UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                         to                                        

Commission File No. 1-12911

GRANITE CONSTRUCTION INCORPORATED

State of Incorporation:	I.R.S. Employer Identification Number:
Delaware	77-0239383

Corporate Administration:

585 W. Beach Street
Watsonville, California 95076
(831) 724-1011

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 þ No o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
July 28, 2005.

Class	Outstanding
Common Stock, $0.01 par value	41,713,343 shares

Index

 EXHIBIT 10.1

 EXHIBIT 10.2

 EXHIBIT 31.1

 EXHIBIT 31.2

 EXHIBIT 32

2

PART I. FINANCIAL INFORMATION

3

Item 1. FINANCIAL STATEMENTS (unaudited)

Granite Construction Incorporated

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited – in thousands, except shares and per share data)

	June 30,			December 31,			June 30,
	2005			2004			2004
Assets
Current assets
Cash and cash equivalents	$	116,988		$	161,627			$	112,555
Short-term marketable securities		60,751			102,237				62,535
Accounts receivable, net		498,892			357,842				389,479
Costs and estimated earnings in excess of billings		51,233			54,384				55,682
Inventories		34,377			31,711				33,222
Deferred income taxes		20,947			21,012				22,144
Equity in construction joint ventures		21,167			20,895				19,901
Other current assets		62,176			75,630				45,601
Total current assets		866,531			825,338				741,119
Property and equipment, net		397,476			376,197				356,377
Long-term marketable securities		23,718			13,828				32,949
Investments in affiliates		10,844			10,725				12,974
Other assets		49,306			51,866				47,091
Total assets	$	1,347,875		$	1,277,954			$	1,190,510
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	22,639		$	15,861			$	10,482
Accounts payable		256,888			191,782				213,989
Billings in excess of costs and estimated earnings		148,161			144,401				128,257
Accrued expenses and other current liabilities		125,926			117,367				99,659
Total current liabilities		553,614			469,411				452,387
Long-term debt		130,427			148,503				131,592
Other long-term liabilities		43,044			40,641				33,118
Deferred income taxes		44,135			44,135				45,775
Commitments and contingencies
Minority interest in consolidated subsidiaries		27,520			24,790				25,905
Shareholders’ equity
Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding		—			—				—
Common stock, $0.01 par value, authorized 100,000,000 shares; issued and outstanding 41,714,138 shares as of June 30, 2005, 41,612,319 shares as of December 31, 2004 and 41,609,521 as of June 30, 2004		417			416				416
Additional paid-in capital		79,603			76,766				75,812
Unearned compensation		(13,380	)		(10,818	)			(13,747	)
Retained earnings		480,979			482,635				438,648
Accumulated other comprehensive income		1,516			1,475				604
Total shareholders’ equity		549,135			550,474				501,733
Total liabilities and shareholders’ equity	$	1,347,875		$	1,277,954			$	1,190,510

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Granite Construction Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited – in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenue
Construction	$	592,128		$	487,718		$	966,841		$	785,070
Material sales		84,576			71,036			130,797			110,702
Total revenue		676,704			558,754			1,097,638			895,772
Cost of revenue
Construction		534,431			443,079			888,812			734,549
Material sales		65,566			55,931			105,179			90,795
Total cost of revenue		599,997			499,010			993,991			825,344
Gross profit		76,707			59,744			103,647			70,428
General and administrative expenses		40,606			35,914			79,476			72,458
Provision for legal judgment		9,300			—			9,300			—
Gain on sales of property and equipment		2,189			1,109			2,215			14,439
Operating income		28,990			24,939			17,086			12,409
Other income (expense)
Interest income		1,968			1,317			4,127			2,715
Interest expense		(1,636	)		(1,859	)		(3,667	)		(3,599	)
Equity in (loss) income of affiliates		(17	)		2,766			(77	)		2,873
Other, net		(651	)		(7	)		(724	)		95
Total other income (expense)		(336	)		2,217			(341	)		2,084
Income before provision for income taxes and minority interest		28,654			27,156			16,745			14,493
Provision for income taxes		8,220			9,239			4,528			4,855
Income before minority interest		20,434			17,917			12,217			9,638
Minority interest in consolidated subsidiaries		(5,480	)		(4,111	)		(5,530	)		(4,941	)
Net income	$	14,954		$	13,806		$	6,687		$	4,697
Net income per share
Basic	$	0.37		$	0.34		$	0.16		$	0.12
Diluted	$	0.36		$	0.34		$	0.16		$	0.11
Weighted average shares of common stock
Basic		40,638			40,417			40,562			40,341
Diluted		41,212			41,018			41,118			40,919
Dividends per share	$	0.10		$	0.10		$	0.20		$	0.20

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Granite Construction Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited — in thousands)

Six Months Ended June 30,	2005			2004
Operating Activities
Net income	$	6,687		$	4,697
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization		31,142			30,618
Gain on sales of property and equipment		(2,215	)		(14,439	)
Change in deferred income taxes		80			1,478
Amortization of unearned compensation		2,867			2,010
Common stock contributed to ESOP		1,994			3,989
Minority interest in consolidated subsidiaries		5,530			4,941
Equity in loss (income) of affiliates		77			(2,873	)
Changes in assets and liabilities, net of the effects of initial FIN 46 consolidations:
Accounts receivable		(138,585	)		(59,339	)
Inventories		(2,666	)		(3,344	)
Equity in construction joint ventures		(272	)		786
Other assets		16,001			7,844
Accounts payable		65,106			61,014
Billings in excess of costs and estimated earnings, net		6,911			(42,478	)
Accrued expenses and other liabilities		8,491			(9,915	)
Net cash provided by (used in) operating activities		1,148			(15,011	)
Investing Activities
Purchases of marketable securities		(25,130	)		(46,160	)
Maturities of marketable securities		56,414			81,242
Additions to property and equipment		(53,688	)		(37,525	)
Proceeds from sales of property and equipment		3,706			9,191
(Contributions to) distributions from affiliates, net		(196	)		8,193
Acquisition of minority interest		—			(9,219	)
Net cash (used in) provided by investing activities		(18,894	)		5,722
Financing Activities
Additions to long-term debt		26,585			22,908
Repayments of long-term debt		(40,220	)		(22,587	)
Dividends paid		(8,333	)		(8,313	)
Repurchases of common stock		(4,702	)		(6,260	)
Contributions from minority partners		804			5,093
Distributions to minority partners		(1,210	)		(8,904	)
Other financing activities		183			274
Net cash used in financing activities		(26,893	)		(17,789	)
Decrease in cash and cash equivalents		(44,639	)		(27,078	)
Cash and cash equivalents added in initial FIN 46 consolidations		—			69,714
Cash and cash equivalents at beginning of period		161,627			69,919
Cash and cash equivalents at end of period	$	116,988		$	112,555
Supplementary Information
Cash paid during the period for:
Interest	$	3,728		$	3,773
Income taxes		3,664			3,093
Non-cash investing and financing activity:
Restricted stock issued for services		5,363			4,234
Dividends accrued but not paid		4,171			4,161
Financed acquisition of long-term asset		2,337			6,863
Notes received from sale of assets		—			8,893
Undisbursed escrow funds		2,500			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we”, “us”, “our” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2005 and 2004 and the results of our operations and cash flows for the periods presented. The December 31, 2004 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results are subject to significant seasonal variations and the results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.

2. Recently Issued Accounting Pronouncements:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”), which is a revision of SFAS 123. SFAS 123-R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach to accounting for share-based payments in SFAS 123-R is similar to the approach described in SFAS 123. However, SFAS 123-R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). SFAS 123-R is effective for Granite beginning in fiscal year 2006. On March 29, 2005 the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) which provides the SEC Staff’s views regarding interactions between SFAS 123-R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. We are currently reviewing the impact of implementing SFAS 123-R and SAB 107 on our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. This Interpretation is effective for fiscal years ending after December 15, 2005. Accordingly, we are required to adopt FIN 47 in our fiscal year ended December 31, 2005. We are currently reviewing the impact of implementing FIN 47 on our consolidated financial statements.

7

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Change in Accounting Estimate:

The following table indicates the net reduction in gross profit from changes in our estimate of the cost to complete certain Heavy Construction Division projects:

Heavy Construction Division Change in	Three Months Ended				Six Months Ended
Accounting Estimate	June 30,				June 30,
	2005		2004		2005		2004
Net reduction in gross profit (in millions)	$	11.0	$	5.4	$	22.5	$	25.4
Number of projects with significant estimate changes		5		1		8		8
Range of impact from each project (in millions)	$	1.0 - $3.0	$	5.4	$	1.2 - $6.8	$	0.5 - $8.0

These forecast adjustments were made in response to unanticipated changes in project conditions occurring during the periods when recorded and were due to a variety of factors, including liquidated damages, recognition of costs associated with owner directed added scope changes, site conditions that differed from our expectations, design issues on design/build projects, subcontractor performance issues, increased overhead due to owner and weather delays and changes in productivity expectations. At June 30, 2005, three of the five projects adjusted in the quarter were greater than 90% complete, one was approximately 76% complete and the remaining project was approximately 36% complete; one of the projects was a joint venture for which we are not the sponsoring partner. We believe we have entitlement to additional compensation related to some of these changes and are actively pursuing these issues with the contract owners. However, the amount and timing of any future recovery is highly uncertain and under our accounting policies we do not recognize revenue from contract changes until we have a signed change order or executed claim settlement. We believe that our current estimates of the gross profit for each of these projects are achievable. However, it is possible that the actual cost to complete will vary from our current estimate and any future estimate changes could be significant.

Additionally, during the three months ended March 31, 2005, our Branch Division recognized a reduction of gross profit of approximately $2.5 million, due to a change in our estimate of project profitability related to certain unresolved and disputed issues on one project.

4. Inventories:

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

5. Property and Equipment:

	June 30,		December 31,		June 30,
(in thousands)	2005		2004		2004
Land	$	55,191	$	53,974	$	52,801
Quarry property		101,449		101,545		73,749
Buildings and leasehold improvements		76,692		78,350		77,399
Equipment and vehicles		739,978		700,290		698,505
Office furniture and equipment		18,780		17,478		15,107
		992,090		951,637		917,561
Less: accumulated depreciation, depletion and amortization		594,614		575,440		561,184
	$	397,476	$	376,197	$	356,377

8

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Intangible Assets:

The following table indicates the allocation of goodwill by reportable segment which is included in other assets on our condensed consolidated balance sheets:

	June 30,		December 31,		June 30,
(in thousands)	2005		2004		2004
Goodwill by segment:
Heavy Construction Division	$	18,011	$	18,011	$	18,011
Branch Division		9,900		9,900		4,089
Total Goodwill	$	27,911	$	27,911	$	22,100

The following intangible assets are included in other assets on our condensed consolidated balance sheets:

	June 30, 2005
	Gross		Accumulated			Net
(in thousands)	Value		Amortization			Value
Amortized intangible assets:
Covenants not to compete	$	1,139	$	(894	)	$	245
Permits		2,000		(561	)		1,439
Trade names		1,425		(463	)		962
Other		200		(178	)		22
Total amortized intangible assets	$	4,764	$	(2,096	)	$	2,668

	December 31, 2004
	Gross		Accumulated			Net
(in thousands)	Value		Amortization			Value
Amortized intangible assets:
Covenants not to compete	$	1,139	$	(781	)	$	358
Permits		2,000		(494	)		1,506
Trade names		1,425		(361	)		1,064
Other		622		(580	)		42
Total amortized intangible assets	$	5,186	$	(2,216	)	$	2,970

	June 30, 2004
	Gross		Accumulated			Net
(in thousands)	Value		Amortization			Value
Amortized intangible assets:
Covenants not to compete	$	1,124	$	(669	)	$	455
Permits		2,000		(428	)		1,572
Trade names		1,425		(259	)		1,166
Other		622		(229	)		393
Total amortized intangible assets	$	5,171	$	(1,585	)	$	3,586

Amortization expense related to intangible assets was approximately $151,000 and $302,000 for the three and six months ended June 30, 2005, respectively, and approximately $151,000 and $296,000 for the three and six months ended June 30, 2004. Amortization expense expected to be recorded in the future is as follows: $303,000 for the balance of 2005, $444,000 in 2006, $350,000 in 2007, $338,000 in 2008, $262,000 in 2009 and $971,000 thereafter.

9

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. 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 interest 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 each venture’s contract with the project owner typically requires joint and several liability, our agreements with our joint venture partners provide that each partner 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.

We have determined that certain of these joint ventures are variable interest entities as defined by FIN 46. Accordingly, we have consolidated those joint ventures where we have determined that we are the primary beneficiary prospectively beginning January 1, 2004. The joint ventures we have consolidated are engaged in construction projects with total contract values ranging from $14.6 million to $391.4 million. Our proportionate share of the consolidated joint ventures ranges from 52.0% to 70.0%.

Consistent with Emerging Issues Task Force Issue 00-01, “Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures,” we account for our share of the operations of construction joint ventures in which we have determined we are not the primary beneficiary on a pro rata basis in the consolidated statements of operations and as a single line item in the consolidated balance sheets. The joint ventures in which we hold a significant interest but are not the primary beneficiary are engaged in construction projects with total contract values ranging from $3.9 million to $261.0 million. Our proportionate share of these joint ventures ranges from 25% to 40%.

Circumstances that could lead to a loss under our joint venture arrangements beyond our proportionate share include a partner’s inability to contribute additional funds to the venture in the event the project incurs a loss, or additional costs that we could incur should a partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement. At June 30, 2005, approximately $325.3 million of work representing our partners’ share of joint venture contracts in progress had yet to be completed.

10

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Weighted Average Shares Outstanding:

A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income per share in the accompanying condensed consolidated statements of operations is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2005		2004		2005		2004
Weighted average shares outstanding
Weighted average common stock outstanding		41,712		41,604		41,653		41,544
Less: weighted average restricted stock outstanding		1,074		1,187		1,091		1,203
Total		40,638		40,417		40,562		40,341

Basic weighted average shares outstanding	40,638	40,417	40,562	40,341
Effect of dilutive securities:
Common stock options and units	63	52	62	53
Restricted stock	511	549	494	525
Total	41,212	41,018	41,118	40,919

Restricted stock representing approximately 189,000 shares and 417,000 shares for the three months ended June 30, 2005 and 2004, respectively, and approximately 94,000 shares and 321,000 shares for the six months ended June 30, 2005 and 2004, respectively, have been excluded from the calculation of diluted net income per share because their effects are anti-dilutive.

9. Comprehensive Income:

The components of comprehensive income, net of tax, are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2005		2004		2005		2004
Net income	$	14,954	$	13,806	$	6,687	$	4,697
Other comprehensive income:
Changes in net unrealized gains on investments		253		92		41		528
Total comprehensive income	$	15,207	$	13,898	$	6,728	$	5,225

10. Provision for Income Taxes:

Our effective tax rate decreased to 28.7% and 27.0% for the three and six month periods ended June 30, 2005, respectively, from 34.0% and 33.5% for the corresponding periods in 2004, respectively, due primarily to a discrete period tax benefit of approximately $3.5 million related to the provision for a legal judgment recorded in the second quarter of 2005 (see Note 11) and an increase in our partners’ share of consolidated construction joint venture income. Generally, our construction joint ventures are not subject to income taxes on a stand-alone basis. Additionally, our effective tax rate for the 2005 periods reflect the estimated impact of a deduction based on income from qualified domestic production activities under the American Jobs Creation Act of 2004. We currently expect our effective tax rate for the year ending December 31, 2005 to be approximately 30.0%.

11

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. Legal Proceedings:

Eldredge

A $9.3 million judgment was entered in June 2005 against our wholly owned subsidiary Granite Construction Company (“Granite”) by the District Court Clark County, Nevada in an action entitled Eldredge Vs. Las Vegas Valley Water District, Granite, et al. The civil lawsuit was initially brought by a former employee of Granite against the Las Vegas Water District in June 2000. The plaintiff subsequently filed an Amended Complaint on June 10, 2003, bringing Granite into the action and seeking compensation in addition to the worker’s compensation payments the employee previously accepted for injuries sustained when a trench excavation collapsed. The jury issued a verdict finding against Granite on two causes of action, assault and battery and intentional infliction of emotional distress. The damages awarded past and future lost wages, medical expenses and pain and suffering. Although no punitive damages were assessed, Granite’s insurance carrier has denied coverage for this judgment.

On June 23, 2005, Granite filed several post-trial motions seeking reconsideration by the trial court as well as a reduction in the amount of the judgment. We anticipate that these post-trial motions will be heard in September 2005. If we do not prevail in the post-trial motions, we fully intend to pursue an appeal. We anticipate that the appeal process will take between 12 and 18 months to complete. The judgment will accrue interest until it is satisfied. During the three months ended June 30, 2005, we recorded a provision of $9.3 million, which was estimated based on the amounts of the judgment described above.

After the verdict in Eldredge was issued, plaintiff filed a motion seeking monetary sanctions against Granite in the amount of $26.8 million (a multiple of the jury verdict) based on allegations that Granite and/or its trial counsel improperly withheld and/or attempted to influence testimony in respect to the case. Granite’s opposition and plaintiff’s reply have been filed with the Court. We believe that the plaintiff has failed to submit any meaningful proof to support these allegations, that the motion is without merit and that it is highly unlikely that the motion will be granted. We anticipate the motion will be heard in September 2005.

Wasatch Constructors

Granite Construction Company, as a member of a joint venture, Wasatch Constructors, is among a number of construction companies and the Utah Department of Transportation that were named 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 $46.4 million.

The original complaint was filed in January 1999 and the Third Amended Complaint was filed in February 2003. On May 30, 2003, Wasatch Constructors and the coordinated defendants filed their motion to dismiss the Third Amended Complaint. On December 23, 2003, the Court issued its order granting Wasatch Constructors’ and the coordinated defendants’ motion to dismiss the Third Amended Complaint but allowed the plaintiffs one last opportunity to amend their complaint. Plaintiffs’ Fourth Amended Complaint was filed on July 12, 2004.

On May 27, 2005, the Court granted Wasatch Constructors’ motion to dismiss that part of the plaintiffs’ Fourth Amended Complaint, which alleged fraud on behalf of Wasatch Constructors with respect to charges to the Government for excess truck weight. The Court denied the motion to dismiss the remaining allegations of plaintiffs’ complaint. Wasatch Constructors has filed a Petition to Appeal with the United States Court of Appeals for the 10^th Circuit as to the Court’s decision to deny the motion to dismiss the remaining allegations. In addition, Wasatch Constructors has filed with the Court a separate motion to dismiss the entire case.

12

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Silica

Granite Construction Company is one of approximately one hundred defendants in six California State Court lawsuits filed in 2004 in Alameda and San Francisco Counties where six plaintiffs have, by way of various causes of action, including strict product and market share liability, alleged personal injuries caused by exposure to silica products and related materials during plaintiffs’ use or association with sand blasting or grinding concrete. The plaintiffs in each lawsuit have categorized the defendants as equipment defendants, respirator defendants, premises defendants and sand defendants. We have been identified as a sand defendant, meaning a party that manufactured, supplied or distributed silica-containing products. Our preliminary investigation revealed that we have not knowingly sold or distributed abrasive silica sand for sandblasting. We have been dismissed in five of these lawsuits and continue to evaluate our exposure on the remaining lawsuit. In addition, we recently have been apprised of ten new complaints brought by 11 individual plaintiffs and that are based on similar allegations of exposure to silica containing products being filed, but not served, against Granite and more than a hundred other defendants in California State Court. We are investigating the specific allegations against Granite for these ten new complaints.

Other

We are a party to a number of other legal proceedings arising in the normal course of business 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 or cash flows, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and/or financial position for the period in which the ruling occurs.

12. Business Segment Information:

We have two reportable segments: the Branch Division and the Heavy Construction Division (“HCD”). The Branch Division is composed of branch offices, including our majority owned subsidiary, Wilder Construction Company (“Wilder”), that serve local markets, while HCD pursues major infrastructure projects throughout the nation. HCD focuses on building larger heavy-civil projects with contract durations that are frequently 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 our revenue from the sale of materials is from the Branch Division.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in our 2004 Annual Report on Form 10-K. We evaluate performance based on operating profit or loss (excluding gain on sales of property and equipment) and exclude income taxes, interest income, interest expense or other income (expense). Unallocated other corporate expenses principally comprise corporate general and administrative expenses.

13

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Branch Division operating income for the three and six months ended June 30, 2005 includes a $9.3 million provision for a legal judgment (see Note 11).

Summarized Segment Information (in thousands):

	Three Months Ended June 30,
	HCD			Branch		Total
2005
Revenue from external customers	$	285,919		$	390,785	$	676,704
Inter-segment revenue transfer		(9,638	)		9,638		—
Net revenue		276,281			400,423		676,704
Depreciation, depletion and amortization		3,792			10,839		14,631
Operating profit		8,000			30,546		38,546
2004
Revenue from external customers	$	225,062		$	333,692	$	558,754
Inter-segment revenue transfer		(4,933	)		4,933		—
Net revenue		220,129			338,625		558,754
Depreciation, depletion and amortization		3,257			10,582		13,839
Operating profit		10,329			23,667		33,996

	Six Months Ended June 30,
	HCD			Branch		Total
2005
Revenue from external customers	$	495,516		$	602,122	$	1,097,638
Inter-segment revenue transfer		(17,279	)		17,279		—
Net revenue		478,237			619,401		1,097,638
Depreciation, depletion and amortization		7,483			20,998		28,481
Operating profit		6,705			29,477		36,182
Property and equipment		51,289			309,690		360,979
2004
Revenue from external customers	$	400,499		$	495,273	$	895,772
Inter-segment revenue transfer		(10,290	)		10,290		—
Net revenue		390,209			505,563		895,772
Depreciation, depletion and amortization		6,836			21,414		28,250
Operating (loss) profit		(1,010	)		18,041		17,031
Property and equipment		48,959			279,049		328,008

Reconciliation of Segment Operating Profit to Consolidated Totals (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Total operating profit for reportable segments	$	38,546		$	33,996		$	36,182		$	17,031
Gain on sales of property and equipment		2,189			1,109			2,215			14,439
Other income (expense), net		(336	)		2,217			(341	)		2,084
Unallocated other corporate expense, net		(11,745	)		(10,166	)		(21,311	)		(19,061	)
Income before provision for income taxes and minority interest	$	28,654		$	27,156		$	16,745		$	14,493

14

Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. Line of Credit:

On June 24, 2005, we entered into an agreement for a $150.0 million bank revolving line of credit, which replaced the $100.0 million line of credit we entered into in June 2003. The new revolving line of credit allows for unsecured borrowings for up to five years through June 24, 2010, with interest rate options. Interest on outstanding borrowings under the revolving line of credit is at our choice of selected LIBOR rates plus a margin that is recalculated quarterly. The margin was 0.875% at June 30, 2005. The unused and available portion of this line of credit was $120.1 million at June 30, 2005. Restrictive covenants under the terms of our debt agreements require the maintenance of certain financial ratios and the maintenance of tangible net worth (as defined). We were in compliance with these covenants at June 30, 2005.

14. Acquisition:

In April 2004, we purchased an additional 643,348 shares of Wilder common stock for a cash payment of $9.2 million. As a result of this transaction, our interest in Wilder increased from 60.3% to 75.0%. The acquisition was accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.”

15. Sale of Assets:

In March 2004, we sold certain assets related to our ready-mix concrete business in Utah for cash of $10.0 million and promissory notes with an estimated fair value of $8.9 million which are payable in installments from 2005 through 2010, the first of which has been paid. The sale transaction resulted in the recognition of a gain of approximately $10.0 million, which is included in gain on sales of property and equipment for the six months ended June 30, 2004.

16. Reclassifications:

Certain financial statement items have been reclassified to conform to the current period’s format. These reclassifications had no impact on previously reported results of operations, financial position or cash flows.

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

Forward-Looking Disclosure

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

General

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

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, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period.

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

16

to balance their budgets. Conversely, higher public funding and/or a robust economy will increase demand for our services and provide opportunities for revenue growth and margin improvement.

Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing and other variable compensation, as well as other 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 project employees to estimating and bidding activities until another project gets underway, temporarily moving their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the stock (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 very profitable years and decreasing expenses in less profitable years.

Results of Operations

Comparative Financial Summary	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2005		2004		2005		2004
Revenue	$	676,704	$	558,754	$	1,097,638	$	895,772
Gross profit		76,707		59,744		103,647		70,428
General and administrative expenses		40,606		35,914		79,476		72,458
Provision for legal judgment		9,300		—		9,300		—
Gain on sales of property and equipment		2,189		1,109		2,215		14,439
Operating income		28,990		24,939		17,086		12,409
Net income		14,954		13,806		6,687		4,697

Our results of operations for the three months and six months ended June 30, 2005 reflect improved results from our operating divisions compared with the corresponding periods in 2004, particularly in our Branch Division which realized higher revenue and gross margins on construction projects and on the sales of construction materials. These improvements were partially offset by additional costs recorded due to changes in the estimates of the cost to complete certain projects and the recognition of a provision related to an unfavorable legal judgment.

	Three Months Ended June 30,										Six Months Ended June 30,
Total Revenue	2005					2004					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Revenue by Division:
Branch Division	$	400,423		59.2	%	$	338,625		60.6	%	$	619,401		56.4	%	$	505,563		56.4	%
Heavy Construction Division		276,281		40.8	%		220,129		39.4	%		478,237		43.6	%		390,209		43.6	%
	$	676,704		100.0	%	$	558,754		100.0	%	$	1,097,638		100.0	%	$	895,772		100.0	%

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	Three Months Ended June 30,										Six Months Ended June 30,
Branch Division Revenue	2005					2004					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Geographic area:
California	$	211,938		52.9	%	$	188,750		55.7	%	$	327,858		52.9	%	$	303,063		59.9	%
West (excluding California)		188,485		47.1	%		149,875		44.3	%		291,543		47.1	%		202,500		40.1	%
	$	400,423		100.0	%	$	338,625		100.0	%	$	619,401		100.0	%	$	505,563		100.0	%
Market Sector:
Federal agencies	$	19,551		4.9	%	$	34,295		10.1	%	$	26,489		4.3	%	$	42,482		8.4	%
State agencies		90,298		22.6	%		90,854		26.8	%		133,590		21.6	%		131,793		26.1	%
Local public agencies		88,932		22.1	%		78,635		23.3	%		146,976		23.7	%		117,528		23.2	%
Total public sector		198,781		49.6	%		203,784		60.2	%		307,055		49.6	%		291,803		57.7	%
Private sector		117,131		29.3	%		64,080		18.9	%		181,700		29.3	%		103,819		20.5	%
Material sales		84,511		21.1	%		70,761		20.9	%		130,646		21.1	%		109,941		21.8	%
	$	400,423		100.0	%	$	338,625		100.0	%	$	619,401		100.0	%	$	505,563		100.0	%

Branch Division Revenue: Revenue from our Branch Division for the three and six month periods ended June 30, 2005 increased over the corresponding 2004 periods by $61.8 million, or 18.2%, and $113.8 million, or 22.5%, respectively. The higher revenue reflects increases in private sector construction revenue and sales of construction materials as a result of the increase in demand created by the continuing strong housing market, particularly in the Central Valley of California (from Sacramento to Bakersfield) and in Northern Nevada.

	Three Months Ended June 30,										Six Months Ended June 30,
HCD Revenue	2005					2004					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Geographic area:
California	$	47,511		17.2	%	$	—		—		$	72,173		15.1	%	$	4		—
West (excluding California)		20,362		7.4	%		23,838		10.8	%		36,415		7.6	%		45,666		11.7	%
Midwest		28,457		10.3	%		17,457		7.9	%		36,458		7.6	%		36,108		9.3	%
New York		65,963		23.9	%		78,996		35.9	%		122,613		25.6	%		129,723		33.2	%
Northeast (excluding New York)		11,737		4.2	%		1,234		0.6	%		18,824		3.9	%		3,822		1.0	%
South		102,251		37.0	%		98,604		44.8	%		191,754		40.2	%		174,886		44.8	%
	$	276,281		100.0	%	$	220,129		100.0	%	$	478,237		100.0	%	$	390,209		100.0	%
Market sector:
Federal agencies	$	4,977		1.8	%	$	3,506		1.6	%	$	7,340		1.5	%	$	7,623		2.0	%
State agencies		111,708		40.4	%		110,948		50.4	%		195,873		41.0	%		196,504		50.4	%
Local public agencies		151,043		54.7	%		92,959		42.2	%		259,549		54.3	%		162,270		41.5	%
Total public sector		267,728		96.9	%		207,413		94.2	%		462,762		96.8	%		366,397		93.9	%
Private sector		8,489		3.1	%		12,441		5.7	%		15,325		3.2	%		23,051		5.9	%
Material sales		64		—			275		0.1	%		150		—			761		0.2	%
	$	276,281		100.0	%	$	220,129		100.0	%	$	478,237		100.0	%	$	390,209		100.0	%

HCD Revenue: Revenue from our Heavy Construction Division for the three months and six months ended June 30, 2005 increased over the corresponding 2004 periods by $56.2 million, or 25.5%, and $88.0 million, or 22.6%, respectively, due primarily to the increase in volume from a higher backlog at the beginning of the respective periods. Approximately $24.5 million of the growth in HCD revenue for

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the three and six month periods ended June 30, 2005 represented revenue related to our minority partners’ share of work in our consolidated construction joint ventures.

	June 30,					March 31,					June 30,
Total Backlog	2005					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Backlog by Division:
Heavy Construction Division	$	1,852,445		74.1	%	$	2,031,256		77.7	%	$	1,378,110		67.6	%
Branch Division		647,862		25.9	%		582,774		22.3	%		660,059		32.4	%
	$	2,500,307		100.0	%	$	2,614,030		100.0	%	$	2,038,169		100.0	%

	June 30,					March 31,					June 30,
HCD Backlog	2005					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Geographic area:
California	$	274,780		14.8	%	$	321,292		15.8	%	$	1,058		0.1	%
West (excluding California)		34,773		1.9	%		54,600		2.7	%		104,500		7.6	%
Midwest		85,915		4.6	%		112,437		5.5	%		32,507		2.4	%
New York		513,070		27.7	%		510,900		25.2	%		546,765		39.7	%
Northeast (excluding New York)		123,653		6.7	%		120,830		5.9	%		135,958		9.9	%
South		820,254		44.3	%		911,197		44.9	%		557,322		40.3	%
	$	1,852,445		100.0	%	$	2,031,256		100.0	%	$	1,378,110		100.0	%
Market sector:
Federal agencies	$	70,184		3.8	%	$	73,677		3.6	%	$	46,114		3.3	%
State agencies		758,549		40.9	%		826,164		40.7	%		512,252		37.2	%
Local public agencies		952,686		51.5	%		1,072,517		52.8	%		732,052		53.1	%
Total public sector		1,781,419		96.2	%		1,972,358		97.1	%		1,290,418		93.6	%
Private sector		71,026		3.8	%		58,898		2.9	%		87,692		6.4	%
	$	1,852,445		100.0	%	$	2,031,256		100.0	%	$	1,378,110		100.0	%

HCD Backlog: Heavy Construction Division backlog of $1.9 billion at June 30, 2005 was $178.8 million, or 8.8%, lower than at March 31, 2005, and $474.3 million, or 34.4%, higher than at June 30, 2004. Approximately $153.0 million of the growth in HCD backlog from June 30, 2004 to June 30, 2005 represented an increase in our minority partners’ share of consolidated joint venture backlog. Additions to HCD backlog in the current quarter included a $44.9 million site preparation project in New York.

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	June 30,					March 31,					June 30,
Branch Division Backlog	2005					2005					2004
(in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Geographic Area:
California	$	302,003		46.6	%	$	287,060		49.3	%	$	321,864		48.8	%
West (excluding California)		345,859		53.4	%		295,714		50.7	%		338,195		51.2	%
	$	647,862		100.0	%	$	582,774		100.0	%	$	660,059		100.0	%
Market Sector:
Federal agencies	$	29,181		4.5	%	$	26,956		4.6	%	$	67,270		10.2	%
State agencies		236,475		36.5	%		189,268		32.5	%		198,990		30.1	%
Local public agencies		203,717		31.4	%		170,120		29.2	%		270,345		41.0	%
Total public sector		469,373		72.4	%		386,344		66.3	%		536,605		81.3	%
Private sector		178,489		27.6	%		196,430		33.7	%		123,454		18.7	%
	$	647,862		100.0	%	$	582,774		100.0	%	$	660,059		100.0	%

Branch Division Backlog: Branch Division backlog of $647.9 million at June 30, 2005 was $65.1 million, or 11.2%, higher than at March 31, 2005 due primarily to increases in public sector awards, particularly from state and local government agencies in most of the states in which the Branch Division operates. The growth in state government agency backlog from March 31, 2005 to June 30, 2005 includes an increase of approximately $13.3 million from the state of California. A sizeable percentage of Branch Division anticipated contract revenue in any year is not reflected in our backlog due to the short duration of smaller Branch Division projects that are initiated and completed during each year.

Gross Profit	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2005			2004			2005			2004
Branch Division	$	61,656		$	41,774		$	81,423		$	55,931
Percent of division revenue		15.4	%		12.3	%		13.1	%		11.1	%
Heavy Construction Division	$	15,212		$	18,354		$	22,308		$	14,831
Percent of division revenue		5.5	%		8.3	%		4.7	%		3.8	%
Other	$	(161	)	$	(384	)	$	(84	)	$	(334	)
Total gross profit	$	76,707		$	59,744		$	103,647		$	70,428
Percent of total revenue		11.3	%		10.7	%		9.4	%		7.9	%

Gross Profit: We recognize revenue only equal to cost, deferring profit recognition, until a project reaches 25% completion. Because we have a large number of projects at various stages of completion in our Branch Division, this policy generally has little impact on the Branch Division’s gross profit on a quarterly or annual basis. However, HCD has fewer projects in process at any given time and those projects tend to be much larger than Branch Division projects. As a result, HCD gross profit as a percent of revenue can vary significantly in periods where one or several very large projects reach 25% completion and the deferred profit is recognized or conversely, in periods where backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross margin recognition.

Additionally, we do not recognize revenue from contract claims until we have a signed settlement agreement and payment is assured and we do not recognize revenue from contract change orders until the contract owner has agreed to the change order in writing. However, we do recognize the estimated costs related to any contract claims or pending change orders when the additional work is identified. As a

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result, our gross profit as a percent of revenue can vary during periods when a large volume of change orders or contract claims are pending resolution (reducing gross profit percent) or, conversely, during periods where large change orders or contract claims are agreed to or settled (increasing gross profit percent). Although this variability can occur in both our Branch Division and HCD, it is more pronounced in HCD because of the larger size and complexity of its projects.

Branch Division gross profit as a percent of revenue for the three months and six months ended June 30, 2005 increased relative to the corresponding periods in 2004 due primarily to improved performance on construction projects and higher gross margin on the sales of construction materials due to higher unit selling prices. On a year-to-date basis, Branch Division gross profit was negatively impacted by approximately $2.5 million related to the estimated impact of certain unresolved and disputed issues on one project recorded in the first quarter of 2005. Branch Division gross profit in the first quarter 2004 includes costs of approximately $1.4 million associated with the closing of certain ready-mix concrete plants in preparation for their subsequent sale during that quarter (see Note 15 to the Condensed Consolidated Financial Statements).

HCD gross profit as a percent of revenue was lower in the second quarter of 2005 compared to the second quarter of 2004 due primarily to an increase in the net impact of downward contract estimate changes. In the second quarter of 2005 we recognized additional costs of approximately $11.0 million related to changes in estimates of costs to complete five of our HCD projects compared with approximately $5.4 million in such additional costs related to one of our HCD projects in the second quarter of 2004 (See Note 3 to the Condensed Consolidated Financial Statements). We believe we have entitlement to additional compensation related to some of these additional costs and are actively pursuing these claims with the contract owners. However, the amount and timing of any future recovery is highly uncertain.

Additionally, HCD gross profit as a percent of revenue was negatively impacted by a higher volume of work performed on jobs less than 25% complete, which rose to $49.4 and $80.1 million in the three and six months ended June 30, 2005, respectively, from $29.3 million and $50.4 million, respectively, in the corresponding periods in 2004. These reductions were partially offset by the impact of a large project reaching 25% complete during the quarter ended June 30, 2005

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 and fuel).

General and Administrative Expenses	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2005			2004			2005			2004
Salaries and related expenses	$	22,129		$	19,726		$	46,705		$	43,621
Incentive compensation, discretionary profit sharing and other variable compensation		4,920			4,142			7,317			5,709
Other general and administrative expenses		13,557			12,046			25,454			23,128
Total	$	40,606		$	35,914		$	79,476		$	72,458
Percent of revenue		6.0	%		6.4	%		7.2	%		8.1	%

General and Administrative Expenses: Salaries and related expenses in the three months and six months ended June 30, 2005 increased $1.7 million, or 8.5%, and $3.2 million, or 7.5%, over the comparable periods in 2004 due primarily to a combination of increased headcount, higher payroll related benefits and normal salary increases. Incentive compensation, discretionary profit sharing and other variable compensation increased in the three months and six months ended June 30, 2005 compared with the corresponding periods in 2004 due to higher profitability in the 2005 periods. Additionally, the six month

21

period ended June 30, 2004 included significant forfeitures of unvested restricted stock which have the effect of reducing our expense in the period of forfeiture. Other general and administrative costs include information technology, occupancy, office equipment and supplies, depreciation, travel and entertainment, advertising and marketing, training and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses.

Provision for Legal Judgment	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2005		2004		2005		2004
Provision for legal judgment	$	9,300	$	—	$	9,300	$	—

Provision for Legal Judgment: In June 2005, we recorded a provision of $9.3 million related to an unfavorable judgment in a legal proceeding (see Note 11 to the Condensed Consolidated Financial Statements).

Gain on Sales of Property and Equipment	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2005		2004		2005		2004
Gain on sales of property and equipment	$	2,189	$	1,109	$	2,215	$	14,439

Gain on Sales of Property and Equipment: Gain on sales of property and equipment was significantly higher in the six months ended June 30, 2004 as compared with the six months ended June 30, 2005 primarily due to a gain of approximately $10.0 million recognized on the sale of certain assets related to our ready-mix concrete business in Utah in the first quarter of 2004.

Other Income (Expense)	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2005			2004			2005			2004
Interest income	$	1,968		$	1,317		$	4,127		$	2,715
Interest expense		(1,636	)		(1,859	)		(3,667	)		(3,599	)
Equity in (loss) income of affiliates		(17	)		2,766			(77	)		2,873
Other, net		(651	)		(7	)		(724	)		95
Total	$	(336	)	$	2,217		$	(341	)	$	2,084

Other Income (Expense): Interest income increased in both the three months and six months ended June 30, 2005 as compared with the corresponding periods in 2004 due primarily to a higher average yield on our interest bearing investments. The decrease in equity in income (loss) of affiliates over the same periods was due to a $2.1 million gain related to the sale of certain assets by a partnership in which we hold a 9.0% interest in the second quarter of 2004.

Provision for Income Taxes	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2005			2004			2005			2004
Provision for income taxes	$	8,220		$	9,239		$	4,528		$	4,855
Effective tax rate		28.7	%		34.0	%		27.0	%		33.5	%

Provision for Income Taxes: Our effective tax rate decreased to 28.7% and 27.0% for the three and six month periods ended June 30, 2005, respectively, from 34.0% and 33.5% for the corresponding periods in 2004, respectively, due primarily to a discrete period tax benefit of approximately $3.5 million for a provision for a legal judgment recorded in the second quarter of 2005 (see Note 11 to the Condensed Consolidated Financial Statements) and an increase in our partners’ share of consolidated construction

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joint venture income. Generally, our construction joint ventures are not subject to income taxes on a stand-alone basis. Additionally, our effective tax rate for the 2005 periods reflect the estimated impact of a deduction based on income from qualified domestic production activities under the American Jobs Creation Act of 2004. We currently expect our effective tax rate for the year ending December 31, 2005 to be approximately 30.0%.

Outlook

We are encouraged by the strength in most of our markets and the growth opportunities for our business in both the private and public sectors. We continue to focus considerable effort on capturing higher margins and building our capacity throughout the Company to satisfy the demand for our services across the nation.

The outlook for public sector work in California has improved dramatically due to a significant increase in funding for the state’s transportation projects. In the fiscal year 2005-06, California’s transportation construction budget increased to $4.2 billion from less than $1.0 billion in the prior fiscal year. The current budget, beginning July 1, includes the reinstatement of Proposition 42 funding from gasoline sales tax proceeds, expected Indian gaming revenues and regular revenues from state and federal gas taxes and truck weight fees. This recent commitment to reinvest into California’s transportation program provides us with the first positive funding event we have experienced for this part of our business in over three years.

Key beneficiaries of the California transportation budget increases will be our eight California-based branches. In light of this positive news, our branches are concentrating significant effort on building capacity, in terms of people, equipment and construction materials. However, it is the capacity of the labor market for our industry nationwide and our ability to hire qualified workers that will be our biggest challenge. One key to our success is our ongoing commitment to investment in building the skills and capabilities of both new hires and our existing workforce by providing specialized in-house training programs.

In the private sector, demand for residential and commercial site development work continues to drive positive results for the Branch Division. Although some branches are experiencing stronger markets than others, all of our locations are very busy bidding and building work and we expect that this improved level of activity is sustainable at least through the end of our 2005 construction season. Wet weather this past winter and spring in the West affected the early start to our construction season in some areas and set the stage for a “compressed work season”. However, at this point in the year, the market demands in the private sector coupled with healthy public sector funding gives us reason to believe that operating income for the Branch Division will exceed that of 2004.

Our construction materials business remains strong. With third-party sales representing 21.1% of the Branch Division’s revenue for the first six months of 2005, the ownership of aggregate materials is both a valuable resource for our core construction business, as well as a strategic and profitable retail business. Over the next several years, we plan to increase our investment in our materials business. Our plan is to strategically invest in this business by acquiring additional aggregate reserves, “green fielding” new facilities and expanding our existing operations.

Our Heavy Construction Division is committed to its goal of increasing gross margin and operating income in 2005 over that of 2004. Although there are adequate bidding opportunities in all of our HCD Regions, we have been more selective this year and continue to focus our efforts on the successful execution of our existing backlog. In addition, with the long delay in passing a federal highway bill, it appears to us that more states are looking for alternative procurement and financing methods for their

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transportation programs. As a result, we have noticed a shift in the types of bidding opportunities available with fewer $50 to $100 million size projects (that are typically more dependent on federal funding) and more of the large projects in excess of $300 million that are structured with non-traditional procurement contracts such as design/build. Bidding opportunities for HCD over the next six to twelve months include several large highway, bridge and rail projects in Texas, the Southeast and New York totaling in excess of $6 billion.

As of July 29, 2005, the House and Senate have both passed the long awaited six-year federal transportation bill, sending it to the White House for signature where it is reported that President Bush will sign the bill. The Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users (SAFETEA-LU) would provide $286.4 billion in transportation funding through Fiscal Year 2009 and achieves a 92% rate of return to donee states by fiscal year 2008. While we have not been materially impacted as a result of the lengthy impasse, we nevertheless are pleased to hear that the states will be able to retain their ability to establish long-term infrastructure building programs which will provide much needed visibility to our industry.

While we do have some exposure in areas of our business to price increases and availability of raw materials, we have not been materially impacted to date. We are subject to oil price volatility as it relates to our use of liquid asphalt in our production of asphaltic concrete and diesel fuel for our rolling stock equipment, as well as steel, cement and other commodities. We manage our exposure to these price changes by monitoring the escalation of these commodities and pricing them into our projects and contracts accordingly. Some of our contracts include clauses for liquid asphalt and fuel escalation and de-escalation that provide protection in the event that oil product prices change significantly. Although we are exposed to price spikes in projects that do not include such clauses, this potential impact can be reversed when prices come down. Some of our HCD projects are anticipating cement delivery delays but have not been materially impacted to date as a result.

Looking forward, we are very encouraged by the near-term opportunities we are witnessing in the Branch Division as well as the long-term prospects for HCD. We will continue to grow our capabilities and remain focused on the execution of our backlog to improve our financial performance in both of our operating divisions.

Liquidity and Capital Resources

	Six Months Ended June 30,
(in thousands)	2005			2004
Cash and cash equivalents	$	116,988		$	112,555
Net cash provided by (used in):
Operating activities		1,148			(15,011	)
Investing activities		(18,894	)		5,722
Financing activities		(26,893	)		(17,789	)
Capital expenditures		53,688			37,525
Working capital		312,917			288,732

Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. We expect the principal use of funds for the foreseeable future will be for capital expenditures,

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working capital, debt service, acquisitions and other investments. We have budgeted $93.2 million for capital expenditures in 2005, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of land and aggregate reserves.

Our cash and cash equivalents and short-term and long-term marketable securities totaled $201.5 million at June 30, 2005 and included $35.6 million of cash from our consolidated construction joint ventures. This joint venture cash is for the working capital needs of each joint venture’s project. The decision to distribute cash must generally be made jointly by all of the partners. 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 the next twelve months and beyond. If we experience a significant change in our business such as the execution of a significant acquisition, we would likely need to acquire additional sources of financing, which may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements.

Cash provided by operating activities of $1.1 million for the six months ended June 30, 2005 represents a $16.2 million increase from the amount used by operating activities during the same period in 2004. Contributing to this increase were higher net income from operating activities in the six months ended June 30, 2005, an increase in billings in excess of costs and estimated earnings and an increase in accounts payable and accrued expenses at June 30, 2005 compared with June 30, 2004. The increase in billings in excess of costs and estimated earnings was due primarily to cash timing differences on several large projects in the early stages of construction and the increase in accounts payable and accrued expenses was largely due to growth in costs related to revenue growth in the 2005 period. Partially offsetting these items was an increase in accounts receivable of $109.4 million from June 30, 2004 to June 30, 2005. Included in this increase is approximately $34.4 million related to an increase in accounts receivable from retention provisions in our contracts, which are generally due upon completion of the projects and acceptance by the project owner. The growth in retention receivable is largely due to an increase in the number of large HCD projects that were nearing completion at June 30, 2005 compared with June 30, 2004. The remaining increase is due primarily to higher revenue in the three months ended June 30, 2005 compared with the same period in 2004.

Cash used by investing activities of $18.9 million for the six months ended June 30, 2005 represents a $24.6 million decrease from the same period in 2004. The decrease was primarily due to an increase in planned purchases of construction and plant equipment to support growth in operations and the absence of cash received from the sale of certain assets by one of our equity method investments in the 2004 period. Additionally, cash flow during the six months ended June 30, 2004 included cash paid for the acquisition of additional interest in our majority-owned subsidiary, Wilder Construction Company.

Cash used by financing activities was $26.9 million for the six months ended June 30, 2005, a change of $9.1 million from the same period in 2004, which is primarily due to higher repayments of long term debt, partially offset by lower distributions to minority partners in our consolidated construction joint ventures.

Included in our other assets at June 30, 2005 is a receivable of approximately $3.5 million that we accepted as partial payment for work on a large private mass transit project which became operational in the latter half of 2004. The receivable is part of a series of bonds that formed the basis for the project owners’ funding for the entire project and is payable out of future fare revenues. In March 2005, one of the two services rating a series of these bonds reduced their rating to below investment grade. This change in rating is not specific to the particular bonds that we hold and we have no information that

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would indicate that our bond receivable is not collectible. We are closely monitoring factors that could impact our ability to collect this amount.

We had standby letters of credit totaling approximately $4.9 million outstanding at June 30, 2005, which expire between October of 2005 and March of 2006, but automatically renew unless canceled by the beneficiary. 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 June 30, 2005, approximately $2.4 billion of our backlog was bonded and performance bonds totaling approximately $7.7 billion were outstanding. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds when each contract is accepted by the owner. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.

On June 24, 2005, we entered into an agreement for a $150.0 million bank revolving line of credit, which replaced the $100.0 million line of credit we entered into in June 2003. The new revolving line of credit allows for unsecured borrowings for up to five years through June 24, 2010, with interest rate options. Interest on outstanding borrowings under the revolving line of credit is at our choice of selected LIBOR rates plus a margin that is recalculated quarterly. The margin was 0.875% at June 30, 2005. The unused and available portion of this line of credit was $120.1 million at June 30, 2005. Additionally, our Wilder subsidiary has a bank revolving line of credit of $10.0 million that expires in June 2006. There were no amounts outstanding under the Wilder line of credit at June 30, 2005.

Restrictive covenants under the terms of our debt agreements require the maintenance of certain financial ratios and the maintenance of tangible net worth (as defined). We were in compliance with these covenants at June 30, 2005. 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 June 30, 2005. Failure to comply with these covenants could cause the amounts due under the debt agreements to become currently payable.

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. These reports, and any amendments to them, are also available at the website of the Securities and Exchange Commission, www.sec.gov.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There was no significant change in our exposure to market risk during the six months ended June 30, 2005.

Item 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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, as of June 30, 2005, our disclosure controls and procedures were effective.

During the second quarter of 2005, there were no changes in our internal controls over financial reporting that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

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Item 1.LEGAL PROCEEDINGS

Eldredge

A $9.3 million judgment was entered in June 2005 against our wholly owned subsidiary Granite Construction Company (“Granite”) by the District Court Clark County, Nevada in an action entitled Eldredge Vs. Las Vegas Valley Water District, Granite, et al. The civil lawsuit was initially brought by a former employee of Granite against the Las Vegas Water District in June 2000. The plaintiff subsequently filed an Amended Complaint on June 10, 2003, bringing Granite into the action and seeking compensation in addition to the worker’s compensation payments the employee previously accepted for injuries sustained when a trench excavation collapsed. The jury issued a verdict finding against Granite on two causes of action, assault and battery and intentional infliction of emotional distress. The damages awarded past and future lost wages, medical expenses and pain and suffering. Although no punitive damages were assessed, Granite’s insurance carrier has denied coverage for this judgment.

On June 23, 2005, Granite filed several post-trial motions seeking reconsideration by the trial court as well as a reduction in the amount of the judgment. We anticipate that these post-trial motions will be heard in September 2005. If we do not prevail in the post-trial motions, we fully intend to pursue an appeal. We anticipate that the appeal process will take between 12 and 18 months to complete. The judgment will accrue interest until it is satisfied. During the three months ended June 30, 2005, we recorded a provision of $9.3 million, which was estimated based on the amounts of the judgment described above.

After the verdict in Eldredge was issued, plaintiff filed a motion seeking monetary sanctions against Granite in the amount of $26.8 million (a multiple of the jury verdict) based on allegations that Granite and/or its trial counsel improperly withheld and/or attempted to influence testimony in respect to the case. Granite’s opposition and plaintiff’s reply have been filed with the Court. We believe that the plaintiff has failed to submit any meaningful proof to support these allegations, that the motion is without merit and that it is highly unlikely that the motion will be granted. We anticipate the motion will be heard in September 2005.

Wasatch Constructors

Granite Construction Company, as a member of a joint venture, Wasatch Constructors, is among a number of construction companies and the Utah Department of Transportation that were named 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 $46.4 million.

The original complaint was filed in January 1999 and the Third Amended Complaint was filed in February 2003. On May 30, 2003, Wasatch Constructors and the coordinated defendants filed their motion to dismiss the Third Amended Complaint. On December 23, 2003, the Court issued its order granting Wasatch Constructors’ and the coordinated defendants’ motion to dismiss the Third Amended Complaint but allowed the plaintiffs one last opportunity to amend their complaint. Plaintiffs’ Fourth Amended Complaint was filed on July 12, 2004.

On May 27, 2005, the Court granted Wasatch Constructors’ motion to dismiss that part of the plaintiffs’ Fourth Amended Complaint, which alleged fraud on behalf of Wasatch Constructors with respect to charges to the Government for excess truck weight. The Court denied the motion to dismiss the remaining allegations of plaintiffs’ complaint. Wasatch Constructors has filed a Petition to Appeal with the United States Court of Appeals for the 10^th Circuit as to the Court’s decision to deny the motion to dismiss the remaining allegations. In addition, Wasatch Constructors has filed with the Court a separate motion to dismiss the entire case.

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Silica

Granite Construction Company is one of approximately one hundred defendants in six California State Court lawsuits filed in 2004 in Alameda and San Francisco Counties where six plaintiffs have, by way of various causes of action, including strict product and market share liability, alleged personal injuries caused by exposure to silica products and related materials during plaintiffs’ use or association with sand blasting or grinding concrete. The plaintiffs in each lawsuit have categorized the defendants as equipment defendants, respirator defendants, premises defendants and sand defendants. We have been identified as a sand defendant, meaning a party that manufactured, supplied or distributed silica-containing products. Our preliminary investigation revealed that we have not knowingly sold or distributed abrasive silica sand for sandblasting. We have been dismissed in five of these lawsuits and continue to evaluate our exposure on the remaining lawsuit. In addition, we recently have been apprised of ten new complaints brought by 11 individual plaintiffs and that are based on similar allegations of exposure to silica containing products being filed, but not served, against Granite and more than a hundred other defendants in California State Court. We are investigating the specific allegations against Granite for these ten new complaints.

Other

We are a party to a number of other legal proceedings arising in the normal course of business 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 or cash flows, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and/or financial position for the period in which the ruling occurs.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2005, we did not sell any of our equity securities that were not registered under the Securities Act of 1933, as amended. The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended June 30, 2005:

Issuer Purchases of Equity Securities

							Approximate dollar
					Total number of		value of shares
					shares purchased as		that may yet be
	Total number of				part of publicly		purchased under the
	shares		Average price paid		announced plans or		plans or
Period	purchased1		per share		programs2		programs2
April 1, 2005 through April 30, 2005		—		—		—	$	22,787,537
May 1, 2005 through May 31, 2005		85,200		23.45		—	$	22,787,537
June 1, 2005 through June 30,2005		7,992		23.94		—	$	22,787,537
		93,192		23.49		—

1	The total number of shares purchased includes: (i) shares purchased between May 5, 2005 and May 17, 2005 for contribution to our Employee Stock Ownership Plan; and (ii) shares purchased on June 2, 2005 in connection with employee tax withholding for shares granted under our 1999 Equity Incentive Plan.
2	On October 16, 2002, we publicly announced that our Board of Directors had authorized us to repurchase up to $25.0 million worth of shares of our Company’s common stock, exclusive of repurchases related to employee benefit plans, at management’s discretion.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

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

At our annual meeting of shareholders on May 23, 2005, the following members were elected to three-year terms to the Board of Directors:

	Affirmative Votes		Withhold
David H. Watts		37,213,861		339,624
J. Fernando Niebla		37,013,230		540,255
Gary M. Cusumano		37,086,255		333,621

In addition, the shareholders ratified the Board's appointment of the following director to serve for the remaining two-year term:

	Affirmative Votes		Against		Abstain
William H. Powell		37,351,277		184,387		17,821
The following proposal was approved at the annual meeting:

	Affirmative Votes		Against		Abstain
Proposal to ratify the appointment by the Audit/Compliance Committee of PricewaterhouseCoopers LLP as the independent accounting firm of Granite for the fiscal year ending December 31, 2005.		36,702,319		521,459		61,473

Item 5. OTHER INFORMATION

None

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Item 6. EXHIBITS

10.1	Credit Agreement, dated as of June 24, 2005 among Granite Construction Incorporated and six enumerated financial institutions, and Bank of America, N.A., as Administrative Agent
10.2	Guaranty Agreement, dated as of June 24, 2005, from the Subsidiaries of Granite Construction Incorporated as Guarantors of financial accommodations pursuant to the terms of the Credit Agreement dated June 24, 2005
31.1	Certification of Principal Executive Officer
31.2	Certification of Principal Financial Officer
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements 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
Date: August 1, 2005	By:	/s/ William E. Barton
		William E. Barton
		Senior Vice President and Chief Financial Officer

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