10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

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

For the fiscal year ended December 31, 2004

or

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

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 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 þ No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the common stock of The Ryland Group, Inc. held by nonaffiliates of the registrant (46,563,098 shares) at June 30, 2004, was $1,820,617,132.

The number of shares of common stock of The Ryland Group, Inc. outstanding on February 7, 2005, was 47,541,136.

DOCUMENTS INCORPORATED BY REFERENCE

Name of Document	Location in Report
Proxy Statement for the 2005 Annual Meeting of Stockholders	Parts I, III
Annual Report to Shareholders for the Year Ended December 31, 2004	Parts II, III, IV

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THE RYLAND GROUP, INC.
FORM 10-K
INDEX

ITEM NO.

PART I
Item 1.	Business	4
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	10
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	12
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	13
Item 8.	Financial Statements and Supplementary Data	13
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	13
Item 9A.	Controls and Procedures	13
Item 9B.	Other Information	13
PART III
Item 10.	Directors and Executive Officers of the Registrant	14
Item 11.	Executive Compensation	14
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	14
Item 13.	Certain Relationships and Related Transactions	14
Item 14.	Principal Accountant Fees and Services	14
PART IV
Item 15.	Exhibits and Financial Statement Schedules	15
SIGNATURES		19
INDEX OF EXHIBITS		20
EXHIBIT 12.1
EXHIBIT 13
EXHIBIT 21
EXHIBIT 23
EXHIBIT 24
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I

Item 1. Business

With headquarters in Southern California, The Ryland Group, Inc. (“the Company”) is one of the nation’s largest homebuilders and a leading mortgage-finance company. The Company consists of two business segments: homebuilding and financial services. (Please refer to Note B of the Company’s Consolidated Financial Statements, attached hereto as Exhibit 13, for more specific segment information.) Founded as a corporation in 1967, the Company has built more than 230,000 homes during its 37-year history. In addition, Ryland Mortgage Company (“RMC”), founded in 1978, has provided mortgage financing and related services for more than 200,000 homebuyers.

The Company builds homes for entry-level buyers, as well as for first- and second-time move-up buyers. At December 31, 2004, Ryland homes were available in 339 communities in 27 markets across the country. The Company’s prices range from $85,000 to more than $500,000, with the average price of a Ryland home closed during 2004 being $251,000. Subject to economic conditions, the Company not only plans to expand in its existing markets and enter new markets, but also strives to be one of the largest builders in each of those markets.

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.

Homebuilding

General

Ryland homes are built on-site and marketed in the three major geographic regions which include 27 of the nation’s housing markets. At December 31, 2004, the Company operated in the following metropolitan areas:

Region	Major Markets Served
North Central
North	Baltimore, Chicago, Cincinnati, 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, San Diego and the
	San Francisco Bay Area

Ryland markets detached and attached single-family homes, which are generally targeted to entry-level and first- and second-time move-up buyers, as well as to active adults seeking retirement housing. The Company’s diverse product line is tailored to 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.

Homebuyers are able to customize certain features of their homes by selecting from among 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 sources of additional revenue and profit for the Company.

Architectural services are generally outsourced to increase creativity and to ensure that the Company’s home designs are consistent with local market preferences.

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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 tastes; 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.

Land Acquisition and Development

At December 31, 2004, the Company operated in 339 communities in 27 markets across the country. The Company’s objective is to control a portfolio of building lots sufficient to meet 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, 2004, the Company had cash deposits and letters of credit outstanding of $134.3 million in connection with option and land purchase contracts having a total purchase price of $1.9 billion. These options and commitments expire at various dates through 2010.

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 which 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

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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 maintains 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, workers’ compensation, 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, as well as to active adults seeking retirement housing, 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 and title and possession are transferred to the buyer.

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 Internet 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 it utilizes models to 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 which 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, the permitting process 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 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.

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Financial Services

RMC provides mortgage-related products and services primarily for the Company’s homebuilding customers. RMC aligns its operations with the homebuilding segment and 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. In 1999, RMC entered into an agreement with Countrywide Financial Corporation (“Countrywide”) in which Countrywide buys the loans originated by RMC on a best-efforts basis. Through this alliance with Countrywide, RMC creates value for Ryland homebuyers by providing innovative and competitive mortgage programs.

Loan Origination

In 2004, 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 11,920 loans, totaling approximately $2.5 billion, of which 99.0 percent was for purchases of homes built by the Company and 1.0 percent was for purchases of homes built by others, purchases of existing homes and for the refinancing of existing mortgage loans. RMC’s capture rate of Ryland’s homebuyers was 84.2 percent in 2004.

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).

Loan Servicing

RMC previously completed the sale of its loan servicing portfolio during 1999. The Company no longer services the loans it originates and sells its loans, along with the related servicing rights, to others.

Title and Escrow Services

Cornerstone Title Company, a wholly-owned subsidiary doing business as Ryland Title Company (“Ryland Title”), provides title services and acts as a title insurance agent, primarily to the Company’s homebuyers. At December 31, 2004, Ryland Title 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, which performs escrow and loan closing functions for the Company’s homebuyers in California. During 2004, Ryland Title and Ryland Escrow provided these services to 95.9 percent of the Company’s homebuyers in the markets in which they operate.

Insurance Brokerage Services

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

Investment Portfolio

RMC’s investment operations hold certain assets, primarily mortgage-backed securities and notes receivable, which were obtained as a result of the exercise of redemption rights on various mortgage-backed bonds previously owned by the Company’s limited-purpose subsidiaries. The Company earns a net interest spread on this portfolio and may periodically realize gains from sales of its mortgage-backed securities. This investment portfolio has declined in recent years as the result of a sale of a portion of the investment portfolio and continued runoff. Currently, it represents a very small portion of the earnings of RMC.

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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 and similar matters. These include local regulations which impose restrictive zoning and density requirements to limit the number of homes that can be built within the boundaries of a particular area. The Company may also experience periodic delays in homebuilding projects due to building moratoria in any of the areas in which it operates.

The Company is also subject to a variety of local, state and federal laws, ordinances, rules and regulations concerning the protection of health and the environment. In addition, it is subject to a variety of environmental conditions that can affect its business and its homebuilding projects. The particular environmental laws which apply to any given homebuilding site vary greatly according to the site’s location; environmental condition; present and former uses of the site; and adjoining properties. Environmental laws and conditions may result in delays; cause the Company to incur substantial compliance and other costs; and prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas.

RMC is subject to the rules and regulations of FHA, FHLMC, FNMA, HUD and VA with respect to originating, processing and selling mortgage loans. In addition, there are other federal and state laws and regulations which affect not only these activities, but RMC’s title, escrow and insurance brokerage operations as well. These rules and regulations prohibit discrimination and establish underwriting guidelines which 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

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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 which prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs.

Employees

At December 31, 2004, the Company had 2,829 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 Securities and Exchange Commission (the “SEC”) under the Exchange Act. The Exchange Act file number for the Company’s SEC filings is 1-8029. You may read any document the Company files at the SEC’s public reference room, Room 1024 at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC toll free at 1-800-SEC-0330 for information about its public reference room. The Company files information electronically with the SEC. The Company’s SEC filings are available from the SEC’s Internet site at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically.

Stockholders, securities analysts and others seeking information about the Company’s business operations and financial performance can receive copies of the 2004 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.”

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Item 2. Properties

The Company leases office space for its corporate headquarters in Calabasas, California. 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 alleges violations of federal securities law as a result of information about home sales during the fourth quarter of 2003. The Company and the individual defendants intend to vigorously defend themselves.

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 of the Company.

The Company is party to various other legal proceedings generally incidental to its business. 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 year ended December 31, 2004.

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Executive Officers of the Company

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

			Position (date elected to position)
Name	Age		Prior Business Experience
R. Chad Dreier		57	Chairman of the Board of Directors (since 1994); President and
			Chief Executive Officer of the Company (since 1993)
Mark L. Beisswanger		44	Senior Vice President of the Company (since 2000);
			President of the West Region of Ryland Homes (since 2000);
			Vice President of the West Region of Ryland Homes (1999–2000)
Robert J. Cunnion, III		49	Senior Vice President, Human Resources of the Company (since 1999)
Eric E. Elder		47	Senior Vice President, Marketing of the Company (since 2000)
David L. Fristoe		48	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); Vice President, Controller and Chief Accounting Officer of the Company (1999–2000)
Timothy J. Geckle		52	Senior Vice President, General Counsel and Secretary of the
			Company (since 1997)
Cathey S. Lowe		51	Senior Vice President, Finance and Treasurer of the Company
			(since 2002); Vice President and Treasurer of the Company (2000–2002)
Gordon A. Milne		53	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		47	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		47	Senior Vice President of the Company (since 1999); President of
			Ryland Mortgage Company (since 1998)
Kipling W. Scott		50	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, 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 Proxy Statement for the 2005 Annual Meeting of Stockholders, which is to be filed pursuant to Regulation 14A under the Exchange Act (the “2005 Proxy Statement”).

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The 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 75 of the Annual Report to Shareholders for the Year Ended December 31, 2004.

The following is a table summarizing the issuer’s purchases of its own equity securities during the twelve months ended December 31, 2004:

					Total Number
					of Shares		Maximum Number
	Total				Purchased as Part		of Shares That
	Number of		Average		of Publicly		May Yet Be
	Shares		Price Paid		Announced Plans		Purchased Under the
Period	Purchased		Per Share		or Programs		Plans or Programs
January 1 – 31		1,000,000	$	37.56		1,000,000		877,200
February 1 – 29		—		—		—		2,877,200
March 1 – 31		—		—		—		2,877,200
April 1 – 30		104,000		40.60		104,000		2,773,200
May 1 – 31		400,000		38.09		400,000		2,373,200
June 1 – 30		420,000		38.98		420,000		1,953,200
July 1 – 31		150,000		37.67		150,000		1,803,200
August 1 – 31		414,874		40.01		414,874		1,388,326
September 1 – 30		80,000		44.85		80,000		1,308,326
October 1 – 31		—		—		—		1,308,326
November 1 – 30		140,000		48.80		140,000		1,168,326
December 1 – 31		230,000		53.22		230,000		2,938,326
Total		2,938,874	$	40.25		2,938,874		2,938,326

On July 11, 2003, the Company announced that it had received authorization from its Board of Directors to purchase two million shares of its common stock in open-market transactions. At December 31, 2004, all of the shares had been purchased in accordance with this authorization.

On February 26, 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, 2004, 938,326 shares were available for purchase in accordance with this authorization. This authorization does not have an expiration date.

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, 2004, two million shares were available for purchase 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 34 of the Annual Report to Shareholders for the Year Ended December 31, 2004.

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Item 7.  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 36 through 47 of the Annual Report to Shareholders for the Year Ended December 31, 2004.

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 47 of the Annual Report to Shareholders for the Year Ended December 31, 2004.

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 48 through 71 of the Annual Report to Shareholders for the Year Ended December 31, 2004, and from the section entitled “Quarterly Financial Data and Common Stock Prices and Dividends,” which appears on page 75.

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

During the fiscal years ended December 31, 2004 and 2003, there were no disagreements between the Company and its accountants on any matter of accounting principle or financial statement disclosure.

Item 9A.  Controls and Procedures

The Company has procedures in place for accumulating and evaluating information which 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. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective at December 31, 2004. 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, 2004, and has concluded that there was no change during the quarterly period ended December 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As a result of procedures required by the Sarbanes-Oxley Act of 2002, the Company formed a committee consisting of key officers, including the chief accounting officer and general counsel, to formalize and expand the Company’s disclosure controls and procedures 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.

At December 31, 2004, the Company completed a detailed evaluation of its internal controls, 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 74 of the Annual Report to Shareholders for the Year Ended December 31, 2004.

Item 9B.  Other Information

None.

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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 2005 Proxy Statement, including the determination by the Board of Directors with respect to the “audit committee financial expert” and the identity of the members 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.

The Company has adopted a code of business conduct and ethics for its Board of Directors and senior executives, including the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer. Any amendments to, or waivers from, the code of business conduct and ethics that applies to the Company’s Principal Executive Officer, Principal Financial Officer or Principal Accounting Officer will be posted on the Company’s Web site at www.ryland.com. The Guidelines on Significant Corporate Governance Issues, as well as the full text of the Code of Ethics, can be found on the Company’s Web site at www.ryland.com. Additionally, the charters of the Audit, Compensation, Finance, and Nominating and Governance Committees of the Board of Directors are posted on the Company’s Web site. Copies of all of these documents are available upon request by contacting the Corporate Secretary’s office at (818) 223-7500 or by writing to The Ryland Group, Inc., 24025 Park Sorrento, Suite 400, Calabasas, California 91302.

Item 11.  Executive Compensation

The information required by this item is incorporated by reference from the 2005 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 2005 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 2005 Proxy Statement.

14

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, 2004, are incorporated by reference in Item 8:
		Consolidated Statements of Earnings — years ended December 31, 2004, 2003 and 2002
		Consolidated Balance Sheets — December 31, 2004 and 2003
		Consolidated Statements of Stockholders’ Equity — years ended December 31, 2004, 2003 and 2002
		Consolidated Statements of Cash Flows — years ended December 31, 2004, 2003 and 2002
		Notes to Consolidated Financial Statements

		Page No.
2.	Financial Statement Schedule
	(Filed herewith)
	Schedule II — Valuation and Qualifying Accounts		18
	Schedules not listed above have been omitted either because they are inapplicable or because the required information has been provided in the financial statements or notes thereto.

3.		Exhibits
	The following exhibits are included with this report or incorporated herein by reference as indicated below:
		3.1	Charter of The Ryland Group, Inc., as amended
			(Incorporated by reference from Form 10-K for the year ended December 31, 1989)
		3.2	Bylaws of The Ryland Group, Inc., as amended
			(Incorporated by reference from Form 10-K for the year ended December 31, 1996)
		4.1	Rights Agreement, dated as of October 18, 1996, between The Ryland Group, Inc. and
			ChaseMellon Shareholder Services L.L.C.
			(Incorporated by reference from Form 8-K, filed October 24, 1996)
		4.2	Articles Supplementary, dated as of August 31, 1989
			(Incorporated by reference from Form 8-K, filed September 12, 1989)
		4.3	Senior Subordinated Notes, dated as of June 13, 2001
			(Incorporated by reference from Registration Statement on Form S-3, Registration
			Nos. 333-31034 and 333-58208)

15

3.	Exhibits, continued
		4.4	Senior Notes, dated as of August 16, 2001
			(Incorporated by reference from Registration Statement on Form S-3,
			Registration No. 333-58208)
		4.5	Senior Notes, dated as of May 29, 2003
			(Incorporated by reference from Registration Statement on Form S-3, Registration
			No. 333-100167)
		4.6	Senior Notes, dated as of August 24, 2000
			(Incorporated by reference from Registration Statement on Form S-3, Registration
			No. 333-31034)
		4.7	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, 2004)
		4.8	Senior Notes, dated as of January 6, 2005
			(Incorporated by reference from Registration Statement on Form S-3, Registration
			No. 333-121469)
		10.1	Lease Agreement, dated as of December 29, 1999, between The Ryland Group, Inc. and
			Kilroy Realty Group
			(Incorporated by reference from Form 10-K for the year ended December 31, 1999)
		10.2	2002 Equity Incentive Plan of The Ryland Group, Inc.*, as amended
			(Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002)
		10.3	2004 Non-Employee Director Equity Plan of The Ryland Group, Inc.*, as amended
			(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2004)
		10.4	Amended Credit Agreement, dated as of March 29, 2004, between Ryland Mortgage
			Company, Associates Funding, Inc. and JP Morgan Chase Bank
			(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2004)
		10.5	Employment Agreement, dated as of July 1, 2002, between The Ryland Group, Inc.
			and R. Chad Dreier*
			(Incorporated by reference from Form 8-K, filed September 5, 2002)
		10.6	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)
		10.7	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)
		10.8	Non-Employee Directors’ Stock Unit Plan, effective January 1, 1998*, between The Ryland
			Group, Inc. and the Board of Directors
			(Incorporated by reference from Form 10-K for the year ended December 31, 1997)
		10.9	Credit Agreement, dated as of June 16, 2004, between The Ryland Group, Inc. and
			certain financial institutions
			(Incorporated by reference from Form 10-Q for the quarter ended June 30, 2004)

16

3.	Exhibits, continued
		10.10	Amendment of the TRG Incentive Plan, effective January 1, 2003*
			(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2003)
		10.11	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)
		10.12	The Ryland Group, Inc. Senior Executive Performance Plan*
			(Incorporated by reference from Form 10-Q for the quarter ended March 31, 2003)
		10.13	The Ryland Group, Inc. Dreier Supplemental Executive Retirement Plan*
			(Incorporated by reference from Form 10-Q for the quarter ended September 30, 2003)
		10.14	The Ryland Group, Inc. Senior Executive Supplemental Retirement Plan*
			(Incorporated by reference from Form 10-Q for the quarter ended September 30, 2003)
		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, 2004
			(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)

* Management contract or compensatory plan or arrangement

17

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

	Balance at		Charged to		Deductions			Balance at
	Beginning		Costs and		and			End of
	of Period		Expenses		Transfers			Period
Valuation allowance:
Homebuilding inventories1
2004	$	1,526	$	33	$	(154	)	$	1,405
2003		5,340		25		(3,839	)		1,526
2002		7,117		2,066		(3,843	)		5,340

¹ Balances as of December 31, 2004, 2003 and 2002, represent valuation allowances for assets to be disposed of.

18

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant 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	February 22, 2005
R. Chad Dreier, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Principal Executive Officer:
/s/ R. Chad Dreier	February 22, 2005
R. Chad Dreier
Chief Executive Officer
Principal Financial Officer:
/s/ Gordon A. Milne	February 22, 2005
Gordon A. Milne
Chief Financial Officer
Principal Accounting Officer:
/s/ David L. Fristoe	February 22, 2005
David L. Fristoe
Chief Accounting Officer

All members of the Board of Directors: R. Chad Dreier, Daniel T. Bane, Leslie M. Frécon, Roland A. Hernandez, William L. Jews, Ned Mansour, Robert E. Mellor, Norman J. Metcalfe, Charlotte St. Martin, Paul J. Varello and John O. Wilson

By:
/s/ Timothy J. Geckle	February 22, 2005
Timothy J. Geckle
As Attorney-in-Fact

19

INDEX OF EXHIBITS

12.1	Computation of Ratio of Earnings to Fixed Charges
13	Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2004
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

20

EX-12.1

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

	Year Ended December 31,
	2000			2001			2002			2003			2004
Consolidated pretax income	$	134,840		$	218,336		$	309,340		$	396,217		$	521,212
Share of distributed income of 50%-or-less-owned affiliates, net of equity pickup		(163	)		(26	)		(2,689	)		94			(5,772	)
Amortization of capitalized interest		27,581			31,878			32,162			38,263			41,764
Interest		62,610			55,327			49,086			50,125			53,242
Less interest capitalized during the period		(34,105	)		(31,675	)		(39,695	)		(42,602	)		(52,015	)
Interest portion of rental expense		6,065			7,190			6,679			5,973			5,639
EARNINGS	$	196,828		$	281,030		$	354,883		$	448,070		$	564,070
Interest	$	62,610		$	55,327		$	49,086		$	50,125		$	53,242
Interest portion of rental expense		6,065			7,190			6,679			5,973			5,639
FIXED CHARGES	$	68,675		$	62,517		$	55,765		$	56,098		$	58,881
Ratio of earnings to fixed charges		2.87			4.50			6.36			7.99			9.58

EX-13

Exhibit 13: Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2004

The following pages represent pages 34 through 75 of The Ryland Group, Inc.’s Annual Report to Shareholders for the Year Ended December 31, 2004, 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; the Report of Independent Registered Public Accounting Firm; the Report of Management; and Quarterly Financial Data and Common Stock Prices and Dividends.

page 34.

THE RYLAND GROUP

EXHIBIT 13

SELECTED FINANCIAL DATA

(in millions, except share data) unaudited	2004			2003			2002			2001			2000
ANNUAL RESULTS
REVENUES
Homebuilding	$	3,867		$	3,355		$	2,805		$	2,684		$	2,286
Financial services		85			89			72			63			46
TOTAL REVENUES		3,952			3,444			2,877			2,747			2,332
Cost of sales		2,964			2,616			2,216			2,182			1,901
Selling, general and administrative expenses		466			419			342			316			268
Interest expense		1			8			10			24			28
Expenses related to early retirement of debt		—			5			—			7			—
Earnings before taxes		521			396			309			218			135
Tax expense		201			154			124			86			53
NET EARNINGS	$	320		$	242		$	185		$	132		$	82
YEAR-END POSITION
ASSETS
Cash and cash equivalents	$	88		$	317		$	269		$	298		$	142
Housing inventories		2,024			1,397			1,100			899			888
Other assets		313			294			289			314			331
TOTAL ASSETS		2,425			2,008			1,658			1,511			1,361
LIABILITIES
Debt		559			574			537			557			543
Other liabilities and minority interest		809			609			441			391			365
TOTAL LIABILITIES		1,368			1,183			978			948			908
STOCKHOLDERS’ EQUITY	$	1,057		$	825		$	680		$	563		$	453
PER COMMON SHARE DATA
NET EARNINGS
Basic	$	6.72		$	4.86		$	3.51		$	2.47		$	1.55
Diluted		6.36			4.56			3.32			2.32			1.48
DIVIDENDS DECLARED	$	0.21		$	0.08		$	0.04		$	0.04		$	0.04
STOCKHOLDERS’ EQUITY		22.32			16.98			13.46			10.65			8.37
OTHER FINANCIAL DATA
EBITDA1	$	603		$	478		$	384		$	311		$	219
EBITDA/interest incurred2		11.3	x		9.5	x		7.8	x		5.6	x		3.5	x
Return on equity3		38.9	%		35.5	%		33.0	%		29.1	%		21.3	%
Debt-to-total capital4		34.6	%		41.0	%		44.1	%		49.7	%		54.5	%

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

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

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

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

2004 ANNUAL REPORT

page 35.

THE RYLAND GROUP

SELECTED FINANCIAL DATA, CONTINUED

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

	YEAR ENDED DECEMBER 31,
(in thousands)	2004		2003		2002		2001		2000
Earnings before taxes	$	521,212	$	396,217	$	309,340	$	218,336	$	134,840
Interest expense		1,227		7,523		9,391		23,652		28,505
Capitalized interest amortized to cost of sales		41,764		38,263		32,162		31,878		27,581
Depreciation and amortization		38,519		36,436		32,670		37,068		28,489
EBITDA	$	602,722	$	478,439	$	383,563	$	310,934	$	219,415

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)	2004			2003			2002			2001			2000
Net cash (used for) provided by operating activities	$	(78,471	)	$	139,471		$	87,715		$	182,736		$	111,814
Increase in inventory		585,562			239,989			200,623			10,984			65,724
Tax expense		200,667			154,525			123,736			86,243			52,588
Interest expense		1,227			7,523			9,391			23,652			28,505
Capitalized interest amortized to cost of sales		41,764			38,263			32,162			31,878			27,581
Net change in other assets, payables and other liabilities		(119,632	)		(83,299	)		(52,866	)		(22,404	)		(67,666	)
Tax benefit from exercise of stock options		(17,475	)		(17,120	)		(12,103	)		(8,337	)		(2,826	)
Other		(10,920	)		(913	)		(5,095	)		6,182			3,695
EBITDA	$	602,722		$	478,439		$	383,563		$	310,934		$	219,415

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

2004 ANNUAL REPORT

page 36.

THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Operations Of The Ryland Group, Inc. and its subsidiaries (“the Company”) consist of two business segments: homebuilding and financial services. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing in 27 markets. Subject to economic conditions, the Company not only plans to expand in its existing markets and enter new markets, but also strives to be one of the largest builders in each of those markets. The financial services segment is involved in originating mortgages and providing title, escrow, and insurance products and services for the Company’s homebuilding customers.

     Ryland homes are built on-site and marketed in three major geographic regions. At December 31, 2004, the Company operated in the following metropolitan areas:

REGION		MAJOR MARKETS SERVED
North Central
	North	Baltimore, Chicago, Cincinnati, 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, San Diego and the San Francisco Bay Area

RESULTS OF OPERATIONS

Earnings, revenues, new orders and deliveries of homes reached record-breaking highs for the sixth consecutive year in 2004. These trends were indicative of favorable economic and demographic environments, as well as the Company’s ability to deliver a competitive product in superior locations while achieving higher relative economies through cost-saving initiatives. In 2004, the Company’s internally generated top- and bottom-line growth was fueled by increasing operating profits. The Company achieved Fortune 500 status and an investment-grade rating on its debt. The Company completed a two-for-one stock split of its common stock and increased its quarterly common stock dividend to $0.06 per share from the previous quarterly rate of $0.05 per share. The Company continues to make significant investments in training and technology, which are critical to streamlining processes and improving the customer experience.

NET EARNINGS
(in millions)
2004	$	320
2003	$	242
2002	$	185

DILUTED EARNINGS PER SHARE
2004	$	6.36
2003	$	4.56
2002	$	3.32

EBITDA
(in millions)
2004	$	603
2003	$	478
2002	$	384

     The Company reported consolidated net earnings of $320.5 million, or $6.36 per diluted share, for 2004, compared to $241.7 million, or $4.56 per diluted share, for 2003 and $185.6 million, or $3.32 per diluted share, for 2002. This net earnings increase resulted from higher volume, increased profitability and lower interest expense for the homebuilding operations.

     The Company’s revenues reached a historical high of $3.9 billion for 2004, up 14.7 percent from $3.4 billion for 2003. Total revenues for 2003 exceeded 2002 levels by $566.9 million, or 19.7 percent. Homebuilding pretax operating margins increased to 13.7 percent for 2004, compared to 11.8 percent for 2003.

2004 ANNUAL REPORT

page 37.

THE RYLAND GROUP

     EBITDA was $602.7 million for the year ended December 31, 2004, compared to $478.4 million and $383.6 million for the same period in 2003 and 2002, respectively. The Company’s ratio of EBITDA to interest incurred improved to 11.3 for the year ended December 31, 2004, compared to 9.5 for the same period in 2003 and 7.8 for the same period in 2002.

     The Company continued to strengthen its balance sheet in 2004. Consolidated inventories owned grew 40.6 percent to $1.9 billion, and at 75,023 lots, or a five-year supply, the Company increased the number of lots it controlled during the year, positioning itself for expansion in 2005. Goodwill of $18.2 million was among the lowest in the industry. The Company’s debt-to-capital ratio was down to 34.6 percent at December 31, 2004, from 41.0 percent at December 31, 2003. Stockholders’ equity increased 28.2 percent, or $232.3 million, during 2004, compared to 21.2 percent, or $144.5 million, during 2003. As a result of balancing cash outlays between achieving growth objectives and common stock repurchases, stockholders’ equity per share increased to $22.32, or 31.5 percent, in 2004. The Company’s book value at December 31, 2004, was 98.3 percent tangible.

RETURN ON EQUITY
2004	38.9	%
2003	35.5	%
2002	33.0	%

RETURN ON CAPITAL
2004	24.8	%
2003	22.1	%
2002	18.8	%

STOCKHOLDERS’ EQUITY PER SHARE
2004	$22.32
2003	$16.98
2002	$13.46

     During 2004, revenues grew 14.7 percent, net earnings increased 32.6 percent, diluted earnings per share improved 39.5 percent, EBITDA increased 26.0 percent, return on beginning equity was 38.9 percent, return on capital⁵ was 24.8 percent and inventory was turned 1.8 times. 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 increased 11.1 percent in 2004 and 9.0 percent in 2003, compared to the prior year. The Company continued to diversify geographically as newer markets in the West and Southeast matured during the year. All regions showed year-over-year increases in new orders during 2004.

NEW ORDERS
2004	16,880
2003	15,197
2002	13,936

OUTSTANDING CONTRACTS
2004	7,620
2003	5,841
2002	5,368

OUTSTANDING CONTRACT DOLLARS
(in millions)
2004	$2,115
2003	$1,473
2002	$1,188

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

2004 ANNUAL REPORT

page 38.

THE RYLAND GROUP

     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. New orders for 2003 increased 7.4 percent in the North, 14.5 percent in the Southeast and 16.5 percent in the West; they decreased 1.8 percent in Texas. Positive new order trends 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. New orders represent sales contracts that have been signed by the homebuyer and approved by the Company, subject to cancellation. During 2004, the Company opened 161 communities and closed 155 others. It expects to open a significantly higher number of communities in 2005. The number of active communities was 339 at December 31, 2004, compared to 333 at December 31, 2003.

	NORTH		TEXAS		SOUTHEAST		WEST		TOTAL
New orders (units)
2004		4,419		3,299		5,009		4,153		16,880
2003		4,385		3,141		4,648		3,023		15,197
2002		4,083		3,198		4,060		2,595		13,936
Closings (units)
2004		4,349		3,116		4,374		3,262		15,101
2003		4,393		3,291		4,216		2,824		14,724
2002		3,974		3,310		3,738		2,123		13,145
Average closing price (in thousands)
2004	$	288	$	165	$	230	$	312	$	251
2003		259		159		208		270		224
2002		232		155		195		283		210
Outstanding contracts at December 31
Units
2004		1,808		992		2,858		1,962		7,620
2003		1,738		809		2,223		1,071		5,841
2002		1,746		959		1,791		872		5,368
Dollars (in millions)
2004	$	568	$	173	$	725	$	649	$	2,115
2003		503		142		508		320		1,473
2002		432		155		377		224		1,188
Average price (in thousands)
2004	$	314	$	175	$	254	$	331	$	278
2003		289		175		229		299		252
2002		248		162		210		257		221

     The Company’s homebuilding operations typically reflect increased new order activity in the second and third quarters and heightened levels of closings in the third and fourth quarters. This is primarily due to the preference of many homebuyers to buy in the spring, as well as to seasonal weather conditions which affect construction schedules.

     At December 31, 2004, the Company had outstanding contracts for 7,620 units, representing the highest year-end backlog in its history and a 30.5 percent increase over year-end 2003. The rise in outstanding contracts relative to new orders was the result of expansion, new product focus in Texas, and longer permit and inspection times in certain markets. 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. The $2.1 billion value of outstanding contracts increased 43.6 percent from year-end 2003 due, in part, to a 10.3 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, 2004 represent over 42.0 percent of 2005 targeted closings.

2004 ANNUAL REPORT

page 39.

THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

(in thousands)	2004		2003		2002
Revenues	$	3,867,086	$	3,355,450	$	2,805,055
Cost of sales		2,964,087		2,615,975		2,216,059
Gross profit		902,999		739,475		588,996
Selling, general
and administrative expenses		372,660		333,726		281,049
Interest expense		210		6,032		6,826
Expenses related to early retirement of debt		—		5,086		—
Homebuilding pretax earnings	$	530,129	$	394,631	$	301,121

     The homebuilding segment reported pretax earnings of $530.1 million for 2004, compared to $394.6 million for 2003 and $301.1 million for 2002. Homebuilding results in 2004 increased from 2003 primarily due to higher average closing prices, gross profit margins and closing volume. Homebuilding results in 2003 increased from 2002 primarily due to these same factors.

HOMEBUILDING REVENUE BY REGION

(in millions)

	NORTH		TEXAS		SOUTHEAST		WEST		TOTAL
2004	$	1,284	$	533	$	1,012	$	1,038	$	3,867
2003	$	1,157	$	532	$	892	$	774	$	3,355
2002	$	935	$	528	$	728	$	614	$	2,805

AVERAGE CLOSING PRICE

(in thousands)

	NORTH		TEXAS		SOUTHEAST		WEST		TOTAL
2004	$	288	$	165	$	230	$	312	$	251
2003	$	259	$	159	$	208	$	270	$	224
2002	$	232	$	155	$	195	$	283	$	210

     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. Homebuilding revenues increased 19.6 percent for 2003, compared to 2002, due to a 12.0 percent increase in closings and a 6.7 percent increase in average closing price.The increase in closings in 2003 was due to a higher backlog at the beginning of the year and a 9.0 percent increase in new home orders during the year.

2004 ANNUAL REPORT

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THE RYLAND GROUP

     Consistent with its policy of managing land investments according to return and risk targets, the Company executed several land sales during the year. Homebuilding revenues for the year ended December 31, 2004, included $74.2 million from land sales, compared to revenues of $56.0 million for 2003 and $43.4 million for 2002, which contributed net gains of $25.2 million, $10.5 million and $10.8 million to pretax earnings in 2004, 2003 and 2002, respectively.

GROSS PROFIT MARGIN
2004	23.2	%
2003	22.1	%
2002	20.9	%

SG&A EXPENSE
2004	9.6	%
2003	9.9	%
2002	10.0	%

PRETAX EARNINGS MARGIN
2004	13.7	%
2003	11.8	%
2002	10.7	%

     Gross profit margins from home sales averaged 23.2 percent for 2004, an increase from 22.1 percent for 2003 and 20.9 percent for 2002. The improvement was primarily attributable to increasing sales prices due to strong demand resulting from the positive economic environment, coupled with supply constraints in certain areas; a rise in deliveries from new higher-margin markets; and increased sales of higher-margin upgrades, partially offset by rising material costs and cycle times. The Company generated the strongest gross margins in its California, Chicago, Denver, Las Vegas, Mid-Atlantic, Orlando and Twin Cities markets, while its Charlotte and Dallas markets were the most challenging.

     Selling, general and administrative expenses, as a percentage of revenue, were 9.6 percent for 2004, 9.9 percent for 2003 and 10.0 percent for 2002. Selling, general and administrative expenses, as a percentage of revenue, for 2004 and 2003 decreased from prior year levels primarily as a result of leverage obtained through a dramatic increase in closings in the West region, which was accompanied by more modest increases in general and administrative expenses, partially offset by higher incentive compensation expense resulting from improved earnings.

     Interest expense decreased $5.8 million to $0.2 million for 2004, compared to $6.0 million for 2003. Interest expense decreased $0.8 million in 2003, compared to 2002. These decreases were primarily attributable to a rise in capitalized interest. The Company ended the year with $88.4 million in cash, nothing drawn against its revolving credit facility and static long-term debt.

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

2004 ANNUAL REPORT

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THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FINANCIAL SERVICES

The financial services segment reported pretax earnings of $56.9 million for 2004, compared to $62.8 million for 2003 and $48.3 million for 2002. 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. The increase in 2003 from 2002 was attributable to gains realized from the growth of operations, which resulted from heightened volume; a higher capture rate of the Company’s home closings; an increase in average loan size; and higher gains on the sale of mortgages, resulting from a favorable interest rate environment.

STATEMENTS OF EARNINGS

	YEAR ENDED DECEMBER 31,
(in thousands)	2004			2003			2002
REVENUES
Net gains on sales of mortgages and mortgage servicing rights	$	45,040		$	53,938		$	44,522
Title/escrow/insurance		23,740			18,651			13,581
Net origination fees		10,768			10,731			6,854
Interest
Mortgage-backed securities and notes receivable		2,639			4,274			6,226
Other		935			1,068			869
Total interest		3,574			5,342			7,095
Other		1,613			17			106
TOTAL REVENUE		84,735			88,679			72,158
EXPENSES
General and administrative		26,825			24,339			21,299
Interest		1,017			1,491			2,565
TOTAL EXPENSES		27,842			25,830			23,864
PRETAX EARNINGS	$	56,893		$	62,849		$	48,294
Ryland Homes origination capture rate		84.2	%		85.4	%		82.4	%
Mortgage-backed securities and notes receivable average balance	$	18,603		$	33,000		$	49,951

BALANCE SHEETS

	DECEMBER 31,
(in thousands)	2004		2003
ASSETS
Cash	$	19,149	$	2,186
Other assets		50,410		66,084
TOTAL ASSETS		69,559		68,270
LIABILITIES
Accounts payable		2,779		2,486
Accrued and other liabilities		37,588		20,376
Debt		10,490		26,254
TOTAL LIABILITIES		50,857		49,116
STOCKHOLDER’S EQUITY		18,702		19,154
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	69,559	$	68,270

2004 ANNUAL REPORT

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THE RYLAND GROUP

RMC ORIGINATIONS
2004	11,920
2003	11,983
2002	10,278

RMC REVENUES (in thousands)
2004	$84,735
2003	$88,679
2002	$72,158

RMC PRETAX EARNINGS
(in thousands)
2004	$56,893
2003	$62,849
2002	$48,294

     The number of mortgage originations was 11,920 for 2004, compared to 11,983 for 2003. The capture rate of mortgages originated for customers of the homebuilding segment was 84.2 percent in 2004, compared to 85.4 percent in 2003. The number of mortgage originations rose by 16.6 percent in 2003, compared to 2002, primarily due to an increase in the number of homebuilder closings, as well as to an increase in the capture rate of mortgages originated for customers of the homebuilding segment to 85.4 percent from 82.4 percent in 2002.

     Revenues for the financial services segment were $84.7 million for 2004, compared to $88.7 million for 2003. This decrease is primarily attributable 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 financial services segment capture rates for originations, title and escrow, and insurance services were 84.2 percent, 95.9 percent and 58.7 percent, respectively, during 2004. In 2003, revenues for the financial services segment increased 22.9 percent to $88.7 million from 2002, driven primarily by a 24.0 percent increase in origination volume.

     General and administrative expenses increased for the year ended December 31, 2004, compared to 2003, primarily as a result of additional expenses incurred in supporting expansion of both the Company’s homebuilding operations and its insurance and title operations. General and administrative expenses rose for the year ended December 31, 2003, compared to 2002, primarily as a result of increased incentive compensation commensurate with improved earnings.

     Interest expense decreased 31.8 percent for the year ended December 31, 2004, compared to 2003, following the sale of a portion of the investment portfolio during the third quarter of 2004, the proceeds from which were used to pay off the Company’s repurchase facility, as well as from a continued decline in bonds payable and short-term notes payable, which resulted from continued runoff of the underlying collateral. In 2003, interest expense decreased 41.9 percent, compared to 2002, primarily due to a decline in average borrowing rates, as well as to a continued decline in bonds payable and short-term notes payable, which resulted from continued runoff of the underlying collateral.

CORPORATE

Corporate is a nonoperating business segment whose purpose is to support operations as the internal source of capital; develop and implement strategic initiatives; provide financial, human resources, marketing, legal and information technology services; and perform administrative functions associated with a publicly traded entity. Corporate expenses, which represent the costs of these functions, were $65.8 million for 2004, $61.3 million for 2003 and $40.1 million for 2002. Corporate expenses for 2004 and 2003 rose from prior year levels primarily as a result of an increase in support and training costs commensurate with anticipated growth; an increase in incentive compensation, which was due to the Company’s increases in results and financial performance; and costs incurred as a result of the Company’s compliance with Sarbanes-Oxley Section 404.

2004 ANNUAL REPORT

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THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INVESTMENT IN JOINT VENTURES

At December 31, 2004, the Company had an interest in 13 active joint ventures in the Atlanta, Chicago, Dallas, Denver, Orlando, Phoenix and Washington, D.C., 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 level of activity in the entities, yearly earnings from joint ventures will vary significantly. The Company recognized its proportionate share of earnings, which totaled $5.8 million from the unconsolidated joint ventures in 2004, compared to losses of $94,000 in 2003 and earnings of $2.7 million in 2002. The increase in 2004 resulted from 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 $2.5 million at December 31, 2004, compared to $14.0 million at December 31, 2003.

INCOME TAXES

Income taxes for fiscal years 2004, 2003 and 2002 were provided at effective tax rates of 38.5 percent, 39.0 percent and 40.0 percent, respectively. The decrease in the effective tax rate for 2004 was primarily due to a reduction in nondeductible compensation, while the 2003 decrease was primarily due to the reduction of state income taxes, which resulted from the current mix of income in taxing states and settled audits. (See Note H.)

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 $320.5 million in 2004, $241.7 million in 2003 and $185.6 million in 2002, primarily as a result of increased profitability. Additionally, net changes in other assets, payables and other liabilities provided $119.6 million in 2004, $83.3 million in 2003 and $52.9 million in 2002. The cash provided was invested principally in inventory of $585.6 million, $240.0 million and $200.6 million in 2004, 2003 and 2002, respectively, as well as in stock repurchases of $118.3 million, $130.9 million and $95.9 million in 2004, 2003 and 2002, respectively. Effective in the fourth quarter of 2004, the Company’s quarterly common stock dividend was increased to $0.06 per share from the previous quarterly common stock dividend of $0.05 per share. Dividends totaling $0.21, $0.08 and $0.04 per share were declared in the annual periods ending December 31, 2004, 2003 and 2002, respectively. During 2004, stockholders’ equity increased $232.3 million, while debt decreased $14.9 million, continuing the Company’s reduction in leverage.

STOCKHOLDERS’ EQUITY (in millions)
2004	$	1,057
2003	$	825
2002	$	680

DEBT (in millions)
2004	$	559
2003	$	574
2002	$	537

DEBT-TO-CAPITAL RATIO
2004	34.6	%
2003	41.0	%
2002	44.1	%

     Consolidated inventories owned by the Company increased to $1.9 billion at December 31, 2004, from $1.3 billion at December 31, 2003. The Company attempts to maintain approximately a four- to five-year supply of land, with half or more controlled through options. At December 31, 2004, the Company controlled 75,023 lots (a five-year supply based on actual 2004 closings), with 29,439 lots owned and 45,584 lots, or 60.8 percent, under option. The Company has historically funded the exercise of land options through a combination of operating

2004 ANNUAL REPORT

page 44.

THE RYLAND GROUP

cash flows, capital transactions and, to a lesser extent, borrowings under its revolving credit facility. The Company expects these sources to continue to be adequate to fund future obligations with regard to option contracts; 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 in prior years, models were sold and leased back on a selective basis. As cash balances increased, model leases declined. The Company owned 80.4 percent of its model homes at December 31, 2004, versus 60.1 percent at December 31, 2003.

     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 $540.5 million at December 31, 2004 and 2003.

     The Company uses its $500.0 million unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital, when necessary. There were no borrowings under the current facility at December 31, 2004. Additionally, at December 31, 2003, there were no borrowings under the previous $400.0 million unsecured revolving credit facility. Under these facilities, the Company had letters of credit outstanding which totaled $131.3 million at December 31, 2004, and $93.3 million at December 31, 2003. Unused borrowing capacity under these facilities was $368.7 million and $306.7 million at December 31, 2004 and 2003, respectively.

     The senior and senior subordinated note and indenture agreements, as well as the unsecured revolving credit facility, contain numerous restrictive covenants which include, among other things, limitations on change of control; liens and guarantees; dividends and distributions; sale of assets; modification of debt instruments; transactions with affiliates; and inventory. At December 31, 2004, the Company was in compliance with these covenants.

     To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2004 and 2003, outstanding seller-financed nonrecourse secured notes payable were $8.0 million and $7.1 million, respectively.

     The financial services segment uses cash generated internally and from outside borrowing arrangements to finance its operations. Borrowing arrangements at December 31, 2004, included a $15.0 million revolving credit facility which finances investment portfolio securities. During 2004, the financial services segment terminated its repurchase agreement. The agreement provided for borrowings of up to $80.0 million and was used to finance mortgage investment portfolio securities. At December 31, 2004 and 2003, the combined borrowings of the financial services segment, outstanding under all agreements, were $10.5 million and $26.3 million, respectively.

     Although the Company’s limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Revenues, expenses and portfolio balances continue to decline as mortgage collateral pledged to secure the bonds decreases due to scheduled payments and prepayments, as well as to the sale of a portion of the investment portfolio. The source of cash for the bond payments was cash received from mortgage loans, notes receivable and mortgage-backed securities.

     The Ryland Group has not guaranteed the debt of either its financial services segment or its limited-purpose subsidiaries.

     The Company’s Form S-3 Registration Statement, which registered up to $350.0 million of the Company’s debt and equity securities with the SEC, was declared effective on January 6, 2005. 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; or warrants to purchase both debt and equity securities, as well as guarantees of debt securities. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. In January 2005, the Company sold $250.0 million aggregate principal amount of 5.4 percent senior notes pursuant to this registration statement. (See Note M.) The timing and amount of future offerings, if any, will depend on market and general business conditions.

     During 2004, the Company repurchased approximately 2.9 million shares of its outstanding common stock at a cost of $118.3 million. At December 31, 2004, the Company had authorization from its Board of Directors to repurchase up to an additional 2.9 million shares of its outstanding common stock. The Company’s stock repurchase program has been funded primarily through internally generated funds.

2004 ANNUAL REPORT

page 45.

THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     The Company granted fewer stock options in 2004, which when combined with common stock repurchases had the effect of lowering dilution.

SHARES OF COMMON STOCK REPURCHASED (in thousands)
2004	2,939
2003	3,996
2002	4,612

STOCK OPTIONS OUTSTANDING AT DECEMBER 31 (in thousands)
2004	5,535
2003	6,013
2002	6,875

DILUTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands)
2004	50,379
2003	53,044
2002	55,918

     The following table provides a summary of the Company’s contractual cash obligations and commercial commitments at December 31, 2004, and the effect such obligations are expected to have on liquidity and cash flow in future periods.

	CONTRACTUAL PAYMENTS DUE BY PERIOD
			Less than		1–3		4–5		After 5
(in thousands)	Total		1 Year		Years		Years		Years
Debt, principal maturities	$	558,942	$	18,112	$	100,330	$	150,000	$	290,500
Interest on debt1		206,480		43,638		75,978		58,213		28,651
Operating leases		35,505		8,087		14,732		9,503		3,183
Land option contracts2		108,585		56,556		36,730		15,299		—
Total at December 31, 2004	$	909,512	$	126,393	$	227,770	$	233,015	$	322,334

¹Interest on variable rate obligations is based on rates effective at December 31, 2004 .
²Represents obligations under option contracts with specific performance provisions, net of cash deposits.

     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. 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, 2004, the Company had $134.3 million in cash deposits and letters of credit to purchase land and lots with a total purchase price of $1.9 billion. Only $117.2 million of the $1.9 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 $144.1 million of inventory not owned at December 31, 2004, $110.3 million of which pertained to lot option contracts and $33.8 million of which pertained to three of the Company’s homebuilding joint ventures.

     At December 31, 2004, the Company had outstanding letters of credit totaling $131.3 million and development or performance bonds of $302.9 million, issued by third parties, to secure performance under various contracts. 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 performed, 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 $500.0 million revolving credit facility and its senior notes. (See Note L.)

2004 ANNUAL REPORT

page 46.

THE RYLAND GROUP

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.

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. However, changes of assumptions relating to such factors could have a material effect on the Company’s results of operations for a particular quarterly or annual period.

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 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 amortized 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 the 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. The Company believes the accounting for partnerships 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.

2004 ANNUAL REPORT

page 47.

THE RYLAND GROUP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

																		FAIR
																			VALUE
(in thousands)	2005			2006			2007	2008			2009	THEREAFTER			TOTAL			12/31/04
Senior notes and senior subordinated notes (fixed rate)				$	100,000			$	150,000			$	290,500		$	540,500		$	581,777
Average interest rate					8.0	%			5.4	%			9.4	%		8.1	%
Financial services’ revolving credit agreement (variable rate)	$	10,490													$	10,490		$	10,490
Average interest rate	Various1														Various1
Other financial instruments
Forward-delivery contracts:
Notional amount	$	69,620													$	69,620		$	(178	)
Average interest rate		5.0	%													5.0	%
Interest rate lock commitments:
Notional amount	$	94,809													$	94,809		$	1,770
Average interest rate		5.6	%													5.6	%

¹Variable interest rate available to the Company is based upon LIBOR, federal funds or prime rate plus a specified margin.

     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 interest rate lock commitments (IRLCs) and mortgage loans held-for-sale. In managing interest rate risk, the Company does not speculate on the direction of interest rates.

2004 ANNUAL REPORT

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THE RYLAND GROUP

CONSOLIDATED STATEMENTS OF EARNINGS

	YEAR ENDED DECEMBER 31,
(in thousands, except share data)	2004		2003		2002
REVENUES
Homebuilding	$	3,867,086	$	3,355,450	$	2,805,055
Financial services	84,735		88,679		72,158
TOTAL REVENUES	3,951,821		3,444,129		2,877,213
EXPENSES
Cost of sales		2,964,087		2,615,975		2,216,059
Selling, general and administrative		372,660		333,726		281,049
Financial services		26,825		24,339		21,299
Corporate		65,810		61,263		40,075
Interest		1,227		7,523		9,391
Expenses related to early retirement of debt	—		5,086		—
TOTAL EXPENSES	3,430,609		3,047,912		2,567,873
Earnings before taxes		521,212		396,217		309,340
Tax expense		200,667		154,525		123,736
NET EARNINGS	$	320,545	$	241,692	$	185,604
NET EARNINGS PER COMMON SHARE
Basic	$	6.72	$	4.86	$	3.51
Diluted		6.36		4.56		3.32
AVERAGE COMMON SHARES OUTSTANDING
Basic		47,678,887		49,718,032		52,842,620
Diluted		50,378,840		53,044,404		55,918,286
DIVIDENDS DECLARED PER COMMON SHARE	$	0.21	$	0.08	$	0.04

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

CONSOLIDATED BALANCE SHEETS

	DECEMBER 31,
(in thousands, except share data)	2004		2003
ASSETS
Cash and cash equivalents	$	88,388	$	316,704
Housing inventories
Homes under construction		1,002,214		734,280
Land under development and improved lots		877,801		602,504
Consolidated inventory not owned		144,118		59,868
Total inventories		2,024,133		1,396,652
Property, plant and equipment		50,258		40,853
Net deferred taxes		45,708		37,443
Purchase price in excess of net assets acquired		18,185		18,185
Other		198,298		197,753
TOTAL ASSETS		2,424,970		2,007,590
LIABILITIES
Accounts payable		200,611		157,488
Accrued and other liabilities		500,808		395,033
Debt		558,942		573,876
TOTAL LIABILITIES		1,260,361		1,126,397
MINORITY INTEREST		107,775		56,651
STOCKHOLDERS’ EQUITY
Common stock, $1.00 par value:
Authorized — 80,000,000 shares
Issued — 47,348,070 shares at December 31, 2004 (48,552,494 shares at December 31, 2003)		47,348		48,552
Retained earnings		1,009,242		774,859
Accumulated other comprehensive income		244		1,131
TOTAL STOCKHOLDERS’ EQUITY		1,056,834		824,542
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,424,970	$	2,007,590

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

										ACCUMULATED
										OTHER			TOTAL
	COMMON			PAID-IN			RETAINED			COMPREHENSIVE			STOCKHOLDERS’
(in thousands, except share data)	STOCK			CAPITAL			EARNINGS			INCOME			EQUITY
BALANCE AT JANUARY 1, 2002	$	52,868		$	—		$	508,530		$	1,464		$	562,862
Comprehensive income:
Net earnings								185,604						185,604
Other comprehensive income, net of tax:
Unrealized losses on mortgage-backed securities, net of taxes of $(67)											(106	)		(106	)
Total comprehensive income														185,498
Common stock dividends (per share $0.04)								(2,134	)					(2,134	)
Repurchase of common stock		(4,612	)		(27,504	)		(63,800	)					(95,916	)
Employee stock plans and related income tax benefit		2,265			27,504									29,769
BALANCE AT DECEMBER 31, 2002		50,521			—			628,200			1,358			680,079
Comprehensive income:
Net earnings								241,692						241,692
Other comprehensive income, net of tax:
Unrealized losses on mortgage-backed securities, net of taxes of $(139)											(227	)		(227	)
Total comprehensive income														241,465
Common stock dividends (per share $0.08)								(3,966	)					(3,966	)
Repurchase of common stock		(3,996	)		(35,876	)		(91,067	)					(130,939	)
Employee stock plans and related income tax benefit		2,027			35,876									37,903
BALANCE AT DECEMBER 31, 2003		48,552			—			774,859			1,131			824,542
Comprehensive income:
Net earnings								320,545						320,545
Other comprehensive income, net of tax:
Unrealized losses 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

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	YEAR ENDED DECEMBER 31,
(in thousands)	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	320,545		$	241,692		$	185,604
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		38,519			36,436			32,670
Changes in assets and liabilities:
Increase in inventories		(585,562	)		(239,989	)		(200,623	)
Net change in other assets, payables and other liabilities		119,632			83,299			52,866
Tax benefit from exercise of stock options		17,475			17,120			12,103
Other operating activities, net		10,920			913			5,095
Net cash (used for) provided by operating activities		(78,471	)		139,471			87,715
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment		(47,131	)		(32,541	)		(36,547	)
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral		19,336			18,672			25,314
Net cash used for investing activities		(27,795	)		(13,869	)		(11,233	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds of long-term debt		—			150,000			—
Repayment of long-term debt		—			(100,000	)		—
Decrease in short-term borrowings		(14,934	)		(13,561	)		(19,509	)
Common stock dividends		(9,661	)		(2,020	)		(2,148	)
Common stock repurchases		(118,296	)		(130,939	)		(95,916	)
Proceeds from stock option exercises		15,907			15,190			11,382
Other financing activities, net		4,934			2,987			844
Net cash used for financing activities		(122,050	)		(78,343	)		(105,347	)
Net (decrease) increase in cash and cash equivalents		(228,316	)		47,259			(28,865	)
Cash and cash equivalents at beginning of year		316,704			269,445			298,310
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	88,388		$	316,704		$	269,445
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest)	$	763		$	7,652		$	14,275
Cash paid for income taxes		177,449			132,731			101,939
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Increases in consolidated inventory not owned related to land options	$	41,919		$	56,651		$	—

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its wholly-owned subsidiaries (“the Company”). Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2004 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 $61.7 million and $309.5 million at December 31, 2004 and 2003, 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 SPLITS

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

HOMEBUILDING REVENUES

Homebuilding revenues are recognized when home sales are closed and title and possession are transferred to the buyer in accordance with Statement of Financial Accounting Standards No. 66 (SFAS 66), “Accounting for Sales of Real Estate.” Sales incentives are expensed as incurred.

HOUSING INVENTORIES

Housing inventories consist principally of homes under construction, land under development and improved lots. Inventories to be held and used are stated at cost, unless a community is determined to be impaired, in which case the impaired inventories are written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and sales of comparable assets. Inventories to be disposed of are stated at either the lower of cost or fair value, less cost to sell, and are reported net of valuation reserves. Write-downs of impaired inventories to fair value are recorded as adjustments to the cost basis of the respective inventory. Valuation reserves related to inventories to be disposed of amounted to $1.4 million at December  31, 2004, and $1.5 million at December 31, 2003. The net carrying values of the related inventories amounted to $31,000 and $795,000 at December 31, 2004 and 2003, 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)	2004			2003
Capitalized interest at January 1	$	45,163		$	40,824
Interest capitalized		52,015			42,602
Interest amortized to cost of sales		(41,764	)		(38,263	)
Capitalized interest at December 31	$	55,414		$	45,163

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THE RYLAND GROUP

VARIABLE INTEREST ENTITIES

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

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

     In accordance with the provisions of FIN 46, the Company consolidated $144.1 million of inventory not owned at December 31, 2004, $110.3 million of which pertained to lot option contracts and $33.8 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 $11.7 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned. Minority interest totaling $98.6 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs. At December 31, 2004, the Company had cash deposits and letters of credit totaling $17.5 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, 2004, the Company had cash deposits and/or letters of credit totaling $76.1 million which were associated with lot option purchase contracts that had an aggregate purchase price of $1.3 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 routinely enters into joint ventures for the purpose of acquisition and co-development of lots. Currently, the Company participates in homebuilding joint ventures in the Atlanta, Chicago, Dallas, Denver, Orlando, Phoenix and Washington, D.C., markets. The Company participates in a number of joint ventures in which it has less than a controlling interest. At December 31, 2004 and 2003, the Company’s investment in unconsolidated joint ventures amounted to $2.5 million and $14.0 million, respectively. 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 these unconsolidated joint ventures was $5.8 million for the year ended December 31, 2004, compared to losses of $94,000 for the same period in 2003 and earnings of $2.7 million for the same period in 2002. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $10.3 million and $47.3 million at December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $3.6 million and $21.1 million, respectively. The Company does not guarantee the debt of its unconsolidated joint ventures.

     At December 31, 2004, three of the joint ventures in which the Company participates 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 $130,000 for 2004. Total assets of $34.4 million (including consolidated inventory not owned), total liabilities of $18.1 million and minority interest of $9.2 million were consolidated.

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THE RYLAND GROUP

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, which includes model home furnishings of $43.2 million at December 31, 2004, 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 other intangible assets no longer be amortized but be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity-method investments no longer be amortized.

     The Company adopted the provisions of SFAS 142 on January 1, 2002, and performs impairment tests of its goodwill annually as of March 31. The Company tests goodwill for impairment by using the two-step process prescribed in SFAS 142. The first step is used to identify potential impairment, while the second step measures the amount of impairment. The Company had no impairment in the years ended December 31, 2004 or 2003.

     The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in 2004, 2003 and 2002.

     Goodwill is allocated to the reporting unit from which it originated. At December 31, 2004, 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.

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 2004, 2003 and 2002 would have been reduced to the pro forma amounts indicated in the following table:

	YEAR ENDED DECEMBER 31,
(in thousands, except share data)	2004			2003			2002
Net earnings, as reported	$	320,545		$	241,692		$	185,604
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		(5,662	)		(3,991	)		(3,455	)
Pro forma net earnings	$	314,883		$	237,701		$	182,149
Earnings per share:
Basic — as reported	$	6.72		$	4.86		$	3.51
Basic — pro forma		6.60			4.78			3.45
Diluted — as reported		6.36			4.56			3.32
Diluted — pro forma		6.25			4.48			3.26

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THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 2004, 2003 and 2002, respectively: a risk-free interest rate of 2.4 percent, 2.1 percent and 4.0  percent; an expected volatility factor for the market price of the Company’s common stock of 38.4 percent, 37.6 percent and 36.8 percent; a dividend yield of 0.5 percent, 0.3 percent and 0.2 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted in 2004, 2003 and 2002 were $11.65, $7.28 and $6.57, respectively.

MORTGAGE-BACKED SECURITIES AND NOTES RECEIVABLE

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

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 interest rate lock commitments (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 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 Derivatives and Hedging Activities,” as amended.

ADVERTISING COSTS

The Company expenses advertising costs as they are incurred. Advertising costs totaled $21.6 million, $16.8 million and $18.9 million in 2004, 2003 and 2002, respectively.

COMPREHENSIVE INCOME

Comprehensive income consists of net income and the increase or decrease of unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $319.7 million, $241.5 million and $185.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

SAB 105

In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),“Application of Accounting Principles to Loan Commitments,” which provides guidance regarding IRLCs that are accounted for as derivative instruments in accordance with SFAS 133. SAB 105 states that the value of expected future cash flows related to servicing

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THE RYLAND GROUP

rights and other intangible components should be excluded when determining the fair value of derivative IRLCs and that such value should not be recognized until the underlying loans are sold. SAB 105 is applicable to IRLCs initiated after March 31, 2004. Additionally, SAB 105 requires both the disclosure of the accounting policy for loan commitments, including the methods and assumptions used to estimate the fair value of these commitments, and any associated hedging strategies. The Company’s current accounting policy for determining the fair value of IRLCs requires consideration of the terms of the individual IRLCs (including loan type, coupon and expected funding date) in comparison to current market conditions. The value of servicing rights and other intangible components representing potential economic gains the Company expects to receive upon disposition of its funded loans is not included in the determination of the fair value of IRLCs while they are outstanding.

     The implementation of SAB 105 did not have a material impact on the Company’s financial condition or results of operations.

SFAS 123(R)

In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004),“Share-Based Payment” (SFAS 123(R)), which is a revision of SFAS 123. SFAS 123(R) supercedes APB Opinion 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 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 the “modified retrospective” method which includes the requirements of the modified prospective method described above, but 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 beginning after June 15, 2005. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees by using APB Opinion 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 third quarter of 2005, which will have an impact on its statements of earnings, although the Company does not expect implementation 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 depends on levels of share-based payments granted in the future. However, had SFAS 123(R) been adopted in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note A to the Consolidated Financial Statements under “Stock-Based Compensation.” 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 stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $17.5 million, $17.1 million and $12.1 million in 2004, 2003 and 2002, respectively.

NOTE B: SEGMENT INFORMATION

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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.

	YEAR ENDED DECEMBER 31,
(in thousands)	2004			2003			2002
REVENUES
Homebuilding	$	3,867,086		$	3,355,450		$	2,805,055
Financial services		84,735			88,679			72,158
Total	$	3,951,821		$	3,444,129		$	2,877,213
PRETAX EARNINGS
Homebuilding	$	530,129		$	394,631		$	301,121
Financial services		56,893			62,849			48,294
Corporate		(65,810	)		(61,263	)		(40,075	)
Total	$	521,212		$	396,217		$	309,340
DEPRECIATION AND AMORTIZATION
Homebuilding	$	33,122		$	30,448		$	27,901
Financial services		623			922			819
Corporate		4,774			5,066			3,950
Total	$	38,519		$	36,436		$	32,670
IDENTIFIABLE ASSETS
Homebuilding	$	2,217,589		$	1,829,640		$	1,483,505
Financial services		69,559			68,270			83,614
Corporate and other		137,822			109,680			90,632
Total	$	2,424,970		$	2,007,590		$	1,657,751

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)	2004		2003		2002
NUMERATOR
Net earnings	$	320,545	$	241,692	$	185,604
DENOMINATOR
Basic earnings per share — weighted-average shares		47,678,887		49,718,032		52,842,620
Effect of dilutive securities:
Stock options		2,282,812		2,622,548		2,405,840
Equity incentive plan		417,141		703,824		669,826
Dilutive potential of common shares		2,699,953		3,326,372		3,075,666
Diluted earnings per share — adjusted weighted-average shares and assumed conversions		50,378,840		53,044,404		55,918,286
NET EARNINGS PER COMMON SHARE
Basic	$	6.72	$	4.86	$	3.51
Diluted		6.36		4.56		3.32

     Options to purchase 420,000 shares, 227,000 shares and 1,353,400 shares of common stock at various prices were outstanding at December 31, 2004, 2003 and 2002, respectively, but were not included in the computation of diluted earnings per share for those annual periods because the exercise prices were greater than the average market price of the common shares, and, therefore, their effect would have been antidilutive.

2004 ANNUAL REPORT

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THE RYLAND GROUP

NOTE D: LIMITED-PURPOSE SUBSIDIARIES

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

     Collateral for bonds payable, which consists of mortgage-backed securities; notes receivable secured by mortgage-backed securities and mortgage loans; fixed-rate mortgage loans; and funds held by trustee, is reported in the balance sheet under “Other” assets. Mortgage-backed securities consist of GNMA certificates, FNMA mortgage pass-through certificates and FHLMC participation certificates. All principal and interest on collateral is remitted directly to a trustee and is available for payment on the bonds. Neither the Company nor its homebuilding and financial services subsidiaries have guaranteed these nonrecourse bond issues.

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

(in thousands)	2004			2003
Bonds payable, net of discounts: 2004 — $186; 2003 — $242	$	5,097		$	8,011
Range of interest rates		7.25% – 11.65	%		7.25% – 11.65	%
Stated maturities		2009 – 2018			2009 – 2018

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 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.

	2004						2003
	CARRYING			FAIR			CARRYING			FAIR
(in thousands)	VALUE			VALUE			VALUE			VALUE
OTHER ASSETS
Mortgage loans held-for-sale	$	20,540		$	20,919		$	21,920		$	22,234
Mortgage-backed securities and notes receivable		10,220			10,763			26,260			27,304
Collateral for bonds payable of the limited-purpose subsidiaries		6,082			6,106			9,188			9,241
OTHER LIABILITIES
Bonds payable of the limited-purpose subsidiaries	$	5,097		$	5,564		$	8,011		$	8,721
DEBT
Senior notes	$	397,000		$	421,954		$	397,000		$	427,141
Senior subordinated notes		143,500			159,823			143,500			160,519
OTHER FINANCIAL INSTRUMENTS
Interest rate lock commitments	$	1,770		$	1,770		$	1,625		$	1,625
Forward-delivery contracts		(178	)		(178	)		(124	)		(124	)
Other		(126	)		(126	)		(19	)		(19	)

     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; and interest rate lock commitments are based on either quoted market prices or market prices for similar financial instruments.

2004 ANNUAL REPORT

page 59.

THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F: 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)	2004		2003
Interest rate lock commitments	$	94,809	$	73,590
Hedging contracts:
Forward-delivery contracts	$	69,620	$	84,491
Other		35,000		20,000

     IRLCs represent loan commitments with customers at market rates 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 9.5 percent at December 31, 2004, and 4.9 percent to 10.2 percent at December 31, 2003.

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

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

NOTE G: DEBT

Debt consists of the following at December 31:

(in thousands)	2004		2003
Senior notes	$	397,000	$	397,000
Senior subordinated notes		143,500		143,500
Secured notes payable		7,952		7,122
Financial services’ revolving credit agreement		10,490		14,247
Repurchase agreement		—		12,007
Total	$	558,942	$	573,876

     Maturities of debt are scheduled as follows:

(in thousands)
2005	$	18,112
2006		100,300
2007		30
2008		150,000
After 2008		290,500
Total debt	$	558,942

2004 ANNUAL REPORT

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THE RYLAND GROUP

     In 2004, the Company executed an agreement for a new $500.0 million unsecured revolving credit facility. The agreement, maturing in June 2009, contains an accordion feature under which the aggregate commitment may be increased up to $650.0 million, subject to the availability of additional commitments. Borrowings under this agreement bear interest at variable short-term rates. In addition to the stated interest rates, the agreement requires the Company to pay certain fees. The Company used its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital, although it did not utilize its previous $400.0 million revolving credit facility during 2003. There were no outstanding borrowings under these agreements at December 31, 2004 and 2003. The agreement contains numerous restrictive covenants. At December 31, 2004, the Company was in compliance with these covenants. The effective interest rate was 4.1 percent for 2004 and 4.8 percent for 2002.

     At December 31, 2004, the Company had $143.5 million of 9.1 percent senior subordinated notes due June 2011, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after June 15, 2006. Senior subordinated notes are subordinated to all existing and future senior debt of the Company.

     At December 31, 2004, the Company had $100.0 million of 8.0 percent senior notes due August 2006, with interest payable semiannually, which may not be redeemed prior to maturity. Additionally, the Company had $150.0 million of 5.4 percent senior notes due June 2008, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time. Also at December 31, 2004, the Company had $147.0 million of 9.8 percent senior notes due September 2010, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time on or after September 1, 2005.

     The Company’s obligations to pay principal, premium, if any, and interest under its $500.0 million unsecured revolving credit facility; the 8.0 percent senior notes due August 2006; the 5.4 percent senior notes due June 2008; and the 9.8 percent senior notes due September 2010 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. (See Note L.)

     The senior and senior subordinated note and indenture agreements, as well as the unsecured revolving credit facility, contain numerous restrictive covenants which include, among other things, limitations on change of control; liens and guarantees; dividends and distributions; sale of assets; modification of debt instruments; transactions with affiliates; and inventory. At December 31, 2004, the Company had $170.3 million of retained earnings available for dividends and was in compliance with these covenants.

     During the fourth quarter of 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 of the underlying collateral, RMC no longer had a need for this borrowing facility. Borrowings totaling $12.0 million were outstanding against this agreement at December 31, 2003, and were collateralized by mortgage loans and mortgage-backed securities. The outstanding collateral balance was $11.2 million, with a fair value of $12.0 million, at December 31, 2003. Weighted-average borrowings during the period were $6.4 million, $15.7 million and $24.0 million for 2004, 2003 and 2002, respectively. The interest rate at December 31, 2003, was 2.1 percent. Weighted-average interest rates during the period were 1.5 percent, 1.6 percent and 2.0 percent for 2004, 2003 and 2002, respectively.

     In 2004, the Company’s financial services segment renewed and extended a revolving credit facility used to finance mortgage investment portfolio securities. The facility, previously $25.0 million, was renewed for $15.0 million. The agreement matures in March 2005 and bears interest at market rates. Borrowings outstanding under this facility totaling $10.5 million and $14.3 million, respectively, were collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries and had principal balances of $10.4 million and $14.1 million, with fair values of $11.0 million and $14.9 million, at December 31, 2004 and 2003, respectively. Weighted-average borrowings during the period were $12.3 million, $18.3 million and $27.5 million for 2004, 2003 and 2002, respectively. The interest rates at the end of the period were 2.8 percent and 1.9 percent for 2004 and 2003, respectively. Weighted-average interest rates during the period were 2.2 percent, 2.0 percent and 2.6 percent for 2004, 2003 and 2002, respectively. The revolving credit agreement contains certain financial covenants which include minimum thresholds for net worth and cash flow, plus maximum thresholds for investments and leverage ratios. The Company was in compliance with these covenants at December 31, 2004.

2004 ANNUAL REPORT

page 61.

THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2004 and 2003, outstanding seller-financed nonrecourse notes payable were $8.0 million and $7.1 million, respectively.

NOTE H: INCOME TAXES

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

	YEAR ENDED DECEMBER 31,
(in thousands)	2004			2003			2002
CURRENT
Federal	$	181,426		$	137,108		$	106,722
State		27,079			17,884			17,014
Total current		208,505			154,992			123,736
DEFERRED
Federal		(6,820	)		(413	)		—
State		(1,018	)		(54	)		—
Total deferred		(7,838	)		(467	)		—
Total expense	$	200,667		$	154,525		$	123,736

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

	YEAR ENDED DECEMBER 31,
	2004			2003			2002
Income taxes at federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		3.2			3.0			3.6
Other, net		0.3			1.0			1.4
Effective rate		38.5	%		39.0	%		40.0	%

     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)	2004			2003
DEFERRED TAX ASSETS
Warranty, legal and other accruals	$	28,227		$	30,534
Employee benefits		32,001			23,045
Noncash charge for impairment of long-lived assets		655			950
Other		1,199			665
Total deferred tax assets		62,082			55,194
DEFERRED TAX LIABILITIES
Installment sales method and deferred gains		(5,327	)		(7,439	)
Capitalized expenses		(8,886	)		(8,036	)
Other		(2,161	)		(2,276	)
Total deferred tax liabilities		(16,374	)		(17,751	)
Net deferred tax asset	$	45,708		$	37,443

     The Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total current tax liability of $48.4 million and $34.9 million at December 31, 2004 and 2003, respectively. These amounts are reported in the balance sheet in “Accrued and other liabilities.”

2004 ANNUAL REPORT

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THE RYLAND GROUP

NOTE I: 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 SPLITS

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

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

NOTE J: EMPLOYEE INCENTIVE AND STOCK PLANS

RETIREMENT SAVINGS OPPORTUNITY PLAN (RSOP)

All full-time employees are eligible to participate in the RSOP following 30 days of employment. Part-time employees are eligible to participate in the RSOP following the completion of one thousand hours of service within the first 12 months of employment or within any plan year after the date of hire. Pursuant to Section 401(k) of the Internal Revenue Code, the plan permits deferral of a portion of a participant’s income into a variety of investment options. Total compensation expense related to the Company’s matching contributions for this plan amounted to $9.3 million, $8.1 million and $7.2 million in 2004, 2003 and 2002, respectively.

     Previously, the Company issued its preferred stock in connection with its matching contributions to those accounts. As a result of the redemption of its preferred stock in 2001, 455,974 and 506,864 shares of common stock were allocated to participants’ accounts at December 31, 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 $390,000, $321,000 and $258,000 in 2004, 2003 and 2002, 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

2004 ANNUAL REPORT

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THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2004 and 2003, the cash surrender value of these contracts was $13.0 million and $6.1 million, respectively. The net periodic benefit cost of these plans for 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 net periodic benefit cost of these plans for the year ended December 31, 2003, was $3.7 million and included service costs of $3.7 million, interest costs of $290,000 and investment earnings of $324,000. The $9.4 million and $4.0 million projected benefit obligations at December 31, 2004 and 2003, respectively, were equal to the net liability recognized in the balance sheet at those dates. For the year ended December 31, 2004, the weighted-average discount rate used for the plans was 7.7 percent, compared to 7.8 percent for the same period in 2003.

EQUITY INCENTIVE PLAN AND OTHER RELATED PLANS

The Ryland Group, Inc. 2002 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 1992 Equity Incentive Plan, which expired on April 15, 2002. The aggregate number of shares available for issuance under the Plan includes 30,864 shares carried over from the 1992 Equity Incentive Plan and 2.6 million new shares available under the terms of the Plan. Any shares of the Company’s common stock covered by an award (or portion of an award) granted under the Plan or the 1992 Equity Incentive Plan that are forfeited, expired or canceled without delivery of shares of common stock, or which are tendered to the Company as full or partial payment of the exercise price or related tax withholding obligations, will again be available for award under the Plan. The Plan will remain in effect until April 24, 2012, unless it is terminated by the Board of Directors at an earlier date. The options are exercisable at various dates over one- to ten-year periods. Stock options granted in accordance with this plan generally have a maximum term of ten years and vest over three years. At December 31, 2004 and 2003, there were 765,408 and 1,540,584 stock options available for grant, respectively.

     The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan (“the 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 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 Plan. The Plan will remain in effect until January 1, 2014, unless it is terminated by the Compensation Committee of the Board of Directors at an earlier date. Stock options fully vest, become exercisable six months after the date of grant and have a maximum term of ten years. Upon termination of service on 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, 2004 and 2003, 1,153,200 and 353,200 stock options were available for grant, respectively.

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

	2004						2003						2002
					WEIGHTED-						WEIGHTED-						WEIGHTED-
					AVERAGE						AVERAGE						AVERAGE
					EXERCISE						EXERCISE						EXERCISE
		SHARES			PRICE			SHARES			PRICE			SHARES			PRICE
Options outstanding at beginning of year			6,012,876		$	13.11			6,874,796		$	10.11			7,346,568		$	6.58
Granted			1,016,400			43.45			1,032,300			26.08			1,574,400			21.48
Exercised			(1,452,654	)		10.95			(1,762,008	)		8.62			(1,939,230	)		5.87
Forfeited			(41,224	)		25.13			(132,212	)		18.19			(106,942	)		11.94
Options outstanding at end of year			5,535,398		$	19.15			6,012,876		$	13.11			6,874,796		$	10.11
Available for future grant			1,918,608						1,893,784						2,793,872
Total shares reserved			7,454,006						7,906,660						9,668,668
Options exercisable at end of year			3,676,991		$	12.11			3,788,128		$	7.76			3,997,936		$	6.26
Prices related to options exercised during the year		$	3.38–$22.70					$	3.41–$22.70					$	3.38–11.35		$

2004 ANNUAL REPORT

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THE RYLAND GROUP

     A summary of stock options outstanding and exercisable at December 31, 2004, follows:

	OPTIONS OUTSTANDING						OPTIONS EXERCISABLE
			WEIGHTED-
RANGE OF			AVERAGE		WEIGHTED-					WEIGHTED-
EXERCISE	NUMBER		REMAINING		AVERAGE			NUMBER		AVERAGE
PRICES	OUTSTANDING		LIFE (YEARS)		EXERCISE PRICE			EXERCISABLE		EXERCISE PRICE
$3.19 to $5.97		1,138,922		3.01	$	3.89			1,138,922	$	3.89
$6.04 to $11.38		1,399,090		5.00		7.69			1,399,090		7.69
$16.68 to $24.44		1,761,586		7.64		20.99			876,669		20.44
$34.70 to $57.54		1,235,800		9.27		43.58			262,310		43.58

     The Company has made several restricted stock awards to senior executives under the 2002 Equity Incentive 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 $14.3 million, $16.1 million and $9.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.

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

	2004			2003			2002
Restricted shares at January 1		638,600			904,200			500,000
Shares awarded		—			—			730,000
Shares vested		(281,800	)		(265,600	)		(325,800	)
Restricted shares at December 31		356,800			638,600			904,200

     At December 31, 2004, the outstanding restricted shares will vest as follows: 2005 — 168,800; 2006 — 94,000; and 2007 — 94,000.

     All outstanding stock options and restricted stock awards have been granted in accordance with the terms of the 2002 Equity Incentive Plan, the 2004 Non-Employee Director Equity Plan and their respective predecessor plans, which were approved by the Company’s stockholders.

NOTE K: 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, 2004, it had related cash deposits and letters of credit outstanding of $134.3 million for land options and land purchase contracts having a total purchase price of $1.9 billion. At December 31, 2004, the Company had commitments with respect to option contracts having specific performance provisions of approximately $117.2 million, compared to $51.5 million at December 31, 2003.

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

	YEAR ENDED DECEMBER 31,
(in thousands)	2004			2003			2002
Total rent expense	$	16,934		$	17,937		$	20,058
Less income from subleases		(295	)		(215	)		(1,233	)
Net rent expense	$	16,639		$	17,722		$	18,825

2004 ANNUAL REPORT

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THE RYLAND GROUP

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)
2005	$	8,087
2006		8,177
2007		6,555
2008		5,845
2009		3,658
Thereafter		3,183
Less sublease income		(515	)
Total lease commitments	$	34,990

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, 2004, total development bonds were $302.9 million and total deposits and letters of credit were $74.4 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.

     IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement. At December 31, 2004, the Company had outstanding IRLCs totaling $94.8 million. Hedging contracts are entered into to mitigate the risk associated with interest rate fluctuations on IRLCs. (See further discussion of IRLCs in Note F.)

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

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

(in thousands)	2004			2003
Balance at January 1	$	34,258		$	29,860
Warranties issued		16,621			16,668
Settlements made		(21,287	)		(16,201	)
Changes in liability for accruals related to pre-existing warranties		3,498			3,931
Balance at December 31	$	33,090		$	34,258

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

2004 ANNUAL REPORT

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THE RYLAND GROUP

NOTE L: SUPPLEMENTAL GUARANTOR INFORMATION

The Company’s obligations to pay principal, premium, if any, and interest under its $500.0 million unsecured revolving credit facility; the 8.0 percent senior notes due August 2006; the 5.4 percent senior notes due June 2008; and the 9.8 percent senior notes due September 2010 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, 2004
						NON-
				GUARANTOR		GUARANTOR		CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			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

2004 ANNUAL REPORT

page 67.

THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENT OF EARNINGS

	YEAR ENDED DECEMBER 31, 2003
					NON-
			GUARANTOR		GUARANTOR		CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.		SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			TOTAL
REVENUES
Homebuilding	$	2,153,561	$	1,317,300	$	—	$	(115,411	)	$	3,355,450
Financial services		—		—		88,679		—			88,679
TOTAL REVENUES		2,153,561		1,317,300		88,679		(115,411	)		3,444,129
EXPENSES
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

CONSOLIDATING STATEMENT OF EARNINGS

	YEAR ENDED DECEMBER 31, 2002
						NON-
				GUARANTOR		GUARANTOR		CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES		ELIMINATIONS			TOTAL
REVENUES
Homebuilding	$	1,745,222		$	1,122,661	$	—	$	(62,828	)	$	2,805,055
Financial services		—			—		72,158		—			72,158
TOTAL REVENUES		1,745,222			1,122,661		72,158		(62,828	)		2,877,213
EXPENSES
Cost of sales		1,350,717			928,077		93		(62,828	)		2,216,059
Selling, general and administrative		167,428			113,543		78		—			281,049
Financial services		—			—		21,299		—			21,299
Corporate		11,383			28,692		—		—			40,075
Interest		(132	)		6,958		2,565		—			9,391
TOTAL EXPENSES		1,529,396			1,077,270		24,035		(62,828	)		2,567,873
Earnings before taxes		215,826			45,391		48,123		—			309,340
Tax expense		86,330			18,157		19,249		—			123,736
Equity in net earnings of subsidiaries		56,108			—		—		(56,108	)		—
NET EARNINGS	$	185,604		$	27,234	$	28,874	$	(56,108	)	$	185,604

2004 ANNUAL REPORT

page 68.

THE RYLAND GROUP

CONSOLIDATING BALANCE SHEET

	DECEMBER 31, 2004
						NON-
				GUARANTOR		GUARANTOR			CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES			ELIMINATIONS			TOTAL
ASSETS
Cash and cash equivalents	$	36,090		$	31,390	$	20,908		$	—		$	88,388
Consolidated inventories owned		1,118,062			761,953		—			—			1,880,015
Consolidated inventories not owned		2,398			9,298		132,422			—			144,118
Total inventories		1,120,460			771,251		132,422			—			2,024,133
Property, plant and equipment		30,024			20,234		—			—			50,258
Net deferred taxes		49,524			—		(3,816	)		—			45,708
Purchase price in excess of net assets acquired		15,383			2,802		—			—			18,185
Investment in subsidiaries		95,408			—		—			(95,408	)		—
Other		124,396			19,522		54,380			—			198,298
TOTAL ASSETS		1,471,285			845,199		203,894			(95,408	)		2,424,970
LIABILITIES
Accounts payable		121,362			76,470		2,779			—			200,611
Accrued and other liabilities		386,023			67,802		46,983			—			500,808
Debt		547,612			840		10,490			—			558,942
Intercompany payables		(403,987	)		285,782		(107,177	)		225,382			—
TOTAL LIABILITIES		651,010			430,894		(46,925	)		225,382			1,260,361
MINORITY INTEREST		—			—		107,775			—			107,775
STOCKHOLDERS’ EQUITY		820,275			414,305		143,044			(320,790	)		1,056,834
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,471,285		$	845,199	$	203,894		$	(95,408	)	$	2,424,970

CONSOLIDATING BALANCE SHEET

	DECEMBER 31, 2003
						NON-
				GUARANTOR		GUARANTOR			CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES		SUBSIDIARIES			ELIMINATIONS			TOTAL
ASSETS
Cash and cash equivalents	$	34,434		$	278,767	$	3,503		$	—		$	316,704
Consolidated inventories owned		821,009			515,775		—			—			1,336,784
Consolidated inventories not owned		962			2,255		56,651			—			59,868
Total inventories		821,971			518,030		56,651			—			1,396,652
Property, plant and equipment		25,478			15,375		—			—			40,853
Net deferred taxes		41,857			—		(4,414	)		—			37,443
Purchase price in excess of net assets acquired		15,383			2,802		—			—			18,185
Investment in subsidiaries		66,700			—		—			(66,700	)		—
Other		83,104			22,052		92,597			—			197,753
TOTAL ASSETS		1,088,927			837,026		148,337			(66,700	)		2,007,590
LIABILITIES
Accounts payable		105,557			49,445		2,486			—			157,488
Accrued and other liabilities		307,630			57,781		29,622			—			395,033
Debt		545,953			1,669		26,254			—			573,876
Intercompany payables		(458,196	)		389,236		(74,800	)		143,760			—
TOTAL LIABILITIES		500,944			498,131		(16,438	)		143,760			1,126,397
MINORITY INTEREST		—			—		56,651			—			56,651
STOCKHOLDERS’ EQUITY		587,983			338,895		108,124			(210,460	)		824,542
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,088,927		$	837,026	$	148,337		$	(66,700	)	$	2,007,590

2004 ANNUAL REPORT

page 69.

THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENT OF CASH FLOWS

	YEAR ENDED DECEMBER 31, 2004
							NON-
				GUARANTOR			GUARANTOR			CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			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 stock option exercises		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

2004 ANNUAL REPORT

page 70.

THE RYLAND GROUP

CONSOLIDATING STATEMENT OF CASH FLOWS

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

2004 ANNUAL REPORT

page 71.

THE RYLAND GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENT OF CASH FLOWS

	YEAR ENDED DECEMBER 31,2002
							NON-
				GUARANTOR			GUARANTOR			CONSOLIDATING			CONSOLIDATED
(in thousands)	TRG, INC.			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			TOTAL
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	185,604		$	27,234		$	28,874		$	(56,108	)	$	185,604
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		20,020			11,831			819			—			32,670
Changes in assets and liabilities:
Increase in inventories		(139,594	)		(61,029	)		—			—			(200,623	)
Net change in other assets, payables and other liabilities		11,815			14,511			(29,568	)		56,108			52,866
Tax benefit from exercise of stock options		12,103			—			—			—			12,103
Other operating activities, net		5,095			—			—			—			5,095
Net cash provided by (used for) operating activities		95,043			(7,453	)		125			—			87,715
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment		(22,185	)		(13,191	)		(1,171	)		—			(36,547	)
Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral		—			—			25,314			—			25,314
Net cash (used for) provided by investing activities		(22,185	)		(13,191	)		24,143			—			(11,233	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings		(535	)		—			(18,974	)		—			(19,509	)
Common stock dividends		(2,148	)		—			—			—			(2,148	)
Common stock repurchases		(95,916	)		—			—			—			(95,916	)
Proceeds from stock option exercises		11,382			—			—			—			11,382
Other financing activities, net		6,284			—			(5,440	)		—			844
Net cash used for financing activities		(80,933	)		—			(24,414	)		—			(105,347	)
Net decrease in cash and cash equivalents		(8,075	)		(20,644	)		(146	)		—			(28,865	)
Cash and cash equivalents at beginning of year		32,470			261,677			4,163			—			298,310
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	24,395		$	241,033		$	4,017		$	—		$	269,445

NOTE M: SUBSEQUENT EVENT

In January 2005, the Company sold $250.0 million aggregate principal amount of its 5.4 percent senior notes due 2015. The Company received net proceeds of approximately $247.3 million from this offering, before certain administrative expenses, which it expects to use for general corporate purposes.

     The Company will pay interest semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2005. The notes will mature on January 15, 2015, and may be redeemed, in whole or in part, prior to their maturity at the redemption prices described in the prospectus supplement. Additionally, the notes are subject to certain restrictive covenants which include, among other things, limitations on change of control; liens and guarantees; sale of assets; and sale and leaseback of assets.

     Payment of principal and interest on the notes will be guaranteed, jointly and severally, by substantially all of the Company’s direct and indirect wholly-owned homebuilding subsidiaries. The guarantees will rank equally with all other unsecured and unsubordinated indebtedness of such subsidiaries.

2004 ANNUAL REPORT

page 72.

THE RYLAND GROUP

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

BOARD OF DIRECTORS AND STOCKHOLDERS
THE RYLAND GROUP, INC.

We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. 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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, 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, 2004, 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, 2005 expressed an unqualified opinion thereon.

Ernst & Young LLP
Los Angeles, California
February 22, 2005

2004 ANNUAL REPORT

page 73.

THE RYLAND GROUP

REPORT 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. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’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. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion,The Ryland Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, 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, 2004 and 2003, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004, and our report dated February 22, 2005 expressed an unqualified opinion thereon.

Ernst & Young LLP
Los Angeles, California
February 22, 2005

2004 ANNUAL REPORT

page 74.

THE RYLAND GROUP

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.

Gordon A. Milne
Executive Vice President and
Chief Financial Officer

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

2004 ANNUAL REPORT

page 75.

THE RYLAND GROUP

QUARTERLY FINANCIAL DATA AND COMMON STOCK
PRICES AND DIVIDENDS

QUARTERLY FINANCIAL DATA

(in thousands, except share data) unaudited							2004								2003
	DEC. 31		SEPT. 30		JUN. 30		MAR. 31		DEC. 31		SEPT. 30		JUN. 30		MAR. 31
CONSOLIDATED RESULTS
Revenues	$	1,244,379	$	1,034,322	$	918,521	$	754,599	$	1,072,238	$	872,184	$	840,031	$	659,676
Earnings before taxes		176,675		134,908		124,408		85,221		141,219		101,307		90,072		63,619
Tax expense		68,020		51,939		47,898		32,810		55,076		37,973		36,028		25,448
Net earnings	$	108,655	$	82,969	$	76,510	$	52,411	$	86,143	$	63,334	$	54,044	$	38,171
Net earnings per common share:
Basic	$	2.29	$	1.75	$	1.60	$	1.09	$	1.75	$	1.28	$	1.08	$	0.76
Diluted		2.17		1.66		1.51		1.03		1.65		1.20		1.02		0.72
Weighted-average common shares outstanding:
Basic		47,481		47,368		47,918		47,947		49,096		49,537		49,923		50,312
Diluted		50,026		49,920		50,561		50,976		52,364		52,723		53,200		53,266

COMMON STOCK PRICES AND DIVIDENDS

The Ryland Group lists its common shares on the New York Stock Exchange, trading under the symbol RYL.

The number of common stockholders of record at February 7, 2005, was 2,796.

The table below presents high and low market prices and dividend information for the Company.
(See Note G for dividend restrictions.)

					DIVIDENDS							DIVIDENDS
					DECLARED							DECLARED
2004	HIGH		LOW		PER SHARE		2003	HIGH		LOW		PER SHARE
First quarter	$	46.30	$	36.07	$	0.05	First quarter	$	22.34	$	17.60	$	0.01
Second quarter		44.25		36.34		0.05	Second quarter		38.42		22.12		0.01
Third quarter		46.95		34.69		0.05	Third quarter		38.28		31.45		0.01
Fourth quarter		57.63		42.45		0.06	Fourth quarter		47.07		38.94		0.05

2004 ANNUAL REPORT

EX-21

Exhibit 21: Subsidiaries of the Registrant

The following subsidiaries represent the significant subsidiaries of the Registrant as of December 31, 2004:

Ryland Homes of California, Inc., a Delaware corporation
Ryland Homes of Texas, Inc., a Texas corporation
Ryland Mortgage Company, an Ohio corporation
The Ryland Corporation, a California corporation
Ryland Organization Company, a California corporation

EX-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, 2005, 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 2004 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. 333-31034; Form S-3 No. 333-58208; Form 
S-3 No. 333-100167; Form S-3 No. 333-113756; and Form S-3 No. 333-121469) of The Ryland Group, Inc. and in the related Prospectuses of our reports dated February 22, 2005, 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, 2004.

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; and the Registration Statement (Form S-8 No. 333-119922) pertaining to The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan of our reports dated February 22, 2005, 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, 2004.

/s/ ERNST & YOUNG LLP

Ernst & Young LLP
Los Angeles, California
February 28, 2005

EX-24

Exhibit 24: Power of Attorney

The undersigned directors and officers 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 and officers of The Ryland Group, Inc., the Annual Report on Form 10-K of The Ryland Group, Inc., for the fiscal year ended December 31, 2004, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

DATED: February 22, 2005

/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

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. (“Ryland”);

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 Ryland as of, and for, the periods presented in this report;

4. Ryland’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 Ryland 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 Ryland, 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 Ryland’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 Ryland’s internal control over financial reporting that occurred during Ryland’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Ryland’s internal control over financial reporting; and

5. Ryland’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Ryland’s auditors and the audit committee of Ryland’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 Ryland’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 Ryland’s internal control over financial reporting.

Date: February 22, 2005	/s/ R. Chad Dreier
	R. Chad Dreier Chairman, President and Chief Executive Officer

EX-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. (“Ryland”);

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 Ryland as of, and for, the periods presented in this report;

4. Ryland’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 Ryland 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 Ryland, 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 Ryland’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 Ryland’s internal control over financial reporting that occurred during Ryland’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Ryland’s internal control over financial reporting; and

5. Ryland’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Ryland’s auditors and the audit committee of Ryland’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 Ryland’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 Ryland’s internal control over financial reporting.

Date: February 22, 2005	/s/ Gordon A. Milne
	Gordon A. Milne Executive Vice President and
	Chief Financial Officer

EX-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 Registrant”), 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, 2004 of the Registrant (“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 Registrant.

/s/ R. Chad Dreier

Name: R. Chad Dreier
Date: February 22, 2005

EX-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 Registrant”), 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, 2004 of the Registrant (“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 Registrant.

/s/ Gordon A. Milne

Name: Gordon A. Milne
Date: February 22, 2005