Amended Quarterly Report

Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

Note 1.  Consolidated Financial Statements

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 2006 presentation.  See Note A, “Summary of Significant Accounting Policies” of the Company’s 2005 Annual Report on Form 10-K/A for a description of its accounting policies.

The consolidated balance sheet at March 31, 2006, the consolidated statements of earnings for the three months ended March 31, 2006 and 2005, and the consolidated statements of cash flows for the three months ended March 31, 2006 and 2005, have been prepared by the Company without audit.  In the opinion of management, all adjustments, which include normally recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows at March 31, 2006, 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 2005 Annual Report on Form 10-K/A.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results.  Accordingly, the results of operations for the three months ended March 31, 2006, are not necessarily indicative of the operating results expected for the year ended December 31, 2006.

Note 2.  Comprehensive Income

Comprehensive income consists of net income and the increase or decrease in unrealized gains or losses on the Company’s available-for-sale securities, as well as the increase or decrease in unrealized gains or losses associated with treasury interest rate locks (treasury locks), net of applicable taxes.  (See Note 12, “Commitments and Contingencies.”) Comprehensive income totaled $95.5 million and $62.7 million for the three months ended March 31, 2006 and 2005, respectively.

Note 3.  Segment Information (Restated)

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 28 markets.  The Company consists of six segments: four geographically-determined homebuilding regions, referred to as North, Texas, Southeast and West; financial services; and corporate.  The Company’s homebuilding segments specialize in the sale and construction of single-family attached and detached housing.  The Company’s financial services segment provides loan origination and offers mortgage, title, escrow and insurance services.  Corporate is a non-operating business segment with the sole purpose of supporting operations.  Certain corporate expenses are allocated to the homebuilding and financial services segments.  As a result of disaggregating the Company’s homebuilding operations into formal segments, certain employee benefit plan assets and costs have been reclassified from corporate to other segments in order to best reflect the financial position and results of the Company’s segments.

The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings.  The accounting policies of the segments are the same as those described in Note 1, “Consolidated Financial Statements.”

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

Options to purchase 5,000 shares of common stock were outstanding at March 31, 2006, but were not included in the computation of diluted earnings per share for the three-month period ended March 31, 2006, because their effect would have been antidilutive since the exercise price was greater than the average market price of the shares.  At March 31, 2005, all options were included in the diluted earnings per share calculation.

Note 5.  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.

The following table is a summary of capitalized interest:

Note 6.  Purchase Price in Excess of Net Assets Acquired

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

The Company adopted the provisions of SFAS 142 on January 1, 2002, and performs impairment tests of its goodwill annually as of March 31. The Company tests goodwill for impairment by using the two-step process prescribed in SFAS 142. The first step identifies potential impairment, while the second step measures the amount of impairment. The Company had no impairment at March 31, 2006 or 2005.

As a result of the Company’s application of the nonamortization provisions of SFAS 142, no amortization was recorded during the three months ended March 31, 2006 or 2005.

Note 7.  Variable Interest Entities

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

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

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

In compliance with the provisions of FIN 46, the Company consolidated $235.3 million of inventory not owned at March 31, 2006, $175.2 million of which pertained to land and lot option contracts and $60.1 million of which pertained to three of the Company’s homebuilding joint ventures. (See Note 8, “Investments in Joint Ventures.”)  While the Company may not have had legal title to the optioned land or guaranteed the seller’s debt associated with that property, under FIN 46 it had the primary variable interest and was required to consolidate the particular VIE’s assets under option at fair value.  This represents the fair value of the optioned property.  Additionally, to reflect the fair value of the inventory consolidated under FIN 46, the Company eliminated $14.4 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned.  Minority interest totaling $160.8 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs.  At March 31, 2006, the Company had cash deposits and letters of credit totaling $25.3 million relating to lot option contracts that were consolidated, representing its current maximum exposure to loss. Creditors of these VIEs, if any, have no recourse against the Company.  At March 31, 2006, the Company had cash deposits and/or letters of credit totaling $94.1 million that were associated with lot option purchase contracts that had an aggregate purchase price of $1.3 billion and that were related to VIEs in which it did not have a primary variable interest.

Note 8.  Investments in Joint Ventures

The Company enters into joint ventures, from time to time, for the purpose of acquisition and co-development of land parcels and lots.  Currently, the Company participates in homebuilding joint ventures in the Atlanta, Austin, Chicago, Dallas, Denver, Las Vegas, Orlando and Phoenix markets.  The Company participates in a number of joint ventures in which it has less than a controlling interest.  At March 31, 2006, and December 31, 2005, the Company’s investment in its unconsolidated joint ventures totaled $14.0 million and $10.2 million, respectively, and were classified under “Other” assets.  The Company recognizes its share of the respective joint ventures’ earnings from the sale of lots to other homebuilders.  It does not, however, recognize earnings from lots that it purchases from the joint ventures.  Instead, it reduces its cost basis in these lots by its share of the earnings from the lots.  The Company’s equity in losses of its unconsolidated joint ventures totaled $383,000 for the three-month period ended March 31, 2006, compared to equity in earnings of $99,000 for the three-month period ended March 31, 2005.

The aggregate assets of the unconsolidated joint ventures in which the Company participated were $598.8 million and $581.4 million at March 31, 2006, and December 31, 2005, respectively.  The aggregate debt of the unconsolidated joint ventures in which the Company participated totaled $400.0 million and $394.0 million at March 31, 2006, and December 31, 2005, respectively.

At March 31, 2006, the increase in aggregate joint venture assets and debt from December 31, 2005, was primarily attributable to one joint venture which had aggregate assets of $557.5 million and aggregate debt of $378.9 million.  In this joint venture, the Company and its partners provided guarantees of debt on a pro rata basis.  The Company had a 3.3 percent pro rata interest on the debt, or $12.6 million, and a completion guarantee related to project development.  The guarantees apply if a partner defaults on its loan arrangement and the fair value of the collateral (land and improvements) is less than the loan balance.

At March 31, 2006, three of the joint ventures in which the Company participates were consolidated in accordance with the provisions of FIN 46, as the Company was determined to have the primary variable interest in the entities.  In association with these consolidated joint ventures, the Company recorded pretax earnings of $42,000 and pretax losses of $5,000 for the three-month periods ended March 31, 2006 and 2005, respectively.  Total assets of $62.7 million and $63.7 million, including consolidated inventory not owned, (See Note 7, “Variable Interest Entities.”); total liabilities of $45.9 million and $43.3 million; and minority interest of $9.8 million and $11.5 million, were consolidated as of March 31, 2006, and December 31, 2005, respectively.  In February 2006, the Company guaranteed up to 50.0 percent of a $55.0 million revolving credit facility for one of its consolidated joint

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

ventures.  At March 31, 2006, the actual borrowings against the revolving credit facility for this consolidated joint venture were $43.4 million, of which the Company guaranteed $21.7 million.

Note 9.  Debt

At March 31, 2006, the Company had outstanding ( a ) $100.0 million of 8.0 percent senior notes due August 2006, with interest payable semiannually, which may not be redeemed prior to maturity; ( b ) $150.0 million of 5.4 percent senior notes due June 2008, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time; ( c ) $250.0 million of 5.4 percent senior notes due May 2012, with interest payable semiannually, which may be redeemed at a stated redemption price at the option of the Company, in whole or in part, at any time; and ( d ) $250.0 million of 5.4 percent senior notes due January 2015, with interest payable semiannually, which may be redeemed at a stated redemption price, in whole or in part, at any time.

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

In January 2006, the Company entered into a $750.0 million unsecured revolving credit facility. The new credit agreement, which matures in January 2011, also provides access to an additional $750.0 million of financing through an accordion feature under which the aggregate commitment may be increased up to $1.5 billion, subject to the availability of additional lending commitments. The $750.0 million revolving credit facility includes a $75.0 million swing-line facility and a $600.0 million sublimit for issuance of standby letters of credit. Amounts borrowed under the credit agreement are guaranteed on a joint and several basis by substantially all of the Company’s wholly-owned homebuilding subsidiaries. Such guarantees are full and unconditional. Interest rates on outstanding borrowings are determined either by reference to LIBOR, with margins determined based on changes in the Company’s leverage ratio and credit ratings, or by reference to an alternate base rate. The credit agreement contains various customary affirmative, negative and financial covenants; replaces the Company’s prior $500.0 million revolving credit facility; and is used for general corporate purposes.  There were no outstanding borrowings under this agreement or under the Company’s prior $500.0 million revolving credit facility at March 31, 2006 or December 31, 2005, respectively.

At March 31, 2006, the Company’s obligations to pay principal, premium, if any, and interest under its $750.0 million unsecured revolving credit facility; 8.0 percent senior notes due August 2006; 5.4 percent senior notes due June 2008; 5.4 percent senior notes due May 2012; and 5.4 percent senior notes due January 2015 are guaranteed on a joint and several basis by substantially all of its wholly-owned homebuilding subsidiaries. Such guarantees are full and unconditional. (See Note 14, “Supplemental Guarantor Information.”)

The senior and senior subordinated note and indenture agreements, as well as the unsecured revolving credit facility, contain numerous restrictive covenants. At March 31, 2006, the Company was in compliance with these covenants.

To finance land purchases, the Company may also use seller-financed non-recourse secured notes payable. At March 31, 2006, and December 31, 2005, outstanding seller-financed non-recourse notes payable were $41.9 million and $28.5 million, respectively.

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

Note 10.  Postretirement Benefits

The Company has supplemental nonqualified retirement plans, which vest over five-year periods beginning in 2003, pursuant to which the Company will pay supplemental pension benefits to key employees upon retirement.  In connection with these plans, the Company has purchased cost-recovery life insurance on the lives of certain employees.  Insurance contracts associated with the plans are held by trusts established as part of the plans to implement and carry out their provisions and finance their related benefits.  The trusts are owners and beneficiaries of such contracts.  The amount of coverage is designed to provide sufficient revenue to cover all costs of the plans if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized.  At March 31, 2006, and December 31, 2005, the cash surrender value of these contracts was $23.5 million and $19.2 million, respectively.  The net periodic benefit cost for these plans for the three months ended March 31, 2006, was $280,000 and included service costs of $886,000, interest costs of $214,000 and investment earnings of $820,000.  For the three months ended March 31, 2005, the net periodic benefit cost was $1.3 million and included service costs of $798,000, interest costs of $176,000 and investment losses of $301,000.   The $13.7 million and $12.6 million projected benefit obligations at March 31, 2006, and December 31, 2005, respectively, were equal to the net liability recognized in the balance sheet at those dates.  For the three months ended March 31, 2006 and 2005, the weighted-average discount rates used for the plans were 7.6 percent and 7.7 percent, respectively.

Note 11.  Stock-Based Compensation

The Ryland Group, Inc. 2005 Equity Incentive Plan (the “Plan”) permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, stock units or any combination of the foregoing to employees.  Stock options granted in accordance with the Plan generally have a maximum term of five years and vest in equal annual installments over three years. Outstanding stock options granted under previous plans generally have a maximum term of ten years and vest over three years.  At March 31, 2006, and December 31, 2005, stock options or other awards or units available for grant totaled 661,489 and 659,263, respectively.

The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan (the “Director Plan”) provides automatic grants of nonstatutory stock options to directors for the purchase of shares at prices not less than the fair market value of the shares at the date of grant.  Stock options fully vest, become exercisable six months after the date of grant and have a maximum term of ten years. Upon termination of service on the Board of Directors, all stock options become fully vested, immediately exercisable and expire three years after the date of termination, regardless of their stated expiration dates. At March 31, 2006, and December 31, 2005, there were 953,200 stock options available for grant.

All outstanding stock options and restricted stock awards have been granted in accordance with the terms of the Plan, the Director Plan and their respective predecessor plans, all of which were approved by the Company’s stockholders.  Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans).

Prior to January 1, 2006, the Company accounted for stock options granted in accordance with the Plan and the Director Plan by adhering to the provisions and related interpretation of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” as permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” as amended.  Therefore, except for costs related to restricted stock units, no stock-based employee compensation cost was recognized in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), “Share-Based Payment,” by using the modified-prospective transition method.  Under that transition method, compensation cost recognized in 2006 includes: ( a ) compensation cost for all share-based payments granted prior to January 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123; and ( b ) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

The fair value of each of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing formula, which requires input assumptions for the Company’s expected dividend yield, expected volatility, risk-free interest rate and expected option life.  Expected volatility is based upon the historical volatility of the Company’s common stock.  The expected dividend yield is based on an annual dividend rate of $0.48 per common share.  The risk-free interest rate for periods within the contractual life of the stock option award is based upon the zero-coupon U.S. Treasury bond on the date the stock option is granted, with a maturity equal to the expected option life of the stock option granted.  The expected option life is derived from historical experience under the Company’s share-based payment plans and represents the period of time that stock option awards granted are expected to be outstanding.

Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows.  SFAS 123(R) requires cash flows attributable to tax benefits resulting from tax deductions in excess of compensation cost recognized for those stock options (“excess tax benefits”) to be classified as financing cash flows.  Had the Company not adopted SFAS 123(R), the $6.6 million excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow.

Net earnings for the three months ended March 31, 2006, included $6.4 million, or $0.08 per diluted share of stock-based compensation expense, before income tax benefits of $2.4 million.  Stock-based compensation expenses have been allocated to the Company’s reportable segments and are reported within “Corporate,” “Financial services” and “Selling, general and administrative” expenses.

The following table illustrates the effect on net earnings and earnings per share had the Company applied the fair value recognition provisions of SFAS 123 to stock options granted under its equity-based compensation plans in the first quarter of 2005.  For purposes of this pro forma disclosure, the grant-date fair value of the Company’s stock options was estimated by using a Black-Scholes-Merton option-pricing formula and amortized to expense over the stock options’ vesting periods.

1. Amount represents the Company’s net stock-based compensation expense associated with restricted stock units.

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

No stock options were granted during the three months ended March 31, 2006 or 2005.   Accordingly, there is no information on the grant-date fair value for these periods.

A summary of stock option activity in accordance with the Company’s plans as of March 31, 2006, and changes for the three-month period then ended follows:

The total intrinsic value of stock options exercised during the quarters ended March 31, 2006 and 2005, was $17.3 million and $16.0 million, respectively.  The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

A summary of the Company’s nonvested options as of and for the three-month period ended March 31, 2006, follows:

As of March 31, 2006, there was $8.5 million of unrecognized compensation cost that related to nonvested stock option awards granted under the Company’s plans.  That cost is expected to be recognized over the next 2.3 years.

The Company has made several restricted stock awards to senior executives under the Plan and its predecessor plans.  Compensation expense recognized for such awards was $3.0 million and $5.2 million for the three months ended March 31, 2006 and 2005, respectively.

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At March 31, 2006, the outstanding restricted shares will vest as follows:  2006 – 44,336; 2007 – 138,328; 2008 – 84,336; 2009 – 40,000; and 2010 – 40,000.

Note 12.  Commitments and Contingencies

In the normal course of business, the Company acquires rights under option agreements to purchase land or lots for use in future homebuilding operations.  At March 31, 2006, it had related cash deposits and letters of credit outstanding of $181.2 million for land options pertaining to land purchase contracts with an aggregate purchase price of $2.1 billion.  At March 31, 2006, the Company had commitments with respect to option contracts having specific performance provisions of approximately $53.9 million, compared to $60.5 million at December 31, 2005.

As an on-site housing producer, the Company is often required by some municipalities to obtain development or performance bonds and letters of credit in support of its contractual obligations.  At March 31, 2006, total development bonds were $455.1 million, while total related deposits and letters of credit were $77.5 million.  In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; however, it does not expect that any currently outstanding bonds or letters of credit will be called.

At March 31, 2006, one of the joint ventures in which the Company participates had debt of $378.9 million.  In this joint venture, the Company and its partners provided guarantees of debt on a pro rata basis.  The Company had a 3.3 percent pro rata interest on the debt, or $12.6 million, at March 31, 2006, and a completion guarantee related to project development.  The guarantees apply if a partner defaults on its loan arrangement and the fair value of the collateral (land and improvements) is less than the loan balance.  In another of its joint ventures, the Company guaranteed up to 50.0 percent of a $55.0 million revolving credit facility.  At March 31, 2006, the actual borrowings against the revolving credit facility for this consolidated joint venture were $43.4 million, of which the Company guaranteed $21.7 million.

Interest rate lock commitments (IRLCs) represent loan commitments with customers at market rates generally up to 180 days before settlement.  At March 31, 2006, the Company had outstanding IRLCs totaling $268.0 million.  Hedging contracts are utilized to mitigate the risk associated with interest rate fluctuations on IRLCs.

In September 2005, the Company entered into a $150.0 million treasury lock at 4.1 percent that terminates on June 1, 2006, and a $100.0 million treasury lock at 4.2 percent that terminates on September 1, 2006, to facilitate the replacement of higher-rate senior and senior subordinated debt in 2006. These hedges were evaluated and deemed to be highly effective at the inception of the contracts. In accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities,” the Company accounted for the treasury locks as cash flow hedges and recorded an unrealized cumulative gain of $8.4 million, net of applicable taxes, resulting from changes in fair value in the consolidated balance sheets under “Accumulated other comprehensive income” in “Stockholders’ equity.”

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

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

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

The Company requires substantially all of its subcontractors to have general liability insurance (including construction defect coverage) and workmans compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. However, with fewer insurers participating, general liability insurance for the homebuilding industry has become more difficult to obtain over the past several years. As a result, Ryland Homes Insurance Company, a wholly-owned subsidiary of the Company, provides insurance services to the homebuilding segments’ subcontractors in certain markets.

Please refer to “Part II. Other Information, Item 1. Legal Proceedings” of this document for additional information regarding the Company’s commitments and contingencies.

Note 13.  New Accounting Pronouncements

SFAS 123(R) and SAB 107

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R), which is a revision of SFAS 123.  SFAS 123(R) supercedes APB No. 25 and amends FASB Statement No. 95, “Statement of Cash Flows.”  While generally similar in approach to its predecessor statement, SFAS 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values.  SFAS 123(R) permits public companies to adopt its requirements by using either the modified “prospective-transition” method, in which compensation cost is recognized beginning with the effective date ( a ) for all share-based payments granted after the effective date and ( b ) for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date, or by using the “modified-retrospective” method, which includes the requirements of the modified-prospective method described above and also permits entities to restate, based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures, either ( a ) all prior periods presented or ( b ) prior interim periods of the year of adoption.  SFAS 123(R) is effective for public companies at the beginning of the first interim or annual period beginning after December 15, 2005.  The Company implemented the provisions of SFAS 123(R) during the first quarter of 2006. Had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have been what is reported in the disclosure of pro forma net income and earnings per share in Note 11, “Stock-Based Compensation.”

SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow.  This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption.  (See Note 11, “Stock-Based Compensation.”)

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Notes to Consolidated Financial Statements (Unaudited)

The Ryland Group, Inc. and Subsidiaries

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

SFAS 154

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

FSP 109-1

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

Note 14.  Supplemental Guarantor Information

The Company’s obligations to pay principal, premium, if any, and interest under its $750.0 million unsecured revolving credit facility; 8.0 percent senior notes due August 2006; 5.4 percent senior notes due June 2008; 5.4 percent senior notes due May 2012; and 5.4 percent senior notes due January 2015 are guaranteed on a joint and several basis by substantially all of its 100 percent-owned homebuilding subsidiaries (the “Guarantor Subsidiaries”). Such guarantees are full and unconditional.

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

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

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