Ryland 1998 Annual Report

THE RYLAND GROUP, INC. & SUBSIDIARIES

Notes to Consolidated Financial Statements

(amounts in thousands, except share data, in all notes unless otherwise noted)

NOTE G: FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company's financial instruments, both on and off the balance sheet, are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using present value or other valuation techniques. Estimated fair values are significantly affected by the assumptions used, including the discount rate and estimates of cash flows. In that regard, the derived fair-value estimates can not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

The table below sets forth the carrying values and fair values of the Company's financial instruments, except for those financial instruments noted below for which the carrying values approximate fair values at the end of the year. It excludes non-financial instruments and, accordingly, the aggregate fair-value amounts presented do not represent the underlying value of the Company.

The Company used the following methods and assumptions in estimating fair values:

Cash and cash equivalents, secured notes payable, loan servicing receivables, funds held by trustee and short-term notes payable: The carrying amounts reported in the balance sheet approximate fair values.

Senior notes, senior subordinated notes, mortgage loans held-for-sale, mortgage-backed securities, notes receivable and whole loans, the various hedging contracts if settled on December 31, 1998 and 1997 and mortgage loan commitments: The fair values of these financial instruments are estimated based on quoted market prices for similar financial instruments.