-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6ri0ozDibr6Z8Qp85LFq5fJ54E4HYaEjWmelG0BFHEQ9wg1Rc8wCJp+dEwK9R1T GFhjQlmT3B669wmpkEwx6w== 0001047469-06-002462.txt : 20060224 0001047469-06-002462.hdr.sgml : 20060224 20060224173153 ACCESSION NUMBER: 0001047469-06-002462 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060224 DATE AS OF CHANGE: 20060224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYLAND GROUP INC CENTRAL INDEX KEY: 0000085974 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 520849948 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08029 FILM NUMBER: 06644302 BUSINESS ADDRESS: STREET 1: 24025 PARK SORRENTO STREET 2: SUITE 400 CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182237500 FORMER COMPANY: FORMER CONFORMED NAME: RYAN JAMES P CO DATE OF NAME CHANGE: 19720414 10-K 1 a2167774z10-k.htm 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

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

For the transition period from to

Commission File Number 1-8029

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

Maryland (State or other jurisdiction of incorporation or organization)		52-0849948 (I.R.S. Employer Identification No.)
24025 Park Sorrento, Suite 400, Calabasas, California 91302 (Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the 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 a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

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

Indicate by check mark whether the dregistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Act.

Large Accelerated Filer ý Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

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

The number of shares of common stock of The Ryland Group, Inc. outstanding on February 13, 2006, was 46,043,293.

DOCUMENTS INCORPORATED BY REFERENCE

Name of Document		Location in Report
Proxy Statement for the 2006 Annual Meeting of Stockholders		Parts I, III
Annual Report to Shareholders for the Year Ended December 31, 2005		Parts II, III, IV

THE RYLAND GROUP, INC.
FORM 10-K
INDEX

ITEM NO.
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
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	15
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 8.	Financial Statements and Supplementary Data	16
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	16
Item 9A.	Controls and Procedures	16
Item 9B.	Other Information	17
PART III
Item 10.	Directors and Executive Officers of the Registrant	17
Item 11.	Executive Compensation	17
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	17
Item 13.	Certain Relationships and Related Transactions	17
Item 14.	Principal Accountant Fees and Services	17
PART IV
Item 15.	Exhibits and Financial Statement Schedules	18
SIGNATURES		22
INDEX OF EXHIBITS		23

PART I

Item 1. Business

With headquarters in Southern California, The Ryland Group, Inc., a Maryland corporation (the "Company"), is one of the nation's largest homebuilders and a leading mortgage-finance company. The Company is a Fortune 500 company and is traded on the New York Stock Exchange under the symbol "RYL." Founded in 1967, the Company has built more than 250,000 homes during its 38-year history. In addition, Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 210,000 homebuyers.

The Company consists of two operating business segments: homebuilding and financial services. The homebuilding operations are by far the most substantial part of its business, comprising approximately 98 percent of consolidated revenues in fiscal year 2005. The homebuilding segment generates nearly all of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The Company's operations span all significant aspects of the homebuying process—from design, construction and sale to mortgage origination, title insurance, escrow and homeowners insurance brokerage services. In addition to building single-family detached homes, the Company's homebuilding segment also builds attached homes, such as town homes and condominiums, including some mid-rise buildings, which share common walls and roofs. It builds homes for entry-level buyers, as well as for first- and second-time move-up buyers. The Company's prices range from $92,000 to more than $600,000, with the average price of a Ryland home closed during 2005 being $278,000.

Over the last 12 years, the Company has concentrated on expanding its operations by investing its available capital into both existing and new markets. It believes that measured "organic" growth avoids the risk, debt, intangible assets and distractions associated with external acquisitions.

The Company focuses on achieving a high return on invested capital and profitable operations in every one of its markets. New communities are evaluated based on return and profitability benchmarks, and both senior and local management are incentivized based on their ability to achieve such returns. Management continually monitors the land acquisition process, sales revenues, margins and returns achieved in each of the Company's markets as part of its evaluation of the use of its capital.

The Company is highly diversified throughout the United States, with no more than 10 percent and 20 percent of its deployed capital allocated to any given market or geographic area, respectively. The Company believes diversification minimizes exposure to economic and market fluctuations and enhances growth potential. Capital is strategically allocated to avoid concentration in any given geographic area and to circumvent the accompanying risk associated with excessive dependence on local market anomalies. Subject to economic conditions, the Company plans to continue expanding in its existing markets and strives to be among the largest builders in each of those markets. It also intends to continue diversification by entering new markets, primarily through establishing start-up or satellite operations in markets near its existing divisions.

The Company's national scale has provided increased opportunities for negotiation of volume discounts and rebates from national and regional material suppliers. Additionally, it has greater access to a lower cost of capital due to the strength and transparency of its balance sheet, as well as its lending and capital markets relationships. The Company's economies of scale and diversification have contributed to significant improvements in its operating margins.

Committed to product innovation, the Company conducts ongoing research into consumer preferences and trends. It is constantly adapting and improving house plans, design features, customized options and mortgage programs. The Company strives to offer value, selection, location and quality to all homebuyers.

the Company developed new training programs for services representatives and on-line systems for tracking requests, processing issues and improving customer interaction. In addition, the Company entered into a contract with Eliant, an organization which analyzes customer feedback, in order to better serve homebuyers' needs.

In addition to being an added value to customers, RMC greatly enhances the Company's profitability while limiting its risk. A competitively high capture rate for mortgage financing allows the homebuilder to monitor its backlog and closing process. Risk is further reduced because substantially all loans are sold on the day they close to a third party, which the third party then services and manages.

The Company enters into land development joint ventures from time to time as a means of building lot positions, reducing its risk profile and enhancing its return on capital. It often partners with developers, other homebuilders or financial investors to develop finished lots for sale to the joint ventures' members or other third parties.

Homebuilding Operations

General

Ryland homes are built on-site and marketed in three major geographic regions. At December 31, 2005, the Company operated in the following metropolitan areas:

Region		Major Markets Served
North Central
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 has decentralized its operations to provide more flexibility to local division presidents and management teams. Each of its 22 homebuilding divisions across the country generally consists of a division president, a controller and other management personnel focused on land entitlement, acquisition and development; sales, construction, customer service, and purchasing; as well as accounting and administrative personnel. The Company's operations in each of its homebuilding markets may differ due to a number of market-specific factors. These factors include regional economic conditions and job growth; land availability and local land development; consumer preferences; competition from other homebuilders; and home resale activity. The Company not only considers each of these factors upon entering into new markets, but also in determining the extent of its operations and capital allocation in existing markets. The Company's local management teams are familiar with these factors and their market experience and expertise are critical in making decisions regarding local operations.

The Company provides oversight and centralizes key elements of its homebuilding business through its corporate and regional offices. Corporate is a non-operating business segment whose purpose is to support operations. Corporate departments are responsible for establishing operational policies and internal control standards; implementing strategic initiatives; and monitoring compliance with policies and controls throughout the Company's operations. Corporate acts as an internal source of capital and provides financial, human resources, information technology, insurance, legal, marketing, national purchasing, and tax compliance services, as well as performing administrative functions associated with a publicly traded entity. The Company has three regional offices, which generally consist of a region president; a chief financial officer; real estate legal counsel; and other management personnel focused on human resources, marketing and operations. Regional offices provide oversight and standardization where appropriate. The region staff monitors activities by using various operational metrics in order to achieve Company return benchmarks.

Ryland markets attached and detached single-family homes, which are generally targeted to entry-level and first- and second-time move-up buyers. The Company's diverse product line is tailored to the local styles and preferences found in each of its geographic markets. The product line offered in a particular community is determined in conjunction with the land acquisition process and is dependent upon a number of factors, including consumer preferences, competitive product offerings and development costs. Architectural services are generally outsourced to increase creativity and to ensure that the Company's home designs are consistent with local market preferences.

Homebuyers are able to customize certain features of their homes by selecting from numerous options and upgrades displayed in the Company's model homes and design centers. These design centers, which are conveniently located in most of the Company's markets, also represent an increasing source of additional revenue and profit for the Company. Custom options contributed in excess of 11 percent of revenues in 2005 and significantly higher margins than base homes.

Land Acquisition and Development

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

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

At December 31, 2005, the Company had cash deposits and letters of credit outstanding of $188.5 million in connection with option and land purchase contracts having a total purchase price of $2.1 billion. These options and commitments expire at various dates through 2018.

Materials Costs

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

Construction

Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a competitive-bid basis. The Company generally requires a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company's production team, which schedules and coordinates subcontractor work, monitors quality, and ensures compliance with local zoning and building codes. Construction time for homes depends on weather, availability of labor or subcontractors, materials, the size of the home, geological conditions and other factors.

The duration of the home construction process is generally between three and six months. The Company has an integrated financial and homebuilding management system that assists in scheduling production and controlling costs. Through this system, the Company monitors construction status and job costs incurred for each home during each phase of construction. The system provides for detailed budgeting and allows the Company to track and control actual costs, versus construction bids, for each community and subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the past.

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

Marketing

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

The Company advertises in newspapers and trade publications, as well as with marketing brochures and newsletters. It also uses billboards, radio and television advertising, and its Web site to market the location, price range and availability of its homes. The Company also attempts to operate in conspicuously located communities that permit it to take advantage of local traffic patterns. Model homes play a significant role in the Company's marketing efforts, as they create an attractive atmosphere and display options and upgrades.

The Company's sales contracts typically require an earnest money deposit. The amount of earnest money required varies between markets and communities. Additionally, buyers are generally required to pay additional deposits when they select options or upgrade features for their homes. Most of the Company's sales contracts stipulate that when homebuyers cancel their contracts with the Company, it has the right to retain their earnest money and option deposits; however, its operating divisions may choose to refund such deposits. The Company's sales contracts may also include contingencies that permit homebuyers to cancel and receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period. The Company's contracts may also include other contingencies, such as the sale of an existing home. The length of time between the signing of a sales contract for a home and delivery of the home to the buyer may vary depending on customer preferences, permit approval and construction cycle times.

Customer Service and Warranties

The Company's operating divisions are responsible for preclosing quality control inspections and responding to homebuyers' postclosing needs. The Company believes that a prompt and courteous response to homebuyers' needs during and after construction reduces postclosing repair costs, enhances its reputation for quality and service, and ultimately leads to repeat and referral business. The subcontractors who perform most of the actual construction also provide warranties on workmanship.

The Company provides each homeowner with product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years at the time of sale. The

Company believes its warranty program meets or exceeds terms customarily offered in the homebuilding industry.

Seasonality

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

Financial Services

RMC provides mortgage-related products and services primarily for the Company's homebuilding customers. By aligning its operations with the Company's homebuilding segment, RMC leverages this relationship to capture homebuyers' loans. RMC focuses primarily on originating mortgage loans and improving the profitability of these activities through increased operational efficiencies.

Loan Origination

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

The Company arranges various types of mortgage financing, including conventional, Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages, with various fixed- and adjustable-rate features. The Company is approved to originate loans that conform to the guidelines established by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). The Company sells the loans it originates, along with the related servicing rights, to others.

Title and Escrow Services

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

Insurance Brokerage Services

Ryland Insurance Services, a wholly-owned subsidiary of RMC, provides insurance brokerage services primarily to the Company's homebuyers. At December 31, 2005, Ryland Insurance Services was licensed to operate in all of the states in which the Company's homebuilding segment operates. During 2005, it provided insurance brokerage services to 60.4 percent of the Company's homebuyers, compared to 58.7 percent during 2004.

Real Estate and Economic Conditions

The Company is significantly affected by fluctuations in economic activity, interest rates and levels of consumer confidence. The effects of these fluctuations differ among the various geographic markets in which the Company operates. Higher interest rates may affect the ability of buyers to qualify for mortgage financing and decrease demand for new homes. As a result, rising interest rates generally will decrease the Company's home

sales and mortgage originations. The Company's business is also affected by local economic conditions, such as employment rates and housing demand, in the markets in which it operates. Some of these markets have, at times, experienced a significant decline in housing demand.

Inventory risk can be substantial for homebuilders. The market value of land, building lots and housing inventories fluctuates as a result of changing market and economic conditions. The Company must continuously locate and acquire land not only for expansion into new markets, but also for replacement and expansion of land inventory within current markets. The Company employs various measures, including a corporate land approval process and a continuous review by senior management, designed to control inventory risk. However, it cannot assure that these measures will avoid or eliminate this risk.

Competition

The Company competes in each of its markets with a large number of national, regional and local homebuilding companies. Some of these national companies are larger than the Company, and most national homebuilders have greater financial resources than in the past. The strength and expanded presence of national homebuilders, plus the continued viability of regional and local homebuilders, has increased competition in many markets. This competition could make it more difficult to acquire suitable land at acceptable prices, force an increase in selling incentives or decrease sales. Any of these could have an adverse impact on the Company's financial performance or results of operations. The Company also competes with other housing alternatives, including existing homes and rental housing. Principal competitive factors in the homebuilding industry include price; design; quality; reputation; relationship with developers; accessibility of subcontractors; availability and location of lots; and availability of customer financing.

Regulatory and Environmental Matters

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

RMC is subject to the rules and regulations of FHA, FHLMC, FNMA, VA and the Department of Housing and Urban Development (HUD) with respect to originating, processing and selling mortgage loans. In addition, there are other federal and state laws and regulations that affect not only these activities, but also RMC's title, escrow and insurance brokerage operations. These rules and regulations prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals; require credit reports on prospective borrowers; and fix maximum loan amounts. RMC is required to submit audited financial statements to various regulatory agencies annually, and each regulatory entity has its own financial requirements. The Company's affairs are also subject to examination by these regulatory agencies and by state agencies, at all times, to assure compliance with applicable regulations, policies and procedures. Mortgage origination activities are subject to the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act, as well as to associated regulations that prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs.

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 collective bargaining agreement.

Web Site Access to Reports

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

Stockholders, securities analysts and others seeking information about the Company's business operations and financial performance can receive copies of the 2005 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other publications filed with the SEC in Washington, D.C., without charge, by contacting the treasurer's office at (818) 223-7677; by writing to The 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, news releases and quarterly earnings announcements, including live audio and replays of the most recent quarterly earnings conference calls, can be accessed free of charge on the Company's Web site (www.ryland.com). Information on the Company's Web site is not part of this report. Ryland makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available on its Web site as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. To retrieve any 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, the Company's revenue may decrease.

The Company can be significantly affected by the cyclical nature of the homebuilding industry which is sensitive to fluctuations in general and local economic conditions, interest rates, housing demand, employment levels, availability of financing and levels of consumer confidence. The effects of these fluctuations differ among the various geographic markets in which it operates. Sales of new homes are affected by market conditions for resale homes and rental properties. Its business is also affected by local economic conditions, such as employment rates and housing demand in the markets in which the Company builds homes. The markets in which it operates can experience mild to significant declines in housing demand. The Company is currently experiencing a decline in market demand in some of its markets.

If market demand significantly changes, the Company is subject to inventory risk.

Inventory risk can be substantial for homebuilders. The market value of the Company's land, building lots and housing inventories fluctuates as a result of changing market and economic conditions. In addition, inventory carrying costs can result in losses in poorly performing projects or markets. In the event of significant changes in economic or market conditions, the Company may dispose of land or housing inventories on a basis that may result in a loss. In the course of its business, the Company continuously seeks and makes acquisitions of land for expansion into new markets, as well as for replacement and expansion of land inventory within its current markets. Although it employs various measures, including its land approval process and continued review by senior management designed to manage inventory risks, the Company cannot assure that these measures will enable it to avoid or eliminate its inventory risk.

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

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

If interest rates rise further, then the Company's business may decline and profitability may be reduced.

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

Because the Company's industry is highly competitive, others may be more successful than it and cause its business to decline.

The residential housing industry is highly competitive. The Company competes in each of its markets with a large number of national, regional and local homebuilding companies. This competition could make it more difficult to acquire suitable land at acceptable prices, force it to increase selling incentives or lower its sales per community. Any of these could have an adverse impact on the Company's financial performance or results of operations. It also competes with other housing alternatives, including existing homes and rental housing. Principal competitive factors in homebuilding are home price, design, quality, reputation, relationship with developers, accessibility of subcontractors, availability and location of lots and availability of customer financing.

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

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

The Company's homebuilding segment is subject to various local, state and federal laws, statutes, ordinances, rules and regulations concerning zoning, building design, construction, stormwater permitting and discharge and similar matters, as well as open space, wetlands and environmentally protected areas. These include local regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area, as well as other municipal or city land planning restrictions, requirements or limitations. The Company may also experience periodic delays in homebuilding projects due to regulatory compliance, municipal appeals and other government planning processes in any of the areas in which it operates.

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

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

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

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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

Item 3. Legal Proceedings

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

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

In November 2003, the Company received a request from the United States Environmental Protection Agency (the "EPA") pursuant to Section 308 of the Clean Water Act for information about storm water discharge practices in connection with recent homebuilding projects undertaken by the Company. The Company is working with the EPA to provide the requested information and review its compliance with the Clean Water Act. It is not known at this time whether the EPA will seek to take legal action or impose penalties in connection with either the information requested or the prior storm water discharge practices employed by the Company.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2005.

Executive Officers of the Company

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

Name	Age	Position (date elected to position) Prior Business 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.

There are no family relationships between any director or executive officer, or arrangements or understandings pursuant to which the officers listed above were elected. For a description of the Company's employment and severance arrangements with certain of its executive officers, see the Company's Proxy Statement for the 2006 Annual Meeting of Stockholders, which is to be filed pursuant to Regulation 14A under the Exchange Act (the "2006 Proxy Statement").

PART II

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

Information required by this item is incorporated by reference from the section entitled "Quarterly Financial Data and Common Stock Prices and Dividends," which appears on page 88 of the Company's Annual Report to Shareholders for the Year Ended December 31, 2005.

The following is a table summarizing the Company's purchases of its own equity securities during the 12 months ended December 31, 2005:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the 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 previous authorization plus $250.0 million new authorization divided by the Company's stock price at December 31, 2005.

On December 22, 2004, the Company announced that it had received authorization from its Board of Directors to purchase two million additional shares of its common stock in open-market transactions. At December 31, 2005, there were 380,626 shares available for purchase in accordance with this authorization. This authorization does not have an expiration date.

On December 12, 2005, the Company announced that it had received authorization from its Board of Directors to purchase shares totaling $250.0 million, or approximately 3.5 million shares based on the Company's stock price at December 31, 2005. As of December 31, 2005, no shares had been repurchased in accordance with this authorization. This authorization does not have an expiration date.

Item 6. Selected Financial Data

The information required by this item is incorporated by reference from the section entitled "Selected Financial Data," which appears on page 42 of the Annual Report to Shareholders for the Year Ended December 31, 2005.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition," which appears on pages 44 through 59 of the Annual Report to Shareholders for the Year Ended December 31, 2005.

Outlook
The Company entered 2006 with a backlog of orders for new homes totaling 8,464 units and the dollar value of the Company's backlog was $2.6 billion, representing approximately 45 percent of 2006 targeted closings. In the first two months of the year, the Company has experienced a decline in sales orders for new homes, as compared to the same period last year. The Company believes its sales order results to date in 2006 reflect recent broader market trends toward a softening in demand for residential housing. It is too early to forecast whether year-to-date sales are indicative of a longer-term trend. Historically, the Company's new order activity is higher in the spring and summer months, and those numbers will be more indicative of its annual performance. Currently, the Company does not anticipate revising its earnings guidance for 2006; however, if sales orders do not improve, the Company may revise its guidance for 2006.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition," under "Market Risk Summary," which appears on page 59 of the Annual Report to Shareholders for the Year Ended December 31, 2005.

Item 8. Financial Statements and Supplementary Data

The information required by this item is incorporated by reference from the sections entitled "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements," which appear on pages 60 through 84 of the Annual Report to Shareholders for the Year Ended December 31, 2005, and from the section entitled "Quarterly Financial Data and Common Stock Prices and Dividends," which appears on page 88.

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

None.

Item 9A. Controls and Procedures

The Company has procedures in place for accumulating and evaluating information that enable it to prepare and file reports with the SEC. At the end of the period covered by this report on Form 10-K, an evaluation was performed by the Company's management, including the CEO and CFO, of the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2005.

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

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

At December 31, 2005, the Company completed a detailed evaluation of its internal control over financial reporting, including the assessment, documentation and testing of its controls as required by the Sarbanes-Oxley Act of 2002. No material weaknesses were identified. The Company's management summarized its assessment process and documented its conclusions in the "Report of Management," which appears on page 85 of the Annual Report to Shareholders for the Year Ended December 31, 2005. The Company's independent registered public accounting firm summarized its review of management's assessment of internal control over financial reporting in an attestation report appearing on page 87 of the Annual Report to Shareholders for the year ended December 31, 2005.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information as to the Company's directors and executive officers is incorporated by reference from the Company's 2006 Proxy Statement, including the determination by the Board of Directors, with respect to the "Audit Committee's financial expert," and the identity of each member of the Audit Committee of the Board of Directors. Additional information as to the Company's executive officers is shown under Part I as a separate item.

Item 11. Executive Compensation

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

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

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

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accountant Fees and Services

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

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)	1.	Financial Statements
		The following consolidated financial statements of The Ryland Group, Inc. and subsidiaries, which are included in the Annual Report to Shareholders for the Year Ended December 31, 2005, are incorporated by reference in Item 8:
		Consolidated Statements of Earnings — years ended December 31, 2005, 2004 and 2003
		Consolidated Balance Sheets — December 31, 2005 and 2004
		Consolidated Statements of Stockholders' Equity — years ended December 31, 2005, 2004 and 2003
		Consolidated Statements of Cash Flows — years ended December 31, 2005, 2004 and 2003
		Notes to Consolidated Financial Statements

		Page No.
2.	Financial Statement Schedule (Filed herewith)
	Schedule II — Valuation and Qualifying Accounts	21
	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:

Exhibits, continued

				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)
				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)

Exhibits, continued

				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. (Filed herewith)
				10.19		Office Lease, dated March 18, 1999, as amended, by and between Ryland Mortgage Company and IDS Life Insurance Company (Filed herewith)
				12.1		Computation of Ratio of Earnings to Fixed Charges (Filed herewith)
				13		Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2005 (Filed herewith)
				21		Subsidiaries of the Registrant (Filed herewith)
				23		Consent of Independent Registered Public Accounting Firm (Filed herewith)
				24		Power of Attorney (Filed herewith)
				31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
				31.2		Certification of Principal 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)

The Ryland Group, Inc. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
(amounts in thousands)

			Balance at Beginning of Period		Charged to Costs and Expenses		Deductions and Transfers			Balance at End of 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 valuation allowances for assets to be disposed of.

SIGNATURES

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

THE RYLAND GROUP, INC.

By:
/s/ R. Chad Dreier R. Chad Dreier, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)				February 21, 2006

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 R. Chad Dreier Chief Executive Officer				February 21, 2006
Principal Financial Officer:
/s/ Gordon A. Milne Gordon A. Milne Chief Financial Officer				February 21, 2006
Principal Accounting Officer:
/s/ David L. Fristoe David L. Fristoe Chief Accounting Officer				February 21, 2006

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 Timothy J. Geckle As Attorney-in-Fact				February 23, 2006

INDEX OF EXHIBITS

10.18		First Amendment to Office Building Lease, dated August 26, 2005, by and between The Ryland Group, Inc. and Kilroy Realty, L.P.
10.19		Office Lease, dated March 18, 1999, as amended, by and between Ryland Mortgage Company and IDS Life Insurance Company
12.1		Computation of Ratio of Earnings to Fixed Charges
13		Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2005
21		Subsidiaries of the Registrant
23		Consent of Independent Registered Public Accounting Firm
24		Power of Attorney
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

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DOCUMENTS INCORPORATED BY REFERENCE

PART I

Item 1. Business

PART II

Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

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

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

EX-10.18 2 a2167774zex-10_18.htm EXHIBIT 10.18
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Exhibit 10.18

FIRST AMENDMENT TO OFFICE BUILDING LEASE

This FIRST AMENDMENT TO OFFICE BUILDING LEASE (this "First Amendment") is made and entered into as of August 26, 2005, by and between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord"), and THE RYLAND GROUP, INC., a Maryland corporation ("Tenant").

R E C I T A L S :

A. Landlord and Tenant entered into that certain Office Lease dated as of December, 1999 (the "Lease"), whereby Landlord leased to Tenant and Tenant leased from Landlord a total of approximately 32,946 rentable (31,388 usable) square feet of space (the "Premises"), comprised of (i) approximately 7,622 rentable (6,686 usable) square feet of space commonly known as Suite 100, and (ii) approximately 25,324 rentable (24,702 usable) square feet of space commonly known as Suite 400, located on the first (1^st) and fourth (4^th) floors, respectively, of that certain office building located at 24025 Park Sorrento, Calabasas, California (the "Building"), which Building forms a part of that certain multi-building project commonly known as "Calabasas Park Centre" (the "Project").

B. Tenant desires to extend the term of the Lease, and in connection therewith, Landlord and Tenant desire to amend the Lease on the terms and conditions contained herein.

A G R E E M E N T :

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows.

1. Defined Terms. All capitalized terms when used herein shall have the same respective meanings as are given such terms in the Lease unless expressly provided otherwise in this First Amendment.

2. Extended Term. Landlord and Tenant acknowledge that Tenant's lease of the Premises is scheduled to expire on October 31, 2006, pursuant to the terms of the Lease. Notwithstanding any provision to the contrary set forth in the Lease, the term of Tenant's lease of the Premises is hereby extended for a period of ten (10) years commencing on November 1, 2006 (the "Extended Term Commencement Date"), and ending on October 31, 2016 (the "Extended Term Expiration Date"), unless sooner terminated as provided in the Lease, as hereby amended. The period of time commencing on the Extended Term Commencement Date and ending on the Extended Term Expiration Date shall be referred to herein as the "Extended Term."

3. Base Rent.

3.1 Monthly Base Rent. Prior to the Extended Term Commencement Date, Tenant shall continue to pay Monthly Base Rent for the Premises in accordance with the terms of the Lease. Notwithstanding the foregoing or any provision to the contrary set forth in the Lease, commencing on the Extended Term Commencement Date and continuing throughout the Extended Term, Tenant shall pay Monthly Base Rent for the Premises in accordance with the following schedule:

Period	Annual Base Rent		Monthly Base Rent			Monthly Base Rental Rate Per Rentable Square Foot
November 1, 2006 – October 31, 2007	$	1,126,753.20	$	93,896.10	*	$	2.85
November 1, 2007 – October 31, 2008	$	1,162,334.88	$	96,861.24		$	2.94
November 1, 2008 – October 31, 2009	$	1,197,916.56	$	99,826.38		$	3.03
November 1, 2009 – October 31, 2010	$	1,233,498.24	$	102,791.52		$	3.12
November 1, 2010 – October 31, 2011	$	1,269,079.92	$	105,756.66		$	3.21
November 1, 2011 – October 31, 2012	$	1,308,615.12	$	109,051.26		$	3.31
November 1, 2012 – October 31, 2013	$	1,348,150.32	$	112,345.86		$	3.41
November 1, 2013 – October 31, 2014	$	1,387,685,52	$	115,640.46		$	3.51
November 1, 2014 – October 31, 2015	$	1,431,174.24	$	119,264.52		$	3.62
November 1, 2015 – October 31, 2016	$	1,474,662.96	$	122,888.58		$	3.73

*: The installments of Monthly Base Rent payable by Tenant for the first three (3) months of the Extended Term (i.e., the period from November 1, 2006 through January 31, 2007) shall be subject to reduction in accordance with the terms set forth in Section 3.2 of this First Amendment.

3.2 Abatement of Monthly Base Rent. Notwithstanding any contrary provision set forth in Section 3.1, above, provided that Tenant is not then in default under the Lease (beyond all applicable notice and cure periods), as amended hereby, Tenant's Monthly Base Rent for that portion of the Premises consisting of Suite 100 only (i.e.,for 7,622 rentable square feet of space of the Premises only) shall be abated for the first three (3) months of the Extended Term, thereby reducing each installment of Monthly Base Rent payable by Tenant for the three (3) month period commencing on the November 1, 2006 (i.e., the Extended Term Commencement Date) and ending on January 31, 2007 to Seventy-Two Thousand One Hundred Seventy-Three and 40/100 Dollars ($72,173.40) (i.e., $2.85 per rentable square foot of Suite 400 only).

4. Operating Expenses. Prior to the Extended Term Commencement Date, Tenant shall continue to pay Tenant's Percentage of Operating Expenses for the Premises in accordance with the terms of the Lease. Notwithstanding any provision to the contrary set forth in the Lease or this First Amendment, commencing on the Extended Term Commencement Date and continuing throughout the Extended Term, Tenant shall continue to pay Tenant's Percentage of Operating Expenses in connection with the Premises in accordance with the terms of the Lease; provided, however, that for purposes of calculating Tenant's Operating Expense Allowance for the Extended Term (i.e., the period commencing on November 1, 2006 and expiring on October 31, 2016), the Base Year shall be the calendar year 2006. Notwithstanding the foregoing or any other contrary provision of the Lease, as amended hereby, however, Tenant shall not be obligated to pay Tenant's Percentage of Operating Expenses attributable to the first twelve (12) months of the Extended Term (i.e, the period from November 1, 2006 through October 31, 2007).

5. Improvements in the Premises. Landlord and Tenant acknowledge that Tenant has been occupying the Premises pursuant to the Lease, and therefore Tenant continues to accept the Premises in its currently existing, "as-is" condition. Except as specifically set forth in this First Amendment and the Tenant Work Letter attached hereto as Exhibit A (the "Tenant Work Letter"), Landlord shall not be obligated to provide or pay for any improvement work or services related to the Premises during the Extended Term. Except as specifically set forth in the Tenant Work Letter, Tenant hereby acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises or with respect to the suitability of any of the Premises for the conduct of Tenant's business. Any improvements, alterations, additions or changes to the Premises other than the "Tenant Improvements," as that term is defined in Section 2.1 of the Tenant Work Letter, shall be performed pursuant to the terms of Article 13 of the Lease.

6. Right of First Offer. Tenant's right of first offer set forth in Section 2 of the Addendum attached to the Lease shall remain in full force and effect during the Extended Term.

7. Option Term. Tenant shall have the right to further extend the term of the Lease for an additional five (5) year period, subject to and in accordance with the terms and conditions set forth in Sections 3(b) through 3(o) of the Lease.

8. Termination Right. Provided that the Original Tenant is not in default under the Lease, as amended, as of the date of Tenant's delivery of the "Termination Notice," as that term is defined below, the Original Tenant shall have a one-time right to terminate the Lease, as amended hereby, effective as of October 31, 2011 (the "Termination Date"), provided that (i) Landlord receives written notice (the "Termination Notice") from Tenant on or before October 31, 2010, stating that Tenant irrevocably exercises its right to terminate the Lease, as amended hereby, pursuant to the terms and conditions of this Section 8, and (ii) Tenant pays to Landlord, concurrently with its delivery of the Termination Notice, as an early termination fee, an amount equal to the sum of the (x) the Monthly Base Rent payable during the sixty-first (61^st) through the sixty-third (63^rd) months of the Extended Term, (y) the unamortized portion, as of the Termination Date, of all costs expended by Landlord in connection with the Tenant Improvements, the Tenant Improvement Allowance and any other allowances paid by Landlord in connection with any First Offer Space leased by Tenant, and (z) the unamortized portion, as of the Termination Date, of all leasing commissions paid by Landlord in connection with the Lease, as amended, including any First Offer Space, with the costs set forth in items (y) and (z) above being amortized at an annual interest rate of seven percent (7%) over the initial Extended Term. Provided that the Original Tenant terminates the Lease, as amended, pursuant to the terms of this Section 8, (A) the Lease, as amended, shall automatically terminate and be of no further force or effect, (B) Landlord and Tenant shall be relieved of their respective obligations under the Lease, as amended, as of the Termination Date, except those obligations set forth in the Lease, as amended, which specifically survive the expiration or earlier termination of the Lease, as amended including, without limitation, the payment by Tenant of all amounts owed by Tenant under the Lease, as amended, up to and including the

Termination Date, and (C) as of the date of Tenant's delivery of the Termination Notice, Tenant's right lease any first offer space pursuant to Section 6, above, shall be deemed null and void and no further force or effect. The rights contained in this Section 8 shall be personal to the Original Tenant and may only be exercised by the Original Tenant (and not any assignee, sublessee or other transferee of the Original Tenant's interest in the Lease, as amended).

9. Signage. Notwithstanding the terms and conditions set forth in the first sentence of Article 34 of the Lease (but subject to all other terms and conditions set forth therein), commencing as of the date of this First Amendment and continuing throughout the Extended Term, Tenant shall be entitled to (i) a maximum of two (2) eyebrow identification signs on the exterior of the Building, one (1) sign to be placed on the north facing side of the Building (in a location mutually and reasonably agreed upon by Landlord and Tenant) and the other sign to be placed on the south facing side of the Building (in a location mutually and reasonably agreed upon by Landlord and Tenant), and (ii) Tenant's existing identification signage located on the existing monument sign adjacent to the Building. Tenant's rights and obligations with respect to such signage shall be subject to all applicable terms and conditions of Article 34 of the Lease.

10. Parking Relocation. The parties hereby acknowledge that Landlord is contemplating construction of any additional phase of the Project, which construction may require relocation of certain parking areas utilized by Tenant in connection with its lease of the Premises. If Landlord proceeds with the construction of such additional phase of the Project and Landlord determines, in its sole discretion, that the relocation of such parking areas is necessary, Landlord agrees that it shall provide Tenant with not less than thirty (30) days prior written notice of the commencement of such construction at the Project and the relocation of such parking areas, which notice shall, among other items, identify the alternate parking areas provided by Landlord for Tenant's use. In no event shall any capital expenditures incurred by Landlord with respect to the relocation of the such parking areas be included in Operating Expenses, except as expressly permitted under the Lease.

11. Broker. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this First Amendment excepting only Travers Realty (the "Broker"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this First Amendment. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent occurring by, through, or under the indemnifying party other than the Broker. The terms of this Section 10 shall survive the expiration or earlier termination of the Lease, as amended hereby.

12. No Further Modification. Except as specifically set forth in this First Amendment, all of the terms and provisions of the Lease, as amended, shall remain unmodified and in full force and effect. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this First Amendment, the terms and conditions of this First Amendment shall prevail.

IN WITNESS WHEREOF, this First Amendment has been executed as of the day and year first above written.

	LANDLORD:
	KILROY REALTY, L.P., a Delaware limited partnership
	By:	Kilroy Realty Corporation, a Maryland corporation, its general partner
/s/ JOHN T. FUCCI John T. Fucci Sr. Vice President Asset Management		By: /s/ JEFFREY C. HAWKEN Name: Jeffrey C. Hawken Title: Executive Vice President Chief Operating Officer
	TENANT:
	THE RYLAND GROUP, a Maryland corporation
	By: /s/ ROBERT J. CUNNION, III Name: Robert J. Cunnion, III Title: SVP
	By: /s/ CATHY S. LOWE Name: Cathy S. Lowe Title: SVP, Treasurer

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Exhibit 10.18

FIRST AMENDMENT TO OFFICE BUILDING LEASE
EX-10.19 3 a2167774zex-10_19.htm EXHIBIT 10.19
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Exhibit 10.19

TABLE OF CONTENTS

		PAGE
ARTICLE 1.	BASIC LEASE INFORMATION	3
ARTICLE 2.	AGREEMENT	5
ARTICLE 3.	TERM, DELIVERY & ACCEPTANCE OF PREMISES	5
ARTICLE 4.	MONTHLY RENT, RENTAL ADJUSTMENT & CONVERSION	6
ARTICLE 5.	OPERATING EXPENSES	7
ARTICLE 6.	INSURANCE	9
ARTICLE 7.	USE	10
ARTICLE 8.	REQUIREMENTS OF LAW; FIRE INSURANCE	10
ARTICLE 9.	ASSIGNMENTS AND SUBLETTING	12
ARTICLE 10.	RULES AND REGULATIONS	15
ARTICLE 11.	COMMON AREAS	15
ARTICLE 12.	LANDLORD'S SERVICES	16
ARTICLE 13.	TENANT'S CARE OF THE PREMISES	17
ARTICLE 14.	ELECTRICAL SERVICES	17
ARTICLE 15.	ALTERATIONS	17
ARTICLE 16.	MECHANICS' LIEN	18
ARTICLE 17.	END OF TERM	19
ARTICLE 18.	EMINENT DOMAIN	19
ARTICLE 19.	DAMAGE AND DESTRUCTION	19
ARTICLE 20.	SUBORDINATION	20
ARTICLE 21.	ENTRY BY LANDLORD	21
ARTICLE 22.	INDEMNIFICATION, WAIVER AND RELEASE	22
ARTICLE 23.	SECURITY DEPOSIT	22
ARTICLE 24.	QUIET ENJOYMENT	22
ARTICLE 25.	EFFECT OF SALE	22
ARTICLE 26.	DEFAULT	23
ARTICLE 27.	PARKING	25
ARTICLE 28.	MISCELLANEOUS	26

OFFICE LEASE

THIS OFFICE LEASE (the "Lease") is entered into by Landlord and Tenant as described in the following Basic Lease Information as of the Date which is set forth for reference only in the following Basic Lease Information.

Landlord and Tenant agree:

ARTICLE 1. BASIC LEASE INFORMATION

THE FOLLOWING BASIC LEASE INFORMATION IS A PART OF THIS LEASE, BUT DOES NOT CONSTITUTE THE ENTIRE LEASE. TENANT ACKNOWLEDGES THAT IT HAS READ ALL OF THE PROVISIONS CONTAINED IN THE ENTIRE LEASE AND ALL EXHIBITS WHICH ARE A PART THEREOF AND AGREES THAT THIS LEASE, INCLUDING THE BASIC LEASE INFORMATION AND ALL EXHIBITS, REFLECTS THE ENTIRE UNDERSTANDING AND REASONABLE EXPECTATIONS OF LANDLORD AND TENANT REGARDING THE PREMISES. TENANT ALSO ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO REVIEW THIS LEASE PRIOR TO EXECUTION WITH LEGAL COUNSEL AND SUCH OTHER ADVISORS AS TENANT DEEMS APPROPRIATE.

In addition to the terms which are defined elsewhere in this Lease, the following defined terms are used in this Lease:

(a)	Date:	March 18, 1999
(b)	Landlord:	IDS Life Insurance Company, a Minnesota Corporation c/o Wessex Service Company, 2828 North Central Avenue, Suite #770 Phoenix, Arizona 85004
(c)	Tenant:	Ryland Mortgage Company, an Ohio Corporation
(d)	Building Address:	14555 North Hayden Road Suite 100 Scottsdale, Arizona 85260
(e)	Premises:	Suite #100
(f)	Parking Charge:	Free per covered reserved additional parking space per month, subject to the provisions specified in Article 27, below.
(g)	Parking Spaces:	Tenant shall have Fourteen (14) covered reserved parking spaces at no charge to Tenant for the entire lease term and including any option period which may be exercised, according to Article 27, below. Additionally, Tenant shall have 40 uncovered reserved parking space's marked "Ryland" in front of the suite at the North Entrance. Plus open parking for an additional 56 cars for a total of 110 parking spaces for tenant's use.
(h)	Term:	Five (5) years, beginning on the Commencement Date and expiring on the Expiration Date.
(i)	Commencement Date:	May 15, 1999, or as extended pursuant to Section 3.3, below.
(j)	Expiration Date:	May 31, 2004 or as extended pursuant to Section 3.3, below.
(k)	Monthly Base Rent:	5/15/99 - 5/31/99 = $11,462.50 per month ($17.50psf)* 6/1/99 - 5/31/01 = $22,925.00 per month ($17.50psf)* 6/1/01 - 5/31/04 = $23,580.00 per month ($18.00psf)* *plus additional charges as provided for in lease.

		(i) Deleted.
		(ii) The Monthly Rent is subject to adjustment pursuant to Article 5 below.
		(iii) Rent: The monthly rent and additional rent.

(l): Additional Rent: Increased expenses over Base Year: Actual 2000 Operating Expenses
(m): Additional Rent—Taxes: Any amounts which this Lease requires Tenant to pay in addition to Monthly Base Rent, including without limitation all state and local transaction privilege taxes imposed on Landlord or Tenant as a result of amounts payable hereunder.
(n): Rentable Area of the Premises: approximately 15,720 rentable square feet (rentable and usable are the same)
(o): Rentable Area of the Office Building: 152,006 square feet.
(p): Security Deposit: Waived.
(q): Broker: Jamie Drinkwater Realty & Mark Linsalata of Lee & Associates
(r): Prepaid (1st) Month's Rent: $0.00
(s): Office Building: Scottsdale Technology Center consisting of three (3) office buildings.

	(t)		Land:		The land on which the Office Building is located and which is more particularly described on Exhibit "B" to this Lease.
	(u)		Project:		The development consisting of the Land and all improvements built on the Land including without limitation the Building, parking lot, parking structure, if any, walkways, driveways, fences, and landscaping.

(v): Landlord's Address:

IDS Life Insurance Company,
a Minnesota Corporation
c/o Wessex Service Company
2828 North Central Avenue, Suite #770
Phoenix, Arizona 85004

and

(w): Tenant's Address:

Ryland Mortgage Company
Scottsdale Technology Center
14555 North Hayden Road
Suite # 100
Scottsdale, Arizona 85260

(x): Prime Rate: The rate of interest from time to time announced by Bank One, or any successor to it, as its prime rate. If Bank One or any successor to it ceases to announce its prime rate, the Prime Rate will be a comparable interest rate designated by Landlord which replaces the Prime Rate.

If any other provision of this Lease contradicts any definition of this Article, the other provision will prevail.

The following exhibits are attached to this Lease and are made parts of this Lease:

EXHIBIT "A"—The Premises
EXHIBIT "B"—Legal Description of the Land
EXHIBIT "C"—Work Letter
EXHIBIT "D"—Rules and Regulations

ARTICLE 2. AGREEMENT

Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, according to this Lease.

ARTICLE 3. TERM DELIVERY AND ACCEPTANCE OF PREMISES

3.1 General. The duration of this Lease will be the Term. The Term will commence on the Commencement Date and will expire on the Expiration Date.

3.2 Delivery of Possession. Landlord will construct or install in the Premises the improvements to be constructed or installed by Landlord according to the Work Letter attached to this Lease as Exhibit "C" (the "Work Letter"). Landlord will be deemed to have delivered possession of the Premises to Tenant ten (10) days after the date when Landlord has given Tenant notice that the improvements will be substantially completed within ten (10) days of the date of such notice, subject to only the completion of Landlord's "punch list" items which do not materially interfere with Tenant's use and enjoyment of the Premises.

3.3 Failure to Deliver Possession. If, for any reason, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date:

(a): This Lease will not be void or voidable:
(b): Landlord will not be liable to Tenant for any resultant loss or damage; and
(c): If delivery of possession of the Premises to Tenant on the Commencement Date is delayed by Landlord, (i) Rent will be waived for the period between the original Commencement Date and the date on which Landlord delivers possession of the Premises to Tenant, (ii) the original Commencement Date and Expiration Date will be extended automatically one day for each day of delay after the original Commencement Date and before delivery of possession, and (iii) Landlord and Tenant will execute a certificate of the new Commencement Date and Expiration Date promptly after delivery of possession.
(d): not withstanding the foregoing, should Landlord be unable to deliver possession of the Premises by May 15, 1999, Tenant may terminate this Lease without penalty.

3.4 Early Entry. If Tenant is permitted entry to the Premises prior to the Commencement Date for the purpose of installing fixtures or any other purpose permitted by Landlord, such early entry will be at Tenant's sole risk and subject to all the terms and provisions of this Lease as though the Commencement Date had occurred, except for the payment of Monthly Rent which will commence on the Commencement Date. Tenant, its agents or employees, will not interfere with or delay Landlord's completion of construction of the improvements. All rights of Tenant under this Section 3.4 will be subject to the requirements of all applicable building codes and zoning requirements so as not to interfere with Landlord's obtaining a certificate of occupancy for the Premises. Landlord has the right to impose such additional conditions on Tenant's early entry as Landlord, in its sole but reasonable discretion, deems appropriate, and will further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry.

3.5 Condition of the Premises. Prior to the Commencement Date, Tenant will conduct a walk-through inspection of the Premises with Landlord and prepare a punch-list of items needing additional work by Landlord. Other than the items specified in the punch-list, by taking possession of the Premises, Tenant

will be deemed to have accepted the Premises in their condition on the date of delivery of possession. The punch-list will not include any damage to the Premises caused by Tenant's move-in or early access, if permitted. Damage caused by Tenant will be repaired or corrected by Landlord, at Tenant's expense. Tenant acknowledges that neither Landlord nor its agents or employees have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its agents or employees agreed to undertake any alterations or construct any Tenant improvements to the Premises except as expressly provided in this Lease and the Work Letter. If Tenant fails to submit a punch-list to Landlord prior to the Commencement Date, it will be deemed that there are no items needing additional work or repair. Landlord's contractor will complete all reasonable punch-list items within thirty (30) days after the walk-through.

3.6 Adjustments Upon Completion. As soon as practicable, upon completion of the improvements in accordance with the Work Letter, Landlord will notify Tenant of the Rentable Area of the Premises, the Rentable Area of the Building, Monthly Rent, and Tenant's Share, if such information was not previously determinable by Landlord. At Landlord's request, Tenant will promptly execute a certificate confirming such information.

ARTICLE 4. MONTHLY RENT, RENTAL ADJUSTMENT AND CONVERSION

4.1 Monthly Rent. Throughout the Term of this Lease, Tenant will pay Monthly Rent to Landlord as rent for the Premises. Monthly Rent will be paid in advance, on or before the first day of each calendar month of the Term. If the Term commences on a day other than the first day of a calendar month, the Monthly Rent will be appropriately prorated by Landlord for such month. If the Term commences on a day other than the first day of a calendar month, then prorated Monthly Rent for such month will be paid on or before the first day of the Term. Monthly Rent will be paid to Landlord, without notice or demand, and without deduction or offset, in lawful money of the United States of America at Landlord's Address, or to such other person or at any other place as Landlord may from time to time designate in writing.

4.2 Rental Adjustment: Commencing with the second lease year and each lease year thereafter, and continuing throughout the term or any extension thereof, the monthly guaranteed rental shall be adjusted upward in accordance with the formula set forth below in applying the formula, the following definitions shall prevail.

(a): "Bureau" means the Federal Bureau of Labor Statistics or any successor agency that shall issue the indices or any data referred to in subparagraph "e".
(b): "Average Price Index" means the Consumers' Price Index, "All Items, An Urban Consumers, U.S. City Average (1967 = 100)" issued from time to time by the Bureau.
(c): "Adjustment Index" is the Indices issued for the month prior to the adjustment date.
(d): "Base Index" is the Indices issued by the Bureau for the month prior to the first day of the calendar month in which the term of this Lease commences.
(e): The "issue" of a Price Index means the release to the public of the Price Index, and the date of issue shall be the date it is so released whether or not the issued Index is for the current month or period in which the release occurs or for a prior month or period.

If the Average Price Index for any such lease year is greater than the Base Index, then the monthly rental, beginning with the first day of such lease year, shall be increased in the same proportion that the increase in the Average Price Index bears to the Base Index. If an increase shall become effective by application of the rule stated in the preceding sentence and the Average Price Index for any subsequent lease year decreases, then the monthly rental beginning with such subsequent lease year shall not be decreased but shall remain equal to the highest increased monthly rental applicable to any such prior lease year.

4.3 CPI Conversion: If the base period presently employed in calculating and determining the CPI should hereafter be changed and a new base period adopted by the Bureau of Labor Statistics of the United States Department of Labor, the base index figure as set forth herein shall be converted so as to conform with the new index figure and the new index figure as converted shall be used. In the event that the Bureau of Labor Statistics discontinues the issuance of the CPI, then, in that event, Tenant and Landlord agree to use any other nationally recognized cost of living index issued by the United States Department of Labor or any other branch or department of the United States Department of Labor or any other branch of department of the Federal government and the index so used shall be converted in accordance with good accounting practices as a substitute basis for determining such adjustments to the minimum annual rent.

ARTICLE 5. OPERATING EXPENSES

5.1 General: This Lease shall be deemed a full service lease and Tenant shall do all acts and make all payments prorata connected with or arising out of any increase of operating expenses for Scottsdale Technology Center over Tenant's expense base, in addition to Tenant's base rent. This includes, without limitation, all taxes and assessments, and any increases in all taxes and assessments, whether now or hereafter existing, levied or imposed on Landlord or Tenant, and whether foreseen or unforeseen. In addition to Monthly Rent, Tenant will pay Tenant's Monthly Share of the Increased Current Operating Expenses of Scottsdale Technology Center. Controllable Operating Expense increases shall be capped at 5% per annum. Controllable expenses are all expenses except for; property taxes, property insurance, utility costs (water & electric) and governmental assessments.

As used in this Lease, the term "Operating Expenses" includes:

(a): all reasonable costs of management, operation and maintenance of the Project, including without limitation, real and personal property taxes and assessments (and any tax levied in whole or in part in lieu of or in addition to real property taxes), wages, salaries and compensation of employees, consulting, accounting, legal and janitorial, maintenance, guard and other services, management fees not to exceed five (5%) percent of the net revenue of the Project (charged by any entity managing the Project other than Landlord's employees unless Landlord is self managing the property), reasonable reserves for Operating Expenses, that part of office rent or rental value of space in the Project used by Landlord to manage, operate and maintain the Project or furnished by Landlord to enhance the management, operation or maintenance of the Project, power, water, waste disposal and other utilities, materials and supplies, maintenance and repairs, insurance obtained with respect to the Project, depreciation on personal property and equipment (which is or should be capitalized on the books of Landlord), and any other costs, charges, and expenses which under generally accepted accounting principles, would be regarded as management, maintenance and operating expenses; and
(b): the cost (amortized over such period as Landlord will reasonably determine) together with interest at the greater of (i) the Prime Rate prevailing plus two percent (2%) or (ii) Landlord's borrowing rate for such capital improvements plus two percent (2%), on the unamortized balance of any capital improvements which are made to the Project by Landlord (A) for the purposes of reducing Operating Expenses, or (B) after the Date and which were required under any governmental law or regulation that was not applicable to the Project at the time it was constructed and which are not a result of the nature of Tenant's use of the Premises.

The Operating Expenses will not include: (1) depreciation on the Project (other than depreciation on personal property, equipment, window coverings on exterior windows provided by Landlord and carpeting in public corridors and common areas); (2) costs of improvements made for tenants of the

Project; (3) finders fees and real estate brokers' commission; (4) mortgage principal or interest; and (5) capital items other than those referred to in clause (b), above.

Tenant acknowledges that Landlord has not made any representation or given Tenant any assurances that the Operating Expenses will equal or approximate any actual amount per square foot of Rentable Area of the Premises, for any calendar year during the Term.

5.2 Estimated Payments: In addition to Monthly Rent, Tenant will pay to Landlord on the first day of each month during the Term one-twelfth (¹/12) of Landlord's estimate of the Additional Rent payable by Tenant pursuant to Section 5.1, above, during the subject calendar year or partial calendar year (the "Additional Rent"). The Additional Rent are subject to revision according to the further provisions of this Section 5.2 and Section 5.3, below. During December of each calendar year, or as soon after December as practicable, Landlord will give Tenant written notice of Additional Rent for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year, Tenant will pay to Landlord one-twelfth (¹/12) of the Additional Rent; however, if such notice is not given in December, Tenant will continue to pay on the basis of the prior year's Additional Rent until the month after such notice is given. In the month Tenant first pays Landlord's new Additional Rent, Tenant will pay to Landlord the difference between the new Additional Rent estimate and the amount payable to Landlord for the prior year's Additional Rent, for each month which has elapsed since December. If, at any time or times it reasonably appears to Landlord that the amount payable under Section 5.1 above, for the current calendar year will vary from the Additional Rent, Landlord may, by written notice to Tenant, revise the Estimate Operating Expenses for such year, and subsequent payments by Tenant for such year will be based upon Landlord's reasonably revised estimate.

5.3 Annual Settlement. Within ninety (90) days after the end of each calendar year or as soon after such ninety (90) day period as practicable, Landlord will deliver to Tenant a statement of amounts payable under Section 5.1, above, for such calendar year prepared and certified by Landlord. Such certified statement will be final and binding upon Landlord within thirty (30) days after it is given to Tenant. If such statement shows an amount owing by Tenant that is less than the estimated payments previously made by Tenant for such calendar year, the excess will be held by Landlord and credited against the next payment of Rent; however, if the Term has ended and Tenant was not in default at its end, Landlord will refund the excess payment previously made by Tenant for such calendar year, if such statement shows a balance due from Tenant, Tenant will pay the deficiency to Landlord within thirty (30) days after the delivery of such statement. Tenant may review Landlord's records of the Operating Expenses, at Tenant's sole cost and expense, at the place Landlord normally maintains such records during Landlord's normal business hours.

5.4 Final Proration. If this Lease ends on a day other than the last day of a calendar year, the amount of increase (if any) in the Operating Expenses payable by Tenant applicable to the calendar year in which this Lease ends will be calculated on the basis of the number of days of the Term falling within such calendar year and Tenant's obligation to pay the amount so determined will survive the end of this Lease.

5.5 Other Taxes. Tenant will reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of Landlord and Tenant:

(a): upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is in Tenant or Landlord;
(b): upon or measured by Rent, including without limitation, any gross income tax or excise tax levied by the Federal government or any other governmental body with respect to the receipt of Rent;

(c): upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Premises; and
(d): upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises.

If it is not lawful for Tenant to reimburse Landlord, the Rent payable to Landlord under this Lease will be revised to yield to Landlord the same net rental after the imposition of any such tax upon Landlord as would have been payable to Landlord prior to the imposition of any such tax.

Tenant will pay promptly when due all personal property taxes on Tenant's personal property in the Premises and any other taxes payable by Tenant, the non-payment of which might give rise to a lien on the Premises or Tenant's interest in the Premises.

5.6 Rent Payable. Amounts payable by Tenant as provided herein, will be payable as Rent without deduction or offset. If Tenant fails to pay any amounts due, Landlord will have all the rights and remedies available to it on account of Tenant's failure to pay Rent.

ARTICLE 6. INSURANCE

6.1 Landlord's Insurance. At all times during the Term, Landlord will carry and maintain:

(a): fire and extended coverage insurance covering the Project, parking structure (if any), the Building's equipment and common area furnishings, and leasehold improvements in the Premises to the extent of the Tenant Finish Allowance (as that term is defined in the Work Letter);
(b): public liability and property damage insurance; and
(c): such other insurance as Landlord determines from time to time.

The insurance coverages and amounts in this Section 6.1 will be determined by Landlord.

6.2 Tenant's Insurance. At all times during the Term, Tenant will carry and maintain, at Tenant's expense, the following insurance, in the amounts specified below or such other amounts as Landlord may from time to time reasonably request, with insurance companies and on forms satisfactory to Landlord:

(a): public liability and property damage liability insurance, with a combined single occurrence limit of not less than $3,000,000.00. All such insurance will specifically include without limitation, contractual liability coverage for the performance by Tenant of the indemnity agreements set forth in Article 21 of this Lease, below;
(b): insurance covering all of Tenant's equipment, trade fixtures, appliances, furniture, furnishings and personal property from time to time in, on or upon the Premises, and any leasehold improvements to the Premises in excess of the Tenant Finish Allowance, in an amount not less than the full replacement cost without deduction for depreciation from time to time during the term of this Lease, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended peril (all risk), boiler, flood, glass breakage and sprinkler leakage. All policy proceeds will be used for the repair or replacement of the property damaged or destroyed, however, if this Lease ceased under the provisions of Article 18 below, Tenant will be entitled to any proceeds resulting from damage to Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and personal property, and Landlord will be entitled to all other proceeds; and

(c): workmen's compensation insurance insuring against and satisfying Tenant's obligations and liabilities under the workmen's compensation law of the state in which the Premises are located.

6.3 Forms of the Policies. All policies of insurance which Tenant is obligated to maintain according to this Lease (other than any policy of workmen's compensation insurance) will name Landlord and such other persons or firms as Landlord specifies from time to time as additional insured. Original or copies of original policies (together with copies of the endorsements naming Landlord, and any others specified by Landlord as additional insured) and evidence of the payment of all premiums of such policies will be delivered to Landlord prior to Tenant's occupancy of the Premises and from time to time at least thirty (30) days prior to the expiration of the term of each such policy. All public liability and property damage liability insurance policies maintained by Tenant will contain a provision that Landlord and any other additional insured will be entitled to recover under such policies for any loss sustained by them, their agents and employees as a result of the acts or omissions of Tenant. All such policies maintained by Tenant will provide that they may not be terminated or amended except after thirty (30) days' prior written notice to Landlord. All public liability, property damage, liability and casualty policies maintained by Tenant will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry. Insurance required to be maintained by Tenant by this Article 6 may be subject to a deductible of up to $1,000.00.

6.4 Waiver of Subrogation. Except as otherwise provided herein, Landlord and Tenant each waive any and all rights to recover against the other or against any other Tenant or occupant of the Project, or against the officers, directors, shareholders, partners, joint ventures, employees, agents, customers, invitees or business visitors of such other party or of such other Tenant or occupancy of the Project, for any loss or damage to such waiving party arising from any cause covered by any insurance required by such party pursuant to this Article 6 or any other insurance actually carried by such party to the extent of the limits of such policy. Landlord and Tenant, from time to time, will cause their respective insurers to issue appropriate waiver of subrogation rights endorsements to all policies of insurance carried in connection with the Project or the Premises claiming by, under or through Tenant to execute and deliver to Landlord such a waiver of claims and to obtain such waiver of subrogation rights endorsements.

6.5 Adequacy of Coverage. Landlord, its agents and employees, make no representation that the limits of liability specified to be carried by Tenant pursuant to this Article 6 are adequate to protect Tenant. If Tenant believes that any of such insurance coverage is inadequate, Tenant will obtain such additional insurance coverage as Tenant deems adequate, at Tenant's sole expense.

ARTICLE 7. USE

The premises will be used only for general office purposes. Tenant will not: do or permit to be done in or about the premises, or bring to, keep or permit to be brought or kept in the Premises, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation which is now in force or which may be enacted or promulgated after the Date, do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants of the Building or Project, or injure or annoy them; use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose; cause, maintain or permit any nuisance in, on or about the Premises or commit or allow to be committed any waste in, on or about the Premises; construct, excavate, trench, dig, or improve any portion of the common areas of the Project.

ARTICLE 8. REQUIREMENTS OF LAW: FIRE INSURANCE AND HAZARDOUS MATERIALS

8.1 General. At its sole cost and expense Tenant will promptly comply with all laws, statues, ordinances and governmental rules, regulations or requirements now in force or in force after the Date, with the requirements of any board of free underwriters or other similar body constituted now or after

the Date, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises, insofar as they relate to the condition, use or occupancy of the Premises, excluding requirements of structural changes or changes outside the Premises unless related to (a) Tenant's acts, (b) Tenant's business, (c) Tenant's use of the Premises, or (d) improvements made by or for Tenant.

8.2 Hazardous Materials. Tenant will not generate, manufacture, receive, transport from, store, use or dispose of any Hazardous Material in, on or about the Premises or the Project. For the purpose of this Section 8.2, Hazardous Materials shall include but not be limited to substances defined as "hazardous substances," "hazardous materials," or "toxic substances," in the Comprehensive Environmental Response, Compensation and Liability Act of Materials Transportation Act, 49 U.S.C. Section 1901, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; and those substances defined as "hazardous wastes" in the Arizona Revised Statues Section 36-3501(16). Tenant will be solely responsible for and will defend, indemnify and hold Landlord, its agents and employees harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with Tenant's breach of its obligations under this Section 8.2. Tenant will be solely responsible for and will defend, indemnify and hold Landlord, its agents and employees harmless from and against any and all claims, costs, liabilities and damage, including attorneys' fees and costs, arising out of or in connection with the removal, cleanup, remediation and restoration work and materials necessary to return the Premises and any other property of whatever nature located on the Project to their condition existing prior to the appearance of Tenant's Hazardous Materials on the premises. Tenant will pay to Landlord upon demand an amount equal to any permanent damage to the real property or buildings. Tenant is liable for all damages under the Law.

(a): If Tenant shall become aware of or receive notice or other communication concerning any actual, alleged, suspected or threatened violation of any applicable present and future statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, and similar items, of all governmental agencies, departments, commissions, boards, bureaus or instrumentalities of the United States, states and political subdivisions thereof relating to the protection of human health or the environment (collectively, "Environmental Laws"); or if Tenant should become aware of or receive notice or other communication concerning any factual, alleged, suspected communication concerning any factual, alleged, suspected or threatened liability for a violation of the Environmental Laws in connection with the Property or the past or present activities of any person thereon, including but not limited to notice or other communication concerning any actual or threatened investigation, inquiry, lawsuit, claim, citation, directive, summons, proceedings, complaint, notice, order, writ or injunction, then Tenant shall deliver to Landlord, within ten (10) days of the receipt of such notice or communication by Tenant, a written description of said violation, liability, or actual or threatened event or condition, together with copies of any documents evidencing same. Receipt of such notice shall not be deemed to create any obligation on the part of Landlord to defend or otherwise respond to any such notification.
(b): Tenant shall not initiate communications with or provide information to any party other than Landlord regarding any hazardous materials without Landlord's prior written approval, unless required by law or imminent emergency posing a substantial endangerment to human health, in which event Tenant shall provide notice of such communication or disclosure to Landlord as soon as reasonably possible.

8.3 Certain Insurance Risks. Tenant will not do or permit to be done any act or things upon the Premises or the Project which would (a) jeopardize or be in conflict with fire insurance policies covering the Project and fixtures and property in the Project, or (b) increase the rate of fire insurance applicable to the Project to an amount higher than it otherwise would be for general office use of the

Project, or (c) subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on upon the Premises.

ARTICLE 9. ASSIGNMENTS AND SUBLETTING

9.1 General. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, covenants that it will not assign, mortgage or encumber this Lease, nor sublease, nor permit the Premises or any part of the Premises to be used or occupied by others, without the prior written consent of Landlord in each instance. Any assignment or sublease in violation of this Article 9 will be void. If this Lease is assigned, or if the Premises or any part of the Premises are subleased or occupied by anyone other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the new amount collected to Rent. No assignment, sublease, occupancy or collection will be deemed a waiver of the provisions of this Section 9.1, and acceptance by Landlord of the assignee, subtenant or occupant as Tenant, shall not release Tenant from the further performance by Tenant of covenants on the part of Tenant contained in this Lease. The consent by Landlord to an assignment or sublease will not be construed to relieve Tenant from obtaining Landlord's prior written consent in each instance.

9.2 Landlord's Right to Recapture. If Tenant desires to assign all or part of this Lease or to sublease all or any portion of the Premises, Tenant will first submit to Landlord the documents described in Section 9.3, below, and will offer in writing, (a) with respect to a prospective assignment, to assign this Lease to Landlord without any payment of money or other consideration for such assignment, or (b) with respect to a prospective sublease, to sublease to Landlord the portion of the Premises involved ("Leaseback Area") for the term specified by Tenant in its offer and at the lower of (i) Tenant's proposed sub-rental or (i) the rate of Monthly Rent and Additional Rent then in effect according to this Lease, and on the same terms, covenants and conditions contained under Lease and applicable to the Leaseback Area. The offer will specify the date when the Leaseback Area will be made available to Landlord. That date will not be earlier than thirty (30) days nor later than one hundred eighty (180) days after the date of Landlord's acceptance of the offer. If an offer of sublease is made, it will also specify the term of the proposed sublease except that if the proposed sublease will result in all or substantially all of the Premises being subleased, then Landlord will have the option to extend the term of the proposed sublease for the balance of the Term of this Lease less one (1) day.

Landlord will have thirty (30) days from the receipt of the offer either to accept or reject it. If Landlord accepts the offer, Tenant will then execute and deliver to Landlord, or to anyone designated or named by Landlord, an assignment or sublease, as the case may be, in either case in a form reasonably satisfactory to Landlord's counsel.

If such a sublease is made to Landlord or its designee, such sublease will expressly:

(a): permit Landlord to make further subleases of all or any part of the Leaseback Area and to make and authorize any and all changes, alterations, installations and improvements in such space as Landlord deems necessary for such subletting, at Landlord's expense;
(b): provide that Tenant will permit reasonably appropriate means of ingress to and egress from the Leaseback Area at all times;
(c): negate any intention that the estate created under such sublease be merged with any other estate held by Landlord or Tenant;
(d): provide that Landlord will accept the Leaseback Area "as is" except that Landlord, at Tenant's expense, will perform all such work and make all such alterations as may be required physically to separate the Leaseback Area from the remainder of the Premises and to permit lawful occupancy; and
(e): provide that at the expiration of the term of such sublease, Tenant will accept the Leaseback Area as may be reasonably necessary to preserve the Leaseback Area in good order and condition, ordinary wear and tear excepted.

Performance by Landlord, or its designee, under a sublease of the Leaseback Area will be deemed performance by Tenant of any similar obligation under this Lease. Tenant will not be liable for any default under this Lease or deemed to be in default under this Lease if such default is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease.

9.3 Submission of Information. If Tenant requests Landlord's consent to a specific assignment or subletting, Tenant will submit in writing to Landlord (a) the name and address of the proposed assignee or subtenant, (b) a counterpart of the proposed agreement of assignment or sublease, (c) reasonably satisfactory information as to the nature and character of the business of the proposed assignee or subtenant, and as to the nature of its proposed use of the space, and (d) banking, financial or other credit information reasonably sufficient to enable Landlord to determine the financial responsibility and character of the proposed assignee or subtenant.

9.4 Consent Not to be Unreasonably Withheld. If Landlord does not accept Tenant's offer within thirty (30) days after receipt of it, as provided in Section 9.2, above, then Landlord will not unreasonably withhold or delay its consent to Tenant's request for consent to such specific assignment or sublease if the conditions in Section 9.3, above, and all of the following conditions are satisfied:

(a): The proposed transferee has acceptable net worth to Landlord and satisfied Landlord's then-current credit standards for tenants of the Building, and in Landlord's opinion has the financial strength and stability to perform all obligations under this Lease to be performed by Tenant as and when they fall due.
(b): The proposed transferee will make use of the Premises which in Landlord's reasonable opinion (i) is lawful, (ii) is consistent with the permitted use of the Premises under this Lease, (iii) is consistent with the general character of business carried on by tenants of a first class office building, (iv) does not conflict with any exclusive rights or covenants not to compete in favor of any other Tenant or proposed Tenant in the Project, (v) will not increase the likelihood of damage or destruction, (vi) will not increase the rate of wear and tear to the Premises, Building common facilities, or Project, (vii) will not likely cause an increase in insurance premiums for insurance policies applicable to the Project, and (viii) will not require Tenant improvements incompatible with then existing Building or Project systems and components.
(c): Tenant pays Landlord's reasonable attorneys' fees and costs incurred in connection with negotiation, review and processing of the transfer, plus a processing fee not to exceed $500.00 for each such request.
(d): Landlord is paid any increase in the Security Deposit required by Landlord and permitted by law.
(e): The proposed transferee has demonstrated to the reasonable satisfaction of Landlord that it has good character, moral stability and good reputation in the general business community.
(f): At the time of the proposed transfer, there is no Event of Default under this Lease.
(g): The proposed transferee is not a tax-exempt entity as defined in the Internal Revenue Code of 1986, as amended.
(h): At least 75% of the Rentable Area of the Building is leased to paying tenants.
(i): The transfer will not otherwise have or cause a material adverse impact on Landlord's interests, the Building, the Premises or the Project.
(j): If Landlord consents to the proposed assignment or sublease, Tenant complies with the further provisions of Sections 9.5 and 9.6, below.

Tenant shall have the burden of demonstrating that each of the foregoing conditions is satisfied.

9.5 Form of Assignment or Sublease. If Landlord consents to a proposed assignment or sublease, Landlord will give Tenant's form of assignment or sublease, as the case may be, which is acceptable to Landlord and will provide, among other things, that in the event of any sublease, Tenant will remain liable under this Lease. Any sublease will provide, among other things, that the subtenant will comply with all applicable terms and conditions of this Lease. Any assignment will contain, among other things, an assumption by the assignee of all of the terms, covenants and conditions which this Lease requires Tenant to perform. Landlord's consent will not be effective unless and until Tenant (a) delivers to Landlord an original duly executed assignment or sublease, as the case may be, in the form approved by Landlord in its sole discretion, and (b) pays Landlord the amounts required under Section 9.4(c), above.

9.6 Payments to Landlord. If Landlord consents to a proposed assignment or sublease, then Landlord will have the right to require Tenant to pay to Landlord a sum equal to: (a) any rent or other consideration paid to Tenant by any proposed transferee which (after deducting the costs of Tenant, if any, in effecting the assignment or sublease, including reasonable alteration costs, commissions and legal fees) is in excess of the Rent allocable to the transferred space which is then being paid by Tenant to Landlord pursuant to this Lease; and (b) any other profit or gain (after deducting any necessary expenses incurred) realized by Tenant from any such sublease or assignment. All such sums payable will be payable to Landlord at the time the next payment of Monthly Rent is due.

9.7 Prohibited Transfers.

(a)
(b): The transfer of a majority of the issued and outstanding capital stock of any corporate Tenant or subtenant of this Lease or a majority of the total interest in any partnership Tenant or subtenant, however accomplished, and whether in a single transaction or in a series of related or unrelated transactions, will be deemed an assignment of this Lease or of such sublease requiring Landlord's consent in each instance. For purposes of this Article 9, the transfer of outstanding capital stock of any corporate Tenant will not include any sale of such stock by persons (other than those deemed "insiders" within the meaning of the Securities Exchange Act of 1934, as amended) effected through "over-the-counter-market" or through any recognized stock exchange.

9.8 Permitted Transfer. Subject to Sections 9.5, 9.6 and 9.10, Landlord consents to an assignment of this Lease, or sublease of all or part of the Premises, to a wholly-owned subsidiary of Tenant or affiliate of Tenant, or the parent of Tenant or to any corporation into or with which Tenant may be merged or consolidated.

9.9 Limitation on Remedies. Tenant will not be entitled to make, nor will Tenant make, any claim, and Tenant by this Section 9.9 waives any claim, for money damages (nor will Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord has unreasonably withheld or unreasonably delayed its consent or approval to a proposed assignment or subletting as provided for in this Section. Tenant's sole remedy will be an action or proceeding to enforce any such provision, or for specific performance, injunction, or declaratory judgment.

9.10 Consent of Mortgage. Any transfer for which consent is required of any party having a mortgage, deed of trust or other encumbrance on, or of any lessor under any ground or underlying lease of, all or any part of the Project shall not be effective unless and until such consent is given (and which will not be unreasonably withheld).

ARTICLE 10. RULES AND REGULATIONS

Tenant and its employees, agents, licensees and visitors will at all times observe faithfully, and comply strictly with, the rules and regulations set forth on Exhibit "D". Landlord may from time to time reasonably amend, delete or modify existing rules and regulations, or adopt reasonable new rules and regulations for the use, safety, cleanliness and care of the Premises, the Building, and the Project, and the comfort, quiet enjoyment and convenience of occupants of the Project. Modifications or additions to the rules and regulations will be effective upon notice to Tenant from Landlord. In the event of any breach of any rules or regulations or any amendments or additions to such rules and regulations, Landlord will have all remedies which this Lease provides for default by Tenant, and will, in addition, have any remedies available at law or in equity, including the right to enjoin any breach of such rules and regulations. Landlord will not be liable to Tenant for violations such rules and regulations by any other Tenant, its employees, agents, visitors or licensees or any other person unless caused by intentional negligence or misconduct of Landlord or any one acting through Landlord. In the event of any conflict between the provisions of this Lease and the rules and regulations, the provisions of this Lease will govern.

ARTICLE 11. COMMON AREAS

As used in this Lease, the term "common areas" means, without limitation, the hallways, entryways, parking areas, driveways, walkways, terraces, loading areas, trash facilities and all other areas and facilities in the Project which are provided and designated from time to time by Landlord for the general nonexclusive use and convenience of Tenant with Landlord and other tenants of the Project and their respective employees, invitees, licensees or other visitors. Landlord grants Tenant, its employees, invitees, licensees and other visitors a nonexclusive license for the Term to use the common areas in common with others entitled to use the common areas, subject to the terms and conditions of this Lease. Without advance notice to Tenant (except with respect to matters covered by Subsection (a) below) and without any liability to Tenant in any respect, Landlord will have the right to:

(a): establish and enforce reasonable rules and regulations concerning the maintenance, management, use and operation of the common areas;
(b): close off any of the common areas to whatever extent required in the opinion of Landlord and its counsel to prevent a dedication of any of the common areas or the accrual of any rights by any person or the public to the common areas, provided such closure does not deprive Tenant of the substantial benefit and enjoyment of the Premises;
(c): temporarily close any of the common areas for maintenance, alteration or improvement purposes;
(d): select, appoint or contract with any person for the purpose of operating and maintaining the common areas, on such terms and conditions as Landlord deems reasonable;
(e): change the size, use, shape or nature of any such common areas, provided such change does not deprive Tenant of the substantial benefit and enjoyment of the Premises. So long as Tenant is not thus deprived of the substantial use and benefit of the Premises, Landlord will also have the right at any time to change the arrangement or location of, or both, or to regulate or eliminate the use of any concourse, parking spaces, toilets or other public conveniences in the Project, without incurring any liability to Tenant or entitling Tenant to any abatement of rent and such action will not constitute an actual or constructive eviction of Tenant; and
(f): erect one or more additional building on the common areas, expand the existing Building or other buildings to cover a portion of the common areas, convert common areas to a portion of the Building (excluding the Premises) or other buildings to common areas. Upon erection

of any additional buildings or change in common areas, the portion of the Project upon which buildings or structures have been erected will no longer be deemed to be a part of the common areas. In the event of any such changes in the size or use of the Building or common areas of the Building or Project, Landlord may make an appropriate adjustment in the Rentable Area of the Building or the Building's pro rata share of exterior common areas of the Project, as appropriate, and a corresponding adjustment to Tenant's Share of the Operating Expenses payable pursuant to Article 5 of this Lease, above.

ARTICLE 12. LANDLORD'S SERVICES

12.1 Landlord's Repair and Maintenance. Landlord will maintain, repair and restore the common areas of the Project, including lobbies, corridors and restrooms, the windows in the Building, the mechanical, plumbing and electrical equipment serving the Building, and the structure of the Building in reasonably good order and condition.

12.2 Landlord's Services. Landlord will furnish the Premises with: (i) heat and air conditioning equipment in good condition with sufficient capacity required for the comfortable occupation of the Premises; (ii) lighting replacement (for building standard lights) during Business Hours; (iii) restroom supplies; (iv) window washing with reasonable frequency; and (v) daily cleaning service on weekdays, in the manner that such services are customarily furnished in comparable office buildings. Landlord may provide, but will not be obligated to provide, any such services on Holidays and weekends.

Landlord will not be in default under this Lease or be liable for any damages directly or indirectly resulting from, nor will the Rent be abated by reason of (1) the installation, use or interruption of use of any equipment in connection with the furnishing of any of such services, (2) failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control for Landlord or by the making of necessary repairs or improvements to the Premises, the Building, or the Project, (3) the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or other form of energy serving the Premises, the Building, or the Project. Landlord will use reasonable efforts to remedy diligently any interruption in the furnishing of such services. Notwithstanding the foregoing, Tenant will receive an abatement of rent should any interruption of services continue a period in excess of five (5) consecutive business days.

The term "Business Hours" means 6:00 a.m. to 7:00 p.m. on Monday through Friday, except Holidays (as that term is defined below), and 9:00 a.m. to 3:00 p.m. on Saturdays and Sundays, except Holidays. The term "Holidays" means New Year's Day; Martin Luther King, Jr. Day; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; Christmas Day and such other national holidays as may be established after the Date by the United States Government.

12.3 Tenant's Costs. Whenever equipment or lighting (other than building standard lights) is used in the Premises by Tenant and such equipment or lighting affects the temperature otherwise normally maintained by the design of the air conditioning system, Landlord will have the right, after notice to Tenant, to install supplementary air conditioning facilities in the Premises or otherwise modify the ventilating and air conditioning system serving the Premises, and the cost of such facilities and modifications will be borne by Tenant. Tenant will also pay as Additional Rent the cost of providing all cooling energy to the Premises in excess of that required for normal office use or during hours requested by Tenant when air conditioning is not otherwise furnished by Landlord. Tenant will bear the cost of replacement bulbs or tubes for all non-building standard light fixtures.

12.4 Limitation on Liability. Subject to section 12.2 above, Landlord will not be liable to Tenant or any other person, for direct or consequential damage, or otherwise, for any failure to supply any heat, air conditioning, cleaning, lighting, security, surges or interruptions of electricity, or other service Landlord has agreed to supply during any period when Landlord uses reasonable diligence to supply such services. Landlord reserves the right temporarily to discontinue such services, or any of them, at

such times as may be necessary by reason of accident, repairs, alterations or improvements, strikes, lockouts, riots, acts of God, governmental preemption in connection with a national or local emergency, any rule, order or regulation of any governmental agency, conditions of supply and demand which make any product unavailable. Landlord's compliance with any mandatory governmental energy conservation or environmental protection program, or any voluntary governmental energy conservation program at the request of or with consent or acquiescence of Tenant, or any other happening beyond the control of Landlord. Landlord will not be liable to Tenant or any other person or entity for direct or consequential damages resulting from the admission to or exclusion from the Building or Project of any person. In the event of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's sole opinion, Landlord will have the right to prevent access to the Building or Project during he continuance of the same by such means as Landlord, in its sole discretion, may deem appropriate, including, without limitation, locking doors and closing parking areas and other common areas. Subject to section 12.2 above, Landlord will not be liable for damages to person or property or for injury to, or interruption of, business for any discontinuance permitted under this Article 12, nor will such discontinuance in any way be construed as an eviction of Tenant or cause an abatement of Rent or operate to release Tenant from any of Tenant's obligations under this Lease.

ARTICLE 13. TENANT'S CARE OF THE PREMISES

Tenant will maintain the Premises (including Tenant's equipment, personal property and trade fixtures located in the Premises) in their condition at the time they were delivered to Tenant, reasonable wear and tear excluded. Tenant will immediately advise Landlord of any material damage to the Premises or the Project. All damage or injury to the Premises, or the Project, or the fixtures, appurtenances and equipment in the Premises or the Project which is caused by Tenant, its agents employees, or invitees, may be repaired, restored or replaced by Landlord, at the expense of Tenant and such expense (Plus ten percent (10%) of such expense for Landlord's overhead) will be collectible as Additional Rent and will be paid by Tenant within ten (10) days after delivery of a statement for such expense.

ARTICLE 14. ELECTRICAL SERVICES

Tenant acknowledges and agrees that this Lease is "Full Service" and that it shall be Landlord's responsibility to secure electrical services for the premises and to pay all costs associated therewith, including deposits, hook up charges and ongoing service charges. The electric costs are included in the operating costs of the property.

ARTICLE 15. ALTERATIONS

15.1 General. During the Term, Tenant will not make or allow to be made any material alterations, additions or improvements to or of the Premises or any part of the Premises, or attach any fixtures or equipment to the Premises, without first obtaining Landlord's written consent. All such alterations, additions and improvements consented to by Landlord, and capital improvements which are required to be made to the Project as a result of the nature of Tenant's use of the Premises, which consent shall not be un reasonably withheld:

(a): Will be performed by contractors and subject to conditions specified by Landlord (which may include requiring the posting of a mechanic's or material man's lien bond); and
(b): At Landlord's option, will be made by Landlord for Tenant's account, and Tenant will reimburse Landlord for their costs (including fifteen percent (15%) for Landlord's overhead) within ten (10) days after receipt of a statement of such cost. Subject to Tenant's rights in Article 17, below, all alterations, additions, fixtures and improvements, whether temporary or permanent in character, made in or upon the Premises either by Tenant or Landlord will immediately become Landlord's property, and at the end of the Term will remain on the Premises without compensation to Tenant.

15.2 Free-Standing Partitions. Tenant will have the right to install free-standing work station partitions, without Landlord's prior written consent, so long as no building or other governmental permit is required for their installation or relocation; however, if a permit is required Landlord will not unreasonably withhold its consent to such relocation or installation. The free-standing work station partitions for which Tenant pays will be part of Tenant's trade fixtures for all purposes under this Lease.

15.3 Other Charges. Tenant acknowledges that any alterations, additions and improvements to the Premises (including without limitation installation or relocation of partitions) may affect the heating, cooling, power, lighting and other systems in the Project and any increased cost attributable to such changes will be payable by Tenant to Landlord as Additional Rent.

15.4 Removal. By notice given to Tenant no less than thirty (30) days prior to the Expiration Date, Landlord may either:

(a): require that Tenant remove any or all alterations, additions, fixtures and improvements which are made in or upon the Premises pursuant to this Article 15. In that event, prior to the Expiration Date, Tenant will remove such alterations, additions, fixtures and improvements at Tenant's sole cost and will restore the Premises to the condition in which they were before such alterations, additions, fixtures, improvements and additions were made, reasonable wear and tear excepted; or

If Landlord does not so notify Tenant, Landlord may remove such alterations, fixtures, additions, and improvements after the end of the Term at Tenant's cost.

ARTICLE 16. MECHANICS' LIENS

Tenant will pay or cause to be paid all costs and charges for work (a) done by Tenant or caused to be done by Tenant, in or to the Premises, and (b) for all materials furnished for or in connection with such work. Tenant will indemnify Landlord against and hold Landlord, the Premises and the Project free, clear and harmless of and from all mechanic's liens and claims of liens, and all other liabilities, liens, claims and demands on account of such work by or on behalf of Tenant. If any such lien, at any time, is filed against the Premises, or any part of the Project, Tenant will cause such lien to be discharged of record within ten (10) days after the filing of such lien, except that if Tenant desires to contest such lien, it will furnish Landlord, within such ten (10) day period, security reasonably satisfactory to Landlord of at least 150% of the amount of the claim, plus estimated costs and interest. If a final judgment establishing the validity or existence of a lien for any amount is entered, Tenant will pay and satisfy the same at once. If Tenant fails to pay any charge for which a mechanics' lien has been filed, and has not given Landlord security as described above, Landlord may, at its option, pay such charge and related costs and interest, and the amount so paid, together with reasonable attorneys' fees incurred in connection with such lien, will be immediately due from Tenant to Landlord as Additional Rent. Nothing contained in this Lease will be deemed the consent or agreement of Landlord subject Landlord's interest in the Project to liability under any mechanics' or other lien law. If Tenant received notice that a lien has been or is about to be filed against the Premises or the Project or any action affecting title to the Project has been commenced on account of work done by or for or materials furnished to or for Tenant, it will immediately give Landlord written notice of such notice. At least fifteen (15) days prior to the commencement of any work (including but not limited to, any material maintenance, repairs, alterations, additions, improvements or installations) in or to the premises, by or for Tenant, Tenant will give Landlord written notice of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work. Landlord will have the right to post notices of non-responsibility or similar notices on the Premises in order to protect the Premises against any such liens.

ARTICLE 17. END OF TERM

At the end of this Lease, Tenant will promptly quit and surrender the Premises broom-clean, in good order and repair, ordinary wear and tear excepted. If Tenant is not then in default, Tenant may remove from the Premises any trade fixtures, equipment and movable furniture placed in the Premises by Tenant, whether or not such trade fixtures or equipment are fastened to the Building; Tenant will not remove any trade fixtures or equipment without Landlord's prior written consent if such fixtures or equipment are used in the operation of the Building, or if the removal of such fixture or equipment will result in impairing the structural strength of the Building. Whether or not Tenant is in default, Tenant will remove such alterations, additions, improvements, trade fixtures, equipment and furniture as Landlord has requested in accordance with Article 15. above. Tenant will fully repair any damage occasioned by the removal of any trade fixtures, equipment, furniture, alterations, additions and improvements. All trade fixtures, equipment, furniture inventory, effects, alterations, additions, and improvements on the Premises after the end of the Term will be deemed conclusively to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant or any other person and without obligation to account for them; and Tenant will pay Landlord for all expenses incurred in connection with the removal of such property, including, but not limited to, the cost of repairing any damage to the Building or Premises caused by the removal of such property. Tenant's obligation to observe and perform this covenant will survive the expiration or other termination of this Lease.

ARTICLE 18. EMINENT DOMAIN

If all the Premises are taken by exercise of the power of eminent domain (or conveyed by Landlord in lieu of such exercise) either party may terminate this Lease on a date (the "termination date") which is the earlier of the date upon which the condemning authority takes possession of the Premises or the date on which title to the Premises is vested in the condemning authority. If more than twenty-five percent (25%) of the Rentable Area of the Premises is so taken, or if the Tenant does not cancel this Lease according to the preceding sentence, the Monthly Rent will be abated in the proportion of the Rentable Area of the Premises so taken to the Rentable Area of the Premises immediately before such taking, and Tenant's Share will be appropriately recalculated. If all or substantially all of the Building or the Project is so taken, Landlord may cancel this Lease by written notice to Tenant given thirty (30) days after the termination date. In the event of any such taking, the entire award will be paid to Landlord and Tenant will have no right or claim to any part of such award; however, Tenant will have the right to assert a claim against the condemning authority in a separate action and so long as Landlord's award is not reduced by such claim: for (i) Tenant's moving expenses; (ii) leasehold improvements owned by Tenant; (iii) any other award established solely for the benefit of Tenant.

ARTICLE 19. DAMAGE AND DESTRUCTION

If the Premises or the Building are damaged by fire or other insured casualty, Landlord will give Tenant notice of the time which will be needed to repair such damage, as determined by Landlord in its sole discretion, and the election (if any) which Landlord has made according to this Article 19. Such notice will be given before the forty-fifth (45th) day (the "Notice Date") after the fire or other insured casualty. If more than 25% of the rentable area is damaged as to be unrentable, then Tenant may cancel Lease.

(a): If the Premises or the Building are damaged by fire or other insured casualty to an extent which may be repaired within ninety (90) days after the commencement of repair, as determined by Landlord, Landlord will begin to repair the damage within ninety (90) days after the notice date and will diligently pursue the completion of such repair. In such event, this Lease will continue in full force and effect except that Monthly Rent will be abated on a pro rata basis from the date of the fire or other insured casualty until the date of the

completion of such repairs (the "repair period") based on the Rentable Area of the portion of the Premises the use of which Tenant is deprived of during the repair period.

(b): If the Premises or the Building are damaged by fire or other insured casualty to an extent which may not be repaired within ninety (90) days after the commencement of repair, but may be repaired within one hundred eighty (180) days after the commencement of repair, as reasonably determined by Landlord, then, at Landlord's option, Landlord will diligently pursue to repair such damage within one hundred eight (180) days after the notice date. If Landlord elects to repair such damage, Monthly Rent will be abated on a pro rata basis during the repair period based on the Rentable Area of the portion of the Premises the use of which Tenant is deprived during the repair period. If Landlord does not elect to repair such damage, this Lease will terminate on the notice date.
(c): If the Premises or the Building are damaged by fire or other insured casualty to an extent which may not be repaired within one hundred eighty (180) days after the commencement of repair, as reasonably determined by Landlord, then (i) Landlord may cancel this Lease as of the date of such damage by written notice given to Tenant on or before the notice date or (ii) Tenant may cancel this Lease as of the date of such damage by written notice given to Landlord within ten (10) days after Landlord's delivery of a notice that the repairs cannot be made within such one hundred eighty (180) day period. If neither Landlord nor Tenant so elects to cancel this Lease, Landlord will repair the Building and Premises and Monthly Rent will be abated on a pro rata basis during the repair period based on the Rentable Area of the portion of the Premises the use of which Tenant is deprived during the repair period.
(d): If the proceeds of insurance are insufficient to pay for the repair of any damage to the Premises or the Building, Landlord will have the option to repair such damage or cancel this Lease as of the date of such casualty by written notice to Tenant on or before the notice date. If any such damage by fire or other casualty is the result of the willful conduct or negligence or failure to act of Tenant, its agent, contractors, employees, or invitees, there will be no abatement of Monthly Rent as otherwise provided for in this Article 19.

Tenant waives any rights conferred by statute or otherwise on account of any damage to the Premises, the Building, or the Project, to the extent that those rights are inconsistent with Tenant's rights under this Article 19.

ARTICLE 20. SUBORDINATION AND ATTORNMENT

20.1 General. This Lease and Tenant's rights under this Lease are subject and subordinate to any ground or underlying lease, first mortgage, indenture, first deed of trust or other first lien encumbrance, together with any renewals, extensions, modifications, consolidations and replacements of such first lien encumbrance, now or after the Date affecting or placed, charged or enforced against the Land, the Building, or all or any portion of the Project or any interest of Landlord in them or Landlord's interest in this Lease and the leasehold estate created by this Lease (except to the extent any such instrument will expressly provide that this Lease is superior to such instrument). This provision will be self-operative and no further instrument of subordination will be required in order to effect it. Nevertheless, Tenant will execute, acknowledge and deliver to Landlord, at any time and from time to time, upon demand by Landlord, such documents as may be requested by Landlord, any ground or underlying lessor or any mortgagee, to confirm or effect any such subordination.

20.2 Attornment. Tenant agrees that in the event that any holder of any ground or underlying lease, mortgage, deed of trust, or other encumbrance encumbering any part of the Project succeeds to landlord's interest in the Premises, Tenant will pay to such holder all rents subsequently payable under this Lease. Further, Tenant agrees that in the event of the enforcement by the trustee or the beneficiary under or holder or owner of any such mortgage, deed of trust, land or ground lease, Tenant will, upon

request of any person or party succeeding to the interest of Landlord as a result of such enforcement, automatically become the Tenant of and attorn to such successor in interest without change in the term or provisions of this Lease. Such successor in interest will not be bound by (i) any payment of Monthly Rent or Rent for more than one month in advance except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease, or (ii) any amendment or modification of this Lease made without the written consent or such trustee, beneficiary, holder or owner or such successor in interest. Upon request by such successor in interest and without cost to Landlord or such successor in interest Tenant will execute, acknowledge and deliver an instrument or instruments confirming the attornment.

ARTICLE 21. ENTRY BY LANDLORD

Landlord, its agents, employees, and contractors may enter the Premises at any time in response to an emergency or at reasonable hours to:

(a): inspect the Premises;
(b): exhibit the same to prospective purchasers and lenders. Prospective tenants during the last six (6) months of the term only;
(c): determine whether Tenant is complying with all its obligations in this Lease;
(d): supply cleaning service and any other service to be provided by Landlord to Tenant according to this Lease;
(e): post notices of non-responsibility or similar notices; or
(f): make repairs required of Landlord under the terms of this Lease or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building; however, all such work will be done as promptly as reasonably possible and so to cause as little interference to Tenant as reasonably possible.

Tenant, by this Article 21, waives any claim against Landlord, its agents, employees or contractors for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry. Landlord will at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance). Landlord will have the right to use any and all means which Landlord may deem proper to open doors in and to the Premises in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any means permitted under this Article 21 will not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises, or any portion of the Premises, nor will any such entry entitle Tenant to damages or an abatement of Monthly Rent, Additional Rent, or other charges which this Lease requires Tenant to pay.

ARTICLE 22. INDEMNIFICATION, WAIVER AND RELEASE

22.1 Indemnification. Tenant will neither hold nor attempt to hold Landlord or its employees or agents liable for, and Tenant will indemnify and hold harmless Landlord, its employees and agents from and against, any and all demands, claims, causes of action, fines, penalties, damages (including consequential damages), liabilities, judgments, and expenses (including, without limitation, attorneys' fees) incurred in connection with or arising from:

(a): the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming under Tenant;
(b): any activity, work or thing done, permitted or offered by Tenant in or about the Premises or the Project;
(c): any acts, omissions or negligence of Tenant or any person claiming under Tenant, or the contractors, agents, employees, invitees or visitors of Tenant or any such person;
(d): any breach, violation or nonperformance by Tenant or any person claiming under Tenant or the employees agents, contractors, invitees or visitors of Tenant or any such person or any term, covenant or provision of this Lease to any law, ordinance or governmental requirement of any kind; or
(e): any injury or damage to the person, property or business of Tenant, its employees, agents, contractors, invitees, visitors or any other person entering upon the Premises or the Project under the express or implied invitation of Tenant except for any injury or damage to persons or property on the Premises which is proximately caused by or results proximately from the negligence or deliberate act of Landlord or its employees agents or contractors.

If any action of proceeding is brought against Landlord or its employees by reason of any such claim for which Tenant has indemnified Landlord, Tenant, upon notice from Landlord, will defend the same at Tenant's expense with counsel reasonably satisfactory to Landlord.

22.2 Waiver and Release. Tenant, as a material part of the consideration to Landlord for this Lease, by this Section 22.2, waives and releases all claims against Landlord, its employees and agents with respect to all matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease. Except for any damage or injury to person or property on the Premises, which is proximately caused by or results proximately from the negligence or deliberate act of Landlord or its employee and agents or contractors, Tenant covenants and agrees that Landlord and its employees will not at any time or to any extent whatsoever be liable, responsible, or in any way accountable for any loss, injury, death or damage (including consequential damages) to persons, property or Tenant's business occasioned by any acts or omissions of any other Tenant, occupant or visitor of the Project, or from any cause, either ordinary or extraordinary, beyond Landlord's control.

ARTICLE 23. SECURITY DEPOSIT

ARTICLE 24. QUIET ENJOYMENT

Landlord covenants and agrees with Tenant that so long as Tenant pays the Rent, and observes and performs all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peacefully and quietly enjoy the Premises subject, nevertheless, to the terms and conditions of this Lease and Tenant's possession will not be disturbed by anyone claiming by, through or under Landlord.

ARTICLE 25. EFFECT OF SALE

A sale, conveyance or assignment of the Building or the Project which includes an assumption of Landlord's obligations to Tenant hereunder, will operate to release Landlord from liability from and after the effective date of such sale, conveyance or assignment upon all of the covenants, terms and

conditions of this Lease, express or implied, except those liabilities which arose prior to such effective date, and after the effective date of such sale, conveyance or assignment, Tenant will look solely to Landlord's successor in interest in and to this Lease. This Lease will not be affected by any such sale, conveyance or assignment, and Tenant will attorn to Landlord's successor in interest to this Lease.

ARTICLE 26. DEFAULT

26.1 Events of Default. The following events are referred to collectively as "Events of Default," or individually, as an "Event of Default":

(a): Tenant defaults in the due and punctual payment of Rent, and such default continues for ten (10) days after written notice from Landlord; however, Tenant will not be entitled to more than three (3) notice's for monetary defaults during any twelve (12) month period, and if, after such notice, any Rent is not paid when due, an Event of Default will be considered to have occurred without further notice.
(b): Tenant vacates or abandons the Premises for a period in excess of thirty (30) days;
(c): This Lease or the Premises or any part of the Premises are taken upon execution or by other process of law directed against Tenant, or are taken upon subject to any attachment at the instance for any creditor or claimant against Tenant, and said attachment is not discharged or disposed of within fifteen (15) days after its levy;
(d): Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy law or insolvency act of any state, or admits the material allegations of any such petition by answer or otherwise, or is dissolved or makes an assignment for the benefit of creditors;
(e): Involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for all or substantially all of the property of Tenant, and such proceedings is not dismissed or such receivership or trusteeship vacated within sixty (60) days after such institution or appointment;
(f): Tenant fails to take possession of the Premises on the Commencement Date of the Term; or
(g): Tenant breaches any of the other agreements, terms, covenants or conditions which this Lease requires Tenant to perform, and such breach continues for a period of thirty (30) days after written notice from Landlord to Tenant; or if such breach cannot be cured reasonably within such thirty (30) day period and Tenant fails to commence to cure such breach within thirty (30) days after notice from Landlord or fails to proceed diligently to cure such breach within a reasonable time period thereafter.

26.2 Landlord's Remedies. If any one or more Events of Default set forth in Section 26.1 above, occurs, then Landlord has the right, at its election:

(a): to give Tenant written notice of Landlord's intention to terminate this Lease on the earliest date permitted by law or on any later date specified in such notice, in which case Tenant's right to possession of the Premises will cease and this Lease will be terminated, except as to Tenant's liability, as if the expiration of the term fixed in such notice were the end of the Term; or
(b): without further demand or notice, to re-enter and take possession of the Premises or any part of the Premises, repossess the same, expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of Monthly Rent or other amounts

payable under this Lease or as a result of any proceeding breach of covenants or conditions; or

(c): without further demand or notice to cure any Event of Default and to charge Tenant for the cost of effecting such cure, including, without limitation, attorneys' fees and interest on the amount so advanced at the rate set forth in Section 28.21, below, provided that Landlord will have no obligation to cure any such Event of Default of Tenant. Should Landlord elect to reenter as provided in subsection (b), above, or should Landlord take possession pursuant to any notice provided by law, Landlord may from time to time, without terminating this Lease, relet the Premises or any part of the Premises in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine and Landlord may collect and receive the Rent. Landlord will in no way be responsible or liable for any failure to relet the Premises, or any part of the Premises, for any failure to collect any Rent due upon such reletting. No such re-entry or taking possession of the Premises by Landlord will be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord under this Section or under a forcible or unlawful entry and detainer statute or similar law will constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any such re-entry or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event this Lease will terminate as specified in such notice.

26.3 Certain Damages. In the event that Landlord does not elect to terminate this Lease as permitted in Section 26.2(a) above, but on the contrary, elects to take possession as provided in Section 26.2(b), above, Tenant will pay to Landlord: (i) Monthly Rent and other sums as provided in this Lease, which would be payable under this Lease if such repossession had not occurred, less; (ii) the net proceeds, if any, of any reletting of the Premises after deducting all of Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, attorneys' fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing Term, or the premises covered by such new lease, include other premises not part of the Premises, a fair apportionment of the rent received for such reletting and the expenses incurred in connection with such reletting as provided in this Section will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Tenant will pay such rent and other sums to Landlord monthly on the day which the Monthly Rent would have been payable under this Lease if possession had not been retaken and Landlord will be entitled to receive such rent and other sums from Tenant on each such day.

26.4 Continuing Liability After Termination. If this Lease is terminated on account of the occurrence of an Event of Default, Tenant will remain liable to Landlord for damages in an amount equal to Monthly Rent and other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all of Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Section 26.3, above. Landlord will be entitled to collect such damages from Tenant monthly on the day on which Monthly Rent and other amounts would have been payable under this Lease if this Lease had not been terminated, and Landlord will be entitled to receive such Monthly Rent and other amounts from Tenant on each such day. Alternatively, at the option of Landlord, in the event this Lease is so

terminated, Landlord will be entitled to recover against Tenant as damages for losses of the bargain and not as a penalty:

(i): the worth at the time of award of the unpaid Rent which had been earned at the time of termination;
(ii): the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided;
(iii): the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term of this Lease (had the same not ben so terminated by Landlord) after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided or,
(iv): any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom.

"The worth at the time of award" of the amounts referred to in clauses (i) and (ii), above, is computed by adding interest at the per annum interest rate described in Section 28.21, below, on the date on which this Lease is terminated from the date of termination until the time of award. "The worth at the time of award" of the amount referred to in clause (iii), above, is computed by discounting such amount at the discount rate of the Federal Reserve Bank of Denver at the time of award plus one percent (1%).

26.5 Cumulative Remedies. Any suit or suits for recovery of the amounts and damages set forth in Sections 26.3 and 26.4, above, may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease will be deemed to require Landlord to await the date upon which this Lease or the term would have expired had there occurred no Event of Default. Each right and remedy provided for in this Lease is cumulative and is in addition to every other right or remedy provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise. The prevailing party shall be entitled to recover its attorney's fees and costs whether or not suit is brought.

26.6 Waiver of Redemption. Tenant waives any right of redemption arising as a result of Landlord's exercise of its remedies under this Article 26.

26.7 Mitigation. Landlord shall make reasonable efforts to mitigate any damages caused by Tenant's default.

ARTICLE 27. PARKING

Tenant will be entitled to use the Parking Spaces during the Term subject to the rules and regulations set forth below and any amendments or additions to them as may be done by Landlord from time to time during the Lease term.

Landlord shall provide Fourteen (14) covered reserved parking spaces for the entire Lease term at no charge to Tenant, including any renewal option which may be exercised in the near future. Visitor parking will be available for use by Tenant's invitee. Landlord will also provide Forty (40) uncovered reserved parking space marked "Ryland" in the front of suite for Tenant's use, with an additional open non reserved spaces for a total of 110.

ARTICLE 28. MISCELLANEOUS

28.1 No Offer. This Lease is submitted to Tenant on the understanding that it will not be considered an offer and will not bind Landlord in any way until (a) Tenant has duly executed and delivered duplicate originals to Landlord and (b) Landlord has executed and delivered one of such originals to Tenant.

28.2 Joint and Several Liability. If Tenant is composed of more than one signatory to this Lease, each signatory will be jointly and severally liable with each other signatory for payment and performance according to this Lease. The act of, notice to, notice from, refund to, or signature of, any signatory to this Lease (including without limitation modifications of this Lease made by fewer than all such signatories) will bind every other signatory as though every other signature had so acted, or received or given the notice or refund, or signed.

28.3 No Construction Against Drafting Parry. Landlord and Tenant acknowledge that each of them and their counsel have had an opportunity to review this Lease and that this Lease will not be construed against Landlord merely because Landlord has prepared it.

28.4 Time of the Essence. Time is of the essence of each and every provision of this Lease.

28.5 No Recordation. Tenant's recordation of this Lease or any memorandum or short form of it will be void and a default under this Lease.

28.6 No Waiver. The waiver by Landlord of any agreement, condition or provision contained in this Lease will not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision contained in this Lease, nor will any custom or practice which may grow up between the parties in the administration of the terms of this Lease be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms of this Lease. The subsequent acceptance of Rent by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any agreement, condition, or provision of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent.

28.7 Estoppel Certificate. At any time and from time to time, but within ten (10) days after prior written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification, (b) the date, if any to which rent and other sums payable under this Lease have been paid, (c) that no notice of any default has been delivered to Landlord which default has not been cured, except as to defaults specified in said certificate, and (d) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by any prospective purchaser or existing or prospective mortgagee or beneficiary under any deed of trust on the building or any part of the Project. Tenant's failure to deliver such a certificate within such time will be conclusive evidence of the matters set forth in it.

28.8 Waiver of Jury Trial. Landlord and Tenant by this Section 28.8, waive trial by jury in any action, proceeding or counterclaim brought by either of the parties to this Lease against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of occupancy of the Premises, or any other claims (except claims for personal injury or property damage), and any emergency statutory or any other statutory remedy.

28.9 No Merger. The voluntary or other surrender of this Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant and Landlord or the termination of this Lease on account of Tenant's default will not work a merger, and will, at Landlord's option, (a) terminate all or any subleases and subtenancies or (b) operate as an assignment to Landlord of all or any subleases or

subtenancies. Landlord's option under this Section 28.9 will be exercised by notice to Tenant and all known sublessees or subtenants in the Premises or any part of the Premises.

28.10 Holding Over. Tenant will have no right to remain in possession of all or any part of the Premises after the expiration of the Term. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with the express or implied consent of Landlord: (a) such tenancy will be deemed to be a periodic tenancy from month-to-month only; (b) such tenancy will not constitute a renewal or extension of this Lease for any further term; and (c) such tenancy may be terminated by Landlord upon the earliest of (i) thirty (30) days' prior written notice or (ii) the earliest date permitted by law. In such event, Monthly Rent will be increased to an amount equal to one hundred fifty (150%) percent of the Monthly Rent payable during the last month of the Term, and any other sums due under this Lease will be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy will be subject to every other term, condition, and covenant contained in this Lease.

28.11 Notices. Any notice, request, demand, consent, approval or other communications required or permitted under this Lease must be in writing and will be deemed to have been given when personally delivered or deposited in any depository regularly maintained by the United States Postal Service, postage prepaid, certified mail, return receipt requested, addressed to the party for whom it is intended at its address set forth in Article 1, above. Either Landlord or Tenant may add additional addresses or change its address for purposes of receipt of any such communication by giving ten (10) days' prior written notice of such change to the other party in the manner prescribed in this Section 28.11.

28.12 Severability. If any provision of this Lease proves to be illegal, invalid or unenforceable, the remainder of this Lease will not be affected by such finding, and in lieu of each provision of this Lease that is illegal, invalid or unenforceable, a provision will be added as a part of this Lease as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

28.13 Written Amendment Required. No amendment, alteration, modification of or addition to the Lease will be valid or binding unless expressed in writing and signed by Landlord and Tenant. Tenant agrees to make any modifications of the terms and provisions of this Lease required or requested by any lending institution providing financing for the Building, or Project, as the case may be, provided that no such modifications will materially adversely affect Tenant's rights and obligations under this Lease.

28.14 Entire Agreement. This Lease, the Exhibits and Addenda, if any, contain the entire agreement between Landlord and Tenant. No promises or representations, except as contained in this Lease, have been made to Tenant respecting the condition or the manner of operating the Premises, the Building, or the Project.

28.15 Captions. The captions of the various Articles and Sections of this Lease are for convenience only and do not necessarily define, limit, describe or construe the contents of such Articles or Sections.

28.16 Notice of Landlord's Default. In the event of any alleged default in the obligation of Landlord under this Lease, Tenant will deliver to Landlord written notice listing the reasons for Landlord's default and Landlord will have thirty (30) days following receipt of such notice to cure such alleged default or, in the event the alleged default cannot reasonably be cured within a thirty (30) day period, to commence action and proceed diligently to cure such alleged default. A copy of such notice to Landlord will be sent to any holder of a mortgage or other encumbrances on the Building or Project of which Tenant has been notified in writing, and any such holder will also have the same time periods to cure such alleged default.

28.17 Authority. Tenant and the party executing this Lease on behalf of Tenant represent to Landlord that such party is authorized to do so by requisite action of the Board of Directors, or partners, as the

case may be, and agree upon request to deliver to Landlord a resolution or similar document to that effect.

28.18 Brokers. Landlord and Tenant respectively represent and warrant to each other that neither of them has consulted or negotiated with any broker or finder with regard to the Premises except the Broker names in Article 1, above, of any, (the "Broker"). Each of them will indemnify the other against and hold the other harmless from any claims for fees or commissions from anyone with whom either of them has consulted or negotiated with regard to the Premises except the Broker. Landlord will pay any fees or commission due the Broker. Landlord and Tenant agree that should expansion take place negotiations will be handled through Broker referred to in Article 1 of this Lease, and Landlord shall pay Broker ¹/2 standard commission (2¹/2%).

28.19 Governing Law. This Lease will be governed by and construed pursuant to the laws of the State in which the Project is located.

28.20 Force Majeure. Landlord will have no liability to Tenant nor will Tenant have any right to terminate this Lease or abate Rent or assert a claim of partial or total actual or constructive eviction, because of Landlord's failure to perform any of its obligations in the Lease if the failure is due to reasons beyond Landlord's reasonable control, including without limitation, strikes or other labor difficulties, inability to obtain necessary governmental permits and approvals (including scarcity of materials, war, riot, civil insurrection, accidents, acts of God and governmental preemption in connection with a national emergency.

28.21 Late Payments. Any payment of Rent, including Monthly Rent, which is not received within five (5) days after it is due will be subject to a late charge equal to five percent (5%) of the unpaid payment, or $100.00, whichever is greater. This amount is in compensation of Landlord's additional cost of processing late payments. In addition, any Rent which is not paid when due, including Monthly Rent, will accrue interest at a late rate charge of the Prime Rate plus five percent (5%) per annum (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the date on which it was due until the date on which it is paid in full with accrued interest.

28.22 No Easements for Air or Light. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building will in no way affect this Lease or impose any liability on Landlord.

28.23 Tax Credits. Landlord is entitled to claim all tax credits and depreciation attributable to leasehold improvements in the Premises. Promptly after Landlord's demand, Landlord and Tenant will prepare a detailed list of the leasehold improvements and fixtures and their respective costs for which Landlord or Tenant has paid. Landlord will designate those items for which Landlord will claim tax credits and depreciation; Tenant will be entitled to any remaining tax credits and depreciation for leasehold improvements not designated by Landlord.

28.24

28.25 Financial Reports. Within fifteen (15) days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant, or, failing those, Tenant's internally prepared financial statements. Tenant will discuss its financial statements with Landlord and will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements which Tenant designates to Landlord as confidential except (a) to Landlord's lenders or prospective purchasers of the Project, (b) in litigation between Landlord and Tenant, and (c) if required by court order.

28.26 Landlord's Fees. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers' or architects' fees, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action.

28.27 Binding Effect. The covenants, conditions and agreements contained in this Lease will bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributes, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns.

29.0 Lighting. Management will work with Tenant as to what lighting may be needed to provide a more security to the area.

30.0 Lease Termination. Upon full execution of this lease agreement by all parties and the commencement of this lease, Landlord will termination all rights and obligations under the current lease dated December 1, 1996 for Suite 340 in Scottsdale Technology Center.

31.0 Option to Renew. Tenant shall have Two (2) Five (5) year options to renew this lease, with the rental charges to be at the then current prevailing market rent for the premises. To exercise these options, Tenant must notify Landlord in writing One Hundred Eighty (180) days prior to expiration of current lease expiration.

32.0 Environmental & ADA. Landlord maintains that the property has no asbestos or other hazardous substances to our knowledge. Landlord further agrees to comply with all ADA regulations as required by the City of Scottsdale.

33.0 First Right of Refusal. Landlord shall provide Tenant with a First Right of Refusal on the adjacent space, currently vacant. Once Landlord has received an acceptable offer from a prospective tenant, Landlord shall give written notice to Tenant to exercise their option to take the space. Tenant shall have Five (5) business days from receipt of the written notice to make the decision. If Tenant exercises the option, they must take the premises under the terms of the prospective tenant's unless Landlord and Tenant are willing to renegotiate the expansion.

LANDLORD:		TENANT:
IDS LIFE INSURANCE a Minnesota Corporation		RYLAND MORTGAGE COMPANY, AN OHIO CORPORATION
By:	/s/ Mark McMullen Mark McMullen	By:	/s/ Sandra J. McDowell
Its:	Asst. Vice President	Its:	Vice President
Date:	3/24/99	Date:	3-22-99

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (the "Agreement") made and entered into as of the 14th day of December, 1999, by and between IDS Life Insurance Company, a Minnesota corporation, ("Landlord"), and Ryland Mortgage Company, an Ohio corporation ("Tenant").

RECITALS

WHEREAS, Landlord and Tenant entered into that certain lease agreement dated March 18, 1999 (the "Lease"), for that certain leased premises in the complex known as Scottsdale Technology Center, located at 14555 North Hayden Road, Suite 100, Scottsdale, Arizona 85260 (the "Premises"); and

WHEREAS, Landlord and Tenant desire to amend Article 1, Paragraphs (g), (h), (i), (j), (k), (1) and (n) of the Lease; and

WHEREAS, the Term of said Lease is scheduled to expire on May 31, 2004; and

WHEREAS, the parties wish to add certain space to the Premises and make certain changes to said Lease.

WITNESSETH

NOW, THEREFORE, in consideration of the mutual covenants contained herein and in said lease, the parties hereto agree as follows:

1. Article 1, Paragraph (g)—Parking Spaces: Landlord and Tenant hereby agree to amend the Lease to add ten (10) addition reserved covered parking space to the current fourteen (14) covered parking space as provided for in Article 1, Paragraph (g) of the Lease for a total of twenty-four (24) covered reserved parking spaces at no charge for the initial term of the Lease. Four (4) of the reserved covered parking spaces will be made available upon execution of this Agreement by both Landlord and Tenant. The remaining six (6) will be subject to availability as tenants vacate the spaces. Additionally, Tenant shall have an additional fifteen (15) spaces painted "Ryland" for a total of fifty-five (55) painted spaces. Landlord reserves the right to reassign any or all of the painted and covered reserved spaces as Landlord deems in its sole and absolute discretion to be necessary. In addition, Tenant shall have an additional fifteen (15) uncovered unreserved "open parking" for a total open parking of seventy-one (71) parking spaces. The total parking available to Tenant is now one hundred fifty (150) parking spaces.

2. Article 1 Paragraph (h)—Term: Effective the day of Substantial Completion (hereinafter defined) of the tenant improvements in the Expansion Space (hereinafter defined), a Declaration of Commencement, see attached Exhibit "B", will be provided Tenant and the Term will be adjusted to reflect a full sixty (60) month Term from the date of Substantial Completion.

The term "Substantial Completion", as used herein, means that a state of completion of the tenant improvements within the Expansion Space (hereinafter defined), as set forth in Exhibit "C", which will allow Tenant to commence its obligations hereunder and take possession of the space without material interference from Landlord's contractor, has been meet. This determination shall be at the sole and absolute discretion of Landlord.

3. Article 1, Paragraph (i)—Commencement Date: Landlord and Tenant agree that the Commencement Date will be modified pursuant to the Declaration of Commencement (the "New Commencement Date"), upon the Substantial Completion of the Tenant Improvements (hereinafter defined) in the Expansion Space (hereinafter defined).

4. Article 1, Paragraph (j)—Expiration Date: Landlord and Tenant agree that the Expiration Date will be modified pursuant to the Declaration of Commencement (the "New Expiration Date"), upon

the Substantial Completion of the Tenant Improvements(hereinafter defined) in the Expansion Space (hereinafter defined).

5. Article 1, Paragraph (k)—Monthly Base Rent: Landlord and Tenant agree that effective as of the New Commencement Date the Monthly Base Rent will be adjusted as set forth below and will continue through mid-night of the New Expiration Date:

Years 1 - 2 = $37,438.33 per month ($17.50)*
Years 3 - 5 = $38,508.00 per month ($18.00)*

*: plus any additional charges and/or taxes as provided for in the Lease

6. Article 1, Paragraph (I)—Additional Rent: Landlord and Tenant agree that the Base Year of the Lease is the year 2000. In addition, Landlord and Tenant agree that certain operating expenses pursuant to Article 5 of the Lease will be capped at five percent (5%) per year on a cumulative bases (the "Controllable Operating Expenses"). Controllable Operating Expenses shall include all expenses as set forth in Article 5, except utilities, insurance and taxes.

7. Article 1, Paragraph (n)—Rentable Area of the Premises: Effective as of the New Commencement Date, the description of the Premises contained in said Lease is amended so as to add approximately nine thousand nine hundred fifty-two (9,952) rentable square feet and (the "Expansion Space"). As of the New Commencement Date, the total space (the "Enlarged Premises") leased to Tenant under said Lease shall consist of a total rentable area of approximately twenty-five thousand six hundred seventy-two (25,672) rentable square feet. The Expansion Space is generally shown on the floor plan attached hereto as Exhibit "A", which exhibit is made a part hereof by this reference. As of the New Commencement Date, that certain Exhibit "A" attached to said Lease is hereby amended to include the attached Exhibit "A".

8. Tenant Improvement Allowance; Tenant has inspected the Expansion Space and accepts same in its present condition as of this date. Any tenant improvements (the "Tenant Improvements") in excess of Ten and 50/100 Dollars ($10.50) per rentable square foot, in other words, One Hundred Four Thousand Four Hundred Ninety-six and no/100 Dollars ($104,496.00), will be paid by Tenant and will be done by Landlord at Tenant's sole cost and expense, and in accordance with the provisions of Article 15 of the Lease.

9. Authority: If Tenant is a corporation, each individual executing this Agreement on behalf of the Tenant corporation represents and warrants that he or she is duly authorized to sign and deliver this Agreement on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation, or in accordance with the by-laws of said corporation, and that this Agreement is binding upon said corporation in accordance with its terms.

If Tenant is a division or subsidiary of a corporation, each individual executing this Agreement on behalf of the division or subsidiary represents and warrants that he or she is duly authorized to execute and deliver this Agreement on behalf of the division or subsidiary, in accordance with a duly adopted resolution of the Board of Directors of the parent corporation, that this Agreement is binding upon the parent corporation (as well as the division or subsidiary) in accordance with its terms, and that said division or subsidiary shall, within thirty (30) days after request by Landlord, deliver to Landlord a certified copy of a resolution of the Board of Directors of the parent corporation authorizing or ratifying the execution of this Agreement.

If Tenant is a partnership, each individual executing this Agreement on behalf of said partnership represents and warrants that he or she is duly authorized to sign and deliver this Agreement on behalf of said partnership and that this Agreement is binding upon said partnership in accordance with its terms.

If this Agreement is signed by only one person on behalf of Tenant, that person represents and warrants to Landlord that his or her signature alone is sufficient to bind Tenant to the provisions of this Agreement.

10. Miscellaneous:

a.: The provisions of this Agreement shall remain in full force and effect for the duration of the extended term of the Lease.
b.: Except as otherwise set forth herein, all of the terms and conditions of the Lease shall remain in full force and effect and shall remain fully applicable to the Premises, throughout the duration of the extended term of said Lease. Said Lease, as extended and amended herein constitutes the entire agreement between the parties hereto, and no further modification of said Lease shall be binding unless evidenced by an agreement in writing signed by Landlord and Tenant.
c.: The captions and paragraph numbers appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe, affect or describe the scope or intent of the provisions of this Agreement.

This Agreement will not be in effect until duly signed by Landlord and Tenant.

IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as a supplement and amendment to said Lease for the purposes set forth above, in any number of counterpart copies each of which counterpart copy shall for all purposes be deemed an original.

LANDLORD:		TENANT:
IDS LIFE INSURANCE COMPANY, a Minnesota corporation		Ryland Mortgage Company, an Ohio corporation
By:	/s/ Mark McMullen	By:	/s/ Sandra McDowell
Name:	Mark McMullen	Name:	Sandra McDowell
Title:	Asst. V. President	Title:	Vice President
Date:	1/3/00	Date:	12/22/99

SECOND AMENDMENT TO LEASE

THIS 2nd AMENDMENT TO LEASE (the "Agreement") made and entered into as of the 16th day of April, 2001, by and between IDS Life Insurance Company, a Minnesota corporation, ("Landlord"), and Ryland Mortgage Company, an Ohio corporation ("Tenant").

RECITALS

WHEREAS, Landlord and Tenant entered into that certain lease agreement dated March 18, 1999 (the "Lease"), as amended on January 3, 2000, for that certain leased premises in the complex known as Scottsdale Technology Center, located at 14555 North Hayden Road, Suite 100, Scottsdale, Arizona 85260 (the "Premises"); and

WHEREAS, Landlord and Tenant desire to amend Article 1, Paragraphs (g), (h), (i), (j), (k), (l) and (n) of the Lease; and

WHEREAS, the Term of said Lease is scheduled to expire on March 31, 2005; and

WHEREAS, the parties wish to add certain space to the Premises and make certain changes to said Lease.

WITNESSETH

NOW, THEREFORE, in consideration of the mutual covenants contained herein and in said lease, the parties hereto agree as follows:

1. Article 1, Paragraph (g)—Parking Spaces: Landlord and Tenant hereby agree to amend the Lease to add an additional seven (7) reserved covered parking space to the current twenty-four (24) reserved covered parking space as provided for in Article 1, Paragraph (g) of the Lease, as amended, for a total of thirty-one (31) reserved covered parking spaces at no charge for the initial term of the Lease. The six (6) unavailable reserved covered spaces, as set forth in the First Amendment To Lease, were provided to Tenant on February 1, 2001. Tenant shall have an additional twenty-four (24) spaces painted "Ryland" for a total of seventy-nine (79) painted spaces Landlord reserves the right to reassign any or all of the painted spaces, with forty-five (45) days prior written notice to Tenant, as Landlord deems in its sole and absolute discretion to be necessary. Tenant currently has seventy-one (71) uncovered unreserved "open parking" spaces. The total parking available to Tenant is now one hundred eight-one (181) parking spaces as shown on Exhibit "A".

2. Article 1, Paragraph (h)—Term: Effective the day of Substantial Completion (hereinafter defined) of the tenant improvements in the Second Expansion Space (hereinafter defined), a Declaration of Commencement, see attached Exhibit "C", will be provided Tenant and the Term will be adjusted to reflect a full sixty (60) month Term from the date of Substantial Completion.

The term "Substantial Completion", as used herein, means that a state of completion of the tenant improvements within the Expansion Space (hereinafter defined), as set forth in the final approved space plan, which will allow Tenant to commence its obligations hereunder and take possession of the space without material interference from Landlord's contractor, has been meet. This determination shall be at the sole and absolute discretion of Landlord, which shall not be unreasonable.

3. Article 1, Paragraph (i)—Commencement Date: Landlord and Tenant agree that the Commencement Date will be modified pursuant to the Declaration of Commencement (the "New Commencement Date"), upon the Substantial Completion of the Tenant Improvements in the Second Expansion Space (hereinafter defined).

4. Article 1, Paragraph (j)—Expiration Date: Landlord and Tenant agree that the Expiration Date will be modified pursuant to the Declaration of Commencement (the "New Expiration Date"), upon

the Substantial Completion of the Tenant Improvements in the Second Expansion Space (hereinafter defined).

New Commencement Date—March 31, 2002
April 1, 2002—March 31, 2005
April 1, 2005—New Expiration Date

$46,078.96 per month ($17.50 per sq. ft.)*
$47,395.50 per month ($18.00 per sq. ft.)*
$52,661.67 per month ($20.00 per sq. ft.)*

*: plus any additional charges and/or taxes as provided for in the Lease

6. Article 1, Paragraph (l)—Additional Rent: Landlord and Tenant agree that the Base Year of the Lease is the year 2000. In addition, Landlord and Tenant agree that certain operating expenses pursuant to Article 5 of the Lease will be capped at five percent (5%) per year on a cumulative bases (the "Controllable Operating Expenses"). Controllable Operating Expenses shall include all expenses as set forth in Article 5, except utilities, insurance and taxes.

7. Article 1, Paragraph (n)—Rentable Area of the Premises: Effective as of the New Commencement Date, the description of the Premises contained in said Lease is amended so as to add approximately five thousand nine hundred twenty-five (5,925) rentable square feet (the "Second Expansion Space"). As of the New Commencement Date, the total space (the "Enlarged Premises") leased to Tenant under said Lease shall consist of a total rentable area of approximately thirty-one thousand five hundred ninety-seven (31,597) rentable square feet. The Expansion Space is generally shown on the floor plan attached hereto as Exhibit "B", which exhibit is made a part of this agreement by this reference. As of the New Commencement Date, that certain Exhibit "A" attached to said Lease is hereby amended to include the attached Exhibit "B".

8. Tenant Improvement Allowance: Tenant has inspected the Second Expansion Space and accepts same in its present condition as of this date. Any tenant improvements (the "Tenant Improvements") in excess of Ten and 50/100 Dollars ($10.50) per rentable square foot, in other words, Sixty-two Thousand Two Hundred Twelve and 50/100 Dollars ($62,212.50), (the "Tenant Improvement Allowance"), will be paid by Tenant and will be done by Landlord at Tenant's sole cost and expense, and in accordance with the provisions of Article 15 of the Lease. Any unused portion of the Tenant Improvement Allowance shall accrue to Landlord account.

9. Right of First Refusal: Provided Tenant is not in default, during the Term of this Lease, Tenant shall have the right of first refusal (the "Right of First Refusal"), to lease space located at 14505 North Hayden Road, Suite 101, Scottsdale, Arizona 85260, as depicted in Exhibit "D" attached hereto (the "Option Space") subject to further provisions hereof:

A. Conditions at the time Tenant exercises a Right of First Refusal: Option Space is to be defined as the First Right of Refusal for the four thousand nine hundred ninety-four (4,994) square feet of rentable area in what is known as Suite 101 (see Exhibit "D") and Landlord is willing to grant such a right in Tenant only upon the terms and conditions, and subject to the limitation hereinafter set forth. Accordingly, it is hereby agreed by and between Landlord and Tenant as follows:

1.: Subject to the further provisions hereof, Landlord shall be free to enter into negotiations with and make proposals to any party which it deems, in its sole discretion, to be a prospective tenant with respect to the Option Space and such negotiations or proposals may include all or any part of the Option Space upon and including any terms and conditions which Landlord deems advisable.

2.: However, before Landlord enters into a written and firm agreement with any prospective tenant which includes any or all portion of the Option Space, Landlord shall give Tenant written notice of any such written and firm agreement, or any firm proposal, which Landlord proposes to submit or offer to a prospective tenant, and Tenant shall have not more than three (3) business days after such notice is received from Landlord within which to elect and notify Landlord whether or not Tenant will exercise its right to Lease the Option Space included in any such agreement or proposal.
3.: In the event Landlord is not notified by Tenant within three (3) business days after receipt of said notice, Landlord has the right to lease the Option Space.

B. The lease rate for the Option Space will be the then existing market rate at the time of the exercised option.

10. Authority: If Tenant is a corporation, each individual executing this Agreement on behalf of the Tenant corporation represents and warrants that he or she is duly authorized to sign and deliver this Agreement on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation, or in accordance with the by-laws of said corporation, and that this Agreement is binding upon said corporation in accordance with its terms.

11. Miscellaneous:

a.: The provisions of this Agreement shall remain in full force and effect for the duration of the extended term of the Lease.
b.: Except as otherwise set forth herein, all of the terms and conditions of the Lease shall remain in full force and effect and shall remain fully applicable to the Premises, throughout the duration of the extended term of said Lease. Said Lease, as extended and amended herein constitutes the entire agreement between the parties hereto, and no further modification of said Lease shall be binding unless evidenced by an agreement in writing signed by Landlord and Tenant.
c.: The captions and paragraph numbers appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe, affect or describe the scope or intent of the provisions of this Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as a supplement and amendment to said Lease for the purposes set forth above, in any number of counterpart copies each of which counterpart copy shall for all purposes be deemed an original.

LANDLORD:		TENANT:
IDS LIFE INSURANCE COMPANY, a Minnesota corporation		Ryland Mortgage Company, an Ohio corporation
By:	/s/ Mark McMullen	By:	/s/ Sandra J. McDowell
Name:	Mark McMullen	Name:	Sandra J. McDowell
Title:	AVP	Title:	SVP
Date:	5/25/01	Date:	5/15/01

THIRD AMENDMENT TO LEASE

WHEREAS AB Scottsdale Technology Center, LLC an Arizona limited liability company (Landlord)), as successor to IDS Life Insurance Company, and Ryland Mortgage Company, an Ohio corporation (Tenant), are parties to a lease ("Lease") dated March 18, 1999 as amended by the First Amendment to Lease dated January 3, 2000, and as amended by a Second Amendment on April 16, 2001 for the premises located at 14455 North Hayden Road, Suite 100, Scottsdale, Arizona 85260 (the "Premises") and;

WHEREAS, the Landlord and Tenant now desire to enter into this Third Amendment to Lease this 27th day of November 2002 to expand suite 100 of the Premises (the "Expansion Space") and make certain changes to said lease;

NOW THEREFORE, mutual consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the specific Lease terms set forth below.

1.: Amendment to Lease:

Article 1(n): Rentable Area of the Premises. This section is hereby amended to add approximately 3,428 square feet to the Premises in addition to the existing square feet of 31,597 for a total of 35,025 square feet. The Expansion Space is generally shown on the floor plan attached hereto as Exhibit "A", which exhibit is made a part of this agreement by this reference. Landlord agrees to deliver the Expansion Space by the Commencement Date herein in good, clean and habitable condition.

Article 1(h): Term. The Term as it pertains to the Expansion Space shall be co-terminous with the existing Lease

Article l(i): Commencement Date. The Commencement Date for occupancy of the expansion space shall be February 1, 2003

Article l(j): Expiration Date. The Expiration Date for the Term herein shall be July 31, 2006

Article l(k): This section is amended to reflect that the Base Rent for the Premises shall include the following increases for the Expansion Space:

Base Rent:	Feb 1, 2003-Mar 31, 2005	$	18.00psf	($	5,142.00	)
(For Expansion	Apr 1, 2005-Jul 31, 2006	$	20.00psf	($	5,713.33	)
Space only)	To be added to existing rent, plus applicable rental tax.

2.: Miscellaneous:

a. The provisions of this Amendment shall remain in full force and effect for the duration of the Term of the Lease.

b. Except as otherwise set forth herein, all of the terms and conditions of the Lease shall remain in full force and effect and shall remain fully applicable to the Premises, throughout the duration of the Term of said Lease. Said Lease, as amended herein constitutes the entire agreement between the parties hereto, and no further modification of said Lease shall be binding unless evidenced by an agreement in writing signed by Landlord and Tenant.

c. The captions and paragraph numbers appearing in this Amendment are inserted only as a matter of convenience and in no way define, limit, construe, affect or describe the scope or intent of the provisions of this Agreement.

d. Tenant hereby represents and warrants to Landlord that this Lease and any addendum thereto, has been duly authorized and that the person executing this Amendment on behalf of the Tenant has all the necessary power and authority to execute this Amendment on behalf of Tenant and that no consent of any other person or entity is required for the execution or performance of the Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to Lease this 10th day of December 2002, for the purposes set forth above, in any number of counterpart copies each of which counterpart copy shall for all purposes be deemed an original.

FOURTH AMENDMENT TO LEASE

WHEREAS AB Scottsdale Technology Center, LLC an Arizona limited liability company (Landlord), as successor to IDS Life Insurance Company, and Ryland Mortgage Company, an Ohio corporation (Tenant), are parties to a lease ("Lease") dated March 18, 1999 as amended by the First Amendment to Lease dated Dec. 14, 1999, as amended by the Second Amendment to Lease dated April 16, 2001, and as amended by the Third Amendment to the Lease dated Nov. 27, 2002, for the premises located at 14455 North Hayden Road, Suite 100, Scottsdale, Arizona 85260 (the "Premises") and;

WHEREAS, the Landlord and Tenant now desire to enter into this Fourth Amendment to Lease

NOW THEREFORE, mutual consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the specific Lease terms set forth below.

Operating Expenses:

Tenant Operating Expenses shall be adjusted from a 2000 base year to an Expense Stop of $6.87 which will be retroactive as of July 2002. The Expense Stop calculation is attached as a letter dated April 26, 2005 to Ryland by Rodney Prokop, CFO of International Capital Partners. With the adjustments noted in that letter, Landlord and Tenant agree that rent and operating expenses for all years prior to 2005 are finalized.

IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth Amendment to Lease as of this 11th day of May 2005, for the purposes set forth above, in any number of counterpart copies each of which counterpart copy shall for all purposes be deemed an original.

QuickLinks

OFFICE LEASE for Scottsdale Technology Center 14455, 14555, 14505 North Hayden Road Scottsdale, Arizona 85260 IDS LIFE INSURANCE COMPANY A MINNESOTA CORPORATION Landlord and RYLAND MORTGAGE COMPANY AN OHIO CORPORATION Dated March 18, 1999
FIRST AMENDMENT TO LEASE
RECITALS
WITNESSETH
SECOND AMENDMENT TO LEASE
RECITALS
WITNESSETH
THIRD AMENDMENT TO LEASE
FOURTH AMENDMENT TO LEASE
EX-12.1 4 a2167774zex-12_1.htm EXHIBIT 12.1

Exhibit 12.1: Computation of Ratio of Earnings to Fixed Charges
(in thousands, except ratio)

	Year Ended December 31,
	2001			2002			2003			2004			2005
Consolidated pretax income	$	218,336		$	309,340		$	396,217		$	521,212		$	721,051
Share of distributed income of 50%-or-less-owned affiliates, net of equity pickup		(26	)		(2,689	)		94			(5,772	)		(315	)
Amortization of capitalized interest		31,878			32,162			38,263			41,764			45,483
Interest		55,327			49,086			50,125			53,242			66,697
Less interest capitalized during the period		(31,675	)		(39,695	)		(42,602	)		(52,015	)		(65,959	)
Interest portion of rental expense		7,190			6,679			5,973			5,639			5,678

EARNINGS	$	281,030		$	354,883		$	448,070		$	564,070		$	772,635
Interest	$	55,327		$	49,086		$	50,125		$	53,242		$	66,697
Interest portion of rental expense		7,190			6,679			5,973			5,639			5,678

FIXED CHARGES	$	62,517		$	55,765		$	56,098		$	58,881		$	72,375
Ratio of earnings to fixed charges		4.50			6.36			7.99			9.58			10.68

EX-13 5 a2167774zex-13.htm EXHIBIT 13

Exhibit 13

Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2005

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

The Ryland Group	2005 Annual Report	Page 42
	Selected Financial 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
Expenses 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	12.2		x	11.3		x	9.5		x	7.8		x	5.6		x
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		%

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

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

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

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

The Ryland Group	2005 Annual Report	Page 43
	Selected Financial Data

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

	YEAR ENDED DECEMBER 31,
(in thousands)	2005		2004		2003		2002		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 reconciliation of EBITDA to net cash provided by operations, the most directly comparable GAAP measure, is provided below for each period presented.

	YEAR ENDED DECEMBER 31,
(in thousands)	2005			2004			2003			2002			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

Forward-looking Statements

Note: Certain statements in this annual report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company’s expectations and beliefs concerning future events, and no assurance can be given that the results described in this annual report will be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “likely,” “may,” “plan,” “project,” “should,” “target,” “will” or other similar words or phrases. All forward-looking statements contained herein are based upon information available to the Company on the date of this annual report. Except as may be required under applicable law, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. The factors and assumptions upon which any forward-looking statements herein are based are subject to risks and uncertainties which include, among others:

• economic changes nationally or in the Company’s local markets, including volatility in interest rates, inflation, changes in consumer confidence levels and the state of the market for homes in general;

• the availability and cost of land;

• increased land development costs on projects under development;

• shortages of skilled labor or raw materials used in the production of houses;

• increased prices for labor, land and raw materials used in the production of houses;

• increased competition;

• failure to anticipate or react to changing consumer preferences in home design;

• increased costs and delays in land development or home construction resulting from adverse weather conditions;

• potential delays or increased costs in obtaining necessary permits as a result of changes to laws, regulations or governmental policies (including those that affect zoning, density, building standards and the environment);

• delays in obtaining approvals from applicable regulatory agencies and others in connection with the Company’s communities and land activities;

• the risk factors set forth in the Company’s most recent Annual Report on Form 10-K; and

• other factors over which the Company has little or no control.

The Ryland Group	2005 Annual Report	Page 44
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

With headquarters in Southern California, The Ryland Group, Inc. and its subsidiaries (“the Company”) is one of the nation’s largest homebuilders and a leading mortgage-finance company. The Company is a Fortune 500 company and is traded on the New York Stock Exchange (NYSE) under the symbol “RYL.” Founded in 1967, the Company has built more than 250,000 homes during its 38-year history. In addition, Ryland Mortgage Company (RMC), has provided mortgage financing and related services for more than 210,000 homebuyers.

The Company consists of two operating business segments: homebuilding and financial services. The home-building operations are, by far, the most substantial part of its business, comprising approximately 98 percent of consolidated revenues in fiscal year 2005. The homebuilding segment generates nearly all of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The Company’s operations span all significant aspects of the home buying process—from design, construction and sale to mortgage origination, title insurance, escrow and homeowners insurance brokerage services. In addition to building single-family detached homes, the Company also builds attached homes, such as town homes and condominiums, including some mid-rise buildings, which share common walls and roofs. It builds homes for entry-level buyers, as well as for first- and second-time move-up buyers. The Company’s prices range from $92,000 to more than $600,000, with the average price of a Ryland home closed during 2005 being $278,000.

Over the last 12 years, the Company has concentrated on expanding its operations by investing its available capital into both existing and new markets. It believes that measured “organic” growth avoids the risk, debt, intangible assets and distractions associated with external acquisitions.

The Company focuses on achieving a high return on invested capital and profitable operations in every one of its markets. New communities are evaluated based on return and profitability benchmarks, and both senior and local management are incentivized based on their ability to achieve such returns. Management continually monitors the land acquisition process, sales revenues, margins and returns achieved in each of the Company’s markets as part of its evaluation of the use of its capital.

The Company is highly diversified throughout the United States, with no more than ten percent and 20 percent of its deployed capital allocated to any given market or geographic area, respectively. The Company believes diversification minimizes exposure to economic and market fluctuations and enhances growth potential. Capital is strategically allocated to avoid concentration in any given geographic area and to circumvent the accompanying risk associated with excessive dependence on local market anomalies. Subject to economic conditions, the Company plans to continue expanding in its existing markets and strives to be among the largest builders in each of those markets. It also intends to continue diversification by entering new markets, primarily through establishing start-up or satellite operations in markets near its existing divisions.

The Company’s national scale has provided increased opportunities for negotiation of volume discounts and rebates from national and regional material suppliers. Additionally, it has greater access to a lower cost of capital due to the strength and transparency of its balance sheet, as well as its lending and capital markets relationships. The Company’s economies of scale and diversification have contributed to significant improvements in its operating margins.

The Company is dedicated to building quality homes and customer relationships. With customer satisfaction as a major priority, it continues to make innovative enhancements designed to attract homebuyers. During 2005, the Company developed new training programs for service representatives and on-line systems for tracking requests, processing issues and improving customer interaction. In addition, the Company entered into a contract with Eliant, an organization which analyzes customer feedback, in order to better serve homebuyers’ needs.

The Ryland Group	2005 Annual Report	Page 45
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

In addition to being an added value to customers, RMC greatly enhances the Company’s profitability while limiting its risk. A competitively high capture rate for mortgage financing allows the homebuilder to monitor its backlog and closing process. Risk is further reduced because substantially all loans are sold on the day they close to a third party, which the third party then services and manages.

Ryland homes are built on-site and marketed in three major geographic regions. At December 31, 2005, the Company operated in the following metropolitan areas:

REGION		MAJOR MARKETS SERVED
North Central
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 has decentralized its operations to provide more flexibility to local division presidents and management teams. Each of its 22 homebuilding divisions across the country generally consists of a division president, a controller and other management personnel focused on land entitlement, acquisition and development; sales, construction, customer service, and purchasing; as well as accounting and administrative personnel. The Company’s operations in its homebuilding markets may differ due to a number of market-specific factors. These factors include regional economic conditions and job growth; land availability and local land development; consumer preferences; competition from other homebuilders; and home resale activity. The Company not only considers each of these factors upon entering into new markets, but also in determining the extent of its operations and capital allocation in existing markets. The Company’s local management teams are familiar with these factors and their market experience and expertise are critical in making decisions regarding local operations.

The Company provides oversight and centralizes key elements of its homebuilding business through its corporate and regional offices. Corporate is a non-operating business segment whose purpose is to support operations. Corporate departments are responsible for establishing operational policies and internal control standards; implementing strategic initiatives; and monitoring compliance with policies and controls throughout the Company’s operations. Corporate acts as an internal source of capital and provides financial, human resources, information technology, insurance, legal, marketing, national purchasing and tax compliance services, as well as performing the administrative functions associated with a publicly traded entity. The Company has three regional offices, which generally consist of a region president; a chief financial officer; real estate legal counsel; and other management personnel focused on human resources, marketing and operations. Regional offices provide oversight and standardization where appropriate. The region staff monitors activities by using various operational metrics in order to achieve Company return benchmarks.

Ryland markets attached and detached single-family homes, which are generally targeted to entry-level and first- and second-time move-up buyers. The Company’s diverse product line is tailored to the local styles and preferences found in each of its geographic markets. The product line offered in a particular community is determined in conjunction with the land acquisition process and is dependent upon a number of factors, including consumer preferences, competitive product offerings and development costs. Architectural services are generally outsourced to increase creativity and to ensure that the Company’s home designs are consistent with local market preferences.

The Ryland Group	2005 Annual Report	Page 46
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

Homebuyers are able to customize certain features of their homes by selecting from numerous options and upgrades displayed in the Company’s model homes and design centers. These design centers, which are conveniently located in most of the Company’s markets, also represented an increasing source of additional revenue and profit for the Company. Custom options contributed in excess of 11 percent of revenues in 2005 and significantly higher margins than base homes.

RESULTS OF OPERATIONS

Earnings, revenues, new orders and deliveries of homes reached record-breaking highs for the seventh consecutive year in 2005. These trends were indicative of another year of favorable economic and demographic environments, as well as of the Company’s ability to deliver a competitive product in superior locations while achieving higher relative economies through cost-saving initiatives. In 2005, the Company’s internally generated top- and bottom-line growth was fueled by increased volume and operating profits. The Company improved its Fortune 500 ranking and maintained its investment-grade rating while lowering the average interest rate on its debt. The Company continues to make significant investments in new marketing initiatives, product development, customer service, training and technology, all of which are critical to streamlining processes and improving the customer’s experience.

The Company reported consolidated net earnings of $447.1 million, or $9.03 per diluted share, for 2005, compared to $320.5 million, or $6.36 per diluted share, for 2004 and $241.7 million, or $4.56 per diluted share, for 2003. These net earnings increases resulted from higher revenues, increased operating margins and decreased expenses for its homebuilding operations.

The Company’s revenues reached a historical high of $4.8 billion for 2005, up 21.9 percent from $4.0 billion for 2004. Total revenues for 2004 exceeded 2003 levels by $507.7 million, or 14.7 percent. Homebuilding pretax operating margins increased to 15.6 percent for 2005, compared to 13.7 percent for 2004 and 11.8 percent for 2003.

EBITDA was $810.4 million for the year ended December 31, 2005, compared to $602.7 million and $478.4 million for the same period in 2004 and 2003, respectively. The Company’s ratio of EBITDA to interest incurred improved to 12.2 for the year ended December 31, 2005, compared to 11.3 for 2004 and 9.5 for 2003.

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

The Ryland Group	2005 Annual Report	Page 47
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

Stockholders’ equity increased 30.2 percent, or $319.2 million, during 2005, compared to an increase of 28.2 percent, or $232.3 million, during 2004. As a result of balancing cash outlays among achieving growth objectives, common stock repurchases and increasing dividends, stockholders’ equity per share increased 33.0 percent, to $29.68 in 2005, compared to $22.32 in 2004. The Company’s book value at December 31, 2005, was 98.7 percent tangible. The Company is not a significant participant in off-balance sheet type financing outside of traditional option contracts with land developers, and its investment in joint ventures represents less than one percent of its total assets.

During 2005, the Company continued to deliver superior returns to stockholders while maintaining its strategically low-risk model. In addition, it has focused on developing competitive advantages through training and technology initiatives. Revenues grew 21.9 percent, net earnings increased 39.5 percent, diluted earnings per share improved 42.0 percent, EBITDA increased 34.5 percent, return on beginning equity was 42.3 percent, return on beginning capital⁵ was 29.4 percent and inventory was turned 1.5 times. Dividends declared were doubled for the second time in two years. The Company’s returns remained among the highest in the industry and Fortune 500 companies. The Company’s credit quality continues to improve, and its financial position is stronger than at any time in its history.

HOMEBUILDING

New orders represent sales contracts that have been signed by the homebuyer and approved by the Company, subject to cancellation. The dollar value of new order contracts increased $702.5 million, or 15.8 percent, to $5.1 billion at December 31, 2005, from $4.4 billion at December 31, 2004 and $3.6 billion at December 31, 2003. Unit orders increased 3.8 percent in 2005 and 11.1 percent in 2004. The Company continued to diversify geographically as newer markets in the West and Southeast contributed more significant gains during the year.

⁵ Return on beginning capital is calculated by dividing net earnings before tax-affected interest by the sum of beginning debt and total stockholders’ equity.

The Ryland Group	2005 Annual Report	Page 48
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

New orders for 2005 increased 12.2 percent in Texas and 12.4 percent in the Southeast, but decreased 1.9 percent in the North and 7.2 percent in the West. In 2005, new order trends were generally driven by historically low interest rates and expansion plans but declined slightly in the fourth quarter in the California, Chicago, Phoenix, Mid-Atlantic and Twin Cities markets, due, in part, to increased price appreciation having a moderating effect on consumer demand, and in Las Vegas due to product shortages resulting, in part, from delays in development, processing and approval times for new projects. New orders for 2004 increased 0.8 percent in the North, 5.0 percent in Texas, 7.8 percent in the Southeast and 37.4 percent in the West. Positive new order trends in 2004 were driven by low interest rates and corresponding robust market conditions; expansion plans; a renewed focus on Internet marketing and customer-relations management; and a proactive approach to maintaining an adequate supply of competitively priced product and lots.

	NORTH		TEXAS		SOUTHEAST		WEST		TOTAL
New orders (units)
2005	4,333		3,702		5,630		3,852		17,517
2004	4,419		3,299		5,009		4,153		16,880
2003	4,385		3,141		4,648		3,023		15,197
Closings (units)
2005	4,367		3,365		4,887		4,054		16,673
2004	4,349		3,116		4,374		3,262		15,101
2003	4,393		3,291		4,216		2,824		14,724
Average closing price (in thousands)
2005	$	310	$	177	$	254	$	356	$	278
2004	288		165		230		312		251
2003	259		159		208		270		224
Outstanding contracts at December 31
Units
2005	1,774		1,329		3,601		1,760		8,464
2004	1,808		992		2,858		1,962		7,620
2003	1,738		809		2,223		1,071		5,841
Dollars (in millions)
2005	$	571	$	259	$	1,106	$	686	$	2,622
2004	568		173		725		649		2,115
2003	503		142		508		320		1,473
Average price (in thousands)
2005	$	322	$	195	$	307	$	390	$	310
2004	314		175		254		331		278
2003	289		175		229		299		252

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

Outstanding contracts denote the Company’s backlog of homes sold but not closed, which are generally built and closed, subject to cancellation, over the subsequent two quarters. At December 31, 2005, the Company had outstanding contracts for 8,464 units, representing the highest year-end backlog in its history and an 11.1 percent increase over year-end 2004.

The Ryland Group	2005 Annual Report	Page 49
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

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

Results of operations for the homebuilding segment are summarized as follows:

(in thousands)	2005		2004		2003
Revenues	$	4,725,751	$	3,867,086	$	3,355,450
Cost of sales	3,537,603		2,964,087		2,615,975
Gross profit	1,188,148		902,999		739,475
Selling, general and administrative expenses	440,965		372,660		333,726
Interest expense	—		210		6,032
Expenses related to early retirement of debt	8,277		—		5,086
Homebuilding pretax earnings	$	738,906	$	530,129	$	394,631

The homebuilding segment reported pretax earnings of $738.9 million for 2005, compared to $530.1 million for 2004 and $394.6 million for 2003. Homebuilding results in 2005 increased from 2004, primarily due to higher average closing prices, gross profit margins and closing volume. Homebuilding results in 2004 increased from 2003, primarily due to these same factors.

HOMEBUILDING REVENUE BY REGION

(in millions)

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

Consistent with its policy of managing land investments according to return and risk targets, the Company executed several land and lot sales during the year. Homebuilding revenues for the year ended December 31, 2005, included $96.9 million from land and lot sales, compared to revenues of $74.2 million for 2004 and $56.0 million for 2003, which contributed net gains of $23.9 million, $25.2 million and $10.5 million to pretax earnings in 2005, 2004 and 2003, respectively.

The Ryland Group	2005 Annual Report	Page 50
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

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

Selling, general and administrative expenses, as a percentage of revenue, were 9.3 percent for 2005, 9.6 percent for 2004 and 9.9 percent for 2003. Selling, general and administrative expenses, as a percentage of revenue, decreased from prior year levels for 2005 and 2004, primarily as a result of leverage obtained through a substantial increase in closings in the Atlanta, Charlotte, Inland Empire, Jacksonville, Las Vegas, Phoenix and Texas markets, which was accompanied by more modest increases in marketing and general and administrative expenses, partially offset by higher incentive compensation expense resulting from improved earnings.

Interest expense for the year ended December 31, 2004, was $0.2 million. Interest expense decreased $5.8 million in 2004, compared to 2003. In 2005, the homebuilding segment capitalized all interest incurred, resulting in no interest expense being recorded during the period. The rise in capitalized interest resulted from increased development activity. The Company ended the year with $461.4 million in cash, no borrowings against its revolving credit facility and a lower cost of funds.

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

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

FINANCIAL SERVICES

RMC provides mortgage-related products and services primarily for the Company’s homebuilding customers. By aligning its operations with the Company’s homebuilding segment, RMC leverages this relationship to capture homebuyers’ loans. RMC focuses primarily on originating mortgage loans and improving the profitability of these activities through increased operational efficiencies.

The Ryland Group	2005 Annual Report	Page 51
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

The Company arranges various types of mortgage financing, including conventional, Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages, with various fixed- and adjustable-rate features. The Company is approved to originate loans that conform to the guidelines established by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). The Company sells loans it originates, along with the related servicing rights, to others.

In 2005, RMC’s mortgage origination operations consisted primarily of the Company’s homebuilder loans, which were originated in connection with the sale of the Company’s homes. The number of mortgage originations was 12,774 for 2005, compared to 11,920 for 2004 and 11,983 for 2003. During 2005, total dollar originations were approximately $3.1 billion, of which 99.5 percent was for purchases of homes built by the Company and 0.5 percent was for purchases of homes built by others, purchases of existing homes or for the refinancing of existing mortgage loans. The capture rate of mortgages originated for customers of the home-building segment was 81.9 percent in 2005, compared to 84.2 percent in 2004 and 85.4 percent in 2003.

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

Ryland Insurance Services, a wholly-owned subsidiary of RMC, provides insurance brokerage services primarily to the Company’s homebuyers. At December 31, 2005, Ryland Insurance Services was licensed to operate in all of the states in which the Company’s homebuilding segment operates. During 2005, it provided insurance brokerage services to 60.4 percent of the Company’s homebuyers, compared to 58.7 percent during 2004.

The financial services segment reported pretax earnings of $59.5 million for 2005, compared to $56.9 million for 2004 and $62.8 million for 2003. The increase in 2005 was primarily due to a 7.2 percent increase in loans originated and a rise in average loan size, as well as increased profitability from title, escrow and insurance operations. The decrease in 2004 from 2003 was primarily due to lower gains on the sale of mortgages and loan servicing rights, which resulted from an increase in less profitable adjustable-rate mortgage product and a more competitive marketplace, partially offset by an increase in average loan size and a gain from the sale of a portion of the investment portfolio.

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

The Ryland Group	2005 Annual Report	Page 52
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

FINANCIAL SERVICES
STATEMENTS 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
Other	157			1,613			17
TOTAL REVENUES	91,815			84,735			88,679
EXPENSES
General and administrative	31,582			26,825			24,339
Interest	738			1,017			1,491
TOTAL EXPENSES	32,320			27,842			25,830
PRETAX EARNINGS	$	59,495		$	56,893		$	62,849
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

BALANCE SHEETS

	DECEMBER 31,
(in thousands)	2005		2004
ASSETS
Cash	$	845	$	19,149
Other assets	42,080		50,410
TOTAL ASSETS	42,925		69,559
LIABILITIES
Accounts payable	863		2,779
Accrued and other liabilities	23,706		37,588
Debt	—		10,490
TOTAL LIABILITIES	24,569		50,857
STOCKHOLDER’S EQUITY	18,356		18,702
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	42,925	$	69,559

The Ryland Group	2005 Annual Report	Page 53
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

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

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

CORPORATE

Corporate expenses were $77.4 million for 2005, $65.8 million for 2004 and $61.3 million for 2003. Corporate expenses for 2005 and 2004 rose primarily as a result of an increase in support and training costs commensurate with anticipated growth; a rise in incentive compensation, which was due to increases in the Company’s results and financial performance; and costs incurred as a result of the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

INVESTMENTS IN JOINT VENTURES

At December 31, 2005, the Company had an interest in 13 active joint ventures in the Atlanta, Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenix markets, three of which were consolidated. These joint ventures exist for the purpose of acquisition and co-development of lots, which are then sold to the Company, its joint venture partners or others, at market prices. Depending on the number of joint ventures and the level of activity in the entities, annual earnings from the Company’s investment in joint ventures will vary significantly. The Company recognized its proportionate share of earnings, which totaled $315,000 from unconsolidated joint ventures in 2005, compared to earnings of $5.8 million in 2004 and losses of $94,000 in 2003. The increase in 2004 was primarily attributable to a $5.4 million gain on the sale of land to a third party in one joint venture in Atlanta. The Company’s investment in unconsolidated joint ventures was $10.2 million at December 31, 2005, compared to $2.5 million at December 31, 2004. (See “Investments in Joint Ventures” in Note A, “Summary of Significant Accounting Policies.”)

INCOME TAXES

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

The Ryland Group	2005 Annual Report	Page 54
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

Financial Condition and Liquidity

Cash requirements for the Company’s homebuilding and financial services segments are generally provided from internally generated funds and outside borrowings.

Net earnings provided cash flows of $447.1 million in 2005, $320.5 million in 2004 and $241.7 million in 2003, primarily as a result of volume growth and increased operating margins. Net proceeds from the issuance of long-term debt were $353.0 million during 2005. Additionally, net changes in other assets, payables and other liabilities provided $194.2 million in 2005, $119.6 million in 2004 and $83.3 million in 2003. The cash provided was invested principally in inventory of $491.0 million, $585.6 million and $240.0 million in 2005, 2004 and 2003, respectively, as well as in stock repurchases of $176.2 million, $118.3 million and $130.9 million in 2005, 2004 and 2003, respectively. Dividends totaled $0.30, $0.21 and $0.08 per share for the annual periods ending December 31, 2005, 2004 and 2003, respectively. Effective in the fourth quarter of 2005, the Company’s quarterly common stock dividend was increased to $0.12 per share from the previous quarterly common stock dividend of $0.06 per share. During 2005, stockholders’ equity rose $319.2 million, while debt increased $363.0 million, increasing the Company’s leverage.

Consolidated inventories owned by the Company increased to $2.3 billion at December 31, 2005, from $1.9 billion at December 31, 2004. The Company attempts to maintain a projected four- to five-year supply of land, with half or more controlled through options. At December 31, 2005, the Company controlled 75,671 lots, with 30,201 lots owned and 45,470 lots, or 60.1 percent, under option. The Company has historically funded the acquisition of land and exercise of land options through a combination of operating cash flows, capital transactions and borrowings under its revolving credit facility. The Company expects these sources to continue to be adequate to fund future obligations with regard to land acquisition and exercise of land options; therefore, it does not anticipate that the exercise of land options will have a material adverse effect on its liquidity. In an effort to increase liquidity, models have been sold and leased back on a selective basis. The Company owned 80.7 percent of its model homes at December 31, 2005.

The homebuilding segment’s borrowings include senior notes, senior subordinated notes, an unsecured revolving credit facility and nonrecourse secured notes payable. Senior and senior subordinated notes outstanding totaled $893.5 million at December 31, 2005, compared to $540.5 million at December 31, 2004.

The Company used its $500.0 million unsecured revolving credit facility to finance increases in its home-building inventory and working capital, when necessary. There were no borrowings under the facility at either December 31, 2005 or 2004. Under this facility, the Company had letters of credit outstanding which totaled $185.6 million at December 31, 2005, and $131.3 million at December 31, 2004. Unused borrowing capacity under this facility was $314.4 million and $368.7 million at December 31, 2005 and 2004, respectively.

The Ryland Group	2005 Annual Report	Page 55
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

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

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

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

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

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

To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2005, such notes payable outstanding amounted to $28.5 million, compared to $8.0 million at December 31, 2004.

The financial services segment uses cash generated internally and from outside borrowing arrangements to finance its operations. During the fourth quarter of 2005, the financial services segment terminated its revolving credit facility, which was previously used to finance investment portfolio securities. Accordingly, the financial services segment had no borrowings outstanding at December 31, 2005. Borrowings of the financial services segment outstanding under the agreement were $10.5 million at December 31, 2004.

Although the Company no longer issues mortgage-backed securities and mortgage-participation securities, some of its limited-purpose subsidiaries continued to hold collateral for previously issued mortgage-backed bonds in which the Company maintained a residual interest. Revenues, expenses and portfolio balances declined as mortgage collateral pledged to secure the bonds decreased due to scheduled payments and prepayments, as well as to the sale and redemption of a majority of the investment portfolio during 2005 and 2004.

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

The Ryland Group	2005 Annual Report	Page 56
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

The Company filed a shelf registration statement with the U.S. Securities and Exchange Commission (SEC), for up to $1.0 billion of the Company’s debt and equity securities on April 11, 2005. At December 31, 2005, $850.0 million remained available under this registration statement due to the issuance of $250.0 million of senior notes in May 2005, of which $100.0 million was applied to the previous shelf registration statement. The registration statement provides that securities may be offered, from time to time, in one or more series and in the form of senior, subordinated or convertible debt; preferred stock; preferred stock represented by depository shares; common stock; stock purchase contracts; stock purchase units; and warrants to purchase both debt and equity securities. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. The timing and amount of future offerings, if any, will depend on market and general business conditions.

During 2005, the Company repurchased approximately 2.6 million shares of its outstanding common stock at a cost of approximately $176.2 million. At December 31, 2005, the Company had existing authorization from its Board of Directors to purchase approximately 381,000 additional shares and a new authorization for shares totaling $250.0 million. The Company’s stock repurchase program has been funded primarily through internally generated funds.

The Company granted fewer stock options in 2005 which, when combined with common stock repurchases, lowered dilution.

The following table provides a summary of the Company’s contractual cash obligations and commercial commitments at December 31, 2005, and the effect such obligations are expected to have on liquidity and cash flow in future periods.

	CONTRACTUAL PAYMENTS DUE BY PERIOD
(in thousands)	TOTAL		2006		2007-2008		2009-2010		AFTER 2010
Debt, principal 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 based on rates effective at December 31, 2005.

² Represents obligations under option contracts with specific performance provisions, net of cash deposits.

The Ryland Group	2005 Annual Report	Page 57
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

The Company believes that its current cash position, cash generation capabilities, amounts available under its revolving credit facility and its ability to access the capital markets in a timely manner with its existing shelf registration statement are adequate to meet its cash needs for the foreseeable future.

Off–Balance Sheet Arrangements

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

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

At December 31, 2005, the Company had outstanding letters of credit totaling $185.6 million and development or performance bonds of $428.6 million, issued by third parties, to secure performance under various contracts and land or municipal improvement obligations. The Company expects that the obligations secured by these letters of credit and performance bonds will generally be satisfied in the ordinary course of business and in accordance with applicable contractual terms. To the extent that the obligations are fulfilled, the related letters of credit and performance bonds will be released, and the Company will not have any continuing obligations.

The Company has no material third-party guarantees other than those associated with its $750.0 million revolving credit facility, its senior notes, and its investments in joint ventures. (See “Investments in Joint Ventures” in Note A, “Summary of Significant Accounting Policies” and Note K, “Supplemental Guarantor Information.”)

Critical Accounting Policies

Preparation of the Company’s consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of inherently uncertain matters. Listed below are those policies which management believes are critical and require the use of complex judgment in their application.

Management has discussed the critical accounting policies with the Audit Committee of its Board of Directors and the Audit Committee has reviewed the disclosure. There are items within the financial statements that require estimation but are not considered critical.

USE OF ESTIMATES

In budgeting land acquisitions, development and homebuilding construction costs associated with real estate projects, the Company evaluates market conditions; material and labor costs; buyer preferences; construction timing; and provisions for insurance and warranty obligations. The Company accrues its best estimate of the probable cost for resolution of legal claims. Estimates, which are based on historical experience and other assumptions, are reviewed continually, updated when necessary and believed to be reasonable under the circumstances. Management believes that the timing and scope of its evaluation procedures are proper and adequate. Changes in assumptions relating to such factors, however, could have a material effect on the Company’s results of operations for a particular quarterly or annual period.

The Ryland Group	2005 Annual Report	Page 58
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

INCOME RECOGNITION

Revenues and cost of sales are recorded at the time each home or lot is closed and title and possession are transferred to the buyer and there is no significant continuing involvement in accordance with Statement of Financial Accounting Standards No. 66 (SFAS 66), “Accounting for Sales of Real Estate.” In order to match revenues with related expenses, land, land development, interest, taxes and other related costs (both incurred and estimated to be incurred in the future) are allocated to the cost of homes closed, based upon the relative sales value basis of the total number of homes to be constructed in each community, in accordance with Statement of Financial Accounting Standards No. 67 (SFAS 67), “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Estimated land, common area development and related costs of master planned communities (including the cost of amenities) are allocated to individual parcels or communities on a relative sales value basis. Changes to estimated costs, subsequent to the commencement of the delivery of homes, are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific-identification method.

INVENTORY VALUATION

Housing projects and land held for development (inventory) and sale are stated at either the lower of cost or net realizable value. Inventory includes land and development costs; direct construction costs; capitalized indirect construction costs; capitalized interest; and real estate taxes. It may take one to three years to develop, sell and deliver all of the homes in a typical community. The Company assesses these assets for recoverability in accordance with the provisions of Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires that long-lived assets and assets held-for-sale be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of housing inventories is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and sales of comparable assets. Assets held-for-sale are carried at the lower of cost or fair value, less selling costs. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, as well as by other factors. In addition, land, or costs related to future communities, whether owned or under option, is reviewed to determine if the Company will proceed with development and if all related costs are recoverable. If these assets are considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets and is recognized within the same period that it is identified. Management believes its processes are designed to properly assess market values and carrying values of assets.

VARIABLE INTEREST ENTITIES

FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to the majority of the entity’s expected losses and/or receives a majority of the entity’s expected returns as a result of ownership, contractual agreements or other financial interests in the entity. FIN 46 also requires disclosure about variable interest entities (VIEs) that the Company is not required to consolidate but in which it has a significant, though not primary, variable interest. The Company enters into joint ventures from time to time for the purpose of acquisition and co-development of land parcels and lots. Its investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. Additionally, in the ordinary course of business, the Company enters into lot option purchase contracts in order to procure land for the construction of homes. Under such lot option purchase contracts, the Company funds stated deposits in consideration for the right to purchase lots at a future point in time, usually at predetermined prices. In accordance with the requirements of FIN 46, certain of the Company’s lot option purchase contracts may result in the creation of a variable interest in a VIE. The Company believes the accounting for joint ventures and land option contracts using the variable interest consolidation methodology is a critical accounting policy because the application of FIN 46 requires the use of complex judgment in its application.

The Ryland Group	2005 Annual Report	Page 59
	Management’s Discussion and Analysis of Results of Operations and Financial Condition

INCOME TAXES

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

Market Risk Summary

The following table provides information about the Company’s significant financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on implied forward rates as of the reporting date.

INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY

(in thousands)	2006			2007	2008			2009	2010 THEREAFTER		TOTAL			FAIR VALUE 12/31/05
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 the Company. Interest rate risk not only arises principally in the Company’s financial services segment, but also in respect to the homebuilding segment’s revolving credit facility. The Company enters into forward-delivery contracts and may, at times, use other hedging contracts to mitigate its exposure to movements in interest rates on mortgage interest rate lock commitments (IRLCs) and mortgage loans held-for-sale. The Company entered into treasury locks during 2005 to facilitate replacement of debt in 2006. (See “Financial Condition and Liquidity” and Note D, “Derivative Instruments.”) In managing interest rate risk, the Company does not speculate on the direction of interest rates.

The Ryland Group	2005 Annual Report	Page 60
	Consolidated Statements 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	440,965		372,660		333,726
Financial services	31,582		26,825		24,339
Corporate	77,350		65,810		61,263
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.

The Ryland Group	2005 Annual Report	Page 61
	Consolidated Balance 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.

The Ryland Group	2005 Annual Report	Page 62
	Consolidated Statements
	of Stockholders’ Equity

(in thousands, except share data)	COMMON STOCK			PAID-IN CAPITAL			RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE INCOME			TOTAL STOCKHOLDERS’ 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.

The Ryland Group	2005 Annual Report	Page 63
	Consolidated Statements
	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 NON CASH ACTIVITIES
Increase in consolidated inventory not owned related to land options	$	64,563		$	41,919		$	56,651

See Notes to Consolidated Financial Statements.

The Ryland Group	2005 Annual Report	Page 64
	Notes to Consolidated
	Financial Statements

Note A: Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its wholly-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2005 presentation.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid short-term investments and cash held in escrow to be cash equivalents. Cash equivalents totaled $428.2 million and $61.7 million at December 31, 2005 and 2004, respectively.

PER SHARE DATA

Basic net earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Additionally, diluted net earnings per common share give effect to dilutive common stock equivalent shares.

STOCK SPLIT

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

HOMEBUILDING REVENUES

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

HOUSING INVENTORIES

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

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

The following table is a summary of capitalized interest:

(in thousands)	2005			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

The Ryland Group	2005 Annual Report	Page 65
	Notes to Consolidated
	Financial Statements

VARIABLE INTEREST ENTITIES

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

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

In compliance with the provisions of FIN 46, the Company consolidated $239.2 million of inventory not owned at December 31, 2005, $176.4 million of which pertained to land and lot option contracts and $62.8 million of which pertained to three of the Company’s homebuilding joint ventures. (See further discussion in “Investments in Joint Ventures,” below.) While the Company may not have had legal title to the optioned land or guaranteed the seller’s debt associated with that property, under FIN 46 it had the primary variable interest and was required to consolidate the particular VIE’s assets under option at fair value. This represents the fair value of the optioned property. Additionally, to reflect the fair value of the inventory consolidated under FIN 46, the Company eliminated $13.3 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned. Minority interest totaling $163.1 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs. At December 31, 2005, the Company had cash deposits and letters of credit totaling $22.1 million relating to lot option contracts that were consolidated, representing its current maximum exposure to loss. Creditors of these VIEs, if any, have no recourse against the Company. At December 31, 2005, the Company had cash deposits and/or letters of credit totaling $95.9 million that were associated with lot option purchase contracts which had an aggregate purchase price of $1.2 billion and that were related to VIEs in which it did not have a primary variable interest.

SERVICE LIABILITIES

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

INVESTMENTS IN JOINT VENTURES

The Company enters into joint ventures from time to time for the purpose of acquisition and co-development of land parcels and lots. Currently, the Company participates in homebuilding joint ventures in the Atlanta, Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenix markets. The Company participates in a number of joint ventures in which it has less than a controlling interest. At December 31, 2005 and 2004, the Company’s investments in its unconsolidated joint ventures totaled $10.2 million and $2.5 million, respectively, and were classified in the consolidated balance sheets under “Other” assets. The Company recognizes its share of the respective joint ventures’ earnings from the sale of lots to other homebuilders. It does not, however, recognize earnings from lots that it purchases from the joint ventures. Instead, it reduces its cost basis in these lots by its share of the earnings from the lots. The Company’s equity in earnings of its unconsolidated joint ventures totaled $315,000 for the year ended December 31, 2005, compared to earnings of $5.8 million for the same period in 2004 and losses of $94,000 for the same period in 2003.

The Ryland Group	2005 Annual Report	Page 66
	Notes to Consolidated
	Financial Statements

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

The increase in aggregate joint venture assets and debt, year over year, is primarily attributable to one new joint venture which had total assets of $554.1 million and debt of $375.5 million at December 31, 2005. In this joint venture, the Company and its partners provided guarantees of debt on a pro rata basis. The Company has a 3.3 percent pro rata interest on the debt, or $12.5 million, and a completion guarantee related to project development. The guarantees apply if a joint venture partner defaults on its loan arrangement and the fair value of the collateral (land and improvements) is less than the loan balance.

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

PROPERTY, PLANT AND EQUIPMENT

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

PURCHASE PRICE IN EXCESS OF NET ASSETS ACQUIRED

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

The Company adopted the provisions of SFAS 142 on January 1, 2002, and performs impairment tests of its goodwill annually as of March 31. The Company tests goodwill for impairment by using the two-step process prescribed in SFAS 142. The first step identifies potential impairment, while the second step measures the amount of impairment. The Company had no impairment in the years ended December 31, 2005 or 2004.

As a result of the Company’s application of the nonamortization provisions of SFAS 142, no amortization was recorded in 2005, 2004 or 2003.

Goodwill is allocated to the reporting unit from which it originates. At December 31, 2005, goodwill attributable to the Company’s homebuilding operations was $18.2 million, net of $24.9 million of accumulated amortization.

INCOME TAXES

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

The Ryland Group	2005 Annual Report	Page 67
	Notes to Consolidated
	Financial Statements

STOCK-BASED COMPENSATION

The Company has elected to follow the intrinsic-value method to account for compensation expense, which is related to the award of stock options, and to furnish the pro forma disclosures required under Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” as amended. Since stock option awards are granted at prices no less than the fair market value of the shares at the date of grant, no compensation expense is recognized. Had compensation expense been determined based on fair value at the grant date for stock-option awards, consistent with the provisions of SFAS 123, the Company’s net earnings and earnings per share in 2005, 2004 and 2003 would have been reduced to the pro forma amounts indicated in the following table:

	YEAR ENDED DECEMBER 31,
*(in thousands, except share data)*	2005			2004				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 of each option grant is estimated on the grant date by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants in 2005, 2004 and 2003, respectively: a risk-free interest rate of 4.0 percent, 2.4 percent and 2.1 percent; an expected volatility factor for the market price of the Company’s common stock of 38.4 percent, 38.4 percent and 37.6 percent; a dividend yield of 0.5 percent, 0.5 percent and 0.3 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted in 2005, 2004 and 2003 were $18.99, $11.65 and $7.28, respectively. Beginning in 2006, stock based compensation expense will be recorded based on the fair value at the grant date. (See “SFAS 123(R) and SAB 107” in “New Accounting Pronouncements.”)

LOAN ORIGINATION FEES, COSTS, MORTGAGE DISCOUNTS AND LOAN SALES

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

DERIVATIVE INSTRUMENTS

In the normal course of business and pursuant to its risk-management policy, the Company enters, as an end user, into derivative instruments, including forward-delivery contracts for loans and mortgage-backed securities; options on forward-delivery contracts; futures contracts; and options on futures contracts, to minimize the impact of movements in market interest rates on IRLCs and mortgage loans held-for-sale. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. It manages this credit risk by entering into

The Ryland Group	2005 Annual Report	Page 68
	Notes to Consolidated
	Financial Statements

agreements with counterparties meeting its credit standards and by monitoring position limits. The Company elected not to use hedge accounting treatment with respect to its economic hedging activities. Accordingly, all derivative instruments used as economic hedges are carried in the consolidated balance sheets in “Other” assets or “Accrued and other liabilities” at fair value, with changes in value recorded in current earnings. The Company’s mortgage pipeline includes IRLCs, which represent commitments that have been extended by the Company to those borrowers who have applied for loan funding and have met certain defined credit and underwriting criteria. The Company determined that its IRLCs meet the definition of derivatives under Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities,” as amended.

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

ADVERTISING COSTS

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

COMPREHENSIVE INCOME

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

NEW ACCOUNTING PRONOUNCEMENTS

SFAS 123(R) AND SAB 107

In December 2004, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123(R)), “Share-Based Payment”, which is a revision of SFAS 123. SFAS 123(R) supercedes Accounting Principles Board (APB) Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” While generally similar in approach to its predecessor statement, SFAS 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. SFAS 123(R) permits public companies to adopt its requirements by using either the “modified prospective” method, in which compensation cost is recognized beginning with the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date; or by using the “modified-retrospective” method, which includes the requirements of the modified-prospective method described above and also permits entities to restate, based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS 123(R) is effective for public companies at the beginning of the first interim or annual period after December 15, 2005. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees by using APB No. 25’s intrinsic-value method and, as such, generally recognizes no compensation cost for employee stock options.

The Company will implement the provisions of SFAS 123(R) in the first quarter of 2006, which will have an impact on its financial statements but is not expected to have a material impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123, which is described in the disclosure of pro forma net income and earnings per share in “Stock-Based Compensation.”

The Ryland Group	2005 Annual Report	Page 69
	Notes to Consolidated
	Financial Statements

SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise their stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $30.5 million, $17.5 million and $17.1 million in 2005, 2004 and 2003, respectively.

In March 2005, the SEC released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 presents the SEC’s staff position regarding the application of SFAS 123(R). SAB 107 contains interpretive guidance related to the interaction between SFAS 123(R) and SEC rules and regulations. SAB 107 outlines the significance of disclosures made regarding the accounting for share-based payments.

SFAS 154

In March 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections,” which is a replacement of APB Opinion No. 20, “Accounting Changes,” and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 amends requirements for reporting a change in accounting principles. The statement requires a retrospective application of changes in accounting principle to prior period financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS 154 will not have a material effect on the Company’s financial condition or results of operations.

FSP 109-1

In December 2004, the FASB issued Staff Position 109-1 (FSP 109-1), “Application of FASB Statement No. 109 (SFAS 109), ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” The American Jobs Creation Act, which was signed into law in October 2004, provides a tax deduction on qualified domestic production activities. When fully phased-in, the deduction will be up to nine percent of the lesser of “qualified production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction should be accounted for as a special deduction under SFAS 109 and will reduce tax expense in the period or periods that the amounts are deductible on the tax return. The tax benefit resulting from the new deduction was effective beginning in the Company’s fiscal year 2005. The Company currently estimates the reduction in its federal income tax rate to be in the range of one half of one percent to one percent.

Note B: Segment Information

The Company is a leading national homebuilder and mortgage-related financial services firm. As one of the largest single-family on-site homebuilders in the United States, it builds homes in 27 markets. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The Company’s financial services segment provides loan origination and offers title, escrow and insurance brokerage services. Corporate is a nonoperating business segment with the sole purpose of supporting operations. Certain corporate expenses are allocated to the homebuilding and financial services segments.

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

The Ryland Group	2005 Annual Report	Page 70
	Notes to Consolidated
	Financial Statements

SELECTED SEGMENT INFORMATION

	YEAR ENDED DECEMBER 31,
(in thousands)	2005			2004			2003
REVENUES
Homebuilding	$	4,725,751		$	3,867,086		$	3,355,450
Financial services	91,815			84,735			88,679
Total	$	4,817,566		$	3,951,821		$	3,444,129
PRETAX EARNINGS
Homebuilding	$	738,906		$	530,129		$	394,631
Financial services	59,495			56,893			62,849
Corporate	(77,350		)	(65,810		)	(61,263		)
Total	$	721,051		$	521,212		$	396,217
DEPRECIATION AND AMORTIZATION
Homebuilding	$	37,500		$	33,122		$	30,448
Financial services	1,119			623			922
Corporate	4,547			4,774			5,066
Total	$	43,166		$	38,519		$	36,436
IDENTIFIABLE ASSETS
Homebuilding	$	3,187,550		$	2,217,589		$	1,829,640
Financial services	42,925			69,559			68,270
Corporate and other	156,398			137,822			109,680
Total	$	3,386,873		$	2,424,970		$	2,007,590

Note C: Earnings Per Share Reconciliation

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

	YEAR ENDED DECEMBER 31,
(in thousands, except share data)	2005		2004		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
Diluted 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 to purchase 205,000 shares, 420,000 shares and 227,000 shares of common stock at various prices were outstanding at December 31, 2005, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share for those annual periods because their effect would have been antidilutive since the exercise prices were greater than the average market price of the common shares.

The Ryland Group	2005 Annual Report	Page 71
	Notes to Consolidated
	Financial Statements

Note D: Derivative Instruments

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

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

(in thousands)	2005		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 represent loan commitments with customers at market rates generally up to 180 days before settlement. IRLCs expose the Company to market risk as a result of increases in mortgage interest rates. IRLCs had interest rates ranging from 1.0 percent to 12.6 percent at December 31, 2005, and 1.0 percent to 9.5 percent at December 31, 2004.

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

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

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

Note E: Fair Values of Financial Instruments

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

The Ryland Group	2005 Annual Report	Page 72
	Notes to Consolidated
	Financial Statements

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

	2005						2004
(in thousands)	CARRYING VALUE			FAIR VALUE			CARRYING VALUE			FAIR 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 carrying amounts of cash and cash equivalents, secured notes payable and short-term borrowings under various credit agreements are reported in the balance sheet and approximate their fair values. The fair values of the senior notes; senior subordinated notes; mortgage loans held-for-sale; mortgage-backed securities and notes receivable; forward-delivery and other hedging contracts; treasury locks; and IRLCs are based on either quoted market prices or market prices for similar financial instruments.

Note F: Debt

Debt consists of the following at December 31:

(in thousands)	2005		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 agreement	—		10,490
Total	$	921,970	$	558,942

Maturities of debt are 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 interest payable semiannually, which may not be redeemed prior to maturity; (b) $150.0 million of 5.4 percent senior notes due June 2008, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time;

The Ryland Group	2005 Annual Report	Page 73
	Notes to Consolidated
	Financial Statements

(c) $250.0 million of 5.4 percent senior notes due May 2012, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time; and (d) $250.0 million of 5.4 percent senior notes due January 2015, with interest payable semiannually, which may be redeemed at a stated redemption price, in whole or in part, at any time.

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

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

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

At December 31, 2005, the Company’s obligations to pay principal, premium, if any, and interest under its $500.0 million unsecured revolving credit facility; 8.0 percent senior notes due August 2006; 5.4 percent senior notes due June 2008; 5.4 percent senior notes due May 2012; and 5.4 percent senior notes due January 2015 are guaranteed on a joint and several basis by substantially all of its wholly-owned homebuilding subsidiaries. Such guarantees are full and unconditional. (See Note K, “Supplemental Guarantor Information.”)

The senior and senior subordinated note and indenture agreements, as well as the unsecured revolving credit facility, contain numerous restrictive covenants. At December 31, 2005, the Company had $258.2 million of retained earnings available for dividends and was in compliance with these covenants.

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

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

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

The Ryland Group	2005 Annual Report	Page 74
	Notes to Consolidated
	Financial Statements

Note G: Income Taxes

The Company’s expense 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

The following table reconciles the statutory federal income tax rate to the Company’s effective 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 income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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

(in thousands)	2005			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 Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total net current tax liability of $67.1 million and $48.4 million at December 31, 2005 and 2004, respectively. These amounts are reported in the consolidated balance sheets in “Accrued and other liabilities.”

The Ryland Group	2005 Annual Report	Page 75
	Notes to Consolidated
	Financial Statements

Note H: Stockholders’ Equity

COMMON SHARE PURCHASE RIGHTS

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

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

STOCK SPLIT

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

Note I: Employee Incentive and Stock Plans

EQUITY INCENTIVE PLAN AND OTHER RELATED PLANS

The Ryland Group, Inc. 2005 Equity Incentive Plan (the “Plan”) permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, stock units or any combination of the foregoing to employees. This Plan replaces the Company’s 2002 Equity Incentive Plan (the “2002 Plan”). The aggregate number of shares available for issuance under the Plan includes 769,576 shares carried over from the 2002 Plan and 475,000 new shares available under the terms of the Plan. Any shares of the Company’s common stock covered by an award (or portion of an award) granted under the Plan or the 2002 Plan that are forfeited, expired or canceled without delivery of shares of common stock, will again be available for award under the Plan. The Plan will remain in effect until February 2015, unless it is terminated by the Board of Directors at an earlier date. Stock options granted in accordance with this plan generally have a maximum term of five years and vest over three years. Outstanding stock options granted under previous plans generally have a maximum term of ten years and vest over three years. At December 31, 2005 and 2004, there were 659,263 and 765,408 stock options or other awards or units available for grant under the Plan or the 2002 Plan, respectively.

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

The Ryland Group	2005 Annual Report	Page 76
	Notes to Consolidated
	Financial Statements

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

A summary of stock options outstanding and exercisable at December 31, 2005, follows:

	OPTIONS OUTSTANDING				OPTIONS EXERCISABLE
RANGE OF EXERCISE PRICES	NUMBER OUTSTANDING	WEIGHTED- AVERAGE REMAINING LIFE (YEARS)	WEIGHTED- AVERAGE EXERCISE PRICE		NUMBER EXERCISABLE	WEIGHTED- AVERAGE EXERCISE PRICE
$ 3.19 to $6.38	1,552,232	2.97	$	5.46	1,552,232	$	5.46
$ 10.19 to $24.44	1,448,151	6.44	19.19		1,210,525	18.83
$ 34.70 to $57.54	1,098,437	8.27	43.64		597,778	46.72
$ 61.40 to $83.13	555,750	6.37	65.46		—	—

The Company has made several restricted stock awards to senior executives under the Plan and its predecessor plans. All restricted stock was awarded in the name of each participant who had all the rights of other common stockholders, subject to restrictions and forfeiture provisions. Accordingly, such restricted stock awards were considered common stock equivalents. Compensation expense recognized for such awards totaled $18.8 million, $14.3 million and $16.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.

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

	2005		2004		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 outstanding stock options and restricted stock awards have been granted in accordance with the terms of the Plan, the Director Plan and their respective predecessor plans, all of which were approved by the Company’s stockholders.

The Ryland Group	2005 Annual Report	Page 77
	Notes to Consolidated
	Financial Statements

RETIREMENT SAVINGS OPPORTUNITY PLAN (RSOP)

All full-time employees are eligible to participate in the RSOP following 30 days of employment. Part-time employees are eligible to participate in the RSOP following the completion of 1,000 hours of service within the first 12 months of employment or within any plan year after the date of hire. Pursuant to Section 401(k) of the Internal Revenue Code, the plan permits deferral of a portion of a participant’s income into a variety of investment options. Total compensation expense related to the Company’s matching contributions for this plan amounted to $11.0 million, $9.3 million and $8.1 million in 2005, 2004 and 2003, respectively.

EMPLOYEE STOCK PURCHASE PLAN (ESPP)

All full-time employees of the Company, with the exception of its executive officers, are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made for the purchase of shares. The Company matches a portion of the employee’s contribution by donating an additional 20.0 percent of the employee’s payroll deduction. Stock is purchased by a plan administrator on a regular monthly basis. All brokerage and transaction fees for purchasing the stock are paid for by the Company. The Company’s expense related to its matching contribution for this plan was $514,000, $390,000 and $321,000 in 2005, 2004 and 2003, respectively.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

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

Note J: Commitments and Contingencies

COMMITMENTS

In the normal course of business, the Company acquires rights under option agreements to purchase land or lots for use in future homebuilding operations. At December 31, 2005, it had related cash deposits and letters of credit outstanding of $188.5 million for land options pertaining to land purchase contracts with an aggregate purchase price of $2.1 billion. At December 31, 2005, the Company had commitments with respect to option contracts having specific performance provisions of approximately $60.5 million, compared to $117.2 million at December 31, 2004.

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

	YEAR ENDED DECEMBER 31,
(in thousands)	2005			2004			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

The Ryland Group	2005 Annual Report	Page 78
	Notes to Consolidated
	Financial Statements

Future minimum rental commitments under noncancelable leases with remaining terms in excess of one 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-site housing producer, the Company is often required by some municipalities to obtain development or performance bonds and letters of credit in support of its contractual obligations. At December 31, 2005, total development bonds were $428.6 million, while total related deposits and letters of credit were $81.3 million. In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; however, it does not expect that any currently outstanding bonds or letters of credit will be called.

At December 31, 2005, one of the joint ventures in which the Company participates had debt of $375.5 million. In this joint venture, the Company and its partners provided guarantees of debt on a pro rata basis. The Company has a 3.3 percent pro rata interest on the debt, or $12.5 million, and a completion guarantee related to project development. The guarantees apply if a joint venture partner defaults on its loan arrangement and the fair value of the collateral (land and improvements) is less than the loan balance. In addition, the Company guaranteed up to 50.0 percent of a $55.0 million revolving credit facility in another of its joint ventures, in February 2006.

IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement. At December 31, 2005, the Company had outstanding IRLCs totaling $233.8 million. Hedging contracts are utilized to mitigate the risk associated with interest rate fluctuations on IRLCs. (See Note D, “Derivative Instruments.”)

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

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

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

(in thousands)	2005			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 Company requires substantially all of its subcontractors to have general liability insurance (including construction defect coverage) and workmans compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles

The Ryland Group	2005 Annual Report	Page 79
	Notes to Consolidated
	Financial Statements

and other coverage limits. Over the past several years, general liability insurance for the homebuilding industry has become more difficult to obtain with fewer insurers participating. As a result, Ryland Homes Insurance Company, a wholly-owned subsidiary of the Company, provides insurance services to the home-building segment’s subcontractors in certain markets.

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

Note K: Supplemental Guarantor Information

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

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

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

CONSOLIDATING STATEMENT OF EARNINGS

	YEAR ENDED DECEMBER 31, 2005
(in thousands)	TRG, INC.			GUARANTOR SUBSIDIARIES		NON- GUARANTOR SUBSIDIARIES		CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
REVENUES
Homebuilding	$	2,777,565		$	2,064,488	$	—	$	(116,302	)	$	4,725,751
Financial services				—		91,815		—			91,815
TOTAL REVENUES	2,777,565			2,064,488		91,815		(116,302		)	4,817,566
EXPENSES
Cost of sales	2,118,187			1,535,718		—		(116,302		)	3,537,603
Selling, general and administrative	243,660			197,259		46		—			440,965
Financial services	—			—		31,582		—			31,582
Corporate	19,118			58,232		—		—			77,350
Interest	(8,320		)	8,320		738		—			738
Expenses related to early retirement of debt	8,277			—		—		—			8,277
TOTAL EXPENSES	2,380,922			1,799,529		32,366		(116,302		)	4,096,515
Earnings before taxes	396,643			264,959		59,449		—			721,051
Tax expense	150,724			100,684		22,591		—			273,999
Equity in net earnings of subsidiaries	201,133			—		—		(201,133		)	—
NET EARNINGS	$	447,052		$	164,275	$	36,858	$	(201,133	)	$	447,052

The Ryland Group	2005 Annual Report	Page 80
	Notes to Consolidated
	Financial Statements

CONSOLIDATING STATEMENT OF EARNINGS

	YEAR ENDED DECEMBER 31, 2004
(in thousands)	TRG, INC.			GUARANTOR SUBSIDIARIES		NON- GUARANTOR SUBSIDIARIES		CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
REVENUES
Homebuilding	$	2,403,614		$	1,551,529	$	1,341	$	(89,398	)	$	3,867,086
Financial services	—			—		84,735		—			84,735
TOTAL REVENUES	2,403,614			1,551,529		86,076		(89,398		)	3,951,821
EXPENSES
Cost of sales	1,832,163			1,219,981		1,341		(89,398		)	2,964,087
Selling, general and administrative	219,388			153,160		112		—			372,660
Financial services	—			—		26,825		—			26,825
Corporate	15,735			50,075		—		—			65,810
Interest	(5,484		)	5,694		1,017		—			1,227
TOTAL EXPENSES	2,061,802			1,428,910		29,295		(89,398		)	3,430,609
Earnings before taxes	341,812			122,619		56,781		—			521,212
Tax expense	131,597			47,209		21,861		—			200,667
Equity in net earnings of subsidiaries	110,330			—		—		(110,330		)	—
NET EARNINGS	$	320,545		$	75,410	$	34,920	$	(110,330	)	$	320,545

CONSOLIDATING STATEMENT OF EARNINGS

	YEAR ENDED DECEMBER 31, 2003
(in thousands)	TRG, INC.		GUARANTOR SUBSIDIARIES		NON- GUARANTOR SUBSIDIARIES		CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
REVENUES
Homebuilding	$	2,153,561	$	1,317,300	$	—	$	(115,411	)	$	3,355,450
Financial services	—		—		88,679		—			88,679
TOTAL REVENUES	2,153,561		1,317,300		88,679		(115,411		)	3,444,129
EXPENSES
Cost of sales	1,671,666		1,059,627		93		(115,411		)	2,615,975
Selling, general and administrative	203,246		130,401		79		—			333,726
Financial services	—		—		24,339		—			24,339
Corporate	15,378		45,885		—		—			61,263
Interest	134		5,898		1,491		—			7,523
Expenses related to early retirement of debt	5,086		—		—		—			5,086
TOTAL EXPENSES	1,895,510		1,241,811		26,002		(115,411		)	3,047,912
Earnings before taxes	258,051		75,489		62,677		—			396,217
Tax expense	100,640		29,441		24,444		—			154,525
Equity in net earnings of subsidiaries	84,281		—		—		(84,281		)	—
NET EARNINGS	$	241,692	$	46,048	$	38,233	$	(84,281	)	$	241,692

The Ryland Group	2005 Annual Report	Page 81
	Notes to Consolidated
	Financial Statements

CONSOLIDATING BALANCE SHEET

	DECEMBER 31, 2005
(in thousands)	TRG, INC.		GUARANTOR SUBSIDIARIES			NON- GUARANTOR SUBSIDIARIES		CONSOLIDATING ELIMINATIONS			CONSOLIDATED 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 balances	1,188,956		(608,086		)	18,557		(599,427		)	—
Other assets	238,325		52,432			36,881		—			327,638
TOTAL ASSETS	2,914,140		771,009			301,151		(599,427		)	3,386,873

LIABILITIES
Accounts payable and other accrued liabilities	630,383		178,194			105,653		—			914,230
Debt	907,736		14,234			—		—			921,970
TOTAL LIABILITIES	1,538,119		192,428			105,653		—			1,836,200
MINORITY INTEREST	—		—			174,652		—			174,652
STOCKHOLDERS’ EQUITY	1,376,021		578,581			20,846		(599,427		)	1,376,021
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,914,140	$	771,009		$	301,151	$	(599,427	)	$	3,386,873

CONSOLIDATING BALANCE SHEET

	DECEMBER 31, 2004
(in thousands)	TRG, INC.		GUARANTOR SUBSIDIARIES			NON GUARANTOR SUBSIDIARIES			CONSOLIDATING ELIMINATIONS			CONSOLIDATED 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 balances	739,770		(285,782		)	(18,194		)	(435,794		)	—
Other assets	200,128		39,756			54,380			—			294,264
TOTAL ASSETS	2,111,831		559,417			189,516			(435,794		)	2,424,970

LIABILITIES
Accounts payable and other accrued liabilities	507,385		144,272			49,762			—			701,419
Debt	547,612		840			10,490			—			558,942
TOTAL LIABILITIES	1,054,997		145,112			60,252			—			1,260,361
MINORITY INTEREST	—		—			107,775			—			107,775
STOCKHOLDERS’ EQUITY	1,056,834		414,305			21,489			(435,794		)	1,056,834
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,111,831	$	559,417		$	189,516		$	(435,794	)	$		2,424,970

The Ryland Group	2005 Annual Report	Page 82
	Notes to Consolidated
	Financial Statements

CONSOLIDATING STATEMENT OF CASH FLOWS

	YEAR ENDED DECEMBER 31, 2005
(in thousands)	TRG, INC.			GUARANTOR SUBSIDIARIES			NON- GUARANTOR SUBSIDIARIES			CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	447,052		$	164,275		$	36,858		$	(201,133	)	$	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		)	354,270			(6,087		)	201,133			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

The Ryland Group	2005 Annual Report	Page 83
	Notes to Consolidated
	Financial Statements

CONSOLIDATING STATEMENT OF CASH FLOWS

	YEAR ENDED DECEMBER 31, 2004
(in thousands)	TRG, INC.			GUARANTOR SUBSIDIARIES			NON- GUARANTOR SUBSIDIARIES			CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	320,545		$	75,410		$	34,920		$	(110,330	)	$	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			(63,878		)	16,113			110,330			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

The Ryland Group	2005 Annual Report	Page 84
	Notes to Consolidated
	Financial Statements

CONSOLIDATING STATEMENT OF CASH FLOWS

	YEAR ENDED DECEMBER 31, 2003
(in thousands)	TRG, INC.			GUARANTOR SUBSIDIARIES			NON- GUARANTOR SUBSIDIARIES			CONSOLIDATING ELIMINATIONS			CONSOLIDATED TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	241,692		$	46,048		$	38,233		$	(84,281	)	$	241,692
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	24,261			11,253			922			—			36,436
Changes in assets and liabilities:
Increase in inventories	(148,412		)	(91,577		)	—			—			(239,989		)
Net change in other assets, payables and other liabilities	(44,754		)	81,683			(37,911		)	84,281			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

Note L: Subsequent Event

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

The Ryland Group	2005 Annual Report	Page 85
	Report of Management

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

The accounting systems, which record, summarize and report financial information, are supported by internal control systems designed to provide reasonable assurance, at an appropriate cost, that the assets are safeguarded and that transactions are recorded in accordance with Company policies and procedures. Developing and maintaining these systems are the responsibility of management. Proper selection, training and development of personnel also contribute to the effectiveness of the internal control systems. For the purpose of evaluating and documenting its systems of internal control, management elected to use the integrated framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s systems, evaluation and test results were documented. The Company’s internal auditors regularly test these systems. Based on its evaluation, management believes that its systems of internal control over financial reporting were effective and is not aware of any material weaknesses.

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

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

/s/ Gordon A. 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

The Ryland Group	2005 Annual Report	Page 86
	Reports of Independent Registered
	Public Accounting Firm

BOARD OF DIRECTORS AND STOCKHOLDERS

THE RYLAND GROUP, INC.

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

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ryland Group, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005,in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Ryland Group, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Ernst & Young LLP
Los Angeles, California February 22, 2006

The Ryland Group	2005 Annual Report	Page 87
	Reports of Independent Registered
	Public Accounting Firm

BOARD OF DIRECTORS AND STOCKHOLDERS

THE RYLAND GROUP, INC.

We have audited management’s assessment, included in the accompanying Report of Management, that The Ryland Group, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Ryland Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated February 22, 2006 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Ernst & Young LLP
Los Angeles, California February 22, 2006

The Ryland Group	2005 Annual Report	Page 88
	Quarterly Financial Data and
	Common Stock Prices and Dividends

QUARTERLY FINANCIAL 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	$	1,500,518	$	1,231,112	$	1,135,744	$	858,377	$	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

COMMON STOCK PRICES AND DIVIDENDS

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

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

The table below presents high and low market prices and dividend information for the Company. (See Note F, “Debt” for dividend restrictions.)

2005	HIGH		LOW		DIVIDENDS DECLARED PER SHARE		2004	HIGH		LOW		DIVIDENDS DECLARED PER 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

NYSE CERTIFICATION

The NYSE requires that the chief executive officers of its listed companies certify annually to the NYSE that they are not aware of violations by their companies of NYSE corporate governance listing standards. The Company submitted a non-qualified certification by its Chief Executive Officer to the NYSE last year in accordance with the NYSE’s rules. Further, the Company filed certifications by its Chief Executive Officer and Chief Financial Officer with the SEC in accordance with the Sarbanes-Oxley Act of 2002. These certifications were filed as exhibits to the Company’s most recent Annual Report on Form 10-K.

EX-21 6 a2167774zex-21.htm EXHIBIT 21
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Exhibit 21: Subsidiaries of the Registrant

The following subsidiaries represent the significant subsidiaries of the Registrant as of December 31, 2005:

Ryland Homes of California, Inc., a Delaware corporation
The Ryland Corporation, a California corporation
Ryland Organization Company, a California corporation

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Exhibit 21: Subsidiaries of the Registrant

EX-23 7 a2167774zex-23.htm EXHIBIT 23

Exhibit 23: Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Ryland Group, Inc. of our reports dated February 22, 2006, with respect to the consolidated financial statements of The Ryland Group, Inc., The Ryland Group, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of The Ryland Group, Inc., included in the 2005 Annual Report to Shareholders of The Ryland Group, Inc.

Our audits also included the financial statement schedule of The Ryland Group, Inc. listed in Item 15(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-58208; Form S-3 No. 333-100167; Form S-3 No. 333-113756; Form S-3 No. 333-121469; and Form S-3 No. 333-124000) of The Ryland Group, Inc. and in the related Prospectuses of our reports dated February 22, 2006, with respect to the consolidated financial statements and schedule of The Ryland Group, Inc., The Ryland Group, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of The Ryland Group, Inc., incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2005.

We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-32431) pertaining to The Ryland Group, Inc. Retirement Savings Opportunity Plan; the Registration Statement (Form S-8 No. 333-101445) pertaining to The Ryland Group, Inc. 2002 Equity Incentive Plan; the Registration Statement (Form S-8 No. 333-58204) pertaining to The Ryland Group, Inc. 2000 Non-Employee Director Equity Plan; the Registration Statement (Form S-8 No. 333-68397) pertaining to The Ryland Group, Inc. Executive and Director Deferred Compensation Plan and The Ryland Group, Inc. Non-Employee Directors' Stock Unit Plan; the Registration Statement (Form S-8 No. 33-56905) pertaining to The Ryland Group, Inc. 1992 Equity Incentive Plan; the Registration Statement (Form S-8 No. 333-119922) pertaining to The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan; and the Registration Statement (Form S-8 No. 333-126783) pertaining to the 2005 Equity Incentive Plan of our reports dated February 22, 2006, with respect to the consolidated financial statements and schedule of The Ryland Group, Inc., The Ryland Group, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of The Ryland Group, Inc., incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ ERNST & YOUNG LLP

Ernst & Young LLP
Los Angeles, California
February 24, 2006

EX-24 8 a2167774zex-24.htm EXHIBIT 24

Exhibit 24: Power of Attorney

The undersigned directors of The Ryland Group, Inc., a Maryland corporation, constitute and appoint Timothy J. Geckle the true and lawful agent and attorney-in-fact of the undersigned, with full power and authority in said agent and attorney-in-fact to sign for the undersigned, in their respective names as directors of The Ryland Group, Inc., the Annual Report on Form 10-K of The Ryland Group, Inc. for the fiscal year ended December 31, 2005, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Dated: February 23, 2006

		/s/ R. Chad Dreier R. Chad Dreier, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
		/s/ Daniel T. Bane Daniel T. Bane, Director
		/s/ Leslie M. Frécon Leslie M. Frécon, Director
		/s/ Roland A. Hernandez Roland A. Hernandez, Director
		/s/ William L. Jews William L. Jews, Director
		/s/ Ned Mansour Ned Mansour, Director
		/s/ Robert E. Mellor Robert E. Mellor, Director
		/s/ Norman J. Metcalfe Norman J. Metcalfe, Director
		/s/ Charlotte St. Martin Charlotte St. Martin, Director
		/s/ Paul J. Varello Paul J. Varello, Director
		/s/ John O. Wilson John O. Wilson, Director

EX-31.1 9 a2167774zex-31_1.htm EXHIBIT 31.1


Exhibit 31.1:	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Executive Officer Pursuant to Rule 13a – 14(a)
Under the Securities Exchange Act of 1934

I, R. Chad Dreier, certify that:

1. I have reviewed this Annual Report on Form 10-K of The Ryland Group, Inc. ("the Company");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and

5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

Date: February 21, 2006

/s/ R. Chad Dreier

R. Chad Dreier
Chairman, President and
Chief Executive Officer

EX-31.2 10 a2167774zex-31_2.htm EXHIBIT 31.2


Exhibit 31.2:	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Financial Officer Pursuant to Rule 13a – 14(a)
Under the Securities Exchange Act of 1934

I, Gordon A. Milne, certify that:

1. I have reviewed this Annual Report on Form 10-K of The Ryland Group, Inc. ("the Company");

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

Date: February 21, 2006

/s/ Gordon A. Milne

Gordon A. Milne
Executive Vice President and
Chief Financial Officer

EX-32.1 11 a2167774zex-32_1.htm EXHIBIT 32.1


Exhibit 32.1:	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350

I, R. Chad Dreier, Chairman, President and Chief Executive Officer (principal executive officer) of The Ryland Group, Inc. ("the Company"), certify, to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the year ended December 31, 2005 of the Company ("the Report"), that:

(1): The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2): The information contained and incorporated by reference in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ R. Chad Dreier

Name: R. Chad Dreier
Date: February 21, 2006

EX-32.2 12 a2167774zex-32_2.htm EXHIBIT 32.2


Exhibit 32.2:	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350

I, Gordon A. Milne, Executive Vice President and Chief Financial Officer (principal financial officer) of The Ryland Group, Inc. ("the Company"), certify, to the best of my knowledge, based upon a review of the Annual Report on Form 10-K for the year ended December 31, 2005 of the Company ("the Report"), that:

(1): The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2): The information contained and incorporated by reference in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gordon A. Milne

Name: Gordon A. Milne
Date: February 21, 2006

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

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

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)

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)

Senior Subordinated Notes, dated as of June 13, 2001
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-58208)

Senior Notes, dated as of August 16, 2001
(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-58208)