From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Quarterly Report on Form 10-Q, or statements made by its officers or directors that are not based on historical facts and which may be forward-looking in nature. Under the Private Securities Litigation Reform Act of 1995, a "safe harbor" may be provided to us for certain of these forward-looking statements. Words such as "outlook," "believes," "expects," "appears," "may," "will," "should," "anticipates" or the negative thereof or comparable terminology, are intended to identify such forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and are based on our current expectations and projections concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those more specifically described in our Annual Report on Form 10-K under "Item 1A. Risk Factors." Granite undertakes no obligation to publicly revise or update any forward-looking statements for any reason. As a result, the reader is cautioned not to rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

Overview

We are one of the largest heavy civil contractors in the United States and are engaged in the construction and improvement of streets, roads, highways and bridges as well as dams, airport infrastructure, mass transit facilities and other infrastructure-related projects. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.

Our construction contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period. We have three reportable business segments: Granite West, Granite East and Granite Land Company (see Note 13 to the condensed consolidated financial statements).

The two primary economic drivers of our business are (1) the overall health of the economy and (2) federal, state and local public funding levels, both nationally and locally. The level of demand for our services will have a direct correlation to these drivers. For example, a weak economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for fewer private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce revenue growth and/or increase pressure on gross profit margins. A weak economy also tends to produce less tax revenue, thereby decreasing the funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, which are not as directly impacted by a weak economy. However, even these funds can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have the effect of reducing consumption, resulting in lower tax revenue. Conversely, higher public funding and/or a robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.

Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing and other variable compensation, as well as other costs to support our business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs may also vary depending on the number of projects in process in a particular area and the corresponding level of estimating activity. For example, as large projects are completed or if the level of work slows down in a particular area, we will often re-assign project employees to estimating and bidding activities until another project gets underway, temporarily allocating their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the stock. Depending on the mix of cash and restricted stock, these incentives can have the effect of increasing general and administrative expenses in very profitable years and decreasing expenses in less profitable years.

Results of Operations

Comparative Financial Summary             Three Months Ended June 30,           Six Months Ended June 30,
(in thousands)                              2008               2007                2008            2007
Revenue                                 $     694,332     $      770,876      $    1,149,132    $ 1,258,536
Gross profit                                  109,026            127,634             207,720        175,670
General and administrative expenses            65,760             65,130             126,411        119,467
Operating income                               45,421             66,850              83,865         61,262
Other income, net                               1,247              3,949              10,548          9,824
Minority interest                              (7,969 )           (4,799 )           (30,464 )       (7,246 )
Net income                                     25,618             43,846              38,741         41,597

Our results of operations for the three and six months ended June 30, 2008 reflect the impact of a difficult economic environment on several of our Granite West locations and a continuation of profitability improvement in Granite East, which also had the effect of increasing minority interest for our partners' share of more profitable project work. Additionally, our gross profit for the three months ended June 30, 2008 included a $4.5 million impairment charge related to our Granite Land Company business segment.

Total Revenue                Three Months Ended June 30,                       Six Months Ended June 30,
(in thousands)               2008                   2007                     2008                     2007
Revenue by Division:
Granite West           $ 517,463    74.5 %    $ 542,447    70.4 %     $   757,465    65.9 %    $   840,541    66.8 %
Granite East             170,769    24.6        218,028    28.3           384,894    33.5          402,677    32.0
Granite Land Company       6,100     0.9         10,401     1.3             6,773     0.6           15,318     1.2
Total                  $ 694,332   100.0 %    $ 770,876   100.0 %     $ 1,149,132   100.0 %    $ 1,258,536   100.0 %

Granite West Revenue         Three Months Ended June 30,                     Six Months Ended June 30,
(in thousands)               2008                   2007                    2008                   2007
California:
Public sector          $ 159,208    61.4 %    $ 181,884    61.1 %     $ 231,878    58.3 %    $ 275,545    57.6 %
Private sector            29,153    11.2         54,483    18.3          59,117    14.9         96,240    20.1
Material sales            71,149    27.4         61,134    20.6         106,588    26.8        106,275    22.3
Total                  $ 259,510   100.0 %    $ 297,501   100.0 %     $ 397,583   100.0 %    $ 478,060   100.0 %
West (excluding
California):
Public sector          $ 190,086    73.7 %    $ 148,789    60.7 %     $ 261,256    72.6 %    $ 212,890    58.7 %
Private sector            31,727    12.3         57,200    23.4          46,371    12.9         89,664    24.7
Material sales            36,140    14.0         38,957    15.9          52,255    14.5         59,927    16.6
Total                  $ 257,953   100.0 %    $ 244,946   100.0 %     $ 359,882   100.0 %    $ 362,481   100.0 %
Total Granite West
Revenue:
Public sector          $ 349,294    67.5 %    $ 330,673    61.0 %     $ 493,134    65.1 %    $ 488,435    58.1 %
Private sector            60,880    11.8        111,683    20.6         105,488    13.9        185,904    22.1
Material sales           107,289    20.7        100,091    18.4         158,843    21.0        166,202    19.8
Total                  $ 517,463   100.0 %    $ 542,447   100.0 %     $ 757,465   100.0 %    $ 840,541   100.0 %

Granite West Revenue: Revenue from Granite West for the three and six months ended June 30, 2008 decreased by $25.0 million, or 4.6%, and $83.1 million, or 9.9%, respectively, over the corresponding 2007 periods. The decreases were primarily attributable to the ongoing contraction of residential construction and tighter credit markets which is driving a decline in our private sector revenue. Additionally, there was an indirect impact on public sector revenue, as many competitors have migrated from the increasingly scarce private sector work. These economic factors have had a larger impact on our revenue in California, which has generally been the most negatively impacted by the decline in the residential and credit markets. Granite West revenue outside of California increased by $13.0 million, or 5.3%, for the three months ended June 30, 2008 over the corresponding 2007 period, driven by a $41.3 million increase in public sector revenue, partially offset by lower private sector revenue. Granite West revenue included amounts from projects with a contract value greater than $50.0 million of approximately $69.1 million and $50.0 million in the three months ended June 30, 2008 and 2007, respectively, and $99.3 million and $80.8 million in the six months ended June 30, 2008 and 2007, respectively.

Granite East Revenue         Three Months Ended June 30,                      Six Months Ended June 30,
(in thousands)               2008                   2007                    2008                    2007
Revenue by
Geographic Area:
Midwest                $  43,457    25.4 %    $  26,594    12.2 %     $  83,814    21.7 %    $   42,753    10.6 %
Northeast                 35,624    20.9         57,270    26.3          72,043    18.7          98,252    24.4
South                     34,510    20.2         36,448    16.7          64,095    16.7          72,265    17.9
Southeast                 52,443    30.7         79,688    36.5         123,452    32.1         158,357    39.3
West                       4,735     2.8         18,028     8.3          41,490    10.8          31,050     7.8
Total                  $ 170,769   100.0 %    $ 218,028   100.0 %     $ 384,894   100.0 %    $  402,677   100.0 %
Revenue by Contract
Type:
Fixed unit price       $  15,567     9.1 %    $  39,365    18.1 %     $  34,469     9.0 %    $   72,732    18.1 %
Fixed price,
including
design/build             155,202    90.9        178,663    81.9         350,425    91.0         329,945    81.9
Total                  $ 170,769   100.0 %    $ 218,028   100.0 %     $ 384,894   100.0 %    $  402,677   100.0 %

Granite East Revenue: Revenue from Granite East for the three and six months ended June 30, 2008 decreased by $47.3 million, or 21.7%, and $17.8 million, or 4.4%, respectively, over the corresponding 2007 periods. Decreases in the Northeast, South and Southeast were due to lower backlog at the beginning of the 2008 periods and were partially offset by increases in the Midwest and West. The increase in the Midwest was attributable to revenue from a large design/build joint venture project which was added to backlog in 2007. The increase in the West for the six months was primarily due to the settlement of an outstanding revenue issue on the SR22 project in California which is now substantially complete.

Granite Land Company Revenue: Revenue from GLC for the three and six months ended June 30, 2008 decreased by $4.3 million, or 41.4%, and $8.5 million, or 55.8%, respectively, over the corresponding 2007 periods. GLC's revenue is primarily dependent on the timing of real estate sales transactions, which are relatively few in number and can cause variability in the timing of revenue and profit recognition.

Total Backlog
(in thousands)            June 30, 2008          March 31, 2008           June 30, 2007
Backlog by Division:
Granite West           $ 1,188,948    55.5 %   $   868,530    44.7 %   $   986,316    39.4 %
Granite East               952,700    44.5       1,074,659    55.3       1,516,785    60.6
Total                  $ 2,141,648   100.0 %   $ 1,943,189   100.0 %   $ 2,503,101   100.0 %



Granite West Backlog
(in thousands)                    June 30, 2008         March 31, 2008         June 30, 2007
California:
Public sector                  $   597,257    93.5 %   $ 380,358    87.6 %   $ 301,159    74.2 %
Private sector                      41,548     6.5        53,957    12.4       104,888    25.8
Total                          $   638,805   100.0 %   $ 434,315   100.0 %   $ 406,047   100.0 %
West (excluding California):
Public sector                  $   523,629    95.2 %   $ 398,542    91.8 %   $ 526,786    90.8 %
Private sector                      26,514     4.8        35,673     8.2        53,483     9.2
Total                          $   550,143   100.0 %   $ 434,215   100.0 %   $ 580,269   100.0 %
Total Granite West backlog:
Public sector                  $ 1,120,886    94.3 %   $ 778,900    89.7 %   $ 827,945    83.9 %
Private sector                      68,062     5.7        89,630    10.3       158,371    16.1
Total                          $ 1,188,948   100.0 %   $ 868,530   100.0 %   $ 986,316   100.0 %

Granite West Backlog: Granite West backlog of $1.2 billion at June 30, 2008 was $0.3 billion, or 36.9%, higher than at March 31, 2008 and $0.2 billion, or 20.5%, higher than at June 30, 2007. The increase from June 30, 2007 was primarily driven by significant public sector awards for federally funded national security projects in Arizona and California, a $48.1 million award for additional work on an airport terminal project in California and a $39.2 million award for a highway widening and rehabilitation project in California. Additionally, we added $47.0 million to backlog in the quarter related to our agreement to resume work on the US 20 Pioneer Mountain to Eddyville design/build project in Oregon. Work on that project had been suspended pending resolution of issues associated with numerous deep-seated landslides discovered on the construction site. In May 2008 we agreed upon and executed a change order with the contract owner that allowed us to resume work activities on the site. Granite West private sector backlog continues to be negatively impacted by the weak demand for residential construction, particularly in certain California and Nevada markets. Granite West backlog included approximately $369.7 million, $236.5 million and $240.7 million from projects with a total contract value greater than $50.0 million at June 30, 2008, March 31, 2008 and June 30, 2007, respectively.

Granite East Backlog
(in thousands)                  June 30, 2008         March 31, 2008           June 30, 2007
Backlog by Geographic Area:
Midwest                       $ 248,888    26.1 %   $   287,488    26.7 %   $   380,190    25.1 %
Northeast                        88,686     9.3         104,896     9.8         173,562    11.4
South                           114,365    12.0         126,593    11.8         188,681    12.4
Southeast                       495,007    52.0         544,595    50.7         743,054    49.0
West                              5,754     0.6          11,087     1.0          31,298     2.1
Total                         $ 952,700   100.0 %   $ 1,074,659   100.0 %   $ 1,516,785   100.0 %

Granite East Backlog: Granite East backlog of $1.0 billion at June 30, 2008 was $0.1 billion, or 11.3%, lower than at March 31, 2008, and $0.6 billion, or 37.2%, lower than at June 30, 2007. The decrease reflects progress on construction projects during the quarter. Granite East did not receive any significant new awards during the six months ended June 30, 2008.

Gross Profit                            Three Months Ended June 30,               Six Months Ended June 30,
(in thousands)                           2008                 2007                  2008               2007
Granite West                         $      93,240        $     109,409         $     133,319        $ 161,738
Percent of division revenue                   18.0 %               20.2 %                17.6 %           19.2 %
Granite East                                19,072               14,411                78,118            6,403
Percent of division revenue                   11.2 %                6.6 %                20.3 %            1.6 %
Granite Land Company                        (2,655 )              3,964                (2,186 )          7,519
Percent of division revenue                  -43.5 %               38.1 %               -32.3 %           49.1 %
Other                                         (631 )               (150 )              (1,531 )             10
Total gross profit                   $     109,026        $     127,634         $     207,720        $ 175,670
Percent of total revenue                      15.7 %               16.6 %                18.1 %           14.0 %

Gross Profit: We defer recognition of construction project profit until a project reaches 25% completion. In the case of large, complex design/build projects, we may continue to defer profit recognition beyond the point of 25% completion until such time as we believe we have enough information to make a reasonably dependable estimate of contract revenue and cost. This policy can have a significant impact on gross profit, particularly in periods where one or several very large projects reach the point of profit recognition and the deferred profit is recognized or, conversely, in periods where backlog related to larger projects is growing rapidly and a higher percentage of projects are in their early stages with no associated gross margin recognition. Revenue from jobs with deferred contract profit was as follows:

Revenue from Contracts with
Deferred Profit                      Three Months Ended June 30,            Six Months Ended June 30,
(in thousands)                          2008              2007                2008             2007
Granite West                        $      55,938    $       19,988      $       60,672    $      22,723
Granite East                               26,667            36,179              49,861           55,193
Total revenue from contracts
with deferred profit                $      82,605    $       56,167      $      110,533    $      77,916

Additionally, we do not recognize revenue from contract claims until we have a signed settlement agreement and payment is assured, and we do not recognize revenue from contract change orders until the contract owner has agreed to the change order in writing. However, we do recognize the costs related to any contract claims or pending change orders in our forecasts when we are contractually obligated to incur them. As a result, our gross profit as a percent of revenue can vary during periods when a large volume of contract claims or change orders are pending resolution (reducing gross profit) or, conversely, during periods where large contract claims or change orders are agreed to or settled (increasing gross profit). Although this variability can occur in both Granite West and Granite East, it is more pronounced in Granite East because of the larger size and complexity of its projects.

Granite West gross profit as a percent of revenue for the three and six months ended June 30, 2008 decreased to 18.0% and 17.6%, respectively, from 20.2% and 19.2% for the three and six months ended June 30, 2007, respectively. This decrease was largely due to higher revenue with deferred profit margin for projects that had not yet reached the threshold for profit recognition as well as lower gross profit margin on the sale of construction materials. Profit margins on our construction materials sales have been negatively impacted by lower sales volume in certain locations, which provided less coverage of maintenance and other fixed costs, lower demand from the private sector for our higher margin products, and higher costs of certain raw materials such as diesel fuel and asphalt. These decreases were partially offset by the positive effect of project forecast changes during the three and six months ended June 30, 2008 which increased our gross profit by approximately $21.8 million and $34.5 million, respectively. This compares with an increase in gross profit from such forecast changes of approximately $9.0 million and $13.9 million during the three and six months ended June 30, 2007, respectively. See Note 3 to the condensed consolidated financial statements.

Granite East gross profit as a percent of revenue for the three and six months ended June 30, 2008 increased to 11.2% and 20.3%, respectively, from 6.6% and 1.6% for the three and six months ended June 30, 2007, respectively. Gross profit in the 2008 periods was positively impacted by changes in profitability estimates which added approximately $8.6 million to gross profit in the quarter and $46.6 million in the six month period. In 2007, project estimate changes increased gross profit by $2.3 million in the second quarter and decreased gross profit by $13.2 million in the six month period. See Note 3 to the condensed consolidated financial statements.

Granite Land Company gross profit for the three months ended June 30, 2008 includes an impairment charge of $4.5 million related to certain residential real estate development assets. See Note 6 to the condensed consolidated financial statements.

General and Administrative Expenses        Three Months Ended June 30,                Six Months Ended June 30,
(in thousands)                              2008                  2007                 2008                2007
Salaries and related expenses           $      35,171        $       32,208        $      70,594        $   66,366
Incentive compensation,
discretionary profit sharing and
other variable compensation                    10,435                12,644               15,810            16,690
Other general and administrative
expenses                                       20,154                20,278               40,007            36,411
Total                                   $      65,760        $       65,130        $     126,411        $  119,467
Percent of revenue                                9.5 %                 8.4 %               11.0 %             9.5 %

General and Administrative Expenses: Our general and administrative expenses for the three and six months ended June 30, 2008 increased $0.6 million, or 1.0%, and $6.9 million, or 5.8%, over the comparable periods in 2007. The increase for the six months ended June 30, 2008 was largely due to costs associated with integrating our former Wilder Construction Company ("Wilder") business unit following our purchase of the remaining Wilder minority shares in January, costs associated with our new business in the state of Washington, which was acquired in April 2007, and higher personnel related costs, primarily related to normal salary increases and headcount growth.

Other Income (Expense)                      Three Months Ended June 30,                 Six Months Ended June 30,
(in thousands)                               2008                  2007                 2008                 2007
Interest income                          $       3,593        $        6,439        $      9,648         $     13,282
Interest expense                                (3,058 )              (2,028 )            (7,568 )             (3,114 )
Equity in income (loss) of affiliates              528                   (29 )              (179 )                322
Other, net                                         184                  (433 )             8,647                 (666 )
Total                                    $       1,247        $        3,949        $     10,548         $      9,824

Other Income (Expense): Interest income decreased in the three and six months ended June 30, 2008, compared with the corresponding periods in 2007 due to the decline in short term interest rates resulting in lower yields on our invested cash balances. Interest expense increased in both the three and six month ended June 30, 2008, compared with the corresponding periods in 2007 due to an increase in average debt outstanding during the period. The increase in other, net during the six months ended June 30, 2008 is primarily due to a gain of approximately $9.3 million recognized on the sale of gold during the first quarter. Gold is produced as a by-product of one of our aggregate excavation operations.

Provision for Income Taxes                 Three Months Ended June 30,                 Six Months Ended June 30,
(in thousands)                              2008                  2007                 2008                 2007
Provision for income taxes              $      13,081        $       22,154        $      25,208        $      22,243
Effective tax rate                               28.0 %                31.3 %               26.7 %               31.3 %

Provision for Income Taxes: Our effective tax rate decreased to 26.7% for the six months ended June 30, 2008 from 31.3% for the corresponding period in 2007. The decreased effective tax rate was due primarily to the estimated income attributed to minority partners' share in our consolidated construction joint ventures and other entities which are not subject to income taxes on a separate entity basis.

Minority Interest in Consolidated
Subsidiaries                               Three Months Ended June 30,                Six Months Ended June 30,
(in thousands)                              2008                  2007                  2008               2007
. . .