversification by entering new markets, primarily through establishingstart-up or satellite operations in markets near its existing divisions.*

The Company’snational scale has provided increased opportunities for negotiation of volumediscounts and rebates from national and regional material suppliers.  Additionally, it has greater access to alower cost of capital due to the strength and transparency of its balancesheet, as well as to its lending and capital markets relationships.  The Company’s economies of scale anddiversification have contributed to significant improvements in its operatingmargins.

Committed toproduct innovation, the Company conducts ongoing research into consumerpreferences and trends.  It is constantlyadapting and improving its house plans, design features, customized options andmortgage programs.  The Company strivesto offer value, selection, location and quality to all homebuyers.

The Company isdedicated to building quality homes and customer relationships.  With customer satisfaction as a majorpriority, it continues to make innovative enhancements designed to attracthomebuyers.  During 2005, the Companydeveloped new training programs for service representatives and implemented on-linesystems for 

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tracking requests,processing issues and improving customer interaction.  In addition, the Company contracted withEliant, an organization that analyzes customer feedback, in order to betterserve homebuyers’ needs.

The Company entersinto land development joint ventures, from time to time, as a means of buildinglot positions, reducing its risk profile and enhancing its return oncapital.  It often partners withdevelopers, other homebuilders or financial investors to develop finished lotsfor sale to the joint ventures’ members or other third parties.

Aside from beingan added value to customers, the financial services segment greatly enhancesthe Company’s profitability while limiting its risk.  A competitively high capture rate formortgage financing and other services allows the homebuilder to monitor itsbacklog and closing process.  Risk isfurther reduced because substantially all loans are sold on the day they closeto a third party, which the third party then services and manages.

**Homebuilding**

*General*

Ryland homes arebuilt on-site and marketed in four major geographic regions, or segments.  At December 31, 2005, the Company operated inthe following metropolitan areas:
| Region/Segment |     | Major Markets Served                                                                                                                |
|----------------|----------|-------------------------------------------------------------------------------------------------------------------------------------|
| North          | * * | *Baltimore, Chicago, Cincinnati,  Delaware, Indianapolis, Minneapolis and Washington, D.C.*                                         |
| Texas          | * * | *Austin, Dallas, Houston and San  Antonio*                                                                                          |
| Southeast      | * * | *Atlanta, Charleston, Charlotte,  Fort Myers, Greensboro, Greenville, Jacksonville, Orlando and Tampa*                              |
| West           | * * | *California’s Central Valley, California’s  Inland Empire, Denver, Las Vegas, Phoenix, Sacramento and the San Diego area* |

 

The Company hasdecentralized its operations to provide more flexibility to local divisionpresidents and management teams.  Each ofits 22 homebuilding divisions across the country generally consists of adivision president, a controller and other management personnel focused on landentitlement, acquisition and development; sales, construction, customerservice, and purchasing; as well as accounting and administrativepersonnel.  The Company’s operations ineach of its homebuilding markets may differ due to a number of market-specificfactors.  These factors include regionaleconomic conditions and job growth; land availability and local landdevelopment; consumer preferences; competition from other homebuilders; andhome resale activity.  The Company notonly considers each of these factors upon entering into new markets, but alsoin determining the extent of its operations and capital allocation in existingmarkets.  The Company’s local managementteams are familiar with these factors, and their market experience andexpertise are critical in making decisions regarding local operations.

The Companyprovides oversight and centralizes key elements of its homebuilding businessthrough its corporate and regional offices. The Company has four regional offices, which generally consist of aregion president; a chief financial officer; real estate legal counsel; andother management personnel focused on human resources, marketing andoperations.  Regional offices provideoversight and standardization where appropriate.  The staff in each of the Company’s regionoffices monitors activities by using various operational metrics in order toachieve Company return benchmarks.

Ryland marketsattached and detached single-family homes, which are generally targeted toentry-level and first- and second-time move-up buyers.  The Company’s diverse product line istailored to the local styles and preferences found in each of its geographicmarkets.  The product line offered in aparticular community is determined in conjunction with the land acquisitionprocess and is dependent upon a number of factors, including consumerpreferences, competitive product offerings and development costs.  Architectural services are generallyoutsourced to increase creativity and to ensure that the Company’s home designsare consistent with local market preferences.

Homebuyers areable to customize certain features of their homes by selecting from numerous optionsand upgrades displayed in the Company’s model homes and design centers.  These design centers, which are convenientlylocated in most of the Company’s markets, also represent an increasing sourceof additional revenue and profit for the 

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Company.  Custom options contributed in excess of 11percent of revenues in 2005 and significantly higher margins than base homes.

*Land Acquisition and Development*

The Company’sobjective is to control a portfolio of building lots sufficient to meet itsanticipated homebuilding requirements for a period of approximately four tofive years.  The Company acquires landonly after completing due diligence and feasibility studies.  The land acquisition process is controlled bya corporate land approval committee to help ensure that transactions meet theCompany’s standards for financial performance and risk.  In the ordinary course of its homebuildingbusiness, the Company utilizes both direct acquisition and option contracts tocontrol building lots for use in the sale and construction of homes.  The Company’s direct land acquisitionactivities include the bulk purchase of finished lots from developers and thepurchase of undeveloped entitled land from third parties.  The Company generally does not purchaseunentitled or unzoned land.

Although controlof lot inventory through the use of option contracts minimizes the Company’sinvestment, such a strategy is not viable in certain markets due to the absenceof third-party land developers.  In othermarkets, competitive conditions may prevent the Company from controllingquality lots solely through the use of option contracts.  In such situations, the Company may acquireundeveloped entitled land and/or finished lots on a bulk basis.  The Company utilizes the selective developmentof land to gain access to prime locations, increase margins and position itselfas a leader in the area through its influence over a community’s character,layout and amenities.  After determiningthe size, style, price range, density, layout and overall design for acommunity, the Company obtains governmental and other approvals necessary tobegin the development process.  Land isthen graded; roads, utilities, amenities and other infrastructures areinstalled; and the individual home sites are created.

*AtDecember 31, 2005, the Company had cash deposits and letters of creditoutstanding of $188.5 million in connection with option and land purchasecontracts having a total purchase price of $2.1 billion.  These options and commitments expire atvarious dates through 2018.*

*Materials Costs*

Substantially allmaterials used in construction are available from a number of sources but mayfluctuate in price due to various factors. To increase purchasing efficiencies, the Company not only standardizescertain building materials and products, but also acquires such productsthrough national supply contracts.  TheCompany 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 thanthose experienced in the past.

*Construction*

Substantially allon-site construction is performed for a fixed price by independentsubcontractors selected on a competitive-bid basis.  The Company generally requires a minimum ofthree competitive bids for each phase of construction.  Construction activities are supervised by theCompany’s production team, which schedules and coordinates subcontractor work,monitors quality, and ensures compliance with local zoning and buildingcodes.  Construction time for homesdepends on weather, availability of labor or subcontractors, materials, thesize of the home, geological conditions and other factors.  The duration of the home construction processis generally between three and six months. The Company has an integrated financial and homebuilding managementsystem that assists in scheduling production and controlling costs.  Through this system, the Company monitorsconstruction status and job costs incurred for each home during each phase ofconstruction.  The system provides fordetailed budgeting and allows the Company to track and control actual costs,versus construction bids, for each community and subcontractor.  The Company has, on occasion, experiencedshortages of skilled labor in certain markets. If shortages were to occur in the future, such shortages could result inlonger construction times and higher costs than those experienced in the past.

The Company, itssubcontractors and suppliers maintain insurance, subject to deductibles andself-insured amounts, to protect it against various risks associated with itsactivities, including, among others, general liability, “all-risk” property,workmans compensation, and automobile and employee fidelity.  The Company accrues for its expected costsassociated with the deductibles and self-insured amounts.

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*Marketing*

The Companygenerally markets its homes to entry-level and first- and second-time move-upbuyers, through targeted product offerings in each of the communities in whichit operates.  The Company’s marketingstrategy is determined during the land acquisition and feasibility stage of acommunity’s development.  Employees andindependent real estate brokers sell the Company’s homes, generally by showingfurnished models.  A new order isreported when a customer’s sales contract has been signed by the homebuyer andapproved by the Company, subject to cancellation.  The Company normally starts construction of ahome when a customer has selected a lot, chosen a floor plan and receivedpreliminary mortgage approval.  However,construction of homes may begin prior to this in order to satisfy market demandfor completed homes and to facilitate construction scheduling and/or costsavings.  Homebuilding revenues arerecognized when home sales are closed, title and possession are transferred tothe buyer and there is no significant continuing involvement.

The Companyadvertises in newspapers and trade publications, as well as with marketingbrochures and newsletters.  It also usesbillboards, radio and television advertising, and its Web site to market thelocation, price range and availability of its homes.  The Company also attempts to operate inconspicuously located communities that permit it to take advantage of localtraffic patterns.  Model homes play asignificant role in the Company’s marketing efforts, as they create anattractive atmosphere and display options and upgrades.

The Company’ssales contracts typically require an earnest money deposit.  The amount of earnest money required variesbetween markets and communities. Additionally, buyers are generally required to pay additional depositswhen they select options or upgrade features for their homes.  Most of the Company’s sales contractsstipulate that when homebuyers cancel their contracts with the Company, it hasthe right to retain their earnest money and option deposits; however, itsoperating divisions may choose to refund such deposits.  The Company’s sales contracts may alsoinclude contingencies that permit homebuyers to cancel and receive a refund oftheir deposits if they cannot obtain mortgage financing at prevailing orspecified interest rates within a specified time period.  The Company’s contracts may also includeother contingencies, such as the sale of an existing home.  The length of time between the signing of asales contract for a home and delivery of the home to the buyer may vary,depending on customer preferences, permit approval and construction cycletimes.

*CustomerService and Warranties*

The Company’soperating divisions are responsible for pre-closing quality control inspectionsand responding to homebuyers’ post-closing needs.  The Company believes that a prompt andcourteous response to homebuyers’ needs during and after construction reducespost-closing repair costs, enhances its reputation for quality and service, andultimately leads to repeat and referral business.  The subcontractors, who perform most of theactual construction, also provide warranties on workmanship.

The Companyprovides each homeowner with product warranties covering workmanship andmaterials for one year, certain mechanical systems for two years and structuralsystems for ten years at the time of sale. The Company believes its warranty program meets or exceeds terms customarilyoffered in the homebuilding industry.

*Seasonality*

The Company experiences seasonal variations in its quarterly operatingresults and capital requirements. Historically, new order activity is higher during the spring and summermonths.  As a result, it typically hasmore homes under construction, closes more homes, and has greater revenues andoperating income in the third and fourth quarters of a fiscal year.  This is primarily due to the preference ofmany homebuyers to act during those periods.

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**FinancialServices**

The Company’sfinancial services segment includes RMC, Ryland Homes Insurance Company (RHIC),LPS Holdings Corporation and its subsidiaries (LPS) and Columbia National RiskRetention Group, Inc. (CNRRG).  Thefinancial services segment provides mortgage-related products and services, aswell as insurance services, primarily for the Company’s homebuyers andsubcontractors.  By aligning itsoperations with the Company’s homebuilding segments, the financial servicessegment leverages this relationship to capture homebuyers’ loans.

*Loan Origination*

In 2005, RMC’smortgage origination operations consisted primarily of the Company’shomebuilder loans, which were originated in connection with the sale of theCompany’s homes.  During the year, mortgageoperations originated 12,774 loans, totaling approximately $3.1 billion, ofwhich 99.5 percent was for purchases of homes built by the Company and 0.5percent was for the purchase of homes built by others, the purchase of existinghomes or for the refinancing of existing mortgage loans.

The Companyarranges various types of mortgage financing, including conventional, FederalHousing Administration (FHA) and Veterans Administration (VA) mortgages, with various fixed- andadjustable-rate features.  The Company isapproved to originate loans that conform to the guidelines established by theFederal Home Loan Mortgage Corporation (FHLMC) and the Federal NationalMortgage Association (FNMA).  The Companysells the loans it originates, along with the related servicing rights, toothers.

*Title and Escrow Services*

Cornerstone TitleCompany, a wholly-owned subsidiary of RMC and its subsidiaries doing businessas Ryland Title Company, provides title services and acts as a title insuranceagent primarily for the Company’s homebuyers. At December 31, 2005, Ryland Title Company had offices in Arizona,Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Minnesota, Nevada,North Carolina, Ohio, South Carolina, Texas and Virginia.  The Company also operates Ryland EscrowCompany, which performs escrow and loan closing functions for the Company’shomebuyers in California.  During 2005,Ryland Title Company and Ryland Escrow Company provided these services to 96.9percent of the Company’s homebuyers in the markets in which they operate,compared to 95.9 percent during 2004.

LPS is a wholly-owned subsidiary of the Company and was formed to operatecertain limited purpose subsidiaries, including Ryland Escrow Company.

*Insurance Services*

Ryland Insurance Services, a wholly-ownedsubsidiary of RMC, provides insurance services to the Company’shomebuyers.  At December 31, 2005, RylandInsurance Services was licensed to operate in all of the states in which theCompany’s homebuilding segments operate. During 2005, it provided insurance services to 60.4 percent of theCompany’s homebuyers, compared to 58.7 percent during 2004.

RHIC is awholly-owned subsidiary of the Company providing insurance services to thehomebuilding segments’ subcontractors in certain markets.

CNRRG is awholly-owned subsidiary of the Company and some of its affiliates.  CNRRG was formed to directly insure liabilityrisks, specifically homeowners’ warranty coverage, arising in connection withthe homebuilding business of the Company and its affiliates.

**Corporate**

Corporate is anon-operating business segment whose purpose is to support operations.  Corporate departments are responsible forestablishing operational policies and internal control standards; implementingstrategic initiatives; and monitoring compliance with policies and controlsthroughout the Company’s operations. Corporate acts as an internal source of capital and provides financial,human resources, information technology, insurance, legal, marketing, nationalpurchasing and tax compliance services, and performs administrative functionsassociated with a publicly traded entity.

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**Real Estate and EconomicConditions**

The Company issignificantly affected by fluctuations in economic activity, interest rates andlevels of consumer confidence.  Theeffects of these fluctuations differ among the various geographic markets inwhich the Company operates.  Higherinterest rates may affect the ability of buyers to qualify for mortgagefinancing and decrease demand for new homes. As a result, rising interest rates generally will decrease the Company’shome sales and mortgage originations. The Company’s business is also affected by local economic conditions,such as employment rates and housing demand, in the markets in which itoperates.  Some of these markets have, attimes, experienced a significant decline in housing demand.

Inventory risk canbe substantial for homebuilders.  Themarket value of land, lots and housing inventories fluctuates as a result ofchanging market and economic conditions. The Company must continuously locate and acquire land not only forexpansion into new markets, but also for replacement and expansion of landinventory within current markets.  TheCompany employs various measures, including a corporate land approval process anda continuous review by senior management, designed to control inventoryrisk.  However, it cannot assure thatthese measures will avoid or eliminate this risk.

**Competition**

The Companycompetes in each of its markets with a large number of national, regional andlocal homebuilding companies.  Some ofthese national companies are larger than the Company, and most nationalhomebuilders have greater financial resources than in the past.  The strength and expanded presence ofnational homebuilders, plus the continued viability of regional and localhomebuilders, has increased competition in many markets.  This competition could make it more difficultto acquire suitable land at acceptable prices, force an increase in sellingincentives or decrease sales.  Any ofthese could have an adverse impact on the Company’s financial performance orresults of operations.  The Company alsocompetes with other housing alternatives, including existing homes and rentalhousing.  Principal competitive factorsin the homebuilding industry include price; design; quality; reputation;relationship with developers; accessibility of subcontractors; availability andlocation of lots; and availability of customer financing.

**Regulatory and EnvironmentalMatters**

The homebuildingsegments are subject to various local, state and federal laws, 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 zoning anddensity requirements to limit the number of homes that can be built within theboundaries of a particular area, as well as other municipal or city planningissues.  The Company may also experienceperiodic delays in homebuilding projects due to regulatory compliance,municipal appeals and other governmental planning processes in any of the areasin which it operates.

RMC is subject tothe rules and regulations of FHA, FHLMC, FNMA, VA and the Department of Housingand Urban Development (HUD) with respect to originating, processing and sellingmortgage loans.  In addition, there areother federal and state laws and regulations that affect not only theseactivities, but also RMC’s title, escrow and insurance brokerageoperations.  These rules and regulationsprohibit discrimination and establish underwriting guidelines that includeprovisions for inspections and appraisals; require credit reports onprospective borrowers; and fix maximum loan amounts.  RMC is required to submit audited financialstatements to various regulatory agencies annually, and each regulatory entityhas its own financial requirements.  TheCompany’s affairs are also subject to examination by these regulatory agenciesand by state agencies, at all times, to assure compliance with applicableregulations, policies and procedures. Mortgage origination activities are subject to the Equal CreditOpportunity Act, the Federal Truth-in-Lending Act and the Real Estate SettlementProcedures Act (RESPA), as well as to associated regulations that prohibitdiscrimination and require the disclosure of certain information to mortgagorsconcerning credit and settlement costs.

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RHIC is registered and licensed under Section 431, Article 19 of theHawaii Revised Statutes and is required to meet certain minimum capital andsurplus requirements.  Additionally, nodividends may be paid without prior approval of the Hawaii InsuranceCommissioner.

**Employees**

At December 31,2005, the Company had 3,217 employees. The Company considers its employee relations to be good.  No employees are represented by a collectivebargaining agreement.

**Web Site Access to Reports**

The Company files annual, quarterly and specialreports; proxy statements; and other information with the U.S. Securities andExchange Commission (SEC) under the Exchange Act.  Any document the Company files may be read atthe SEC’s public reference room, Room 1580 at 100 F Street, NE, Washington,D.C. 20549.  Please call the SEC toll freeat 1-800-SEC-0330 for information regarding its public reference room.  The Company files information electronicallywith the SEC.  The Company’s SEC filingsare available from the SEC’s Web site at www.sec.gov.  Reports, proxy and information statements,and other information regarding issuers that file electronically are readilyobtainable there.

Stockholders, securities analysts and others seekinginformation about the Company’s business operations and financial performancecan receive copies of the 2005 Annual Report on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K, all amendments to those reports andother publications filed with the SEC in Washington, D.C., withoutcharge, by contacting the treasurer’s office at (818) 223-7677; by writing toThe Ryland Group, Inc., Investor Relations, 24025 Park Sorrento, Suite 400,Calabasas, California 91302; or via e-mail at *investors@ryland.com*.  In addition, all filings with the SEC, newsreleases and quarterly earnings announcements, including live audio and replaysof the most recent quarterly earnings conference calls, can be accessed free ofcharge on the Company’s Web site (*www.ryland.com*).  Information on the Company’s Web site is notpart of this report.  Ryland makes itsAnnual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section13(a) or 15(d) of the Exchange Act available on its Web site as soon asreasonably practicable after it electronically files such material with, orfurnishes it to, the SEC.  To retrieveany of this information, go to *www.ryland.com*,select “Investor Information” and scroll down the page to “SEC Filings.”

**Item 1A.**                 Risk Factors

**If real estate and economic conditions deteriorate, theCompany’s revenue may decrease.**

TheCompany can be significantly affected by the cyclical nature of thehomebuilding industry which is sensitive to fluctuations in general and localeconomic conditions, interest rates, housing demand, employment levels,availability of financing and levels of consumer confidence.  The effects of these fluctuations differamong the various geographic markets in which it operates.  Sales of new homes are affected by marketconditions for resale homes and rental properties.  Its business is also affected by localeconomic conditions, such as employment rates and housing demand in the marketsin which the Company builds homes.  Themarkets in which it operates can experience mild to significant declines inhousing demand.  The Company is currentlyexperiencing a decline in market demand in some of its markets.

**If market demand significantly changes, the Company is subject toinventory risk.**

Inventoryrisk can be substantial for homebuilders. The market value of the Company’s land, building lots and housinginventories fluctuates as a result of changing market and economicconditions.  In addition, inventorycarrying costs can result in losses in poorly performing projects or markets.  In the event of significant changes in economicor market conditions, the Company may dispose of land or housing inventories ona basis that may result in a loss.  Inthe course of its business, the Company continuously seeks and makesacquisitions of land for expansion into new markets, as well as for replacementand expansion of land inventory within its current markets.  Although it employs various measures,including its land approval process and continued review by senior management 

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designed tomanage inventory risks, the Company cannot assure that these measures willenable it to avoid or eliminate its inventory risk.

**Construction costs can fluctuate and impact the Company’s margins.**

Thehomebuilding industry has from time to time experienced significantdifficulties, including: shortages of qualified trades people; reliance onlocal subcontractors who may be inadequately capitalized; shortages ofmaterials; and volatile increases in the cost of materials, particularlyincreases in the price of lumber, drywall and cement, which are significantcomponents of home construction costs. The Company may not be able to recapture increased costs by raisingprices either because of market conditions or because the Company fixes itsprices at the time home sales contracts are signed.

**If interest rates rise further, then the Company’s business may declineand profitability may be reduced.**

Interestrates can significantly affect the Company’s lines of business.  Higher interest rates affect the ability ofbuyers to qualify for mortgage financing and decrease demand for newhomes.  As a result, rising interestrates can decrease its home sales and mortgage originations.  Further, the level and expected direction ofinterest rates can adversely affect the profitability of sales.  Any of these factors could have an adverseimpact on the Company’s results of operations or financial position.

**Because the Company’s industry is highly competitive, others may be moresuccessful and cause its business to decline.**

Theresidential housing industry is highly competitive.  The Company competes in each of its marketswith a large number of national, regional and local homebuildingcompanies.  This competition could makeit more difficult to acquire suitable land at acceptable prices, force it toincrease selling incentives or lower its sales per community.  Any of these could have an adverse impact onthe Company’s financial performance or results of operations.  It also competes with other housingalternatives, including existing homes and rental housing.  Principal competitive factors in homebuildingare home price, design, quality, reputation, relationship with developers,accessibility of subcontractors, availability and location of lots andavailability of customer financing.

The Company’sfinancial services segment competes with other mortgage bankers to arrangefinancing for homebuyers.  Principalcompetitive factors include interest rates and other features of mortgage loanproducts available to the consumer.

**Because the Company’s business is subject to various regulatory andenvironmental limitations, it may not be able to conduct its business asplanned.**

The Company’shomebuilding 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 wellas open space, wetlands and environmentally protected areas.  These include local regulations that imposerestrictive zoning and density requirements in order to limit the number ofhomes that can be built within the boundaries of a particular area, as well asother municipal or city land planning restrictions, requirements orlimitations.  The Company may alsoexperience periodic delays in homebuilding projects due to regulatorycompliance, municipal appeals and other government planning processes in any ofthe areas in which it operates.

The Company’sfinancial services segment is subject to the rules and regulations of FHA,FHLMC, FNMA, VA and HUD with respect to originating, processing, selling andservicing mortgage loans.  Mortgageorigination activities are further subject to the Equal Credit Opportunity Act,Federal Truth-in-Lending Act and RESPA and their associated regulations.  These and other federal and state statutesand regulations, among other things, prohibit discrimination and establishunderwriting guidelines which include provisions for audits, inspections andappraisals, require credit reports on prospective borrowers, fix maximum loanamounts and require the disclosure of certain 

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informationconcerning 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 toexamination by these entities at all times to assure compliance with applicableregulations, policies and procedures.

**Natural disasters may have a significant impact on the Company’sbusiness.**

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

**Because this report contains forward-looking statements, it may not proveto be accurate.**

This reportand other Company releases and filings with the SEC may contain forward-lookingstatements.  The Company generallyidentifies 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 currentviews concerning future events, these statements involve risks, uncertaintiesand assumption, including the risks and uncertainties identified in thisreport.  Actual results may differsignificantly from the results discussed in these forward-looking statements.  The Company does not undertake to update itsforward-looking statements or risk factors to reflect future events orcircumstances.

**Item 1B.**                 Unresolved StaffComments

None.

**Item 2.**                          Properties

*The Company leases office space for its corporateheadquarters in Calabasas, California and for its IT department and RMC’soperations center in Scottsdale, Arizona. In addition, the Company leases office space in the various markets inwhich it operates.*

**Item 3.**                       LegalProceedings

Contingentliabilities may arise from obligations incurred in the ordinary course ofbusiness or from the usual obligations of on-site housing producers for thecompletion of contracts.

On January 15,2004, a stockholder class action lawsuit was filed against the Company and twoof its officers in the United States District Court for the Northern Districtof Texas.  The lawsuit alleged violationsof federal securities law as a result of information about home sales duringthe fourth quarter of 2003.  The lawsuithas been dismissed, but is under review by the court with respect to variousprocedural matters which if determined adversely to the Company could cause thelawsuit to be reinstated.

In November 2003,the Company received a request from the United States Environmental ProtectionAgency (the “EPA”) pursuant to Section 308 of the Clean Water Act forinformation about storm water discharge practices in connection with recenthomebuilding projects undertaken by the Company.  The Company is working with the EPA toprovide the requested information and review its compliance with the CleanWater Act.  It is not known at this timewhether the EPA will seek to take legal action or impose penalties inconnection with either the information requested or the prior storm waterdischarge practices employed by the Company.

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

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** **

**Item 4.**                          Submissionof Matters to a Vote of SecurityHolders

No matters weresubmitted to a vote of security holders during the fourth quarter of the fiscalyear ended December 31, 2005.

**ExecutiveOfficers of the Company**

 

The following setsforth certain information regarding the executive officers of the Company:
| **Name**                | ** ** | **Age** | ** ** | **Position  (date elected to position)  Prior Business Experience**                                                                                                                                                      |
|-------------------------|------------|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| R. Chad Dreier          |       | 58      |       | Chairman of the Board  of Directors (since 1994);   President and Chief Executive Officer of the Company (since 1993)                                                                                                    |
| Mark L.  Beisswanger    |       | 45      |       | Senior Vice President  of the Company (since 2000);  President of the West Region of Ryland Homes (since 2000)                                                                                                           |
| Robert J.  Cunnion, III |       | 50      |       | Senior Vice President,  Human Resources of the Company (since 1999)                                                                                                                                                      |
| Eric E. Elder           |       | 48      |       | Senior Vice President,  Marketing and Communications of the Company (since 2000)                                                                                                                                         |
| David L. Fristoe        |       | 49      |       | Senior Vice President,  Controller and Chief Accounting Officer of the Company (since 2004);  Senior Vice President, Controller, Chief Accounting Officer and Chief  Information Officer of the Company (2000–2004) |
| Timothy J.  Geckle      |       | 53      |       | Senior Vice President,  General Counsel and Secretary of the Company (since 1997)                                                                                                                                        |
| Cathey S. Lowe          |       | 52      |       | Senior Vice President,  Finance and Treasurer of the Company (since 2002);  Vice President and Treasurer of the Company (2000–2002)                                                                                 |
| Gordon A. Milne         |       | 54      |       | Executive Vice  President and Chief Financial Officer of the Company (since 2002);  Senior Vice President and Chief Financial Officer of the Company (2000–2002)                                                    |
| Larry T.  Nicholson     |       | 48      |       | Senior Vice President  of the Company (since 2004);  President of the Southeast Region of Ryland Homes (since 2004);  President of the Orlando Division of Ryland Homes (1999–2004)                                 |
| Daniel G.  Schreiner    |       | 48      |       | Senior Vice President  of the Company (since 1999);  President of Ryland Mortgage Company (since 1998)                                                                                                                   |
| Kipling W. Scott        |       | 51      |       | Executive Vice  President of the Company (since 2003);  Senior Vice President of the Company (1995–2003);  President of the North Central Region of Ryland Homes (since 1997)                                       |

 

The Board of Directors elects all officers.

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Thereare no family relationships between any director or executive officer, orarrangements or understandings pursuant to which the officers listed above wereelected.  For a description of theCompany’s employment and severance arrangements with certain of its executiveofficers, see the Company’s *Proxy Statementfor the 2006 Annual Meeting of Stockholders*, which is filed pursuantto Regulation 14A under the Exchange Act (the “2006 Proxy Statement”).

**PART II**

**Item 5.**                          Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of EquitySecurities

Information required by this item appears in *Part II, Item 8: “Financial Statements andSupplementary Data,”* in the section entitled “Quarterly FinancialData” and “Common Stock Prices and Dividends.”

The following is atable summarizing the Company’s purchases of its own equity securities duringthe 12 months ended December 31, 2005:
|                       |   |           |   |            |   | Total Number           |      |                          |      |
|-----------------------|--------|----------------|--------|-----------------|--------|-----------------------------|-----------|-------------------------------|-----------|
|                  |   |           |   |            |   | of Shares              |      | Maximum Number           |      |
|                  |   | Total          |   |            |   | Purchased as Part |      | of Shares that      |      |
|                  |   | Number of |   | Average         |   | of Publicly            |      | May Yet Be          |      |
|                  |   | Shares         |   | Price Paid |   | Announced Plans        |      | Purchased under the |      |
| Period                |   | Purchased      |   | Per Share  |   | or Programs            |      | Plans or Programs   |      |
|                  |   |           |   |            |   |                        |      |                          |      |
| January 1 – 31   |   | -              |   | $               | -      |                        | -         |                          | 2,938,326 |   |
| February 1 – 28  |   | 130,000        |   | 67.12           |   | 130,000                     |      | 2,808,326                     |      |
| March 1 – 31     |   | 355,000        |   | 65.70           |   | 355,000                     |      | 2,453,326                     |      |
| April 1 – 30     |   | 366,500        |   | 60.92           |   | 366,500                     |      | 2,086,826                     |      |
| May 1 – 31       |   | 215,000        |   | 64.23           |   | 215,000                     |      | 1,871,826                     |      |
| June 1 – 30      |   | 166,200        |   | 70.47           |   | 166,200                     |      | 1,705,626                     |      |
| July 1 – 31      |   | 220,000        |   | 80.71           |   | 220,000                     |      | 1,485,626                     |      |
| August 1 – 31    |   | 345,000        |   | 75.20           |   | 345,000                     |      | 1,140,626                     |      |
| September 1 – 30 |   | 100,000        |   | 67.60           |   | 100,000                     |      | 1,040,626                     |      |
| October 1 – 31   |   | 110,000        |   | 67.53           |   | 110,000                     |      | 930,626                       |      |
| November 1 – 30  |   | 550,000        |   | 69.87           |   | 550,000                     |      | 380,626                       |      |
| December 1 – 31  |   | -              |   | -               |   | -                           |      | 3,846,590                     | *         |
|                  |   |           |   |            |   |                        |      |                          |      |
| Total                 |   | 2,557,700      |   | $               | 68.90  |                        | 2,557,700 |                          | 3,846,590 |   |
|                  |   |           |   |            |   |                        |      |                          |      |

** Estimate based on shares remaining under previousauthorization plus $250.0 million new authorization divided by the Company’sstock price at December 31, 2005.*

On December 22,2004, the Company announced that it had received authorization from its Boardof Directors to purchase two million additional shares of its common stock inopen-market transactions.  At December31, 2005, there were 380,626 shares available for purchase in accordance withthis authorization.  This authorizationdoes not have an expiration date.

On December 12, 2005, the Company announced that ithad received authorization from its Board of Directors to purchase sharestotaling $250.0 million, or approximately 3.5 million shares based on theCompany’s stock price at December 31, 2005. As of December 31, 2005, no shares had been repurchased in accordancewith this authorization.  Thisauthorization does not have an expiration date.

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**Item 6.**                          SelectedFinancial Data
| *(in millions, except share data) unaudited* |       | **     2005     ** | ** ** | 2004       |       | 2003       |       | 2002       |       | 2001       |       |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **ANNUAL  RESULTS**                                                   | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                              |       | ** **                                                           | ** ** |       |       |       |       |       |       |       |       |
| Homebuilding                                                          | ** ** | **$**                                                                | **4,726**  | ** ** | $          | 3,867      |       | $          | 3,355      |       | $          | 2,805 |   | $ | 2,684 |   |
| Financial  services                                                   | ** ** | **92**                                                               | ** ** | 85         |       | 89         |       | 72         |       | 63         |       |
| **TOTAL  REVENUES**                                                   | ** ** | **4,818**                                                            | ** ** | 3,952      |       | 3,444      |       | 2,877      |       | 2,747      |       |
| Cost of sales                                                         | ** ** | **3,538**                                                            | ** ** | 2,964      |       | 2,616      |       | 2,216      |       | 2,182      |       |
| Selling, general  and administrative expenses                         | ** ** | **550**                                                              | ** ** | 466        |       | 419        |       | 342        |       | 316        |       |
| Interest expense                                                      | ** ** | **1**                                                                | ** ** | 1          |       | 8          |       | 10         |       | 24         |       |
| Expense related  to early retirement of debt                          | ** ** | **8**                                                                | ** ** | -          |       | 5          |       | -          |       | 7          |       |
| Earnings before  taxes                                                | ** ** | **721**                                                              | ** ** | 521        |       | 396        |       | 309        |       | 218        |       |
| Tax expense                                                           | ** ** | **274**                                                              | ** ** | 201        |       | 154        |       | 124        |       | 86         |       |
| NET EARNINGS                                                          | ** ** | **$**                                                                | **447**    | ** ** | $          | 320        |       | $          | 242        |       | $          | 185 |   | $ | 132 |   |
| **YEAR-END  POSITION**                                                | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                |       | ** **                                                           | ** ** |       |       |       |       |       |       |       |       |
| Cash and cash  equivalents                                            | ** ** | **$**                                                                | **461**    | ** ** | $          | 88         |       | $          | 317        |       | $          | 269 |   | $ | 298 |   |
| Housing  inventories                                                  | ** ** | **2,580**                                                            | ** ** | 2,024      |       | 1,397      |       | 1,100      |       | 899        |       |
| Other assets                                                          | ** ** | **346**                                                              | ** ** | 313        |       | 294        |       | 289        |       | 314        |       |
| TOTAL ASSETS                                                          | ** ** | **3,387**                                                            | ** ** | 2,425      |       | 2,008      |       | 1,658      |       | 1,511      |       |
| LIABILITIES                                                           |       | ** **                                                           | ** ** |       |       |       |       |       |       |       |       |
| Debt                                                                  | ** ** | **922**                                                              | ** ** | 559        |       | 574        |       | 537        |       | 557        |       |
| Other liabilities  and minority interest                              | ** ** | **1,089**                                                            | ** ** | 809        |       | 609        |       | 441        |       | 391        |       |
| TOTAL  LIABILITIES                                                    | ** ** | **2,011**                                                            | ** ** | 1,368      |       | 1,183      |       | 978        |       | 948        |       |
| STOCKHOLDERS’  EQUITY                                            | ** ** | **$**                                                                | **1,376**  | ** ** | $          | 1,057      |       | $          | 825        |       | $          | 680 |   | $ | 563 |   |
| **PER  COMMON SHARE DATA**                                            | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET EARNINGS                                                          |       | ** **                                                           | ** ** |       |       |       |       |       |       |       |       |
| Basic                                                                 | ** ** | **$**                                                                | **9.52**   | ** ** | $          | 6.72       |       | $          | 4.86       |       | $          | 3.51 |   | $ | 2.47 |   |
| Diluted                                                               | ** ** | **9.03**                                                             | ** ** | 6.36       |       | 4.56       |       | 3.32       |       | 2.32       |       |
| DIVIDENDS  DECLARED                                                   | ** ** | **$**                                                                | **0.30**   | ** ** | $          | 0.21       |       | $          | 0.08       |       | $          | 0.04 |   | $ | 0.04 |   |
| STOCKHOLDERS’  EQUITY PER SHARE                                  | ** ** | **$**                                                                | **29.68**  | ** ** | $          | 22.32      |       | $          | 16.98      |       | $          | 13.46 |   | $ | 10.65 |   |
| **OTHER  FINANCIAL DATA**                                             | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| EBITDA1                                                               | ** ** | **$**                                                                | **810**    | ** ** | $          | 603        |       | $          | 478        |       | $          | 384 |   | $ | 311 |   |
| EBITDA/interest  incurred2                                            | ** ** | **12.2X**                                                            | ** ** | 11.3X      |       | 9.5X       |       | 7.8X       |       | 5.6X       |       |
| Return on  beginning equity3                                          | ** ** | **42.3**                                                             | **%**      | 38.9       | %          | 35.5       | %          | 33.0       | %          | 29.1       | %          |
| Debt-to-total capital4                                                | ** ** | **40.1**                                                             | **%**      | 34.6       | %          | 41.0       | %          | 44.1       | %          | 49.7       | %          |

 

*1EBITDA(earnings before interest, taxes, depreciation and amortization) is a measurecommonly used in the homebuilding industry and is presented to assist inunderstanding the ability of the operations of The Ryland Group, Inc. and itssubsidiaries (“the Company”) to generate cash beyond that which is needed toservice existing interest requirements and ongoing tax obligations.  EBITDA equals net earnings before (a)interest expense; (b) previously capitalized interest amortized to cost ofsales; (c) income taxes; and (d) depreciation and amortization.  EBITDA is not a financial measure recognizedin accordance with generally accepted accounting principles (GAAP).  EBITDA should neither be considered analternative to net earnings determined in accordance with GAAP as an indicatorof operating performance nor an alternative to cash flows from operatingactivities determined in accordance with GAAP as a measure of liquidity.*

*2EBITDA/interest incurredis calculated as EBITDA (defined above) divided by total interest incurred,which is the sum of interest expense and capitalized interest for the period.*

*3Return on beginningequity is calculated as net earnings divided by total stockholders’ equity atthe beginning of the period.*

*4Debt-to-total capital iscalculated as debt divided by the sum of debt and total stockholders’ equity.*

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The followingtable sets forth the computation of EBITDA for each period presented.
|                                             |       | YEAR ENDED DECEMBER 31,                               |        |
|--------------------------------------------------|------------|----------------------------------------------------------------------|-------------|
| *(in thousands)*                            |       | **     2005     ** |        | 2004 |   | 2003 |   | 2002 |   | 2001 |   |
| Earnings before  taxes                           | ** ** | **$**                                                                | **721,051** |   | $ | 521,212 |   | $ | 396,217 |   | $ | 309,340 |   | $ | 218,336 |   |
| Interest expense                                 | ** ** | **738**                                                              |        | 1,227 |   | 7,523 |   | 9,391 |   | 23,652 |   |
| Capitalized  interest amortized to cost of sales | ** ** | **45,483**                                                           |        | 41,764 |   | 38,263 |   | 32,162 |   | 31,878 |   |
| Depreciation and  amortization                   | ** ** | **43,166**                                                           |        | 38,519 |   | 36,436 |   | 32,670 |   | 37,068 |   |
| EBITDA                                           | ** ** | **$**                                                                | **810,438** |   | $ | 602,722 |   | $ | 478,439 |   | $ | 383,563 |   | $ | 310,934 |   |

 

A reconciliationof EBITDA to net cash provided by operations, the most directly comparable GAAPmeasure, is provided below for each period presented.
|                                                                             |       | YEAR ENDED DECEMBER 31,                               |        |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------|-------------|
| *(in thousands)*                                                       |       | **     2005     ** |        | 2004 |   | 2003 |   | 2002 |   | 2001 |   |
| Net cash  provided by (used for) operating activities                       | ** ** | **$**                                                                | **216,264** |   | $ | (78,471 | ) | $ | 139,471 |   | $ | 87,715 |   | $ | 182,736 |   |
| Increase in  inventory                                                      | ** ** | **490,971**                                                          |        | 585,562 |   | 239,989 |   | 200,623 |   | 10,984 |   |
| Tax expense                                                                 | ** ** | **273,999**                                                          |        | 200,667 |   | 154,525 |   | 123,736 |   | 86,243 |   |
| Interest expense                                                            | ** ** | **738**                                                              |        | 1,227 |   | 7,523 |   | 9,391 |   | 23,652 |   |
| Capitalized  interest amortized to cost of sales                            | ** ** | **45,483**                                                           |        | 41,764 |   | 38,263 |   | 32,162 |   | 31,878 |   |
| Net change in  other assets, payables and other liabilities                 | ** ** | **(194,220**                                                         | **)**       | (119,632 | ) | (83,299 | ) | (52,866 | ) | (22,404 | ) |
| Tax benefit from  exercise of stock options and vesting of restricted stock |       | **(30,505**                                                          | **)**       | (17,475 | ) | (17,120 | ) | (12,103 | ) | (8,337 | ) |
| Other                                                                       | ** ** | **7,708**                                                            |        | (10,920 | ) | (913 | ) | (5,095 | ) | 6,182 |   |
| EBITDA                                                                      | ** ** | **$**                                                                | **810,438** |   | $ | 602,722 |   | $ | 478,439 |   | $ | 383,563 |   | $ | 310,934 |   |

 

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**Item 7.                Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**Forward-lookingStatements**

*NOTE:Certain statements in this annual report may be regarded as “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, and may qualify for the safe harbor provided for in Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statements represent the Company’s expectationsand beliefs concerning future events, and no assurance can be given that theresults described in this annual report will be achieved.  These forward-looking statements cangenerally 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 containedherein are based upon information available to the Company on the date of thisannual report.  Except as may be requiredunder applicable law, the Company does not undertake any obligation to updateor revise any forward-looking statements, whether as a result of new information,future events or otherwise.*

*Theseforward-looking statements are subject to risks, uncertainties and otherfactors, many of which are outside of the Company’s control, that could causeactual results to differ materially from the results discussed in theforward-looking statements.  The factorsand assumptions upon which any forward-looking statements herein are based aresubject to risks and uncertainties which include, among others:*

·                                  *economic changes nationally or in the Company’s localmarkets, including volatility in interest rates, inflation, changes in consumerconfidence levels and the state of the market for homes in general;*

·                                  *the availability and cost of land;*

·                                  *increased land development costs on projects underdevelopment;*

·                                  *shortages of skilled labor or raw materials used inthe production of houses;*

·                                  *increased prices for labor, land and raw materialsused in the production of houses;*

·                                  *increased competition;*

·                                  *failure to anticipate or react to changing consumerpreferences in home design;*

·                                  *increased costs and delays in land development orhome construction resulting from adverse weather conditions;*

·                                  *potential delays or increased costs in obtainingnecessary permits as a result of changes to laws, regulations or governmentalpolicies (including those that affect zoning, density, building standards andthe environment);*

·                                  *delays in obtaining approvals from applicableregulatory agencies and others in connection with the Company’s communities andland activities;*

·                                  *the risk factors set forth in the Company’s mostrecent Annual Report on Form 10-K/A; and*

·                                  *other factors over which the Company has little or nocontrol.*

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The discussion inthe Results of Operations section of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for the years ended December 31,2005, 2004 and 2003 reflects a restatement to contain expanded disclosure ofreportable segments in accordance with the provisions of Statement of FinancialAccounting Standards No. 131 (SFAS 131) “Disclosures About Segments of anEnterprise and Related Information.”  TheCompany had historically aggregated its homebuilding operating segments into asingle, national reportable segment, but has restated its segment disclosure toinclude four homebuilding reportable segments for the years ended December 31,2005, 2004 and 2003.  (See Note B “SegmentInformation.”)  The restatement has noimpact on the Company’s consolidated balance sheets as of December 31, 2005 and2004, or consolidated statements of earnings and related earnings per shareamounts, consolidated statements of cash flows or consolidated statements ofstockholders’ equity for the years ended December 31, 2005, 2004 and 2003.

**Resultsof Operations**

Earnings,revenues, new orders and deliveries of homes reached record-breaking highs forthe seventh consecutive year in 2005. These trends were indicative of another year of favorable economic anddemographic environments, as well as of the Company’s ability to deliver acompetitive product in superior locations while achieving higher relative economiesthrough cost-saving initiatives.  In2005, the Company’s internally generated top- and bottom-line growth was fueledby increased volume and operating profits. The Company improved its Fortune 500 ranking and maintained itsinvestment-grade rating while lowering the average interest rate on itsdebt.  The Company continues to makesignificant investments in new marketing initiatives, product development,customer service, training and technology, all of which are critical tostreamlining processes and improving the customer’s experience.
|            | NET EARNINGS    |       | DILUTED EARNINGS |       | EBITDA               |       |
|------------|----------------------|------------|-----------------------|------------|----------------------|------------|
|       | *(in millions)* |       | PER SHARE        |       | *(in millions)* |       |
|       | 2003                 |       | $ 242            |       | 2003                 |       | $ 4.56 |   | 2003 |   | $ 478 |   |
|       | 2004                 |       | $ 320            |       | 2004                 |       | $ 6.36 |   | 2004 |   | $ 603 |   |
| ** ** | **2005**             | ** ** | **$ 447**        | ** ** | **2005**             | ** ** | **$ 9.03** | ** ** | **2005** | ** ** | **$ 810** | ** ** |

 

The Companyreported consolidated net earnings of $447.1 million, or $9.03 per dilutedshare, for 2005, compared to $320.5 million, or $6.36 per diluted share, for2004 and $241.7 million, or $4.56 per diluted share, for 2003.  These net earnings increases resulted fromhigher revenues, increased operating margins and decreased expenses for itshomebuilding operations.

The Company’srevenues reached a historical high of $4.8 billion for 2005, up 21.9 percentfrom $4.0 billion for 2004.  Totalrevenues for 2004 exceeded 2003 levels by $507.7 million, or 14.7 percent.  Homebuilding pretax operating marginsincreased to 15.8 percent for 2005, compared to 13.6 percent for 2004 and 11.8percent for 2003.

EBITDA was $810.4million for the year ended December 31, 2005, compared to $602.7 million and$478.4 million for the same period in 2004 and 2003, respectively.  The Company’s ratio of EBITDA to interestincurred improved to 12.2 for the year ended December 31, 2005, compared to11.3 for 2004 and 9.5 for 2003.

The Companygenerated significantly more cash flow from its operational growth andcontinued to position itself for expansion in 2006 with a 24.5 percent increasein inventory owned and 75,671 lots under control, or a projected four- tofive-year supply.  Its balance sheetexemplifies strength, low risk and transparency.  Goodwill of $18.2 million was among thelowest in the industry.  The Company’sdebt-to-capital ratio was 40.1 percent at December 31, 2005, despite adding$353.0 million of new low-rate financing during the year.

Stockholders’equity increased 30.2 percent, or $319.2 million, during 2005, compared to anincrease of 28.2 percent, or $232.3 million, during 2004.  As a result of balancing cash outlays amongachieving growth objectives, common stock repurchases and increasing dividends,stockholders’ equity per share increased 33.0 percent, to $29.68 in 2005,compared to $22.32 in 2004.  The Company’sbook value at December 31, 2005, was 98.7 percent tangible.  The 

18

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Company is not asignificant participant in off-balance sheet type financing outside oftraditional option contracts with land developers, and its investments in jointventures represent less than one percent of its total assets.
|       | RETURN ON |       | RETURN ON |       | STOCKHOLDERS’ |       |
|------------|-----------|------------|-----------|------------|--------------------|------------|
|       | EQUITY    |       | CAPITAL   |       | EQUITY PER SHARE   |       |
|       | 2003      |       | 35.5%     |       | 2003               |       | 22.1% |   | 2003 |   | $ 16.98 |   |
|       | 2004      |       | 38.9%     |       | 2004               |       | 24.8% |   | 2004 |   | $ 22.32 |   |
| ** ** | **2005**  | ** ** | **42.3%** | ** ** | **2005**           | ** ** | **29.4%** | ** ** | **2005** | ** ** | **$ 29.68** | ** ** |

 

During 2005, theCompany continued to deliver superior returns to stockholders while maintainingits strategically low-risk model.  Inaddition, it has focused on developing competitive advantages through trainingand technology initiatives.  Revenuesgrew 21.9 percent, net earnings increased 39.5 percent, diluted earnings pershare improved 42.0 percent, EBITDA increased 34.5 percent, return on beginningequity was 42.3 percent, return on beginning capital5 was29.4 percent and inventory was turned 1.5 times.  Dividends declared were doubled for thesecond time in two years.  The Company’sreturns remained among the highest in the industry and Fortune 500companies.  The Company’s credit qualitycontinues to improve, and its financial position is stronger than at any timein its history.

**HomebuildingOverview**

The Company’shomebuilding operations consist of four regional reporting segments: North,Texas, Southeast and West.

New ordersrepresent sales contracts that have been signed by the homebuyer and approvedby the Company, subject to cancellation. The dollar value of new order contracts increased $702.5 million, or15.8 percent, to $5.1 billion at December 31, 2005, from $4.4 billion atDecember 31, 2004 and $3.6 billion at December 31, 2003.  Unit orders increased 3.8 percent in 2005 and11.1 percent in 2004.  The Companycontinued to diversify geographically as newer markets in the West andSoutheast contributed more significant gains during the year.
|       | NEW ORDER       |       |             |       | OUTSTANDING           |       |        |       |
|------------|----------------------|------------|------------------|------------|-----------------------|------------|-------------|------------|
|       | DOLLARS              |       |             |       | CONTRACT DOLLARS |       | OUTSTANDING |       |
|       | *(in millions)* |       | NEW ORDERS  |       | *(in millions)*  |       | CONTRACTS   |       |
|       | 2003                 |       | $ 3,584     |       | 2003                  |       | 15,197      |       | 2003 |   | $ 1,473 |   | 2003 |   | 5,841 |   |
|       | 2004                 |       | $ 4,433     |       | 2004                  |       | 16,880      |       | 2004 |   | $ 2,115 |   | 2004 |   | 7,620 |   |
| ** ** | **2005**             | ** ** | **$ 5,136** | ** ** | **2005**              | ** ** | **17,517**  | ** ** | **2005** | ** ** | **$ 2,622** | ** ** | **2005** | ** ** | **8,464** | ** ** |

 

The combinedhomebuilding operations reported pretax earnings of $744.2 million for 2005,compared to $525.5 million for 2004 and $395.0 million for 2003.  Homebuilding results in 2005 increased from2004, primarily due to higher average closing prices, gross profit margins andclosing volume.  Homebuilding results in2004 increased from 2003, primarily due to these same factors.

Homebuildingrevenues increased 22.2 percent for 2005, compared to 2004, due to a 10.4percent increase in closings and a 10.8 percent increase in average closingprice.  The rise in closings in 2005 wasdue to a higher backlog at the beginning of the year and a 3.8 percent increasein new home orders during the year. Homebuilding revenues increased 15.3 percent for 2004, compared to 2003,due to a 2.6 percent increase in closings and a 12.1 percent increase inaverage closing price.  The increase inclosings in 2004 was due to a higher backlog at the beginning of the year andan 11.1 percent increase in new home orders during the year.

*5Returnon beginning capital is calculated by dividing net earnings before tax-affectedinterest by the sum of beginning debt and total stockholders’ equity*

19

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Consistent withits policy of managing land investments according to return and risk targets,the Company executed several land and lot sales during the year.  Homebuilding revenues for the year endedDecember 31, 2005, included $96.9 million from land and lot sales, compared torevenues of $74.2 million for 2004 and $56.0 million for 2003, which contributednet gains of $23.9 million, $25.2 million and $10.5 million to pretax earningsin 2005, 2004 and 2003, respectively.
|       | GROSS PROFIT |       | SG&A  |       | PRETAX EARNINGS |       |
|------------|--------------|------------|-----------|------------|-----------------|------------|
|       | MARGIN       |       | EXPENSE   |       | MARGIN          |       |
|       | 2003         |       | 22.1%     |       | 2003            |       | 10.1% |   | 2003 |   | 11.8% |   |
|       | 2004         |       | 23.2%     |       | 2004            |       | 9.8% |   | 2004 |   | 13.6% |   |
| ** ** | **2005**     | ** ** | **25.2%** | ** ** | **2005**        | ** ** | **9.4%** | ** ** | **2005** | ** ** | **15.8%** | ** ** |

 

Gross profitmargins from home sales averaged 25.2 percent for 2005, an increase from 23.2percent for 2004 and 22.1 percent for 2003. The improvements were primarily attributable to sales prices rising at agreater rate than costs, savings from purchasing initiatives, and a change inclosing-volume mix, with an increased percentage of closings in higher-marginmarkets during 2005.  The Companygenerated the strongest gross margins in its Baltimore, California, Las Vegas,Orlando, Phoenix, Tampa and Washington, D.C., markets, while its Dallas andOhio Valley markets were the most challenging.

Selling, generaland administrative expenses, as a percentage of revenue, were 9.4 percent for2005, 9.8 percent for 2004 and 10.1 percent for 2003.  Selling, general and administrative expenses,as a percentage of revenue, decreased from prior year levels for 2005 and 2004,primarily as a result of leverage obtained through a substantial increase inclosings in the Atlanta, Charlotte, Inland Empire, Jacksonville, Las Vegas,Phoenix and Texas markets, which was accompanied by more modest increases inmarketing and general and administrative expenses, partially offset by higherincentive compensation expense resulting from improved earnings.

Interest expense forthe year ended December 31, 2004, was $0.2 million.  Interest expense decreased $5.8 million in2004, compared to 2003.  In 2005, thehomebuilding segments capitalized all interest incurred, resulting in nointerest expense being recorded during the period.  The rise in capitalized interest resultedfrom increased development activity.

**HomebuildingSegments Information**

New orders for2005 increased 12.2 percent in Texas and 12.4 percent in the Southeast, butdecreased 1.9 percent in the North and 7.2 percent in the West.  In 2005, new order trends were generallydriven by historically low interest rates and expansion plans but declinedslightly in the fourth quarter in the North and West regions, due, in part, toincreased price appreciation having a moderating effect on consumer demand, andin Las Vegas to product shortages resulting, in part, from delays indevelopment, processing and approval times for new projects.  New orders for 2004 increased 0.8 percent inthe North, 5.0 percent in Texas, 7.8 percent in the Southeast and 37.4 percentin the West.  Positive new order trendsin 2004 were driven by low interest rates and corresponding robust marketconditions; expansion plans; a renewed focus on Internet marketing andcustomer-relations management; and a proactive approach to maintaining anadequate supply of competitively priced product and lots.

20

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|                                                 |         | YEAR ENDED DECEMBER 31,                           |         |
|-------------------------------------------------|--------------|------------------------------------------------------------------|--------------|
|                                            |         |      2005      |         | 2004 |   | 2003 |   |
| **NEW  ORDERS**                                 | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| **Units**                                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| North                                           |         | **4,333**                                                        |         | 4,419 |   | 4,385 |   |
| Texas                                           |         | **3,702**                                                        |         | 3,299 |   | 3,141 |   |
| Southeast                                       |         | **5,630**                                                        |         | 5,009 |   | 4,648 |   |
| West                                            |         | **3,852**                                                        |         | 4,153 |   | 3,023 |   |
| Total                                           |         | **17,517**                                                       |         | 16,880 |   | 15,197 |   |
|                                            |         |                                                             |         |   |   |   |   |
| **CLOSINGS**                                    | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| **Units**                                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| North                                           |         | **4,367**                                                        |         | 4,349 |   | 4,393 |   |
| Texas                                           |         | **3,365**                                                        |         | 3,116 |   | 3,291 |   |
| Southeast                                       |         | **4,887**                                                        |         | 4,374 |   | 4,216 |   |
| West                                            |         | **4,054**                                                        |         | 3,262 |   | 2,824 |   |
| Total                                           |         | **16,673**                                                       |         | 15,101 |   | 14,724 |   |
| **Average closing price* (in thousands)*** | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** *** | *** *** |
| North                                           |         | **$**                                                            | **310**      |   | $ | 288 |   | $ | 259 |   |
| Texas                                           |         | **177**                                                          |         | 165 |   | 159 |   |
| Southeast                                       |         | **254**                                                          |         | 230 |   | 208 |   |
| West                                            |         | **356**                                                          |         | 312 |   | 270 |   |
| Total                                           |         | **278**                                                          |         | 251 |   | 224 |   |
|                                            |         | DECEMBER 31,                                                     |         |
|                                            | ** **   | **2005**                                                         |         | 2004 |   | 2003 |   |
| **OUTSTANDING  CONTRACTS**                      | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| **Units**                                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| North                                           |         | **1,774**                                                        |         | 1,808 |   | 1,738 |   |
| Texas                                           |         | **1,329**                                                        |         | 992 |   | 809 |   |
| Southeast                                       |         | **3,601**                                                        |         | 2,858 |   | 2,223 |   |
| West                                            |         | **1,760**                                                        |         | 1,962 |   | 1,071 |   |
| Total                                           |         | **8,464**                                                        |         | 7,620 |   | 5,841 |   |
| **Dollars*(in  millions)***                     | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** *** | *** *** |
| North                                           |         | **$**                                                            | **571**      |   | $ | 568 |   | $ | 503 |   |
| Texas                                           |         | **259**                                                          |         | 173 |   | 142 |   |
| Southeast                                       |         | **1,106**                                                        |         | 725 |   | 508 |   |
| West                                            |         | **686**                                                          |         | 649 |   | 320 |   |
| Total                                           |         | **$**                                                            | **2,622**    |   | $ | 2,115 |   | $ | 1,473 |   |
| **Average price*(in thousands)***               | *** *** | *** ***                                                     | *** *** | *** *** | *** *** | *** *** | *** *** |
| North                                           |         | **$**                                                            | **322**      |   | $ | 314 |   | $ | 289 |   |
| Texas                                           |         | **195**                                                          |         | 175 |   | 175 |   |
| Southeast                                       |         | **307**                                                          |         | 254 |   | 229 |   |
| West                                            |         | **390**                                                          |         | 331 |   | 299 |   |
| Total                                           |         | **310**                                                          |         | 278 |   | 252 |   |

 

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The Companyexperiences seasonal variations in its quarterly operating results and capitalrequirements.  Historically, new orderactivity is higher in the spring and summer months.  As a result, it typically has more homesunder construction, closes more homes, and has greater revenues and operatingincome in the third and fourth quarters of its fiscal year.  This is primarily due to the preference ofmany homebuyers to act during those periods.

Outstandingcontracts denote the Company’s backlog of homes sold but not closed, which aregenerally built and closed, subject to cancellation, over the subsequent twoquarters.  At December 31, 2005, theCompany had outstanding contracts for 8,464 units, representing the highestyear-end backlog in its history and an 11.1 percent increase over year-end2004.

The $2.6 billionvalue of outstanding contracts increased 24.0 percent from December 31, 2004due, in part, to an 11.5 percent increase in average sales price.  Average sales price increases resulted, in part,from a change in mix that was weighted toward higher-priced markets.  Outstanding contracts at December 31, 2005,represented over 45 percent of 2006 targeted closings.

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Results ofoperations for the homebuilding segments are summarized as follows:
|                                         |       | YEAR ENDED DECEMBER 31,                               |          |
|----------------------------------------------|------------|----------------------------------------------------------------------|---------------|
| *(in thousands)*                        |       | **     2005     ** |          | 2004 |   | 2003 |   |
| **North**                                    |       |                                                                 |          |   |   |   |   |
| Revenues                                     | ** ** | **$**                                                                | **1,388,208** |   | $ | 1,284,361 |   | $ | 1,157,417 |   |
| Expenses                                     |       |                                                                 |          |   |   |   |   |
| Cost of sales                                | ** ** | **1,023,752**                                                        |          | 938,045 |   | 857,147 |   |
| Selling, general and administrative expenses | ** ** | **123,273**                                                          |          | 111,858 |   | 112,578 |   |
| Interest expense                             | ** ** | **-  **                                                    |          | 67 |   | 1,675 |   |
| Total Expenses                               | ** ** | **1,147,025**                                                        |          | 1,049,970 |   | 971,400 |   |
| Pretax Earnings                              | ** ** | **$**                                                                | **241,183**   |   | $ | 234,391 |   | $ | 186,017 |   |
| **Texas**                                    |       |                                                                 |          |   |   |   |   |
| Revenues                                     | ** ** | **$**                                                                | **619,332**   |   | $ | 533,276 |   | $ | 532,144 |   |
| Expenses                                     |       |                                                                 |          |   |   |   |   |
| Cost of sales                                | ** ** | **509,818**                                                          |          | 438,238 |   | 431,901 |   |
| Selling, general and administrative expenses | ** ** | **65,206**                                                           |          | 58,131 |   | 59,643 |   |
| Interest expense                             | ** ** | **-  **                                                    |          | 40 |   | 1,059 |   |
| Total Expenses                               | ** ** | **575,024**                                                          |          | 496,409 |   | 492,603 |   |
| Pretax Earnings                              | ** ** | **$**                                                                | **44,308**    |   | $ | 36,867 |   | $ | 39,541 |   |
| **Southeast**                                |       |                                                                 |          |   |   |   |   |
| Revenues                                     | ** ** | **$**                                                                | **1,258,373** |   | $ | 1,011,494 |   | $ | 892,351 |   |
| Expenses                                     |       |                                                                 |          |   |   |   |   |
| Cost of sales                                | ** ** | **962,634**                                                          |          | 796,071 |   | 710,335 |   |
| Selling, general and administrative expenses | ** ** | **116,497**                                                          |          | 106,399 |   | 90,723 |   |
| Interest expense                             | ** ** | **-  **                                                    |          | 60 |   | 1,841 |   |
| Total Expenses                               | ** ** | **1,079,131**                                                        |          | 902,530 |   | 802,899 |   |
| Pretax Earnings                              | ** ** | **$**                                                                | **179,242**   |   | $ | 108,964 |   | $ | 89,452 |   |
| **West**                                     |       |                                                                 |          |   |   |   |   |
| Revenues                                     | ** ** | **$**                                                                | **1,459,838** |   | $ | 1,037,955 |   | $ | 773,538 |   |
| Expenses                                     |       |                                                                 |          |   |   |   |   |
| Cost of sales                                | ** ** | **1,041,399**                                                        |          | 791,733 |   | 616,592 |   |
| Selling, general and administrative expenses | ** ** | **138,962**                                                          |          | 100,947 |   | 75,505 |   |
| Interest expense                             | ** ** | **-  **                                                    |          | 43 |   | 1,457 |   |
| Total Expenses                               | ** ** | **1,180,361**                                                        |          | 892,723 |   | 693,554 |   |
| Pretax Earnings                              | ** ** | **$**                                                                | **279,477**   |   | $ | 145,232 |   | $ | 79,984 |   |
| **Total**                                    |       |                                                                 |          |   |   |   |   |
| Revenues                                     | ** ** | **$**                                                                | **4,725,751** |   | $ | 3,867,086 |   | $ | 3,355,450 |   |
| Expenses                                     |       |                                                                 |          |   |   |   |   |
| Cost of sales                                | ** ** | **3,537,603**                                                        |          | 2,964,087 |   | 2,615,975 |   |
| Selling, general and administrative expenses | ** ** | **443,938**                                                          |          | 377,335 |   | 338,449 |   |
| Interest expense                             | ** ** | **-  **                                                    |          | 210 |   | 6,032 |   |
| Total Expenses                               | ** ** | **3,981,541**                                                        |          | 3,341,632 |   | 2,960,456 |   |
| Pretax Earnings                              | ** ** | **$**                                                                | **744,210**   |   | $ | 525,454 |   | $ | 394,994 |   |

 

23

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**GROSS PROFIT MARGINS BY REGION/SEGMENT**
|                               |       | YEAR ENDED DECEMBER 31,                                     |   |
|-------------------------------|------------|----------------------------------------------------------------------------|--------|
|                          |       | **     2005      ** |   | 2004 |   | 2003 |   |
| Housing gross  profit margins |       |                                                                       |   |   |   |   |   |
| North                         | ** ** | **26.5**                                                                   | **%**  | 26.6 | % | 26.1 | % |
| Texas                         | ** ** | **17.9**                                                                   |   | 17.6 |   | 18.8 |   |
| Southeast                     | ** ** | **23.4**                                                                   |   | 21.3 |   | 20.2 |   |
| West                          | ** ** | **28.4**                                                                   |   | 23.6 |   | 20.5 |   |
| Total                         | ** ** | **25.2**                                                                   |   | 23.2 |   | 22.1 |   |

 

**Homebuilding Segments 2005 versus 2004**

*North***–**Homebuildingrevenues increased by 8.1 percent from $1.3 billion in 2004 to $1.4 billion in2005, primarily due to an increase in the number of homes delivered in the TwinCities market and an increase in the average sales price of homes delivered inall of the markets in this segment.

*Texas* – Homebuilding revenues increased by 16.1 percent from $533.3 million in2004 to $619.3 million in 2005, primarily due to an increase in the number ofhomes delivered and an increase in the average sales price of homes delivered.  Gross margins on home sales were 17.9 percentin 2005, compared to 17.6 percent in 2004.

*Southeast***–**Homebuildingrevenues were $1.3 billion in 2005, compared to $1.0 billion in 2004, anincrease of 24.4 percent, primarily due to an increase in the number of homesdelivered and an increase in the average sales price of homes delivered of 10.4percent.  Gross margins on home saleswere 23.4 percent in 2005, compared to 21.3 percent in 2004.  Gross margins on home sales increased in 2005primarily due to rising demand and sales prices.

*West***–**Homebuildingrevenues increased $421.9 million, or 40.6 percent, to $1.5 billion in 2005,compared to $1.0 billion in 2004, primarily due to an increase in the number ofhomes delivered in Inland Empire, Las Vegas and Phoenix and a 14.1 percentincrease in the average sales price of homes delivered.  Gross margins from home sales were 28.4percent in 2005, compared to 23.6 percent in 2004.  Gross margins on home sales increased in 2005due to a significant rise in price appreciation.

**Homebuilding Segments 2004 versus 2003**

*North***–**Homebuildingrevenues increased by 11.0 percent from $1.2 billion in 2003 to $1.3 billion in2004, primarily due to an increase in the average sales price of homesdelivered in all of the markets in this region. Gross margins on home sales were 26.6 percent in 2004, compared to 26.1percent in 2003.  Gross margins on homesales increased in 2004 primarily attributable to sales prices rising at agreater rate than costs. 

*Texas* – Homebuilding revenues were relatively flat from $532.1 million in2003 to $533.3 million in 2004, primarily due to a 5.3 percent decrease in thenumber of homes delivered in Texas, offset by an increase in the average salesprice of homes delivered.  Gross marginson home sales were 17.6 percent in 2004, compared to 18.8 percent in 2003.  Gross margins on home sales decreased in 2004primarily due to lower margins in the Dallas market.

*Southeast***–**Homebuildingrevenues were $1,011.5 million in 2004, compared to $892.4 million in 2003, anincrease of 13.4 percent, primarily due to a 3.7 percent increase in the numberof homes delivered and a 10.6 percent increase in the average sales price ofhomes delivered in this region.  Grossmargins on home sales were 21.3 percent in 2004, compared to 20.2 percent in2003.

 

24

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*West***–**Homebuildingrevenues increased $264.4 million, or 34.2 percent, to $1,038.0 million in2004, compared to $773.5 million in 2003, primarily due to a 15.5 percentincrease in the number of homes delivered in the region and a 15.6 percentincrease in the average sales price of homes delivered in this region.  Gross margins from home sales were 23.6percent in 2004, compared to 20.5 percent in 2003.  Gross margins on home sales increased in 2004due to a significant rise in price appreciation.

**FinancialServices**

The Company’s financial services segment providesmortgage-related products and services, as well as insurance services to itshomebuyers and subcontractors.  Byaligning its operations with the Company’s homebuilding segments, the financialservices segment leverages this relationship to capture homebuyers’ loans.  In addition to being a valuable asset tocustomers, the financial services segment greatly enhances the Company’sprofitability.  Providing mortgagefinancing and other services to its customers allows the homebuilder to bettermonitor its backlog and closing process. Substantially all loans are sold within one business day of the date theyclose to a third party, which the third party then services and manages.  Insurance services provide  subcontractors with construction-relatedinsurance in the western markets. Additionally, this segment provides insurancefor liability risks, specifically homeowners’ warranty coverage arising inconnection with the homebuilding business of the Company and its affiliates.

In 2005, RMC’s mortgage origination operationsconsisted primarily of the Company’s homebuilder loans, which were originatedin connection with the sale of the Company’s homes.  The number of mortgage originations was12,774 for 2005, compared to 11,920 for 2004 and 11,983 for 2003.  During 2005, total dollar originations wereapproximately $3.1 billion, of which 99.5 percent was for purchases of homesbuilt by the Company and 0.5 percent was for purchases of homes built byothers, purchases of existing homes or for the refinancing of existing mortgageloans.  The capture rate of mortgagesoriginated for customers of the homebuilding operations was 81.9 percent in2005, compared to 84.2 percent in 2004 and 85.4 percent in 2003.

The financial services segment reported pretaxearnings of $59.4 million for 2005, compared to $56.7 million for 2004 and$62.4 million for 2003.  The increase in2005 was primarily due to a 7.2 percent increase in loans originated and a risein average loan size, as well as increased profitability from title, escrow andinsurance operations.  The decrease in2004 from 2003 was primarily due to lower gains on the sale of mortgages andloan servicing rights, which resulted from an increase in less profitableadjustable-rate mortgage product and a more competitive marketplace, partiallyoffset by an increase in average loan size and a gain from the sale of aportion of the investment portfolio.

Revenues for the financial services segment were $91.8million for 2005, compared to $84.7 million for 2004.  This increase was primarily attributable toincreased revenues from loan origination activities and title, escrow andinsurance operations, partially offset by reduced interest income from thedeclining investment portfolio.  In 2004,revenues for the financial services segment decreased 4.4 percent to $84.7million from 2003 due to reduced gains on the sale of mortgages and loanservicing rights, which resulted from an increase in less profitableadjustable-rate mortgage product and a more competitive marketplace, partiallyoffset by increased revenues from title, escrow and insurance operations and again from the sale of a portion of the investment portfolio.

25

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**FINANCIAL SERVICES’ STATEMENT OF EARNINGS**
|                                                             |       | YEAR ENDED DECEMBER 31,                               |       |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| *(in thousands)*                                            |       | **     2005     ** |       | 2004 |   | 2003 |   |
|                                                             |       |                                                                 |       |   |   |   |   |
| **REVENUES**                                                     |       |                                                                 |       |   |   |   |   |
| Net gains on  sales of mortgages and mortgage servicing rights   |       | **$**                                                                | **45,918** |   | $ | 45,040 |   | $ | 53,938 |   |
| Title/escrow/insurance                                           | ** ** | **28,489**                                                           |       | 23,740 |   | 18,651 |   |
| Net origination  fees                                            | ** ** | **15,032**                                                           |       | 10,768 |   | 10,731 |   |
| Interest                                                         |       |                                                                 |       |   |   |   |   |
| Mortgage-backed  securities and notes receivable                 |       | **1,375**                                                            |       | 2,639 |   | 4,274 |   |
| Other                                                            | ** ** | **844**                                                              |       | 935 |   | 1,068 |   |
| Total interest                                                   | ** ** | **2,219**                                                            |       | 3,574 |   | 5,342 |   |
| Gain on sale of  investments                                     | ** ** | **142**                                                              |       | 1,074 |   | - |   |
| Other                                                            | ** ** | **15**                                                               |       | 539 |   | 17 |   |
| **TOTAL  REVENUES**                                              | ** ** | **91,815**                                                           |       | 84,735 |   | 88,679 |   |
| **EXPENSES**                                                     |       |                                                                 |       |   |   |   |   |
| General and  administrative                                      | ** ** | **31,704**                                                           |       | 27,016 |   | 24,765 |   |
| Interest                                                         | ** ** | **738**                                                              |       | 1,017 |   | 1,491 |   |
| **TOTAL  EXPENSES**                                              | ** ** | **32,442**                                                           |       | 28,033 |   | 26,256 |   |
| **PRETAX  EARNINGS**                                             | ** ** | **$**                                                                | **59,373** |   | $ | 56,702 |   | $ | 62,423 |   |
| Ryland Homes  origination capture rate                           | ** ** | **81.9**                                                             | **%**      | 84.2 | % | 85.4 | % |
| Mortgage-backed securities and notes receivable  average balance | ** ** | **$**                                                                | **7,365**  |   | $ | 18,603 |   | $ | 33,000 |   |

 

General andadministrative expenses increased for the year ended December 31, 2005,compared to 2004, primarily as a result of additional expenses incurred insupporting expansion of both the Company’s homebuilding operations and itstitle and insurance operations.  Generaland administrative expenses rose for the year ended December 31, 2004, comparedto 2003, primarily as a result of these same factors.

Interest expensedecreased 27.4 percent for the year ended December 31, 2005, compared to 2004,following a continued decline in bonds payable and short-term notes payable,which resulted from continued runoff of the underlying collateral and from thesale and redemption of portions of the Company’s mortgage-backed securitiesportfolio.  In 2004, interest expensedecreased 31.8 percent, compared to 2003. This was due, in part, to the sale of a portion of the investment portfolioin 2003, the proceeds from which were used to pay off the Company’s repurchasefacility.

**Corporate**

Corporate expenseswere $74.3 million for 2005, $60.9 million for 2004 and $56.1 million for2003.  Corporate expenses for 2005 and2004 rose primarily as a result of an increase in support and training costscommensurate with anticipated growth; a rise in incentive compensation, whichwas due to increases in the Company’s results and financial performance; andcosts incurred as a result of the Company’s compliance with Section 404 of theSarbanes-Oxley Act of 2002.  The Companyended the year with $461.4 million in cash, no borrowings against its revolvingcredit facility and a lower cost of funds.

In 2005, theCompany recorded expenses of approximately $8.3 million associated with theredemption of its $150.0 million 9.8 percent senior notes due September 2010 ata stated call price of 104.9 percent of the principal amount.

In 2003, theCompany recorded expenses of approximately $5.1 million associated with theredemption of its $100.0 million 8.3 percent senior subordinated notes dueApril 2008 at a stated call price of 104.1 percent of the principal amount.

26

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**Investmentsin Joint Ventures**

At December 31,2005, the Company had an interest in 13 active joint ventures in the Atlanta,Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenix markets, three of whichwere consolidated.  These joint venturesexist for the purpose of acquisition and co-development of lots, which are thensold to the Company, its joint venture partners or others, at marketprices.  Depending on the number of jointventures and the level of activity in the entities, annual earnings from theCompany’s investment in joint ventures will vary significantly.  The Company recognized its proportionateshare of earnings, which totaled $315,000 from unconsolidated joint ventures in2005, compared to earnings of $5.8 million in 2004 and losses of $94,000 in2003.  The increase in 2004 was primarilyattributable to a $5.4 million gain on the sale of land to a third party in onejoint venture in Atlanta.  The Company’sinvestment in unconsolidated joint ventures was $10.2 million at December 31,2005, compared to $2.5 million at December 31, 2004.  (See “Investments in Joint Ventures” in NoteA, “Summary of Significant Accounting Policies.”)

**IncomeTaxes**

Income taxes forfiscal years 2005, 2004 and 2003 were provided at effective tax rates of 38.0percent, 38.5 percent and 39.0 percent, respectively.  The decrease in the effective tax rate for2005 was primarily due to a new tax deduction on qualified productionactivities created by the American Jobs Creation Act of 2004, while the 2004decrease was primarily due to a reduction in nondeductible compensation.  (See Note G, “Income Taxes.”)

**FinancialCondition and Liquidity**

Cash requirementsfor the Company are generally provided from internally generated funds andoutside borrowings.

Net earningsprovided cash flows of $447.1 million in 2005, $320.5 million in 2004 and$241.7 million in 2003, primarily as a result of volume growth and increasedoperating margins.  Net proceeds from theissuance of long-term debt were $353.0 million during 2005.  Additionally, net changes in other assets,payables and other liabilities provided $194.2 million in 2005, $119.6 millionin 2004 and $83.3 million in 2003.  Thecash provided was invested principally in inventory of $491.0 million, $585.6million and $240.0 million in 2005, 2004 and 2003, respectively, as well as instock repurchases of $176.2 million, $118.3 million and $130.9 million in 2005,2004 and 2003, respectively.  Dividendstotaled $0.30, $0.21 and $0.08 per share for the annual periods ended December31, 2005, 2004 and 2003, respectively. Effective in the fourth quarter of 2005, the Company’s quarterly commonstock dividend was increased to $0.12 per share from the previous quarterlycommon stock dividend of $0.06 per share. During 2005, stockholders’ equity rose $319.2 million, while debtincreased $363.0 million, increasing the Company’s leverage.
|            | STOCKHOLDERS’ |       |                         |       |            |       |
|------------|--------------------|------------|------------------------------|------------|-----------------|------------|
|       | EQUITY             |       | DEBT                         |       | DEBT-TO-CAPITAL |       |
|       | *(in  millions)*   |       | *(in  millions)*             |       | RATIO           |       |
|       | 2003               |       | $    825 |       | 2003            |       | $ 574 |   | 2003 |   | 41.0% |   |
|       | 2004               |       | $ 1,057                 |       | 2004            |       | $ 559 |   | 2004 |   | 34.6% |   |
| ** ** | **2005**           | ** ** | **$**** ****1,376**     | ** ** | **2005**        | ** ** | **$ 922** | ** ** | **2005** | ** ** | **40.1%** | ** ** |

 

Consolidatedinventories owned by the Company increased to $2.3 billion at December 31,2005, from $1.9 billion at December 31, 2004. The Company attempts to maintain a projected four- to five-year supplyof land, with half or more controlled through options.  At December 31, 2005, the Company controlled75,671 lots, with 30,201 lots owned and 45,470 lots, or 60.1 percent, underoption.  The Company has historicallyfunded the acquisition of land and exercise of land options through acombination of operating cash flows, capital transactions and borrowings underits revolving credit facility.  TheCompany expects these sources to continue to be adequate to fund futureobligations with regard to land acquisition and exercise of land options;therefore, it does not anticipate that the exercise of land options will have amaterial adverse effect on its liquidity. In an effort to increase liquidity, models have been sold and leasedback on a selective basis.  The Companyowned 80.7 percent of its model homes at December 31, 2005.

27

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The homebuildingsegments’ borrowings include senior notes, senior subordinated notes, anunsecured revolving credit facility and nonrecourse secured notes payable.  Senior and senior subordinated notesoutstanding totaled $893.5 million at December 31, 2005, compared to $540.5million at December 31, 2004.

The Company usedits $500.0 million unsecured revolving credit facility to finance increases inits homebuilding inventory and working capital, when necessary.  There were no borrowings under the facilityat either December 31, 2005 or 2004. Under this facility, the Company had letters of credit outstanding whichtotaled $185.6 million at December 31, 2005, and $131.3 million at December 31,2004.  Unused borrowing capacity underthis facility was $314.4 million and $368.7 million at December 31, 2005 and2004, respectively.

On January 12,2006, the Company entered into a $750.0 million unsecured revolving creditfacility.  The new credit agreement,which matures in January 2011, also provides access to an additional $750.0million of financing through an accordion feature under which the aggregatecommitment may be increased up to $1.5 billion, subject to the availability ofadditional lending commitments.  The$750.0 million credit facility includes a $75.0 million swing-line facility anda $600.0 million sublimit for issuance of standby letters of credit.  Amounts borrowed under the credit agreementare guaranteed on a joint and several basis by substantially all of the Company’s100 percent-owned homebuilding subsidiaries. Such guarantees are full and unconditional.  Interest rates on outstanding borrowings aredetermined by reference to LIBOR, with margins determined based on changes inits leverage ratio and credit ratings, or to an alternate base rate.  The credit agreement contains variouscustomary affirmative, negative and financial covenants.  The credit agreement replaces the Company’sprior $500.0 million revolving credit facility and will be used for generalcorporate purposes.  (See Note F, “Debt”and Note L, “Subsequent Event.”)

In 2005, theCompany redeemed $150.0 million of 9.8 percent senior notes due September 2010,of which it owned $3.0 million.  Thenotes were redeemed at a price of $1,048.75 per $1,000 notes outstanding, plusaccrued and unpaid semiannual interest of $48.75 per $1,000 notes, for anaggregate of $164.6 million paid to holders of record.  The Company recorded $8.3 million of expensesrelated to the early retirement of debt.

The $100.0 millionof 8.0 percent senior notes due August 2006 and $143.5 million of 9.1 percentsenior subordinated notes due June 2011 contain various restrictive covenantsthat include, among other things, limitations on additional indebtedness;change of control; transactions with affiliates; liens and guarantees;dividends and distributions; sale of assets; modification of debt instruments;transactions with affiliates; and inventory. At December 31, 2005, the Company was in compliance with thesecovenants.

The $150.0 millionof 5.4 percent senior notes due June 2008; the $250.0 million of 5.4 percentsenior notes due May 2012; and the $250.0 million of 5.4 percent senior notesdue January 2015 are subject to certain covenants that include, among otherthings, restrictions on additional secured debt and the sale of assets.  At December 31, 2005, the Company was incompliance with these covenants.

In September 2005,the Company entered into treasury interest rate locks (treasury locks) whichterminate in 2006 to facilitate the replacement of higher-rate senior andsenior subordinated debt in 2006.  (SeeNote D, “Derivative Instruments.”)

To finance landpurchases, the Company may also use seller-financed nonrecourse secured notespayable.  At December 31, 2005, suchnotes payable outstanding amounted to $28.5 million, compared to $8.0 millionat December 31, 2004.

The financialservices segment uses cash generated internally and from outside borrowingarrangements to finance its operations. During the fourth quarter of 2005, the financial services segmentterminated its revolving credit facility, which was previously used to financeinvestment portfolio securities. Accordingly, the financial services segment had no borrowings outstandingat December 31, 2005.  Borrowings of thefinancial services segment outstanding under the agreement were $10.5 millionat December 31, 2004.

28

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Although theCompany no longer issues mortgage-backed securities and mortgage-participationsecurities, some of its limited-purpose subsidiaries continued to holdcollateral for previously issued mortgage-backed bonds in which the Companymaintained a residual interest. Revenues, expenses and portfolio balances declined as mortgagecollateral pledged to secure the bonds decreased due to scheduled payments andprepayments, as well as to the sale and redemption of a majority of theinvestment portfolio during 2005 and 2004.

The Ryland Group,Inc. did not guarantee the debt of either its financial services segment or itslimited-purpose subsidiaries.

The Company fileda shelf registration statement with the SEC for up to $1.0 billion of theCompany’s debt and equity securities on April 11, 2005.  At December 31, 2005, $850.0 million remainedavailable under this registration statement due to the issuance of $250.0million of senior notes in May 2005, of which $100.0 million was applied to theprevious shelf registration statement. The registration statement provides that securities may be offered, fromtime to time, in one or more series and in the form of senior, subordinated orconvertible debt; preferred stock; preferred stock represented by depositoryshares; common stock; stock purchase contracts; stock purchase units; andwarrants to purchase both debt and equity securities.  In the future, the Company intends tocontinue to maintain effective shelf registration statements that willfacilitate access to the capital markets. The timing and amount of future offerings, if any, will depend on marketand general business conditions.
|       | SHARES OF         |       | STOCK OPTIONS     |       | DILUTED AVERAGE   |       |
|------------|-------------------|------------|-------------------|------------|-------------------|------------|
|       | COMMON STOCK      |       | OUTSTANDING AT    |       | COMMON SHARES     |       |
|       | REPURCHASED       |       | DECEMBER 31       |       | OUTSTANDING       |       |
|       | *(in  thousands)* |       | *(in  thousands)* |       | *(in  thousands)* |       |
|       | 2003              |       | 3,996             |       | 2003              |       | 6,013 |   | 2003 |   | 53,044 |   |
|       | 2004              |       | 2,939             |       | 2004              |       | 5,535 |   | 2004 |   | 50,379 |   |
| ** ** | **2005**          | ** ** | **2,558**         | ** ** | **2005**          | ** ** | **4,655** | ** ** | **2005** | ** ** | **49,491** | ** ** |

 

During 2005, theCompany repurchased approximately 2.6 million shares of its outstanding commonstock at a cost of approximately $176.2 million.  At December 31, 2005, the Company hadexisting authorization from its Board of Directors to purchase approximately381,000 additional shares and a new authorization for shares totaling $250.0million.  The Company’s stock repurchaseprogram has been funded primarily through internally generated funds.

The Companygranted fewer stock options in 2005, which when combined with common stockrepurchases, lowered dilution.

The followingtable provides a summary of the Company’s contractual cash obligations andcommercial commitments at December 31, 2005, and the effect suchobligations are expected to have on liquidity and cash flow in future periods.
|                             |   | CONTRACTUAL PAYMENTS DUE BY PERIOD |      |
|-----------------------------|--------|--------------------------------------------------------|-----------|
|                        |   |                                                   |      |   |   |   |   |   |   | AFTER |   |
| *(in thousands)*       |   | TOTAL                                                  |      | 2006 |   | 2007-2008 |   | 2009-2010 |   | 2010 |   |
| Debt, principle  maturities |   | $                                                      | 921,970   |   | $ | 119,361 |   | $ | 159,109 |   | $ | -   |   | $ | 643,500 |   |
| Interest on debt1           |   | 303,121                                                |      | 53,032 |   | 91,361 |   | 79,938 |   | 78,790 |   |
| Operating leases            |   | 50,476                                                 |      | 10,483 |   | 18,579 |   | 11,423 |   | 9,991 |   |
| Land option  contracts2     |   | 57,616                                                 |      | 14,008 |   | 27,648 |   | 15,960 |   | - |   |
| Total at December 31, 2005  |   | $                                                      | 1,333,183 |   | $ | 196,884 |   | $ | 296,697 |   | $ | 107,321 |   | $ | 732,281 |   |

*1 Interest on variable rate obligations is basedon rates effective at December 31, 2005.*

*2 Represents obligations under option contractswith specific performance provisions, net of cash deposits*.

29

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The Companybelieves that its current cash position, cash generation capabilities, amountsavailable under its revolving credit facility and its ability to access thecapital markets in a timely manner with its existing shelf registrationstatement are adequate to meet its cash needs for the foreseeable future.

**Off–BalanceSheet Arrangements**

In the ordinarycourse of business, the Company enters into land and lot option purchasecontracts in order to procure land or lots for the construction of homes.  Land and lot option contracts enable theCompany to control significant lot positions with a minimal capital investmentand substantially reduce the risks associated with land ownership anddevelopment.  At December 31, 2005, theCompany had $188.5 million in cash deposits and letters of credit to purchaseland and lots with a total purchase price of $2.1 billion.  Only $60.5 million of the $2.1 billion inland and lot option purchase contracts contain specific performanceprovisions.  Additionally, the Company’sliability is generally limited to forfeiture of the nonrefundable deposits,letters of credit and other nonrefundable amounts incurred.

Pursuant toInterpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,”the Company consolidated $239.2 million of inventory not owned at December 31,2005, $176.4 million of which pertained to land and lot option contracts and$62.8 million of which pertained to three of the Company’s homebuilding jointventures.  (See “Investments in JointVentures” in Note A, “Summary of Significant Accounting Policies.”)

At December 31,2005, the Company had outstanding letters of credit totaling $185.6 million anddevelopment or performance bonds of $428.6 million, issued by third parties, tosecure performance under various contracts and land or municipal improvementobligations.  The Company expects thatthe obligations secured by these letters of credit and performance bonds willgenerally be satisfied in the ordinary course of business and in accordancewith applicable contractual terms.  Tothe extent that the obligations are fulfilled, the related letters of creditand performance bonds will be released, and the Company will not have anycontinuing obligations.

The Company has nomaterial third-party guarantees other than those associated with its $750.0million revolving credit facility, its senior notes, and its investments injoint ventures.  (See “Investments inJoint Ventures” in Note A, “Summary of Significant Accounting Policies” andNote K, “Supplemental Guarantor Information.”)

**CriticalAccounting Policies**

Preparation of theCompany’s consolidated financial statements requires the use of judgment in theapplication of accounting policies and estimates of inherently uncertainmatters.  Listed below are those policieswhich management believes are critical and require the use of complex judgmentin their application.

Management hasdiscussed the critical accounting policies with the Audit Committee of itsBoard of Directors and the Audit Committee has reviewed the disclosure.  There are items within the financialstatements that require estimation but are not considered critical.

*Use ofEstimates*

In budgeting landacquisitions, development and homebuilding construction costs associated withreal estate projects, the Company evaluates market conditions; material andlabor costs; buyer preferences; construction timing; and provisions forinsurance and warranty obligations.  TheCompany accrues its best estimate of the probable cost for resolution of legalclaims.  Estimates, which are based onhistorical experience and other assumptions, are reviewed continually, updatedwhen necessary and believed to be reasonable under the circumstances.  Management believes that the timing and scopeof its evaluation procedures are proper and adequate.  Changes in assumptions relating to suchfactors, however, could have a material effect on the Company’s results ofoperations for a particular quarterly or annual period.

*IncomeRecognition*

Revenues and costof sales are recorded at the time each home or lot is closed and title andpossession are transferred to the buyer and there is no significant continuinginvolvement in accordance with Statement of Financial Accounting Standards No.66 (SFAS 66), “Accounting for Sales of Real Estate.” In order to match revenueswith related expenses, 

30

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land, landdevelopment, interest, taxes and other related costs (both incurred andestimated to be incurred in the future) are allocated to the cost of homesclosed, based upon the relative sales value basis of the total number of homesto be constructed in each community, in accordance with Statement of FinancialAccounting Standards No. 67 (SFAS 67), “Accounting for Costs and Initial RentalOperations of Real Estate Projects.” Estimated land, common area developmentand related costs of master planned communities (including the cost ofamenities) are allocated to individual parcels or communities on a relativesales value basis.  Changes to estimatedcosts, subsequent to the commencement of the delivery of homes, are allocatedto the remaining undelivered homes in the community.  Home construction and related costs arecharged to the cost of homes closed under the specific-identification method.

*InventoryValuation*

Housing projectsand land held for development (inventory) and sale are stated at either thelower of cost or net realizable value. Inventory includes land and development costs; direct constructioncosts; capitalized indirect construction costs; capitalized interest; and realestate taxes.  It may take one to threeyears to develop, sell and deliver all of the homes in a typicalcommunity.  The Company assesses theseassets for recoverability in accordance with the provisions of Statement ofFinancial Accounting Standards No. 144 (SFAS 144), “Accounting for theImpairment or Disposal of Long-Lived Assets.” SFAS 144 requires that long-livedassets and assets held-for-sale be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Recoverability ofhousing inventories is measured by comparing the carrying amount of an asset tofuture undiscounted net cash flows expected to be generated by the asset andsales of comparable assets.  Assetsheld-for-sale are carried at the lower of cost or fair value, less sellingcosts.  These evaluations for impairmentare significantly impacted by estimates of revenues, costs and expenses, aswell as by other factors.  In addition,land, or costs related to future communities, whether owned or under option, isreviewed to determine if the Company will proceed with development and if allrelated costs are recoverable.  If theseassets are considered to be impaired, the impairment loss is measured as theamount by which the carrying amount of the assets exceeds the fair value of theassets and is recognized within the same period that it is identified.  Management believes its processes aredesigned to properly assess market values and carrying values of assets.

*VariableInterest Entities*

FIN 46 requires avariable interest entity to be consolidated by a company if that company issubject to the majority of the entity’s expected losses and/or receives amajority of the entity’s expected returns as a result of ownership, contractualagreements or other financial interests in the entity.  FIN 46 also requires disclosure aboutvariable interest entities (VIEs) that the Company is not required toconsolidate but in which it has a significant, though not primary, variableinterest.  The Company enters into jointventures, from time to time, for the purpose of acquisition and co-developmentof land parcels and lots.  Its investmentin these joint ventures may create a variable interest in a VIE, depending onthe contractual terms of the arrangement. Additionally, in the ordinary course of business, the Company entersinto lot option purchase contracts in order to procure land for theconstruction of homes.  Under such lotoption purchase contracts, the Company funds stated deposits in considerationfor the right to purchase lots at a future point in time, usually atpredetermined prices.  In accordance withthe requirements of FIN 46, certain of the Company’s lot option purchasecontracts may result in the creation of a variable interest in a VIE.  The Company believes the accounting for jointventures and land option contracts using the variable interest consolidationmethodology is a critical accounting policy because the application of FIN 46requires the use of complex judgment in its application.

*IncomeTaxes*

The Companycalculates a provision for income taxes using the asset and liability method,under which deferred tax assets and liabilities are recognized by identifyingthe temporary differences arising from the different treatment of items for taxand accounting purposes.  In determiningthe tax consequences of events that have been recognized in its financialstatements or tax returns, judgment is required.  Differences between the amounts recognized inits financial statements or tax returns and actual outcomes may arise uponissuance of regulations and final guidance from federal and state taxingauthorities and could have a material impact on the Company’s consolidatedresults of operations or financial positions. (See “FSP 109-1” under “New Accounting Pronouncements” in Note A, “Summaryof Significant Accounting Policies.”)

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**Outlook**

The Company entered 2006 with a backlog of orders fornew homes totaling 8,464 units and the dollar value of the Company’s backlogwas $2.6 billion, representing approximately 45 percent of 2006 targetedclosings.  In the first two months of theyear, the Company has experienced a decline in sales orders for new homes, ascompared to the same period last year. The Company believes its sales order results to date in 2006 reflectrecent broader market trends toward a softening in demand for residentialhousing.  It is too early to forecastwhether year-to-date sales are indicative of a longer-term trend.  Historically, the Company’s new orderactivity is higher in the spring and summer months, and those numbers will bemore indicative of its annual performance. Currently, the Company does not anticipate revising its earningsguidance for 2006; however, if sales orders do not improve, the Company may reviseits guidance for 2006.

**Item 7A.**                 Quantitative andQualitative Disclosures about Market Risk

**MarketRisk Summary**

The followingtable provides information about the Company’s significant financialinstruments that are sensitive to changes in interest rates.  For debt obligations, the table presentsprincipal cash flows and related weighted-average interest rates by expectedmaturity dates.  Weighted-averagevariable rates are based on implied forward rates as of the reporting date.

**InterestRate Sensitivity**

**PrincipalAmount by Expected Maturity**
|                                                          |   |   |       |       |       |       |       |       |   |   |   |       |   |   |    | FAIR       |   |
|----------------------------------------------------------|--------|--------|------------|------------|------------|------------|------------|------------|--------|--------|--------|------------|--------|--------|---------|------------|--------|
|                                                     |   |   |       |       |       |       |       |       |   |   |   |       |   |   |    | VALUE      |   |
| *(in thousands)*                                    |   | 2006   |       | 2007       |       | 2008       |       | 2009       |   | 2010   |   | THEREAFTER |   | TOTAL  |    | 12/31/2005 |   |
|                                                     |   |   |       |       |       |       |       |       |   |   |   |       |   |   |    |       |   |
| Senior notes and senior subordinated notes (fixed  rate) |   | $      | 100,000    |       |       |       | $          | 150,000    |   |   |   |       |   | $      | 643,500 |       | $      | 893,500 |   | $ | 893,464 |   |
| Average interest rate                                    |   | 8.0    | %          |       |       | 5.4        | %          | ** ** |   |   |   | 6.2        | %      | 6.3    | %       |       |   |
| Other financial instruments                              |   |   | ** ** | ** ** |       |       |       |       |   |   |   |       |   |   |    |       |   |
| Forward-delivery contracts:                              |   |   | ** ** | ** ** |       |       |       |       |   |   |   |       |   |   |    |       |   |
| Notional amount                                          |   | $      | 134,050    |       |       | ** ** | ** ** |       |   |   |   |       |   |   | $       | 134,050    |   | $ | (109 | ) |
| Average interest rate                                    |   | 5.8    | %          |       | ** ** | ** ** |       |       |   |   |   |       |   | 5.8    | %       |       |   |
| Mortgage interest rate lock commitments:                 |   |   |       |       |       |       |       |       |   |   |   |       |   |   |    |       |   |
| Notional amount                                          |   | $      | 233,817    |       |       | ** ** | ** ** |       |   |   |   |       |   |   | $       | 233,817    |   | $ | 1,952 |   |
| Average interest rate                                    |   | 6.5    | %          |       | ** ** | ** ** |       |       |   |   |   |       |   | 6.5    | %       |       |   |
| Treasury interest rate locks:                            |   |   | ** ** | ** ** |       |       |       |       |   |   |   |       |   |   |    |       |   |
| Notional amount                                          |   | $      | 250,000    |       |       | ** ** | ** ** |       |   |   |   |       |   |   | $       | 250,000    |   | $ | 4,785 |   |
| Average interest  rate                                   |   | 4.1    | %          |       | ** ** | ** ** |       |       |   |   |   |       |   | 4.1    | %       |       |   |
|                                                          |        |        |            |            |            |            |            |            |        |        |        |            |        |        |         |            |        |  |  |  |  |  |

 

Interest rate risk is a primary market risk facing theCompany.  Interest rate risk not onlyarises principally in the Company’s financial services segment, but also inrespect to the homebuilding segments’ revolving credit facility.  The Company enters into forward-deliverycontracts and may, at times, use other hedging contracts to mitigate itsexposure to movements in interest rates on mortgage interest rate lockcommitments (IRLCs) and mortgage loans held-for-sale.  The Company entered into treasury locksduring 2005 to facilitate replacement of debt in 2006.  (See “Financial Condition and Liquidity” andNote D, “Derivative Instruments.”) In managing interest rate risk, the Companydoes not speculate on the direction of interest rates.

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**Item 8.**           Financial Statementsand Supplementary Data

**CONSOLIDATEDSTATEMENTS OF EARNINGS**
|                                                    | * *   | YEAR ENDED DECEMBER 31,                               | * *      |
|---------------------------------------------------------|------------|----------------------------------------------------------------------|---------------|
| *(in thousands, except share data)* |       | **     2005     ** |          | 2004 |   | 2003 |   |
|                                                    |       |                                                                 |          |   |   |   |   |
| **REVENUES**                                            | ** ** | ** **                                                           | ** **    | ** ** | ** ** | ** ** | ** ** |
| Homebuilding                                            | ** ** | **$**                                                                | **4,725,751** |   | $ | 3,867,086 |   | $ | 3,355,450 |   |
| Financial services                                      | ** ** | **91,815**                                                           |          | 84,735 |   | 88,679 |   |
| **TOTAL REVENUES**                                      | ** ** | **4,817,566**                                                        |          | 3,951,821 |   | 3,444,129 |   |
| **EXPENSES**                                            | ** ** | ** **                                                           | ** **    | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                           | ** ** | **3,537,603**                                                        |          | 2,964,087 |   | 2,615,975 |   |
| Selling, general and administrative                     | ** ** | **443,938**                                                          |          | 377,335 |   | 338,449 |   |
| Financial services                                      | ** ** | **31,704**                                                           |          | 27,016 |   | 24,765 |   |
| Corporate                                               | ** ** | **74,255**                                                           |          | 60,944 |   | 56,114 |   |
| Interest                                                | ** ** | **738**                                                              |          | 1,227 |   | 7,523 |   |
| Expenses related to early retirement of debt            | ** ** | **8,277**                                                            |          | - |   | 5,086 |   |
| **TOTAL EXPENSES**                                      | ** ** | **4,096,515**                                                        |          | 3,430,609 |   | 3,047,912 |   |
| **EARNINGS**                                            | ** ** | ** **                                                           | ** **    | ** ** | ** ** | ** ** | ** ** |
| Earnings before taxes                                   | ** ** | **721,051**                                                          |          | 521,212 |   | 396,217 |   |
| Tax expense                                             | ** ** | **273,999**                                                          |          | 200,667 |   | 154,525 |   |
| **NET EARNINGS**                                        | ** ** | **$**                                                                | **447,052**   |   | $ | 320,545 |   | $ | 241,692 |   |
| **NET EARNINGS PER COMMON SHARE**                       | ** ** | ** **                                                           | ** **    | ** ** | ** ** | ** ** | ** ** |
| Basic                                                   | ** ** | **$**                                                                | **9.52**      |   | $ | 6.72 |   | $ | 4.86 |   |
| Diluted                                                 | ** ** | **9.03**                                                             |          | 6.36 |   | 4.56 |   |
| **AVERAGE COMMON SHARES OUTSTANDING**                   | ** ** | ** **                                                           | ** **    | ** ** | ** ** | ** ** | ** ** |
| Basic                                                   | ** ** | **46,966,317**                                                       |          | 47,678,887 |   | 49,718,032 |   |
| Diluted                                                 | ** ** | **49,490,887**                                                       |          | 50,378,840 |   | 53,044,404 |   |
| **DIVIDENDS  DECLARED PER COMMON SHARE**                | ** ** | **$**                                                                | **0.30**      |   | $ | 0.21 |   | $ | 0.08 |   |

 

*See Notes to Consolidated Financial Statements.*

33

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

 

*See Notes to Consolidated Financial Statements.*

34

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**
|                                                                                                                        |       |       |       |        |       |         |       | ACCUMULATED   |          |               |       |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|---------------|---------------|--------------------|------------|
|                                                                                                                   |       |       |       |        |       |         |       | OTHER         |          | TOTAL              |       |
|                                                                                                                   |       | COMMON     |       | PAID-IN     |       | RETAINED     |       | COMPREHENSIVE |          | STOCKHOLDERS’ |       |
| *(in thousands, except share data)*                                                                |       | STOCK      |       | CAPITAL     |       | EARNINGS     |       | INCOME        |          | EQUITY             |       |
| BALANCE AT  JANUARY 1, 2003                                                                                            |       | $          | 50,521     |        | $          | -            |       | $             | 628,200       |               | $          | 1,358 |   | $ | 680,079 |   |
| Comprehensive income:                                                                                                  |       |       |       |        |       |         |       |          |          |               |       |
| Net earnings                                                                                                           |       |       |       |        |       | 241,692      |       |          |          | 241,692            |       |
| Other comprehensive income, net of tax:                                                                                |       |       |       |        |       |         |       |          |          |               |       |
| Change in net unrealized gain on mortgage-backed  securities, net of taxes of $139                                     |       |       |       |        |       |         |       | (227          | )             | (227               | )          |
| Total comprehensive income                                                                                             |       |       |       |        |       |         |       |          |          | 241,465            |       |
| Common stock dividends (per share $0.08)                                                                               |       |       |       |        |       | (3,966       | )          |          |          | (3,966             | )          |
| Repurchase of common stock                                                                                             |       | (3,996     | )          | (35,876     | )          | (91,067      | )          |          |          | (130,939           | )          |
| Employee stock plans and related income tax benefit                                                                    |       | 2,027      |       | 35,876      |       |         |       |          |          | 37,903             |       |
| BALANCE AT DECEMBER 31, 2003                                                                                           |       | 48,552     |       | -           |       | 774,859      |       | 1,131         |          | 824,542            |       |
| Comprehensive income:                                                                                                  |       |       |       |        |       |         |       |          |          |               |       |
| Net earnings                                                                                                           |       |       |       |        |       | 320,545      |       |          |          | 320,545            |       |
| Other comprehensive income, net of tax:                                                                                |       |       |       |        |       |         |       |          |          |               |       |
| Change in net unrealized gain on mortgage-backed  securities, net of taxes of $542                                     |       |       |       |        |       |         |       | (887          | )             | (887               | )          |
| Total comprehensive income                                                                                             |       |       |       |        |       |         |       |          |          | 319,658            |       |
| Common stock dividends (per share $0.21)                                                                               |       |       |       |        |       | (10,064      | )          |          |          | (10,064            | )          |
| Repurchase of common stock                                                                                             |       | (2,939     | )          | (39,259     | )          | (76,098      | )          |          |          | (118,296           | )          |
| Employee stock plans and related income tax benefit                                                                    |       | 1,735      |       | 39,259      |       |         |       |          |          | 40,994             |       |
| BALANCE AT DECEMBER 31, 2004                                                                                           |       | 47,348     |       | -           |       | 1,009,242    |       | 244           |          | 1,056,834          |       |
| Comprehensive income:                                                                                                  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** **    | ** **         | ** ** |
| Net earnings                                                                                                           | ** ** | ** ** | ** ** | ** **  | ** ** | **447,052**  | ** ** | ** **    | ** **    | **447,052**        | ** ** |
| Other comprehensive income, net of tax:                                                                                | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** **    | ** **         | ** ** |
| Change in net unrealized gain on cash flow hedging  instruments and mortgage-backed securities, net of taxes of $1,685 | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **2,720**     | ** **    | **2,720**          | ** ** |
| Total comprehensive income                                                                                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** **    | **449,772**        | ** ** |
| Common stock dividends (per share $0.30)                                                                               | ** ** | ** ** | ** ** | ** **  | ** ** | **(14,138**  | **)**      | ** **    | ** **    | **(14,138**        | **)**      |
| Repurchase of common stock                                                                                             | ** ** | **(2,558** | **)**      | **(58,189** | **)**      | **(115,467** | **)**      | ** **    | ** **    | **(176,214**       | **)**      |
| Employee stock plans and related income tax benefit                                                                    | ** ** | **1,578**  | ** ** | **58,189**  | ** ** | ** **   | ** ** | ** **    | ** **    | **59,767**         | ** ** |
| **BALANCE  AT DECEMBER 31, 2005**                                                                                      | ** ** | **$**      | **46,368** | ** **  | **$**      | **-**        | ** ** | **$**         | **1,326,689** | ** **         | **$**      | **2,964** | ** ** | **$** | **1,376,021** | ** ** |

 

*See Notes to Consolidated Financial Statements.*

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

*See Notesto Consolidated Financial Statements.*

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**NoteA: Summary of Significant Accounting Policies**

*Basisof Presentation*

The consolidatedfinancial statements include the accounts of The Ryland Group, Inc. and itswholly-owned subsidiaries.  Intercompanytransactions have been eliminated in consolidation.  Certain prior year amounts have beenreclassified to conform to the 2005 presentation.

*Use ofEstimates*

The preparation offinancial statements, in conformity with accounting principles generallyaccepted in the United States, requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual results coulddiffer from these estimates.

*Cashand Cash Equivalents*

The Companyconsiders all highly liquid short-term investments and cash held in escrow tobe cash equivalents.  Cash equivalentstotaled $428.2 million and $61.7 million at December 31, 2005 and 2004,respectively.

*PerShare Data*

Basic net earningsper common share is computed by dividing net earnings by the weighted-averagenumber of common shares outstanding. Additionally, diluted net earnings per common share give effect todilutive common stock equivalent shares.

*StockSplit*

All references inthe consolidated financial statements to common shares, share prices, per shareamounts and stock plans have been retroactively restated for the 2004two-for-one stock split.  (See Note H, “Stockholders’Equity.”)

*HomebuildingRevenues*

Homebuildingrevenues are recognized when home and lot sales are closed, title andpossession are transferred to the buyer and there is no significant continuinginvolvement in accordance with SFAS 66. Sales incentives offset revenues and are expensed as incurred.

*HousingInventories*

Housinginventories consist principally of homes under construction, land underdevelopment and improved lots.  Inventoryincludes land and development costs; direct construction costs; capitalizedindirect construction costs; capitalized interest; and real estate taxes.  Inventories to be held and used are stated atcost unless a community is determined to be impaired, in which case theimpaired inventories are written down to fair value.  Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount ofan asset to future undiscounted net cash flows expected to be generated by theasset and sales of comparable assets. Inventories to be disposed of are stated at either the lower of cost orfair value, less cost to sell, and are reported net of valuation reserves.  Write-downs of impaired inventories to fairvalue are recorded as adjustments to the cost basis of the respectiveinventory.  Valuation reserves related toinventories to be disposed of amounted to $486,000 at December 31, 2005 and$1.4 million at December 31, 2004.  Thenet carrying values of the related inventories amounted to $1.2 million and$31,000 at December 31, 2005 and 2004, respectively.

Costs of inventoryinclude direct costs of land and land development; material acquisition; andhome construction expenses.  The costs ofacquiring and developing land and constructing certain related amenities areallocated to the parcels to which these costs relate.  Interest and taxes are capitalized during theland development stage.

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The followingtable is a summary of capitalized interest:
| *(in thousands)*                |       | **     2005     ** |       | 2004    |   |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|---------|--------|
| Capitalized  interest at January 1   | ** ** | **$**                                                                | **55,414** |    | $      | 45,163 |   |
| Interest capitalized                 | ** ** | **65,959**                                                           |       | 52,015  |   |
| Interest amortized to cost of sales  | ** ** | **(45,483**                                                          | **)**      | (41,764 | )      |
| Capitalized  interest at December 31 | ** ** | **$**                                                                | **75,890** |    | $      | 55,414 |   |

 

*VariableInterest Entities*

FIN 46 requires aVIE to be consolidated by a company if that company is subject to a majority ofthe risk of loss from the VIE’s activities and/or entitled to receive amajority of the VIE’s residual returns. FIN 46 also requires disclosures about VIEs that the Company is notrequired to consolidate but in which it has a significant, though not primary,variable interest.

The Company entersinto joint ventures, from time to time, for the purpose of acquisition andco-development of land parcels and lots. Its investment in these joint ventures may create a variable interest ina VIE, depending on the contractual terms of the arrangement.  Additionally, in the ordinary course ofbusiness, the Company enters into lot option purchase contracts in order toprocure land for the construction of homes. Under such lot option purchase contracts, the Company funds stateddeposits in consideration for the right to purchase lots at a future point intime, usually at predetermined prices. In accordance with the requirements of FIN 46, certain of the Company’slot option purchase contracts may result in the creation of a variable interestin a VIE.

In compliance withthe provisions of FIN 46, the Company consolidated $239.2 million of inventorynot owned at December 31, 2005, $176.4 million of which pertained to land andlot option contracts and $62.8 million of which pertained to three of theCompany’s homebuilding joint ventures. (See further discussion in “Investments in Joint Ventures,” below.)While the Company may not have had legal title to the optioned land orguaranteed the seller’s debt associated with that property, under FIN 46 it hadthe primary variable interest and was required to consolidate the particularVIE’s assets under option at fair value. This represents the fair value of the optioned property.  Additionally, to reflect the fair value ofthe inventory consolidated under FIN 46, the Company eliminated $13.3 millionof its related cash deposits for lot option contracts, which are included inconsolidated inventory not owned. Minority interest totaling $163.1 million was recorded with respect tothe consolidation of these contracts, representing the selling entities’ownership interests in these VIEs.  AtDecember 31, 2005, the Company had cash deposits and letters of credit totaling$22.1 million relating to lot option contracts that were consolidated,representing its current maximum exposure to loss.  Creditors of these VIEs, if any, have norecourse against the Company.  AtDecember 31, 2005, the Company had cash deposits and/or letters of credittotaling $95.9 million that were associated with lot option purchase contractswhich had an aggregate purchase price of $1.2 billion and that were related toVIEs in which it did not have a primary variable interest.

*ServiceLiabilities*

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

*Investmentsin Joint Ventures*

The Company entersinto joint ventures, from time to time, for the purpose of acquisition andco-development of land parcels and lots. Currently, the Company participates in homebuilding joint ventures inthe Atlanta, Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenixmarkets.  The Company participates in anumber of joint ventures in which it has less than a controlling interest.  At December 31, 2005 and 2004, the Company’sinvestments in its unconsolidated joint ventures totaled $10.2 million and $2.5million, respectively, and were classified in the consolidated balance sheetsunder “Other” assets.  The Companyrecognizes its share of the respective joint ventures’ earnings from the saleof lots to other homebuilders.  It doesnot, however, recognize earnings from lots that it purchases from the jointventures.  Instead, it reduces its costbasis in these lots by its share of the earnings from the 

38

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lots.  The Company’s equity in earnings of itsunconsolidated joint ventures totaled $315,000 for the year ended December 31,2005, compared to earnings of $5.8 million for the same period in 2004 andlosses of $94,000 for the same period in 2003.

The aggregateassets of the unconsolidated joint ventures in which the Company participatedwere $581.4 million and $10.3 million at December 31, 2005 and 2004,respectively.  The aggregate debt of theunconsolidated joint ventures in which the Company participated totaled $394.0million and $3.6 million at December 31, 2005 and 2004, respectively.

The increase inaggregate joint venture assets and debt, year over year, is primarilyattributable to one new joint venture which had total assets of $554.1 millionand debt of $375.5 million at December 31, 2005.  In this joint venture, the Company and itspartners provided guarantees of debt on a pro rata basis.  The Company has a 3.3 percent pro ratainterest on the debt, or $12.5 million, and a completion guarantee related toproject development.  The guaranteesapply if a partner defaults on its loan arrangement and the fair value of thecollateral (land and improvements) is less than the loan balance.

At December 31,2005 and 2004, three of the joint ventures in which the Company participatedwere consolidated in accordance with the provisions of FIN 46, as the Companywas determined to have the primary variable interest in the entities.  In association with these consolidated jointventures, the Company recorded pretax earnings of $7,000 and $130,000 for 2005and 2004, respectively.  Total assets of$63.7 million and $34.4 million (including consolidated inventory not owned),total liabilities of $43.3 million and $18.1 million, and minority interest of$11.5 million and $9.2 million were consolidated at December 31, 2005 and 2004,respectively.  In February 2006, theCompany guaranteed up to 50.0 percent of a $55.0 million revolving creditfacility for one of its consolidated joint ventures.

*Property,Plant and Equipment*

Property, plantand equipment, which included model home furnishings of $56.3 million and $43.2million at December 31, 2005 and 2004, respectively, are carried at cost lessaccumulated depreciation and amortization. Depreciation is provided for, principally, by the straight-line methodover the estimated useful lives of the assets. Model home furnishings, which are amortized over the life of thecommunity as homes are closed, are included in cost of sales.

*PurchasePrice in Excess of Net Assets Acquired*

Statement ofFinancial Accounting Standards No. 142 (SFAS 142), “Goodwill and OtherIntangible Assets,” requires that goodwill and certain intangible assets nolonger be amortized but be reviewed for impairment at least annually.  Intangible assets with finite lives willcontinue to be amortized over their estimated useful lives.  Additionally, SFAS 142 requires that goodwillincluded in the carrying value of equity-method investments no longer beamortized.

The Companyadopted the provisions of SFAS 142 on January 1, 2002, and performs impairmenttests of its goodwill annually as of March 31. The Company tests goodwill for impairment by using the two-step processprescribed in SFAS 142.  The first stepidentifies potential impairment, while the second step measures the amount ofimpairment.  The Company had noimpairment in the years ended December 31, 2005 or 2004.

As a result of theCompany’s application of the nonamortization provisions of SFAS 142, noamortization was recorded in 2005, 2004 or 2003.

Goodwill is allocatedto the reporting unit from which it originates. At December 31, 2005, goodwill attributable to the Company’shomebuilding operations was $18.2 million, net of $24.9 million of accumulatedamortization.

*IncomeTaxes*

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

39

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*Stock-BasedCompensation*

The Company haselected to follow the intrinsic-value method to account for compensationexpense, which is related to the award of stock options, and to furnish the proforma disclosures required under Statement of Financial Accounting StandardsNo. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” as amended.  Since stock option awards are granted atprices no less than the fair market value of the shares at the date of grant,no compensation expense is recognized. Had compensation expense been determined based on fair value at thegrant date for stock-option awards, consistent with the provisions of SFAS 123,the Company’s net earnings and earnings per share in 2005, 2004 and 2003 wouldhave been reduced to the pro forma amounts indicated in the following table:
|                                                                                                                                         |       | YEAR ENDED DECEMBER 31,                               |        |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|-------------|
| *(in thousands, except share data)*                                                                                 |       | **     2005     ** |        | 2004 |   | 2003 |   |
| Net earnings, as reported                                                                                                               | ** ** | **$**                                                                | **447,052** |   | $ | 320,545 |   | $ | 241,692 |   |
| Add: Stock-based employee compensation expense  included in reported net earnings, net of related tax effects                           |       | **-  **                                                    |        | **-  ** |   | **-  ** |   |
| Deduct: Total stock-based employee compensation  expense determined under fair-value method for all awards, net of related tax  effects |       | **(5,957**                                                           | **)**       | (5,662 | ) | (3,991 | ) |
| Pro forma net earnings                                                                                                                  | ** ** | **$**                                                                | **441,095** |   | $ | 314,883 |   | $ | 237,701 |   |
| Earnings per share:                                                                                                                     |       |                                                                 |        |   |   |   |   |
| Basic – as reported                                                                                                                | ** ** | **$**                                                                | **9.52**    |   | $ | 6.72 |   | $ | 4.86 |   |
| Basic – pro forma                                                                                                                  | ** ** | **9.39**                                                             |        | 6.60 |   | 4.78 |   |
| Diluted – as reported                                                                                                              | ** ** | **9.03**                                                             |        | 6.36 |   | 4.56 |   |
| Diluted – pro  forma                                                                                                               | ** ** | **8.91**                                                             |        | 6.25 |   | 4.48 |   |

 

The fair value ofeach option grant is estimated on the grant date by using the Black-Scholesoption-pricing model.  The followingweighted-average assumptions were used for grants in 2005, 2004 and 2003,respectively: a risk-free interest rate of 4.0 percent, 2.4 percent and 2.1 percent;an expected volatility factor for the market price of the Company’s commonstock of 38.4 percent, 38.4 percent and 37.6 percent; a dividend yield of 0.5percent, 0.5 percent and 0.3 percent; and an expected life of three years.  The weighted-average fair values at the grantdate for options granted in 2005, 2004 and 2003 were $18.99, $11.65 and $7.28,respectively.  Beginning in 2006, stockbased compensation expense will be recorded based on the fair value at thegrant date.  (See “SFAS 123(R) and SAB107” in “New Accounting Pronouncements.”)

*LoanOrigination Fees, Costs, Mortgage Discounts and Loan Sales*

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

*DerivativeInstruments*

In the normalcourse of business and pursuant to its risk-management policy, the Companyenters, as an end user, into derivative instruments, including forward-deliverycontracts for loans and mortgage-backed securities; options on forward-deliverycontracts; futures contracts; and options on futures contracts, to minimize theimpact of movements in market interest rates on IRLCs and mortgage loansheld-for-sale.  Major factors influencingthe use of various hedging contracts include general market conditions,interest rates, types of mortgages originated and the percentage of IRLCsexpected to fund.  The Company is exposedto credit-related losses in the event of nonperformance by counter parties tocertain hedging contracts.  Credit riskis limited to those instances where the Company is in a net unrealized gainposition.  It manages this credit risk byentering into agreements with counter parties meeting its credit standards andby monitoring position limits.  TheCompany elected not to use hedge accounting treatment with respect to its economichedging activities.  Accordingly, allderivative instruments used as economic hedges are carried in the consolidatedbalance sheets in “Other” assets or “Accrued and other liabilities” at fairvalue, with changes in value recorded in current earnings.  The Company’s mortgage pipeline includesIRLCs, which represent commitments that have been extended by the Company tothose borrowers who have applied for loan funding and have met certain definedcredit and underwriting criteria.  TheCompany determined that its IRLCs 

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meet the definitionof derivatives under Statement of Financial Accounting Standards No. 133 (SFAS133), “Accounting for Derivative Instruments and Hedging Activities,” asamended.

In September 2005,the Company entered into treasury locks which terminate in 2006, to facilitatethe replacement of higher-rate senior and senior subordinated debt in2006.  (See Note D, “DerivativeInstruments.”)

*AdvertisingCosts*

The Companyexpenses advertising costs as they are incurred.  Advertising costs totaled $25.3 million,$21.6 million and $16.8 million in 2005, 2004 and 2003, respectively.

*ComprehensiveIncome*

Comprehensiveincome consists of net income and the increase or decrease in unrealized gainsor losses on the Company’s available-for-sale securities, as well as theincrease or decrease in unrealized gains or losses associated with the treasurylocks, net of applicable taxes. Comprehensive income totaled $449.8 million, $319.7 million and $241.5million for the years ended December 31, 2005, 2004 and 2003, respectively.

*NewAccounting Pronouncements*

*SFAS123(R) and SAB 107*

In December 2004,the Financial Accounting Standards Board (FASB), issued Statement of FinancialAccounting Standards No. 123 (revised 2004), (SFAS 123(R)), “Share-BasedPayment”, which is a revision of SFAS 123. SFAS 123(R) supercedes AccountingPrinciples Board (APB) Opinion No. 25 (APB No. 25), “Accounting for StockIssued to Employees,” and amends FASB Statement No. 95, “Statement of CashFlows.” While generally similar in approach to its predecessor statement, SFAS123(R) requires that all share-based payments to employees, including grants ofemployee stock options, be recognized in the financial statements based ontheir fair values.  SFAS 123(R) permitspublic companies to adopt its requirements by using either the “modifiedprospective” method, in which compensation cost is recognized beginning withthe effective date *(a)* for allshare-based payments granted after the effective date and *(b)* for all awards granted to employeesprior to the effective date of SFAS 123(R) that remain unvested on theeffective date; or by using the “modified-retrospective” method, which includesthe requirements of the modified-prospective method described above and alsopermits entities to restate, based on the amounts previously recognized underSFAS 123 for purposes of pro forma disclosures, either *(a)* all prior periods presented or *(b)* prior interim periods of the year ofadoption.  SFAS 123(R) is effective forpublic companies at the beginning of the first interim or annual period afterDecember 15, 2005.  As permitted by SFAS123, the Company currently accounts for share-based payments to employees byusing APB No.  25’s intrinsic-valuemethod and, as such, generally recognizes no compensation cost for employeestock options.

The Company willimplement the provisions of SFAS 123(R) in the first quarter of 2006, whichwill have an impact on its financial statements but is not expected to have amaterial impact on its overall financial position.  The impact of adoption of SFAS 123(R) cannotbe predicted at this time because it will depend on levels of share-basedpayments granted in the future.  However,had the Company adopted SFAS 123(R) in prior periods, the impact of thatstandard would have approximated the impact of SFAS 123, which is described inthe disclosure of pro forma net income and earnings per share in”Stock-BasedCompensation.” SFAS 123(R) also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flowrather than as an operating cash flow. This requirement will reduce net operating cash flows and increase netfinancing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in thefuture (because they depend on, among other things, when employees exercisetheir stock options), the amount of operating cash flows recognized in priorperiods for such excess tax deductions were $30.5 million, $17.5 million and$17.1 million in 2005, 2004 and 2003, respectively.

In March 2005, theSEC released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.”SAB 107 presents the SEC’s staff position regarding the application of SFAS123(R).  SAB 107 contains interpretiveguidance related to the interaction between SFAS 123(R) and SEC rules andregulations.  SAB 107 outlines thesignificance of disclosures made regarding the accounting for share-basedpayments.

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*SFAS154*

In March 2005, theFASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “AccountingChanges and Error Corrections,” which is a replacement of APB Opinion No. 20, “AccountingChanges,” and Statement of Financial Accounting Standards No. 3, “ReportingAccounting Changes in Interim Financial Statements.” SFAS 154 amends requirementsfor reporting a change in accounting principles.  The statement requires a retrospectiveapplication of changes in accounting principle to prior period financialstatements, unless it is impracticable to determine the period-specific effectsor the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.  The implementation of SFAS 154 will not havea material effect on the Company’s financial condition or results ofoperations.

*FSP109-1*

In December 2004,the FASB issued Staff Position 109-1 (FSP 109-1), “Application of FASBStatement No. 109 (SFAS 109), ‘Accounting for Income Taxes,’ to the TaxDeduction on Qualified Production Activities Provided by the American JobsCreation Act of 2004.” The American Jobs Creation Act, which was signed intolaw in October 2004, provides a tax deduction on qualified domestic productionactivities.  When fully phased-in, thededuction will be up to nine percent of the lesser of “qualified productionactivities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction should beaccounted for as a special deduction under SFAS 109 and will reduce tax expensein the period or periods that the amounts are deductible on the taxreturn.  The tax benefit resulting fromthe new deduction was effective beginning in the Company’s fiscal year2005.  The Company currently estimatesthe reduction in its federal income tax rate to be in the range of one half ofone percent to one percent.

**Note B:Segment Information (Restated)**

 

The Company is aleading national homebuilder and mortgage-related financial services firm.  As one of the largest single-family on-sitehomebuilders in the United States, it builds homes in 27 markets.  The Company consists of six operations: fourgeographically-determined homebuilding regions; financial services; andcorporate.  The Company’s homebuildingsegment consists of four regional reporting segments, referred to as North,Texas, Southeast and West.  Thehomebuilding segments specialize in the sale and construction of single-familyattached and detached housing.  TheCompany’s financial services segment includes Ryland Mortgage Company (RMC),RHIC, LPS and CNRRG.  The Company’sfinancial services segment provides loan origination and offers title, escrowand insurance services.  Corporate is anon-operating business segment with the sole purpose of supporting operations.  Certain corporate expenses are allocated tothe homebuilding and financial services segments.  As a result of disaggregating the Company’shomebuilding regions into formal segments, certain employee benefit plan assetsand costs have been reclassified from Corporate to other segments in order tobest reflect the financial position and results of the Company’s segments.

The Companyevaluates performance and allocates resources to segments based on a number offactors, including segment pretax earnings. The accounting policies of the segments are the same as those describedin Note A, “Summary of Significant Accounting Policies.”

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**SelectedSegment Information**
|                              |       | YEAR ENDED DECEMBER 31,                               |          |
|-----------------------------------|------------|----------------------------------------------------------------------|---------------|
| *(in thousands)*             |       | **     2005     ** |          | 2004 |   | 2003 |   |
| * *                          |       |                                                                 |          |   |   |   |   |
| **REVENUES**                      |       |                                                                 |          |   |   |   |   |
| Homebuilding                      |       |                                                                 |          |   |   |   |   |
| North                             | ** ** | **$**                                                                | **1,388,208** |   | $ | 1,284,361 |   | $ | 1,157,417 |   |
| Texas                             | ** ** | **619,332**                                                          |          | 533,276 |   | 532,144 |   |
| Southeast                         | ** ** | **1,258,373**                                                        |          | 1,011,494 |   | 892,351 |   |
| West                              | ** ** | **1,459,838**                                                        |          | 1,037,955 |   | 773,538 |   |
| Financial services                | ** ** | **91,815**                                                           |          | 84,735 |   | 88,679 |   |
| Total                             | ** ** | **$**                                                                | **4,817,566** |   | $ | 3,951,821 |   | $ | 3,444,129 |   |
| **PRETAX EARNINGS**               |       |                                                                 |          |   |   |   |   |
| Homebuilding                      |       |                                                                 |          |   |   |   |   |
| North                             | ** ** | **$**                                                                | **241,183**   |   | $ | 234,391 |   | $ | 186,017 |   |
| Texas                             | ** ** | **44,308**                                                           |          | 36,867 |   | 39,541 |   |
| Southeast                         | ** ** | **179,242**                                                          |          | 108,964 |   | 89,452 |   |
| West                              | ** ** | **279,477**                                                          |          | 145,232 |   | 79,984 |   |
| Financial services                | ** ** | **59,373**                                                           |          | 56,702 |   | 62,423 |   |
| Corporate and unallocated         | ** ** | **(82,532**                                                          | **)**         | (60,944 | ) | (61,200 | ) |
| Total                             | ** ** | **$**                                                                | **721,051**   |   | $ | 521,212 |   | $ | 396,217 |   |
| **DEPRECIATION AND AMORTIZATION** |       |                                                                 |          |   |   |   |   |
| Homebuilding                      |       |                                                                 |          |   |   |   |   |
| North                             | ** ** | **$**                                                                | **10,800**    |   | $ | 8,525 |   | $ | 9,215 |   |
| Texas                             | ** ** | **6,049**                                                            |          | 4,897 |   | 5,217 |   |
| Southeast                         | ** ** | **9,083**                                                            |          | 8,151 |   | 7,179 |   |
| West                              | ** ** | **14,598**                                                           |          | 14,004 |   | 11,401 |   |
| Financial services                | ** ** | **1,119**                                                            |          | 623 |   | 922 |   |
| Corporate and unallocated         | ** ** | **1,517**                                                            |          | 2,319 |   | 2,502 |   |
| Total                             | ** ** | **$**                                                                | **43,166**    |   | $ | 38,519 |   | $ | 36,436 |   |
| **IDENTIFIABLE ASSETS**           |       |                                                                 |          |   |   |   |   |
| Homebuilding                      |       |                                                                 |          |   |   |   |   |
| North                             | ** ** | **$**                                                                | **950,636**   |   | $ | 681,753 |   | $ | 602,291 |   |
| Texas                             | ** ** | **420,689**                                                          |          | 322,514 |   | 300,790 |   |
| Southeast                         | ** ** | **865,886**                                                          |          | 525,786 |   | 446,538 |   |
| West                              | ** ** | **974,479**                                                          |          | 718,810 |   | 500,949 |   |
| Financial services                | ** ** | **69,415**                                                           |          | 78,040 |   | 74,951 |   |
| Corporate and unallocated         | ** ** | **105,768**                                                          |          | 98,067 |   | 82,071 |   |
| Total                             | ** ** | **$**                                                                | **3,386,873** |   | $ | 2,424,970 |   | $ | 2,007,590 |   |

 

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**Note C: Earnings Per Share Reconciliation**

 

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

 
|                                                                                              |       | YEAR ENDED DECEMBER 31, |        |
|----------------------------------------------------------------------------------------------|------------|-------------------------|-------------|
| *(in thousands, except share  data)*                                                         | ** ** | **2005**                |        | 2004 |   | 2003 |   |
|                                                                                         |       |                    |        |   |   |   |   |
| **NUMERATOR**                                                                                |       |                    |        |   |   |   |   |
| Net earnings                                                                                 | ** ** | **$**                   | **447,052** |   | $ | 320,545 |   | $ | 241,692 |   |
| **DENOMINATOR**                                                                              |       |                    |        |   |   |   |   |
| Basic earnings per share – weighted average shares                                      | ** ** | **46,966,317**          |        | 47,678,887 |   | 49,718,032 |   |
| Effect of dilutive securities:                                                               |       |                    |        |   |   |   |   |
| Stock options                                                                                | ** ** | **2,140,200**           |        | 2,282,812 |   | 2,622,548 |   |
| Equity incentive plan                                                                        | ** ** | **384,370**             |        | 417,141 |   | 703,824 |   |
| Dilutive potential of common shares                                                          | ** ** | **2,524,570**           |        | 2,699,953 |   | 3,326,372 |   |
| Dilutive earnings per share – adjusted  weighted-average shares and assumed conversions |       | **49,490,887**          |        | 50,378,840 |   | 53,044,404 |   |
| **NET EARNINGS PER COMMON SHARE**                                                            |       |                    |        |   |   |   |   |
| Basic                                                                                        | ** ** | **$**                   | **9.52**    |   | $ | 6.72 |   | $ | 4.86 |   |
| Diluted                                                                                      | ** ** | **9.03**                |        | 6.36 |   | 4.56 |   |

 

Options topurchase 205,000 shares, 420,000 shares and 227,000 shares of common stock atvarious prices were outstanding at December 31, 2005, 2004 and 2003,respectively, but were not included in the computation of diluted earnings pershare for those annual periods because their effect would have beenantidilutive since the exercise prices were greater than the average marketprice of the common shares.

**NoteD: Derivative Instruments**

The Company, whichuses financial instruments in its normal course of operations, has noderivative financial instruments that are held for trading purposes.

The contract ornotional amounts of these financial instruments at December 31 were as follows:
| *(in thousands)*                    |       |      2005      |          | 2004   |   |
|------------------------------------------|------------|------------------------------------------------------------------|---------------|--------|--------|
| Mortgage  interest rate lock commitments | ** ** | $                                                                |  233,817 |   | $      | 94,809 |   |
| Hedging contracts:                       | ** ** | ** **                                                       |          |   |   |
| Treasury interest rate locks             | ** ** | **$**                                                            | **250,000**   |   | $      | - |   |
| Forward-delivery  contracts              | ** ** | **134,050**                                                      |          | 69,620 |   |

 

IRLCs representloan commitments with customers at market rates generally up to 180 days beforesettlement.  IRLCs expose the Company tomarket risk as a result of increases in mortgage interest rates.  IRLCs had interest rates ranging from 1.0percent to 12.6 percent at December 31, 2005, and 1.0 percent to 9.5 percent atDecember 31, 2004.

Hedging contractsare regularly entered into by the Company for the purpose of mitigating itsexposure to movements in interest rates on IRLCs and mortgage loansheld-for-sale.  The selection of thesehedging 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 includegeneral market conditions, interest rates, types of mortgages originated andthe percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generallymitigates the market risk associated with IRLCs and mortgage loansheld-for-sale.

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The Company isexposed 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 netunrealized gain position.  The Companymanages this credit risk by entering into agreements with counter partiesmeeting its credit standards and by monitoring position limits.

In September 2005,the Company entered into a $150.0 million treasury lock at 4.1 percent whichterminates on June 1, 2006, and a $100.0 million treasury lock at 4.2 percentthat terminates on September 1, 2006, to facilitate the replacement ofhigher-rate senior and senior subordinated debt in 2006.  These hedges were evaluated and deemed to behighly effective at the inception of the contracts.  In accordance with SFAS 133, the Companyaccounted for the treasury locks as cash flow hedges and records unrealizedgains or losses, net of applicable taxes, resulting from changes in fair valuein the consolidated balance sheets under “Accumulated other comprehensive income” in “Stockholders’ equity.”

**NoteE: Fair Values of Financial Instruments**

The Company’sfinancial instruments are held for purposes other than trading.  The fair values of these financialinstruments are based on quoted market prices, where available, or areestimated by using either present value or other valuation techniques.  Estimated fair values are significantlyaffected by the assumptions used, including discount rates and estimates ofcash flows.  In that regard, derived fairvalue estimates cannot always be substantiated by comparison to independentmarkets and, in some cases, cannot be realized in the immediate settlement ofthe instruments.

The table belowsets forth the carrying values and fair values of the Company’s financialinstruments at December 31.  It excludesnonfinancial instruments, and, accordingly, the aggregate fair value amountspresented do not represent the underlying value of the Company.
|                                                                   |   | 2005     |    | 2004    |   |
|-------------------------------------------------------------------|--------|----------|---------|---------|--------|
|                                                              |   | CARRYING |    | FAIR    |   | CARRYING |   | FAIR |   |
| *(in thousands)*                                             |   | VALUE    |    | VALUE   |   | VALUE |   | VALUE |   |
| **OTHER  ASSETS**                                                 |   |     |    |    |   |   |   |   |   |
| Mortgage loans  held-for-sale                                     |   | $        | 17,528  |    | $      | 17,741 |   | $ | 20,540 |   | $ | 20,919 |   |
| Mortgage-backed  securities and notes receivable                  |   | 3,387    |    | 3,448   |   | 10,220 |   | 10,763 |   |
| Collateral for  bonds payable of the limited-purpose subsidiaries |   | 93       |    | 98      |   | 6,082 |   | 6,106 |   |
| **OTHER  LIABILITIES**                                            |   |     |    |    |   |   |   |   |   |
| Bonds payable of  the limited-purpose subsidiaries                |   | $        | 86      |    | $      | 90 |   | $ | 5,097 |   | $ | 5,564 |   |
| **DEBT**                                                          |   |     |    |    |   |   |   |   |   |
| Senior notes                                                      |   | $        | 750,000 |    | $      | 741,340 |   | $ | 397,000 |   | $ | 421,954 |   |
| Senior  subordinated notes                                        |   | 143,500  |    | 152,124 |   | 143,500 |   | 159,823 |   |
| **OTHER  FINANCIAL INSTRUMENTS**                                  |   |     |    |    |   |   |   |   |   |
| Treasury  interest rate locks                                     |   | $        | 4,785   |    | $      | 4,785 |   | $ | - |   | $ | - |   |
| Mortgage  interest rate lock commitments                          |   | 1,952    |    | 1,952   |   | 1,770 |   | 1,770 |   |
| Forward-delivery contracts                                        |   | (109     | )       | (109    | )      | (178 | ) | (178 | ) |

 

The carryingamounts of cash and cash equivalents, secured notes payable and short-termborrowings under various credit agreements are reported in the balance sheetand approximate their fair values.  Thefair values of the senior notes; senior subordinated notes; mortgage loansheld-for-sale; mortgage-backed securities and notes receivable;forward-delivery and other hedging contracts; treasury locks; and IRLCs arebased on either quoted market prices or market prices for similar financialinstruments.

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**NoteF: Debt**

Debt consists ofthe following at December 31:
| *(in thousands)*                               |       | **     2005     ** |        | 2004    |   |
|-----------------------------------------------------|------------|----------------------------------------------------------------------|-------------|---------|--------|
| Senior notes                                        | ** ** | **$**                                                                | **750,000** |    | $      | 397,000 |   |
| Senior  subordinated notes                          | ** ** | **143,500**                                                          |        | 143,500 |   |
| Secured notes  payable                              | ** ** | **28,470**                                                           |        | 7,952   |   |
| Financial  services’ revolving credit facility | ** ** | **-**                                                                |        | 10,490  |   |
| Total                                               | ** ** | **$**                                                                | **921,970** |    | $      | 558,942 |   |

 

Maturities of debtare scheduled as follows:
| *(in thousands)* |       | ** ** |   |        |        |
|-----------------------|------------|------------|--------|-------------|-------------|
| 2006                  | ** ** | ** ** |   | **$**       | **119,361** |   |
| 2007                  | ** ** | ** ** |   | **2,900**   |        |
| 2008                  | ** ** | ** ** |   | **156,209** |        |
| 2009-2010             | ** ** | ** ** |   | **-**       |        |
| After 2010            | ** ** | ** ** |   | **643,500** |        |
| Total debt            | ** ** | ** ** |   | **$**       | **921,970** |   |

 

At December 31,2005, the Company had outstanding *(a)*$100.0 million of 8.0 percent senior notes due August 2006, with interestpayable semiannually, which may not be redeemed prior to maturity; *(b)* $150.0 million of 5.4 percent seniornotes due June 2008, with interest payable semiannually, which may be redeemedat a stated redemption price at the option of the Company, in whole or in part,at any time; *(c)* $250.0 millionof 5.4 percent senior notes due May 2012, with interest payable semiannually,which may be redeemed at a stated redemption price at the option of theCompany, in whole or in part, at any time; and *(d)*$250.0 million of 5.4 percent senior notes due January 2015, with interestpayable semiannually, which may be redeemed at a stated redemption price, inwhole or in part, at any time.

Additionally, atDecember 31, 2005, the Company had $143.5 million of 9.1 percent seniorsubordinated notes due June 2011, with interest payable semiannually, which maybe redeemed at a stated redemption price at the option of the Company, in wholeor in part, at any time on or after June 15, 2006.  Senior subordinated notes are subordinated toall existing and future senior debt of the Company.

In 2004, theCompany executed an agreement for a $500.0 million unsecured revolving creditfacility.  The agreement contained anaccordion feature under which the aggregate commitment could have beenincreased up to $650.0 million, subject to the availability of additionalcommitments.  Borrowings under thisagreement bore interest at variable short-term rates.  In addition to the stated interest rates, theagreement required the Company to pay certain fees.  The Company used its unsecured revolving creditfacility to finance increases in its homebuilding inventory and workingcapital.  There were no outstandingborrowings under this agreement at December 31, 2005 or 2004.  In January 2006, the Company replaced thiscredit facility with a new $750.0 million credit facility.  (See Note L, “Subsequent Event.”)

In 2005, theCompany redeemed $150.0 million of outstanding 9.8 percent senior notes dueSeptember 2010, of which it owned $3.0 million at the time of redemption, andalso recorded $8.3 million in expenses related to its early retirement.

At December 31,2005, the Company’s obligations to pay principal, premium, if any, and interestunder its $500.0 million unsecured revolving credit facility; 8.0 percentsenior notes due August 2006; 5.4 percent senior notes due June 2008; 5.4percent senior notes due May 2012; and 5.4 percent senior notes due January2015 are guaranteed on a 

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joint and severalbasis by substantially all of its wholly-owned homebuilding subsidiaries.  Such guarantees are full and unconditional.  (See Note K, “Supplemental GuarantorInformation.”)

The senior andsenior subordinated notes and indenture agreements, as well as the unsecuredrevolving credit facility, contain numerous restrictive covenants.  At December 31, 2005, the Company had $258.2million of retained earnings available for dividends and was in compliance withthese covenants.

To finance landpurchases, the Company may also use seller-financed nonrecourse secured notespayable.  At December 31, 2005 and 2004,outstanding seller-financed nonrecourse notes payable were $28.5 million and$8.0 million, respectively.

During the fourthquarter of 2005, the financial services segment terminated its revolving creditfacility.  The facility, which providedfor borrowings of up to $10.0 million, was used to finance mortgage investmentportfolio securities and was collateralized by mortgage obligations previouslyissued by the Company’s limited-purpose subsidiaries.  At December 31, 2004, borrowings under thisfacility totaled $10.5 million with a related collateral balance of $10.4million, having a fair value of $11.0 million. Weighted-average borrowings during the period were $7.5 million, $12.3million and $18.3 million for 2005, 2004 and 2003, respectively.  The interest rate was 2.8 percent at December31, 2004.  Weighted-average interestrates during the period were 3.9 percent, 2.2 percent and 2.0 percent for 2005,2004 and 2003, respectively.

In 2004, thefinancial services segment terminated its repurchase agreement.  The agreement, which provided for borrowingsof up to $80.0 million, was used to finance mortgage investment portfoliosecurities and was collateralized by mortgage loans and mortgage-backedsecurities.  During the third quarter of2004, the underlying collateral was sold and proceeds from the sale were usedto pay off the facility.  As a result ofthe sale, RMC no longer had a need for this borrowing facility.  Weighted-average borrowings during the periodwere $6.4 million and $15.7 million for 2004 and 2003, respectively.  Weighted-average interest rates during theperiod were 1.5 percent and 1.6 percent for 2004 and 2003, respectively.

**NoteG: Income Taxes**

The Company’sexpense for income taxes is summarized as follows:
|                  |       | YEAR ENDED DECEMBER 31, |        |
|-----------------------|------------|----------------------------------------|-------------|
| *(in thousands)* |       | **2005**                               |        | 2004 |   | 2003 |   |
| **CURRENT**           |       |                                   |        |   |   |   |   |
| Federal               | ** ** | **$**                                  | **243,220** |   | $ | 181,426 |   | $ | 137,108 |   |
| State                 | ** ** | **36,852**                             |        | 27,079 |   | 17,884 |   |
| Total current         | ** ** | **280,072**                            |        | 208,505 |   | 154,992 |   |
| **DEFERRED**          |       |                                   |        |   |   |   |   |
| Federal               | ** ** | **(5,274**                             | **)**       | (6,820 | ) | (413 | ) |
| State                 | ** ** | **(799**                               | **)**       | (1,018 | ) | (54 | ) |
| Total deferred        | ** ** | **(6,073**                             | **)**       | (7,838 | ) | (467 | ) |
| Total expense         | ** ** | **$**                                  | **273,999** |   | $ | 200,667 |   | $ | 154,525 |   |

 

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The followingtable reconciles the statutory federal income tax rate to the Company’seffective income tax rate:
|                                         |       | YEAR ENDED DECEMBER 31, |   |
|-----------------------------------------|------------|----------------------------------------|--------|
| * *                                |       | **2005**                               |   | 2004 |   | 2003 |   |
| Income taxes at  federal statutory rate | ** ** | **35.0**                               | **%**  | 35.0 | % | 35.0 | % |
| State income  taxes, net of federal tax | ** ** | **3.2**                                |   | 3.2 |   | 3.0 |   |
| Other, net                              | ** ** | **(0.2**                               | **)**  | 0.3 |   | 1.0 |   |
| Effective rate                          | ** ** | **38.0**                               | **%**  | **38.5** | **%** | **39.0** | **%** |

 

Deferred incometaxes reflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.

Significantcomponents of the Company’s deferred tax assets and liabilities at December 31were as follows:
| *(in thousands)*                     |       | ** ** |   | **     2005     ** |       | 2004    |   |
|-------------------------------------------|------------|------------|--------|----------------------------------------------------------------------|------------|---------|--------|
| **DEFERRED  TAX ASSETS**                  | ** ** | ** ** |   |                                                                 |       |    |   |
| Warranty, legal and  other accruals       | ** ** | ** ** |   | **$**                                                                | **33,032** |    | $      | 28,227 |   |
| Employee benefits                         | ** ** | ** ** |   | **39,297**                                                           |       | 32,001  |   |
| Other                                     | ** ** | ** ** |   | **2,277**                                                            |       | 1,854   |   |
| Total deferred tax  assets                | ** ** | ** ** |   | **74,606**                                                           |       | 62,082  |   |
| **DEFERRED  TAX LIABILITIES**             | ** ** | ** ** |   |                                                                 |       |    |   |
| Deferred recognition of  income and gains | ** ** | ** ** |   | **(6,870**                                                           | **)**      | (5,327  | )      |
| Capitalized expenses                      | ** ** | ** ** |   | **(13,738**                                                          | **)**      | (8,886  | )      |
| Other                                     | ** ** | ** ** |   | **(3,899**                                                           | **)**      | (2,161  | )      |
| Total deferred tax  liabilities           | ** ** | ** ** |   | **(24,507**                                                          | **)**      | (16,374 | )      |
| Net deferred tax  asset                   | ** ** | ** ** |   | **$**                                                                | **50,099** |    | $      | 45,708 |   |

 

The Companydetermined that no valuation allowance for the deferred tax asset wasrequired.  The Company had a total netcurrent tax liability of $67.1 million and $48.4 million at December 31, 2005and 2004, respectively.  These amountsare reported in the consolidated balance sheets in “Accrued and otherliabilities.”

**NoteH: Stockholders’ Equity**

*CommonShare Purchase Rights*

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

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

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*StockSplit*

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

**NoteI: Employee Incentive and Stock Plans**

*EquityIncentive Plan and Other Related Plans*

The Ryland Group,Inc. 2005 Equity Incentive Plan (the “Plan”) permits the granting of stockoptions, stock appreciation rights, restricted or unrestricted stock awards,stock units or any combination of the foregoing to employees.  This Plan replaces the Company’s 2002 EquityIncentive Plan (the “2002 Plan”).  Theaggregate number of shares available for issuance under the Plan includes769,576 shares carried over from the 2002 Plan and 475,000 new shares availableunder the terms of the Plan.  Any sharesof the Company’s common stock covered by an award (or portion of an award)granted under the Plan or the 2002 Plan that are forfeited, expired or canceledwithout delivery of shares of common stock, will again be available for awardunder the Plan.  The Plan will remain ineffect until February 2015, unless it is terminated by the Board of Directorsat an earlier date.  Stock optionsgranted in accordance with this plan generally have a maximum term of fiveyears and vest over three years. Outstanding stock options granted under previous plans generally have amaximum term of ten years and vest over three years.  At December 31, 2005 and 2004, there were659,263 and 765,408 stock options or other awards or units available for grantunder the Plan or the 2002 Plan, respectively.

The Ryland Group,Inc. 2004 Non-Employee Director Equity Plan (the “Director Plan”) provides forautomatic grants of nonstatutory stock options to directors for the purchase ofshares at prices not less than the fair market value of the shares at the dateof grant.  The Director Plan authorizedthe issuance of one million shares of common stock, in addition to the 353,200shares carried over from the 2000 Non-Employee Director Equity Plan.  All members of the Board of Directors who arenot employees of the Company participate in the Director Plan.  The Director Plan will remain in effect untilJanuary 2014, unless it is terminated by the Compensation Committee of theBoard of Directors at an earlier date. Stock options fully vest and become exercisable six months after thedate of grant and have a maximum term of ten years.  Upon termination of service from the Board ofDirectors, all stock options become fully vested, immediately exercisable andexpire three years after the date of termination, regardless of their statedexpiration dates.  At December 31, 2005and 2004, there were 953,200 and 1,153,200 stock options available for grant,respectively.

The following is asummary of transactions relating to all stock option plans for each year endedDecember 31:
|                                                      |   |       |   | 2005                                |             |       |      | 2004                                |    |             |   | 2003                                |   |
|------------------------------------------------------|--------|------------|--------|-------------------------------------|------------------|------------|-----------|-------------------------------------|---------|------------------|--------|-------------------------------------|--------|
|                                                 |   | SHARES     |   | WEIGHTED-  AVERAGE  EXERCISE  PRICE |             | SHARES     |      | WEIGHTED-  AVERAGE  EXERCISE  PRICE |    | SHARES           |   | WEIGHTED-  AVERAGE  EXERCISE  PRICE |   |
| Options outstanding  at beginning of year            |   | 5,535,398  |   | $                                   | 19.15            |       | 6,012,876 |                                | $       | 13.11            |   | 6,874,796                           |   | $ | 10.11 |   |
| Granted                                              |   | 569,750    |   | 65.36                               |             | 1,016,400  |      | 43.45                               |    | 1,032,300        |   | 26.08                               |   |
| Exercised                                            |   | (1,408,973 | )      | 14.84                               |             | (1,452,654 | )         | 10.95                               |    | (1,762,008       | )      | 8.62                                |   |
| Forfeited                                            |   | (41,605    | )      | 42.52                               |             | (41,224    | )         | 25.13                               |    | (132,212         | )      | 18.19                               |   |
| Options  outstanding at end of year                  |   | 4,654,570  |   | $                                   | 25.91            |       | 5,535,398 |                                | $       | 19.15            |   | 6,012,876                           |   | $ | 13.11 |   |
| Available for  future grant                          |   | 1,612,463  |   |                                |             | 1,918,608  |      |                                |    | 1,893,784        |   |                                |   |
| Total shares  reserved                               |   | 6,267,033  |   |                                |             | 7,454,006  |      |                                |    | 7,906,660        |   |                                |   |
| Options  exercisable at end of year                  |   | 3,360,535  |   | $                                   | 17.62            |       | 3,676,991 |                                | $       | 12.11            |   | 3,788,128                           |   | $ | 7.76 |   |
| Prices related to  options exercised during the year |   |       |   | $                              | 3.19–$57.54 |       |      |                                | $  | 3.38–$22.70 |   |                                |   | $  | 3.41–$22.70 |   |

 

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A summary of stockoptions outstanding and exercisable at December 31, 2005, follows:
|                                             |       | OPTIONS OUTSTANDING |       | OPTIONS EXERCISABLE |       |
|---------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                        |       |                     |       | WEIGHTED-                |       | WEIGHTED- |   |   |   | WEIGHTED- |   |
| RANGE OF                               |       |                     |       | AVERAGE                  |       | AVERAGE |   |   |   | AVERAGE |   |
| EXERCISE                                    |       | NUMBER                   |       | REMAINING                |       | EXERCISE |   | NUMBER |   | EXERCISE |   |
| PRICE                                       |       | OUTSTANDING              |       | LIFE (YEARS)        |       | PRICE |   | EXERCISABLE |   | PRICE |   |
| **$  3.19  to $  6.38** | ** ** | **1,552,232**            | ** ** | **2.97**                 | ** ** | **$** | **5.46** | ** ** | **1,552,232** | ** ** | **$** | **5.46** | ** ** |
| **$10.19  to $24.44**                       | ** ** | **1,448,151**            | ** ** | **6.44**                 | ** ** | **19.19** | ** ** | **1,210,525** | ** ** | **18.83** | ** ** |
| **$34.70  to $57.54**                       | ** ** | **1,098,437**            | ** ** | **8.27**                 | ** ** | **43.64** | ** ** | **597,778** | ** ** | **46.72** | ** ** |
| **$61.40 to $83.13**                        | ** ** | **555,750**              | ** ** | **6.37**                 | ** ** | **65.46** | ** ** | **-** | ** ** | **-** | ** ** |
|                                             |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

The Company hasmade several restricted stock awards to senior executives under the Plan andits predecessor plans.  All restrictedstock was awarded in the name of each participant who had all the rights ofother common stockholders, subject to restrictions and forfeitureprovisions.  Accordingly, such restrictedstock awards were considered common stock equivalents.  Compensation expense recognized for suchawards totaled $18.8 million, $14.3 million and $16.1 million for the yearsended December 31, 2005, 2004 and 2003, respectively.

The following is asummary of activity relating to restricted stock awards:
|                                  |       | **2005**     |   | 2004     |   | 2003     |   |
|----------------------------------|------------|--------------|--------|----------|--------|----------|--------|
| Restricted shares at January 1   | ** ** | **356,800**  |   | 638,600  |   | 904,200  |   |
| Shares awarded                   | ** ** | **253,000**  |   | -        |   | -        |   |
| Shares vested                    | ** ** | **(168,800** | **)**  | (281,800 | )      | (265,600 | )      |
| Restricted shares at December 31 | ** ** | **441,000**  |   | 356,800  |   | 638,600  |   |

 

At December 31,2005, the outstanding restricted shares will vest as follows: 2006 – 138,336;2007 – 138,328; 2008 – 84,336; 2009 – 40,000; and 2010 – 40,000.

All outstandingstock options and restricted stock awards have been granted in accordance withthe terms of the Plan, the Director Plan and their respective predecessorplans, all of which were approved by the Company’s stockholders.

*Retirement SavingsOpportunity Plan (RSOP)*

All full-timeemployees are eligible to participate in the RSOP following 30 days ofemployment.  Part-time employees areeligible to participate in the RSOP following the completion of 1,000 hours ofservice within the first 12 months of employment or within any plan year afterthe date of hire.  Pursuant to Section401(k) of the Internal Revenue Code, the plan permits deferral of a portion ofa participant’s income into a variety of investment options.  Total compensation expense related to theCompany’s matching contributions for this plan amounted to $11.0 million, $9.3million and $8.1 million in 2005, 2004 and 2003, respectively.

*Employee Stock PurchasePlan (ESPP)*

All full-timeemployees of the Company, with the exception of its executive officers, areeligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made for thepurchase of shares.  The Company matchesa portion of the employee’s contribution by donating an additional 20.0 percentof the employee’s payroll deduction. Stock is purchased by a plan administrator on a regular monthlybasis.  All brokerage and transactionfees for purchasing the stock are paid for by the Company.  The Company’s expense related to its matchingcontribution for this plan was $514,000, $390,000 and $321,000 in 2005, 2004and 2003, respectively.

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*SupplementalExecutive Retirement Plans*

The Company hassupplemental nonqualified retirement plans, which vest over five-year periodsbeginning in 2003, pursuant to which the Company will pay supplemental pensionbenefits to key employees upon retirement. In connection with these plans, the Company has purchased cost-recoverylife insurance on the lives of certain employees.  Insurance contracts associated with the plansare held by trusts established as part of the plans to implement and carry outtheir provisions and finance their related benefits.  The trusts are owners and beneficiaries ofsuch contracts.  The amount of coverageis designed to provide sufficient revenue to cover all costs of the plans ifassumptions made as to employment term, mortality experience, policy earningsand other factors are realized.  AtDecember 31, 2005 and 2004, the cash surrender value of these contracts was$19.2 million and $13.0 million, respectively. The net periodic benefit cost of these plans for the year endedDecember, 31, 2005, was $2.8 million, which included service costs of $3.1million, interest costs of $117,000 and investment earnings of $423,000.  The net periodic benefit cost of these plansfor the year ended December 31, 2004, was $4.4 million, which included servicecosts of $4.7 million, interest costs of $677,000 and investment earnings of$1.0 million.  The $12.6 million and $9.4million projected benefit obligations at December 31, 2005 and 2004,respectively, were equal to the net liability recognized in the balance sheetat those dates.  For the years endedDecember 31, 2005 and 2004, the weighted-average discount rates used for theplans were 7.5 percent and 7.7 percent, respectively.

**NoteJ: Commitments and Contingencies**

*Commitments*

In the normalcourse of business, the Company acquires rights under option agreements topurchase land or lots for use in future homebuilding operations.  At December 31, 2005, it had related cashdeposits and letters of credit outstanding of $188.5 million for land optionspertaining to land purchase contracts with an aggregate purchase price of $2.1billion.  At December 31, 2005, theCompany had commitments with respect to option contracts having specificperformance provisions of approximately $60.5 million, compared to $117.2million at December 31, 2004.

Rent expenseprimarily relates to office facilities, model homes, furniture and equipment.
|                             |       | YEAR ENDED DECEMBER 31,                               |       |
|-----------------------------|------------|----------------------------------------------------------------------|------------|
| *(in thousands)*       |       | **     2005     ** |       | 2004 |   | 2003 |   |
| Total rent  expense         | ** ** | **$**                                                                | **17,050** |   | $ | 16,934 |   | $ | 17,937 |   |
| Less income from  subleases | ** ** | **(312**                                                             | **)**      | (295 | ) | (215 | ) |
| Net rent expense            | ** ** | **$**                                                                | **16,738** |   | $ | 16,639 |   | $ | 17,722 |   |

 

Future minimumrental commitments under noncancelable leases with remaining terms in excess ofone year are as follows:
| *(in thousands)*   | * *   | * *  | * *   |
|-------------------------|------------|-----------|------------|
| 2006                    | ** ** | **$**     | **10,483** | ** ** |
| 2007                    | ** ** | **9,806** | ** ** |
| 2008                    | ** ** | **8,773** | ** ** |
| 2009                    | ** ** | **6,785** | ** ** |
| 2010                    | ** ** | **4,638** | ** ** |
| Thereafter              | ** ** | **9,991** | ** ** |
| Less sublease  income   | ** ** | **(632**  | **)**      |
| Total lease commitments | ** ** | **$**     | **49,844** | ** ** |

 

*Contingencies*

As an on-sitehousing producer, the Company is often required by some municipalities toobtain development or performance bonds and letters of credit in support of itscontractual obligations.  At December 31,2005, total development bonds were $428.6 million, while total related depositsand letters of credit were $81.3 million. In the 

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event that anysuch bonds or letters of credit are called, the Company would be required toreimburse the issuer; however, it does not expect that any currentlyoutstanding bonds or letters of credit will be called.

At December 31,2005, one of the joint ventures in which the Company participates had debt of$375.5 million.  In this joint venture,the Company and its partners provided guarantees of debt on a pro ratabasis.  The Company had a 3.3 percent prorata interest on the debt, or $12.5 million, and a completion guarantee relatedto project development.  The guaranteesapply if a partner defaults on its loan arrangement and the fair value of thecollateral (land and improvements) is less than the loan balance.  In addition, the Company guaranteed up to50.0 percent of a $55.0 million revolving credit facility in another of itsjoint ventures, in February 2006.

IRLCs representloan commitments with customers at market rates generally up to 180 days beforesettlement.  At December 31, 2005, theCompany had outstanding IRLCs totaling $233.8 million.  Hedging contracts are utilized to mitigatethe risk associated with interest rate fluctuations on IRLCs.  (See Note D, “Derivative Instruments.”)

In 2005, theCompany entered into treasury locks which terminate in 2006, to facilitate thereplacement of higher-rate senior and senior subordinated debt in 2006.  As of December 31, 2005, the fair value ofthe treasury locks was $4.8 million. (See Note D, “Derivative Instruments.”)

The Companyprovides product warranties covering workmanship and materials for one year,certain mechanical systems for two years and structural systems for tenyears.  The Company estimates and recordswarranty liabilities based upon historical experience and known risks at thetime a home closes, and in the case of unexpected claims, upon identificationand quantification of the obligations. Actual future warranty costs could differ from current estimates.

Changes in theCompany’s product liability reserve during the period are as follows:
| *(in thousands)*                                                 |       | **     2005     ** |       | 2004    |   |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------|--------|
| Balance at  January 1                                                 | ** ** | **$**                                                                | **33,090** |    | $      | 34,258 |   |
| Warranties  issued                                                    | ** ** | **23,979**                                                           |       | 16,621  |   |
| Settlements made                                                      | ** ** | **(24,258**                                                          | **)**      | (21,287 | )      |
| Changes in  liability for accruals related to pre-existing warranties | ** ** | **8,836**                                                            |       | 3,498   |   |
| Balance at December 31                                                | ** ** | **$**                                                                | **41,647** |    | $      | 33,090 |   |

 

The Companyrequires substantially all of its subcontractors to have general liabilityinsurance (including construction defect coverage) and workmans compensationinsurance.  These insurance policiesprotect the Company against a portion of its risk of loss from claims, subjectto certain self-insured retentions, deductibles and other coverage limits.  Over the past several years, generalliability insurance for the homebuilding industry has become more difficult toobtain with fewer insurers participating. As a result, RHIC, a wholly-owned subsidiary of the Company, providesinsurance services to the homebuilding segments’ subcontractors in certainmarkets.

The Company isparty to various legal proceedings generally incidental to its businesses.  Litigation reserves have been establishedbased on discussions with counsel and the Company’s analysis of historicalclaims.  The Company has, and requiresthe majority of its subcontractors to have, general liability insurance thatprotects the Company against a portion of its risk of loss and to coverconstruction-related claims.  The Companyestablishes reserves to cover its self-insured retentions and deductibleamounts under those policies.  Due to thehigh degree of judgment required in determining these estimated reserveamounts, actual future litigation costs could differ from the Company’s currentestimates.

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**NoteK: Supplemental Guarantor Information**

As of December 31,2005, the Company’s obligations to pay principal, premium, if any, and interestunder its $500.0 million unsecured revolving credit facility (replaced inJanuary 2006 with a $750.0 million facility described in Note L, “SubsequentEvent.”); 8.0 percent senior notes due August 2006; 5.4 percent senior notesdue June 2008; 5.4 percent senior notes due May 2012; and 5.4 percent seniornotes due January 2015 are guaranteed on a joint and several basis bysubstantially all of its homebuilding subsidiaries that are 100 percent-ownedby the Company (the “Guarantor Subsidiaries”). Such guarantees are full and unconditional.

In lieu ofproviding separate audited financial statements for the Guarantor Subsidiaries,the accompanying condensed consolidating financial statements have beenincluded.  Management does not believethat separate financial statements for the Guarantor Subsidiaries are materialto investors and are, therefore, not presented.

The followinginformation presents the consolidating statements of earnings, financialposition and cash flows for (i) the parent company and issuer, The RylandGroup, Inc. (“TRG, Inc.”); (ii) the Guarantor Subsidiaries; (iii) thenon-guarantor subsidiaries; and (iv) the consolidation eliminations used toarrive at the consolidated information for The Ryland Group, Inc. andsubsidiaries.

CONSOLIDATINGSTATEMENT OF EARNINGS
|                                               |       | YEAR ENDED DECEMBER 31, 2005 |          |
|-----------------------------------------------|------------|--------------------------------------------------|---------------|
|                                          |       |                                             |          |   |   | NON- |   |   |   |   |   |
|                                          |       |                                             |          | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
| *(in thousands)*                         |       | TRG, INC.                                   |          | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **REVENUES**                                  | ** ** | **$**                                            | **2,777,565** | ** ** | **$** | **2,064,488** | ** ** | **$** | **91,815** | ** ** | **$** | **(116,302** | **)** | **$** | **4,817,566** | ** ** |
| **EXPENSES**                                  |       |                                             |          |   |   |   |   |   |   |   |   |
| Corporate,  general and administrative        |       | **2,374,722**                                    |          | **1,797,376** |   | **32,442** |   | **(116,302** | **)** | **4,088,238** |   |
| Expenses related  to early retirement of debt |       | **8,277**                                        |          | **-** |   | **-** |   | **-** |   | **8,277** |   |
| **TOTAL  EXPENSES**                           | ** ** | **2,382,999**                                    | ** **    | **1,797,376** | ** ** | **32,442** | ** ** | **(116,302** | **)** | **4,096,515** | ** ** |
| Earnings before  taxes                        | ** ** | **394,566**                                      | ** **    | **267,112** | ** ** | **59,373** | ** ** | **-** | ** ** | **721,051** | ** ** |
| Tax expense                                   | ** ** | **150,106**                                      | ** **    | **101,502** | ** ** | **22,391** | ** ** | **-** | ** ** | **273,999** | ** ** |
| Equity in net  earning of subsidiaries        | ** ** | **202,592**                                      | ** **    | **-** | ** ** | **-** | ** ** | **(202,592** | **)** | **-** | ** ** |
| **NET  EARNINGS**                             | ** ** | **$**                                            | **447,052**   | ** ** | **$** | **165,610** | ** ** | **$** | **36,982** | ** ** | **$** | **(202,592** | **)** | **$** | **447,052** | ** ** |

 

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CONSOLIDATING STATEMENT OF EARNINGS

 
|                                        |   | YEAR ENDED DECEMBER 31,  2004 |      |
|----------------------------------------|--------|-------------------------------|-----------|
|                                   |   |                          |      |   |   | NON- |   |   |   |   |   |
|                                   |   |                          |      | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
| *(in thousands)*                       |   | TRG, INC.                     |      | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **REVENUES**                           |   | $                             | 2,403,614 |   | $ | 1,551,529 |   | $ | 86,076 |   | $ | (89,398 | ) | $ | 3,951,821 |   |
| **EXPENSES**                           |   |                          |      |   |   |   |   |   |   |   |   |
| Corporate,  general and administrative |   | 2,065,629                     |      | 1,425,004 |   | 29,374 |   | (89,398 | ) | 3,430,609 |   |
| **TOTAL EXPENSES**                     |   | 2,065,629                     |      | 1,425,004 |   | 29,374 |   | (89,398 | ) | 3,430,609 |   |
| Earnings before  taxes                 |   | 337,985                       |      | 126,525 |   | 56,702 |   | - |   | 521,212 |   |
| Tax expense                            |   | 130,280                       |      | 48,713 |   | 21,674 |   | - |   | 200,667 |   |
| Equity in net  earning of subsidiaries |   | 112,840                       |      | - |   | - |   | (112,840 | ) | - |   |
| **NET  EARNINGS**                      |   | $                             | 320,545   |   | $ | 77,812 |   | $ | 35,028 |   | $ | (112,840 | ) | $ | 320,545 |   |

 

CONSOLIDATING STATEMENT OF EARNINGS

 
|                                               |   | YEAR ENDED DECEMBER 31,  2003 |      |
|-----------------------------------------------|--------|-------------------------------|-----------|
|                                          |   |                          |      |   |   | NON- |   |   |   |   |   |
|                                          |   |                          |      | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
| *(in thousands)*                              |   | TRG, INC.                     |      | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **REVENUES**                                  |   | $                             | 2,153,561 |   | $ | 1,317,300 |   | $ | 88,679 |   | $ | (115,411 | ) | $ | 3,444,129 |   |
| **EXPENSES**                                  |   |                          |      |   |   |   |   |   |   |   |   |
| Corporate,  general and administrative        |   | 1,893,855                     |      | 1,238,126 |   | 26,256 |   | (115,411 | ) | 3,042,826 |   |
| Expenses  related to early retirement of debt |   | 5,086                         |      | - |   | - |   | - |   | 5,086 |   |
| **TOTAL EXPENSES**                            |   | 1,898,941                     |      | 1,238,126 |   | 26,256 |   | (115,411 | ) | 3,047,912 |   |
| Earnings before  taxes                        |   | 254,620                       |      | 79,174 |   | 62,423 |   | - |   | 396,217 |   |
| Tax expense                                   |   | 99,496                        |      | 30,878 |   | 24,151 |   | - |   | 154,525 |   |
| Equity in net  earning of subsidiaries        |   | 86,568                        |      | - |   | - |   | (86,568 | ) | - |   |
| **NET  EARNINGS**                             |   | $                             | 241,692   |   | $ | 48,296 |   | $ | 38,272 |   | $ | (86,568 | ) | $ | 241,692 |   |

 

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CONSOLIDATING BALANCE SHEET

 
|                                                       |       | DECEMBER 31, 2005 |          |
|-------------------------------------------------------|------------|-------------------|---------------|
|                                                  |       |              |          |   |   | NON- |   |   |   |   |   |
|                                                  |       |              |          | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
| *(in thousands)*                                 |       | TRG, INC.    |          | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **ASSETS**                                            |       |              |          |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                            | ** ** | **$**             | **81,895**    | ** ** | **$** | **359,709** | ** ** | **$** | **19,779** | ** ** | **$** | **-** | ** ** | **$** | **461,383** | ** ** |
| Consolidated  inventories owned                       | ** ** | **1,382,900**     | ** **    | **957,576** | ** ** | **-** | ** ** | **-** | ** ** | **2,340,476** | ** ** |
| Consolidated  inventories not owned                   | ** ** | **6,681**         | ** **    | **6,576** | ** ** | **225,934** | ** ** | **-** | ** ** | **239,191** | ** ** |
| Total  inventories                                    | ** ** | **1,389,581**     | ** **    | **964,152** | ** ** | **225,934** | ** ** | **-** | ** ** | **2,579,667** | ** ** |
| Purchase  price in excess of net assets acquired      | ** ** | **15,383**        | ** **    | **2,802** | ** ** | **-** | ** ** | **-** | ** ** | **18,185** | ** ** |
| Investment  in subsidiaries/ intercompany receivables |       | **1,169,987**     |          | **-** |   | **23,259** |   | **(1,193,246** | **)** | **-** |   |
| Other  assets                                         | ** ** | **216,190**       | ** **    | **66,208** | ** ** | **45,240** | ** ** | **-** | ** ** | **327,638** | ** ** |
| **TOTAL ASSETS**                                      | ** ** | **2,873,036**     | ** **    | **1,392,871** | ** ** | **314,212** | ** ** | **(1,193,246** | **)** | **3,386,873** | ** ** |
| **LIABILITIES**                                       |       |              |          |   |   |   |   |   |   |   |   |
| Accounts  payable and other accrued liabilities       | ** ** | **589,279**       | ** **    | **205,985** | ** ** | **118,966** | ** ** | **-** | ** ** | **914,230** | ** ** |
| Debt                                                  | ** ** | **907,736**       | ** **    | **14,234** | ** ** | **-** | ** ** | **-** | ** ** | **921,970** | ** ** |
| Intercompany  payables                                | ** ** | **-**             | ** **    | **594,071** | ** ** | **-** | ** ** | **(594,071** | **)** | **-** | ** ** |
| **TOTAL LIABILITIES**                                 | ** ** | **1,497,015**     | ** **    | **814,290** | ** ** | **118,966** | ** ** | **(594,071** | **)** | **1,836,200** | ** ** |
| **MINORITY  INTEREST**                                | ** ** | **-**             | ** **    | **-** | ** ** | **174,652** | ** ** | **-** | ** ** | **174,652** | ** ** |
| **STOCKHOLDERS’  EQUITY**                        | ** ** | **1,376,021**     | ** **    | **578,581** | ** ** | **20,594** | ** ** | **(599,175** | **)** | **1,376,021** |   |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**  | ** ** | **$ **       | **2,873,036** | ** ** | **$ ** | **1,392,871** | ** ** | **$ ** | **314,212** | ** ** | **$ ** | **(1,193,246** | **)** | **$ ** | **3,386,873** |   |

 

55

----

CONSOLIDATING BALANCE SHEET

 
|                                                       |   | DECEMBER 31, 2004 |      |
|-------------------------------------------------------|--------|-----------------------------|-----------|
|                                                  |   |                        |      |   |   | NON- |   |   |   |   |   |
|                                                  |   |                        |      | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
| *(in thousands)*                                 |   | TRG, INC.              |      | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **ASSETS**                                            |   |                        |      |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                            |   | $                           | 36,090    |   | $ | 31,390 |   | $ | 20,908 |   | $ | - |   | $ | 88,388 |   |
| Consolidated  inventories owned                       |   | 1,118,062                   |      | 761,953 |   | - |   | - |   | 1,880,015 |   |
| Consolidated  inventories not owned                   |   | 2,398                       |      | 9,298 |   | 132,422 |   | - |   | 144,118 |   |
| Total  inventories                                    |   | 1,120,460                   |      | 771,251 |   | 132,422 |   | - |   | 2,024,133 |   |
| Purchase  price in excess of net assets acquired      |   | 15,383                      |      | 2,802 |   | - |   | - |   | 18,185 |   |
| Investment  in subsidiaries/ intercompany receivables |   | 724,692                     |      | - |   | - |   | (724,692 | ) | - |   |
| Other  assets                                         |   | 183,423                     |      | 49,544 |   | 61,297 |   | - |   | 294,264 |   |
| **TOTAL ASSETS**                                      |   | 2,080,048                   |      | 854,987 |   | 214,627 |   | (724,692 | ) | 2,424,970 |   |
| **LIABILITIES**                                       |   |                        |      |   |   |   |   |   |   |   |   |
| Accounts  payable and other accrued liabilities       |   | 475,602                     |      | 164,902 |   | 60,915 |   | - |   | 701,419 |   |
| Debt                                                  |   | 547,612                     |      | 840 |   | 10,490 |   | - |   | 558,942 |   |
| Intercompany  payables                                |   | -                           |      | 274,940 |   | 14,085 |   | (289,025 | ) | - |   |
| **TOTAL LIABILITIES**                                 |   | 1,023,214                   |      | 440,682 |   | 85,490 |   | (289,025 | ) | 1,260,361 |   |
| **MINORITY  INTEREST**                                |   | -                           |      | - |   | 107,775 |   | - |   | 107,775 |   |
| **STOCKHOLDERS’  EQUITY**                        |   | 1,056,834                   |      | 414,305 |   | 21,362 |   | (435,667 | ) | 1,056,834 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**   |   | $                      | 2,080,048 |   | $  | 854,987 |   | $  | 214,627 |   | $  | (724,692 | ) | $  | 2,424,970 |   |

 

56

----

CONSOLIDATING STATEMENT OF CASH FLOWS

 
|                                                                                                   |       | YEAR ENDED DECEMBER 31,  2005 |        |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
|                                                                                              |       |                          |        |   |   | NON- |   |   |   |   |   |
|                                                                                              |       |                          |        | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
|                                                                                              |       | TRG, INC.                     |        | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                         |       |                          |        |   |   |   |   |   |   |   |   |
| Net  earnings                                                                                     | ** ** | **$**                         | **447,052** | ** ** | **$** | **165,610** | ** ** | **$** | **36,982** | ** ** | **$** | **(202,592** | **)** | **$** | **447,052** | ** ** |
| Adjustments  to reconcile net earnings to net  cash provided by operating activities:        | ** ** | ** **                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation  and amortization                                                                    | ** ** | **25,880**                    | ** **  | **16,167** | ** ** | **1,119** | ** ** | **-** | ** ** | **43,166** | ** ** |
| Changes  in assets and liabilities:                                                               | ** ** | ** **                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase  in inventories                                                                          | ** ** | **(269,121**                  | **)**       | **(192,901** | **)** | **(28,949** | **)** | **-** | ** ** | **(490,971** | **)** |
| Net  change in other assets, payables and  other liabilities                                 | ** ** | **(355,096**                  | **)**       | **352,935** | ** ** | **(6,211** | **)** | **202,592** | ** ** | **194,220** | ** ** |
| Tax  benefit from exercise of stock options and  vesting of restricted stock                 | ** ** | **30,505**                    | ** **  | **-** | ** ** | **-** | ** ** | **-** | ** ** | **30,505** | ** ** |
| Other  operating activities, net                                                                  | ** ** | **(7,708**                    | **)**       | **-** | ** ** | **-** | ** ** | **-** | ** ** | **(7,708** | **)** |
| Net  cash (used for) provided by operating  activities                                       | ** ** | **(128,488**                  | **)**       | **341,811** | ** ** | **2,941** | ** ** | **-** | ** ** | **216,264** | ** ** |
| **CASH FLOWS  FROM INVESTING ACTIVITIES**                                                         | ** ** | ** **                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  additions to property, plant and equipment                                                   | ** ** | **(27,496**                   | **)**       | **(26,886** | **)** | **(745** | **)** | **-** | ** ** | **(55,127** | **)** |
| Principal  reduction of mortgage-backed securities, notes receivable and mortgage collateral | ** ** | **-**                         | ** **  | **-** | ** ** | **12,561** | ** ** | **-** | ** ** | **12,561** | ** ** |
| Net  cash (used for) provided by investing  activities                                       | ** ** | **(27,496**                   | **)**       | **(26,886** | **)** | **11,816** | ** ** | **-** | ** ** | **(42,566** | **)** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                         | ** ** | ** **                    | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  proceeds of long-term debt                                                                  | ** ** | **500,000**                   | ** **  | **-** | ** ** | **-** | ** ** | **-** | ** ** | **500,000** | ** ** |
| Repayment  of long-term debt                                                                      | ** ** | **(147,000**                  | **)**       | **-** | ** ** | **-** | ** ** | **-** | ** ** | **(147,000** | **)** |
| Increase  (decrease) in short-term borrowings                                                     | ** ** | **7,124**                     | ** **  | **13,394** | ** ** | **(10,490** | **)** | **-** | ** ** | **10,028** | ** ** |
| Common  stock dividends                                                                           | ** ** | **(11,383**                   | **)**       | **-** | ** ** | **-** | ** ** | **-** | ** ** | **(11,383** | **)** |
| Common  stock repurchases                                                                         | ** ** | **(176,214**                  | **)**       | **-** | ** ** | **-** | ** ** | **-** | ** ** | **(176,214** | **)** |
| Proceeds  from exercise of stock options                                                          | ** ** | **20,911**                    | ** **  | **-** | ** ** | **-** | ** ** | **-** | ** ** | **20,911** | ** ** |
| Other  financing activities, net                                                                  | ** ** | **8,351**                     | ** **  | **-** | ** ** | **(5,396** | **)** | **-** | ** ** | **2,955** | ** ** |
| Net  cash provided by (used for) financing  activities                                       | ** ** | **201,789**                   | ** **  | **13,394** | ** ** | **(15,886** | **)** | **-** | ** ** | **199,297** | ** ** |
| Net  increase (decrease) in cash and  cash equivalents                                       | ** ** | **45,805**                    | ** **  | **328,319** | ** ** | **(1,129** | **)** | **-** | ** ** | **372,995** | ** ** |
| Cash  and cash equivalents at beginning of year                                                   | ** ** | **36,090**                    | ** **  | **31,390** | ** ** | **20,908** | ** ** | **-** | ** ** | **88,388** | ** ** |
| **CASH AND  CASH EQUIVALENTS AT END OF YEAR**                                                     | ** ** | **$**                         | **81,895**  | ** ** | **$** | **359,709** | ** ** | **$** | **19,779** | ** ** | **$** | **-** | ** ** | **$** | **461,383** | ** ** |

 

57

----

CONSOLIDATING STATEMENT OF CASH FLOWS

 
|                                                                                               |   | YEAR ENDED DECEMBER 31,  2004 |    |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                          |   |                          |    |   |   | NON- |   |   |   |   |   |
|                                                                                          |   |                          |    | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
|                                                                                          |   | TRG, INC.                     |    | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Net  earnings                                                                                 |   | $                             | 320,545 |   | $ | 77,812 |   | $ | 35,028 |   | $ | (112,840 | ) | $ | 320,545 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:          |   |                          |    |   |   |   |   |   |   |   |   |
| Depreciation  and amortization                                                                |   | 23,287                        |    | 14,609 |   | 623 |   | - |   | 38,519 |   |
| Changes  in assets and liabilities:                                                           |   |                          |    |   |   |   |   |   |   |   |   |
| Increase  in inventories                                                                      |   | (298,489                      | )       | (253,221 | ) | (33,852 | ) | - |   | (585,562 | ) |
| Net  change in other assets, payables and other liabilities                                   |   | 57,067                        |    | (66,280 | ) | 16,005 |   | 112,840 |   | 119,632 |   |
| Tax  benefit from exercise of stock options                                                   |   | 17,475                        |    | - |   | - |   | - |   | 17,475 |   |
| Other  operating activities, net                                                              |   | 10,920                        |    | - |   | - |   | - |   | 10,920 |   |
| Net  cash provided by (used for) operating activities                                         |   | 130,805                       |    | (227,080 | ) | 17,804 |   | - |   | (78,471 | ) |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Net  additions to property, plant and equipment                                               |   | (26,370                       | )       | (19,468 | ) | (1,293 | ) | - |   | (47,131 | ) |
| Principal  reduction of mortgage-backed securities, notes receivable and mortgage  collateral |   | -                             |    | - |   | 19,336 |   | - |   | 19,336 |   |
| Net  cash (used for) provided by investing activities                                         |   | (26,370                       | )       | (19,468 | ) | 18,043 |   | - |   | (27,795 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Increase  (decrease) in short-term borrowings                                                 |   | 1,659                         |    | (829 | ) | (15,764 | ) | - |   | (14,934 | ) |
| Common  stock dividends                                                                       |   | (9,661                        | )       | - |   | - |   | - |   | (9,661 | ) |
| Common  stock repurchases                                                                     |   | (118,296                      | )       | - |   | - |   | - |   | (118,296 | ) |
| Proceeds  from exercise of stock options                                                      |   | 15,907                        |    | - |   | - |   | - |   | 15,907 |   |
| Other  financing activities, net                                                              |   | 7,612                         |    | - |   | (2,678 | ) | - |   | 4,934 |   |
| Net  cash used for financing activities                                                       |   | (102,779                      | )       | (829 | ) | (18,442 | ) | - |   | (122,050 | ) |
| Net  increase (decrease) in cash and cash equivalents                                         |   | 1,656                         |    | (247,377 | ) | 17,405 |   | - |   | (228,316 | ) |
| Cash  and cash equivalents at beginning of year                                               |   | 34,434                        |    | 278,767 |   | 3,503 |   | - |   | 316,704 |   |
| **CASH AND  CASH EQUIVALENTS AT END OF YEAR**                                                 |   | $                             | 36,090  |   | $ | 31,390 |   | $ | 20,908 |   | $ | - |   | $ | 88,388 |   |

 

58

----

CONSOLIDATING STATEMENT OF CASH FLOWS

 
|                                                                                               |   | YEAR ENDED DECEMBER 31,  2003 |    |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                          |   |                          |    |   |   | NON- |   |   |   |   |   |
|                                                                                          |   |                          |    | GUARANTOR |   | GUARANTOR |   | CONSOLIDATING |   | CONSOLIDATED |   |
|                                                                                          |   | TRG, INC.                     |    | SUBSIDIARIES |   | SUBSIDIARIES |   | ELIMINATIONS |   | TOTAL |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Net  earnings                                                                                 |   | $                             | 241,692 |   | $ | 48,296 |   | $ | 38,272 |   | $ | (86,568 | ) | $ | 241,692 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:          |   |                          |    |   |   |   |   |   |   |   |   |
| Depreciation  and amortization                                                                |   | 24,261                        |    | 11,253 |   | 922 |   | - |   | 36,436 |   |
| Changes  in assets and liabilities:                                                           |   |                          |    |   |   |   |   |   |   |   |   |
| Increase  in inventories                                                                      |   | (148,412                      | )       | (91,577 | ) | - |   | - |   | (239,989 | ) |
| Net  change in other assets, payables and other liabilities                                   |   | (44,754                       | )       | 79,435 |   | (37,950 | ) | 86,568 |   | 83,299 |   |
| Tax  benefit from exercise of stock options                                                   |   | 17,120                        |    | - |   | - |   | - |   | 17,120 |   |
| Other  operating activities, net                                                              |   | 913                           |    | - |   | - |   | - |   | 913 |   |
| Net  cash provided by operating activities                                                    |   | 90,820                        |    | 47,407 |   | 1,244 |   | - |   | 139,471 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Net  additions to property, plant and equipment                                               |   | (20,266                       | )       | (11,342 | ) | (933 | ) | - |   | (32,541 | ) |
| Principal  reduction of mortgage-backed securities, notes receivable and mortgage  collateral |   | -                             |    | - |   | 18,672 |   | - |   | 18,672 |   |
| Net  cash (used for) provided by investing activities                                         |   | (20,266                       | )       | (11,342 | ) | 17,739 |   | - |   | (13,869 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                     |   |                          |    |   |   |   |   |   |   |   |   |
| Cash  proceeds of long-term debt                                                              |   | 150,000                       |    | - |   | - |   | - |   | 150,000 |   |
| Repayment  of long-term debt                                                                  |   | (100,000                      | )       | - |   | - |   | - |   | (100,000 | ) |
| Increase  (decrease) in short-term borrowings                                                 |   | 1,661                         |    | 1,669 |   | (16,891 | ) | - |   | (13,561 | ) |
| Common  stock dividends                                                                       |   | (2,020                        | )       | - |   | - |   | - |   | (2,020 | ) |
| Common  stock repurchases                                                                     |   | (130,939                      | )       | - |   | - |   | - |   | (130,939 | ) |
| Proceeds  from exercise of stock options                                                      |   | 15,190                        |    | - |   | - |   | - |   | 15,190 |   |
| Other  financing activities, net                                                              |   | 5,593                         |    | - |   | (2,606 | ) | - |   | 2,987 |   |
| Net  cash (used for) provided by financing activities                                         |   | (60,515                       | )       | 1,669 |   | (19,497 | ) | - |   | (78,343 | ) |
| Net  increase (decrease) in cash and cash equivalents                                         |   | 10,039                        |    | 37,734 |   | (514 | ) | - |   | 47,259 |   |
| Cash  and cash equivalents at beginning of year                                               |   | 24,395                        |    | 241,033 |   | 4,017 |   | - |   | 269,445 |   |
| **CASH AND CASH EQUIVALENTS AT  END OF YEAR**                                                 |   | $                             | 34,434  |   | $ | 278,767 |   | $ | 3,503 |   | $ | - |   | $ | 316,704 |   |

 

59

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**NoteL: Subsequent Event**

On January 12,2006, the Company entered into a $750.0 million unsecured revolving creditfacility.  The new credit agreement,which matures in January 2011, also provides access to an additional $750.0million of financing through an accordion feature under which the aggregate commitmentmay be increased up to $1.5 billion, subject to the availability of additionallending commitments.  The $750.0 millioncredit facility includes a $75.0 million swing-line facility and a $600.0million sublimit for issuance of standby letters of credit.  Amounts borrowed under the credit agreementare guaranteed on a joint and several basis by substantially all of the Company’swholly-owned homebuilding subsidiaries. Such guarantees are full and unconditional.  Interest rates on outstanding borrowings aredetermined either by reference to LIBOR, with margins determined based onchanges in its leverage ratio and credit ratings, or by reference to analternate base rate.  The creditagreement contains various customary affirmative, negative and financialcovenants, replaces the Company’s prior $500.0 million revolving creditfacility and will be used for general corporate purposes.  (See Note F, “Debt.”)

60

----

**Report of Management**

Management of the Company is responsible for theintegrity and accuracy of the financial statements and all other annual reportinformation.  The financial statementsare prepared in conformity with generally accepted accounting principles andinclude amounts based on management’s judgments and estimates.

The accountingsystems, which record, summarize and report financial information, aresupported by internal control systems designed to provide reasonable assurance,at an appropriate cost, that the assets are safeguarded and that transactionsare recorded in accordance with Company policies and procedures.  Developing and maintaining these systems arethe responsibility of management.  Properselection, training and development of personnel also contribute to theeffectiveness of the internal control systems. For the purpose of evaluating and documenting its systems of internalcontrol, management elected to use the integrated framework promulgated by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s systems, evaluation and testresults were documented.  The Company’sinternal auditors regularly test these systems. Based on its evaluation, management believes that its systems ofinternal control over financial reporting were effective and is not aware ofany material weaknesses.

As described inNote B to the Company’s consolidated financial statements, the Company hasrestated Note B to the consolidated financial statements included in this reportto report segment information relating to its homebuilding operations on thebasis of regions of the country, rather than treating its homebuilding businessas a single, national reportable segment. The Company’s management has considered its assessment regarding theeffectiveness of its internal control over financial reporting to take accountof the restatement, and has concluded that its prior assessment, that theCompany’s internal control over financial reporting was effective as ofDecember 31, 2005, is correct.  Thisdetermination was based upon the fact that management believes that the Company’sinternal control over financial reporting operated in a manner that providedmanagement with a reasonable basis for its original conclusion with respect toreporting segment information.

The Company’sindependent registered public accounting firm also reviewed and tested theeffectiveness of these systems to the extent it deemed necessary to express anopinion on the consolidated financial statements and systems of internalcontrol; an attestation report on management’s assessment of the Company’sinternal control over financial reporting was then issued.

The AuditCommittee of the Board of Directors periodically meets with management, theinternal auditors and the independent registered public accounting firm toreview accounting, auditing and financial matters.  Both internal auditors and the independentregistered public accounting firm have unrestricted access to the AuditCommittee.

 

 
| /s/ Gordon A. Milne                      |
|------------------------------------------|
| Gordon A. Milne                          |
| *Executive  Vice President and*          |
| *Chief  Financial Officer*               |
| * *                                 |
| * *                                 |
| /s/ David L.  Fristoe                    |
| David L. Fristoe                         |
| *Senior  Vice President, Controller and* |
| *Chief  Accounting Officer*              |

 

61

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**Reportof Independent Registered Public Accounting Firm**

**Board ofDirectors and Stockholders**

**TheRyland Group, Inc.**

We haveaudited the accompanying consolidated balance sheets of The Ryland Group, Inc.and subsidiaries as of December 31, 2005 and 2004, and the relatedconsolidated statements of earnings, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2005.  Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  These standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of The RylandGroup, Inc. and subsidiaries at December 31, 2005 and 2004, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles.

Asdiscussed in Note B, the accompanying consolidated financial statements havebeen restated to revise the Company’s segment disclosures.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of TheRyland Group, Inc.’s internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated February 22, 2006 expressed an unqualifiedopinion thereon.

/s/ Ernst & Young LLP

Ernst & Young LLP

Los Angeles, California

February 22, 2006, except for Note B,

asto which the date is October 19, 2006

62

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**Reportof Independent Registered Public Accounting Firm**

**Board ofDirectors and Stockholders**

**TheRyland Group, Inc.**

We have auditedmanagement’s assessment, included in the accompanying Report of Management,that The Ryland Group, Inc. maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria established inInternal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria).  TheRyland Group, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting.  Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion,management’s assessment that The Ryland Group, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2005 is fairlystated, in all material respects, based on the COSO criteria.  Also, in our opinion, The Ryland Group, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on the COSO criteria.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of The RylandGroup, Inc. and subsidiaries as of December 31, 2005 and 2004, and the relatedconsolidated statements of earnings, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2005, and our reportdated February 22, 2006, except for Note B, as to which the date is October 19,2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst & Young LLP

Los Angeles, California

February 22, 2006

63

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**QuarterlyFinancial Data**
| *(in thousands, except per share data) unaudited* | ** ** | **2005**         |          |              |       |             |       |             |          | 2004         |   |
|---------------------------------------------------------------------------------|------------|------------------|---------------|-------------------|------------|------------------|------------|------------------|---------------|--------------|--------|
|                                                                            |       | **DEC. 31** | ** **    | **SEPT. 30** | ** ** | **JUN. 30** | ** ** | **MAR. 31** |          | DEC. 31 |   | SEPT. 30 |   | JUN. 30 |   | MAR. 31 |   |
|                                                                            |       | ** **       | ** **    | ** **        | ** ** | ** **       | ** ** | ** **       |          |         |   |   |   |   |   |   |   |
| **CONSOLIDATED  RESULTS**                                                       |       | ** **       | ** **    | ** **        | ** ** | ** **       | ** ** | ** **       |          |         |   |   |   |   |   |   |   |
| Revenue                                                                         | ** ** | **$**            | **1,529,567** | ** **        | **$**      | **1,254,313**    | ** ** | **$**            | **1,159,712** | ** **   | **$**  | **873,974** |   | $ | 1,244,379 |   | $ | 1,034,322 |   | $ | 918,521 |   | $ | 754,599 |   |
| Earnings before taxes                                                           | ** ** | **261,280**      | ** **    | **190,313**       | ** ** | **168,290**      | ** ** | **101,168**      |          | 176,675      |   | 134,908 |   | 124,408 |   | 85,221 |   |
| Tax expense                                                                     | ** ** | **99,288**       | ** **    | **72,319**        | ** ** | **63,950**       | ** ** | **38,442**       |          | 68,020       |   | 51,939 |   | 47,898 |   | 32,810 |   |
| Net earnings                                                                    | ** ** | **$**            | **161,992**   | ** **        | **$**      | **117,994**      | ** ** | **$**            | **104,340**   | ** **   | **$**  | **62,726** |   | $ | 108,655 |   | $ | 82,969 |   | $ | 76,510 |   | $ | 52,411 |   |
| Net earnings per common share:                                                  |       | ** **       | ** **    | ** **        | ** ** | ** **       | ** ** | ** **       |          |         |   |   |   |   |   |   |   |
| Basic                                                                           | ** ** | **$**            | **3.48**      | ** **        | **$**      | **2.52**         | ** ** | **$**            | **2.22**      | ** **   | **$**  | **1.32** |   | $ | 2.29 |   | $ | 1.75 |   | $ | 1.60 |   | $ | 1.09 |   |
| Diluted                                                                         | ** ** | **3.32**         | ** **    | **2.39**          | ** ** | **2.10**         | ** ** | **1.25**         |          | 2.17         |   | 1.66 |   | 1.51 |   | 1.03 |   |
| Weighted-average common shares outstanding:                                     |       | ** **       | ** **    | ** **        | ** ** | ** **       | ** ** | ** **       |          |         |   |   |   |   |   |   |   |
| Basic                                                                           | ** ** | **46,540**       | ** **    | **46,779**        | ** ** | **47,057**       | ** ** | **47,489**       |          | 47,481       |   | 47,368 |   | 47,918 |   | 47,947 |   |
| Diluted                                                                         | ** ** | **48,860**       | ** **    | **49,365**        | ** ** | **49,625**       | ** ** | **50,083**       |          | 50,026       |   | 49,920 |   | 50,561 |   | 50,976 |   |

 

**CommonStock Prices and Dividends**

The Ryland Grouplists its common shares on the NYSE, trading under the symbol “RYL.”

The latestreported sale price of the Company’s common stock on February 3, 2006, was$71.00, and there were approximately 1,478 common stockholders of record.

The table belowpresents high and low market prices and dividend information for the Company. (SeeNote F, “Debt,” for dividend restrictions.)
|                     |       | ** ** | ** ** | ** ** | ** ** | **DIVIDENDS**      |       |            |     |   |           |   |   | DIVIDENDS      |   |
|---------------------|------------|------------|------------|------------|------------|--------------------|------------|-----------------|----------|--------|----------------|--------|--------|----------------|--------|
|                |       | ** ** | ** ** | ** ** | ** ** | **DECLARED**       |       |            |     |   |           |   |   | DECLARED       |   |
| **2005**            |       | **HIGH**   | ** ** | **LOW**    | ** ** | **PER SHARE** |       | 2004            |     | HIGH   |           | LOW    |   | PER SHARE |   |
| **First  quarter**  | ** ** | **$**      | **71.81**  | ** ** | **$**      | **53.97**          | ** ** | **$**           | **0.06** |   | First  quarter |   | $      | 46.30          |   | $ | 36.07 |   | $ | 0.05 |   |
| **Second  quarter** | ** ** | **76.37**  | ** ** | **58.06**  | ** ** | **0.06**           |       | Second  quarter |     | 44.25  |           | 36.34  |   | 0.05           |   |
| **Third  quarter**  | ** ** | **83.13**  | ** ** | **65.97**  | ** ** | **0.06**           |       | Third  quarter  |     | 46.95  |           | 34.69  |   | 0.05           |   |
| **Fourth quarter**  | ** ** | **76.97**  | ** ** | **62.25**  | ** ** | **0.12**           |       | Fourth quarter  |     | 57.63  |           | 42.45  |   | 0.06           |   |
|                     |            |            |            |            |            |                    |            |                 |          |        |                |        |        |                |        |  |  |  |  |  |  |

 

**NYSECertification**

The NYSE requiresthat the chief executive officers of its listed companies certify annually tothe NYSE that they are not aware of violations by their companies of NYSEcorporate governance listing standards. The Company submitted a non-qualified certification by its ChiefExecutive Officer to the NYSE last year in accordance with the NYSE’srules.  Further, the Company filedcertifications by its Chief Executive Officer and Chief Financial Officer withthe SEC in accordance with the Sarbanes-Oxley Act of 2002.  These certifications were filed as exhibitsto this Annual Report on Form 10-K.

64

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**Item 9.****                                               Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 9A.****                                      Controlsand Procedures**

The Company has proceduresin place for accumulating and evaluating information that enable it to prepareand file reports with the SEC.  At theend of the period covered by the report on Form 10-K/A, an evaluation wasperformed by the Company’s management, including the CEO and CFO, of theeffectiveness of the Company’s disclosure controls and procedures as defined inRule 13a-15(e) promulgated under the Exchange Act.  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s disclosurecontrols and procedures were effective as of December 31, 2005.

TheCompany has a committee consisting of key officers, including the chiefaccounting officer and general counsel, to ensure that all information requiredto be disclosed in the Company’s reports is accumulated and communicated tothose individuals responsible for the preparation of the reports, as well as toall principal executive and financial officers, in a manner that will allowtimely decisions regarding required disclosures.

The Company’s management, including the CEO and CFO,has evaluated any changes in the Company’s internal control over financialreporting that occurred during the quarterly period ended December 31, 2005,and has concluded that there was no change during the quarterly period endedDecember 31, 2005, that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

At December 31, 2005, theCompany completed a detailed evaluation of its internal control over financialreporting, including the assessment, documentation and testing of its controlsas required by the Sarbanes-Oxley Act of 2002. No material weaknesses were identified. The Company’s management summarized its assessment process anddocumented its conclusions in the Report of Management, which appears in “PartII, Item 8., “Financial Statements and Supplementary Data.”  The Company’s independent registered publicaccounting firm summarized its review of management’s assessment of internalcontrol over financial reporting in an attestation report which also appears inPart II, Item 8., “Financial Statements and Supplementary Data.”

The Company has restated Note B to the consolidated financial statementsincluded in this Form 10-K/A to report segment information relating to itshomebuilding operations based on regions of the country, rather than treatingit as a single, national, reportable segment. The Company’s management, including its CEO and CFO, has re-evaluatedits disclosure controls and procedures as of the end of the period covered bythis report to determine whether the restatement changes their conclusion.  The Company’s management has determined thatthe restatement does not change any conclusion and that, at December 31, 2005,its disclosure controls and procedures were effective to ensure that theinformation included in the reports that it filed or submitted under theExchange Act was recorded, processed, summarized and disclosed within the timeperiods specified in the SEC’s rules and forms. The treatment of the Company’s homebuilding business as a single,national, reportable segment was previously in accordance with SFAS 131, andthe practice was followed by substantially all the large, geographicallydiverse homebuilders that file reports with the SEC.  The restatement represents a change ininterpretation and practice with respect to the application of SFAS 131.  The change in the way the Company reportssegment information did not affect its previously reported consolidatedfinancial position, results of operations or cash flows.

In the descriptionof its business and Management’s Discussion and Analysis of Financial Conditionand Result of Operations, the Company previously included certain informationon the basis of the geographic regions within which the Company operates.  Based upon a recent technical correction tothe interpretation of homebuilding segment reporting, the Company presents inthis restatement additional information so that all geographic regional data inits reports are presented on the basis of the same geographic homebuildingsegments.  In light of, and afterconsidering this change in reporting homebuilding geographic segmentinformation, the Company’s management continues to believe and has concludedthat its disclosure controls and procedures are effective.

65

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**Item 9B.             Other Information**

None.

**PART III**

**Item 10.****                                        Directorsand Executive Officers of the Registrant**

Information as to the Company’s directors andexecutive officers is incorporated by reference from the Company’s 2006 ProxyStatement, including the determination by the Board of Directors, with respectto the “Audit Committee’s financial expert,” and the identity of each member ofthe Audit Committee of the Board of Directors. Additional information as to the Company’s executive officers is shownunder Part I as a separate item.

**Item 11.****                                        ExecutiveCompensation**

The information required by this item is incorporatedby reference from the 2006 Proxy Statement.

**Item 12.****                                        SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

The information required by this item is incorporatedby reference from the 2006 Proxy Statement.

**Item 13.****                                        CertainRelationships and Related Transactions**

There are no transactions, business relationships orindebtedness required to be reported by the Company pursuant to this item.

**Item 14.****                                        PrincipalAccountant Fees and Services**

The information required by this item is incorporatedby reference from the 2006 Proxy Statement.

66

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**PART IV**

**Item 15.             Exhibits and Financial Statement Schedules**
|        |                                                                                                           |                                                                                                                                                                                     | Page No.  |
|--------|----------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| (a)    | 1.                                                                                                             | Financial Statements                                                                                                                                                                     |      |
|   |                                                                                                           | Consolidated Statements  of Earnings – years  ended December 31, 2005, 2004 and 2003                                                                                                | 33        |
|   |                                                                                                           | Consolidated Balance  Sheets – December  31, 2005 and 2004                                                                                                                          | 34        |
|   |                                                                                                           | Consolidated Statements  of Stockholders’ Equity  – years ended December 31, 2005, 2004 and 2003                                                                               | 35        |
|   |                                                                                                           | Consolidated Statements  of Cash Flows – years  ended December 31, 2005, 2004 and 2003                                                                                              | 36        |
|   |                                                                                                           | Notes to Consolidated  Financial Statements                                                                                                                                              | 37        |
|   |                                                                                                           |                                                                                                                                                                                     | Page  No. |
| 2.     |                                                                                                           | Financial Statement  Schedule  (Filed herewith)                                                                                                                                          |      |
|   |                                                                                                           | Schedule II — Valuation  and Qualifying Accounts                                                                                                                                    | 71        |
|   |                                                                                                           | Schedules 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. |      |
| 3.     | Exhibits                                                                                                       |                                                                                                                                                                                     |      |
|   | The 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                                                                                                            | Rights Agreement, dated  as of October 18, 1996, between The Ryland Group, Inc. and ChaseMellon  Shareholder Services L.L.C.                                                             |      |
|   |                                                                                                           | (Incorporated by reference from Form 8-K, filed  October 24, 1996)                                                                                                                       |      |
|   | 4.2                                                                                                            | Amendment to the Rights  Agreement, dated as of February 25, 2001, between The Ryland Group, Inc. and  Mellon Investor Services L.L.C.                                                   |      |
|   |                                                                                                           | (Incorporated by reference from Form 10-Q for the  quarter ended March 31, 2003)                                                                                                         |      |

67

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| 3.     |   | Exhibits, continued                                                                                                         |     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|----------|
|   | 4.3    | Senior Subordinated  Notes, dated as of June 13, 2001                                                                       |     |
|   |   | (Incorporated by reference from Registration  Statement on Form S-3, Registration No. 333-58208)                            |     |
|   | 4.4    | Senior Notes, dated as  of August 16, 2001                                                                                  |     |
|   |   | (Incorporated by reference from Registration  Statement on Form S-3, Registration No. 333-58208)                            |     |
|   | 4.5    | Senior Notes, dated as  of June 5, 2003                                                                                     |     |
|   |   | (Incorporated by reference from Registration  Statement on Form S-3, Registration No. 333-100167)                           |     |
|   | 4.6    | Senior Notes, dated as  of January 11, 2005                                                                                 |     |
|   |   | (Incorporated by reference from Registration  Statement on Form S-3, Registration No. 333-121469)                           |     |
|   | 4.7    | Senior Notes, dated as  of May 9, 2005                                                                                      |     |
|   |   | (Incorporated by reference from Registration  Statement on Form S-3, Registration No. 333-124000)                           |     |
|   | 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   | 2005 Equity Incentive  Plan of The Ryland Group, Inc.                                                                       |     |
|   |   | (Incorporated by reference from Form 10-Q for the  quarter ended March 31, 2005)                                            |     |
|   | 10.3   | Form of Non-Qualified  Stock Option Agreement for The Ryland Group, Inc. 2005 Equity Incentive Plan                         |     |
|   |   | (Incorporated by reference from Form 8-K, filed  April 29, 2005)                                                            |     |
|   | 10.4   | Form of Stock Unit  Agreement for The Ryland Group, Inc. 2005 Equity Incentive Plan                                         |     |
|   |   | (Incorporated by reference from Form 8-K, filed  April 29, 2005)                                                            |     |
|   | 10.5   | 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)                                            |     |
|   | 10.6   | Form of Stock Option  Agreement for The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan                           |     |
|   |   | (Incorporated by reference from Form 8-K, filed  April 29, 2005)                                                            |     |
|   | 10.7   | 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)                                                             | * * |
|   | 10.8   | The Ryland Group, Inc.  Dreier Supplemental Executive Retirement Plan                                                       |     |
|   |   | (Incorporated by reference from Form 10-Q for the  quarter ended September 30, 2003)                                        |     |
|   | 10.9   | The Ryland Group, Inc.  Dreier Supplemental Executive Retirement Plan II                                                    |     |
|   |   | (Incorporated by reference from Form 8-K/A, filed  May 4, 2005)                                                             |     |

68

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| 3.     | Exhibits, continued |                                                                                                                                 |
|--------|---------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.10               | Form of Senior  Executive Severance Agreement between The Ryland Group, Inc. and the executive  officers of the Company              |   |
|   |                | (Incorporated by reference from Form 10-Q for the  quarter ended September 30, 2000)                                                 |   |
|   | 10.11               | Amendment and  Restatement of the Executive and Director Deferred Compensation Plan,  effective March 1, 1998                        |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 1999)                                                     |   |
|   | 10.12               | Non-Employee Directors’  Stock Unit Plan, effective January 1, 1998, between The Ryland Group, Inc.  and the Board of Directors |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 1997)                                                     |   |
|   | 10.13               | TRG Incentive Plan, as  amended and restated, effective January 1, 2003                                                              |   |
|   |                | (Incorporated by reference from Form 10-Q for the  quarter ended March 31, 2003)                                                     |   |
|   | 10.14               | The Ryland Group, Inc.  Performance Award Program, effective July 1, 2002                                                            |   |
|   |                | (Incorporated by reference from Form 10-Q for the  quarter ended March 31, 2003)                                                     |   |
|   | 10.15               | The Ryland Group, Inc.  Senior Executive Performance Plan                                                                            |   |
|   |                | (Incorporated by reference from Form 10-Q for the  quarter ended March 31, 2003)                                                     |   |
|   | 10.16               | The Ryland Group, Inc.  Senior Executive Supplemental Retirement Plan                                                                |   |
|   |                | (Incorporated by reference from Form 10-Q for the  quarter ended September 30, 2003)                                                 |   |
|   | 10.17               | 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)                                                     |   |
|   | 10.18               | 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)                                                     |   |
|   | 10.19               | Office Lease, dated  March 18, 1999, as amended, by and between Ryland Mortgage Company and IDS  Life Insurance Company              |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 2005)                                                     |   |
|   | 12.1                | Computation of Ratio of  Earnings to Fixed Charges                                                                                   |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 2005)                                                     |   |
|   | 21                  | Subsidiaries of the  Registrant                                                                                                      |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 2005)                                                     |   |
|   | 23                  | Consent of Independent  Registered Public Accounting Firm                                                                            |   |
|   |                | (Filed herewith)                                                                                                                     |   |
|   | 24                  | Power of Attorney                                                                                                                    |   |
|   |                | (Incorporated by reference from Form 10-K for the  year ended December 31, 2005)                                                     |   |

69

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| 3.     | Exhibits, continued |                                                                                                     |
|--------|---------------------|----------------------------------------------------------------------------------------------------------|
|   | 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 Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |   |
|   |                | (Filed herewith)                                                                                         |   |
|   | 32.1                | Certification of  Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |   |
|   |                | (Furnished herewith)                                                                                     |   |
|   | 32.2                | Certification of  Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |   |
|   |                | (Furnished herewith)                                                                                     |   |

** **

70

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**The Ryland Group, Inc. andSubsidiaries**

**Schedule II – Valuation and Qualifying Accounts**

***(amounts in thousands)***
|                      |       | **Balance at** | ** ** | **Charged to** | ** ** | **Deductions** | ** ** | **Balance at** |       |
|---------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
|                      |       | **Beginning**       | ** ** | **Costs and**  | ** ** | **and**        | ** ** | **End of**     |       |
|                      |       | **of Period**  | ** ** | **Expenses**        | ** ** | **Transfers**  | ** ** | **Period**          |       |
| Valuation allowance:      |       |                |       |                |       |           |       |                |       |
| Homebuilding inventories1 |       |                |       |                |       |           |       |                |       |
| **2005**                  | ** ** | **$**               | **1,405**  | ** **          | **$**      | **804**        | ** ** | **$**               | **(1,723** | **)** | **$** | **486** | ** ** |
| 2004                      |       | 1,526               |       | 33                  |       | (154           | )          | 1,405               |       |
| 2003                      |       | 5,340               |       | 25                  |       | (3,839         | )          | 1,526               |       |
|                           |            |                     |            |                     |            |                |            |                     |            |  |  |  |  |

 

1  Balances as of December 31, 2005, 2004 and 2003, represent valuationallowances for assets to be disposed of.

71

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**Report of Independent Public Accounting Firm**

**Board of Directors and Stockholders**

**TheRyland Group, Inc.**

We haveaudited the consolidated financial statements of The Ryland Group, Inc. as ofDecember 31, 2005 and 2004, and for each of the three years in the period endedDecember 31, 2005, and have issued our report thereon dated February 22, 2006(except for Note B, as to which the date is October 19, 2006), included in thisAnnual Report (Form 10-K/A) for the year ended December 31, 2005. Ouraudits also included the financial statement schedule of The RylandGroup, Inc. listed in Item 15(a) of this Annual Report (Form 10-K/A). Thisschedule is the responsibility of the Company’s management. Our responsibilityis to express an opinion based on our audits.

In ouropinion, the financial statement schedule referred to above, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

/s/ Ernst & Young LLP

Ernst & Young LLP

Los Angeles, California

February24, 2006

72

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Exchange Act, the Company has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
| **THE RYLAND GROUP, INC.**                                                                                                                                                                                                                         |   |             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|
|                                                                                                                                                                                                                                               |   |             |
|                                                                                                                                                                                                                                               |   |             |
| By:                                                                                                                                                                                                                                                |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| */s/ R.  Chad Dreier*                                                                                                                                                                                                                              |   | November 7, 2006 |
| R. Chad Dreier,  Chairman of the Board,                                                                                                                                                                                                            |   |             |
| President and Chief  Executive Officer                                                                                                                                                                                                             |   |             |
| (Principal  Executive Officer)                                                                                                                                                                                                                     |   |             |
|                                                                                                                                                                                                                                               |   |             |
| Pursuant to the requirements of the Securities  Exchange Act of 1934, 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 Dreier*                                                                                                                                                                                                                              |   | November 7, 2006 |
| R. Chad Dreier                                                                                                                                                                                                                                     |   |             |
| Chief Executive  Officer                                                                                                                                                                                                                           |   |             |
| ** **                                                                                                                                                                                                                                         |   |             |
| ** **                                                                                                                                                                                                                                         |   |             |
| **Principal  Financial Officer:**                                                                                                                                                                                                                  |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| */s/  Gordon A. Milne*                                                                                                                                                                                                                             |   | November 7, 2006 |
| Gordon A. Milne                                                                                                                                                                                                                                    |   |             |
| Chief Financial  Officer                                                                                                                                                                                                                           |   |             |
| ** **                                                                                                                                                                                                                                         |   |             |
| ** **                                                                                                                                                                                                                                         |   |             |
| **Principal  Accounting Officer:**                                                                                                                                                                                                                 |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| */s/  David L. Fristoe*                                                                                                                                                                                                                            |   | November 7, 2006 |
| David L. Fristoe                                                                                                                                                                                                                                   |   |             |
| Chief Accounting  Officer                                                                                                                                                                                                                          |   |             |
|                                                                                                                                                                                                                                               |   |             |
|                                                                                                                                                                                                                                               |   |             |
| All members of the Board of Directors: R. Chad  Dreier, Daniel T. Bane, Leslie M. Frécon, Roland A. Hernandez, William L.  Jews, Ned Mansour, Robert E. Mellor, Norman J. Metcalfe, Charlotte St.  Martin, Paul J. Varello and John O. Wilson |
|                                                                                                                                                                                                                                               |   |             |
| By:                                                                                                                                                                                                                                                |   |             |
| * *                                                                                                                                                                                                                                           |   |             |
| */s/  Timothy J. Geckle*                                                                                                                                                                                                                           |   | November 7, 2006 |
| Timothy J.  Geckle                                                                                                                                                                                                                                 |   |             |
| As  Attorney-in-Fact                                                                                                                                                                                                                               |   |             |

** **

73

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**INDEX OF EXHIBITS**
| 23   | Consent of Independent Registered Public Accounting  Firm                                                |
|------|----------------------------------------------------------------------------------------------------------|
| 31.1 | Certification of  Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
| 31.2 | Certification of  Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
| 32.1 | Certification of  Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |
| 32.2 | Certification of  Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |

 

74

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