EXHIBIT 13

THE RYLAND GROUP, INC. & SUBSIDIARIES
SELECTED FINANCIAL DATA

(amounts in millions, except share data) unaudited			2001			2000		1999		1998			1997
ANNUAL RESULTS
REVENUES
	Homebuilding		$	2,684		$	2,286	$	1,959	$	1,695		$	1,557
	Financial services			58			46		50		70			93
		TOTAL		2,742			2,332		2,009		1,765			1,650
Cost of sales— homebuilding				2,182			1,901		1,633		1,429			1,346
Selling, general and administrative expenses				311			268		239		216			211
Interest expense				24			28		28		45			57
Earnings before taxes				225			135		109		75			36
Tax expense				89			53		42		32			14
Net earnings before extraordinary item				136			82		67		43			22
Extraordinary item, extinguishment of debt(1)				(4	)		—		—		(3	)		—
Net earnings			$	132		$	82	$	67	$	40		$	22
YEAR-END POSITION
ASSETS
	Housing inventories		$	899		$	888	$	823	$	642		$	555
	Cash and cash equivalents			298			142		70		50			36
	Mortgage-backed securities and notes receivable			62			85		99		112			153
	Other assets			252			246		256		411			539
		TOTAL ASSETS	$	1,511		$	1,361	$	1,248	$	1,215		$	1,283
LIABILITIES
	Long-term debt		$	491		$	450	$	378	$	308		$	310
	Short-term notes payable			62			83		157		223			341
	Other liabilities			395			375		327		338			327
		TOTAL LIABILITIES	$	948		$	908	$	862	$	869		$	978
Stockholders’ equity			$	563		$	453	$	386	$	346		$	305
PER COMMON SHARE DATA
BASIC
	Net earnings before extraordinary item		$	10.21		$	6.19	$	4.49	$	2.90		$	1.33
	Net earnings		$	9.88		$	6.19	$	4.49	$	2.67		$	1.33
DILUTED
	Net earnings before extraordinary item		$	9.57		$	5.92	$	4.30	$	2.79		$	1.32
	Net earnings		$	9.26		$	5.92	$	4.30	$	2.58		$	1.32
Dividends declared			$	0.16		$	0.16	$	0.16	$	0.16		$	0.27
Stockholders’ equity			$	42.59		$	33.49	$	27.22	$	22.83		$	20.31

⁽¹⁾ The Company reported extraordinary after-tax charges of $4.4 million in 2001 and $3.3 million in 1998 which were related to losses on the early extinguishment of debt.

21

THE RYLAND GROUP, INC. & SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

THE COMPANY

Operations of The Ryland Group 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 21 markets. The financial services segment is primarily involved in providing mortgage-related products and services for the Company’s homebuilding customers.

RESULTS OF OPERATIONS

The Company achieved record earnings for the third consecutive year in 2001. New orders and deliveries of homes also reached their highest levels during the same three-year period. The Company reported consolidated net earnings before extraordinary item of $136.5 million, or $10.21 per share ($9.57 per diluted share), for 2001, compared to $82.3 million, or $6.19 per share ($5.92 per diluted share), for 2000 and $66.7 million, or $4.49 per share ($4.30 per diluted share), for 1999. This represents increases in net earnings before extraordinary item of 66 percent and 23 percent for 2001 and 2000, respectively.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) rose to $318.2 million for the year ended December 31, 2001, from $219.3 million for the same period in 2000. EBITDA was $184.5 million for the year ended December 31, 1999.

The Company’s revenues reached a historical high in 2001 at $2.7 billion, up 17 percent from $2.3 billion in 2000. Total revenues of $2.3 billion in 2000 exceeded 1999 levels by $0.3 billion, or 16 percent. Both housing and mortgage banking revenues rose in 2001.

The homebuilding segment reported pretax earnings of $223.2 million for 2001, compared to $151.3 million for 2000 and $120.8 million for 1999. Homebuilding results in 2001 increased from 2000 primarily due to higher average closing prices, gross profit margins and closing volume. Homebuilding results in 2000 increased from 1999 primarily due to these same factors.

The financial services segment reported pretax earnings of $35.1 million for 2001, compared to $11.5 million for 2000 and $11.8 million for 1999. The increase in 2001 from 2000 was primarily attributable to gains realized from the growth of operations, resulting in heightened volume and gains from sales of mortgages and related servicing rights; earnings from title and escrow operations; and decreases in both general and administrative and interest expenses. The decrease in 2000 from 1999 was due to decreased revenues from investment operations and increased general and administrative expenses, partially offset by increased gains realized from sales of mortgages and related servicing rights, as well as from increased earnings from title and escrow operations.

Corporate expenses represent the costs of corporate functions that support the business segments. Corporate expenses were $32.7 million for 2001, $28 million for 2000 and $23.3 million for 1999. Corporate expenses for 2001 and 2000 increased from prior year levels primarily as a result of increases in incentive compensation which were due to higher earnings levels.

During 2001, the Company continued to strengthen its balance sheet. Liquidity increased with cash and unused borrowing capacity totaling $617.7 million at December 31, 2001, versus $485.9 million in 2000, while reliance on short-term debt decreased. Debt-to-total capitalization was down to 47 percent at December 31, 2001, compared to 50 percent at December 31, 2000. In addition, the Company’s ratio of EBITDA to interest incurred improved to 5.8 for the year ended December 31, 2001, compared to 3.5 for the same period in 2000. The Company, which is geographically diverse, has a three-year supply of land and turned inventory over a competitive 2.3 times in 2001.

HOMEBUILDING SEGMENT

Results of operations for the homebuilding segment are summarized as follows (amounts in thousands, except average closing price):

	2001		2000		1999
Revenues	$	2,684,116	$	2,285,540	$	1,958,832
Gross profit		502,497		384,889		325,738
Selling, general and administrative expenses		261,078		216,660		193,193
Interest expense		18,229		16,886		11,715
Homebuilding pretax earnings	$	223,190	$	151,343	$	120,830
Average closing price	$	208,000	$	194,000	$	190,000

22

THE RYLAND GROUP, INC. & SUBSIDIARIES

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

Homebuilding revenues increased 17 percent in 2001, compared to 2000, due to an 11 percent increase in closings and a 7 percent increase in the average closing price. The increase in closings in 2001 was due to a higher backlog at the beginning of the year and a 10 percent increase in new home orders during the year. Homebuilding revenues increased 17 percent in 2000, compared to 1999, due to a 12 percent increase in closings and a 2 percent increase in the average closing price. The increase in closings in 2000 was due to a higher backlog at the beginning of the year and a 15 percent increase in new home orders during the year.

Consistent with its policy of managing land investments according to return and risk targets, the Company executed several land sales during the year. Homebuilding results included a pretax gain of $2.3 million from land sales in 2001, compared to a pretax loss of $0.9 million in 2000 and a pretax gain of $0.7 million in 1999.

Gross profit margins from home sales averaged 19.0 percent for 2001, an increase from 17.4 percent for 2000 and 16.8 percent for 1999. The improvement was primarily due to Company initiatives designed to reduce direct construction costs, escalating sales prices and increased closings from newer communities that had more profitable land positions and a more cost-effective product.

Selling, general and administrative expenses, as a percentage of revenues, were 9.7 percent for 2001, 9.5 percent for 2000 and 9.9 percent for 1999. The increase from 2000 to 2001 was primarily due to higher incentive compensation expense, which resulted from improved earnings, and an increase in rent expense as a result of a rise in model home lease activity, offset by divisional and regional cost savings.

Interest expense increased $1.3 million, or 8 percent, in 2001, compared to 2000. This was primarily due to the issuance of new senior debt prior to redemptions of pre-existing debt and was partially offset by declining interest rates, reduced borrowings against the revolving credit facility and interest earned on increased cash investments. Interest expense increased $5.2 million, or 44 percent, in 2000, compared to 1999, primarily due to a higher long-term debt balance, which resulted from increased activity in the Company’s homebuilding operations, and higher interest rates.

HOMEBUILDING OPERATIONAL DATA

New orders increased 10 percent in 2001, compared to 2000. The Company believes new order trends were driven by a desirable product mix, superior locations and a proactive approach to maintaining an adequate supply of competitively priced lots. At December 31, 2001, the Company had outstanding contracts for 4,577 units, up 10 percent from year-end 2000, due to an increase in new orders during the year. Outstanding contracts represent the Company’s backlog of sold but not closed homes, which are generally built and closed, subject to cancellation, over the subsequent two quarters. The $917 million value of outstanding contracts increased 6 percent from year-end 2000.

		NEW ORDERS (UNITS)						CLOSINGS (UNITS)
						%						%
		2001		2000		CHANGE		2001		2000		CHANGE
North			3,875		3,511		10		3,718		3,242		15
South			6,798		6,018		13		6,356		5,988		6
West			2,422		2,390		1		2,612		2,188		19
	Total		13,095		11,919		10		12,686		11,418		11

	OUTSTANDING									OUTSTANDING
	CONTRACTS									CONTRACTS
	DECEMBER 31, 2001									DECEMBER 31, 2000
						DOLLARS						DOLLARS
			%			IN		AVERAGE				IN		AVERAGE
	UNITS		CHANGE			MILLIONS		PRICE		UNITS		MILLIONS		PRICE
North		1,637		11		$	368	$	225,000		1,480	$	305	$	206,000
South		2,540		21			450		177,000		2,098		383		182,000
West		400		(32	)		99		247,000		590		179		304,000
Total		4,577		10		$	917	$	200,000		4,168	$	867	$	208,000

23

THE RYLAND GROUP, INC. & SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

FINANCIAL SERVICES SEGMENT

Revenues and expenses of the Company’s financial services segment are summarized as follows (amounts in thousands):

				2001		2000		1999
REVENUES
	Net gains on sales of mortgages and mortgage servicing rights			$	35,768	$	20,283	$	17,598
	Title/escrow/insurance				11,957		9,823		9,036
	Interest
		Mortgage-backed securities and notes receivable			8,584		11,969		16,624
		Other			1,165		3,647		5,595
			Total interest		9,749		15,616		22,219
	Other				194		383		1,581
		Total revenues		$	57,668	$	46,105	$	50,434
EXPENSES
	General and administrative			$	17,125	$	22,991	$	21,944
	Interest				5,423		11,619		16,652
		Total expenses		$	22,548	$	34,610	$	38,596
Pretax earnings				$	35,120	$	11,495	$	11,838

FINANCIAL SERVICES OPERATIONAL DATA

		2001			2000			1999
RETAIL OPERATIONS
	Number of mortgage originations		9,743			7,500			7,106
	Dollars (in millions)	$	1,700		$	1,200		$	1,100
	Percent of Ryland Homes originations		81	%		71	%		68	%
INVESTMENT OPERATIONS
	Mortgage-backed securities and notes receivable average balance (in millions)	$	71		$	93		$	98

In 2001, revenues for the financial services segment increased from 2000 levels due to a 44 percent rise in loan sales volume and higher earnings from title and escrow operations. General and administrative expenses decreased for the year ended December 31, 2001, compared to 2000, primarily as a result of provisions made in the prior year for contingent claims relating to loan servicing activities (see Note L), partially offset by increased incentive compensation commensurate with improved earnings. In 2000, revenues for the financial services segment decreased from 1999 levels due to declining mortgage collateral and investment balances, partially offset by an increase in originations and higher revenues from title and escrow operations. General and administrative expenses increased for the year ended December 31, 2000, compared to 1999, primarily as a result of provisions for contingent claims relating to loan servicing activities in prior years.

Interest expense decreased 53 percent for the year ended December 31, 2001, compared to 2000, primarily due to reduced average warehouse borrowings; the termination of the warehouse facility agreement in July 2001; and a decline in average borrowing rates, bonds payable and short-term notes payable. Interest expense decreased 30 percent for the year ended December 31, 2000, compared to 1999, primarily due to a decrease in the warehouse holding period for mortgage loans before they were sold in the secondary market, as well as declining mortgage collateral and investment balances.

Retail operations include residential mortgage origination, title, escrow and homeowners insurance brokerage services. Retail operations reported pretax earnings of $33.1 million for 2001, compared to $9.7 million for 2000 and $9.2 million for 1999.

The number of mortgage originations rose by 30 percent in 2001, primarily due to an increase in the capture rate of Company homebuilder originations to 81 percent in 2001 from 71 percent in 2000. Mortgage originations rose by 6 percent in 2000, primarily due to an increase in the capture rate of Company homebuilder originations to 71 percent in 2000 from 68 percent in 1999.

Pretax earnings from investment operations were $2 million for 2001, compared to $1.8 million for 2000 and $2.7 million for 1999.

24

THE RYLAND GROUP, INC. & SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

FINANCIAL CONDITION AND LIQUIDITY

Cash requirements for the Company’s homebuilding and financial services segments are generally provided from outside borrowings and internally generated funds. The Company believes that its current sources of cash are sufficient to meet its requirements.

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 $490.5 million and $450 million at December 31, 2001 and 2000, respectively.

The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. This facility will mature in October 2003 and provides for borrowings up to $400 million. There were no outstanding borrowings under this facility at December 31, 2001 and 2000. The Company had letters of credit outstanding under this facility which totaled $83.5 million at December 31, 2001, and $55.7 million at December 31, 2000. To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2001 and 2000, outstanding seller-financed nonrecourse secured notes payable were $3.3 million and $1.9 million, respectively.

Housing inventories increased to $899.4 million at December 31, 2001, from $888.4 million at December 31, 2000. The increase in inventory was funded with internally generated funds.

The financial services segment uses cash generated from operations and borrowing arrangements to finance its operations. In July 2001, the financial services segment terminated its credit facility, which provided up to $150 million for mortgage warehouse funding. As a result of its ability to accelerate loan sales, the Company no longer had a need for this facility. Other borrowing arrangements at December 31, 2001, included a repurchase agreement facility providing for borrowings of up to $80 million and a $45 million revolving credit facility used to finance investment portfolio securities. At December 31, 2001 and 2000, the combined borrowings of the financial services segment, outstanding under all agreements, were $62.1 million and $82.6 million, respectively.

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. Revenues, expenses and portfolio balances continue to decline as mortgage collateral pledged to secure the bonds decreases due to scheduled payments, prepayments and exercises of early redemption provisions. The source of cash for the bond payments was cash received from the mortgage loans, notes receivable and mortgage-backed securities.

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

During 2001, the Company repurchased approximately one million shares of its outstanding common stock at a cost of nearly $45.5 million. At December 31, 2001, the Company had Board authorization to repurchase up to an additional 1.6 million shares of its outstanding common stock. The Company’s stock repurchase program has been funded primarily with internally generated funds.

CRITICAL ACCOUNTING POLICIES

USE OF ESTIMATES

In budgeting land acquisitions, development and homebuilding construction costs, the Company evaluates market conditions, material and labor costs, buyer preferences, construction timing and warranty obligations. Estimates are reviewed continually and updated when necessary. 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 gross margins, net profit and inventory valuation for the Company.

ASSET VALUATIONS

The Company reviews long-lived assets and assets held-for-sale to determine that their carrying values have not been impaired. Cash flow forecasts and sales of comparable assets are used as primary methods to evaluate recoverability. Management believes its processes are designed to properly assess market values and carrying values of assets.

See Summary of Significant Accounting Policies (Note A).

25

THE RYLAND GROUP, INC. & SUBSIDIARIES
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
(dollars in thousands)			2002			2003			2004			2005			2006			THEREAFTER			TOTAL			12/31/01
HOMEBUILDING
LIABILITIES
	Long-term debt (fixed rate)														$	100,000		$	390,500		$	490,500		$	514,519
		Average interest rate														8.0	%		9.1	%		8.9	%
FINANCIAL SERVICES
ASSETS
	Mortgage loans, held-for-sale(2) (fixed rate)		$	12,027																	$	12,027		$	12,287
		Average interest rate		7.0	%																	7.0	%
	Mortgage loans, held-for-sale(2) (variable rate)		$	1,211																	$	1,211		$	1,237
		Average interest rate		6.7	%																	6.7	%
	Mortgage-backed securities and notes receivable		$	12,598		$	9,948		$	7,867		$	6,224		$	4,925		$	18,853		$	60,415		$	64,038
		Average interest rate		9.3	%		9.3	%		9.3	%		9.3	%		9.3	%		9.2	%		9.3	%
LIABILITIES
	Short-term notes payable (variable rate)		$	62,119																	$	62,119		$	62,119
		Average interest rate	Various(1)																		Various(1)
OTHER FINANCIAL INSTRUMENTS
	Forward-delivery contracts:
		Notional amount	$	35,000																	$	35,000		$	(290	)
		Average interest rate		6.2	%																	6.2	%
	Interest rate lock
		commitments:
		Notional amount	$	47,820																	$	47,820		$	230
		Average interest rate		7.1	%																	7.1	%

(1)	Variable interest rate available to the Company is based upon LIBOR, federal funds or prime rate plus the specified margin over LIBOR, federal funds or prime rate.
(2)	Mortgage loans held-for-sale are reported in the balance sheet in Financial Services “Other Assets.”

26

THE RYLAND GROUP, INC. & SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

Interest rate risk is the 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 bank 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. The selection of hedging contracts is based upon the Company’s risk-management policy that establishes a risk-tolerance level. The major factors influencing the use of hedging (derivative) contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to be funded. In managing interest rate risk, the Company does not speculate on the direction of interest rates.

NOTE: Certain statements in this annual report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include such risks and uncertainties as the completion and profitability of sales reported; the market for homes generally and in areas where the Company operates; the availability and cost of land; changes in economic conditions and interest rates; availability and increases in raw material and labor costs; consumer confidence; government regulations; and general economic, business and competitive factors, all or each of which may cause actual results to differ materially.

27

THE RYLAND GROUP, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

				YEAR ENDED DECEMBER 31,
(amounts in thousands, except share data)				2001			2000		1999
REVENUES
	HOMEBUILDING			$	2,684,116		$	2,285,540	$	1,958,832
	FINANCIAL SERVICES				57,668			46,105		50,434
			TOTAL REVENUES		2,741,784			2,331,645		2,009,266
EXPENSES
		HOMEBUILDING
			Cost of sales		2,181,619			1,900,651		1,633,094
			Selling, general and administrative		261,078			216,660		193,193
			Interest		18,229			16,886		11,715
			Total homebuilding expenses		2,460,926			2,134,197		1,838,002
		FINANCIAL SERVICES
			General and administrative		17,125			22,991		21,944
			Interest		5,423			11,619		16,652
			Total financial services expenses		22,548			34,610		38,596
		CORPORATE			32,730			27,998		23,332
			TOTAL EXPENSES		2,516,204			2,196,805		1,899,930
Earnings before taxes and extraordinary item					225,580			134,840		109,336
Tax expense					89,104			52,588		42,641
NET EARNINGS BEFORE EXTRAORDINARY ITEM					136,476			82,252		66,695
Extraordinary item— loss on early extinguishment of debt (net of taxes of $2,861)					(4,383	)		—		—
NET EARNINGS				$	132,093		$	82,252	$	66,695
Preferred dividends				$	308		$	694	$	831
Net earnings available to common stockholders				$	131,785		$	81,558	$	65,864
NET EARNINGS PER COMMON SHARE
	BASIC
			Net earnings before extraordinary item	$	10.21		$	6.19	$	4.49
			Extraordinary item		(0.33	)		—		—
			Net earnings per common share	$	9.88		$	6.19	$	4.49
	DILUTED
			Net earnings before extraordinary item	$	9.57		$	5.92	$	4.30
			Extraordinary item		(0.31	)		—		—
			Net earnings per common share	$	9.26		$	5.92	$	4.30
	AVERAGE COMMON SHARES OUTSTANDING
			Basic		13,332,725			13,172,793		14,678,925
			Diluted		14,255,679			13,893,362		15,505,382

See Notes to Consolidated Financial Statements.

28

THE RYLAND GROUP, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

				DECEMBER 31,
(amounts in thousands, except share data)				2001		2000
ASSETS
	HOMEBUILDING
		Cash and cash equivalents		$	295,015	$	135,371
		Housing inventories:
			Homes under construction		460,152		451,723
			Land under development and improved lots		439,237		436,682
			Total inventories		899,389		888,405
		Property, plant and equipment			33,371		35,577
		Purchase price in excess of net assets acquired			18,185		19,947
		Other assets			79,638		71,932
					1,325,598		1,151,232
	FINANCIAL SERVICES
		Cash and cash equivalents			3,295		6,830
		Mortgage-backed securities and notes receivable			62,045		84,600
		Other assets			27,507		23,060
					92,847		114,490
	OTHER ASSETS
		Net deferred taxes			36,739		34,858
		Other			55,685		60,761
			TOTAL ASSETS	$	1,510,869	$	1,361,341
LIABILITIES
	HOMEBUILDING
		Accounts payable and other liabilities		$	260,908	$	254,949
		Long-term debt			490,500		450,000
					751,408		704,949
	FINANCIAL SERVICES
		Accounts payable and other liabilities			23,586		22,600
		Short-term notes payable			62,119		82,563
					85,705		105,163
	OTHER LIABILITIES				110,894		97,600
			TOTAL LIABILITIES	$	948,007	$	907,712
STOCKHOLDERS’ EQUITY
	Convertible preferred stock, $1 par value:
		Authorized— 1,400,000 shares
		Issued— 0 shares (295,018 for 2000)		$	—	$	295
	Common stock, $1 par value:
		Authorized—78,600,000 shares
		Issued— 13,216,864 shares (13,248,948 for 2000)			13,217		13,249
	Paid-in capital				39,514		60,535
	Retained earnings				508,667		379,006
	Accumulated other comprehensive income				1,464		544
			TOTAL STOCKHOLDERS’ EQUITY	$	562,862	$	453,629
			TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,510,869	$	1,361,341

See Notes to Consolidated Financial Statements.

29

THE RYLAND GROUP, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																ACCUMULATED
																OTHER			TOTAL
				PREFERRED			COMMON			PAID-IN			RETAINED			COMPREHENSIVE			STOCKHOLDERS'
(amounts in thousands, except share data)				STOCK			STOCK			CAPITAL			EARNINGS			INCOME			EQUITY
BALANCE AT JANUARY 1, 1999				$	417		$	14,752		$	93,193		$	236,011		$	1,910		$	346,283
	Comprehensive income
		Net earnings												66,695						66,695
		Other comprehensive income, net of tax:
			Unrealized losses on mortgage-backed securities, net of taxes of $(543)														(851	)		(851	)
		Total comprehensive income																		65,844
	Preferred stock dividends (per share $2.21)													(831	)					(831	)
	Common stock dividends (per share $0.16)													(2,328	)					(2,328	)
	Repurchase of common stock							(1,188	)		(25,938	)								(27,126	)
	Conversions and retirements of preferred stock				(67	)		63			(896	)								(900	)
	Reclassification of preferred paid-in capital										612									612
	Employee stock plans (223,800 shares)							224			4,759									4,983
BALANCE AT DECEMBER 31, 1999					350			13,851			71,730			299,547			1,059			386,537
	Comprehensive income
		Net earnings												82,252						82,252
		Other comprehensive income, net of tax:
			Unrealized losses on mortgage-backed securities, net of taxes of $(329)														(515	)		(515	)
		Total comprehensive income																		81,737
	Preferred stock dividends (per share $2.21)													(694	)					(694	)
	Common stock dividends (per share $0.16)													(2,099	)					(2,099	)
	Repurchase of common stock							(1,147	)		(24,262	)								(25,409	)
	Conversions and retirements of preferred stock				(55	)		54			(585	)								(586	)
	Reclassification of preferred paid-in capital										3,179									3,179
	Employee stock plans (491,051 shares)							491			10,473									10,964
BALANCE AT DECEMBER 31, 2000					295			13,249			60,535			379,006			544			453,629
	Comprehensive income
		Net earnings												132,093						132,093
		Other comprehensive income, net of tax:
			Unrealized gains on mortgage-backed securities, net of taxes of $601														920			920
		Total comprehensive income																		133,013
	Preferred stock dividends (per share $1.11)													(308	)					(308	)
	Common stock dividends (per share $0.16)													(2,124	)					(2,124	)
	Repurchase of common stock							(1,002	)		(44,491	)								(45,493	)
	Conversions and retirements of preferred stock				(295	)		295			149									149
	Reclassification of preferred paid-in capital										1,309									1,309
	Employee stock plans (674,853 shares)							675			22,012									22,687
BALANCE AT DECEMBER 31, 2001				$	—		$	13,217		$	39,514		$	508,667		$	1,464		$	562,862

See Notes to Consolidated Financial Statements.

30

THE RYLAND GROUP, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

			YEAR ENDED DECEMBER 31,
(amounts in thousands)			2001			2000			1999
CASH FLOWS FROM OPERATING ACTIVITIES
	Net earnings		$	132,093		$	82,252		$	66,695
	Adjustments to reconcile net earnings to net cash
		provided by operating activities:
		Depreciation and amortization		37,068			28,489			28,010
		Loss on early extinguishment of debt		7,244			—			—
	Changes in assets and liabilities:
		Increase in inventories		(10,984	)		(65,724	)		(178,590	)
		Net change in other assets, payables and other liabilities		14,125			69,903			153,062
	Other operating activities, net			(6,182	)		(3,695	)		(10,039	)
	Net cash provided by operating activities			173,364			111,225			59,138
CASH FLOWS FROM INVESTING ACTIVITIES
	Net additions to property, plant and equipment			(30,883	)		(34,326	)		(29,026	)
	Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral			33,215			24,006			64,101
	Other investing activities, net			—			4,278			(232	)
	Net cash provided by (used for) investing activities			2,332			(6,042	)		34,843
CASH FLOWS FROM FINANCING ACTIVITIES
	Cash proceeds of long-term debt			250,000			150,000			70,000
	Reduction of long-term debt			(214,426	)		(78,000	)		(152	)
	Decrease in short-term notes payable			(20,444	)		(74,895	)		(65,600	)
	Common and preferred stock dividends			(2,605	)		(2,859	)		(3,249	)
	Common stock repurchases			(45,493	)		(25,409	)		(27,126	)
	Other financing activities, net			13,381			(1,745	)		(47,712	)
	Net cash used for financing activities			(19,587	)		(32,908	)		(73,839	)
	Net increase in cash and cash equivalents			156,109			72,275			20,142
	Cash and cash equivalents at beginning of year			142,201			69,926			49,784
CASH AND CASH EQUIVALENTS AT END OF YEAR			$	298,310		$	142,201		$	69,926
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash paid for interest (net of capitalized interest)		$	25,023	(1)	$	23,661		$	29,145
	Cash paid for income taxes		$	72,662		$	51,509		$	40,683

⁽¹⁾ Amount excludes call premiums and unamortized debt issuance costs shown as the loss on early extinguishment of debt.

See Notes to Consolidated Financial Statements.

31

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Ryland Group 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 2001 presentation.

USE OF ESTIMATES

The preparation of financial statements, in conformity with generally accepted accounting principles, 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 to be cash equivalents. Cash equivalents totaled $64 million and $62.2 million at December 31, 2001 and 2000, respectively.

PER SHARE DATA

Basic net earnings per common share is computed by dividing net earnings, after considering preferred stock dividend requirements, by the weighted-average number of common shares outstanding. Additionally, diluted net earnings per common share gives effect to dilutive common stock equivalent shares.

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.

HOMEBUILDING REVENUES

Homebuilding revenues are recognized when home sales are closed and title passes to the customer.

SERVICE LIABILITIES

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

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. Write-downs of impaired inventories to fair value are recorded as adjustments to the cost basis of the respective inventory.

Inventories to be disposed of are stated at the lower of cost or fair value less cost to sell and are reported net of valuation reserves. Valuation reserves related to inventories to be disposed of amounted to $7.1 million at December 31, 2001, and $10.5 million at December 31, 2000. The net carrying values of the related inventories amounted to $6.9 million and $35 million at December 31, 2001 and 2000, respectively.

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

The following table is a summary of capitalized interest:

	2001			2000
Capitalized interest as of January 1	$	33,494		$	26,970
Interest capitalized		31,675			34,105
Interest amortized to cost of sales		(31,878	)		(27,581	)
Capitalized interest as of December 31	$	33,291		$	33,494

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures, based in Atlanta, Dallas, Denver, Orlando and Phoenix, are engaged in the development of land. At December 31, 2001 and 2000, the Company’s investment in unconsolidated joint ventures amounted to $20.1 million and $13.9 million, respectively.

32

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

The joint ventures finance land development investments through a variety of borrowing arrangements. The Company does not guarantee these financing arrangements. At December 31, 2001 and 2000, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $22.6 million and $8.8 million, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, which include model home furnishings, 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 are amortized over the life of the community as homes are closed.

PURCHASE PRICE IN EXCESS OF NET ASSETS ACQUIRED

Historically, costs in excess of net assets of acquired businesses (goodwill) are amortized on a straight-line basis over their estimated useful lives for up to 30 years. The Company periodically evaluates the businesses to which goodwill relates, on an undiscounted cash flow method, in order to assess whether the carrying value of goodwill has been impaired. See “New Accounting Pronouncements.”

MORTGAGE-BACKED SECURITIES

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 are classified as available-for-sale and carried in the consolidated balance sheets at fair value, with unrealized gains and losses, net of applicable taxes, reported as a component of accumulated other comprehensive income in stockholders’ equity. The estimated fair values of these securities are determined based on current market quotations.

LOAN ORIGINATION FEES, COSTS AND MORTGAGE DISCOUNTS

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.

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. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivatives and Hedging Activities,” as amended. During 2001, 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 at fair value, with changes in fair value recorded in current earnings. The Company’s mortgage pipeline includes IRLCs, which represent commitments that have been extended by the Company to its borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. The Company determined that its IRLCs meet the definition of derivatives under SFAS 133.

COMPREHENSIVE INCOME

Comprehensive income consists of net income and the increase or decrease in unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $133 million, $81.7 million and $65.8 million for the years ended December 31, 2001, 2000 and 1999, respectively.

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.” 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.

33

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

NEW ACCOUNTING PRONOUNCEMENTS
SFAS 141 AND SFAS 142

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (SFAS 141), “Business Combinations,” and No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. It also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after that date. SFAS 142 requires that these 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 will apply SFAS 141 and SFAS 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS 142 is expected to result in an increase in net earnings of $1.1 million ($0.08 per share) in 2002. The Company is currently in the process of determining what the effect of the required impairment tests of goodwill and indefinite-lived intangible assets will be on the earnings and financial position of the Company. The Company plans to complete the first of these tests in the first quarter of 2002 and does not expect the impact to be material.

NOTE B: EARNINGS PER SHARE RECONCILIATION

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

			YEAR ENDED DECEMBER 31,
(amounts in thousands, except share data)			2001			2000			1999
NUMERATOR
	Net earnings before extraordinary item		$	136,476		$	82,252		$	66,695
	Preferred stock dividends			(308	)		(694	)		(831	)
	Numerator for basic earnings per share — earnings before extraordinary item available to common stockholders			136,168			81,558			65,864
	Effect of dilutive securities — preferred stock dividends			308			694			831
	Numerator for diluted earnings per share — earnings before extraordinary item available to common stockholders		$	136,476		$	82,252		$	66,695
DENOMINATOR
	Denominator for basic earnings per share — weighted-average shares			13,332,725			13,172,793			14,678,925
	Effect of dilutive securities:
		Stock options		643,555			315,560			292,580
		Conversion of preferred shares		199,495			321,126			384,255
		Equity incentive plan		79,904			83,883			149,622
	Dilutive potential of common shares			922,954			720,569			826,457
	Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions			14,255,679			13,893,362			15,505,382
BASIC EARNINGS PER COMMON SHARE
Net earnings per share before extraordinary item			$	10.21		$	6.19		$	4.49
DILUTED EARNINGS PER COMMON SHARE
Net earnings per share before extraordinary item			$	9.57		$	5.92		$	4.30

The assumed conversion of preferred shares was dilutive for the years ended December 31, 2001, 2000 and 1999.

34

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

NOTE C: 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 21 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 not only provides mortgage-related products and services such as loan origination, title, escrow and homeowners insurance brokerage, but also maintains a portfolio of mortgage-backed securities and notes receivable.

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 the Summary of Significant Accounting Policies (see Note A). Certain corporate expenses are allocated to the homebuilding and financial services segments.

			YEAR ENDED DECEMBER 31,
			2001			2000			1999
REVENUES
	Homebuilding		$	2,684,116		$	2,285,540		$	1,958,832
	Financial services			57,668			46,105			50,434
		Total	$	2,741,784		$	2,331,645		$	2,009,266
PRETAX EARNINGS
	Homebuilding		$	223,190		$	151,343		$	120,830
	Financial services			35,120			11,495			11,838
	Corporate			(32,730	)		(27,998	)		(23,332	)
		Total	$	225,580		$	134,840		$	109,336
DEPRECIATION AND AMORTIZATION
	Homebuilding		$	32,011		$	24,063		$	23,398
	Financial services			709			708			810
	Corporate			4,348			3,718			3,802
		Total	$	37,068		$	28,489		$	28,010
IDENTIFIABLE ASSETS
	Homebuilding		$	1,325,598		$	1,151,232		$	955,371
	Financial services			92,847			114,490			189,724
	Corporate and other			92,424			95,619			103,228
		Total	$	1,510,869		$	1,361,341		$	1,248,323

NOTE D: FINANCIAL SERVICES’ SHORT-TERM NOTES PAYABLE

Financial services had outstanding borrowings at December 31 as follows:

		2001		2000
Repurchase agreements		$	29,005	$	37,664
Revolving credit agreement			33,114		44,899
	Total	$	62,119	$	82,563

In July 2001, the financial services segment terminated its warehouse funding facility, which provided for borrowings of up to $150 million. As a result of its ability to accelerate loan sales, the Company no longer had a need for this facility. There were no borrowings outstanding under this bank facility at December 31, 2000. The effective interest rates on these borrowings were 31.6 percent, 5.8 percent and 3.4 percent for 2001, 2000 and 1999, respectively. The increase in the weighted-average effective interest rate for 2001, compared to 2000, was primarily the result of commitment fees being incurred on the facility through its termination, despite nominal borrowings against the facility during the year.

Repurchase agreements represented short-term borrowings of $29,005 and $37,664 in 2001 and 2000, respectively, which were collateralized by mortgage loans, mortgage-backed securities and investments in mortgage-backed securities previously issued by one of the Company’s limited-purpose subsidiaries. Outstanding collateral balances had fair values of $28,668 and $37,843, at December 31, 2001 and 2000, respectively.

In 2001, the Company renewed and extended a revolving credit facility of $45 million used to finance investment portfolio securities. The agreement extends through March 2002, bears interest at market rates and is collateralized by investment portfolio securities. Borrowings outstanding under this facility, totaling $33,114 and $44,899, were collateralized by investment portfolio securities with principal balances of $33,298 and $47,192 at December 31, 2001 and 2000, respectively.

35

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

Weighted-average short-term borrowings during the period were $72 million, $126 million and $159.3 million for 2001, 2000 and 1999, respectively.

Weighted-average interest rates at the end of the period on all short-term borrowings were 2.4 percent and 7.3 percent for 2001 and 2000, respectively. Weighted-average interest rates during the period on all short-term borrowings were 4.8 percent, 5.3 percent and 3.6 percent for 2001, 2000 and 1999, respectively.

The repurchase agreement and revolving credit agreement contain certain financial covenants. The Company was in compliance with these covenants at December 31, 2001.

NOTE E: DERIVATIVE INSTRUMENTS

The Company, which uses financial instruments in the normal course of its 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:

		2001		2000
Interest rate lock commitments		$	47,820	$	23,578
Hedging contracts:
	Forward-delivery contracts	$	35,000	$	51,000
	Others		5,000		10,000

IRLCs represent loan commitments with customers at market rates up to 120 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 5.4 percent to 10.1 percent at December 31, 2001, and 6.5 percent to 13.6 percent at December 31, 2000.

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 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 be funded. 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 F: FAIR VALUES OF FINANCIAL
INSTRUMENTS

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using 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 be substantiated by comparison to independent markets and, in many cases, cannot be realized in immediate settlement of the instruments.

36

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

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

			2001						2000
			CARRYING			FAIR			CARRYING			FAIR
			VALUE			VALUE			VALUE			VALUE
HOMEBUILDING
	LIABILITIES
		Senior notes	$	247,000		$	263,223		$	250,000		$	253,251
		Senior subordinated notes		243,500			251,296			200,000			186,688
FINANCIAL SERVICES
	ASSETS
		Mortgage loans held-for-sale(1)	$	13,238		$	13,524		$	11,217		$	11,470
		Mortgage-backed securities and notes receivable		62,045			64,038			84,600			86,630
	OTHER FINANCIAL INSTRUMENTS
		Interest rate lock commitments		230			230			292			292
		Forward-delivery contracts		(290	)		(290	)		(165	)		(165	)
		Others		43			43			(17	)		(17	)
OTHER ASSETS
	Collateral for bonds payable of the limited-purpose subsidiaries		$	17,772		$	17,849		$	23,005		$	23,680
OTHER LIABILITIES
	Bonds payable of the limited-purpose subsidiaries		$	15,588		$	17,174		$	21,250		$	22,775

⁽¹⁾ Mortgage loans held-for-sale are reported in the balance sheet in Financial Services “Other Assets.”

The Company used the following methods and assumptions in estimating fair values:

• Cash and cash equivalents; secured notes payable; and short-term notes payable. The carrying amounts reported in the balance sheet approximate fair values.

• Senior notes; senior subordinated notes; mortgage loans held-for-sale; mortgage-backed securities and notes receivable; derivative contracts; and interest rate lock commitments. The fair values of these financial instruments are based on either quoted market prices or market prices for similar financial instruments.

NOTE G: 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 “Other Liabilities.”

Collateral for bonds payable consists of mortgage-backed securities, notes receivable secured by mortgage-backed securities and mortgage loans, fixed-rate mortgage loans, and funds held by trustee, and is reported in the balance sheet under “Other Assets” in “Other.” 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, or are otherwise obligated with respect to, these bond issues.

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

		2001			2000
Bonds payable, net of discounts:
	2001— $637; 2000— $847	$	15,588		$	21,250
Range of interest rates			7.25%-11.65	%		7.25%-11.65	%
Stated maturities			2009-2018			2009-2019

37

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

NOTE H: LONG-TERM DEBT

Long-term debt consists of the following:

		DECEMBER 31,
		2001		2000
Senior subordinated notes		$	243,500	$	200,000
Senior notes			247,000		250,000
	Total	$	490,500	$	450,000

The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. This facility will mature in October 2003 and provides for borrowings up to $400 million. Borrowings under this agreement bear interest at variable short-term rates. The effective interest rates were 7.4 percent for 2001, 8.1 percent for 2000 and 6.8 percent for 1999. There were no amounts outstanding under this agreement at December 31, 2001 and 2000.

At December 31, 2000, the Company had $100 million of 8.25 percent senior subordinated notes due April 2008, with interest payable semiannually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after April 1, 2003. The Company also had $143.5 million of 9.125 percent senior subordinated notes due June 2011, with interest payable semiannually, which may be redeemed 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, 2001, the Company had $100 million of 8 percent senior notes due August 2006, with interest payable semi-annually, which may not be redeemed prior to maturity. The Company also had $147 million of 9.75 percent senior notes due September 2010, with interest payable semiannually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after September 1, 2005.

In July and September 2001, the Company redeemed $100 million of 9.625 percent senior subordinated notes due June 2004 at par and $100 million of 10.5 percent senior notes due July 2006 at the stated call price of 105.25 percent of par, respectively. Additionally, the Company repurchased $3 million of 9.75 percent senior notes due September 2010 at 101.375 percent of par and $6.5 million of 9.125 percent senior subordinated notes due June 2011 at 94.385 percent of par. As a result, the Company recognized an extraordinary loss on early extinguishment of debt in 2001 of $4.4 million (net of a $2.9 million income tax benefit).

Maturities of long-term debt for the next five years are as follows: 2002 through 2005— $0; 2006— $100,000; thereafter— $390,500. The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. The Company had $144.2 million of retained earnings available for dividends at December 31, 2001, and was in compliance with these covenants.

NOTE I: INCOME TAXES

The Company’s expense for income taxes, before extraordinary item, is summarized as follows:

			YEAR ENDED DECEMBER 31,
			2001			2000			1999
CURRENT
	Federal		$	78,267		$	46,988		$	36,633
	State			13,334			8,126			6,335
		Total current		91,601			55,114			42,968
DEFERRED
	Federal			(2,134	)		(2,154	)		(279	)
	State			(363	)		(372	)		(48	)
		Total deferred		(2,497	)		(2,526	)		(327	)
Total expense			$	89,104		$	52,588		$	42,641

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

	YEAR ENDED DECEMBER 31,
	2001			2000			1999
Income taxes at federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		3.7			3.7			3.7
Other, net		0.8			0.3			0.3
Effective rate		39.5	%		39.0	%		39.0	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

38

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

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

			2001			2000
DEFERRED TAX ASSETS
	Inventory valuation differences, operating reserves and accruals		$	45,326		$	38,009
	Other			1,646			1,298
		Total deferred tax assets		46,972			39,307
DEFERRED TAX LIABILITIES
	Installment sales method and deferred gains			(6,917	)		(2,438	)
	Other			(3,316	)		(2,011	)
		Total deferred tax liabilities		(10,233	)		(4,449	)
Net deferred tax asset			$	36,739		$	34,858

The Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total current tax liability of $20,070 and $12,321 at December 31, 2001 and 2000, respectively.

NOTE J: STOCKHOLDERS’ EQUITY

PREFERRED STOCK

On August 31, 1989, the Company sold 1,267,327 shares of nontransferable, convertible preferred stock, par value $1.00, to the Retirement Savings Opportunity Plan (RSOP) Trust. There were no preferred shares outstanding at December 31, 2001. At December 31, 2000, 295,018 preferred shares were outstanding.

During September 2001, Ryland called and redeemed all of its outstanding preferred stock, which was held within the RSOP Trust. At the election of each individual preferred stockholder and in accordance with the terms of the preferred stock, each share of preferred stock was either purchased at a per share price of $31.5625 or converted into one share of Ryland common stock. A total of 252,787 shares of preferred stock was converted into an equivalent number of shares of common stock.

Each share of preferred stock received a quarterly dividend of $0.55. During 2001, 2000 and 1999, the Company paid $308, $694 and $831, respectively, in dividends on its preferred stock. Each share of preferred stock entitled the holder to a number of votes equal to the shares into which the stock was convertible, and preferred stockholders voted together with common stockholders on all matters.

Under the RSOP Trust, at the option of the trustee, the Company was obligated to redeem the preferred stock to satisfy distribution obligations to its participants. For purposes of these redemptions, the value of each share of preferred stock was determined monthly by an independent appraiser, with a minimum guaranteed value of $25.25 per share. The Company issued common stock to satisfy this redemption obligation, with any excess redemption price paid in cash. At December 31, 2000, the maximum cash obligation for such redemption was shown outside of stockholders’ equity as part of other liabilities. This obligation was calculated assuming that all preferred shares outstanding were submitted for redemption. Based upon the appraised value of each share of preferred stock ($43.38) and the market value of each share of common stock ($40.75), the redemption obligation was $774 at December 31, 2000. No such obligation was recorded at December 31, 2001, as a result of the redemption of the preferred stock during the year. During 2001 and 2000, 295,018 and 55,119 shares of preferred stock, respectively, were retired.

COMMON SHARE PURCHASE RIGHTS

In 1996, the Company adopted a revised shareholder 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 $70. The rights become exercisable ten business days after any party acquires, or announces an offer to acquire, 20 percent or more of the Company’s common stock. The rights expire January 13, 2007, and are redeemable at $0.01 per right at any time before ten business days following the time that any party acquires 20 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 issued.

39

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

NOTE K: EMPLOYEE INCENTIVE AND STOCK PLANS

RETIREMENT SAVINGS OPPORTUNITY PLAN (RSOP)

All full-time employees are eligible to participate in the RSOP beginning the first pay period of the quarter, following 30 days of employment. 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. Compensation expense reflects the Company’s matching contributions to its employees’ 401(k) contributions. Total compensation expense related to this plan amounted to $6,485, $5,726 and $5,068 in 2001, 2000 and 1999, respectively.

Previously, the Company issued its preferred stock in connection with its contributions to those accounts. As a result of the redemption of preferred stock, 202,908 shares of common stock were allocated to participants’ accounts at December 31, 2001.

EQUITY INCENTIVE PLAN AND OTHER RELATED PLANS

The Company’s 1992 Equity Incentive Plan permits it to provide equity incentives to employees in the form of stock options, stock appreciation rights, performance shares, restricted stock and other stock-based awards. Under this plan, options are granted to purchase shares at prices not less than the fair market value of the shares at the date of grant. The options are exercisable at various dates over one- to ten-year periods. Stock options granted during 2001 generally have a maximum term of ten years and vest over three years. At the beginning of each year, 2.5 percent of the number of common shares outstanding is authorized for grants of options and other equity instruments. No award shall be granted pursuant to this plan after April 14, 2002, but awards granted prior to April 15, 2002 may extend beyond that date.

Under the Company’s Nonemployee Director Equity Plan, stock options are granted to directors to purchase shares at prices not less than the fair market value of the shares at the date of grant. At December 31, 2001, 193,300 stock options were available for grant.

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

		2001					2000					1999
					WEIGHTED-					WEIGHTED-					WEIGHTED-
					AVERAGE					AVERAGE					AVERAGE
					EXERCISE					EXERCISE					EXERCISE
		SHARES			PRICE		SHARES			PRICE		SHARES			PRICE
Options outstanding at beginning of year			2,199,936		$	20.53		2,238,630		$	20.02		1,840,400		$	18.17
	Granted		382,750			49.34		546,500			19.96		690,250			24.51
	Exercised		(648,133	)		20.13		(468,551	)		17.32		(183,725	)		17.08
	Forfeited		(97,911	)		27.45		(116,643	)		21.13		(108,295	)		22.13
Options outstanding at end of year			1,836,642		$	26.30		2,199,936		$	20.53		2,238,630		$	20.02
Available for future grant			267,411					286,027					71,794
Total shares reserved			2,104,053					2,485,963					2,310,424
Options exercisable at December 31			1,024,183		$	20.89		1,121,064		$	18.90		1,130,805		$	17.18
Prices related to options exercised during the year		$	13.50-$28.94				$	13.50-$28.88				$	11.50-$24.13

A summary of stock options outstanding and exercisable at December 31, 2001, follows:

	OPTIONS OUTSTANDING						OPTIONS EXCERCISABLE
			WEIGHTED-		WEIGHTED-				WEIGHTED-
RANGE OF			AVERAGE		AVERAGE				AVERAGE
EXERCISE	NUMBER		REMAINING		EXERCISE		NUMBER		EXERCISE
PRICES	OUTSTANDING		LIFE (YEARS)		PRICE		EXERCISABLE		PRICE
$12.75 to $16.44		621,835		6.35	$	14.89		385,151	$	13.98
$17.13 to $25.19		579,217		6.23	$	23.02		428,432	$	22.78
$25.50 to $73.20		635,590		8.59	$	40.46		210,600	$	29.67

40

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data, unless otherwise noted)

The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation expense has been recognized for stock option plans. Had compensation expense for these plans been determined based on fair value at the grant date for awards, consistent with the provisions of SFAS 123, in 2001, 2000 and 1999, the Company’s net earnings and net earnings per share would have been reduced to the pro forma amounts indicated in the following table:

	2001		2000		1999
Net earnings— as reported	$	132,093	$	82,252	$	66,695
Net earnings— pro forma	$	129,494	$	80,137	$	64,471
Basic net earnings per share— as reported	$	9.88	$	6.19	$	4.49
Basic net earnings per share— pro forma	$	9.69	$	6.03	$	4.34
Diluted net earnings per share— as reported	$	9.26	$	5.92	$	4.30
Diluted net earnings per share— pro forma	$	9.08	$	5.77	$	4.20

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 2001, 2000 and 1999, respectively: a risk-free interest rate of 4.7 percent, 6.4 percent and 5.2 percent; an expected volatility factor for the market price of the Company’s common stock of 38 percent, 35 percent and 34 percent; a dividend yield of 0.3 percent, 0.9 percent and 0.7 percent; and an expected life of three years, three years and four years. The weighted-average fair values at the grant date for options granted in 2001, 2000 and 1999 were $20.28, $5.97 and $7.95, respectively.

Additionally, at December 31, 2001, there were 125,000 shares of restricted stock outstanding. These shares vest as follows: 2002— 51,450; 2003— 51,450; and 2004— 22,100. Compensation expense is recognized ratably over the vesting period.

NOTE L: COMMITMENTS AND CONTINGENCIES

COMMITMENTS

In the normal course of business, the Company acquires rights under option agreements to purchase land for use in future homebuilding operations. At December 31, 2001, the Company had deposits and letters of credit outstanding of $36,381 for land options and land purchase contracts having a total purchase price of $619,200.

Rent expense primarily relates to office facilities, model homes, and furniture and equipment. The increase in rent expense for 2001 from 2000 was primarily due to an increase in model home lease activity.

	YEAR ENDED DECEMBER 31,
	2001			2000			1999
Total rent expense	$	21,591		$	18,212		$	13,581
Less income from subleases		(2,376	)		(2,416	)		(2,149	)
Net rental expense	$	19,215		$	15,796		$	11,432

Future minimum rental commitments under noncancelable leases with remaining terms in excess of one year are as follows:

2002	$	10,026
2003		7,329
2004		5,601
2005		2,663
2006		1,671
After 2006		39
Subtotal	$	27,329
Less sublease income		(1,700	)
Total lease commitments	$	25,629

CONTINGENCIES

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. Some municipalities require the Company to issue development bonds or maintain letters of credit to assure completion of public facilities within a project. At December 31, 2001, total development bonds were $265,779 and total deposits and letters of credit were $70,545.

Ryland Mortgage Company (RMC) received information from the Federal Deposit Insurance Corporation (FDIC) regarding outstanding claims related to mortgage servicing contracts entered into with the Resolution Trust Company during 1991 and 1992. RMC, together with the FDIC, is in the process of resolving these claims. The Company is party to various legal proceedings generally incidental to its businesses. Based on evaluation of these matters and discussions with counsel, management believes that liabilities arising from these matters will not have a material adverse effect on the financial condition of the Company.

41

THE RYLAND GROUP, INC. & SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS

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, 2001 and 2000, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ERNST & YOUNG LLP

ERNST & YOUNG LLP
Los Angeles, California
January 23, 2002

42

THE RYLAND GROUP, INC. & SUBSIDIARIES
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. Proper selection, training and development of personnel also contribute to the effectiveness of the internal control systems. These systems are the responsibility of management and are regularly tested by the Company’s internal auditors. External auditors also review and test the effectiveness of these systems to the extent they deem necessary to express an opinion on the consolidated financial statements.

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

/s/ GORDON A. MILNE

GORDON A. MILNE
Senior Vice President and Chief Financial Officer

/s/ DAVID L. FRISTOE

DAVID L. FRISTOE
Senior Vice President, CIO, Controller and Chief Accounting Officer

43

THE RYLAND GROUP, INC. & SUBSIDIARIES
QUARTERLY FINANCIAL DATA AND COMMON STOCK PRICES AND DIVIDENDS

			2001									2000
(amounts in thousands,
except share data) unaudited			DEC. 31		SEPT. 30			JUN. 30		MAR. 31		DEC. 31		SEPT. 30		JUN. 30		MAR. 31
CONSOLIDATED RESULTS
	Revenues		$	828,471	$	711,641		$	687,513	$	514,159	$	749,556	$	628,327	$	524,750	$	429,012
	Earnings before taxes and extraordinary item			74,037		68,963			55,986		26,594		51,712		37,441		27,773		17,914
	Income tax expense			29,244		27,241			22,114		10,505		20,168		14,602		10,832		6,986
	Net earnings before extraordinary item		$	44,793	$	41,722		$	33,872	$	16,089	$	31,544	$	22,839	$	16,941	$	10,928
	Extraordinary item— loss on early extinguishment of debt(1)			144		(4,527	)		—		—		—		—		—		—
	Net earnings		$	44,937	$	37,195		$	33,872	$	16,089	$	31,544	$	22,839	$	16,941	$	10,928
	Basic net earnings per common share		$	3.41	$	2.77		$	2.52	$	1.19	$	2.37	$	1.74	$	1.29	$	0.80
	Diluted net earnings per common share		$	3.22	$	2.59		$	2.36	$	1.12	$	2.22	$	1.67	$	1.24	$	0.78
	Weighted-average common shares outstanding:
		Basic		13,190		13,416			13,388		13,340		13,222		12,992		13,027		13,449
		Diluted		13,964		14,355			14,358		14,364		14,219		13,692		13,652		14,010

⁽¹⁾ Net of taxes of ($95) and $2,956 in the quarters ended December 31, 2001, and September 30, 2001, respectively.

COMMON STOCK PRICES AND DIVIDENDS

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

The table below presents high and low market prices and dividend information for the Company. The number of common stockholders of record, at February 7, 2002, was 2,814.

(See Note H for dividend restrictions.)

					DIVIDENDS							DIVIDENDS
					DECLARED							DECLARED
2001	HIGH		LOW		PER SHARE		2000	HIGH		LOW		PER SHARE
First quarter	$	50.82	$	35.80	$	0.04	First quarter	$	22.25	$	15.25	$	0.04
Second quarter		56.30		37.91		0.04	Second quarter		22.88		18.44		0.04
Third quarter		62.49		40.84		0.04	Third quarter		31.00		20.00		0.04
Fourth quarter		74.40		45.20		0.04	Fourth quarter		41.56		27.50		0.04

44