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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the transition period from ______________ to ______________.

Commission File Number: 1-8029

THE RYLAND GROUP, INC.

24025 Park Sorrento, Suite 400
Calabasas, California 91302
818.223.7500
(Address and telephone number of principal executive offices)

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.    [X]  Yes    [   ]  No

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of common stock of The Ryland Group, Inc., outstanding on November 7, 2002, was 25,661,243.

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THE RYLAND GROUP, INC.
FORM 10-Q
INDEX

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PART I.    FINANCIAL INFORMATION

THE RYLAND GROUP, INC. AND SUBSIDIARIES

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THE RYLAND GROUP, INC. AND SUBSIDIARIES

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THE RYLAND GROUP, INC. & SUBSIDIARIES

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THE RYLAND GROUP, INC. & 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.

The consolidated balance sheet as of September 30, 2002, the consolidated statements of earnings for the three and nine months ended September 30, 2002 and 2001, and the consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001, have been prepared by the Company without audit. In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows at September 30, 2002, 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 2001 annual report to its shareholders. Certain amounts in the consolidated statements have been reclassified to conform to the 2002 presentation.

Assets presented in the financial statements are net of any valuation allowances.

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the two-for-one stock split declared on April 24, 2002 (see Note 10).

The results of operations for the nine months ended September 30, 2002, are not necessarily indicative of the operating results for the full year.

Note 2.    Segment Information

Operations of the Company consist of two business segments: homebuilding and financial services. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing in 21 markets. The financial services segment provides mortgage-related products and services for Ryland Homes’ customers and also manages a declining investment portfolio. Corporate expenses represent the costs of corporate functions that support the business segments.

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Note 3.    Earnings Per Share Reconciliation

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

				Three months ended								Nine months ended
				September 30,								September 30,
				2002				2001				2002				2001
Numerator
	Net earnings			$	47,406			$	37,195			$	118,076			$	87,156
	Preferred stock dividends				—				—				—				(308	)
	Numerator for basic earnings per share — earnings available to common stockholders				47,406				37,195				118,076				86,848
	Effect of dilutive securities — preferred stock dividends				—				—				—				308
	Numerator for diluted earnings per share — earnings available to common stockholders			$	47,406			$	37,195			$	118,076			$	87,156
Denominator
	Denominator for basic earnings per share — weighted-average shares				26,310,515				26,831,956				26,721,346				26,760,254
	Effect of dilutive securities:
		Stock options			1,114,292				1,260,734				1,254,313				1,197,768
		Equity incentive plan			452,100				162,392				295,420				144,396
		Conversion of preferred shares			—				454,362				—				531,984
	Dilutive potential of common shares				1,566,392				1,877,488				1,549,733				1,874,148
	Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions				27,876,907				28,709,444				28,271,079				28,634,402
	Basic earnings per share			$	1.80			$	1.39			$	4.42			$	3.25
	Diluted earnings per share			$	1.70			$	1.30			$	4.18			$	3.04

Note 4.    Comprehensive Income

Comprehensive income consists of net income and the increase or decrease in unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $47.5 million and $37.4 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, comprehensive income was $118 million and $88.2 million, respectively.

Note 5.    Inventories

Inventories consist principally of homes under construction, land under development and improved lots. Inventories are stated at the lower of cost or fair value.

The following table is a summary of capitalized interest:

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Note. 6    Investments in Unconsolidated Joint Ventures

The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures, based in Atlanta, Dallas, Denver, Orlando and Phoenix, are engaged in the development of land. At September 30, 2002 and December 31, 2001, the Company’s investment in unconsolidated joint ventures amounted to $15.6 million and $20.1 million, respectively. For the three months ended September 30, 2002 and 2001, the Company’s equity in losses of the unconsolidated joint ventures was $0.07 million and $0.03 million, respectively. The Company’s equity in earnings of the unconsolidated joint ventures was $2.7 million for the nine months ended September 30, 2002, compared to $0.01 million for the same period in 2001.

The joint ventures finance land development investments through a variety of borrowing arrangements. The Company does not guarantee these financing arrangements. At September 30, 2002 and December 31, 2001, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $32.9 million and $22.6 million, respectively.

Note 7.    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 will perform impairment tests of its goodwill annually. The first of these tests performed by the Company, as of March 31, 2002, indicated no impairment.

The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in the first nine months of 2002. Results reported for the three and nine months ended September 30, 2001, included after-tax goodwill amortization expense of $0.3 million, or $0.01 per diluted share, and $0.8 million, or $0.03 per diluted share, respectively.

Note 8.    Financial Services Short-term Notes Payable

In March 2002, the Company amended a revolving credit facility used to finance mortgage-backed securities in the financial services segment. The facility, previously $45 million, was renewed at $35 million. The agreement, which was extended through March 2003, bears interest at market rates and is collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries. Borrowings outstanding under this facility were $24.9 million and $33.1 million at September 30, 2002 and December 31, 2001, respectively.

Note 9.    Long-term Debt

In August 2002, the Company entered into a three-year, unsecured, revolving credit facility with several banks to replace its credit facility that had been scheduled to mature in October 2003. The facility is guaranteed by substantially all of the Company’s subsidiaries other than its financial services subsidiaries. The new facility provides for revolving loans of up to $300 million, of which $150 million may be used for letters of credit. Available credit under the facility is subject to limitations based on percentages of sold and unsold construction in progress and completed units included in inventory and the amount of other senior, unsecured indebtedness. The new facility contains various operating and financial covenants that are substantially similar to the previous credit facility. Outstanding borrowings under the facility will bear interest at a fluctuating rate based upon LIBOR, Prime Rate or the Federal

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Funds Rate depending on the nature of the borrowing. See additional discussion in “Financial Condition and Liquidity.”

Note 10.    Stockholders’ Equity

On April 24, 2002, Ryland’s Board of Directors approved a two-for-one stock split of the Company’s common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock as of 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.

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the two-for-one stock split declared on April 24, 2002.

Cash dividends declared for the three and nine months ended September 30, 2002, were $0.02 and $0.06, respectively. Cash dividends declared for the three and nine months ended September 30, 2001, were $0.02 and $0.06, respectively.

Note 11.    Equity Incentive Plan

On April 24, 2002, the Company’s stockholders approved an equity incentive plan, The Ryland Group 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 1,300,000 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.

Note 12.    Commitments and Contingencies

Refer to Part II, Other Information, Item 1, Legal Proceedings of this document for updated information regarding the Company’s commitments and contingencies.

Note 13.    New Accounting Pronouncements

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 extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion 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, in the third quarter of 2002. As a result, $7.5 million of costs associated with the extinguishment of debt, previously classified as an extraordinary item, are currently included in homebuilding interest expense in the Consolidated Statement of Earnings for the three and nine months ended September 30, 2001.

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Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Three months ended September 30, 2002, compared to three months ended September 30, 2001

For the third quarter of 2002, the Company reported consolidated net earnings of $47.4 million, or $1.80 per share ($1.70 per diluted share), compared to consolidated net earnings of $37.2 million, or $1.39 per share ($1.30 per diluted share), for the third quarter of 2001. The third-quarter 2001 results reflect a reclassification to interest expense of a $7.5 million ($4.5 million net of tax) loss on the early extinguishment of long-term debt, in accordance with the Company’s adoption of Statement of Financial Accounting Standards No. 145. (See Note 13). This amount was previously reflected as an extraordinary item in 2001.

The homebuilding segment reported pretax earnings of $77.7 million for the third quarter of 2002, a $20.2 million, or 35.1 percent, increase over the $57.5 million reported for the third quarter of 2001. The increase over the prior year was primarily attributable to a rise in gross profit margins, lower interest expense and the $7.5 million loss associated with the early extinguishment of long-term debt in the third quarter of 2001.

The financial services segment reported pretax earnings of $12.5 million for the three months ended September 30, 2002, compared to $11.9 million for the same period in 2001. The increase for the third quarter over the same period in the prior year was primarily attributable to a 5.6 percent increase in loan sales volume and increased origination volume. The percentage of Ryland homebuyers who chose Ryland Mortgage Company to finance their new-home purchases was 83.3 percent for the third quarter of 2002, compared to 82 percent in the third quarter of 2001.

Corporate expenses represent the cost of corporate functions that support the business segments. Corporate expenses were $11.1 million for the third quarter of 2002, compared to $7.9 million for the third quarter of 2001. The rise in corporate expenses was primarily attributable to increased incentive compensation which was due, in part, to higher earnings.

Nine months ended September 30, 2002, compared to nine months ended September 30, 2001

Consolidated net earnings for the nine months ended September 30, 2002, were $118.1 million, or $4.42 per share ($4.18 per diluted share), compared to $87.2 million, or $3.25 per share ($3.04 per diluted share), for the same period in the prior year.

For the nine months ended September 30, 2002, the homebuilding segment reported pretax earnings of $192.9 million, compared to $140.9 million for the nine months ended September 30, 2001.

The financial services segment reported pretax earnings of $32.1 million for the nine months ended September 30, 2002, representing an increase of $8.2 million, or 34.3 percent, compared to $23.9 million for the same period last year.

Corporate expenses were $28.2 million for the first nine months of 2002, compared to $20.7 million for the first nine months of 2001. The $7.5 million rise in corporate expenses was primarily attributable to increased incentive compensation which was primarily due to higher earnings.

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The income tax amounts represented effective income tax rates of approximately 40 percent in 2002 and 39.5 percent in 2001. The effective income tax rate increased in 2002 due to an increase in non-deductible expenses.

HOMEBUILDING SEGMENT

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

($ amounts in thousands, except average closing price)

Three months ended September 30, 2002, compared to three months ended September 30, 2001

Homebuilding revenues rose $18.7 million to $713.9 million for the third quarter of 2002, compared to $695.2 million for the same period in the prior year. This was the result of a slight increase in average sales price from $207,000 for the quarter ended September 30, 2001, to $209,000 for the quarter ended September 30, 2002, as well as an increase in the number of closings, with 3,362 homes closed in the third quarter of 2002 versus 3,334 homes closed in the same quarter of the prior year. Homebuilding revenues for the third quarter of 2002 included $9.8 million from land sales, compared to revenues of $5.4 million for the third quarter of 2001, contributing net gains of $3 million and $0.5 million to pretax earnings in 2002 and 2001, respectively.

Gross profit margins from home sales averaged 20.9 percent for the third quarter of 2002, an increase from 20.2 percent for the third quarter of 2001. The increase is primarily attributable to reduced land and land development costs, lower direct construction costs and rising sales prices in certain areas.

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New orders for the third quarter of 2002 were 3,558, compared to 2,735 for the third quarter of 2001. The Company operated in 301 active communities as of September 30, 2002, compared to 265 active communities at September 30, 2001.

Outstanding contracts at September 30, 2002, were 6,687, versus 5,800 at September 30, 2001, and 4,577 at December 31, 2001. Outstanding contracts represent the Company’s backlog of homes sold but not yet closed, which are generally built and closed, subject to cancellation, over the subsequent two quarters. The value of outstanding contracts at September 30, 2002, was $1,452.4 million, an increase of 21.6 percent from September 30, 2001, and an increase of 58.4 percent from December 31, 2001.

Selling, general and administrative expenses, as a percentage of revenue, remained relatively constant at 9.8 percent for the three months ended September 30, 2002, compared to 9.9 percent for the same period in the prior year, due to lower litigation and model home lease expenses offset by increases in insurance costs and incentive compensation costs. Compared to the third quarter of 2001, interest expense decreased $11.3 million to $2.1 million in the third quarter of 2002. This was due to the $7.5 million charge, as reclassified, associated with the early extinguishment of long-term debt in third quarter 2001, as well as to reduced average long-term debt balances and a rise in capitalized interest resulting from increased development activity due to the higher number of new communities. These decreases were partially offset by a decline in interest earned on reduced average cash investments.

Pretax homebuilding margins increased 260 basis points to 10.9 percent for the three months ended September 30, 2002, compared to 8.3 percent for the same period in 2001.

Nine months ended September 30, 2002, compared to nine months ended September 30, 2001

For the nine months ended September 30, 2002, homebuilding revenues increased $25.3 million to $1,898.2 million, compared to $1,872.9 million for the nine months ended September 30, 2001. Homebuilding revenues for the nine months ended September 30, 2002 included revenues of $24.1 million from land sales, compared to revenues of $40.8 million for the nine months ended September 30, 2001, contributing net gains of $5.5 million and $0.9 million to pretax earnings, respectively.

Gross profit margins from home sales rose to 20.9 percent for the first nine months of 2002, versus 19 percent for the same period in 2001. Selling, general and administrative expenses, as a percentage of revenue, were 10.4 percent for the nine months ended September 30, 2002, compared to 10 percent for the same period in the prior year. Pretax homebuilding margins were 10.2 percent and 7.5 percent for the nine months ended September 30, 2002 and 2001, respectively.

New orders were 11,158 for the nine months ended September 30, 2002, compared to 10,484 for the nine months ended September 30, 2001. Closings were 9,048 for the nine months ended September 30, 2002, compared to 8,852 for the nine months ended September 30, 2001.

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FINANCIAL SERVICES

Results of operations of the Company’s financial services segment are summarized as follows: ($ amounts in thousands, except as indicated)