UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2005

or

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

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

Not Applicable

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. þ Yes   o No

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

The number of shares of common stock of The Ryland Group, Inc. outstanding on April 29, 2005, was 47,105,459.

THE RYLAND GROUP, INC.
FORM 10-Q
INDEX

2

PART I. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

See Notes to Consolidated Financial Statements.

3

CONSOLIDATED BALANCE SHEETS
The Ryland Group, Inc. and subsidiaries
(in thousands, except share data)

See Notes to Consolidated Financial Statements.

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
The Ryland Group, Inc. and subsidiaries
(in thousands)

See Notes to Consolidated Financial Statements.

5

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)
The Ryland Group, Inc. and subsidiaries
(in thousands, except share data)

6

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 2005 presentation.

The consolidated balance sheet at March 31, 2005, the consolidated statements of earnings for the three months ended March 31, 2005 and 2004, and the consolidated statements of cash flows for the three months ended March 31, 2005 and 2004, 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, 2005, 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 2004 annual report to its stockholders.

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, 2005, are not necessarily indicative of the operating results expected for the year ended December 31, 2005.

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. Comprehensive income totaled $62.7 million and $52.4 million for the three months ended March 31, 2005 and 2004, respectively.

Note 3. 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 27 markets. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing. Its financial services segment provides loan origination; title, escrow and insurance brokerage services; and maintains a portfolio of mortgage-backed securities and notes receivable.

7

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Corporate is a nonoperating business segment with the sole purpose of supporting operations. Certain corporate expenses are allocated to the homebuilding and financial services 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 A of the Company’s 2004 Annual Report.

Note 4. Earnings Per Share Reconciliation

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

At March 31, 2005, all options were included in the diluted earnings per share calculation. Options to purchase 220,000 shares of common stock at various prices were outstanding at March 31, 2004, but were not included in the computation of diluted earnings per share for the three months ended March 31, 2004, because the exercise prices were greater than the average market price of the shares, and, therefore, their effect would have been antidilutive.

Note 5. Inventories

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 (in thousands):

8

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 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, 2005 or 2004.

The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in 2005 and 2004.

Note 7. Variable Interest Entities

FIN 46 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 routinely enters into joint ventures 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 with a VIE holding the land parcel under option.

In accordance with the provisions of FIN 46, the Company consolidated $209.6 million of inventory not owned at March 31, 2005, $173.7 million of which pertained to lot option contracts and $35.9 million of which pertained to three of the Company’s homebuilding joint ventures (see Note 8). 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 $16.3 million of its related cash deposits for lot option contracts, which are included in consolidated inventory not owned. Minority interest totaling $157.4 million was recorded with respect to the consolidation of these contracts, representing the selling entities’ ownership interests in these VIEs. At March 31, 2005, the Company had cash deposits and letters of credit totaling $23.6 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, 2005, the Company had cash deposits and/or letters of credit totaling $74.5 million which 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.

9

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8. Investments in Joint Ventures

The Company routinely enters into joint ventures for the purpose of acquisition and co-development of land parcels and lots. Currently, the Company participates in homebuilding joint ventures in the Atlanta, Chicago, Dallas, Denver, Las Vegas, Orlando, Phoenix and Washington, D.C., markets. The Company participates in a number of joint ventures in which it has less than a controlling interest. At March 31, 2005, and December 31, 2004, the Company’s investment in its unconsolidated joint ventures amounted to $8.7 million and $2.5 million, respectively. 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 earnings of its unconsolidated joint ventures totaled $99,000 for the three-month period ended March 31, 2005, compared to losses of $14,000 for the three-month period ended March 31, 2004. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $115.7 million and $10.3 million at March 31, 2005, and December 31, 2004, respectively. At December 31, 2004, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $3.6 million. These unconsolidated joint ventures did not have any debt at March 31, 2005. The Company did not guarantee the debt of its unconsolidated joint ventures.

At March 31, 2005, 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 losses of $5,000 for the three-month period ended March 31, 2005. Total assets of $36.3 million, including consolidated inventory not owned (see Note 7), total liabilities of $18.3 million and minority interest of $10.0 million were consolidated.

Note 9. Debt

In January 2005, the Company sold the $250.0 million aggregate principal amount of its 5.4 percent senior notes due January 2015. Commencing on July 15, 2005, the Company will pay interest semiannually in arrears on January 15 and July 15 of each year. The notes will mature on January 15, 2015, and may be redeemed at a stated redemption price, in whole or in part, prior to their maturity.

Additionally, at March 31, 2005, the Company had (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; and (c) $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.

At March 31, 2005, 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 June 2004, the Company executed an agreement for a new $500.0 million unsecured revolving credit facility. The agreement, maturing in June 2009, contains an accordion feature under which the aggregate commitment may be increased up to $650.0 million, subject to the availability of additional commitments. Borrowings under this agreement bear interest at variable short-term rates. In addition to the stated interest rates, the agreement requires the Company to pay certain fees. The Company used its unsecured

10

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

revolving credit facility to finance increases in its homebuilding inventory and working capital. There were no outstanding borrowings under this agreement at March 31, 2005, and December 31, 2004. Under this facility, the Company had letters of credit outstanding which totaled $136.3 million at March 31, 2005, and $131.3 million at December 31, 2004. Unused borrowing capacity under this facility was $363.7 million and $368.7 million at March 31, 2005, and December 31, 2004, respectively.

The Company’s obligations to pay principal, premium, if any, and interest under its $500.0 million unsecured revolving credit facility; 8.0 percent senior notes due August 2006; 5.4 percent senior notes due June 2008; 9.8 percent senior notes due September 2010; 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 (the “Guarantor Subsidiaries”). Such guarantees are full and unconditional.

The senior and senior subordinated note and indenture agreements, as well as the unsecured revolving credit facility, contain numerous restrictive covenants. At March 31, 2005, the Company was in compliance with these covenants.

In 2005, the Company’s financial services segment reduced and extended a revolving credit facility used to finance mortgage investment portfolio securities. The facility, previously $15.0 million, was renewed for $10.0 million. The agreement matures in March 2006 and bears interest at market rates. Borrowings outstanding under this facility totaling $9.7 million and $10.5 million at March 31, 2005, and December 31, 2004, respectively, were collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries.

To finance land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At March 31, 2005, and December 31, 2004, outstanding seller-financed nonrecourse notes payable were $22.9 million and $8.0 million, respectively.

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, 2005, and December 31, 2004, the cash surrender value of these contracts was $16.2 million and $13.0 million, respectively. The net periodic benefit cost for these plans for the three months ended March 31, 2005, was $1.3 million and included service costs of $798,000, interest costs of $176,000 and investment losses of $301,000. For the three months ended March 31, 2004, the net periodic benefit cost was $511,000 and included service costs of $783,000, interest costs of $113,000 and investment earnings of $385,000. The $10.4 million and $9.4 million projected benefit obligations at March 31, 2005, and December 31, 2004, respectively, were equal to the net liability recognized in the balance sheet at those dates. For the three-month periods ended March 31, 2005 and 2004, the weighted-average discount rate used for the plans was 7.7 percent.

11

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11. 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. Had compensation expense been determined based on fair value at the grant date for stock option awards, consistent with the provisions of SFAS 123, the Company’s net earnings and earnings per share in the first three months of 2005 and 2004 would have been reduced to the pro forma amounts indicated in the following table (in thousands, except share data):

The fair value of each option grant is estimated on the grant date by using the Black-Scholes option-pricing model. The Company did not grant stock options during the quarter ended March 31, 2005. The following weighted-average assumptions were used for grants during the first three months of 2004: a risk-free interest rate of 2.2 percent; an expected volatility factor for the market price of the Company’s common stock of 38.5 percent; a dividend yield of 0.5 percent; and an expected life of three years. The weighted-average fair value at the grant date for options granted during the three-month period ended March 31, 2004, was $11.03.

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, 2005, it had related cash deposits and letters of credit outstanding of $140.7 million for land options and land purchase contracts having a total purchase price of $2.1 billion. At March 31, 2005, the Company had commitments with respect to option contracts having specific performance provisions of approximately $82.3 million, compared to $117.2 million at December 31, 2004.

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, 2005, total development bonds were $339.3 million, while total related deposits and letters of

12

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

credit were $82.6 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.

Interest rate lock commitments (IRLCs) represent loan commitments with customers at market rates generally up to 180 days before settlement. At March 31, 2005, the Company had outstanding IRLCs totaling $151.5 million. Hedging contracts are entered into to mitigate the risk associated with interest rate fluctuations on IRLCs.

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

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

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)
In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), which is a revision of SFAS 123. SFAS 123(R) supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” 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 using either the “modified prospective” 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 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 January 1, 2006. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options.

13

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company will implement the provisions of SFAS 123(R) the first quarter of 2006, which will have an impact on its statements of earnings but is not expected to have a material impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 11 to the Consolidated Financial Statements. 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 will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $3.9 million and $4.0 million at March 31, 2005 and 2004, respectively.

In March 2005, the SEC released Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment.” SAB 107 provides 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.

Note 14. Supplemental Guarantor Information

The Company’s obligations to pay principal, premium, if any, and interest under its $500.0 million unsecured revolving credit facility; 8.0 percent senior notes due August 2006; 5.4 percent senior notes due June 2008; 9.8 percent senior notes due September 2010; 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 (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 of 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 its subsidiaries.

14

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATING STATEMENT OF EARNINGS

CONSOLIDATING STATEMENT OF EARNINGS

15

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATING BALANCE SHEET

CONSOLIDATING BALANCE SHEET

16

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

17

THE RYLAND GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 15. Subsequent Events

On May 2, 2005, the Company priced $250.0 million aggregate principal amount of 5.4 percent senior notes due 2012 and intends to close the debt financing on May 9, 2005. Upon closing, the Company will receive proceeds of approximately $248.1 million from this offering, before certain administrative expenses. The Company expects to use a portion of the net proceeds to redeem all of its 9.8 percent senior notes due September 2010 in September 2005, and the remainder of the net proceeds will be used for general corporate purposes. The Company will pay interest semiannually in arrears on May 15 and November 15 of each year, commencing on November 15, 2005. The notes will mature on May 15, 2012, and may be redeemed, in whole or in part, prior to their maturity at a stated redemption price. Additionally, the notes will be subject to certain restrictions which include, among other things, additional secured debt; obligations upon change of control; sale of assets; and sale and leaseback of assets. Payment of principal and interest on the notes will be guaranteed, jointly and severally, by substantially all of the Company’s direct and indirect wholly-owned homebuilding subsidiaries. The guarantees will rank equally with all other unsecured and unsubordinated indebtedness of such subsidiaries.

18

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

Note: Certain statements in this quarterly report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may qualify for the safe harbor provided for in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company’s expectations and beliefs concerning future events, and no assurance can be given that the results described in this quarterly report will be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “likely,” “may,” “plan,” “project,” “should,” “target,” “will” or other similar words or phrases. All forward-looking statements contained herein are based upon information available to the Company on the date of this quarterly report. Except as may be required under applicable law, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. The factors and assumptions upon which any forward-looking statements herein are based are subject to risks and uncertainties which include, among others:

•	economic changes nationally or in the Company’s local markets, including volatility in interest rates, inflation, changes in consumer confidence levels and the state of the market for homes in general;
•	the availability and cost of land;
•	increased land development costs on projects under development;
•	shortages of skilled labor or raw materials used in the production of houses;
•	increased prices for labor, land and raw materials used in the production of houses;
•	increased competition;
•	failure to anticipate or react to changing consumer preferences in home design;
•	delays in land development or home construction resulting from adverse weather conditions;
•	potential delays or increased costs in obtaining necessary permits as a result of changes to laws, regulations or governmental policies (including those that affect zoning, density, building standards and the environment);
•	delays in obtaining approvals from applicable regulatory agencies and others in connection with the Company’s communities and land activities; and
•	other factors over which the Company has little or no control.

19

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

RESULTS OF OPERATIONS

Overview

The Company reported consolidated net earnings of $62.7 million, or $1.25 per diluted share, for the first quarter of 2005, compared to consolidated net earnings of $52.4 million, or $1.03 per diluted share, for the first quarter of 2004. This rise in net earnings was a result of higher revenues and increased profitability.

The Company’s revenues reached $874.0 million for the first quarter of 2005, up 15.8 percent from $754.6 million for the first quarter of 2004. This increase was primarily attributable to higher average closing prices, increased closing volume and a rise in design-option revenues.

The value of outstanding sales contracts rose 32.8 percent at March 31, 2005, compared to March 31, 2004, and the average price of outstanding contracts at $280,000 continued to increase.

Cash generated from operations has been reinvested to fund the Company’s future growth. Consolidated inventories owned by the Company, which include homes under construction, land under development and improved lots, grew 12.3 percent to $2.1 billion at March 31, 2005, compared to $1.9 billion at December 31, 2004, primarily due to an increase in backlog and related construction activities. Land under development increased by 8.3 percent during the first quarter of 2005, compared to December 31, 2004, while the number of lots under the Company’s control increased to 81,507, or 17.3 percent, compared to March 31, 2004.

The Company continued to repurchase stock, acquiring 485,000 shares during the first quarter of 2005. During the first three months of 2005, $250.0 million of debt was issued to fund near term growth while stockholders’ equity grew by $46.3 million and as a result, leverage increased. The Company’s debt-to-capital ratio increased from 34.6 percent at December 31, 2004 to 42.7 percent at March 31, 2005.

20

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

Homebuilding

New orders rose 2.7 percent during the first quarter of 2005, compared to the same period in the prior year. New orders for the three months ended March 31, 2005, increased 16.2 percent in the West and 4.9 percent in the Southeast but decreased 6.6 percent in the North and 2.1 percent in Texas, compared to the first quarter of 2004. The number of active communities at March 31, 2005, was 372, compared to 306 active communities at March 31, 2004.

At March 31, 2005, the Company had outstanding contracts for 9,584 units, representing a 23.3 percent increase over its outstanding contracts at March 31, 2004. 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 value of outstanding contracts at March 31, 2005, was $2.7 billion, an increase of 32.8 percent from March 31, 2004, due to a rise in the number of outstanding contracts and a 7.7 percent increase in average price. Average sales price increased, in part, from a change in mix that was weighted toward higher-priced markets.

21

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

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

Three months ended March 31, 2005, compared to three months ended March 31, 2004

The homebuilding segment reported pretax earnings of $107.3 million for the first quarter of 2005, compared to $85.9 million for the same period in the prior year. Homebuilding results for the first quarter of 2005 rose from 2004, primarily due to higher revenues and increased profitability.

Homebuilding revenues increased $120.3 million for the first quarter of 2005, compared to 2004, primarily due to a 12.0 percent increase in the average closing price of a home, as well as an increase in volume.

Consistent with its policy of managing land investments according to return and risk targets, the Company executed several land sales during the first quarter of 2005. Homebuilding revenues for the first quarter of 2005 included $8.5 million from land sales, compared to $3.8 million for the first quarter of 2004, which contributed net gains of $0.6 million and $0.4 million to pretax earnings in 2005 and 2004, respectively.

Gross profit margins from home sales averaged 23.2 percent for the first quarter of 2005, compared to 22.3 percent for the first quarter of 2004. This improvement was primarily due to sales prices rising at a greater rate than costs and a change in closing volume mix, with an increased percentage of closings coming from higher margin markets during the first quarter of 2005.

Selling, general and administrative expenses, as a percentage of revenue, were 10.5 percent for the three months ended March 31, 2005, compared to 10.6 percent for the same period in the prior year.

The Company capitalized all interest incurred during the first quarter of 2005 and 2004 due to increased development activity.

22

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

Financial Services

For the three months ended March 31, 2005, the financial services segment reported pretax earnings of $8.4 million, compared to $10.3 million for the same period in 2004. The decrease was primarily attributable to reduced gains on the sale of mortgages and loan servicing rights, which resulted from an increase in less profitable adjustable-rate mortgage product and a more competitive marketplace, and partially offset by a rise in mortgage origination dollars.

STATEMENTS OF EARNINGS (unaudited)