Forward-Looking Disclosure

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 and producers of construction materials in the United States. We 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 produce construction materials through the use of our extensive aggregate reserves and plant facilities. We also operate a real estate development company on a significantly smaller scale. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.

Our contracts are obtained primarily through competitive bidding in response to advertisements by both public agencies and private parties and to a lesser extent on a negotiated basis as a result of direct solicitation by private parties. Our bidding activity is affected by such factors as contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period. We have three operating segments:
Granite West, Granite East and Granite Land Company.

The three primary economic drivers of our business are (1) the overall health of the economy, (2) federal, state and local public funding levels, both nationally and locally and (3) population growth with the resulting private development. The level of demand for our services will have a direct correlation to these drivers. For example, a stagnant or declining economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for 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 our revenue growth and/or have a downward impact on gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue, thereby decreasing a source of 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 stagnant or declining economy. However, even these funding sources can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have a dampening effect on consumption, resulting in overall lower tax revenue. Conversely, higher public funding as well as an expanding or 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, provision for doubtful accounts and 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 will 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 restricted stock award (generally three to five years). Depending on the mix of cash and restricted stock, these incentives can have the effect of materially altering general and administrative expenses from year to year.

Results of Operations:

Comparative Financial Summary                       Three Months Ended March 31,
(in thousands)                                        2009                 2008
Total revenue                                    $      347,372       $      454,800
Gross profit                                             68,013               98,694
Operating income                                         16,902               38,444
Other income, net                                         1,914                9,301
Provision for income taxes                                4,829               12,127
Amount attributable to noncontrolling interest           (5,067 )            (22,495 )
Net income attributable to Granite                        8,920               13,123




            Total Revenue                Three Months Ended March 31,
            (in thousands)               2009                    2008
            Revenue by Division:
            Granite West           $ 197,049      56.7 %   $ 240,002      52.8 %
            Granite East             149,906      43.2       214,125      47.1
            Granite Land Company         417       0.1           673       0.1
            Total                  $ 347,372     100.0 %   $ 454,800     100.0 %

       Granite West Revenue                    Three Months Ended March 31,
       (in thousands)                          2009                     2008
       California:
       Public sector                  $    75,426       71.0 %   $  72,670      52.6 %
       Private sector                      10,257        9.7        29,964      21.7
       Material sales                      20,563       19.3        35,439      25.7
       Total                          $   106,246      100.0 %   $ 138,073     100.0 %
       West (excluding California):
       Public sector                  $    76,739       84.5 %   $  71,170      69.8 %
       Private sector                       4,781        5.3        14,644      14.4
       Material sales                       9,283       10.2        16,115      15.8
       Total                          $    90,803      100.0 %   $ 101,929     100.0 %
       Total Revenue:
       Public sector                  $   152,165       77.3 %   $ 143,840      59.9 %
       Private sector                      15,038        7.6        44,608      18.6
       Material sales                      29,846       15.1        51,554      21.5
       Total                          $   197,049      100.0 %   $ 240,002     100.0 %

Granite West Revenue: Revenue from Granite West for the three months ended March 31, 2009 decreased by $43.0 million, or 17.9%, compared with the first quarter of 2008. The decrease was primarily attributable to the ongoing contraction of residential construction and credit markets which had a direct impact on private sector revenue and the sale of construction materials.

Granite East Revenue                    Three Months Ended March 31,
(in thousands)                        2009                       2008
Revenue by Geographic Area:
Midwest                       $   32,894       22.0 %    $   40,357       18.8 %
Northeast                         38,425       25.6          36,419       17.0
South                             41,025       27.4          29,585       13.8
Southeast                         37,242       24.8          71,009       33.2
West                                 320        0.2          36,755       17.2
Total                         $  149,906      100.0 %    $  214,125      100.0 %
Revenue by Market Sector:
Public sector                 $  148,466       99.0 %    $  209,262       97.7 %
Private sector                     1,440        1.0           4,863        2.3
Total                         $  149,906      100.0 %    $  214,125      100.0 %

Granite East Revenue: Revenue from Granite East for the three months ended March 31, 2009 decreased by $64.2 million, or 30.0% compared with the first quarter of 2008. This decrease was due to our continued focus on improved execution and profitability, and large projects nearing completion. This was partially offset by the recognition of settlements related to outstanding issues on two separate projects, one in the first quarter of 2009 in the Northeast, and the other in the first quarter of 2008 in the West.

The following table provides information about revenue from our large projects for the three months ended March 31, 2009 and 2008:

Large Project Revenue
Three months ended March 31,     2009        2008
(dollars in thousands)
Granite West                   $  32,361   $  30,146
Number of projects*                    5           5
Granite East                   $ 120,342   $ 204,619
Number of projects*                   12          17
Total                          $ 152,703   $ 234,765
Number of projects*                   17          22

* Includes only projects with a total contract value greater than $50.0 million and over $1.0 million of revenue in the respective periods.

Granite Land Company Revenue: Revenue from GLC for the three months ended March 31, 2009 decreased by $0.3 million compared with the first quarter of 2008. GLC's revenue is 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. The current real estate downturn and associated tightening of credit markets has had a direct impact on the anticipated timing of several GLC development projects.

The following tables illustrate our contract backlog as of the respective dates:

Total Contract Backlog
(in thousands)                      March 31, 2009              December 31, 2008           March 31, 2008
Contract Backlog by Division:
Granite West                    $   743,219      47.3 %      $   788,872      46.4 %     $   868,530      44.7 %
Granite East                        826,855      52.7            910,524      53.6         1,074,659      55.3
Total                           $ 1,570,074     100.0 %      $ 1,699,396     100.0 %     $ 1,943,189     100.0 %




Granite West Contract Backlog
(in thousands)                      March 31, 2009              December 31, 2008           March 31, 2008
California:
Public sector                   $  395,608        95.3 %      $   430,421      94.8 %     $ 380,358      87.6 %
Private sector                      19,579         4.7             23,841       5.2          53,957      12.4
Total                           $  415,187       100.0 %      $   454,262     100.0 %     $ 434,315     100.0 %
West (excluding California):
Public sector                   $  320,065        97.6 %      $   319,271      95.4 %     $ 398,542      91.8 %
Private sector                       7,967         2.4             15,339       4.6          35,673       8.2
Total                           $  328,032       100.0 %      $   334,610     100.0 %     $ 434,215     100.0 %
Total Contract Backlog:
Public sector                   $  715,673        96.3 %      $   749,692      95.0 %     $ 778,900      89.7 %
Private sector                      27,546         3.7             39,180       5.0          89,630      10.3
Total                           $  743,219       100.0 %      $   788,872     100.0 %     $ 868,530     100.0 %

Granite West Contract Backlog: Granite West contract backlog of $743.2 million at March 31, 2009 was $45.7 million, or 5.8%, lower than at December 31, 2008 and $125.3 million, or 14.4%, lower than at March 31, 2008. The decrease from March 31, 2008 was primarily driven by projects nearing completion in the quarter and the continued weak demand for residential construction. Additionally, there was an indirect impact on public sector contract backlog in California, as competitors migrated from the increasingly scarce private sector work, creating more competition for bidders on public sector projects. The decrease in contract backlog from December 31, 2008 to March 31, 2009 was primarily attributable to a lower volume of public sector work as certain states withheld awards due to budgetary issues and clarity on stimulus funding. Pending final resolution of the distribution and regulation of stimulus funds, governmental agencies are adjusting the anticipated start dates of certain projects. The delay in start dates of projects will push award notifications to later in the year.

Granite East Contract
Backlog
(in thousands)                  March 31, 2009              December 31, 2008              March 31, 2008
Contract Backlog by
Geographic Area:
Midwest                     $  131,896         15.9 %    $  163,795         18.0 %    $    287,488         26.7 %
Northeast                      254,297         30.8         250,232         27.5           104,896          9.8
South                           71,698          8.7          91,720         10.0           126,593         11.8
Southeast                      366,568         44.3         402,062         44.2           544,595         50.7
West                             2,396          0.3           2,715          0.3            11,087          1.0
Total                       $  826,855       100.0  %    $  910,524        100.0 %    $  1,074,659        100.0 %
Contract Backlog by
Market Sector:
Public sector               $  823,859         99.6 %    $  906,470         99.6 %    $  1,062,473         98.9 %
Private sector                   2,996          0.4           4,054          0.4            12,186          1.1
Total                       $  826,855        100.0 %    $  910,524        100.0 %    $  1,074,659        100.0 %

Granite East Contract Backlog: Granite East contract backlog of $826.9 million at March 31, 2009 was $83.7 million, or 9.2%, lower than at December 31, 2008, and $247.8 million, or 23.1%, lower than at March 31, 2008. The decrease reflects progress on large construction projects. New awards for the quarter included our $24.6 million share of additional work order packages related to the World Trade Center Transportation Hub project in New York.

In April 2009 we reached an agreement and executed a contract with Houston Metro for the expansion of the city's light rail system. The total contract value is $1.3 billion, of which our portion is 34%. The associated award will be added to contract backlog as Notices to Proceed are received.

The following tables provide information about our large project contract backlog at March 31, 2009 and 2008:

Large Project Contract Backlog
(dollars in thousands)            March 31, 2009          December 31, 2008     March 31, 2008
Granite West                       $       219,489      $           243,818      $       236,522
Number of projects*                              5                        6                    5
Granite East                       $       796,347      $           868,638      $     1,034,496
Number of projects*                             14                       14                   16
Total                              $     1,015,836      $         1,112,456      $     1,271,018
Number of projects*                             19                       20                   21

*Includes only projects with total contract value greater than $50.0 million and remaining contract backlog over $1.0 million at the respective dates.

The following table presents gross profit by business segment for the respective periods:

Gross Profit                     Three Months Ended March 31,
(in thousands)                     2009                 2008
Granite West                  $       32,939       $       39,629
Percent of division revenue             16.7 %               16.5 %
Granite East                  $       34,864       $       58,596
Percent of division revenue             23.3 %               27.4 %
Granite Land Company          $          210       $          469
Percent of division revenue             50.4 %               69.7 %
Total gross profit            $       68,013       $       98,694
Percent of total revenue                19.6 %               21.7 %

Gross Profit: We recognize revenue only equal to cost, deferring profit recognition, 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. Because we have a large number of projects at various stages of completion in Granite West, this policy generally has a lesser impact on Granite West's gross profit on a quarterly or annual basis. However, Granite East has fewer projects in process at any given time and those projects tend to be much larger than Granite West projects. As a result, Granite East gross profit as a percent of revenue can vary significantly in periods where one or several very large projects reach our percentage of completion threshold and the deferred profit is recognized or, conversely, in periods where contract backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross profit recognition.

Revenue from projects that have not yet reached our profit recognition threshold is as follows:

Revenue from Contracts with Deferred
Profit                                       Three Months Ended March 31,
(in thousands)                                 2009                2008
Granite West                                $      18,104       $      16,673
Granite East                                        4,651              23,194
Total revenue from contracts with
deferred profit                             $      22,755       $      39,867

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. As a result, our gross profit as a percent of revenue can vary depending on the magnitude and timing of settlement claims and change orders.

Granite West gross profit as a percent of revenue remained relatively unchanged for the three months ended March 31, 2009 at 16.7% compared to 16.5% for the three months ended March 31, 2008. Construction gross profit as a percent of construction revenue for the three months ended 2009 increased to 21.1% from 19.7% for the same period in 2008. This increase was primarily the result of the recognition of deferred profit on a large design/build project that reached the point of profit recognition during the quarter. Additionally, the positive effect of project forecast changes during the three months ended March 31, 2009 contributed to the increased construction margins. Increases in gross profit from forecast changes were approximately $15.4 million and $12.7 million for the three months ended March 31, 2009 and 2008, respectively (see Note 3 of the "Notes to the Condensed Consolidated Financial Statements"). The increases in gross margin as a percent of revenue were partially offset by significantly lower gross profit margins on the sale of construction materials. Profit margins on our construction materials sales have been negatively impacted by lower demand from the private sector for our higher margin products and decreased production volume which resulted in increased cost per unit.

Granite East gross profit as a percent of revenue for the three months ended March 31, 2009 decreased to 23.3% from 27.4% for the three months ended March 31, 2008. In the first quarter of both 2009 and 2008 the results were partially due to the net impact of negotiated settlements of our claims with contract owners. For 2009, the settlement on a project in the Northeast added $16.0 million to gross profit. The first quarter of 2008 included $28.6 million related to the settlement of a project in Southern California. Both of these projects had recognized significant margin deterioration in prior years. Additionally, gross profits in the first quarter of both 2009 and 2008 were partially impacted by improved productivity and the resolution of project uncertainties.

When we experience significant contract forecast changes, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a change in estimate for the current period. In our review of these changes, we did not identify any material amounts that should have been recorded in a prior period.

Granite Land Company recorded a gross profit of $0.2 million for the three months ended March 31, 2009 compared to $0.5 million in the first quarter of 2008. Gross profit in both periods was adversely affected by the real estate downturn and the stages of development of our project portfolio, which led to very limited sales activity in 2009 and 2008. (See Note 7 of the "Notes to the Condensed Consolidated Financial Statements").

The following table presents the components of general and administrative expenses for the respective periods:

General and Administrative Expenses           Three Months Ended March 31,
(in thousands)                                  2009                 2008
Salaries and related expenses              $        34,277       $      35,423
Incentive compensation, discretionary
profit sharing and other variable
compensation                                         5,523               5,375
Other general and administrative
expenses                                            13,832              19,853
Total                                      $        53,632       $      60,651
Percent of revenue                                    15.4 %              13.3 %

General and Administrative Expenses: Our general and administrative expenses for the three months ended March 31, 2009 decreased $7.0 million, or 11.6% compared with the 2008 quarter. The decrease of $1.1 million in salary and related expenses for the three months ended March 31, 2009 was due to a reduction in force efforts in Granite West. The reduction of $6.0 million in other general and administrative expenses was due to a recovery of approximately $2.9 million of previously reserved doubtful accounts, a $1.3 million decrease in travel and entertainment and a $1.0 million decrease in relocation costs in Granite West.

The following table presents the components of other income (expense) for the respective periods:

Other Income (Expense)             Three Months Ended March 31,
(in thousands)                      2009                  2008
Interest income                $        2,061         $       6,055
Interest expense                       (3,488 )              (4,510 )
Equity in loss of affiliates             (444 )                (707 )
Other income, net                       3,785                 8,463
Total other income             $        1,914         $       9,301

Other Income (Expense): Interest income decreased in the three months ended March 31, 2009, compared with the 2008 quarter, primarily due to a decrease in investment interest income as we moved our marketable securities to more conservative investment instruments in the fourth quarter of 2008. Interest expense decreased due to a decrease in the associated notes payable as we paid down balances. The decrease in other income, net during the three months ended March 31, 2009 was primarily due to a gain of approximately $9.3 million recognized in the first quarter of 2008 on the sale of gold, a by-product of one of our aggregate extraction operations, compared with a gain of $4.4 million in the first quarter of 2009.

The following table presents the components of the provision for income taxes for the respective periods:

Provision for Income Taxes      Three Months Ended March 31,
(in thousands)                  2009                   2008
Provision for income taxes    $      4,829          $      12,127
Effective tax rate                    25.7 %                25.4  %

Provision for Income Taxes: Our effective tax rate increased to 25.7% for the three months ended March 31, 2009 from 25.4% for the corresponding period in 2008. The change in our effective tax rate was primarily due to the assessment . . .