Consolidated Financial Statements

9 Months Ended

Sep. 30, 2012

Consolidated Financial Statements

Consolidated Financial Statements

Note 1.  Consolidated Financial Statements

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its 100 percent-owned subsidiaries (the “Company”). Noncontrolling interest represents the selling entities’ ownership interests in land and lot option purchase contracts. (See Note 8, “Variable Interest Entities (‘VIE’).”) Intercompany transactions have been eliminated in consolidation. Information is presented on a continuing operations basis unless otherwise noted. The results from continuing and discontinued operations are presented separately in the consolidated financial statements. (See Note 18, “Discontinued Operations.”) Effective January 1, 2012, the Company elected to reclassify its external commissions expense from cost of sales to selling, general and administrative expense in its Consolidated Statements of Earnings in order to not only be consistent with a majority of its peers, but also to combine external and internal commissions. This will have the effect of increasing both housing gross profit and selling, general and administrative expense by the amount of external commissions, which totaled $7.5 million and $5.1 million, or 2.2 percent and 2.1 percent of housing revenues, for the three months ended September 30, 2012 and 2011, respectively. External commissions totaled $18.5 million and $12.7 million, or 2.2 percent and 2.1 percent of housing revenues, for the nine months ended September 30, 2012 and 2011, respectively. Effective July 1, 2012, the Company’s selling, general and administrative expense includes corporate expense. All prior period amounts have been reclassified to conform to the 2012 presentation. For a description of the Company’s accounting policies, see Note A, “Summary of Significant Accounting Policies,” in its 2011 Annual Report on Form 10-K.

The Consolidated Balance Sheet at September 30, 2012, the Consolidated Statements of Earnings for the three- and nine-month periods ended September 30, 2012 and 2011, the Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2012 and 2011, the Consolidated Statement of Stockholders’ Equity as of and for the nine-month period ended September 30, 2012, and the Consolidated Statements of Other Comprehensive Income for the three- and nine-month periods ended September 30, 2012 and 2011, have been prepared by the Company without audit. In the opinion of management, all adjustments, including normally recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows at September 30, 2012, and for all periods presented, have been made. Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2011 Annual Report on Form 10-K.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. Accordingly, the results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the operating results expected for the year ending December 31, 2012.