10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2002

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

Commission File Number 1-8029

THE RYLAND GROUP, INC.

(Exact name of registrant as specified in its charter)

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

24025 Park Sorrento, Suite 400

Calabasas, California 91302

(Address of principal executive offices)

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

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

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

Indicate by check mark 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 x  Noo

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 x   Noo

The aggregate market value of the common stock of The Ryland Group, Inc. held by non-affiliates of the registrant (26,589,530 shares) at June 30, 2002, was $1,322,829,118.

The number of shares of common stock of The Ryland Group, Inc. outstanding on February 10, 2003, was 25,233,261.

DOCUMENTS INCORPORATED BY REFERENCE

Name of Document	Location in Report
Proxy Statement for the 2003 Annual Meeting of Stockholders	Parts I, III
Annual Report to Shareholders for the Year Ended December 31, 2002	Parts II, III

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TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Company’s Common Stock and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX OF EXHIBITS
EXHIBIT 12.1
EXHIBIT 13
EXHIBIT 21
EXHIBIT 23
EXHIBIT 24
EXHIBIT 99.1
EXHIBIT 99.2

THE RYLAND GROUP, INC.
FORM 10-K
INDEX

ITEM NO.

PART I
	Item 1.	Business	4
	Item 2.	Properties	9
	Item 3.	Legal Proceedings	9
	Item 4.	Submission of Matters to a Vote of Security Holders	9
PART II
	Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	11
	Item 6.	Selected Financial Data	11
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	11
	Item 8.	Financial Statements and Supplementary Data	11
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	11
PART III
	Item 10.	Directors and Executive Officers of the Registrant	12
	Item 11.	Executive Compensation	12
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	12
	Item 13.	Certain Relationships and Related Transactions	12
	Item 14.	Controls and Procedures	12
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	13
SIGNATURES			17
CERTIFICATIONS			18
INDEX OF EXHIBITS			20

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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 mortgage-finance companies. The Company consists of two business segments: homebuilding and financial services. (Please refer to Note C to 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 200,000 homes during its 35-year history. In addition, Ryland Mortgage Company (“RMC”), founded in 1978, has provided mortgage financing and related services for more than 175,000 homebuyers.

The Company builds homes primarily for first-time buyers, as well as for move-up buyers. Today, Ryland homes are available in 306 communities in 25 markets across the country. The Company’s prices range from $75,000 to over $767,000, with the current average price of a Ryland home being $210,000. 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 home-buying process—from design, construction and sale, to mortgage origination, title insurance, settlement, escrow and homeowners insurance brokerage services.

Homebuilding

General Ryland markets and builds homes that are constructed on-site in three regions which include 25 of the nation’s strongest housing markets. These three regions are the North, South and West. As of December 31, 2002, the Company operated in the following metropolitan markets:

Region	Major Markets Served
North:	Baltimore, Chicago, Cincinnati, Indianapolis, Minneapolis and Washington, D.C.
South:	Atlanta, Austin, Charleston, Charlotte, Dallas, Greensboro, Greenville, Houston, Jacksonville, Orlando, San Antonio and Tampa
West:	California’s Central Valley, Denver, Phoenix, Riverside/San Bernardino, Sacramento, San Diego and the San Francisco Bay Area

Effective as of January 2003, the Company has a new regional organizational structure. Its Texas operations have been combined with the northern markets forming the North Central and Southeast Regions.

Ryland markets detached and attached single-family homes which are generally targeted to entry-level and 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 options and upgrades displayed in the Company’s model homes and design centers. These design centers, which are located in most of the Company’s markets, provide a convenient means for homebuyers to select from among

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numerous options and upgrades. These centers also represent sources of additional revenue and profit for the Company.

The Company designed nearly 300 new homes in 2002, bringing the number of floor plans introduced since 1993 to over 2,400. Architectural services are generally outsourced to increase creativity and to ensure that the Company’s home designs are consistent with local market preferences.

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 As of December 31, 2002, the Company operated in 306 communities in 25 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 three to four years. The land acquisition process is controlled by a corporate land approval committee, which helps 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.

As of December 31, 2002, the Company had deposits and letters of credit outstanding of $56.0 million in connection with option and land purchase contracts having a total purchase price of $775.0 million. These options and commitments expire at various dates through 2008.

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.

Production Management and Subcontractors Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a competitive-bid basis. The Company generally requires a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company’s production team, which schedules and coordinates subcontractor work, monitors quality, and ensures compliance with local zoning and building codes. The Company has an integrated financial and homebuilding management information 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 subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If

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shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the past.

Marketing and Customer Service The Company generally markets its homes to entry-level and 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 is approved, and revenue is recorded from a sale at closing. The Company normally starts construction of a home when a customer has selected a lot and floor plan and has 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.

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.

Financial Services

RMC primarily provides mortgage-related products and services for the Company’s homebuilding customers. In recent years, the Company has repositioned RMC to align its operations with the homebuilding segment by:

• leveraging this relationship to increase capture rate for its homebuyers’ loans;

• focusing on mortgage loan originations and improving the efficiency of these activities through cost-reduction initiatives and improved profitability per loan;

• divesting noncore assets and business lines, including the sale of loan servicing rights; and

• creating value for Ryland homebuyers through innovative and competitive mortgage programs and related services.

Loan Origination In 2002, 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 10,278 loans, which totaled approximately $1,851.1 million, of which 98.1 percent was for purchases of homes built by the Company and 1.9 percent was for purchases of homes built by others, purchases of existing homes and for the refinancing of existing mortgage loans. In an effort to increase its focus on production of the Company’s homebuilder loans, RMC made the strategic decision to reduce its third-party originations business by exiting certain markets during 1999. The Company has increased its focus by deploying loan officers directly to its homebuilding communities and by utilizing traffic and prospect information generated by its homebuilding sales and marketing staff. RMC’s capture rate of Ryland’s home-buying customers was 82.4 percent in 2002.

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), the Federal National Mortgage Association (FNMA) and the Government National Mortgage Association (GNMA).

Loan Servicing The repositioning of RMC in recent years led to the sale of a majority of its loan servicing portfolio in the first quarter of 1998 and to the sale of its remaining portfolio during 1999. As a result, the Company no longer services loans.

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Title and Escrow Services Cornerstone Title Company, a wholly owned subsidiary doing business as Ryland Title Company, provides title services primarily to the Company’s homebuyers. As of December 31, 2002, Cornerstone Title had offices in Arizona, Colorado, Florida, Illinois, Maryland, Minnesota, Ohio, Texas and Virginia. The Company also operates Ryland Escrow, which performs escrow and loan closing functions for the Company’s homebuyers in California. During 2002, Cornerstone Title and Ryland Escrow provided title and escrow services to 95.7 percent of the Company’s homebuyers in the markets in which it operates, or 75.8 percent of the Company’s total homebuyers.

Insurance Brokerage Services Ryland Insurance Services, a wholly owned subsidiary, provides insurance brokerage services primarily to the Company’s homebuyers. As of December 31, 2002, Ryland Insurance Services was licensed to operate in all of the states in which the homebuilding segment operates. During 2002, Ryland Insurance Services provided insurance brokerage services to 46.8 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 the sales of its mortgage-backed securities.

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 significantly as a result of changing market and economic conditions. In addition, carrying costs for inventory can be significant, resulting in losses from poorly performing projects or markets. 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 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 companies are larger than the Company and have greater financial resources. In addition, a recent increase in the availability of capital and financing has made it easier for homebuilders to expand and enter new 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 are home price, design, quality, reputation, relationship with developers, accessibility of subcontractors, availability and location of lots, and availability of customer financing.

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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 HUD, FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans. In addition, there are other federal and state laws and regulations which also affect these activities. 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. The Company is required to submit audited financial statements annually, and each regulatory entity has its own financial requirements. The Company’s affairs are also subject to examination by these regulatory agencies and by state agencies, at all times, to assure compliance with applicable regulations, policies and procedures. Mortgage origination activities are subject to the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act, as well as to associated regulations which prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs.

Employees

At December 31, 2002, the Company employed 2,458 people. The Company considers its employee relations to be good. No employees are represented by a collective bargaining agreement.

Website Access to Reports

Shareholders, securities analysts and others seeking information about the Company’s business operations and financial performance can receive copies of the 2002 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 Securities and Exchange Commission in Washington, D.C., without charge by contacting the treasurer’s office at (818) 223-7677; by writing to The Ryland Group, Investor Relations, 24025 Park Sorrento, Suite 400, Calabasas, California 91302; or via e-mail at investors@ryland.com. In addition, all filings with the Securities and Exchange Commission, 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 Ryland website (www.ryland.com). 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 website as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. To retrieve any of this information, go to www.ryland.com, select “Corporate and 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.

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.

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, 2002.

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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		55	Chairman of the Board of Directors (since 1994), President and Chief Executive Officer of the Company (since 1993)
Mark L. Beisswanger		42	President of the West Region of Ryland Homes (2000); Vice President of the West Region of Ryland Homes (1999–2000); President and CEO of Alpine Capital, L.L.C. (1996–1999)
Robert J. Cunnion III		47	Senior Vice President, Human Resources of the Company (since 1999); Vice President, Human Resources – West Region (1993–1999)
Eric E. Elder		45	Senior Vice President, Marketing of the Company (since 2000); Vice President, Marketing – West Region (1995–1999)
David L. Fristoe		46	Senior Vice President, Controller, Chief Accounting Officer and Chief Information Officer of the Company (since 2000); Vice President, Controller and Chief Accounting Officer of the Company (1999–2000); Vice President, Financial Operations – West Region (1995–1999)
John M. Garrity		56	Senior Vice President of the Company (since 1995); President of the Southeast Region of Ryland Homes (since 1996)
Timothy J. Geckle		50	Senior Vice President, General Counsel and Secretary of the Company (since 1997)
Cathey S. Lowe		49	Senior Vice President, Finance of the Company (2002); Vice President and Treasurer of the Company (2000–2002); Cash Manager, Atlantic Richfield Co. (1994–1999)
Gordon A. Milne		51	Executive Vice President and Chief Financial Officer of the Company (since 2002); Senior Vice President and Chief Financial Officer of the Company (2000–2002); Senior Vice President of Finance and Chief Financial Officer of Agrium, Inc. (1996–1999)
Daniel G. Schreiner		45	Senior Vice President of the Company (since 1999); President of Ryland Mortgage Company (since 1998); President of Kaufman and Broad Mortgage Company (1991–1998)
Kipling W. Scott		48	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 page 11 of the Proxy Statement for the 2003 Annual Meeting of Stockholders.

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PART II

Item 5. Market for the 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 58 of the Annual Report to Shareholders for the year ended December 31, 2002.

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 25 of the Annual Report to Shareholders for the year ended December 31, 2002.

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 26 through 35 of the Annual Report to Shareholders for the year ended December 31, 2002.

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, Market Risk Summary,” which appears on pages 34 and 35 of the Annual Report to Shareholders for the year ended December 31, 2002.

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 the Consolidated Financial Statements,” which appear on pages 36 through 53 of the Annual Report to Shareholders for the year ended December 31, 2002, and from the section entitled “Quarterly Financial Data and Common Stock Prices and Dividends,” which appears on page 58 of the report.

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

During the fiscal years ended December 31, 2002 and 2001, there were no disagreements between the Company and its accountants on any matter of accounting principle or financial statement disclosure.

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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 Proxy Statement for the 2003 Annual Meeting of Stockholders. Additional information as to the Company’s executive officers is shown under Part I as a separate item.

Item 11. Executive Compensation

The information required by this item is incorporated by reference from pages 6 through 11 of the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders.

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 pages 3 and 10 of the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders.

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. Controls and Procedures

The Company has procedures in place for accumulating and evaluating information which enable it to prepare and file reports with the Securities and Exchange Commission. 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 as of December 31, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002, and no corrective actions with regard to significant deficiencies or weaknesses.

As a result of procedures required by the Sarbanes-Oxley Act of 2002, the Company has 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, and to our principal executive and financial officers, in a manner that will allow timely decisions regarding required disclosures.

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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)	1.	Financial Statements
		The following consolidated financial statements of The Ryland Group, Inc. and subsidiaries, included in the Annual Report to Shareholders for the year ended December 31, 2002, are incorporated by reference in Item 8:
		Consolidated Statements of Earnings – years ended December 31, 2002, 2001 and 2000
		Consolidated Balance Sheets – December 31, 2002 and 2001
		Consolidated Statements of Stockholders’ Equity – years ended December 31, 2002, 2001 and 2000
		Consolidated Statements of Cash Flows – years ended December 31, 2002, 2001 and 2000
		Notes to Consolidated Financial Statements
			Page No.
(a)	2.	Financial Statement Schedule (Filed herewith)
		Schedule II – Valuation and Qualifying Accounts	16
		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.

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(a)   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)
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 Subordinated Notes, dated as of April 13, 1998
	(Incorporated by reference from Registration Statement on Form S-3, Registration Nos. 33-50933 and 333-03791)
4.6	Senior Notes, dated as of August 24, 2000
	(Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-31034)
10.1	Lease Agreement between The Ryland Group, Inc. and Kilroy Realty Group, dated December 29, 1999
	(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	2000 Non-Employee Director Equity Plan of The Ryland Group, Inc.*, as amended
	(Incorporated by reference from Form 10-K for the year ended December 31, 2000)
10.4	Amended Credit Agreement, dated as of March 29, 2002, 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, 2002)
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)

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(a)   3.   Exhibits, continued

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 between The Ryland Group, Inc. and the Board of Directors, effective January 1, 1998*
	(Incorporated by reference from Form 10-K for the year ended December 31, 1997)
10.9	Revolving Credit Agreement, dated as of August 22, 2002, between The Ryland Group, Inc. and certain financial institutions, and the first amendment thereto
	(Incorporated by reference from Form 10-Q for the quarter ended September 30, 2002)
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, 2002
	(Filed herewith)
21	Subsidiaries of the Registrant (Filed herewith)
23	Consent of Ernst & Young LLP, Independent Auditors
	(Filed herewith)
24	Power of Attorney
	(Filed herewith)
99.1	Certification of Principal Executive Officer
	(Filed herewith)
99.2	Certification of Principal Financial Officer
	(Filed herewith)

* Management contract or compensatory plan or arrangement

(b) There were no reports on Form 8-K filed during the fourth quarter of 2002.

15

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

			Balance		Charged to		Charged		Deductions			Balance at
			at Beginning		Costs and		to Other		and			End of
			of Period		Expenses		Accounts		Transfers			Period
Valuation allowance:
	Homebuilding inventories(1)
		2002	$	7,117	$	2,066	$	—	$	(3,843	)	$	5,340
		2001		10,534		11,250		—		(14,667	)		7,117
		2000		3,600		11,809		—		(4,875	)		10,534

⁽¹⁾Balances as of December 31, 2002, 2001 and 2000, represent valuation allowances for assets to be disposed of.

16

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 R. Chad Dreier, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	March 17, 2003

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

Principal Executive Officer:
/s/ R. Chad Dreier R. Chad Dreier Chief Executive Officer	March 17, 2003
Principal Financial Officer:
/s/ Gordon A. Milne Gordon A. Milne Chief Financial Officer	March 17, 2003
Principal Accounting Officer:
/s/ David L. Fristoe David L. Fristoe Chief Accounting Officer	March 17, 2003

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

By:
/s/ Timothy J. Geckle Timothy J. Geckle As Attorney-in-Fact	March 17, 2003

17

CERTIFICATIONS

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 annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. Ryland’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Ryland and have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of Ryland’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. Ryland’s other certifying officers and I have disclosed, based on our most recent evaluation, to Ryland’s auditors and the audit committee of Ryland’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect Ryland’s ability to record, process, summarize and report financial data and have identified for Ryland’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in Ryland’s internal controls; and

6. Ryland’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 17, 2003 /s/ R. Chad Dreier
R. Chad Dreier
Chairman, President and
Chief Executive Officer

18

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 annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. Ryland’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Ryland and have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of Ryland’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. Ryland’s other certifying officers and I have disclosed, based on our most recent evaluation, to Ryland’s auditors and the audit committee of Ryland’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect Ryland’s ability to record, process, summarize and report financial data and have identified for Ryland’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in Ryland’s internal controls; and

6. Ryland’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	/s/ Gordon A. Milne
Date: March 17, 2003
	Gordon A. Milne
	Executive Vice President and
	Chief Financial Officer

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, 2002
21	Subsidiaries of the Registrant
23	Consent of Ernst & Young LLP, Independent Auditors
24	Power of Attorney
99.1	Certification of Principal Executive Officer
99.2	Certification of Principal Financial Officer

20 EX-12.1 3 a88169exv12w1.htm EXHIBIT 12.1

EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges
(amounts in thousands, except ratio)

	Year ended December 31,
	1998			1999			2000			2001			2002
Consolidated pretax income(1)	$	69,615		$	109,336		$	134,840		$	218,336		$	309,340
Share of distributed income of 50 percent-or-less-owned affiliates net of equity pickup		2,602			(263	)		(163	)		(26	)		(2,689	)
Amortization of capitalized interest		20,645			19,027			27,581			31,878			32,162
Interest(1)		68,954			52,764			62,610			62,571			49,086
Less interest capitalized during the period		(18,601	)		(24,397	)		(34,105	)		(31,675	)		(39,695	)
Net amortization of debt discount and premium and issuance expense		36			33			—			—			—
Interest portion of rental expense		4,709			4,522			6,065			7,190			6,679
EARNINGS	$	147,960		$	161,022		$	196,828		$	288,274		$	354,883
Interest(1)	$	68,954		$	52,764		$	62,610		$	62,571		$	49,086
Net amortization of debt discount and premium and issuance expense		36			33			—			—			—
Interest portion of rental expense		4,709			4,522			6,065			7,190			6,679
FIXED CHARGES	$	73,699		$	57,319		$	68,675		$	69,761		$	55,765
Ratio of earnings to fixed charges		2.01			2.81			2.87			4.13			6.36
Ratio before reclassification of costs associated with the early extinguishment of debt(1)		2.17			2.81			2.87			4.61			6.36

⁽¹⁾ The Company adopted the provisions of SFAS 145, with respect to the rescission of Statement 4, in the third quarter of 2002. As a result, $5.5 million and $7.2 million of costs associated with the early extinguishment of long-term debt, previously classified as extraordinary items in 1998 and 2001, respectively, are currently included in homebuilding interest expense. Accordingly, the effect of such reclassifications has been reflected in the computation of the 1998 and 2001 ratios.

EX-13 4 a88169exv13.htm EXHIBIT 13

Exhibit 13: Excerpt from Annual Report to Shareholders for the Year Ended December 31, 2002
 
The following pages represent pages 25 through 55 and 58 of The Ryland Group, Inc.’s Annual Report to Shareholders for the year ended December 31, 2002, and include Selected Financial Data, Management’s Discussion and Analysis of Results of Operations and Financial Condition, Consolidated Financial Statements and related notes thereto, the Report of Independent Auditors, the Report of Management, and Quarterly Financial Data and Common Stock Prices and Dividends.
________________________________

The Ryland Group, Inc. & Subsidiaries
SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT SHARE DATA, UNAUDITED)

			2002			2001			2000			1999			1998
ANNUAL RESULTS
REVENUES
	Homebuilding		$	2,805		$	2,684		$	2,286		$	1,959		$	1,695
	Financial services			72			63			46			47			65
		TOTAL REVENUES		2,877			2,747			2,332			2,006			1,760
Cost of sales — homebuilding				2,216			2,182			1,901			1,633			1,429
Selling, general and administrative expenses				342			316			268			236			211
Interest expense				10			31			28			28			50
Earnings before taxes				309			218			135			109			70
Tax expense				124			86			53			42			30
Net earnings			$	185		$	132		$	82		$	67		$	40
YEAR-END POSITION
ASSETS
	Housing inventories		$	1,100		$	899		$	888		$	823		$	642
	Cash and cash equivalents			269			298			142			70			50
	Mortgage-backed securities and notes receivable			43			62			85			99			112
	Other assets			246			252			246			256			411
		TOTAL ASSETS		1,658			1,511			1,361			1,248			1,215
LIABILITIES
	Long-term debt			491			491			450			378			308
	Short-term notes payable			43			62			83			157			223
	Other liabilities			444			395			375			327			338
		TOTAL LIABILITIES		978			948			908			862			869
STOCKHOLDERS’ EQUITY			$	680		$	563		$	453		$	386		$	346
PER COMMON SHARE DATA
NET EARNINGS
	Basic		$	7.03		$	4.94		$	3.10		$	2.24		$	1.33
	Diluted			6.64			4.63			2.96			2.15			1.29
Dividends declared			$	0.08		$	0.08		$	0.08		$	0.08		$	0.08
Stockholders’ equity				26.92			21.29			16.75			13.61			11.41
OTHER FINANCIAL DATA
EBITDA			$	381		$	318		$	219		$	184		$	169
EBITDA/Interest incurred				7.8	x		5.1	x		3.5	x		3.5	x		2.5	x
Return on equity				33.0	%		29.1	%		21.3	%		19.3	%		13.2	%
Debt-to-total capital				41.9	%		46.6	%		49.8	%		49.4	%		47.1	%

25 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
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 25 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.

RESULTS OF OPERATIONS

The Company achieved record earnings, new orders and deliveries of homes for the fourth consecutive year in 2002. These trends were indicative of both favorable economic and demographic environments, as well as our ability to deliver competitive product in superior locations. The Company reported consolidated net earnings of $185.6 million, or $6.64 per diluted share, for 2002, compared to $132.1 million, or $4.63 per diluted share, for 2001 and $82.3 million, or $2.96 per diluted share, for 2000. This net earnings increase resulted from higher volume, increased profitability and lower interest expense for our homebuilding and financial services operations.

The Company’s revenues reached a historical high of $2,877.2 million for 2002, up 4.7 percent from $2,747.2 million for 2001. Total revenues of $2,747.2 million for 2001 exceeded 2000 levels by $415.4 million, or 17.8 percent. Both housing and mortgage banking revenues rose in 2002.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) rose to $380.9 million for the year ended December 31, 2002, from $318.2 million and $219.3 million for the same period in 2001 and 2000, respectively. The Company’s ratio of EBITDA to interest incurred improved to 7.8 for the year ended December 31, 2002, compared to 5.1 for the same period in 2001.

The Company continued to strengthen its balance sheet in 2002. Cash and unused borrowing capacity for the homebuilding segment totaled $480.1 million at December 31, 2002, versus $617.7 million in 2001, primarily because reliance on short-term debt decreased and the Company reduced its unsecured revolving credit facility by $100.0 million. Inventories grew 22.3 percent to $1,100.0 million, positioning the Company for significant growth in 2003. The Company, which is geographically diverse, currently has a three- to four-year supply of land, based on 2002 deliveries. Goodwill of $18.2 million was among the lowest in the industry. Stockholders’ equity increased 20.8 percent, or $117.2 million, during 2002, and 24.1 percent, or $109.3 million, during 2001. Cash outlays in 2002 were balanced between achieving growth objectives and share repurchases, and, as a result, stockholders’ equity per share increased $5.63, or 26.4 percent. The Company’s book value at December 31, 2002, was 97.3 percent tangible. Debt-to-capital ratio was down to 41.9 percent at December 31, 2002, from 46.6 percent at December 31, 2001.

During 2002, revenues grew 4.7 percent, net earnings increased 40.5 percent, diluted earnings per share improved 43.4 percent, EBITDA increased 19.7 percent, return on beginning equity was 33.0 percent, return on capital was 20.0¹

¹ Net earnings before tax affected interest divided by beginning capital.

26 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

percent and inventory was turned 2.1 times. Stockholder value was enhanced while leverage declined. These results were achieved without acquisitions. We will begin 2003 with a record backlog and a significant increase in the number of active communities at year-end. Our returns were among the highest in the industry, and our financial position continues to improve.

HOMEBUILDING

New orders increased 6.4 percent in 2002 and 9.9 percent in 2001, compared to the respective prior year. The positive new order trends occurred in virtually all of our markets and accelerated late in 2002. The number of active communities at year-end rose 15.0 percent in 2002 from 2001, the majority of which were opened in the second half of the year. New orders for the year increased 5.4 percent in the North, 6.8 percent in the South and 7.1 percent in the West. For the month of December 2002, new orders were up 20.3 percent. These trends were driven by expansion plans and a proactive approach to maintaining an adequate supply of competitively priced lots.

			NORTH		SOUTH		WEST		TOTAL
NEW ORDERS (units)
		2002		4,083		7,258		2,595		13,936
		2001		3,875		6,798		2,422		13,095
		2000		3,511		6,018		2,390		11,919
CLOSINGS (units)
		2002		3,974		7,048		2,123		13,145
		2001		3,718		6,356		2,612		12,686
		2000		3,242		5,988		2,188		11,418
OUTSTANDING CONTRACTS
	UNITS
		2002		1,746		2,750		872		5,368
		2001		1,637		2,540		400		4,577
		2000		1,480		2,098		590		4,168
	DOLLARS (in millions)
		2002	$	432	$	532	$	224	$	1,188
		2001		368		450		99		917
		2000		305		383		179		867
	AVERAGE PRICE (in thousands)
		2002	$	248	$	194	$	257	$	221
		2001		225		177		247		200
		2000		206		182		304		208

At December 31, 2002, the Company had outstanding contracts for 5,368 units, representing the highest year-end backlog in its history and a 17.3 percent increase over year-end 2001. Outstanding contracts denote 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 $1,188.3 million value of outstanding contracts increased 29.6 percent from year-end 2001 due, in part, to a 10.5 percent increase in average sales price.

Results of operations for the homebuilding segment are summarized as follows (in thousands):

	2002		2001		2000
Revenues	$	2,805,055	$	2,684,116	$	2,285,540
Gross profit		588,996		502,497		384,889
Selling, general and administrative expenses		281,049		261,078		216,660
Interest expense		6,826		25,473		16,886
Homebuilding pretax earnings	$	301,121	$	215,946	$	151,343

27 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The homebuilding segment reported pretax earnings of $301.1 million for 2002, compared to $215.9 million for 2001 and $151.3 million for 2000. Homebuilding results in 2002 increased from 2001 primarily due to higher average closing prices, gross profit margins and closing volume. Homebuilding results in 2001 increased from 2000 primarily due to these same factors.

Homebuilding revenues increased 4.5 percent for 2002, compared to 2001, due to a 3.6 percent increase in closings and a 1.0 percent increase in average closing price. The increase in closings in 2002 was due to a higher backlog at the beginning of the year and a 6.4 percent increase in new home orders during the year. Revenues and closings in the West Region were down due to lower investment levels in California in 2001. The West Region generated a 7.1 percent increase in new orders in 2002, which is indicative of the additional expansion expected in 2003. Homebuilding revenues increased 17.4 percent in 2001, compared to 2000, due to an 11.1 percent increase in closings and a 7.2 percent increase in average closing price primarily in the North and West Regions. The increase in closings in 2001 was due to a higher backlog at the beginning of the year and an 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 $10.8 million from land sales in 2002, compared to a pretax gain of $2.3 million in 2001 and a pretax loss of $0.9 million in 2000.

Gross profit margins from home sales averaged 20.9 percent for 2002, a significant increase from 19.0 percent for 2001 and 17.4 percent for 2000. The improvement was primarily due to selling prices increasing at a greater rate than costs; lower land and development costs, including inventory write-downs; and lower direct construction costs which resulted from cost-saving initiatives. Amortization of valuation reserves totaled $3.9 million in 2002 and $14.7 million in 2001.

28 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Selling, general and administrative expenses, as a percentage of revenue, were 10.0 percent for 2002, 9.7 percent for 2001 and 9.5 percent for 2000. The increase in 2002 from 2001 was primarily due to higher incentive compensation expense, which resulted from improved earnings; increases in insurance and marketing costs; and an increase in model home rent expense as a result of a rise in model home lease activity during 2001, partially offset by the discontinuation of amortization of goodwill. Marketing costs increased due to a challenging sales environment in the third quarter of 2002 and the larger number of communities opening late in the year, for which a greater number of closings will occur in 2003 and beyond.

In accordance with the Company’s adoption of Statement of Financial Accounting Standards No. 145, the 2001 results reflected a reclassification to interest expense of a $7.2 million ($4.4 million net of tax) loss on the early extinguishment of long-term debt. This amount was previously reflected as an extraordinary item. Excluding this loss, interest expense decreased $11.5 million, or 62.8 percent, in 2002, compared to 2001. This decrease was primarily attributable to a rise in capitalized interest, which resulted from increased development activity in a greater number of new communities. Interest expense increased $8.6 million, or 50.9 percent, in 2001, compared to 2000, primarily due to the early extinguishment of debt resulting in a $7.2 million charge to interest expense. Excluding the charge associated with the early extinguishment of debt, interest expense increased $1.4 million, or 8.3 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.

FINANCIAL SERVICES

The financial services segment reported pretax earnings of $48.3 million for 2002, compared to $35.1 million for 2001 and $11.5 million for 2000. The increase in 2002 from 2001 was primarily attributable to gains realized from the growth of operations, as a result of heightened volume; a higher capture rate of the Company’s home closings; a 3.3 percent increase in average loan size; and higher gains from sales of mortgages, resulting from a favorable interest rate environment. The increase in 2001 from 2000 was primarily due to these same factors.

(in thousands)					2002			2001			2000
REVENUES
	Net gains on sales of mortgages and mortgage servicing rights				$	44,522		$	35,768		$	20,283
	Title/escrow/insurance					13,581			11,957			9,823
	Net origination fees					6,854			5,407			164
	Interest
			Mortgage-backed securities and notes receivable			6,226			8,584			11,969
			Other			869			1,165			3,647
				Total interest		7,095			9,749			15,616
	Other					106			194			383
		Total revenues				72,158			63,075			46,269
EXPENSES
	General and administrative					21,299			22,532			23,155
	Interest					2,565			5,423			11,619
		Total expenses				23,864			27,955			34,774
Pretax earnings					$	48,294		$	35,120		$	11,495
	Ryland Homes origination capture rate					82.4	%		81.0	%		71.0	%
	Mortgage-backed securities and notes receivable average balance				$	49,951		$	71,050		$	92,666

29 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Revenues for the financial services segment increased 14.4 percent to $72.2 million during 2002, compared to 2001, due to a 10.3 percent increase in loan sales volume, an 8.9 percent increase in origination volume, and a 24.3 percent increase in revenues from loan sales, which is net of hedging losses. In 2001, revenues for the financial services segment increased from 2000 levels due to a 43.9 percent rise in loan sales volume and higher fees from title and escrow operations. General and administrative expenses decreased for the year ended December 31, 2002, compared to 2001, primarily as a result of provisions made in the prior year for contingent claims relating to previously conducted loan servicing activities, partially offset by increased incentive compensation commensurate with improved earnings. General and administrative expenses decreased for the year ended December 31, 2001, compared to 2000, for these same reasons.

Interest expense decreased 51.9 percent for the year ended December 31, 2002, compared to 2001, primarily due to the termination of the warehouse facility agreement in July 2001, a decline in average borrowing rates, and the continued decline in bonds payable and short-term notes payable. For the year ended December 31, 2001, interest expense decreased 53.4 percent, compared to 2000, primarily for these same reasons.

The number of mortgage originations rose by 5.5 percent in 2002 primarily due to an increase in the number of homebuilder closings, as well as an increase in the capture rate of mortgages originated for customers of the homebuilding segment to 82.4 percent from 81.0 percent in 2001. Mortgage originations rose by 29.9 percent in 2001 generally due to an increase in the capture rate to 81.0 percent from 71.0 percent in 2000.

Pretax earnings from investment operations were $2.1 million for 2002, compared to $2.0 million for 2001 and $1.8 million for 2000, as a result of lower interest rates on underlying debt, partially offset by a declining portfolio due to refinancing activity.

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 $40.1 million for 2002, $32.7 million for 2001 and $28.0 million for 2000. Corporate expenses for 2002 and 2001 rose from prior year levels primarily as a result of increases in incentive compensation, which were due to the Company’s increases in results and financial performance.

30 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The Company has an interest in ten active joint ventures in the Atlanta, Dallas, Denver, Orlando, Phoenix and Washington, D.C., markets. These joint ventures exist for the purpose of acquisition and co-development of lots, which are then sold to the Company, the 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 a proportionate share of earnings from these entities of $2.7 million in 2002, compared to $26,000 in 2001 and $163,000 in 2000. The increase in 2002 resulted from a $2.7 million gain on the sale to a third party of land in one joint venture in Atlanta. The Company’s investment in joint ventures was $14.9 million at December 31, 2002, compared to $20.1 million at December 31, 2001.

INCOME TAXES

Income taxes for fiscal years 2002, 2001 and 2000 were provided at effective tax rates of 40.0 percent, 39.5 percent and 39.0 percent, respectively. The increase in the effective tax rate for 2002 was due to increases in executive compensation, partially offset by the discontinuation of goodwill amortization. (See Note I.)

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.

Operating activities provided $87.2 million in 2002 and $176.8 million in 2001, primarily from earnings and an increase in accounts payable commensurate with our growth. Additionally, in 2001, $40.5 million was provided from the issuance of long-term debt. The cash provided was invested principally in inventory of $200.6 million and $11.0 million in 2002 and 2001, respectively, as well as in stock repurchases of $95.9 million and $45.5 million in 2002 and 2001, respectively.

Housing inventories increased to $1,100.0 million at December 31, 2002, from $899.4 million at December 31, 2001. The Company attempts to maintain approximately a four-year supply of land, with half or more controlled through options. At December 31, 2002, the Company controlled 48,745 lots (a 3.7-year supply based on actual 2002 closings), with 22,632 lots owned and 26,113 lots under option. In an effort to increase liquidity, models have been sold and leased back on a selective basis. As cash balances increased, model leases declined. The Company owned 39.9 percent of its model homes at December 31, 2002, versus 21.6 percent at December 31, 2001, and does not currently plan to sell and lease back any additional model homes.

The homebuilding segment’s borrowings included 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 at December 31, 2002 and 2001.

In August 2002, the Company renewed its senior unsecured revolving credit facility for a three-year term, with an option for a one-year extension. The new agreement, which has $300.0 million in capacity and matures in August 2005, has an accordion feature to increase the facility up to $400.0 million if the Company’s borrowing needs increase. The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. There were no outstanding borrowings under this facility at December 31, 2002 and 2001. The Company had letters of credit outstanding under this facility which totaled $86.4 million at December 31, 2002, and $77.3 million at December 31, 2001. Additionally, the Company had letters of credit outstanding under related arrangements of $19.3 million at December 31, 2001.

To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At December 31, 2002 and 2001, outstanding seller-financed nonrecourse secured notes payable were $3.8 million and $3.3 million, respectively.

31 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The financial services segment uses cash generated internally and from outside borrowing arrangements to finance its operations. Borrowing arrangements at December 31, 2002, included a repurchase agreement facility, which provided for borrowings of up to $80.0 million, and a $35.0 million revolving credit facility, which finances investment portfolio securities. At December 31, 2002 and 2001, combined borrowings of the financial services segment, outstanding under all agreements, were $43.1 million and $62.1 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, prepayments and exercises of early redemption provisions. 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 2002 Shelf Registration Statement, filed on September 27, 2002 with the U.S. Securities and Exchange Commission (SEC) for up to $250.0 million of the Company’s debt and equity securities, was declared effective by the SEC on October 7, 2002. The 2002 Shelf 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 covertible debt; preferred stock; preferred stock represented by depository shares; common stock; stock purchase contracts; stock purchase units; and warrants to purchase both debt and equity securities. Pursuant to this filing, the Company may, from time to time over an extended period, offer new debt or equity securities. This statement allows us to periodically access capital markets expediently. At December 31, 2002, no securities had been issued under the 2002 Shelf Registration Statement. The timing and amount of future offerings, if any, will depend on market and general business conditions.

During 2002, the Company repurchased approximately 2.3 million shares of its outstanding common stock at a cost of $95.9 million. At December 31, 2002, the Company had authorization from its Board of Directors to repurchase up to an additional 1.9 million shares of its outstanding common stock. The Company’s stock repurchase program has been funded primarily through internally generated funds.

The Company believes that its current borrowing capacity at December 31, 2002, and anticipated cash flows from operations are sufficient to meet its requirements for the foreseeable future.

32 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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 from operations for a particular quarterly or annual period.

INCOME RECOGNITION
Revenue 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 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. Any 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, and other factors. In addition, land, or costs related to future communities, whether owned or under an option contract, 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.

See Summary of Significant Accounting Policies (Note A).

33 THE RYLAND GROUP

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
(in thousands)			2003			2004			2005			2006			2007			THEREAFTER			TOTAL			12/31/02
HOMEBUILDING
LIABILITIES
	Long-term debt (fixed rate)											$	100,000					$	390,500		$	490,500		$	518,316
		Average interest rate											8.0	%					9.1	%		8.9	%
FINANCIAL SERVICES
ASSETS
	Mortgage loans held-for-sale1
		(fixed rate)	$	16,357																	$	16,357		$	16,681
		Average interest rate		5.7	%																	5.7	%
	Mortgage loans held-for-sale1
		(variable rate)	$	3,054																	$	3,054		$	3,114
		Average interest rate		6.0	%																	6.0	%
	Mortgage-backed securities
		and notes receivable	$	14,008		$	9,138		$	5,998		$	3,957		$	2,732		$	5,290		$	41,123		$	44,208
		Average interest rate		9.2	%		9.2	%		9.3	%		9.3	%		9.5	%		9.5	%		9.3	%
LIABILITIES
	Short-term notes payable
	(variable rate)		$	43,145																	$	43,145		$	43,145
	Average interest rate		Various2																		Various2
OTHER FINANCIAL INSTRUMENTS
	Forward-delivery contracts:
	Notional amount		$	96,000																	$	96,000		$	(1,208	)
	Average interest rate			5.5	%																	5.5	%
	Interest rate lock commitments
	Notional amount		$	63,487																	$	63,487		$	1,472
	Average interest rate			6.2	%																	6.2	%

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

² 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.

34 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

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

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 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 these hedging contracts is based upon a risk-management policy that establishes a risk-tolerance level for the Company. 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 Reform 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.

35   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)

YEAR ENDED DECEMBER 31,				2002		2001		2000
REVENUES
	HOMEBUILDING			$	2,805,055	$	2,684,116	$	2,285,540
	FINANCIAL SERVICES				72,158		63,075		46,269
		TOTAL REVENUES			2,877,213		2,747,191		2,331,809
EXPENSES
	HOMEBUILDING
		Cost of sales			2,216,059		2,181,619		1,900,651
		Selling, general and administrative			281,049		261,078		216,660
		Interest			6,826		25,473		16,886
			Total homebuilding expenses		2,503,934		2,468,170		2,134,197
	FINANCIAL SERVICES
		General and administrative			21,299		22,532		23,155
		Interest			2,565		5,423		11,619
			Total financial services expenses		23,864		27,955		34,774
	CORPORATE				40,075		32,730		27,998
		TOTAL EXPENSES			2,567,873		2,528,855		2,196,969
Earnings before taxes					309,340		218,336		134,840
Tax expense					123,736		86,243		52,588
NET EARNINGS				$	185,604	$	132,093	$	82,252
Preferred dividends				$	—	$	308	$	694
Net earnings available to common stockholders				$	185,604	$	131,785	$	81,558
NET EARNINGS PER COMMON SHARE
	Basic			$	7.03	$	4.94	$	3.10
	Diluted			$	6.64	$	4.63	$	2.96
AVERAGE COMMON SHARES OUTSTANDING
	Basic				26,421,310		26,665,450		26,345,586
	Diluted				27,959,143		28,511,358		27,786,724

See Notes to Consolidated Financial Statements.

36   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,					2002		2001
ASSETS
	HOMEBUILDING
		Cash and cash equivalents			$	266,577	$	295,015
		Housing inventories
			Homes under construction			575,794		460,152
			Land under development and improved lots			524,218		439,237
				Total inventories		1,100,012		899,389
		Property, plant and equipment				40,479		33,371
		Purchase price in excess of net assets acquired				18,185		18,185
		Other assets				58,252		79,638
						1,483,505		1,325,598
	FINANCIAL SERVICES
		Cash and cash equivalents				2,868		3,295
		Mortgage-backed securities and notes receivable				42,583		62,045
		Other assets				38,163		27,507
						83,614		92,847
	OTHER ASSETS
		Net deferred taxes				36,830		36,739
		Other				53,802		55,685
			TOTAL ASSETS			1,657,751		1,510,869
LIABILITIES
	HOMEBUILDING
		Accounts payable and other liabilities				300,168		260,908
		Long-term debt				490,500		490,500
						790,668		751,408
	FINANCIAL SERVICES
		Accounts payable and other liabilities				23,718		23,586
		Short-term notes payable				43,145		62,119
						66,863		85,705
	OTHER LIABILITIES					120,141		110,894
			TOTAL LIABILITIES			977,672		948,007
STOCKHOLDERS’ EQUITY
	Common stock, $1.00 par value:
		Authorized — 80,000,000 shares
		Issued — 25,260,343 shares (26,433,728 for 2001)				25,260		26,434
	Paid-in capital					—		26,297
	Retained earnings					653,461		508,667
	Accumulated other comprehensive income					1,358		1,464
			TOTAL STOCKHOLDERS’ EQUITY			680,079		562,862
			TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,657,751	$	1,510,869

See Notes to Consolidated Financial Statements.

37   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

																	ACCUMULATED
																	OTHER			TOTAL
					PREFERRED			COMMON			PAID-IN			RETAINED			COMPREHENSIVE			STOCKHOLDERS'
					STOCK			STOCK			CAPITAL			EARNINGS			INCOME			EQUITY
BALANCE AT JANUARY 1, 2000					$	700		$	27,702		$	57,529		$	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 $1.10)														(694	)					(694	)
	Common stock dividends (per share $0.08)														(2,099	)					(2,099	)
	Repurchase of common stock								(2,294	)		(23,115	)								(25,409	)
	Conversions and retirements of preferred stock					(110	)		108			(584	)								(586	)
	Reclassification of preferred paid-in capital											3,179									3,179
	Employee stock plans and related income tax benefit								982			9,982									10,964
BALANCE AT DECEMBER 31, 2000						590			26,498			46,991			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 $0.55)														(308	)					(308	)
	Common stock dividends (per share $0.08)														(2,124	)					(2,124	)
	Repurchase of common stock								(2,004	)		(43,489	)								(45,493	)
	Conversions and retirements of preferred stock					(590	)		590			149									149
	Reclassification of preferred paid-in capital											1,309									1,309
	Employee stock plans and
			related income tax benefit						1,350			21,337									22,687
BALANCE AT DECEMBER 31, 2001						—			26,434			26,297			508,667			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 $0.08)														(2,134	)					(2,134	)
	Repurchase of common stock								(2,306	)		(54,934	)		(38,676	)					(95,916	)
	Employee stock plans and related income tax benefit								1,132			28,637									29,769
BALANCE AT DECEMBER 31, 2002					$	—		$	25,260		$	—		$	653,461		$	1,358		$	680,079

See Notes to Consolidated Financial Statements.

38   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,			2002			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
	Net earnings		$	185,604		$	132,093		$	82,252
	Adjustments to reconcile net earnings to net cash
		provided by operating activities:
		Depreciation and amortization		32,670			37,068			28,489
	Changes in assets and liabilities:
		Increase in inventories		(200,623	)		(10,984	)		(65,724	)
		Net change in other assets, payables and other liabilities		52,331			16,443			69,903
	Tax benefit from exercise of stock options			12,103			8,337			2,826
	Other operating activities, net			5,095			(6,182	)		(3,695	)
	Net cash provided by operating activities			87,180			176,775			114,051
CASH FLOWS FROM INVESTING ACTIVITIES
	Net additions to property, plant and equipment			(36,547	)		(30,883	)		(34,326	)
	Principal reduction of mortgage-backed securities, notes receivable and mortgage collateral			25,314			33,215			24,006
	Other investing activities, net			—			—			4,278
	Net cash (used for) provided by investing activities			(11,233	)		2,332			(6,042	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Cash proceeds of long-term debt			—			250,000			150,000
	Reduction of long-term debt			—			(209,500	)		(78,000	)
	Decrease in short-term notes payable			(18,974	)		(20,444	)		(74,895	)
	Common and preferred stock dividends			(2,148	)		(2,605	)		(2,859	)
	Common stock repurchases			(95,916	)		(45,493	)		(25,409	)
	Proceeds from stock option exercises			11,382			12,888			8,116
	Other financing activities, net			844			(7,844	)		(12,687	)
	Net cash used for financing activities			(104,812	)		(22,998	)		(35,734	)
	Net (decrease) increase in cash and cash equivalents			(28,865	)		156,109			72,275
	Cash and cash equivalents at beginning of year			298,310			142,201			69,926
CASH AND CASH EQUIVALENTS AT END OF YEAR			$	269,445		$	298,310		$	142,201
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash paid for interest (net of capitalized interest)		$	14,275		$	33,177		$	24,698
	Cash paid for income taxes		$	101,939		$	72,662		$	51,509

See Notes to Consolidated Financial Statements.

39   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
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 2002 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 $257.0 million and $296.6 million at December 31, 2002 and 2001, 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.

STOCK SPLIT

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

HOMEBUILDING REVENUES

Homebuilding revenues are recognized when home sales are closed and title and possession are transferred to the buyer.

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 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 $5.3 million at December 31, 2002 and $7.1 million at December 31, 2001. The net carrying values of the related inventories amounted to $5.6 million and $6.9 million at December 31, 2002 and 2001, respectively.

Costs of inventory include direct costs of land and land development, material acquisition, home construction and related direct overhead 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):

	2002			2001
Capitalized interest as of January 1	$	33,291		$	33,494
Interest capitalized		39,695			31,675
Interest amortized to cost of sales		(32,162	)		(31,878	)
Capitalized interest as of December 31	$	40,824		$	33,291

40   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SERVICE LIABILITIES

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

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, Phoenix and Washington, D.C., are engaged in the development of land. At December 31, 2002 and 2001, the Company’s investment in unconsolidated joint ventures amounted to $14.9 million and $20.1 million, respectively. The Company’s equity in earnings of these unconsolidated joint ventures was $2.7 million for the year ended December 31, 2002, compared to $26,000 for the same period in 2001 and $163,000 in 2000. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $61.0 million and $69.5 million at December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $31.9 million and $22.6 million, respectively. The Company does not guarantee the debt of its unconsolidated joint ventures.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, which includes 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, 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

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” SFAS 142 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. The Company tests goodwill for impairment 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 year ended December 31, 2002. Identifiable intangible assets other than goodwill are immaterial.

The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in 2002. Results reported for the years ended December 31, 2001 and 2000, included after-tax goodwill amortization expenses of $1.1 million, or $0.04 per diluted share.

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.

41   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Had compensation expense been determined based on fair value at the grant date for awards, consistent with the provisions of SFAS 123, in 2002, 2001 and 2000, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following table (in thousands, except share data):

YEAR ENDED DECEMBER 31,		2002			2001			2000
Net earnings, as reported		$	185,604		$	132,093		$	82,252
	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		(3,455	)		(2,599	)		(2,115	)
Pro forma net earnings		$	182,149		$	129,494		$	80,137
Earnings per share:
	Basic — as reported	$	7.03		$	4.94		$	3.10
	Basic — pro forma		6.89			4.84			3.02
	Diluted — as reported		6.64			4.63			2.96
	Diluted — pro forma	$	6.52		$	4.54		$	2.89

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 2002, 2001 and 2000, respectively: a risk-free interest rate of 4.0 percent, 4.7 percent and 6.4 percent; an expected volatility factor for the market price of the Company’s common stock of 36.8 percent, 37.5 percent and 35.2 percent; a dividend yield of 0.2 percent, 0.3 percent and 0.9 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted in 2002, 2001 and 2000 were $13.14, $10.14 and $2.99, 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, 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.

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. During 2002, 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 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.

42   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $185.5 million, $133.0 million and $81.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.

NEW ACCOUNTING PRONOUNCEMENTS
SFAS 145
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (SFAS 145), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” The provisions of SFAS 145 which relate to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. Under the new pronouncement, any gain or loss on the extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board (APB) Opinion No. 30 for classification as an extraordinary item shall be reclassified. Early application of the provisions of SFAS 145 which relate to the rescission of Statement 4 is encouraged. Statement 64 amended Statement 4 and is no longer necessary because Statement 4 has been rescinded.

The Company adopted the provisions of SFAS 145, with respect to the rescission of Statement 4, on July 1, 2002.

SFAS 146

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS 146), “Accounting for Costs Associated with Exit or Disposal Activities.” The provisions of SFAS 146 address financial accounting and reporting for costs associated with exit or disposal activities and nullify Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring).” SFAS 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF 94-3. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Management does not expect the adoption of SFAS 146 to have a significant impact on the Company’s financial position or results of operations.

SFAS 148

On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-based Compensation – Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-based Compensation,” to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure, in the summary of significant accounting policies, of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the statement does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 123 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25.

SFAS 148’s amendment of the transition and annual disclosure requirements of SFAS 123 and APB Opinion No. 28 are effective for fiscal years ending after December 15, 2002. The Company has implemented these new disclosure provisions. See the disclosure under “Stock-based Compensation” in Note A.

FIN 45

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Each guarantee meeting the requirements of FIN 45 is to be recognized and initially measured at fair value.

43   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additionally, guarantors will be required to make significant new disclosures, even if the likelihood of the guarantor making payments under the guarantee is remote.

FIN 45’s disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial recognition and measurement provisions are applicable on a prospective basis to guarantees that will be issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FIN 45 on December 31, 2002 (see Note L). Management does not expect the adoption of FIN 45 to have a significant impact on the Company’s financial position or results of operations.

FIN 46
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities and/or entitled to receive a majority of the entity’s residual returns. A company that consolidates a variable interest entity is the primary beneficiary of that entity. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate, but in which it has a significant variable interest.

The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Management does not expect the adoption of FIN 46 to have a significant impact on the Company’s financial position or results of operations.

NOTE B: EARNINGS PER SHARE RECONCILIATION

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share data):

YEAR ENDED DECEMBER 31,			2002		2001			2000
NUMERATOR
	Net earnings		$	185,604	$	132,093		$	82,252
	Preferred stock dividends			—		(308	)		(694	)
	Numerator for basic earnings per share — earnings available to common stockholders			185,604		131,785			81,558
	Effect of dilutive securities — preferred stock dividends			—		308			694
	Numerator for diluted earnings per share — earnings available to common stockholders		$	185,604	$	132,093		$	82,252
DENOMINATOR
	Denominator for basic earnings per share — weighted-average shares			26,421,310		26,665,450			26,345,586
	Effect of dilutive securities:
		Stock options		1,202,920		1,287,110			631,120
		Conversion of preferred shares		—		398,990			642,252
		Equity incentive plan		334,913		159,808			167,766
	Dilutive potential of common shares			1,537,833		1,845,908			1,441,138
	Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions			27,959,143		28,511,358			27,786,724
NET EARNINGS PER COMMON SHARE
	Basic		$	7.03	$	4.94		$	3.10
	Diluted		$	6.64	$	4.63		$	2.96

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

44   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 25 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.

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. Certain corporate expenses are allocated to the homebuilding and financial services segments.

YEAR ENDED DECEMBER 31, (in thousands)			2002			2001			2000
REVENUES
	Homebuilding		$	2,805,055		$	2,684,116		$	2,285,540
	Financial services			72,158			63,075			46,269
		Total	$	2,877,213		$	2,747,191		$	2,331,809
PRETAX EARNINGS
	Homebuilding		$	301,121		$	215,946		$	151,343
	Financial services			48,294			35,120			11,495
	Corporate			(40,075	)		(32,730	)		(27,998	)
		Total	$	309,340		$	218,336		$	134,840
DEPRECIATION AND AMORTIZATION
	Homebuilding		$	27,901		$	32,011		$	24,063
	Financial services			819			709			708
	Corporate			3,950			4,348			3,718
		Total	$	32,670		$	37,068		$	28,489
IDENTIFIABLE ASSETS
	Homebuilding		$	1,483,505		$	1,325,598		$	1,151,232
	Financial services			83,614			92,847			114,490
	Corporate and other			90,632			92,424			95,619
		Total	$	1,657,751		$	1,510,869		$	1,361,341

NOTE D: FINANCIAL SERVICES’ SHORT-TERM NOTES PAYABLE

Financial services had outstanding borrowings at December 31 as follows (in thousands):

		2002		2001
Repurchase agreements		$	20,303	$	29,005
Revolving credit agreement			22,842		33,114
	Total	$	43,145	$	62,119

Repurchase agreements represented short-term borrowings of $20.3 million and $29.0 million at December 31, 2002 and 2001, respectively, that were collateralized by mortgage loans and mortgage-backed securities. Outstanding collateral balances were $18.9 million and $27.6 million, with fair values of $20.3 million and $28.7 million, at December 31, 2002 and 2001, respectively.

45   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2002, the Company’s financial services segment renewed and extended a $35.0 million revolving credit facility used to finance mortgage investment portfolio securities. The agreement extends through March 2003 and bears interest at market rates. The Company is currently in the process of extending the facility. Borrowings outstanding under this facility, totaling $22.8 million and $33.1 million, respectively, were collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries and had principal balances of $22.6 million and $33.3 million, and fair values of $23.8 million and $34.8 million, at December 31, 2002 and 2001, respectively.

Weighted-average short-term borrowings during the period were $51.5 million, $72.0 million and $126.0 million for 2002, 2001 and 2000, respectively.

Weighted-average interest rates at the end of the period on all short-term borrowings were 1.9 percent and 2.4 percent for 2002 and 2001, respectively. Weighted-average interest rates during the period on all short-term borrowings were 2.3 percent, 4.8 percent and 5.3 percent for 2002, 2001 and 2000, respectively.

The repurchase agreement and revolving credit agreement contain certain financial covenants. The Company was in compliance with these covenants at December 31, 2002.

NOTE E: 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):

		2002		2001
Interest rate lock commitments		$	63,487	$	47,820
Hedging contracts:
	Forward-delivery contracts	$	96,000	$	35,000
	Other		15,000		5,000

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 5.0 percent to 10.3 percent at December 31, 2002, and 5.4 percent to 10.1 percent at December 31, 2001.

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 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 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 immediate settlement of the instruments.

46   THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

			2002							2001
				CARRYING			FAIR			CARRYING			FAIR
(in thousands)				VALUE			VALUE			VALUE			VALUE
HOMEBUILDING
	LIABILITIES
		Senior notes		$	247,000		$	262,392		$	247,000		$	263,223
		Senior subordinated notes			243,500			255,924			243,500			251,296
FINANCIAL SERVICES
	ASSETS
		Mortgage loans held-for-sale1		$	19,411		$	19,795		$	13,238		$	13,524
		Mortgage-backed securities and notes receivable			42,583			44,208			62,045			64,038
	OTHER FINANCIAL INSTRUMENTS
		Interest rate lock commitments			1,472			1,472			230			230
		Forward-delivery contracts			(1,208	)		(1,208	)		(290	)		(290	)
		Other			30			30			43			43
OTHER ASSETS
		Collateral for bonds payable of the limited-purpose subsidiaries		$	12,011		$	12,045		$	17,772		$	17,849
OTHER LIABILITIES
		Bonds payable of the limited-purpose subsidiaries		$	10,378		$	10,893		$	15,588		$	17,174

     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:

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

o Senior notes; senior subordinated notes; mortgage loans held-for-sale; mortgage-backed securities and notes receivable; hedging 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, 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” 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 these nonrecourse bond issues.

47 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31 (in thousands):

	2002			2001
Bonds payable, net of discounts: 2002 — $408; 2001 — $637	$	10,378		$	15,588
Range of interest rates		7.25% – 11.65	%		7.25% – 11.65	%
Stated maturities		2009–2018			2009–2018
NOTE H: LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):

		2002		2001
Senior subordinated notes		$	243,500	$	243,500
Senior notes			247,000		247,000
	Total	$	490,500	$	490,500

In August 2002, the Company renewed its senior unsecured revolving credit facility for a three-year term, with an option for a one-year extension. The new agreement, which is for $300.0 million and matures in August 2005, has an accordion feature to increase the facility up to $400.0 million should the Company’s borrowing needs increase. The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. Borrowings under this agreement bear interest at variable short-term rates. The effective interest rate was 4.8 percent for 2002, 7.4 percent for 2001 and 8.1 percent for 2000. There were no outstanding borrowings under this agreement at December 31, 2002 and 2001.

At December 31, 2002, the Company had $100.0 million of 8.3 percent senior subordinated notes due April 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 on or after April 1, 2003. The Company also 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, 2002, 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. The Company also 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.

During 2001, the Company redeemed $100.0 million of 9.6 percent senior subordinated notes due June 2004 at par and $100.0 million of 10.5 percent senior notes due July 2006 at the stated redemption price of 105.3 percent of par, respectively. Additionally, the Company repurchased, in market related transactions, $3.0 million of 9.8 percent senior notes due September 2010 at 101.4 percent of par and $6.5 million of 9.1 percent senior subordinated notes due June 2011 at 94.4 percent of par. As a result, the Company recognized a loss on the early extinguishment of debt in 2001 of $7.2 million, which has been reflected in interest expense.

Maturities of long-term debt for the next five years are as follows (in thousands):

2003 – 2005	$	—
2006		100,000
2007		—
After 2007		390,500
Total long-term debt	$	490,500

48 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. Under the loan covenants, the Company had $107.9 million of retained earnings available for dividends at December 31, 2002, and was in compliance with these covenants.

NOTE I: INCOME TAXES

The Company’s expense for income taxes is summarized as follows (in thousands):

YEAR ENDED DECEMBER 31,			2002		2001			2000
CURRENT
	Federal		$	106,722	$	75,822		$	46,988
	State			17,014		12,918			8,126
		Total current		123,736		88,740			55,114
DEFERRED
	Federal			—		(2,134	)		(2,154	)
	State			—		(363	)		(372	)
		Total deferred		—		(2,497	)		(2,526	)
Total expense			$	123,736	$	86,243		$	52,588

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

YEAR ENDED DECEMBER 31,	2002			2001			2000
Income taxes at federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax		3.6			3.7			3.7
Other, net		1.4			0.8			0.3
Effective rate		40.0	%		39.5	%		39.0	%

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

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

			2002			2001
DEFERRED TAX ASSETS
	Warranty, legal and accruals		$	25,706		$	27,412
	Employee benefits			18,030			13,735
	Non-cash charge for impairment of long-lived assets			2,553			3,324
	Other			4,068			2,061
		Total deferred tax assets		50,357			46,532
DEFERRED TAX LIABILITIES
	Installment sales method and deferred gains			(5,553	)		(6,917	)
	Capitalized expenses			(5,656	)		(929	)
	Other			(2,318	)		(1,947	)
		Total deferred tax liabilities		(13,527	)		(9,793	)
Net deferred tax asset			$	36,830		$	36,739

The Company determined that no valuation allowance for the deferred tax asset was required. The Company had a total current tax liability of $29.7 million and $20.1 million at December 31, 2002 and 2001, respectively. These amounts are reported in the balance sheet in “Other liabilities.”

49 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J: STOCKHOLDERS’ EQUITY

PREFERRED STOCK

During 2001, Ryland called and redeemed all of its outstanding preferred stock, which was held within the Retirement Savings Opportunity Plan (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 $31.56 or converted into two shares of Ryland common stock (after the effect of the stock split). A total of 505,574 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 $0.28. During 2001 and 2000, the Company paid $308,000 and $694,000, 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.

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 $35. 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 $0.005 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 issued.

STOCK SPLIT

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 K: 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 $7.2 million, $6.5 million and $5.7 million in 2002, 2001 and 2000, respectively.

Previously, the Company issued its preferred stock in connection with its matching contributions to those accounts. As a result of the redemption of preferred stock, 286,367 and 405,816 shares of common stock were allocated to participants’ accounts at December 31, 2002 and 2001, respectively.

50 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $258,000, $192,000, and $179,000 in 2002, 2001 and 2000, respectively.

EQUITY INCENTIVE PLAN AND OTHER RELATED PLANS

On April 24, 2002, the Company’s stockholders approved The Ryland Group, Inc. 2002 Equity Incentive Plan (“the Plan”), which 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 number of shares available for issuance under the Plan includes 15,432 shares carried over from the 1992 Equity Incentive Plan and 1.3 million new shares available under the terms of the 2002 Equity Incentive 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 during 2002 generally have a maximum term of ten years and vest over three years.

Under the Company’s 2000 Non-Employee 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, 2002 and 2001, 286,600 and 386,600 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:

		2002					2001					2000
					WEIGHTED-					WEIGHTED-					WEIGHTED-
					AVERAGE					AVERAGE					AVERAGE
					EXERCISE					EXERCISE					EXERCISE
		SHARES			PRICE		SHARES			PRICE		SHARES			PRICE
Options outstanding at beginning of year			3,673,284		$	13.15		4,399,872		$	10.27		4,477,260		$	10.01
	Granted		787,200			42.96		765,500			24.67		1,093,000			9.98
	Exercised		(969,615	)		11.74		(1,296,266	)		10.07		(937,102	)		8.66
	Forfeited		(53,471	)		23.88		(195,822	)		13.73		(233,286	)		10.57
Options outstanding at end of year			3,437,398		$	20.21		3,673,284		$	13.15		4,399,872		$	10.27
Available for future grant			1,396,936					534,822					572,054
Total shares reserved			4,834,334					4,208,106					4,971,926
Options exercisable at December 31			1,998,968		$	12.52		2,048,366		$	10.45		2,242,128		$	9.45
Prices related to options exercised during the year		$	6.75 – $22.69				$	6.75 – $14.47				$	6.75 – $14.44

51 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock options outstanding and exercisable at December 31, 2002, 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
$6.38 to $8.94		1,038,340		4.99	$	7.41		806,800	$	7.18
$9.81 to $14.47		941,572		6.38	$	12.42		892,612	$	12.45
$18.81 to $26.10		570,786		8.15	$	22.26		189,556	$	21.57
$33.35 to $45.39		886,700		9.30	$	42.16		110,000	$	36.60

The Company has made several restricted stock awards to senior executives under both the 1992 and 2002 Equity Incentive 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 $9.8 million, $5.7 million and $6.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

The following is a summary of activity relating to restricted stock awards for each year ended December 31:

	2002			2001			2000
Restricted shares, beginning of year		250,000			180,000			150,000
Shares awarded		365,000			130,000			90,000
Shares vested		(162,900	)		(60,000	)		(60,000	)
Restricted shares, end of year		452,100			250,000			180,000

At December 31, 2002, the outstanding restricted shares will vest as follows: 2003 — 132,800; 2004 — 134,100; 2005 — 91,200; 2006 — 47,000; and 2007 — 47,000.

All outstanding stock options and restricted stock awards have been granted in accordance with the terms of the 2002 Equity Incentive Plan, the 2000 Non-Employee Director Equity Plan and their respective predecessor plans, which were approved by the Company’s stockholders.

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, 2002, the Company had deposits and letters of credit outstanding of $56.0 million for land options and land purchase contracts having a total purchase price of $775.0 million. At December 31, 2002, the Company had commitments with respect to option contracts with specific performance provisions of approximately $68.0 million, compared to $94.0 million at December 31, 2001.

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

YEAR ENDED DECEMBER 31, (in thousands)	2002			2001			2000
Total rent expense	$	20,058		$	21,591		$	18,212
Less income from subleases		(1,233	)		(2,376	)		(2,416	)
Net rental expense	$	18,825		$	19,215		$	15,796

52 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries

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):

2003	$	7,757
2004		6,647
2005		3,478
2006		2,769
2007 and thereafter		1,509
Subtotal	$	22,160
Less sublease income		(830	)
Total lease commitments	$	21,330

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, 2002, total development bonds were $299.3 million and total deposits and letters of credit were $51.0 million.

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 on 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.

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

Balance, December 31, 2001	$	26,664
Warranties issued		13,235
Settlements made		(13,936	)
Changes in liability for pre-existing warranties		3,897
Balance, December 31, 2002	$	29,860

During the first quarter of 2002, Ryland Mortgage Company (RMC) settled its outstanding claims related to mortgage servicing contracts entered into during 1991 and 1992 with the Resolution Trust Corporation.

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.

53 THE RYLAND GROUP

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, 2002 and 2001, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

Los Angeles, California

January 23, 2003

54 THE RYLAND GROUP

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.

Gordon A. Milne
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

 

David L. Fristoe

SENIOR VICE PRESIDENT, CIO, CONTROLLER AND CHIEF ACCOUNTING OFFICER

55 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
QUARTERLY FINANCIAL DATA AND
COMMON STOCK PRICES AND DIVIDENDS
(IN THOUSANDS, EXCEPT SHARE DATA, UNAUDITED)

			2002								2001
			DEC. 31		SEPT. 30		JUN. 30		MAR. 31			DEC. 31		SEPT. 30		JUN. 30		MAR. 31
CONSOLIDATED RESULTS
	Revenues		$	929,742	$	732,735	$	675,376	$	539,360		$	830,573	$	713,615	$	688,832	$	514,171
	Earnings before taxes			112,546		79,010		74,868		42,916			74,276		61,480		55,986		26,594
	Tax expense			45,018		31,604		30,162		16,952			29,339		24,285		22,114		10,505
	Net earnings		$	67,528	$	47,406	$	44,706	$	25,964		$	44,937	$	37,195	$	33,872	$	16,089
	Basic net earnings per common share		$	2.65	$	1.80	$	1.65	$	0.97		$	1.70	$	1.39	$	1.26	$	0.60
	Diluted net earnings per common share		$	2.50	$	1.70	$	1.56	$	0.92		$	1.61	$	1.30	$	1.18	$	0.56
	Weighted-average common shares outstanding:
		Basic		25,521		26,311		27,103		26,749			26,380		26,832		26,776		26,680
		Diluted		26,994		27,877		28,644		28,318			27,928		28,709		28,716		28,728

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 10, 2003, was 2,313.

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

					DIVIDENDS							DIVIDENDS
					DECLARED							DECLARED
2002	HIGH		LOW		PER SHARE		2001	HIGH		LOW		PER SHARE
First quarter	$	48.33	$	33.46	$	0.02	First quarter	$	25.41	$	17.90	$	0.02
Second quarter		57.96		45.16		0.02	Second quarter		28.15		18.96		0.02
Third quarter		51.75		35.55		0.02	Third quarter		31.25		20.42		0.02
Fourth quarter		42.48		31.61		0.02	Fourth quarter		37.20		22.60		0.02

     58 THE RYLAND GROUP

The Ryland Group, Inc. & Subsidiaries
CORPORATE AND INVESTOR INFORMATION

HEADQUARTERS 
 
The Ryland Group, Inc. 
24025 Park Sorrento, Suite 400 
Calabasas, California 91302 
(818) 223-7500
 
INTERNET ADDRESS 
 
http://www.ryland.com 
 
STOCK EXCHANGE LISTING 
 
Ryland is listed on the New York Stock Exchange
(NYSE: symbol RYL). 
 
Price information for Ryland’s common stock appears daily in major newspapers, as well as on Ryland’s web site at www.ryland.com, which also includes historical financial information, news and other financial reports. 
 
TRANSFER AGENT AND REGISTRAR 
 
EquiServe Trust Company, N.A. 
P.O. Box 43069 
Providence, Rhode Island 02940-3069 
(781) 575-2726 
http://www.equiserve.com 
 
DIVIDEND PAYMENTS 
 
Dividends on Ryland common stock are paid quarterly as declared by the board of directors. The payment dates are in January, April, July and October. 
 
FORM 10-K REPORT AND OTHER PUBLICATIONS 
 
Shareholders may receive a copy of the 2002 Form 10-K and other publications filed with the Securities and Exchange Commission in Washington, D.C., without charge by writing to: 
 
The Ryland Group, Inc. 
Investor Relations 
24025 Park Sorrento, Suite 400 
Calabasas, California 91302 
investors@ryland.com 
 
Copies of the annual and quarterly reports also are available. INVESTOR INQUIRIES 
 
Shareholders, securities analysts and others seeking information about the Company’s business operations and financial performance are invited to contact Ryland at (818) 223-7677 or write to: 
 
Cathey S. Lowe 
Senior Vice President – Finance 
The Ryland Group, Inc. 
24025 Park Sorrento, Suite 400 
Calabasas, California 91302 
clowe@ryland.com 
 
NEWS RELEASES AND EVENTS 
 
News releases and quarterly earnings announcements, including live audio and replays of the most recent quarterly earnings conference calls, can be found on the Ryland web site in the Corporate and Investor Information section under the headings “News Releases” and “Conference Calls.” In addition, dates for upcoming events, including earnings release dates, conference calls, and Ryland’s participation in analyst and industry conferences, are posted under “Calendar of Events.” 
 
ANNUAL MEETING 
 
The annual meeting of shareholders will be held at 9:00 a.m. local time on April 23, 2003, in Marina del Rey, California.

EX-21 5 a88169exv21.htm EXHIBIT 21

Exhibit 21: List of Subsidiaries of the Registrant

Ryland Mortgage Company (an Ohio corporation)

Ryland Homes of California, Inc. (a Delaware corporation)

RH of Texas Limited Partnership EX-23 6 a88169exv23.htm EXHIBIT 23

Exhibit 23: Consent of Independent Auditors

We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Ryland Group, Inc. of our report dated January 23, 2003, included in the 2002 Annual Report to the 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, present 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. 33-50933, Form S-3 No. 333-03791, Form S-3 No. 333-31034, Form S-3 No. 333-58208 and Form S-3 No. 333-100167) of The Ryland Group, Inc. and in the related Prospectuses of our report dated January 23, 2003, with respect to the consolidated financial statements and schedule of The Ryland Group, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2002.

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. 33-56917) pertaining to The Ryland Group, Inc. 1992 Non-Employee Director Equity Plan of our report dated January 23, 2003, with respect to the consolidated financial statements and schedule of The Ryland Group, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2002.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP
Los Angeles, California
March 17, 2003 EX-24 7 a88169exv24.htm EXHIBIT 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, 2002 to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

DATED: February 26, 2003

/s/ R. Chad Dreier
R. Chad Dreier, Chairman of the Board, President and
Chief Executive Officer (Principal Executive Officer)

/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/ William G. Kagler
William G. Kagler, 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-12.1

The Ryland Group, Inc.

EX-13

The Ryland Group, Inc.

EX-21

The Ryland Group, Inc.

EX-23

The Ryland Group, Inc.

EX-24

The Ryland Group, Inc.

EX-99.1

Exhibit 99.1: Certification of Principal Executive Officer

Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

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, 2002 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: March 17, 2003

EX-99.2 9 a88169exv99w2.htm EXHIBIT 99.2

Exhibit 99.2: Certification of Principal Financial Officer

Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

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, 2002 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: March 17, 2003

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EX-99.2

The Ryland Group, Inc.