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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

The number of shares of common stock of The Ryland Group, Inc. outstanding on August 5, 2003, was 24,870,923.

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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

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP, INC. AND SUBSIDIARIES

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP, INC. & SUBSIDIARIES

See Notes to Consolidated Financial Statements.

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THE RYLAND GROUP, INC. & 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”), and other entities in which the Company is the primary beneficiary (see Note 12). Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2003 presentation.

The consolidated balance sheet as of June 30, 2003, the consolidated statements of earnings for the three and six months ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002, 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 June 30, 2003, 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 2002 annual report to its shareholders.

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

The results of operations for the three and six months ended June 30, 2003, are not necessarily indicative of the operating results for the year ended December 31, 2003.

Note 2. 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 26 markets. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The Company’s financial services segment provides loan origination; title, escrow and insurance brokerage services; and maintains a portfolio of mortgage-backed securities and notes receivable. “Corporate” is a non operating business segment whose sole purpose is to support 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 2002 annual report.

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

Note 3. Earnings Per Share Reconciliation

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

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 $54.0 million and $44.7 million for the three months ended June 30, 2003 and 2002, respectively. Comprehensive income for the six months ended June 30, 2003 and 2002 was $92.4 million and $70.6 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 (in thousands):

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, Phoenix and Washington, D.C., are

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

engaged in the development of land. At June 30, 2003 and December 31, 2002, the Company’s investment in its unconsolidated joint ventures amounted to $14.0 million and $14.9 million, respectively. The Company’s equity in earnings (losses) of the unconsolidated joint ventures was $39,000 and ($159,000) for the three- and six-month periods ended June 30, 2003, compared to equity in earnings of $2.7 million and $2.8 million for the same periods ended June 30, 2002, respectively. The aggregate assets of the unconsolidated joint ventures in which the Company participated were $57.3 million and $61.0 million at June 30, 2003 and December 31, 2002, respectively. At June 30, 2003 and December 31, 2002, the aggregate debt of the unconsolidated joint ventures in which the Company participated was $26.6 million and $31.9 million, respectively. The Company does not guarantee the debt of its unconsolidated joint ventures.

Note 7. Financial Services Short-term Notes Payable

In March 2003, the Company’s financial services segment renewed and extended a revolving credit facility used to finance mortgage investment portfolio securities. The facility, previously $35.0 million, was renewed for $25.0 million. The agreement matures in March 2004, 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 $18.7 million and $22.8 million at June 30, 2003 and December 31, 2002, respectively.

Note 8. Long-term Debt

In June 2003, the Company issued $150.0 million of 5.38 percent senior notes, which pay interest semiannually and will mature on June 1, 2008. In July 2003, the net proceeds from this offering were used to redeem all of the $100.0 million aggregate principal from the Company’s 8.25 percent senior subordinated notes due April 1, 2008. The remaining proceeds will be used for general corporate purposes.

Note 9. Postretirement Benefits

The Company has a supplemental, nonqualified retirement plan (“the Plan”) which vests over a five-year period beginning January 1, 2003, pursuant to which the Company will pay supplemental pension benefits to a key employee upon retirement. In connection with the Plan, the Company has purchased cost-recovery life insurance on the lives of certain employees. Insurance contracts associated with the Plan are held by a trust, established as part of the Plan to implement and carry out its provisions and finance its benefits. The trust is the owner and beneficiary of such contracts. The amount of coverage is designed to provide sufficient revenue to cover all costs of the Plan if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. At June 30, 2003, the cash surrender value of these contracts was $3.7 million. The net periodic benefit cost for the Plan for the three months ended June 30, 2003, which included service costs of $709,000 and interest costs of $57,000, totaled $766,000. For the six months ended June 30, 2003, the net periodic benefit cost was $1.4 million and included service costs of $1.3 million and interest costs of $101,000. The $1.4 million projected benefit obligation at June 30, 2003 was equal to the net liability recognized in the balance sheet at that date. For the six-month period ended June 30, 2003, the weighted-average discount rate used for the Plan was 8.0 percent.

Note 10. Stock-based Compensation

The Company has elected to follow the intrinsic value method to account for compensation expense 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 by Statement of Financial Accounting Standards No. 148. Since stock option awards are

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

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 awards, consistent with the provisions of SFAS 123, the Company’s net earnings and earnings per share in the first six months of 2003 and 2002, 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 following weighted-average assumptions were used for grants during the first six months of 2003 and 2002, respectively: a risk-free interest rate of 2.0 percent and 4.2 percent; an expected volatility factor for the market price of the Company’s common stock of 37.4 percent and 36.7 percent; a dividend yield of 0.2 percent; and an expected life of three years. The weighted-average fair values at the grant date for options granted during the six months ended June 30, 2003 and 2002, were $11.83 and $13.66, respectively.

Note 11. Commitments and Contingencies

In the normal course of business, the Company acquires rights under option agreements to purchase land for use in future homebuilding operations. At June 30, 2003, the Company had related deposits and letters of credit outstanding of $65.5 million for land options and land purchase contacts having a total purchase price of $1,084.3 million. At June 30, 2003, the Company had commitments with respect to option contracts containing specific performance provisions of approximately $70.6 million, compared to $68.0 million at December 31, 2002.

As an on-site housing producer, the Company is often required to obtain bonds and letters of credit in support of its contractual obligations. Some municipalities require the Company to obtain development bonds or letters of credit to assure completion of public facilities within a project. At June 30, 2003, total development bonds were $288.7 million and total related deposits and letters of credit were $49.4 million. In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; however, the Company does not expect that any currently outstanding bonds or letters of credit will be called.

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

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” In accordance with the provisions of FIN 45, the Company adopted its disclosure provisions on December 31, 2002. The adoption of FIN 45 did not have a material effect on the Company’s financial position or results of operations.

The Company provides its customers with 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 on historical experience and known risks at the time a home closes. In the case of unexpected claims, these liabilities are based upon identification and quantification of the obligations. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the accruals as necessary.

Changes in the Company’s warranty reserve 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 12. New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of 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 variable interest and is not the primary beneficiary.

The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003. For VIEs created before January 31, 2003, the consolidation requirements apply in the first fiscal year or interim period beginning after June 15, 2003, (the Company’s quarter ending September 30, 2003). Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established.

As mentioned in Note 6, the Company routinely enters into joint ventures for the purpose of developing land. The Company’s investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. 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 will fund 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 result in the creation of a variable interest with a VIE holding the land parcel under option.

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

Using the framework outlined in FIN 46, the Company evaluated both the joint venture agreement and option contracts entered into after January 31, 2003. The Company’s investment in a new unconsolidated joint venture was not deemed to be a variable interest in a VIE and, therefore, was not required to be consolidated. Based on its evaluation, the Company determined that, in certain cases, it had the primary variable interest in the VIEs subject to the lot option contracts. While the Company did not have legal title to or guarantee the seller’s debt associated with the optioned land, under FIN 46 it had the primary variable interest and was required to consolidate the VIE’s assets under option at fair value. The effect of the consolidation was an increase of $7.4 million to consolidated inventory not owned with a $2.1 million increase to liabilities associated with consolidated inventory not owned in the Company’s June 30, 2003, consolidated balance sheet. The equity interests of the VIEs not owned by the Company are reported as minority interest in the accompanying financial statements. Additionally, to reflect the fair value of the inventory consolidated under FIN 46, the Company eliminated $1.3 million of its related option deposits, which are included in consolidated inventory not owned. At June 30, 2003, the Company had cash deposits of $1.3 million, representing our maximum exposure to loss, relating to lot option contracts that were consolidated.

At June 30, 2003, the Company’s maximum exposure to loss, with regard to unconsolidated partnerships, was its recorded investment in these partnerships, which totaled $14.0 million. Additionally, at June 30, 2003, the Company had cash deposits and/or letters of credit of $7.8 million associated with lot option purchase contracts with an aggregate purchase price of $242.3 million relating to VIEs in which it did not have the VIE’s primary variable interest.

The Company is currently in the process of evaluating its remaining investments in unconsolidated joint ventures and option contracts that may be deemed VIEs under the auspices of FIN 46 and does not expect the full adoption of FIN 46 to have a material impact on its financial condition or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133. This statement is effective for contracts entered into or modified after June 30, 2003. Management does not believe that the implementation of SFAS 149 will have a material impact on the Company’s financial condition or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the start of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Management does not believe that the implementation of SFAS 150 will have a material impact on the Company’s financial condition or results of operations.

Note 13. Subsequent Events

In July 2003, the Company redeemed the $100.0 million aggregate principal of its 8.25 percent senior subordinated notes due April 1, 2008, at a stated call price of 104.125 percent of the principal amount. As a result, the Company will recognize a loss on the early extinguishment of debt in the amount of $5.1 million in the third quarter of 2003.

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

Additionally, in July 2003, the Company amended its unsecured revolving credit facility, which is used to finance increases in its homebuilding inventory and working capital. The amendment increased the facility’s borrowing capacity to $400.0 million from $300.0 million per the terms of the original agreement. Borrowings under this agreement bear interest at variable short-term rates. There were no outstanding borrowings under this agreement at June 30, 2003 or December 31, 2002.

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

Note: Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on various factors and assumptions that include such risks and uncertainties as the completion and profitability of sales reported; the market for homes generally and in areas where the Company operates; the availability and cost of land; changes in economic conditions and interest rates; the availability and increases in raw material and labor costs; consumer confidence; government regulations; and general competitive factors, all or each of which may cause actual results to differ materially.

RESULTS OF OPERATIONS

Three months ended June 30, 2003, compared to three months ended June 30, 2002

The Company reported consolidated net earnings of $54.0 million, or $2.03 per diluted share, for the second quarter of 2003, compared to consolidated net earnings of $44.7 million, or $1.56 per diluted share, for the second quarter of 2002. This net earnings increase resulted from higher volume and increased profitability for the homebuilding and financial services operations.

The Company’s revenues reached $840.0 million for the second quarter of 2003, up 24.4 percent from $675.4 million for the second quarter of 2002. Both housing and mortgage-banking revenues rose during the second quarter of 2003.

Six months ended June 30, 2003, compared to six months ended June 30, 2002

The Company reported consolidated net earnings of $92.2 million, or $3.46 per diluted share, for the first six months of 2003, compared to consolidated net earnings of $70.7 million, or $2.48 per diluted share, for the six months ended June 30, 2002. This net earnings increase resulted from higher volume and increased profitability for our homebuilding and financial services operations.

The Company’s revenues reached $1,499.7 million for the six months ended June 30, 2003, up 23.5 percent from $1,214.7 million for the same period in 2002. Both housing and mortgage-banking revenues rose during the first six months of 2003.

Cash and unused borrowing capacity for the homebuilding segment totaled $528.2 million at June 30, 2003, versus $480.1 million at December 31, 2002, primarily as a result of the issuance of $150.0 million of 5.38 percent senior notes in June 2003 prior to the redemption of the 8.25 percent senior subordinated notes. Consolidated inventories owned by the Company which includes homes under construction and land under development and improved lots, grew 12.7 percent to $1,240.2 million. Stockholders’ equity increased 8.7 percent, or $59.4 million, during the first six months of 2003.

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

HOMEBUILDING

New orders rose 21.2 percent and 17.3 percent during the second quarter and first six months of 2003, respectively, compared to the same periods in the prior year. The number of active communities at June 30, 2003, was 330, an increase of 11.9 percent from June 30, 2002. New orders for the three months ended June 30, 2003, increased 25.0 percent in the North, 8.3 percent in Texas, 22.5 percent in the Southeast and 30.1 percent in the West.