GRANITE CONSTRUCTION INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[ ] 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 1-12911
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GRANITE CONSTRUCTION INCORPORATED
(Exact name of registrant as specified in this charter)

DELAWARE 77-0239383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

585 WEST BEACH STREET, 95076
WATSONVILLE, CALIFORNIA (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(831) 724-1011

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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 and 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. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ].

The aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant was approximately $804,226,228 as of June 28,
2002, based upon the average of the high and low sales prices per share of the
registrant's Common Stock as reported on the New York Stock Exchange on such
date. Shares of Common Stock held by each executive officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

At March 19, 2003, 41,240,297 shares of Common Stock, par value $0.01, of
the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held May 19, 2003, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2002.
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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

FORWARD LOOKING DISCLOSURE

This Annual Report on Form 10-K ("Report") contains "forward-looking
statements" within the meaning of the Private Litigation Reform Act of 1995
regarding future events and the future results of Granite that are based on
current expectations, estimates, forecasts, and projects as well as the beliefs
and assumptions of Granite's management. 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. These forward-looking statements are only predictions and are
subject to risks, uncertainties and assumptions that are difficult to predict.
Therefore actual results may differ materially and adversely from those
expressed in any forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in this Report under the section entitled "Risk Factors" and elsewhere, and in
other reports Granite files with the Securities and Exchange Commission,
specifically the most recent reports on Form 8-K and Form 10-Q. You should not
place undue reliance on these forward-looking statements, which speak only as of
the date of this Annual Report on Form 10-K. Granite undertakes no obligation to
revise or update publicly any forward-looking statements for any reason.

INTRODUCTION

Unless otherwise indicated, the terms "we," "us," "our" and "Granite" refer
to Granite Construction Incorporated and its consolidated subsidiaries. We were
originally incorporated in 1922 as Granite Construction Company. In 1990,
Granite Construction Incorporated was incorporated in Delaware as the holding
company for Granite Construction Company and its wholly owned subsidiaries.

We are one of the largest heavy civil construction contractors in the
United States. We operate nationwide, serving both public and private sector
clients. Within the public sector, we primarily concentrate on infrastructure
projects, including the construction of roads, highways, bridges, dams, tunnels,
canals, mass transit facilities and airports. Within the private sector, we
perform site preparation services for buildings, plants, subdivisions and other
facilities. Our diversification in both the public and private sectors and our
mix of project types and sizes have contributed to our revenue growth and
profitability in various economic environments.

We own and lease substantial aggregate reserves and own 158 construction
materials processing plants. We also have one of the largest contractor-owned
heavy construction equipment fleets in the United States. We believe that the
ownership of these assets enables us to compete more effectively by ensuring
availability of these resources at a favorable cost.

OPERATING STRUCTURE

We are organized into two operating segments, the Branch Division and the
Heavy Construction Division. The Branch Division is comprised of branch offices
that serve local markets, while the Heavy Construction Division ("HCD") is
composed of regional offices and pursues major infrastructure projects
throughout the nation. HCD focuses on building larger heavy civil projects with
contract durations that are generally greater than two years, while Branch
Division projects are typically smaller in size and shorter in duration.

The two divisions complement each other in a variety of ways. HCD is a
major user of construction equipment and employs sophisticated techniques on
complex projects. The branches draw on these resources, which are generally not
available to smaller, local competitors. Conversely, the Branch Division has
greater knowledge of local markets and provides HCD with valuable local
information regarding larger projects in the branches' areas, as well as
providing a source of aggregates. The two divisions sometimes jointly perform
projects when a project in a particular region exceeds the local branch's
capabilities, such as the $170.7 million design/build railroad project in Reno,
Nevada that was awarded in 2002.

As decentralized profit centers, the branches and HCD independently
estimate, bid and complete contracts. Both divisions are supported by
centralized functions, including finance, accounting, tax, human resources,
labor relations, safety, legal, insurance, surety, corporate development and
information technology.

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We believe that centralized support for decentralized profit centers results in
a more market-responsive business with effective controls and reduced overhead.

When determining whether to bid on a project we consider our ability to be
competitive at acceptable profit margins and the availability of estimating and
project building personnel as key factors. Other factors considered include the
customer; the geographic location; our competitive advantages and disadvantages
relative to likely competitors for the project; current and projected workload;
and the likelihood of follow-up work. Both operating divisions use a proprietary
computer-based project estimating system that reflects our significant
accumulated experience. We believe that an exhaustive, detailed approach to a
project's estimate and bid is important in order to best identify the project's
risks and opportunities. Our estimates are comprehensive in nature, sometimes
totaling hundreds of pages of analysis. Each project is broken down into items
of work, for which separate labor, equipment and materials estimates are made.
Once a project begins, the estimate provides us with a budget against which the
actual project cost is regularly measured, which enables us to manage our
projects more effectively.

Information about our business segments for the years ended December 31,
2002, 2001 and 2000 is incorporated in Note 15 of the "Notes to the Consolidated
Financial Statements."

Branch Division. In 2002, Branch Division contract revenue and sales of
aggregate products were $1,187.8 million (67.3% of our total revenue) as
compared with $1,083.7 million (70.0% of our total revenue) in 2001. The Branch
Division has both public and private sector clients. Public sector activities
include both new construction and improvement of streets, roads, highways and
bridges. For example, the branches widen and repave roads and modify and replace
bridges. Major private sector contracts include site preparation for housing and
commercial development, including excavation, grading and street paving, and
installation of curbs, gutters, sidewalks and underground utilities.

During 2002, we purchased additional shares of Wilder Construction Company
("Wilder"), a heavy civil construction company with regional offices located in
Washington, Oregon and Alaska, which increased our ownership interest from
approximately 48% at December 31, 2001 to approximately 59% at December 31, 2002
(see Note 16 of the "Notes to the Consolidated Financial Statements"). Upon
achieving majority ownership of Wilder common stock on April 30, 2002 we ceased
applying the equity method of accounting and began consolidating Wilder's
financial position and results of operations as a part of our Branch Division.
Also during 2002, we purchased the assets of Robinson Construction Company and
Redwood Empire Aggregates together with its wholly owned subsidiary Parnum
Paving, Inc., both Northern California construction contractors and materials
suppliers for combined cash consideration of $23.3 million. We also purchased
certain assets of West Coast Aggregates, Inc., a Central Coast California
materials supplier, for cash consideration of $13.9 million. These recent
acquisitions are part of our Branch Division.

The Branch Division currently has 11 branch offices with additional
satellite operations. Our branch offices in California are located in
Bakersfield, Fresno (Central Valley), Watsonville (Monterey Bay Area), Palm
Springs (Southern California), Sacramento (Northern California), San Jose, Santa
Barbara and Stockton. Our branch offices outside of California are located in
Arizona, Nevada and Utah. Additionally, our newly consolidated Wilder
Construction Company subsidiary has locations in Alaska, Washington and Oregon.
Each branch effectively operates as a local or regional construction company and
our branch management is encouraged to participate actively in the local
community. While individual branch revenues vary from year to year, in 2002
these revenues ranged from $41.5 million to $189.8 million.

As part of our strategy, substantially all of our branches mine aggregates
and operate plants that process aggregates into construction materials for
internal use and for sale to others. These activities are integrated into the
Branch Division construction business and provide both a source of profits and a
competitive advantage to our construction business. Approximately half of the
aggregate products produced in these branch operations are used in our
construction projects. The remainder is sold to unaffiliated parties and
accounted for $227.7 million of revenue in 2002, representing 12.9% of our total
2002 revenue, compared with $189.9 million, or 12.3% of our 2001 revenue. We
have significant aggregate reserves that we have acquired by ownership in fee or
through long-term leases.

Heavy Construction Division. In 2002, revenue from HCD was $576.9 million
(32.7% of Company revenue) compared with $464.3 million (30.0% of Company
revenue) in 2001. HCD projects are usually larger and more complex than those
performed by the Branch Division. HCD has completed projects throughout the
nation in over 20 states from coast to coast.

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HCD builds infrastructure projects, including major highways, large dams,
mass transit facilities, bridges, pipelines, canals, tunnels, waterway locks and
dams, and airport runways, and has engaged in contract mine stripping,
reclamation and large site preparation. It also performs activities such as
demolition, clearing, excavation, de-watering, drainage, embankment fill,
structural concrete, rail signalization, grading, and concrete and asphalt
paving.

HCD markets, estimates, bids and provides management oversight of its
projects from our Watsonville, California headquarters and regional estimating
offices in Davis, California (newly opened in 2003), New York, Texas, Georgia
and Florida. Project staff located at job sites have the managerial, technical
and clerical capacity to meet on-site project management requirements. HCD has
the ability, if appropriate, to process locally sourced aggregates into
construction materials using our own portable crushing, concrete and asphalt
processing plants.

HCD participates in joint ventures with other large construction companies.
Joint ventures are used for large, technically complex projects, including
design/build projects, where it is desirable to share risk and resources. Joint
ventures provide independently prepared estimates and shared financing,
equipment, local knowledge and expertise.

Design/build projects have become a significant market opportunity for HCD.
Unlike traditional projects where owners first hire a design firm and then put
the plans out to bid for construction, design/build projects provide the owner
with a single point of responsibility and a single contact for both design and
construction. HCD's revenue from design/build projects has grown over the last
ten years to 49.6% of HCD revenue in 2002. Although these projects may carry
additional risk as compared to traditional bid/build projects, the profit
opportunities can also be much higher. We frequently bid design/build projects
as a part of a joint venture team.

BUSINESS STRATEGY

Our fundamental objective is to increase long-term stockholder value by
focusing on consistent profitability from controlled revenue growth. Stockholder
value is measured by the appreciation of the value of our common stock over a
period of years as well as a return from dividends. Further, it is a specific
measure of our financial success to achieve a return on net assets, or RONA,
greater than the cost of capital, creating "Granite Value Added." To accomplish
these objectives, we employ the following strategies:

Infrastructure Construction Focus -- We concentrate our core competencies
on this segment of the construction industry, which includes the building of
roads, highways, bridges, dams and tunnels, mass transit facilities, railroad
infrastructure and underground utilities as well as site preparation. This focus
emphasizes our specialized strengths, which include grading, paving and concrete
structures.

Employee Development -- We believe that our employees are key to the
successful implementation of our business strategies. Significant resources are
employed to attract, nurture and retain extraordinary talent and fully develop
each employee's capabilities.

Ownership of Aggregate Materials and Construction Equipment -- We own and
lease aggregate reserves and own processing plants that are vertically
integrated into our construction operations and own a large fleet of carefully
maintained heavy construction equipment. By ensuring availability of these
resources at favorable cost, we believe we have significant bidding advantages
in many of our markets.

Selective Bidding -- Once we select a job that meets our bidding criteria,
the project is estimated using a highly comprehensive method with a proprietary
estimating system, which details anticipated costs to construct to which margin
is added to achieve the appropriate bid price for the risk assumed.

Diversification -- To mitigate the risks inherent in construction and
general economic factors, we pursue projects (i) in both the public and private
sectors; (ii) for a wide range of customers within each sector (from the federal
government to small municipalities and from large corporations to individual
homeowners); (iii) in diverse geographic markets; and (iv) of various sizes,
durations and complexities.

Decentralized Profit Centers -- We approach each selected market with a
local focus through our decentralized structure. Each of our branches and each
HCD estimating office is an individual profit center.

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Profit-based Incentives -- We compensate our profit center managers with
lower-than-market fixed salaries coupled with a substantial variable cash and
restricted stock incentive element based on the annual profit performance of
their respective profit centers.

Controlled Expansion -- We intend to continue our expansion by selectively
adding branches in the western United States, pursuing major infrastructure
projects throughout the nation, expanding into other construction related market
segments through acquisitions, and by leveraging our financial capacity by
investing in projects that will generate construction work for us as well as
provide an acceptable return on our investment.

Accident Prevention -- We believe that the prevention of accidents is both
a moral obligation and good business. By identifying and concentrating resources
to address jobsite hazards, we continually strive to reduce our incident rates
and the costs associated with accidents.

Environmental Responsibility -- We believe it benefits everyone to maintain
environmentally responsible operations. We are committed to effective air
quality control measures and reclamation at our plant sites and to waste
reduction and recycling of the potentially environmentally sensitive products
used in our operations.

Quality and High Ethical Standards -- We emphasize the importance of
performing high quality work and maintaining high ethical standards through an
established code of conduct and an effective corporate compliance program.

CUSTOMERS

We have customers in both the public and private sectors. The Branch
Division's most significant customer is the California Department of
Transportation. In 2002, contracts with the California Department of
Transportation represented 11.9% of our revenue. Other Branch Division clients
include other state departments of transportation, county and city public works
departments and developers and owners of industrial, commercial and residential
sites. HCD's customers are predominantly in the public sector and currently
include the state departments of transportation in several states. (See Note 1
of the "Notes to the Consolidated Financial Statements").

BACKLOG

Our backlog (anticipated revenue from uncompleted portions of existing
contracts) was $1,856.5 million at December 31, 2002, up from $1,377.2 million
at December 31, 2001, and $1,120.5 million at December 31, 2000. Approximately
$770.0 million of the December 31, 2002 backlog is expected to remain at
December 31, 2003. We include a construction project in our backlog at such time
as a contract is awarded and funding is in place. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations.") We believe our
backlog figures are firm, subject only to the cancellation and modification
provisions contained in various contracts. Substantially all of the contracts in
the backlog may be canceled or modified at the election of the client. However,
we have not been materially adversely affected by contract cancellations or
modifications in the past. (See "Business-Contract Provisions and
Subcontracting.") A sizeable percentage of our anticipated contract revenue in
any year is not reflected in our backlog at the start of the year due to the
short duration of smaller Branch Division projects that are initiated and
completed during each year ("turn business").

EQUIPMENT AND PLANTS

We purchase and maintain many pieces of equipment, including cranes,
bulldozers, barges, scrapers, graders, loaders, trucks, pavers and rollers as
well as construction materials processing plants. In 2002 and 2001, we spent
approximately $55.9 million and $57.6 million, respectively, for construction
equipment, plants

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and vehicles. The breakdown of our construction equipment, plants and vehicles
at December 31, 2002 is as follows:

Heavy construction equipment................................ 2,811 units
Trucks, truck-tractors and trailers and vehicles............ 4,814 units
Aggregate crushing plants................................... 55 plants
Asphalt concrete plants..................................... 60 plants
Portland cement concrete batch plants....................... 28 plants
Thermal soil remediation plants............................. 1 plant
Asphalt rubber plants....................................... 4 plants
Lime slurry plants.......................................... 10 plants

We believe that ownership of equipment is preferable to leasing because
ownership ensures the equipment is available as needed and normally results in
lower equipment costs. We attempt to keep our equipment as fully utilized as
possible by pooling equipment for use by both the Branch Division and HCD. We
regularly lease or rent equipment on a short-term basis to supplement existing
equipment and respond to construction activity peaks.

EMPLOYEES

On December 31, 2002, we employed 1,780 salaried employees, who work in
management, estimating and clerical capacities, and 3,237 hourly employees. The
total number of hourly personnel employed by us is subject to the volume of
construction in progress. During 2002, the number of hourly employees ranged
from 2,484 to 5,314 and averaged approximately 4,290. Our wholly owned
subsidiaries, Granite Construction Company and Granite Halmar Construction
Company, Inc. and our majority-owned subsidiary, Wilder Construction Company are
parties to craft collective bargaining agreements in many areas in which they
work.

We believe our employees are our most valuable resource and that our
workforce possesses a strong dedication to and pride in our company. Among
salaried and non-union hourly employees, this dedication is reinforced by 26.4%
equity ownership through our Employee Stock Ownership Plan, our Profit Sharing
and 401k Plan and performance-based incentive compensation arrangements at
December 31, 2002. Our 662 managerial and supervisory personnel have an average
of 10 years of service with us.

COMPETITION

Factors influencing our competitiveness are price, reputation for quality,
the availability of aggregate materials, machinery and equipment, financial
strength, knowledge of local markets and conditions, and project management and
estimating abilities. Although some of our competitors are larger than us and
may possess greater resources, we believe that we compete favorably on the basis
of the foregoing factors. Historically the construction business does not
usually require large amounts of capital, particularly for the smaller size of
construction work pursued by our Branch Division, which can result in relative
ease of market entry for companies possessing acceptable qualifications. Branch
Division competitors range from small local construction companies to large
regional and national construction companies. While the market areas of these
competitors overlap with several of the markets served by our branches, few, if
any, compete in all of our market areas. In addition, most of our branches own
and/or have long-term leases on aggregate resources that provide an extra
measure of competitive advantage in certain markets. HCD normally competes with
large regional and national construction companies, which may or may not be
larger than Granite. Although the construction business is highly competitive,
we believe we are well positioned to compete effectively in the markets in which
we operate.

CONTRACT PROVISIONS AND SUBCONTRACTING

The majority of our contracts with our customers are either "fixed unit
price" or " fixed price". Under fixed unit price contracts, we are committed to
provide materials or services required by a project at fixed unit prices (for
example, dollars per cubic yard of concrete or cubic yards of earth excavated).
While the fixed unit price contract shifts the risk of estimating the quantity
of units required for a particular project to the customer, any increase in our
unit cost over the unit price bid, whether due to inflation, inefficiency,
faulty estimates or other factors, is borne by us unless otherwise provided in
the contract. Fixed price contracts are

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priced on a lump-sum basis under which we bear the risk that we may not be able
to perform all the work for the specified amount. Our design/build projects are
generally fixed price contracts and, primarily as a result of the growth in our
design/build business in the last several years, the number of this type of
contract has been increasing. Our contracts are generally obtained through
competitive bidding in response to advertisements by federal, state and local
government agencies and private parties. Less frequently, contracts may be
obtained through direct negotiations with private owners. Our contract risk
mitigation process includes review of bids fitting certain criteria by various
levels of management and, in some cases, by the executive committee of our Board
of Directors.

There are a number of factors that can create variability in contract
performance and results as compared to a project's original bid. The most
significant of these include site conditions that differ from those assumed in
the original bid (to the extent contract remedies are unavailable), the
availability and skill level of workers in the geographic location of the
project, the availability and proximity of materials, the accuracy of the
original bid and inclement weather. All of these factors can impose
inefficiencies on contract performance and therefore have a direct impact on
contract productivity (i.e., drive up contract costs), which in turn can have a
direct impact on contract results. Design/build projects carry other risks such
as the risk inherent in estimating quantities before the project design is
completed and design error risk, including both additional construction costs
due to any design errors and liability to the contract owner for the design of
the project. Although we manage this additional risk by adding contingencies to
our bid amounts and obtaining indemnifications from our design consultants where
possible, there is no guarantee that these risk management strategies will
always be successful.

All federal government contracts and most of our other contracts provide
for termination of the contract for the convenience of the party contracting
with us, with provisions to pay us for work performed through the date of
termination. In addition, many of our contracts are subject to certain
completion schedule requirements with liquidated damages in the event schedules
are not met. We have not been materially adversely affected by these provisions
in the past.

We act as prime contractor on most of the construction projects we
undertake. We accomplish the majority of our projects with our own resources and
subcontract specialized activities such as electrical and mechanical work. As
prime contractor, we are responsible for the performance of the entire contract,
including subcontract work. Thus, we are subject to increased costs associated
with the failure of one or more subcontractors to perform as anticipated. We
manage this risk by reviewing the size of the subcontract, the financial
stability of the subcontractor and other factors and, based on this review, will
determine whether to require that the subcontractor furnish a bond or other type
of security for their performance. Disadvantaged business enterprise regulations
require us to use our best efforts to subcontract a specified portion of
contract work done for governmental agencies to certain types of subcontractors.
Some of these subcontractors may not be able to obtain surety bonds. We have not
incurred any material loss or liability on work performed by subcontractors to
date.

INSURANCE AND BONDING

We maintain general and excess liability, construction equipment and
workers' compensation insurance; all in amounts consistent with industry
practices.

In connection with our business, we generally are required to provide
various types of surety bonds that provide an additional measure of security for
our performance under certain public and private sector contracts. Our ability
to obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that is currently bonded and their current
underwriting standards, which may change from time to time. We have been bonded
by the same surety for more than 75 years and have never been refused a bond. In
2002, we added two additional sureties to help ensure the availability of
bonding in support of our growth.

GOVERNMENT AND ENVIRONMENTAL REGULATIONS

Our operations are subject to compliance with regulatory requirements of
federal, state and municipal agencies and authorities, including regulations
concerning labor relations and disadvantaged businesses. Additionally, our
aggregate mining and construction materials processing plants are subject to
various federal, state and local laws and regulations relating to the
environment, including those relating to discharges to air,

7

water and land, the handling and disposal of solid and hazardous waste and the
cleanup of properties affected by hazardous substances. Certain environmental
laws impose substantial penalties for non-compliance and others, such as the
federal Comprehensive Environmental Response, Compensation and Liability Act,
impose strict, retroactive, joint and several liability upon persons responsible
for releases of hazardous substances. We continually evaluate whether we must
take additional steps at our locations to ensure compliance with environmental
laws. While compliance with applicable regulatory requirements has not
materially adversely affected our operations in the past, there can be no
assurance that these requirements will not change and that compliance will not
adversely affect our operations in the future. In addition, our aggregate
materials operations require operating permits granted by governmental agencies.
We believe that tighter regulations for the protection of the environment and
other factors will make it increasingly difficult to obtain new permits and
renewal of existing permits may be subject to more restrictive conditions than
currently exist.

Since December 2001, three private citizens groups have served thousands of
California businesses with 60-day notices of intent to sue under the California
Safe Drinking Water and Toxic Enforcement Act ("Prop 65"). We were one of the
many aggregate, hot mix asphalt and asphalt producers, suppliers and contractors
that were served with Prop 65 60-day notices.

Prop 65 requires warnings to persons knowingly and intentionally exposed to
certain chemicals designated by the State as causing cancer and/or reproductive
toxicity. Although the 60-day notices that were served on us and many others
listed various Prop 65 chemicals that are allegedly constituents of petroleum
asphalt emissions and listed crystalline silica, the 60-day notices contained no
factual basis to support the general allegations that we knowingly and
intentionally exposed persons to Prop 65 listed-chemicals without providing
adequate Prop 65 Warnings. Moreover, we have, through safety information sheets,
posted Prop 65 warnings, and through other means, communicated what we believe
to be appropriate warnings and cautions to employees and customers about the
risks associated with excessive, prolonged inhalation of emissions generated by
substances used by us and covered by Prop 65. In early 2002, the California
State Attorney General's office entered into a standstill agreement with
representatives of the two citizens groups that served 60-day notices regarding
asphalt whereby both parties agree to not file lawsuits while the merits of the
60-day notices are being addressed by the state attorney general. Either party
can elect to terminate the standstill agreement upon 30-days written notice. We
are not currently the subject of any lawsuit alleging Prop 65 violations.

The statutory scheme underlying Prop 65 allows the State Attorney General
or local city of attorney to pursue actions against alleged violators of Prop
65's warning requirements, and allows private parties to pursue actions if the
government fails to intervene.

RISK FACTORS

Set forth below and elsewhere in this Report and in other documents we file
with the SEC are various risks and uncertainties that could cause our actual
results to differ materially from the results contemplated by the
forward-looking statements contained in the Report.

- Economic downturns and reductions in government funding could have a
negative impact on our business. A significant portion of our revenues
are derived from contracts that are funded by state, local or federal
government agencies. Our ability to obtain future public sector work at
reasonable margins is highly dependent on the amount of work that is
available to bid, which is largely a function of the level of government
funding available. We also perform commercial and residential site
development and other work for customers in the private sector. The
availability of this private sector work can be significantly adversely
affected by general economic downturns.

- Our fixed price and fixed unit price contracts subject us to the risk of
increased project cost. As more fully described under "Contract
Provisions and Subcontracting" above, the profitability of our fixed
price and fixed unit price contracts can be adversely affected by a
number of factors that can cause our actual costs to materially exceed
the costs estimated at the time of our original bid.

- Accounting for our revenues and costs involves significant estimates. As
further described under "Critical Accounting Policies" in "Management
Discussion and Analysis of Financial Condition and Results of
Operations," accounting for our contract related revenues and costs as
well as other cost items requires management to make a variety of
significant estimates and assumptions. Although we believe we have
sufficient experience and processes to enable us to formulate appropriate
assumptions

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and produce reliable estimates, these assumptions and estimates may
change significantly in the future and these changes could result in a
material adverse effect on our financial position and results of
operations.

- Weather can significantly impact our quarterly revenues and
profitability. Our ability to perform work is significantly impacted by
weather conditions such as precipitation and temperature. Changes in
weather conditions can create significant variability in our quarterly
revenues and profitability, particularly in the first and fourth quarters
of the year.

- Our success depends on attracting and retaining qualified personnel in a
competitive environment. The single largest factor in our ability to
profitably execute our work is our ability to attract, develop and retain
qualified personnel. Our success in attracting qualified people is
dependent on the resources available in individual geographic areas and
the impact on the labor supply due to general economic conditions as well
as our ability to provide a competitive compensation package and work
environment.

- We work in a highly competitive marketplace. As more fully described
under "Competition" above, we have multiple competitors in all of the
areas in which we work. During economic down cycles or times of lower
government funding for public works projects, competition for the fewer
available projects intensifies and this increased competition may result
in a decrease in our ability to be competitive at acceptable margins.

- An inability to secure and permit aggregate reserves could negatively
impact our future operations and results. Tighter regulations for the
protection of the environment and the finite nature of property
containing suitable aggregate reserves are making it increasingly
challenging and costly to secure and permit aggregate reserves. Although
we have thus far been able to secure and permit reserves to support our
business, it is likely to become increasingly difficult to do so and
there is no assurance that we will be able to secure and permit reserves
in the future.

- We are subject to environmental regulation. As more fully described
under "Government and Environmental Regulations" above, we are subject to
a number of federal, state and local laws and regulations relating to the
environment, some of which impose substantial penalties for non-
compliance. While compliance with these laws and regulations has not
materially adversely affected our operations in the past, there can be no
assurance that these requirements will not change and that compliance
will not adversely affect our operations in the future.

- Strikes or work stoppages could have a negative impact on our operations
and results. We are party to collective bargaining agreements covering a
substantial portion of our craft workforce. Although our results and
operations have not been significantly impacted by strikes or work
stoppages in the past, such labor actions could have a significant impact
if they occur in the future.

- Unavailability of insurance coverage could have a negative impact on our
operations and results. We maintain insurance coverage as part of our
overall risk management strategy and due to requirements to maintain
specific coverage in our financing agreements and in most of our
construction contracts. Although we have been able to obtain insurance
coverage to meet our requirements in the past, there is no assurance that
such insurance coverage will be available in the future.

- An inability to obtain bonding would have a negative impact on our
operations and results. As more fully described in "Insurance and
Bonding" above, we generally are required to provide surety bonds
securing our performance under the majority of our public and private
sector contracts. Our inability to obtain surety bonds in the future
would have a material adverse effect on our business.

- Our joint venture contracts with project owners subject us to joint and
several liability. If a joint venture partner fails to perform we could
be liable for completion of the entire contract and, if the contract were
unprofitable, this could result in a material adverse effect on our
financial position, results of operations and cash flows.

- We use diesel fuel, asphalt oil and other petroleum based products that
are subject to significant price fluctuations. These materials are used
to run our equipment and materials processing plants and are a
significant part of the paving materials that are used in many of our
construction projects or are sold to outside parties. Although we can be
partially protected by asphalt or fuel escalation clauses in some of our
contracts, not all contracts provide such protection. We have not been
significantly adversely

9

affected by price fluctuations in the past; however, there is no
guarantee that we will not be in the future.

- As a part of our growth strategy we expect to make future acquisitions
and acquisitions involve many risks. These risks include difficulties
integrating the operations and personnel of the acquired companies,
diversion of management's attention, potential difficulties and increased
costs associated with completion of any assumed construction projects,
insufficient revenues to offset increased expenses associated with
acquisitions and the potential loss of key employees of the acquired
companies. Acquisitions may also cause us to increase our liabilities,
record goodwill or other non-amortizable intangible assets that will be
subject to impairment testing and potential impairment charges and incur
amortization expenses related to certain other intangible assets. Failure
to manage and successfully integrate acquisitions could harm our business
and operating results significantly.

- Failure of our subcontractors to perform as anticipated could have a
negative impact on our results. As further described under "Contract
Provisions and Subcontracting" above, we subcontract a portion of many of
our contracts to specialty subcontractors and we are ultimately
responsible for the successful completion of their work. Although we
require bonding from our higher risk subcontractors and have not incurred
any material loss or liability on work performed by subcontractors to
date, there is no guarantee that we will not incur a material loss or
liability in the future.

- Our long-term debt and credit arrangements contain restrictive covenants
and failure to meet these covenants could significantly harm our
financial condition. Our long-term debt and credit arrangements and
related restrictive covenants are more fully described in Note 9 to the
Consolidated Financial Statements included in this report. In most cases,
failure to meet the restrictive covenants would result in an immediate
repayment liability for all amounts due and cancellation of open lines of
credit. Although we have not had difficulty meeting these covenants in
the past, failure to do so in the future could have material adverse
effects on our business and financial condition.

The foregoing list is not exhaustive. There can be no assurance that we
have correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may
adversely impact us. Should any risks and uncertainties develop into actual
events, these developments could have material adverse effects on our business,
financial condition and results of operations. For these reasons, you are
cautioned not to place undue reliance on our forward-looking statements.

WEBSITE ACCESS

Our website address is www.graniteconstruction.com. On our website we make
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission. The information on our
website is not incorporated into, and is not part of, this report.

ITEM 2. PROPERTIES

We own and lease real property for use in our construction and aggregate
mining and processing activities. We own approximately 600,000 square feet of
office and shop space and lease, pursuant to leases expiring between March 2003
and July 2020, an additional 105,000 square feet of office and shop space. We
own approximately 12,000 acres of land, of which 1,500 acres are un-permitted
reserves available for future use and lease approximately 5,000 additional acres
of land at sites in California, Nevada, Arizona, Utah, Washington and Alaska. A
majority of the land owned or leased by us is intended to serve as aggregate
reserves. There are no significant encumbrances against owned property. Our
leases for aggregate reserves generally limit our interest in the reserves to
the right to mine the reserves. These leases range from month-to-month leases to
leases with expiration dates ranging from January 2003 to June 2020. We consider
our available and future aggregate reserves adequate to meet our expected
operating needs. We pursue a plan of acquiring new sources of aggregate reserves
to replenish those depleted and to support future growth with a goal of
maintaining approximately 30 years of aggregate reserves at most of our branch
locations.

10

ITEM 3. LEGAL PROCEEDINGS

Our wholly-owned subsidiary, Granite Construction Company ("GCCO"), as a
member of a joint venture, Wasatch Constructors ("Wasatch"), is among a number
of construction companies, including Wasatch, who, together with the Utah
Department of Transportation ("UDOT"), are named as defendants in a lawsuit
filed in the United States District Court for the District of Utah. The
plaintiffs are two independent contractor truckers who filed the lawsuit on
behalf of the United States under the federal False Claims Act seeking to
recover damages and civil penalties in excess of $46,400,000. The lawsuit
alleges that, beginning in 1997 and thereafter, the defendants submitted false
claims to the United States Government during the reconstruction of a portion of
Interstate 15 in the Salt Lake Valley pursuant to a prime contract between UDOT
and Wasatch.

Among other things, the plaintiffs allege that certain defendants, who were
subcontractors to Wasatch defrauded the Government by charging Wasatch for dirt
and fill material they did not provide and that Wasatch and UDOT knowingly paid
for such excess material. The plaintiffs also allege that Wasatch committed
certain other acts including providing substandard workmanship and materials;
failure to comply with clean air and clean water standards and the filing of
false certifications regarding its entitlement to the payment of bonuses. The
original complaint was filed in January, 1999 and the Third Amended Complaint
was filed on February, 2003.

Although GCCO owns a 23% interest in Wasatch, it was not the managing
partner of Wasatch nor was it principally involved in the ongoing management of
the project. The Company and GCCO believe that the allegations in the lawsuit
are without merit and intend to contest them vigorously. The lawsuit is in the
preliminary stage and the Company cannot predict its outcome with certainty. The
litigation process is inherently uncertain, and this type of litigation is
particularly complex and can extend for a protracted period of time. As a
result, GCCO's defense of the lawsuit, regardless of its eventual outcome, may
be costly. Should the outcome of the lawsuit be adverse to GCCO, it could be
required to pay significant monetary damages. In addition, since GCCO is a
general partner of Wasatch, it would be jointly and severally liable for damages
or penalties assessed against Wasatch, although the Company and GCCO have no
reason to believe that the other joint venture partners would not bear their pro
rata share of any such damages or penalties.

We are a party to a number of other legal proceedings and believe that the
nature and number of these proceedings are typical for a construction firm of
our size and scope. Our litigation typically involves claims regarding public
liability or contract related issues. While management currently believes, after
consultation with counsel, that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our financial position or overall trends in results of operations, litigation is
subject to inherent uncertainties. Were an unanticipated unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the results
of operations for the period in which the ruling occurs.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of security holders during the
fourth quarter of the year ended December 31, 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are as follows:

11

Granite Construction Incorporated was incorporated in Delaware in January
1990 as the holding company for Granite Construction Company, which was
incorporated in California in 1922. All dates of service for our executive
officers include the periods in which they served for Granite Construction
Company.

Mr. Watts joined Granite in 1987 and has served as our Chief Executive
Officer since 1987 and as our President from 1987 to February 2003. He has also
served as a director since 1988, and Chairman of the Board since 1999. In May
1997, Mr. Watts became a director of TIC Holdings, Inc. He served as a director
of Wilder Construction from January 2000 to May 2001. From 1984 until 1987, Mr.
Watts served as President, Chief Executive Officer and a director of Ford, Bacon
& Davis, Inc., an industrial engineering and construction firm. From 1965 until
1984, Mr. Watts was employed by an underwater services and construction firm in
various capacities, including as President and Chief Operating Officer. He
received a B.A. degree in Economics from Cornell University in 1960. Mr. Watts
is a Past Chair of the California Chamber of Commerce and serves as a Director
of this and several other non-profit organizations.

Mr. Dorey has been an employee of Granite since 1968 and has served in
various capacities, including President and Chief Operating Officer since
February 2003, Executive Vice President and Chief Operating Officer from 1998 to
February 2003, Senior Vice President and Manager, Branch Division from 1987 to
1998, and Vice President and Assistant Manager, Branch Division from 1983 to
1987. Mr. Dorey is also a director of Wilder Construction Company and served as
a director of TIC Holdings, Inc. from 1997 to 2002. He received a B.S. degree in
Construction Engineering from Arizona State University in 1967.

Mr. Boitano has been an employee of Granite since 1977 and has served in
various capacities, including Executive Vice President and Manager, Branch
Division since February 2003, Senior Vice President and Manager, Branch
Division, from 1998 to February 2003, Assistant Branch Division Manager from
1987 to 1998, Branch Manager, Arizona Operations from 1983 to 1987, Assistant
Manager, Arizona Operations from 1980 to 1983, Assistant Manager, Salinas Branch
in 1980, and Project Manager Estimator from 1977 to 1980. In 2001, Mr. Boitano
became a director of Wilder Construction Company. He received a B.S. degree in
Civil Engineering from Santa Clara University in 1971 and an M.B.A. degree from
California State University, Fresno in 1977.

Mr. Costanzo has been an employee of Granite since 1970 and has served in
various capacities, including Senior Vice President and Manager, Heavy
Construction Division, since 1990, Vice President and Assistant Manager, Heavy
Construction Division, from 1988 to 1989, and an Area or Project Manager with
the Heavy Construction Division from 1971 to 1987. Mr. Costanzo served as a
director of TIC Holdings, Inc. from 1997 to 2002. He received a B.S. degree in
Civil Engineering from the University of Connecticut in 1960 and a M.S. degree
in Civil Engineering from Stanford University in 1961.

Mr. Barton has been an employee of Granite since 1980 and has served in
various capacities, including Senior Vice President and Chief Financial Officer
since 1999, Vice President and Chief Financial Officer from 1990 to 1999,
Controller in 1989, Treasurer in 1988 and Cash Manager from 1980 until 1988. In
1997, Mr. Barton became a director of TIC Holdings, Inc. and in January 2000 he
also became a director of Wilder Construction Company. He received a B.S. degree
in Accounting and Finance from San Jose State University in 1967 and an M.B.A.
degree from Santa Clara University in 1973.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Our common stock trades on the New York Stock Exchange under the ticker
symbol GVA. See Quarterly Results in Item 7 for a two-year summary of quarterly
dividends and high and low sales prices of our stock.

Declaration and payment of dividends is within the sole discretion of our
Board of Directors, subject to limitations imposed by Delaware law and
compliance with our credit agreements, and will depend on our earnings, capital
requirements, financial condition and such other factors as the Board of
Directors deems relevant. As of March 19, 2003, there were 41,240,297 shares of
common stock outstanding held by approximately 889 stockholders of record.

12

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated operations data for 2002, 2001 and 2000 and
consolidated balance sheet data as of December 31, 2002 and 2001 set forth below
have been derived from our consolidated financial statements, and are qualified
by reference to the consolidated financial statements included herein audited by
PricewaterhouseCoopers LLP, independent accountants. The selected consolidated
statement of income data for 1992 through 1999 and the consolidated balance
sheet data as of December 31, 1992 through 2000 have been derived from our
audited consolidated financial statements not included herein. These historical
results are not necessarily indicative of the results of operations to be
expected for any future period.

SELECTED CONSOLIDATED FINANCIAL DATA

- ---------------

* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes."

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

GENERAL

We are one of the largest heavy civil contractors in the United States and
are engaged in the construction of highways, dams, airports, mass transit
facilities and other infrastructure-related projects. We have offices in
California, Washington, Oregon, Alaska, Texas, Georgia, Nevada, Arizona,
Florida, New York and Utah. Our business involves two operating segments: the
Branch Division and the Heavy Construction Division.

Our 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, current utilization of
equipment and other resources, 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.

Our general and administrative costs include salaries and related expenses,
incentive compensation, discretionary profit sharing and other variable
compensation, as well as other overhead costs to support our overall 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 employees
who had been working on projects to estimating and bidding activities until
another project becomes available, which temporarily moves their salaries and
other 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
(generally five years). Depending on the mix of cash and restricted stock, these
incentives can have the effect of increasing general and administrative expenses
in a very profitable year and decreasing expenses in less profitable years.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience, however
actual amounts could differ from those estimates. Our significant accounting
policies are described in Note 1 of the Notes to Consolidated Financial
Statements.

Certain of our accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from construction contracts, accounting for construction joint
ventures, the valuation of long-lived assets and the estimation of valuation
allowances and accrued liabilities. We evaluate all of our estimates and
judgments on an on-going basis.

Revenue Recognition for Construction Contracts: The majority of our
contracts with our customers are either "fixed unit price" or "fixed price".
Under fixed unit price contracts, we are committed to provide materials or
services required by a project at fixed unit prices (for example, dollars per
cubic yard of concrete or cubic yards of earth excavated). While the fixed unit
price contract shifts the risk of estimating the quantity of units required for
a particular project to the customer, any increase in our unit cost over the
unit price bid, whether due to inflation, inefficiency, faulty estimates or
other factors, is borne by us unless otherwise provided in the contract. Fixed
price contracts are priced on a lump-sum basis under which we bear the risk that
we may not be able to perform all the work for the specified contract amount.
Our design/build projects are generally fixed price contracts and, primarily as
a result of the growth in our design/build business in the last several years,
the number of design/build contracts has been increasing. All federal government
contracts and

14

many of our other contracts provide for termination of the contract for the
convenience of the party contracting with us, with provisions to pay us for work
performed through the date of termination.

We use the percentage of completion accounting method for construction
contracts in accordance with the American Institute of Certified Public
Accountants Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." Revenue and earnings
on construction contracts, including construction joint ventures, are recognized
on the percentage of completion method in the ratio of costs incurred to
estimated final costs. Provisions are recognized in the statement of income for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total revenue.

Revenue from contract claims is recognized when we have a signed settlement
agreement and payment is assured. Revenue from contract change orders is
recognized when the owner has agreed to the change order. Revenue in an amount
equal to cost incurred is recognized prior to contracts reaching 25% completion.
The related profit is deferred until the period in which such percentage
completion is attained. It is our judgment that until a project reaches 25%
completion, there is insufficient information to determine with a reasonable
level of assurance what the estimated profit on the project will be.

Contract cost consists of direct costs on contracts, including labor and
materials, amounts payable to subcontractors, direct overhead costs and
equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is recorded as incurred and revisions in contract revenue and cost
estimates are reflected in the accounting period when known. The 25% threshold
is applied to all percentage of completion projects without exception unless and
until we project a loss on the project, in which case the estimated loss is
immediately recognized.

The accuracy of our revenue and profit recognition in a given period is
almost solely dependent on the accuracy of our estimates of the cost to complete
each project. Our cost estimates use a highly detailed "bottom up" approach and
we believe our experience allows us to produce materially reliable estimates.
However, our projects can be highly complex and in almost every case the profit
margin estimates for a project will either increase or decrease to some extent
from the amount that was originally estimated at the time of bid. Because we
have many projects of varying levels of complexity and size in process at any
given time (during 2002 we worked on over 3,500 projects) these changes in
estimates can offset each other without materially impacting our profitability.
However, large changes in cost estimates, particularly in the bigger, more
complex projects in our Heavy Construction Division, can have a more significant
effect on profitability.

Factors that can contribute to changes in estimates of contract cost and
profitability include, without limitation, site conditions that differ from
those assumed in the original bid (to the extent that contract remedies are
unavailable), the availability and skill level of workers in the geographic
location of the project, the availability and proximity of materials, the
accuracy of the original bid and subsequent estimates, inclement weather and
timing and coordination issues inherent in all projects, including design/build
projects. The foregoing factors as well as the stage of completion of contracts
in process and the mix of contracts at different margins may cause fluctuations
in gross profit between periods and these fluctuations may be significant.

Construction Joint Ventures: As described under Note 4 to our Consolidated
Financial Statements, we participate in various construction joint venture
partnerships in order to share expertise, risk and resources for certain highly
complex projects. Generally, each construction joint venture is formed to
accomplish a specific project, is jointly controlled by the joint venture
partners and is dissolved upon completion of the project. We select our joint
venture partners based on our analysis of the prospective venturer's
construction and financial capabilities, expertise in the type of work to be
performed and past working relationships with us, among other criteria. The
joint venture agreements typically provide that our interests in any profits and
assets, and our respective share in any losses and liabilities that may result
from the performance of the contract are limited to our stated percentage
interest in the project.

The venture's contract with the project owner typically requires joint and
several liability among the joint venture partners. Our agreements with our
joint venture partners provide that each party will assume and pay

15

its full proportionate share of any losses resulting from a project, however, if
one of our partners was unable to pay its proportionate share we would be fully
liable under our contract with the project owner. Circumstances that could lead
to a loss under these guarantee arrangements include a partner's inability to
contribute additional funds to the venture in the event that the project
incurred a loss or additional costs that we could incur should the partner fail
to provide the services and resources toward project completion that had been
committed to in the joint venture agreement.

Under each joint venture agreement, one partner is designated as the
sponsor. The sponsoring partner typically provides all administrative,
accounting and most of the project management support for the project and
generally receives a fee from the joint venture for these services. We have been
designated as the sponsoring partner in certain of our current joint venture
projects and are a non-sponsor in others.

Consistent with industry practice, we account for our share of the
operations of these jointly controlled ventures on a pro rata basis in the
consolidated statements of income and as a single line item in the consolidated
balance sheets. If we were to account for these interests using a one-line item
equity method presentation in the consolidated statements of income, revenue and
contract costs would be materially lower; however, net income would not change.
Alternatively, if we were to account for these interests using full
consolidation, assets and liabilities in the consolidated balance sheet would be
materially higher and revenue and contract costs in the consolidated statements
of income would be materially higher; however, net income would not change.

Valuation of Long-Lived Assets: Long-lived assets, which include property,
equipment and acquired identifiable intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Impairment evaluations involve management
estimates of asset useful lives and future cash flows. Actual useful lives and
cash flows could be different from those estimated by management and this could
have a material effect on our operating results and financial position.

Additionally, we had approximately $19.1 million in goodwill at December
31, 2002, primarily related to our acquisition of Halmar Builders of New York,
Inc. in 2001 which was recorded in accordance with Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
under the transitional rules of that statement. We perform goodwill impairment
tests on an annual basis and more frequently when events and circumstances occur
that indicate a possible impairment of goodwill. In determining whether there is
an impairment of goodwill, we calculate the estimated fair value of the
reporting unit in which the goodwill is recorded using a discounted future cash
flow method. We then compare the resulting fair value to the net book value of
the reporting unit, including goodwill. If the net book value of a reporting
unit exceeds its fair value, we measure the amount of the impairment loss by
comparing the implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill. To the extent that the carrying amount of a
reporting unit's goodwill exceeds its implied fair value, we recognize a
goodwill impairment loss. We performed our annual impairment test in 2002 and we
determined that no impairment had occurred. The discounted future cash flow
method used in the first step of our impairment test involves significant
estimates including future cash inflows from estimated revenues, future cash
outflows from estimated project cost and general and administrative costs,
estimates of timing of collection and payment of various items and future growth
rates as well as discount rate and terminal value assumptions. Although we
believe the estimates and assumptions that we used in testing for impairment are
reasonable and supportable, significant changes in any one of these assumptions
could produce a significantly different result.

Valuation Allowances and Accrued Liabilities: We grant credit to customers
that include general contractors, property owners and developers, governmental
agencies and other companies in a variety of industries. Although we generally
do not require collateral, the law provides us with the ability to file
mechanics liens on real property improved for private customers in the event of
non-payment. We are subject to potential credit risk related to changes in
business and the general economy. We analyze specific customer accounts
receivable including the age of specific accounts, customer payment history and
general economic trends when evaluating the adequacy of the allowance for
doubtful accounts.

16

We carry insurance policies to cover various risks, primarily general
liability and workers compensation, under which we are liable to reimburse the
insurance company for a portion of each claim paid. The amounts that we are
liable for generally range from the first $0.5 million to $1.0 million per
occurrence. We accrue for the estimated ultimate liability for incurred losses,
both reported and unreported, using actuarial methods based on historic trends
modified, if necessary, by recent events.

There can be no assurance that the actual amounts of our valuation
allowances and estimated accrued liabilities will not change as better
information becomes available, and these changes could be significant.

CURRENT YEAR

REVENUE

Revenue: Revenue for the year ended December 31, 2002 increased over the
year ended December 31, 2001 by $216.7 million, or 14.0%. Branch Division
revenue in 2002 included $155.4 million of revenue from our newly consolidated
majority owned Wilder Construction Company ("Wilder") subsidiary and $51.4
million of revenue from the businesses acquired from Robinson Construction
Company and Parnum Paving, Inc. ("Robinson" and "Parnum") (see Note 16 to the
Consolidated Financial Statements). Excluding the Wilder, Robinson and Parnum
revenue, Branch Division Revenue for 2002 decreased compared with 2001 by $102.7
million, or 9.5%. Revenue was lower in many of our Branch Division's locations
in 2002 compared to 2001, with the most significant decreases in Utah and
California (excluding Parnum and Robinson) and decreases were experienced in
both public and private sector revenue. We believe the decreases are
attributable to a general slowdown in private development projects and the
related increased competitiveness in bidding for public sector projects due to a
weak economic climate as well as a lower level of funding available for public
sector projects in many of our locations.

17

Revenue from our Heavy Construction Division increased 24.3% in the year
ended December 31, 2002 over the year ended December 31, 2001. Included in HCD
revenue in 2002 was $102.3 million of revenue from our new Granite Halmar
location in New York. The Granite Halmar business was acquired on July 1, 2001
and made its first revenue contribution in the third quarter of 2001. In
addition to the impact of having our New York location for a full year in 2002
versus six months in 2001, the increased HCD revenue in 2002 reflects larger
volume from higher backlog at the beginning of 2002.

Revenue from the sale of materials in 2002 included $24.9 million from
Wilder and the businesses acquired from Parnum and Robinson. Excluding this
revenue, our revenue from the sale of materials increased $13.0 million, or
6.8%, in 2002 as compared with 2001, due to the combined factors of higher unit
selling prices and slightly higher volume in many of our locations. We believe
that unit selling prices have been positively influenced by the growing scarcity
of permitted aggregate resources.

BACKLOG

Backlog: Our backlog at December 31, 2002 of $1,856.5 million was $479.3
million, or 34.8% higher than our backlog at December 31, 2001. Our 2002 backlog
includes $95.2 million of backlog in our Branch Division from our newly
consolidated Wilder subsidiary and the businesses acquired from Parnum and
Robinson. The increased Branch Division backlog reflects higher backlog from
public sector projects due primarily to its 35.0% share of a $170.7 million
design/build railroad project in Nevada that is shared between our Branch
Division and HCD as well as the contributions from Wilder and the businesses
acquired from Parnum and Robinson. The increased backlog of public sector
projects in our Branch Division at December 31, 2002 was partially offset by a
$29.7 million, or 31.5%, decrease in Branch Division private sector backlog from
December 31, 2001 which we believe is attributable to the impact of a slowdown
in private development projects due to a relatively weak economic climate (see
"Outlook").

18

Heavy Construction Division backlog increased 35.3% from $1,009.5 million
at December 31, 2001 to $1,365.7 million at December 31, 2002. The increase was
largely due to higher backlog at our Granite Halmar location in New York and
also reflected the high number of large, complex projects, including
design/build projects that were available to bid nationwide in 2002 (see
"Outlook"). HCD's awards in the fourth quarter of 2002 include three new
projects for its Granite Halmar location in New York: a $162.0 million New York
City transit project; a $66.2 million Amtrak project; and a $36.2 million
portion of a $90.6 million subway reconstruction project joint venture.

Although our backlog of projects in California grew slightly in 2002
compared with 2001, it declined as a percentage of total backlog from 21.3% in
2001 to 14.6% in 2002 due to relatively greater increases in other parts of the
West, primarily from Wilder, and in the Northeast at our Granite Halmar location
in New York. Our backlog from local public agency projects at December 31, 2002
increased significantly from the amount at December 31, 2001, primarily because
of the award of the $170.7 million design/build railroad project in Nevada and
the $162.0 million New York City transit project during 2002.

GROSS PROFIT

Gross Profit: Our gross profit as a percent of revenue increased from
11.9% for the year ended December 31, 2001 to 12.7% for the year ended December
31, 2002, as a result of higher gross profit margins in HCD partially offset by
slightly lower gross profit margins in our Branch Division. The increase in HCD
gross profit margin in 2002 was largely due to a generally more profitable mix
of HCD projects compared to a year ago and the absence of a deterioration in
margin of a non-sponsored joint venture project on the East Coast that we
experienced in 2001. This increase was partially offset by the recognition of
additional costs to complete several New York area projects that negatively
impacted gross margin in the first and second quarters of 2002. Additionally,
both HCD and Branch Division gross profit margins were slightly negatively
impacted by an increase in the amount of revenue recognized from projects that
had not yet reached 25% complete from $70.2 million in 2001 to $99.1 million in
2002. We recognize revenue only to the extent of cost, deferring profit
recognition, until a project reaches 25% complete. Branch Division gross profit
margins were also impacted in 2002 by lower profitability on certain projects
assumed in the acquisition of the Parnum and Robinson businesses as well as
increased competition in a slower economic climate.

Cost of revenue consists of direct costs on contracts, including labor and
materials, subcontractor costs, direct overhead costs and equipment expense
(primarily depreciation, maintenance and repairs). Although the composition of
costs varies with each contract, our gross profit margins were not significantly
impacted by changes in any one of these costs during 2002.

GENERAL AND ADMINISTRATIVE EXPENSES

19

General and Administrative Expenses. Salaries and related expenses
increased in the year ended December 31, 2002 over 2001 due to increased
staffing to support our current and expected growth, including approximately
$7.7 million in costs associated with the consolidation of Wilder and our
geographic expansion into Northern California and approximately $3.0 million
resulting from the inclusion of the Granite Halmar location in New York for the
entire year in 2002 versus only six months in 2001. Additionally, salaries and
related expenses increased in certain locations due to certain personnel
normally charged to job cost being temporarily reassigned to general and
administrative cost to bid new work while awaiting reassignment to another
project. Incentive compensation increased in 2002 primarily due to higher
operating income in our Heavy Construction Division and the inclusion of Wilder
in the 2002 amount. Increases in other general and administrative expenses
primarily resulted from costs associated with our continued growth, including
costs associated with our expansion into Northern California and New York as
well as the inclusion of costs from the newly consolidated Wilder subsidiary.
Other general and administrative costs include information technology,
occupancy, office equipment and supplies, depreciation, travel and
entertainment, outside services, advertising and marketing, training and other
miscellaneous expenses, none of which individually exceeded 10% of total general
and administrative expense.

OPERATING INCOME

Operating Income: Our Heavy Construction Division's contribution to
operating income increased in 2002 compared to 2001 due primarily to increased
volume at a higher profit margin as described in "Revenue" and "Gross Profit"
above. Branch Division operating income in 2002 included approximately $5.0
million from our newly consolidated Wilder subsidiary and our expansion into
Northern California and was lower in 2002 compared to 2001 primarily because of
lower revenue and gross profit margins as described in "Revenue" and "Gross
Profit" above. Unallocated other corporate expenses principally comprises
corporate general and administrative expenses.

OTHER INCOME (EXPENSE)

Other Income(Expense): Other income decreased by $12.5 million to $4.6
million in 2002 compared with 2001. The decrease was due primarily to the
absence of $5.1 million recognized on the sale of excess and developed property
in 2001, lower gains on the sale of equipment and the impact of discontinuing
recording the results of T.I.C. Holdings, Inc. ("TIC") and Wilder in other
income under the equity method of accounting during the second quarter of 2002
(see Notes 5 and 16 to the Consolidated Financial Statements). Additionally, our
interest income was negatively impacted by lower interest rates on our
investments in 2002 offset by the recognition of deferred interest income on a
note receivable from the California Private Transportation Company, LP when
collectibility became assured in the fourth quarter of 2002 (see Note 17 to

20

our Consolidated Financial Statements), and recognition of "look back" interest
income related to taxes paid in previous years on income from certain
construction projects.

PROVISION FOR INCOME TAXES

Provision for Income Taxes: Our effective tax rate decreased to 36.2% in
2002 from 38.0% in 2001 due to the combined factors of higher percentage
depletion deductions related to quarry properties and higher tax credits. We
currently expect that we will be able to maintain this effective tax rate
through the end of 2003.

OUTLOOK

Looking ahead at 2003, we are entering the year with a record backlog of
$1.9 billion and a cautiously optimistic outlook for the months ahead. Our
outlook is influenced by a number of key economic and political issues facing
our industry this year. While this will undoubtedly be a key year for
transportation funding, both at the state and federal levels, this is also a
year of uncertainty as state budget deficits remain and the war with Iraq
threatens the amount of funding that will be spent on transportation
infrastructure.

Based on our bidding successes in 2002 and the tremendous number of
available bidding opportunities, the business outlook for HCD is very good. We
are continuing to witness a number of larger projects coming out to bid in
highway, transit and bridge construction. In addition, we are optimistic about
our Granite Halmar business and the increasing number of similar opportunities
in the New York City-area market - including the Port Authority of New York and
New Jersey's recent approval of a $5 billion budget for 2003 that includes $1.84
billion for new transportation facilities.

HCD is targeting bidding opportunities nationwide, including large,
technically complex design-build projects, which we believe play to our
strengths. Examples of upcoming bidding opportunities include three projects in
Texas totaling approximately $500 million, a $200 to $400 million highway
project in California, a $140 to $150 million transit project in Philadelphia
and an approximately $260 million bridge project in Maryland. As it relates to
our existing backlog of work and potential new work, it is important to note
that due to the size of the projects and the time it takes to reach the 25
percent complete profit recognition threshold, any new award would not likely
impact earnings until late 2003 or 2004

Our Branch Division performance in 2003 will depend on the levels of
transportation spending on the local, state and federal level in addition to the
strength and timing of an economic recovery. While some branches are continuing
to witness demand for site development for residential and commercial
construction, others are anticipating a down year due to the current economic
environment and its negative impact on the demand for private sector work in
their areas. Historically, a slowdown in the private sector work generally
translates into increased competition in the public sector bidding arena.

With respect to oil prices, we are subject to oil price volatility as it
relates primarily to our use of liquid asphalt and diesel fuel. Some of our
projects are indexed and include price escalation clauses that provide
protection in the event that oil product prices increase significantly. Although
we are exposed to price spikes in projects that do not include such clauses, we
have historically been able to recover some or all of those costs as prices come
down. This holds particularly true in our branches due to the short duration of
their projects and their ability to respond quickly to fluctuating prices. In
general, while we may have some exposure in this area of our business, we have
not been materially adversely impacted to date.

At the state level, we will be paying close attention to how the states
resolve their respective budget shortfalls. According to the American Road and
Transportation Builders Association (ARTBA), "if the states react by delaying
some highway construction to help alleviate the budget pressures, the highway
construction

21

season in 2003 could be stretched as thin as it was this year (2002)." In a
survey conducted by ARTBA, 25 of the largest state Departments of Transportation
are trying to maintain level highway construction programs in 2003 or even
provide some growth. Also according to ARTBA, approximately 46 states are
working to overcome a combined budget gap of $37 billion in their most recent
fiscal year (ending June 30) and a combined $58 billion deficit for the 2004
fiscal year. Most states, unlike the federal government, are required by law to
balance their budgets.

In California, where 41.8% of our 2002 revenues were derived, the state is
faced with a significant budget shortfall. Projections from the Legislative
Analyst's Office Fiscal Outlook and the Administration's 2003-2004 Governor's
Budget estimates the shortfall to be between $21.1 billion and $34.6,
respectively. In an attempt to reduce the shortfall, a budget proposal from
Governor Gray Davis calls for significant reductions for both the current year
(2002-2003) and budget year (2003-2004). The proposed budget includes a $1.8
billion cut in transportation funding, largely consisting of the suspension of
the Proposition 42 transfer of the sales tax revenues derived from gasoline
sales in 2003-04 ($1.1 billion), the "forgiveness" of a scheduled General Fund
loan repayment to the State Highway Account ($500 million), and recapturing
Transportation Congestion Relief Program funds not yet allocated in 2002-2003
($100 million). Although it is too early to quantify the impact that this crisis
will have on our business, the branches do anticipate a decrease in the amount
of work the California Department of Transportation will be putting out to bid.
The California legislature will consider the governor's proposal over the next
few months as it attempts to agree on the state's 2003-2004 budget. Agreement
may be quite difficult and may take the rest of the year.

Overall, we believe that a strong performance in HCD in 2003 has the
potential to offset the expected decrease in the Branch Division's financial
results -- this is an excellent example of the value of Granite's
diversification strategy. Our ability to diversify projects, customers and
geographic markets, allows us to better withstand fluctuations in the economy
and to mitigate the risks inherent in the construction business. More
specifically, while the nature of the projects performed by the branches is
short-term "turn business", the larger and longer duration projects undertaken
by HCD provide us with more long-term visibility and consistency in earnings. It
is this difference that helps to make what is naturally an unpredictable
business somewhat more predictable.

On the federal front, after much debate, the House of Representatives and
the Senate recently passed a $31.8 billion federal transportation bill for
fiscal year 2003. Last year, the Bush Administration's budget recommendation
called for an $8.6 billion or 27% cut to transportation funding based on lower
than expected revenue contributions to the Highway Trust Fund. The $31.8 billion
level is in line with fiscal year 2002 spending levels and is likely to serve as
a baseline for the upcoming reauthorization of the Transportation Equity Act for
the 21st Century (TEA 21). In late February, the House Transportation and
Infrastructure (T&I) Committee recommended to the House Budget Committee a
combined federal highway and transit program funding level of $48 billion for
fiscal year 2004.

Later this year, Congress will begin focusing on the TEA 21 reauthorization
bill. The current legislation expires on September 30, 2003 and was the largest
federal spending bill in history. Signed by President Clinton on June 9, 1998,
TEA 21 was a six-year, $218 billion program providing federal funding for
highway and transit construction. The size of the next reauthorization bill
remains a key question in the process. While TEA 21 provided a 44% increase in
highway spending over the prior authorization, additional sources of revenue for
the reauthorization bill may be harder to find at this time. T&I Committee
Chairman Don Young (R-Alaska) has publicly announced his support of indexing the
federal gas tax, which, according to industry officials, could potentially raise
$15 billion over the life of the next highway bill. Other proposals by industry
groups for a large increase would require either a gas tax increase or bond
issuance -- both of which are likely to meet with resistance in the
Republican-controlled Congress and Administration.

In summary, we are very pleased with the success of our current operations
in what could be characterized as a challenging economy. We enter 2003 with a
healthy backlog of work and a number of substantial bidding opportunities ahead
for HCD. In the long-term, we remain optimistic that both the state and federal
leaders will work to provide the funding that is needed to meet the nation's
growing transportation needs.

22

PRIOR YEARS

Revenue and Backlog. Total revenue in 2001 increased to $1,548.0 million
from $1,348.3 million in 2000, which reflected increases in both divisions.
Branch Division revenue increased 7.2% in 2001 due to increases in public sector
revenue and revenue from material sales which were partially offset by a
decrease in private sector revenue. The increased revenue from material sales
was due to both higher sales volume and generally higher unit prices. The higher
volume was largely due to increases in construction activity near certain of our
plant locations. HCD revenue increased 37.6% in 2001 due primarily to revenue
generated from contracts added to backlog in late 2000 through mid 2001 and
revenue contributed by HCD's new Granite Halmar location in New York of
approximately $65.0 million. On a market sector basis, revenue from private
sector contracts decreased $50.8 million to $282.5 million or 18.3% of total
revenue in 2001, from $333.4 million or 24.7% of total revenue in 2000. Our
private sector work was primarily comprised of site preparation for both
commercial and residential developments and privately funded transportation
projects. Our revenue from public sector contracts increased to $1,075.6 million
or 69.5% of total revenue in 2001 from $855.1 million or 63.4% of total revenue
in 2000. The level of funding for public sector projects remained strong through
2001 in most of our geographic markets.

Our backlog at December 31, 2001 was $1,377.2 million, up $256.7 million,
or 22.9% from December 31, 2000. The increase in backlog was primarily
attributable to HCD backlog obtained as a result of the Halmar acquisition as
well as awards in the latter half of 2001 which included our $113.9 million
share of a subway reconstruction project in New York, our $69.5 million share of
a design/build rail reconstruction project in Florida and a $44.8 million
highway project in North Carolina.

Gross Profit. For the year ended December 31, 2001, gross profit was
$183.6 million, a $7.0 million decrease from 2000. As a percentage of revenue,
gross profit decreased in 2001 to 11.9% from 14.1% in 2000. The decreased gross
profit margin reflected decreases in HCD that were partially offset by slightly
increased profit margins in the Branch Division. Contributing to the decline in
the HCD profit margin was a reduction in forecasted profitability of a
non-sponsored joint venture project on the East Coast, a generally less
profitable mix of HCD projects compared to the prior year and a higher level of
revenue recognized for projects less than 25% complete. Year to date revenue
recognized for projects less than 25% complete was approximately $70.2 million
and $31.5 million at December 31, 2001 and 2000, respectively. As described
under "Critical Accounting Policies" above, we recognized revenue only to the
extent of cost incurred until a project reaches 25% complete. The reduction in
forecasted profitability of an East Coast joint venture project partially
related to the acceleration of work to complete the project on time to avoid
paying liquidated damages. We recorded a pretax loss of approximately $7.6
million for our portion of the expected reduced profitability of the project in
the year ended December 31, 2001.

Cost of revenue consists of direct costs on contracts; including labor and
materials, amounts payable to subcontractors, direct overhead costs and
equipment expense (primarily depreciation, fuel, maintenance and repairs).
Although the composition of costs varies with each contract, our gross profit
margins were not significantly impacted by changes in any one of these costs
during 2001. We did experience upward pressure on costs associated with natural
gas, fuel and asphalt prices early in 2001, but these had substantially reversed
by the end of the year and our gross profit margins were not materially impacted
by these changes.

General and Administrative Expenses. Salaries and related expenses
increased in 2001 over 2000 due primarily to increased staffing to support our
current and expected growth including staff supporting our new Granite Halmar
location in New York. Incentive compensation and discretionary profit sharing
and pension costs decreased in 2001 compared to 2000 primarily as a function of
our decreased profitability and the absence of additional expense recognized in
2000 related to the impact of certain members of our management reaching age 62.
Other general and administrative expenses include various costs to support our
operations, none of which exceeded 10% of total general and administrative
expenses. The increase in other general and administrative expenses in 2001
primarily reflected the increases in facilities, information technology support,
pre-bidding and other costs to support our growth.

Operating Income. HCD's contribution to operating income in 2001 decreased
compared with the 2000 contribution due to the decreased gross profit margin as
described in "Gross Profit" above. Additionally,

23

HCD's general and administrative expenses increased during 2001 to support the
higher level of revenue and backlog as well as increased costs to support a high
level of bidding activity during the year. The Branch Division's contribution to
operating income in 2001 increased compared to 2000 due primarily to increases
in gross profit margin related to materials sales during the year.

Other Income (Expense). Other income increased by $9.9 million to $17.2
million in 2001 from $7.3 million in 2000. The increase was attributable to
gains recognized on the sale of excess and developed property of approximately
$5.1 million and higher equity in earnings recognized from our investments in
TIC and Wilder. Although we had higher levels of cash equivalents and other
investments during 2001, the effect of declining interest rates left interest
income relatively flat as compared to 2000.

Provision for Income Taxes. Our effective tax rate was 38.0% in 2001 and
39.9% in 2000. The 1.9% decrease reflected the absence of additional tax expense
recognized in 2000 related to our reaching an agreement with TIC to divest our
30.0% investment over a three and one-half year period.

LIQUIDITY AND CAPITAL RESOURCES

During 2002, we generated cash and cash equivalents from operating
activities of $104.0 million, which represented a decrease of $20.6 million
compared with 2001. A reduction in cash and cash equivalents from net changes in
billings in excess of costs and estimated earnings represented a significant
portion of the overall decrease and was attributable to the absence of the large
growth in this balance we experienced in 2001. The 2001 growth was due to cash
timing differences on several large projects added to our backlog in the latter
half of 2001. Additionally, cash and cash equivalents increased due to a
decrease in accounts receivable in 2002, due primarily to lower revenue in the
fourth quarter of 2002 (after adjusting for the impact of Wilder) and higher
collections. This increase was offset by a corresponding decrease in accounts
payable which was due to the cost impact of lower fourth quarter revenue.

Cash used by investing activities in 2002 increased by $37.0 million
compared with 2001 due to higher net purchases of marketable securities, lower
proceeds from sales of property and equipment and higher amounts spent acquiring
businesses which were partially offset by lower purchases of property and
equipment and cash received from T.I.C. Holdings, Inc. ("TIC") related to the
repurchase of TIC shares held by the Company. During the third quarter of 2002,
the Company purchased $30.9 million of U.S. government debt securities with
maturities through 2005 that have been recorded as long-term marketable
securities in the consolidated balance sheet at December 31, 2002. The longer
term securities were purchased as part of our overall investment strategy that
is designed to balance liquidity with achieving a reasonable rate of return on
our invested balances.

Cash used by financing activities in 2002 was $43.1 million as compared to
$39.9 million provided by financing activities in 2001, reflecting the absence
of significant proceeds from long-term debt and the increase in cash expended to
repurchase our stock, partially offset by proceeds received from the exercise of
warrants to purchase the our stock during 2002.

24

As more fully described in Note 9 and Note 14 to our Consolidated Financial
Statements, the following table summarizes our significant contractual
obligations outstanding as of December 31, 2002 (in thousands):

The years of expected payment of deferred compensation are based on estimates
and may be subject to change.

In 1999, our Board of Directors authorized us to repurchase, at our
management's discretion, up to $35.0 million of our common stock on the open
market or in privately negotiated block purchases, exclusive of repurchases
related to employee benefit plans, of which approximately $10.0 million remained
at September 26, 2002. On September 26, 2002, our Board of Directors authorized
us to repurchase $25.0 million of our common stock. The $25.0 million
authorization replaced the $10.0 million remaining from the prior authorization.
In addition, we are authorized to purchase shares for contribution to our
Employee Stock Ownership Plan ("ESOP"). During the year ended December 31, 2002,
we repurchased 540,400 shares of our common stock on the open market for a total
purchase price of $9.8 million. Of the shares repurchased, 348,600 shares were
retired and 191,800 shares were contributed to the ESOP.

On March 24, 2003, we announced a quarterly cash dividend of $0.10 per
share on our common stock. The dividend is payable on April 15, 2003 to
stockholders of record on March 28, 2003.

We had standby letters of credit totaling approximately $4.2 million
outstanding at December 31, 2002, all of which expire during 2003. Additionally,
we generally are required to provide various types of surety bonds that provide
an additional measure of security under certain public and private sector
contracts. At December 31, 2002, approximately $1.8 billion of our backlog was
bonded and performance bonds totaling approximately $4.5 billion were
outstanding. Performance bonds do not have stated expiration dates; rather, we
are released from the bonds when each contract is completed. Our ability to
obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors including the capacity of
the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that is currently bonded and their current
underwriting standards, which may change from time to time. We have been bonded
by the same surety for more than 75 years and have never been refused a bond.
During 2002, we added two additional sureties to ensure access to bonding in
support of our growth. The inability to obtain surety bonds would have a
material adverse effect on our business.

As described under "Critical Accounting Policies" above, we participate in
various construction joint venture partnerships. Under the joint ventures'
contracts with the project owners each of the partners are joint and severally
liable for performance under the contracts. Although our agreements with our
joint venture partners provide that each party will assume and pay its full
proportionate share of any losses resulting from a project, if one of our
partners was unable to pay its proportionate share we would be fully liable
under our contract with the project owner. Circumstances that could lead to a
loss under these guarantee arrangements include a partner's inability to
contribute additional funds to the venture in the event that the project
incurred a loss or additional costs that we could incur should the partner fail
to provide the services and resources toward project completion that had been
committed to in the joint venture agreement. At December 31, 2002 approximately
$900.0 million of work representing either our partners' proportionate share or
work that our partners' are directly responsible for, had yet to be completed.
We have never incurred a loss under these joint and several liability
provisions, however it is possible that we could in the future and such a loss
could be significant.

Restrictive covenants under the terms of our debt agreements require the
maintenance of certain levels of working capital and cash flow and the
maintenance of tangible net worth (as defined) of approximately

25

$370.2 million. We were in compliance with these covenants at December 31, 2002.
Additionally, our Wilder subsidiary has restrictive covenants (on a Wilder
stand-alone basis) under the terms of its debt agreements that include the
maintenance of certain ratios of working capital, liabilities to net worth and
tangible net worth and restricts Wilder capital expenditures in excess of
specified limits. Wilder was in compliance with these covenants at December 31,
2002. Failure to comply with these covenants could cause the amounts due under
the debt agreements to become currently payable.

We expect the principal use of funds for the foreseeable future will be for
capital expenditures, working capital, acquisitions and other investments. We
have budgeted $68.3 million for capital expenditures in 2003, which includes
amounts for construction equipment, aggregate and asphalt plants, buildings,
leasehold improvements and the purchase of land and aggregate reserves.

In addition to our working capital and cash generated from operations, we
currently have access to funds under a $60.0 million bank revolving line of
credit, of which $56.0 million was available at December 31, 2002. Additionally,
our Wilder subsidiary has a bank revolving line of credit of $10.0 million, all
of which was available at December 31, 2002. Both lines of credit expire in June
2004.

On January 3, 2003, the California Private Transportation Company, LP, of
which we are a 22.22% limited partner, closed the sale of the State Route 91
Tollroad Franchise to the Orange County Transportation Authority for $72.5
million in cash and the assumption of $135.0 million in long-term debt. We
completed construction of the $60.4 million project in 1995 and have maintained
an equity interest in the operations of the facility since it opened in December
1995. We will record a gain on the sale of the tollroad of between $10.0 million
and $12.0 million, net of tax, in the first quarter of 2003, with the exact
amount of the gain contingent upon final transaction costs and other
miscellaneous adjustments.

We believe that our current cash and cash equivalents, short-term
investments, cash generated from operations and amounts available under our
existing credit facilities will be sufficient to meet our expected working
capital needs, capital expenditures, financial commitments and other liquidity
requirements associated with our existing operations through at least the next
12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations," which is effective for our fiscal year
beginning January 1, 2003. SFAS 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires, among other things, that
the retirement obligations be recognized when they are incurred and displayed as
liabilities on the balance sheet. In addition, the asset's retirement costs are
to be capitalized as part of the asset's carrying amount and subsequently
allocated to expense over the asset's useful life. We do not believe the
adoption of SFAS 143 will have a material effect on our financial position,
results of operations, or cash flows.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred and is
effective January 1, 2003. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit by the company. We do not
believe the adoption of SFAS 146 will have a material effect on our financial
position, results of operations, or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 supercedes FASB Interpretation No. 34, "Disclosure of Indirect
Guarantees of Indebtedness of

26

Others". The disclosure provisions of FIN 45 are effective for financial
statements of both interim and annual periods that end after December 15, 2002
and the initial recognition and measurement provisions are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. We
are currently assessing the impact of the prospective measurement provisions of
this statement.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation --
Transition and Disclosure -- an amendment of FASB Statement No. 123." SFAS 148
amends SFAS 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As discussed above, under our accounting policy for
stock-based compensation, we adopted the fair value provisions of SFAS 123
effective October 1, 2002. Due to the limited number of options we grant in a
given year, the impact of this change is immaterial, and therefore no additional
disclosure is provided.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities -- an Interpretation of ARB No.
51." FIN 46 addresses consolidation accounting for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective immediately for all variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. We are in the
process of assessing the impact, if any, of FIN 46 on our financial position or
results of operations.

QUARTERLY RESULTS

The following table sets forth selected unaudited financial information for
the eight quarters in the period ended December 31, 2002. This information has
been prepared on the same basis as the audited financial statements and, in the
opinion of management, contains all adjustments necessary for a fair
presentation thereof.

QUARTERLY FINANCIAL DATA
(UNAUDITED -- IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

Net income per share calculations are based on the weighted average common
shares outstanding for each period presented. Accordingly, the sum of the
quarterly net income per share amounts may not equal the per share amount
reported for the year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks due largely to changes in interest
rates, which we have managed primarily by managing the maturities in our
investment portfolio. Through December 31, 2002, we did not use derivatives to
alter the interest characteristics of our investment securities or our debt
instruments. We do not transact business in foreign currencies.

The fair value of our short-term held-to-maturity investment portfolio and
related income would not be significantly impacted by changes in interest rates
since the investment maturities are short and the interest rates are primarily
fixed. The fair value of our long-term held-to-maturity investment portfolio may
be impacted by changes in interest rates. Our mutual fund portfolio of $9.3
million is exposed to equity price risks.

We had senior notes payable of $53.3 million at December 31, 2002 which
carry a fixed interest rate of 6.54% per annum with principal payments due in
nine equal annual installments that began in 2002 and senior notes payable of
$75.0 million at December 31, 2002 which carry a fixed interest rate of 6.96%
per annum with principal payments due in nine equal annual installments
beginning in 2005.

In February 2003, we entered into two interest rate swap agreements in
order to gain access to the lower borrowing rates normally available on
floating-rate debt, while avoiding the prepayment and other costs that would be
associated with refinancing our long-term fixed-rate debt. The swaps purchased
have a combined notional amount of $50 million, six-month maturity and provide
for us to pay variable interest at LIBOR plus set rate spreads and receive fixed
interest of between 6.54% and 6.96%. The notional amount does not quantify risk
or represent assets or liabilities, but rather, is used in the determination of
cash settlement under the swap agreement. As a result of purchasing these swaps,
we will be exposed to credit losses from counter-party non-performance; however,
we do not anticipate any such losses from these agreements, which are with a
major financial institution. The agreements will also expose us to interest rate
risk should LIBOR rise during the term of the agreements.

28

The table below presents principal amounts and related weighted average
interest rates by year for our cash and cash equivalents, held-to-maturity
investments and significant debt obligations (in thousands):

The estimated fair value of our cash, cash equivalents and short-term
held-to-maturity investments approximate the principal amounts reflected above
based on the generally short maturities of these financial instruments. The
estimated fair value of our long-term held-to-maturity investments approximates
the principal amounts above due to the relatively minor change in interest rates
since their date of purchase. Rates currently available to us for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt. Based on the borrowing rates currently available to us for bank
loans with similar terms and average maturities, the fair value of the senior
notes payable was approximately $137.3 million as of December 31, 2002 and
$132.7 million as of December 31, 2001.

29

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Registrant and
auditor's report are included in Item 8 and appear following Item 15:

Report of Independent Accountants

Consolidated Balance Sheets -- At December 31, 2002 and 2001

Consolidated Statement of Income -- Years Ended December 31, 2002, 2001
and 2000

Consolidated Statements of Stockholders' Equity -- Years Ended December
31, 2002, 2001, and 2000

Consolidated Statements of Cash Flows -- Years Ended December 31, 2002,
2001 and 2000

Notes to Consolidated Financial Statements

Additionally, a two-year Summary of Quarterly Results (unaudited) is
included in Item 7 under "Quarterly Results."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Not applicable.

PART III

Certain information required by Part III is omitted from this Report in
that we will file our definitive proxy statement for our annual meeting of
stockholders to be held on May 19, 2003 (the "Proxy Statement") pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Report, and certain information included therein is incorporated herein
by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information regarding our Directors and compliance with Section 16(a)
of the Securities Exchange Act of 1934, we direct you to the sections entitled
"Election Of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," respectively, in the Proxy Statement we will deliver to
our stockholders in connection with our Annual Meeting of Stockholders to be
held on May 19, 2003. This information is incorporated herein by reference.
Information regarding our Executive Officers is contained in the section
entitled "Executive Officers of the Registrant," of this Report.

ITEM 11. EXECUTIVE COMPENSATION

For information regarding our Executive Compensation, we direct you to the
section captioned "Executive Compensation And Other Matters" in the Proxy
Statement we will deliver to our stockholders in connection with our Annual
Meeting of Stockholders to be held on May 19, 2003. This information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

This information is located in the section captioned "Stock Ownership Of
Certain Beneficial Owners And Management And Equity Compensation Plan
Information," which will appear in the Proxy Statement we will deliver to our
stockholders in connection with our Annual Meeting of Stockholders to be held on
May 19, 2003. This information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

You will find this information in the section captioned "Certain
Relationships And Related Transactions," which will appear in the Proxy
Statement we will deliver to our stockholders in connection with our

30

Annual Meeting of Stockholders to be held on May 19, 2003. This information is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Within 90 days prior to the date of filing of this Report, we carried out
an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information
we are required to disclose in the reports we file under the Exchange Act,
within the time periods specified in the SEC's rules and forms.

(b) Changes in Internal Controls

There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation described above.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this Report:

(a) 1.Financial Statements. The following consolidated financial
statements are filed as part of this Report:

2.Financial Statement Schedules. The following financial
statement schedule of Granite Construction Incorporated for the
years ended December 31, 2002, 2001 and 2000 is filed as part
of this Report and should be read in conjunction with the
consolidated financial statements of Granite Construction
Incorporated.

Schedules not listed above have been omitted because the
required information is not applicable or is shown in the
financial statement or notes.

3.Exhibits. The Exhibits listed in the accompanying Exhibit Index
are filed or incorporated by reference as part of this Report.

(b)Reports on Form 8-K. The registrant did not file any reports on
Form 8-K during the fourth quarter of fiscal 2002.

31

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and the Stockholders
of Granite Construction Incorporated:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 31 present fairly, in all material
respects, the financial position of Granite Construction Incorporated and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) on page 31 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
March 11, 2003, except for Note 17 (Dividend),
as to which the date is March 24, 2003

F-1

GRANITE CONSTRUCTION INCORPORATED

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
F-2

GRANITE CONSTRUCTION INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial
statements.
F-3

GRANITE CONSTRUCTION INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial
statements
F-4

GRANITE CONSTRUCTION INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.
F-5

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Granite Construction Incorporated is a heavy
civil contractor engaged in the construction of highways, dams, airports, mass
transit facilities, real estate site development and other infrastructure
related projects with offices in California, Washington, Oregon, Alaska, Texas,
Georgia, Nevada, Arizona, Utah, New York and Florida. Unless otherwise
indicated, the terms "we," "us," "our," and "Granite" refer to Granite
Construction Incorporated and its consolidated subsidiaries.

Principles of Consolidation: The consolidated financial statements include
the accounts of Granite Construction Incorporated and its wholly owned and
majority owned subsidiaries. All intercompany transactions and accounts have
been eliminated. We use the equity method of accounting for affiliated companies
where we have the ability to exercise significant influence and our ownership is
between 20% and 50%. Additionally, we participate in joint ventures with other
construction companies. We account for our share of the operations of these
jointly controlled ventures on a pro rata basis in the consolidated statements
of income and as a single line item in the consolidated balance sheets.

Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Revenue Recognition: The majority of our contracts with our customers are
either "fixed unit price" or "fixed price". Under fixed unit price contracts, we
are committed to provide materials or services required by a project at fixed
unit prices (for example, dollars per cubic yard of concrete or cubic yards of
earth excavated). While the fixed unit price contract shifts the risk of
estimating the quantity of units required for a particular project to the
customer, any increase in our unit cost over the unit price bid, whether due to
inflation, inefficiency, faulty estimates or other factors, is borne by us
unless otherwise provided in the contract. Fixed price contracts are priced on a
lump-sum basis under which we bear the risk that we may not be able to perform
all the work for the specified contract amount. Our design/build projects are
generally fixed price contracts and, primarily as a result of the growth in our
design/build business in the last several years, the number of design/build
contracts has been increasing. All federal government contracts and many of our
other contracts provide for termination of the contract for the convenience of
the party contracting with us, with provisions to pay us for work performed
through the date of termination.

We use the percentage of completion accounting method for construction
contracts in accordance with the American Institute of Certified Public
Accountants Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." Revenue and earnings
on construction contracts, including construction joint ventures, are recognized
on the percentage of completion method in the ratio of costs incurred to
estimated final costs. Provisions are recognized in the statement of income for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total revenue.

Revenue from contract claims is recognized when we have a signed settlement
agreement and payment is assured. Revenue from contract change orders is
recognized when the owner has agreed to the change order. Revenue in an amount
equal to cost incurred is recognized prior to contracts reaching 25% completion.
The related profit is deferred until the period in which such percentage
completion is attained. It is our judgment that until a project reaches 25%
completion, there is insufficient information to determine with a reasonable
level of assurance what the estimated profit on the project will be.

Contract cost consists of direct costs on contracts, including labor and
materials, amounts payable to subcontractors, direct overhead costs and
equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is

F-6

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded as incurred and revisions in contract revenue and cost estimates are
reflected in the accounting period when known.

The 25% threshold is applied to all percentage of completion projects
without exception unless and until we project a loss on the project, in which
case the estimated loss is immediately recognized.

The accuracy of our revenue and profit recognition in a given period is
almost solely dependent on the accuracy of our estimates of the cost to complete
each project. Our cost estimates use a highly detailed "bottom up" approach and
we believe our experience allows us to produce materially reliable estimates.
However, our projects can be highly complex and in almost every case the profit
margin estimates for a project will either increase or decrease to some extent
from the amount that was originally estimated at the time of bid. Because we
have many projects of varying levels of complexity and size in process at any
given time (during 2002 we worked on over 3,500 projects) these changes in
estimates can offset each other without materially impacting our profitability.
However, large changes in cost estimates, particularly in the bigger, more
complex projects in our Heavy Construction Division, can have a more significant
effect on profitability.

Factors that can contribute to changes in estimates of contract cost and
profitability include, without limitation, site conditions that differ from
those assumed in the original bid (to the extent that contract remedies are
unavailable), the availability and skill level of workers in the geographic
location of the project, the availability and proximity of materials, the
accuracy of the original bid and subsequent estimates, inclement weather and
timing and coordination issues inherent in all projects, including design/build
projects. The foregoing factors, as well as the stage of completion and the mix
of contracts at different margins, may cause fluctuations in gross profit
between periods and these fluctuations may be significant.

Revenue from the sale of materials is recognized when delivery occurs and
risk of ownership passes to the customer.

Balance Sheet Classifications: We include in current assets and
liabilities amounts receivable and payable under construction contracts that may
extend beyond one year. A one-year time period is used as the basis for
classifying all other current assets and liabilities.

Cash and Cash Equivalents: Cash equivalents are securities held for cash
management purposes having original maturities of three months or less from the
date of purchase.

Marketable Securities: We determine the classification of our marketable
securities at the time of purchase and reevaluate these determinations at each
balance sheet date. Debt securities are classified as held-to-maturity when we
have the positive intent and ability to hold the securities to maturity.
Held-to-maturity investments are stated at amortized cost. Debt securities for
which we do not have the positive intent or ability to hold to maturity are
classified as available-for-sale, along with any investments in equity
securities. Securities available-for-sale are carried at fair value with the
unrealized gains and losses, net of income taxes, reported as a separate
component of other comprehensive income until realized. We have no investments
that qualify as trading.

The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, which is included in interest
income. Realized gains and losses are included in other income, net. The cost of
securities sold is based on the specific identification method.

Financial Instruments: The carrying value of marketable securities
approximates their fair value as determined by market quotes. Rates currently
available to us for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt. The carrying value of receivables and
other amounts arising out of normal contract activities, including retentions,
which may be settled beyond one year, is estimated to approximate fair value.

F-7

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concentrations: We maintain the majority of cash balances and all of our
marketable securities with several financial institutions. We invest with high
credit quality financial institutions and, by policy, limit the amount of credit
exposure to any financial institution. A significant portion of our labor force
is subject to collective bargaining agreements. Collective bargaining agreements
covering approximately 25.0% of our labor force at December 31, 2002 will expire
during 2003.

Revenue earned by both the Branch Division and the Heavy Construction
Division from federal, state and local government agencies amounted to $1,263.4
million (71.6%) in 2002, $1,075.6 million (69.5%) in 2001 and $855.1 million
(63.4%) in 2000. California Department of Transportation represented $209.6
million (11.9%) in 2002, $223.9 million (14.4%) in 2001 and $174.6 million
(12.9%) in 2000 of total revenue. At December 31, 2002 and 2001, we had
significant amounts receivable from these agencies. We perform ongoing credit
evaluations of our customers and generally do not require collateral, although
the law provides us the ability to file mechanics' liens on real property
improved for private customers in the event of non-payment by such customers. We
maintain reserves for potential credit losses and such losses have been within
management's expectations. We have no foreign operations.

Inventories: Inventories consist primarily of quarry products valued at
the lower of average cost or market.

Property and Equipment: Property and equipment are stated at cost.
Depreciation for construction equipment is primarily provided using accelerated
methods over lives ranging from three to ten years and the straight-line method
over lives from three to twenty years for the remaining depreciable assets. We
believe that accelerated methods best approximate the service provided by the
construction equipment. Depletion of quarry property is based on the usage of
depletable reserves. The cost and accumulated depreciation or depletion of
property sold or retired is removed from the accounts and gains or losses, if
any, are reflected in earnings for the period. We capitalized interest costs
related to certain self-constructed assets of $218,000 in 2002, $67,000 in 2001
and $509,000 in 2000. Maintenance and repairs are charged to operations as
incurred.

Long-Lived Assets: Long-lived assets held and used by us are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recorded when the asset's carrying value exceeds its estimated undiscounted
future cash flows.

We frequently sell property and equipment that has reached the end of its
useful life or no longer meets our needs, including depleted quarry property.
Such property is held in property and equipment until sold.

Intangible Assets: Included in other assets at December 31, 2002 is
goodwill in the amount of $19.1 million, primarily resulting from the
acquisition of Halmar Builders of New York, Inc. in July 2001 which was recorded
in accordance with Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") under the transitional rules of that
statement. As required, we adopted SFAS 142 as of January 1, 2002 with respect
to our other intangible assets. Among other things, the statement prohibits the
amortization of goodwill and sets forth a new methodology for periodically
assessing and, if warranted, recording impairment of goodwill. The Company's
goodwill and related amortization prior to adoption of SFAS 142 was immaterial.

We perform goodwill impairment tests on an annual basis and more frequently
when events and circumstances occur that indicate a possible impairment of
goodwill. In determining whether there is an impairment of goodwill, we
calculate the estimated fair value of the reporting unit in which the goodwill
is recorded using a discounted future cash flow method. We then compare the
resulting fair value to the net book value of the reporting unit, including
goodwill. If the net book value of a reporting unit exceeds its fair value, we
measure the amount of the impairment loss by comparing the implied fair value of
the reporting unit's goodwill with the carrying amount of that goodwill. To the
extent that the carrying amount of a reporting unit's goodwill exceeds its
implied fair value, we recognize a goodwill impairment loss. We performed our
F-8

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

annual impairment test in 2002 and we determined that no impairment had
occurred. The discounted future cash flow method used in the first step of our
impairment test involves significant estimates including future cash inflows
from estimated revenues, future cash outflows from estimated project cost and
general and administrative costs, estimates of timing of collection and payment
of various items and future growth rates as well as discount rate and terminal
value assumptions. Although we believe the estimates and assumptions that we
used in testing for impairment are reasonable and supportable, significant
changes in any one of these assumptions could produce a significantly different
result.

Other intangible assets include covenants not to compete, permits,
tradename and acquired contract value, which are being amortized on a
straight-line basis over terms from two to fifteen years.

Warranties: Many of our construction contracts contain warranty provisions
covering defects in equipment, materials, design or workmanship that generally
run from six months to one year after our customer accepts the project. Because
of the nature of our projects, including contract owner inspections of the work
both during construction and prior to acceptance, we have not experienced
material warranty costs and therefore, do not believe an accrual for these costs
is necessary.

Accrued Insurance Costs: We carry insurance policies to cover various
risks, primarily general liability and workers compensation, under which we are
liable to reimburse the insurance company for a portion of each claim paid. The
amounts that we are liable for generally range from the first $0.5 to $1.0
million per occurrence. We accrue for the estimated ultimate liability for
incurred losses, both reported and unreported, using actuarial methods based on
historic trends modified, if necessary, by recent events.

Stock Option Compensation: As more fully described in Note 11, we maintain
an Equity Incentive Plan that allows for the grant of incentive and nonqualified
stock options to employees and our Board of Directors. Prior to 2002, we
accounted for options granted under this plan under the recognition and
measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Effective October 1, 2002, we adopted
the fair value recognition provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
prospectively to all awards granted, modified, or settled after January 1, 2002.
We have granted very few options under this plan. As a result, the effect on our
consolidated financial statements from this change in accounting policy was
insignificant.

Income Taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

Computation of Earnings Per Share: Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding, excluding restricted common stock. Diluted
earnings per share are computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options, warrants and upon the vesting of restricted common stock.

Reclassifications: Certain financial statement items have been
reclassified to conform to the current year's format. These reclassifications
had no impact on previously reported net income, financial position or cash
flows.

Recent Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for

F-9

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Asset Retirement Obligations," which is effective for our fiscal year beginning
January 1, 2003. SFAS 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires, among other things, that
the retirement obligations be recognized when they are incurred and displayed as
liabilities on the balance sheet. In addition, the asset's retirement costs are
to be capitalized as part of the asset's carrying amount and subsequently
allocated to expense over the asset's useful life. We do not believe the
adoption of SFAS 143 will have a material effect on our financial position,
results of operations, or cash flows.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred and is
effective January 1, 2003. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit by the company. We do not
believe the adoption of SFAS 146 will have a material effect on our financial
position, results of operations, or cash flows.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 supercedes FASB Interpretation No. 34, "Disclosure of Indirect
Guarantees of Indebtedness of Others". The disclosure provisions of FIN 45 are
effective for financial statements of both interim and annual periods that end
after December 15, 2002 and the initial recognition and measurement provisions
are effective on a prospective basis to guarantees issued or modified after
December 31, 2002. We are currently assessing the impact of the prospective
measurement provisions of this statement.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS 148 amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As discussed
above, under our accounting policy for stock-based compensation, we adopted the
fair value provisions of SFAS 123 effective October 1, 2002. Due to the limited
number of options we grant in a given year, the impact of this change is
immaterial, and therefore no additional disclosure is provided.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities -- an Interpretation of ARB No.
51." FIN 46 addresses consolidation accounting for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective immediately for all variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. We are in the
process of assessing the impact, if any, of FIN 46 on our financial position or
results of operations.

F-10

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MARKETABLE SECURITIES

The carrying amounts of marketable securities were as follows at December
31, 2002 and 2001 (in thousands):

Held-to-maturity investments are carried at amortized cost, which
approximates fair value. Unrealized holding gains and losses for all debt
securities were insignificant for the years ended December 31, 2002 and 2001. We
recognized gross unrealized holding losses of $1,481 ($962 after tax) and $710
($440 after tax) related to our available-for-sale investment in mutual funds as
a component of the other comprehensive income for the years ended December 31,
2002 and 2001, respectively.

At December 31, 2002, scheduled maturities of held-to-maturity investments
were as follows (in thousands):

Within one year............................................. $ 87,559
--------
After one year through five years........................... 33,762
--------
$121,321
========

For the years ended December 31, 2002 and 2001, changes in our marketable
securities were as follows (in thousands):

F-11

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNING IN EXCESS OF BILLINGS

Our accounts receivable comprised (in thousands):

Accounts receivable includes amounts billed and billable for public and
private contracts. The balances billed but not paid by customers pursuant to
retainage provisions in construction contracts generally become due upon
completion of the contracts and acceptance by the owners. Retainage amounts at
December 31, 2002 are expected to be collected as follows: $81,907 in 2003,
$13,134 in 2004, $286 in 2005 and $1,793 in 2006 and thereafter.

Included in our costs and estimated earnings in excess of billings at
December 31, 2002 is approximately $12.0 million related to claims and
unexecuted change orders acquired from Halmar Builders of New York, Inc. (Note
16) that we believe are probable of collection.

4. EQUITY IN CONSTRUCTION JOINT VENTURES

We participate in various construction joint venture partnerships.
Generally, each construction joint venture is formed to accomplish a specific
project, is jointly controlled by the joint venture partners and is dissolved
upon completion of the project. The joint venture agreements typically provide
that our interests in any profits and assets, and our respective share in any
losses and liabilities that may result from the performance of the contract are
limited to our stated percentage interest in the project. Although the venture's
contract with the project owner typically requires joint and several liability,
our agreements with our joint venture partners provide that each party will
assume and pay its full proportionate share of any losses resulting from a
project. We have no significant commitments beyond completion of the contract.
Our share of equity in these ventures ranges from 15% -- 65%, the most
significant of which include a 65% share of a highway project in Tempe, Arizona,
a 60% share in a rapid transit project in New York, New York, and a 57% share of
a light rail project in Minneapolis, Minnesota.

F-12

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The combined assets, liabilities and net assets of these ventures are as
follows (in thousands):

The revenue and costs of revenue of construction joint ventures are as
follows (in thousands):

5. INVESTMENTS IN AFFILIATES

We have investments in affiliates that are accounted for using the equity
method. The most significant of these investments are a 50.0% interest in a
limited liability company, which owns and operates an asphalt terminal in Nevada
and a 22.2% limited partnership interest in California Private Transportation
Company, LP ("CPTC"), which constructed and operates a private toll road. During
2002 and 2001, we made advances to the asphalt terminal limited liability
company of which $4.6 million remained outstanding at December 31, 2002. We had
a commitment supported by a letter of credit of $2.8 million at December 31,
2002 related to our limited partnership interest in CPTC.

During the year ended December 31, 2002 we purchased additional common
stock of Wilder Construction Company ("Wilder"), bringing our ownership interest
in Wilder above 50.0%. Accordingly, we changed our method of accounting for our
investment in Wilder from the equity method of accounting to consolidation as of
the date we exceeded 50% ownership. (See Note 16 "Acquisitions" for additional
discussion of and disclosure related to our investment in Wilder).

At December 31, 2001, we held a 27.0% minority interest in T.I.C. Holdings,
Inc. ("TIC"), which we accounted for under the equity method of accounting. In
June 2002, TIC repurchased 1.1 million shares of the TIC shares held by us for a
cash payment of $13.1 million. The transaction reduced our interest in TIC to
F-13

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.5% and therefore we discontinued applying the equity method and applied the
cost method as of the date of the transaction.

The summarized financial information below represents an aggregation of our
investments in affiliates (in thousands):

6. PROPERTY AND EQUIPMENT (in thousands)

F-14

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INTANGIBLE ASSETS

The following intangible assets are included in other assets on our
consolidated balance sheet at December 31, 2002 (in thousands):

Goodwill at December 31, 2002 relates primarily to the HCD operating
segment. Aggregate amortization expense related to intangible assets for the
years ended December 31, 2002 and 2001 was $1.5 million and $1.0 million,
respectively. Amortization expense expected to be recorded in the future is as
follows (in thousands): $1,041 in 2003, $563 in 2004, $557 in 2005, $396 in
2006, $302 in 2007 and $1,442 thereafter.

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (in thousands)

F-15

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS (in thousands)

- ---------------

The aggregate minimum principal maturities of long-term debt for each of the
five years following December 31, 2002 are as follows: 2003 -- $8,640;
2004 -- $11,096; 2005 -- $17,840; 2006 -- $16,288; 2007 -- $16,047; and beyond
2007 -- $71,109.

We have a bank revolving line of credit of $60.0 million that allows for
unsecured borrowings for up to three years through June 29, 2004, with interest
rate options. Outstanding borrowings under the revolving line of credit are
charged at the LIBOR interest rate plus margin (1.38% and 1.38%, respectively at
December 31, 2002) with principal payable semiannually beginning December 2001
through June 2004 and interest payable quarterly. There were no amounts
outstanding at December 31, 2002. We have standby letters of credit totaling
approximately $4.2 million outstanding at December 31, 2002, of which $4.0
million reduces the amount available under the revolving line of credit. The
unused and available portion of the line of credit at December 31, 2002 was
$56.0 million.

Additionally, our Wilder subsidiary has a bank revolving line of credit of
$10.0 million that also expires in 2004, with borrowings collateralized by
certain of Wilder's equipment, accounts receivable, inventory and general
intangibles. Outstanding borrowings under this line are charged interest at the
bank's prime rate (4.25% as of December 31, 2002) less 1.0%. There were no
amounts outstanding at December 31, 2002.

Senior notes payable in the amount of $53.3 million are due to a group of
institutional holders. The notes are due in equal annual installments beginning
in 2002 through 2010 and bear interest at 6.54% per annum. Additional senior
notes payable in the amount of $75.0 million are due to a group of institutional
holders. The notes are due in nine equal annual installments beginning in 2005
and bear interest at 6.96% per annum. Based on the borrowing rates currently
available to us for bank loans with similar terms and average maturities, the
fair value of the senior notes payable was approximately $137.3 million as of
December 31, 2002 and $132.7 million as of December 31, 2001.

The Wilder subsidiary promissory notes are due primarily to former Wilder
employees relating to the repurchase of Wilder stock. These notes are unsecured,
bear interest at prime (4.25% at December 31, 2002) and are payable in annual
installments through December 2007. The Wilder subsidiary term loans are
collateralized by certain Wilder equipment, mineral reserves, accounts
receivable and inventory, bear interest at rates ranging from 3.9% to 8.1% and
are payable in installments through December 2008.

Restrictive covenants under the terms of our debt agreements include the
maintenance of certain levels of working capital and cash flow and require the
maintenance of tangible net worth (as defined) of approximately $370.2 million.
We were in compliance with these covenants at December 31, 2002. Additionally,
our Wilder subsidiary has restrictive covenants (on a Wilder stand-alone basis)
under the terms of its debt agreements that include the maintenance of certain
ratios of working capital, liabilities to net worth and tangible net worth and
restricts Wilder capital expenditures in excess of specified limits. Wilder was
in compliance with these covenants at December 31, 2002.

F-16

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other notes payable are comprised primarily of notes incurred in connection
with the purchase of property and equipment and other assets. These notes are
collateralized by the assets purchased and bear interest at 6.50% to 8.95% per
annum with principal and interest payable in installments through 2010.

10. EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan: Our Employee Stock Ownership Plan ("ESOP")
covers all employees not included in collective bargaining agreements, except
employees of our majority owned subsidiary, Wilder. As of December 31, 2002, the
ESOP owned 8,768,511 shares of our common stock. Dividends on shares held by the
ESOP are charged to retained earnings and all shares held by the ESOP are
treated as outstanding in computing our earnings per share.

Contributions to the ESOP are discretionary and comprise shares of our
stock that were purchased on the market and immediately contributed to the plan.
Compensation cost is measured as the cost to purchase the shares (market value
on the date of purchase and contribution). Contribution expense for the years
ended December 31, 2002, 2001 and 2000 was $2.0 million, $2.0 million and $0.6
million, respectively.

Profit Sharing and 401k Plan: The plan is a defined contribution plan
covering all employees not included in collective bargaining agreements, except
employees of our majority owned subsidiary, Wilder. Each employee can elect to
have up to 10% of gross pay contributed to the 401k plan on a before-tax basis.
The plan allows for Company matching and additional contributions at the
discretion of the Board of Directors.

Our contributions to the Profit Sharing and 401k Plan for the years ended
December 31, 2002, 2001 and 2000 were $5.9 million, $5.0 million and $5.0
million, respectively. Included in the contributions were 401k matching
contributions of $3.9 million, $3.9 million and $3.0 million, respectively.

Other: Two of our wholly owned subsidiaries, Granite Construction Company
and Granite Halmar Construction Company, Inc. and our majority owned subsidiary,
Wilder, also contribute to various multi-employer pension plans on behalf of
union employees. Contributions to these plans for the years ended December 31,
2002, 2001 and 2000 were approximately $19.6 million, $16.5 million and $14.5
million, respectively. Additionally, Wilder provides a 401k plan covering all of
its employees and a separate defined contribution plan covering employees not
covered by other plans. Wilder's contributions under these plans totaled
approximately $2.0 million in the year ended December 31, 2002. We also provide
non-qualified deferred compensation plans to certain of our highly compensated
employees that provide the participants the opportunity to defer payment of
certain compensation as defined in the plan.

11. STOCKHOLDERS' EQUITY

1999 Equity Incentive Plan: On May 24, 1999, our stockholders approved the
1999 Equity Incentive Plan (the "Plan"), which replaced our 1990 Omnibus stock
and Incentive Plan (the "1990 Plan"). The Plan provides for the grant of
restricted common stock, incentive and nonqualified stock options, performance
units and performance shares to employees and awards to our Board of Directors
in the form of stock units or stock options ("Director Options"). A total of
3,750,000 shares of our common stock have been reserved for issuance under the
Plan. The exercise price for incentive and nonqualified stock options granted to
employees under the Plan may not be less than 100% and 85%, respectively, of the
fair market value at the date of the grant. The exercise price for options
granted our Directors under the Plan is 50.0% of the market price of our common
stock at the date of grant. Employee options granted will be exercisable at such
time and be subject to such restrictions/conditions as determined by the
compensation committee and Director Options are immediately exercisable. No
option will be exercisable later than ten years from the date of grant.
Restricted common stock is issued for services to be rendered and may not be
sold, transferred or pledged for such period as determined by the compensation
committee.

F-17

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted shares outstanding at December 31, 2002 were 1,251,094 shares.
Restricted stock compensation cost is measured at the stock's fair value at the
date of grant. The compensation cost is recognized ratably over the vesting
period - generally three to five years. Restricted shares generally become fully
vested when a holder reaches age 62. An employee may not sell or otherwise
transfer unvested shares and, in the event that an employee terminates his or
her employment prior to the end of the vesting period, any unvested shares are
surrendered to us. We have no obligation to repurchase restricted stock.
Compensation expense related to restricted shares for the years ended December
31, 2002, 2001 and 2000 was $5.9 million, $5.0 million and $5.9 million,
respectively.

Stock options granted under the 1990 Plan, all of which were granted in
1990, expired in 2000.

We granted Director Options under the Plan to purchase shares of our stock
for the years ended December 31, 2002, 2001 and 2000 at a weighted average
exercise price of $9.70, $11.91, and $8.54, respectively. The options are
immediately exercisable and options for 55,812 shares remain outstanding at
December 31, 2002. Director's option transactions are summarized as follows:

Effective October 1, 2002, we adopted the fair value recognition provisions
of SFAS 123, "Accounting for Stock-Based Compensation," prospectively to all
awards granted, modified, or settled after January 1, 2002. Prior to 2002, we
accounted for options granted under the recognition and measurement provisions
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Because we have granted very few options under the Plan, the
effect on our consolidated financial statements from this change in accounting
policy was insignificant.

The fair value of each option grant was estimated at the grant date using a
Black-Scholes option-pricing model. We recognized $229,000, $188,000 and
$150,000 of compensation expense related to grants of stock options in 2002,
2001 and 2000, respectively. Had all compensation expense been determined based
upon fair values at the grant date in accordance with SFAS 123 in 2001 and 2000
our net earnings would have been reduced by an immaterial amount and our
earnings per share would be unchanged. Given the immateriality of the number of
options granted and the related expense, we have omitted additional disclosures
otherwise required.

Dividend Reinvestment and Stock Purchase Plan: During 2001, we adopted a
Dividend Reinvestment and Stock Purchase Plan (the "DRP Plan") under which
4,500,000 shares of common stock are authorized for purchase. The DRP Plan
offers participation to record holders of common stock or other interested
investors. Under the DRP Plan, participants may buy additional shares of common
stock by automatically reinvesting all or a portion of the cash dividends paid
on their shares of common stock or by making optional cash investments.

Other: During the year ended December 31, 2002 warrants to purchase
322,950 shares of our common stock were exercised. No warrants were outstanding
at December 31, 2002.

F-18

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. EARNINGS PER SHARE (in thousands, except per share data)

A reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:

During the fourth quarter of 2002 there were 583 shares of restricted stock
outstanding that were not included in the computation of diluted earnings per
share because the market price was less than the original issue price and their
inclusion would be anti-dilutive.

13. INCOME TAXES

Provision for income taxes (in thousands):

F-19

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reconciliation of statutory to effective tax rate (in thousands):

Deferred tax assets and liabilities (in thousands):

The deferred tax asset for insurance accruals relates primarily to the
accrued liabilities for our workers compensation and public liability insurance
that is deductible in future periods. The deferred tax asset for other accrued
liabilities relates to various items including accrued vacation and accrued
reclamation costs which are deductible in future periods. The deferred tax
liability for the TIC basis difference represents the undistributed earnings of
TIC for which income and the related tax provision have been recognized in our
records.

We have provided a valuation allowance on the net operating loss
carryforward that is related to state and local tax carryforwards for our
Granite Halmar subsidiary because of uncertainty regarding their realizability.
The change in the valuation allowance from December 31, 2001 to December 31,
2002 related to an increase

F-20

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in these carryforwards during 2002. Deferred tax assets of $1.5 million and
deferred tax liabilities of $4.2 million were applied to our balance sheet in
our initial consolidation of Wilder (Note 16).

14. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Leases: Minimum rental commitments under all noncancellable operating
leases, primarily quarry property and construction equipment, in effect at
December 31, 2002 were (in thousands):

Operating lease rental expense was $5.7 million in 2002, $5.0 million in
2001 and $5.5 million in 2000.

Litigation: Our wholly-owned subsidiary, Granite Construction Company
("GCCO"), as a member of a joint venture, Wasatch Constructors ("Wasatch"), is
among a number of construction companies, including Wasatch, who, together with
the Utah Department of Transportation ("UDOT"), are named as defendants in a
lawsuit filed in the United States District Court for the District of Utah. The
plaintiffs are two independent contractor truckers who filed the lawsuit on
behalf of the United States under the federal False Claims Act seeking to
recover damages and civil penalties in excess of $46,400,000. The lawsuit
alleges that, beginning in 1997 and thereafter, the defendants submitted false
claims to the United States Government during the reconstruction of a portion of
Interstate 15 in the Salt Lake Valley pursuant to a prime contract between UDOT
and Wasatch.

Among other things, the plaintiffs allege that certain defendants, who were
subcontractors to Wasatch defrauded the Government by charging Wasatch for dirt
and fill material they did not provide and that Wasatch and UDOT knowingly paid
for such excess material. The plaintiffs also allege that Wasatch committed
certain other acts including providing substandard workmanship and materials;
failure to comply with clean air and clean water standards and the filing of
false certifications regarding its entitlement to the payment of bonuses. The
original complaint was filed in January, 1999 and the Third Amended Complaint
was filed on February, 2003.

Although GCCO owns a 23% interest in Wasatch, it was not the managing
partner of Wasatch nor was it principally involved in the ongoing management of
the project. The Company and GCCO believe that the allegations in the lawsuit
are without merit and intend to contest them vigorously. The lawsuit is in the
preliminary stage and the Company cannot predict its outcome with certainty. The
litigation process is inherently uncertain, and this type of litigation is
particularly complex and can extend for a protracted period of time. As a
result, GCCO's defense of the lawsuit, regardless of its eventual outcome, may
be costly. Should the outcome of the lawsuit be adverse to GCCO, it could be
required to pay significant monetary damages. In addition, since GCCO is a
general partner of Wasatch, it would be jointly and severally liable for damages
or penalties assessed against Wasatch, although the Company and GCCO have no
reason to believe that the other joint venture partners would not bear their pro
rata share of any such damages or penalties.

We are a party to a number of other legal proceedings and believe that the
nature and number of these proceedings are typical for a construction firm of
its size and scope. Our litigation typically involves claims

F-21

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

regarding public liability or contract related issues. While management
currently believes that the ultimate outcome of these proceedings, individually
and in the aggregate, will not have a material adverse effect on our financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unanticipated unfavorable ruling to occur, there
exists the possibility of a material adverse impact on the results of operations
for the period in which the ruling occurs.

Guarantees: As discussed in Note 4 to these consolidated financial
statements, we participate in various construction joint venture partnerships.
Under the joint ventures' contracts with the project owners each of the partners
are joint and severally liable for performance under the contracts. Although our
agreements with our joint venture partners provide that each party will assume
and pay its full proportionate share of any losses resulting from a project, if
one of our partners was unable to pay its proportionate share we would be fully
liable under our contract with the project owner. Circumstances that could lead
to a loss under these guarantee arrangements include a partner's inability to
contribute additional funds to the venture in the event that the project
incurred a loss or additional costs that we could incur should the partner fail
to provide the services and resources toward project completion that had been
committed to in the joint venture agreement. At December 31, 2002 approximately
$900.0 million of work representing either our partners' proportionate share or
work that our partners' are directly responsible for, had yet to be completed.
We have never incurred a loss under these joint and several liability
provisions, however it is possible that we could in the future and such a loss
could be significant.

15. BUSINESS SEGMENT INFORMATION

We have two reportable segments: the Branch Division and the Heavy
Construction Division ("HCD"). The Branch Division is comprised of branch
offices that serve local markets, while HCD pursues major infrastructure
projects throughout the nation. HCD focuses on building larger heavy civil
projects with contract durations greater than two years, while the Branch
Division projects are typically smaller in size and shorter in duration. HCD has
been the primary participant in our construction joint ventures. Substantially
all of the revenues from these joint ventures are included in HCD's revenues
from external customers (Note 4).

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 1). We evaluate performance
based on operating profit or loss which does not include income taxes, interest
income, interest expense or other income (expense).

F-22

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INFORMATION ABOUT PROFIT AND ASSETS (in thousands):

F-23

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reconciliation of Segment Profit and Assets to our Consolidated Totals (in
thousands):

16. ACQUISITIONS

Wilder Construction Company: On April 30, 2002, we purchased an additional
698,483 shares of Wilder common stock for total consideration of $7.9 million
(excluding $9.1 million of cash applied in the resulting consolidation of Wilder
with the Company). As a result of this transaction our interest in Wilder
increased to above 50% and was approximately 59.0% at December 31, 2002. We
accounted for this step acquisition using the purchase method of accounting and
the purchase price was allocated to assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition.

During the years ended December 31, 2001 and 2000, we made investments of
$4.6 million and $14.8 million, respectively, to acquire common stock
representing a 48.0% interest in Wilder which was accounted for under the equity
method of accounting until April 30, 2002. Under the equity method we allocated
our investments to the assets and liabilities of Wilder based on their estimated
fair values at the date of the investments.

Our share of the estimated fair value of Wilder's net assets exceeded the
purchase price at each investment date, therefore, no goodwill was recorded. The
consolidation of Wilder at April 30, 2002 resulted in an increase in assets of
$77.5 million, an increase in liabilities of $46.9 million and a decrease in
investments in affiliates of $19.0 million. These amounts are considered
non-cash items in the consolidated statement of cash flows for the year ended
December 31, 2002.

The following summarized unaudited pro forma results of operations for the
years ended December 31, 2002 and 2001 assume we acquired our majority interest
in Wilder as of the beginning of 2001. The pro forma data has been prepared for
comparative purposes only. It does not purport to be indicative of the results
of

F-24

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations that would have resulted had the acquisition been consummated at the
beginning of the periods presented, or that may occur in the future.

Other Acquisitions: During 2002, we completed the following acquisitions,
all of which were accounted for using the purchase method of accounting. The
results of each of the acquired businesses' operations are included in our
consolidated results from their respective acquisition dates. In each of these
transactions the estimated fair value of the assets exceeded the purchase price,
therefore, no goodwill was recorded. These transactions are not material, either
individually or in the aggregate; therefore certain disclosures otherwise
required have been omitted.

On April 30, 2002 we purchased certain assets and assumed certain contracts
of Robinson Construction Company ("Robinson"), a northern California
construction contractor and materials supplier, for cash consideration of $8.1
million. The purchase price was allocated to the assets acquired (primarily
property and equipment and inventory) based on their estimated fair values at
the date of acquisition. Robinson recorded revenue of approximately $8.6 million
(unaudited) during the year ended December 31, 2001.

In May 2002, we purchased certain assets and assumed certain contracts and
liabilities of Redwood Empire Aggregates and its wholly owned subsidiary Parnum
Paving, Inc. ("Parnum"), a northern California construction contractor and
materials supplier, for cash consideration of approximately $15.2 million. The
purchase price was allocated to the assets acquired (primarily property and
equipment and inventory) and liabilities assumed (primarily environmental
remediation liabilities) based on their estimated fair values at the date of
acquisition. Parnum recorded revenue of approximately $48.0 million (unaudited)
during the year ended December 31, 2001.

Both the Robinson and Parnum acquisitions extend our geographic operations
further into northern California.

In October 2002, we purchased certain assets and assumed certain contracts
of a quarry operation located near Gilroy, California for cash consideration of
approximately $13.9 million. The purchase price was allocated to the assets
acquired (primarily property and equipment and inventory) based on their
estimated fair values at the date of acquisition. This quarry operation recorded
revenue of approximately $3.0 million (unaudited) during the year ended December
31, 2001.

Halmar Builders of New York, Inc.: On July 1, 2001, we acquired 100% of
the common stock of Halmar Builders of New York, Inc. ("Halmar"), a Mt. Vernon,
New York heavy-civil construction company for a cash purchase price of
approximately $13.0 million ($11.4 million net of cash acquired) and assumption
of net liabilities of approximately $7.0 million. The acquired entity operates
under the name Granite Halmar Construction Company, Inc. ("Granite Halmar") as a
wholly owned subsidiary of Granite Construction Incorporated. If Granite Halmar
achieves certain predetermined financial results over the two-year period ending
June 30, 2003, we will pay the former Halmar shareholders up to an additional
$2.0 million which will be recorded as an adjustment to the purchase price by us
at the time the predetermined financial results have been achieved. The
acquisition was accounted for in accordance with SFAS 141, "Business
Combinations." The results of operations of Granite Halmar were included in
these consolidated financial statements as of July 1, 2001. The purchase price
was allocated to the assets acquired and liabilities assumed including

F-25

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $18.0 million of goodwill and approximately $2.0 million of other
intangible assets related to this transaction. This acquisition was not
considered material; therefore, certain disclosures otherwise required have been
omitted.

17. SUBSEQUENT EVENTS

Dividend: On March 24, 2003 we announced a quarterly cash dividend of
$0.10 per common share on our common stock. The dividend is payable April 15,
2003 to stockholders of record on March 28, 2003.

Purchase of interest rate swap: In February 2003, we entered into two
interest rate swap agreements in order to gain access to the lower borrowing
rates normally available on floating-rate debt, while avoiding the prepayment
and other costs that would be associated with refinancing our long-term
fixed-rate debt. The swaps purchased have a combined notional amount of $50
million, six-month maturity and provide for us to pay variable interest at LIBOR
plus a set rate spread and receive fixed interest of between 6.54% and 6.96%.
The notional amount does not quantify risk or represent assets or liabilities,
but rather, is used in the determination of cash settlement under the swap
agreement. As a result of purchasing these swaps, we will be exposed to credit
losses from counter-party non-performance, however, we do not anticipate any
such losses from these agreements, which are with a major financial institution.
The agreements will also expose us to interest rate risk should LIBOR rise
during the term of the agreements. These swap agreements will be accounted for
under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). Under the provisions
of SFAS 133, we will initially record the interest rate swap at fair value, and
subsequently record any changes in the fair value in other income, net. Fair
value will be determined based on quoted market prices, which reflect the
difference between estimated future variable-rate payments and future fixed-rate
receipts.

Sale of investment: On January 3, 2003, the California Private
Transportation Company, LP, of which we are a 22.22% limited partner, closed the
sale of the State Route 91 Tollroad Franchise to the Orange County
Transportation Authority for $72.5 million in cash and the assumption of $135.0
million in long-term debt. We completed construction of the $60.4 million
project in 1995 and have maintained an equity interest in the operations of the
facility since it opened in December 1995. We will record a gain on the sale of
the tollroad of between $10.0 million and $12.0 million, net of tax, in the
first quarter of 2003, with the exact amount of such gain contingent upon final
transaction costs and other miscellaneous adjustments.

F-26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

GRANITE CONSTRUCTION INCORPORATED

By: /s/ WILLIAM E. BARTON
------------------------------------
William E. Barton
Senior Vice President and Chief
Financial Officer

Date: March 27, 2003

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below on March 27, 2003, by the following persons in
the capacities indicated.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David H. Watts, certify that:

I have reviewed this annual report on Form 10-K of Granite Construction
Incorporated;

1. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

2. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

3. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

4. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

5. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: March 27, 2003 /s/ DAVID H. WATTS
--------------------------------------
David H. Watts,
Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, William E. Barton, certify that:

I have reviewed this annual report on Form 10-K of Granite Construction
Incorporated;

1. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

2. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

3. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

4. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

5. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: March 27, 2003 /s/ WILLIAM E. BARTON
--------------------------------------
William E. Barton,
Chief Financial Officer

SCHEDULE II

GRANITE CONSTRUCTION INCORPORATED

SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS

- ---------------

(1) In all years includes accounts written off as uncollectable. In 2002 also
includes allowance for doubtful accounts applied in the initial
consolidation of Wilder Construction Company (see Note 16 to the
Consolidated Financial Statements)

S-1

INDEX TO 10-K EXHIBITS

- ---------------

* Incorporated by reference

** Compensatory plan or management contract

+ Filed herewith