10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)
[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter ended September 30, 2003

[  ]	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 [X]    No [  ]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 5, 2003.

Class	Outstanding
Common Stock, $0.01 par value	41, 533,436 shares

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	Item 3. DEFAULTS UPON SENIOR SECURITIES
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Index

			Page
PART I. FINANCIAL INFORMATION				3
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		4
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2003 and 2002		5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		6
		Notes to the Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4.	Controls and Procedures		23
PART II.OTHER INFORMATION				24
	Item 1.	Legal Proceedings		25
	Item 2.	Changes in Securities and Use of Proceeds		25
	Item 3.	Defaults Upon Senior Securities		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25
	Item 5.	Other Information		25
	Item 6.	Exhibits and Reports on Form 8-K		25

2

PART I. FINANCIAL INFORMATION

3

Item 1. FINANCIAL STATEMENTS (unaudited)

Granite Construction Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

			September 30,			December 31,
			2003			2002
			(Unaudited)
Assets
Current assets
	Cash and cash equivalents		$	73,383		$	52,032
	Short-term marketable securities			96,992			96,900
	Accounts receivable, net			326,757			265,896
	Costs and estimated earnings in excess of billings			42,170			42,966
	Inventories			31,557			29,984
	Deferred income taxes			22,602			23,056
	Equity in construction joint ventures			35,750			24,329
	Other current assets			10,149			12,732
		Total current assets		639,360			547,895
Property and equipment, net				351,447			347,963
Long-term marketable securities				43,023			33,762
Investments in affiliates				19,218			18,970
Other assets				41,746			35,229
			$	1,094,794		$	983,819
Liabilities and Stockholders’ Equity
Current liabilities
	Current maturities of long-term debt		$	10,161		$	8,640
	Accounts payable			152,282			118,813
	Billings in excess of costs and estimated earnings			108,670			105,725
	Accrued expenses and other current liabilities			130,089			94,321
		Total current liabilities		401,202			327,499
Long-term debt				127,473			132,380
Other long-term liabilities				23,217			13,742
Deferred income taxes				40,011			40,011
Commitments and contingencies
Minority interest in consolidated subsidiaries				9,867			15,318
Stockholders’ 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 41,533,436 shares in 2003 and 41,257,015 in 2002			415			413
	Additional paid-in capital			73,673			69,390
	Retained earnings			432,567			398,383
	Accumulated other comprehensive loss			(592	)		(1,402	)
				506,063			466,784
	Unearned compensation			(13,039	)		(11,915	)
				493,024			454,869
			$	1,094,794		$	983,819

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

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Granite Construction Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except per share data)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2003			2002			2003			2002
Revenue:
	Construction			$	496,669		$	508,441		$	1,162,534		$	1,143,629
	Material sales				83,531			75,287			189,231			168,254
		Total revenue			580,200			583,728			1,351,765			1,311,883
Cost of revenue:
	Construction				433,198			446,098			1,029,898			1,005,799
	Material sales				64,943			60,409			153,608			138,092
		Total cost of revenue			498,141			506,507			1,183,506			1,143,891
			Gross Profit		82,059			77,221			168,259			167,992
General and administrative expenses					42,533			40,182			115,478			106,168
			Operating income		39,526			37,039			52,781			61,824
Other income (expense):
	Interest income				1,145			2,122			4,633			6,014
	Interest expense				(1,939	)		(2,527	)		(6,577	)		(6,703	)
	Gain on sales of property and equipment				3,018			939			3,546			1,570
	Equity in income (loss) of affiliates				(37	)		466			18,088			2,419
	Other, net				86			652			2,364			(1,342	)
					2,273			1,652			22,054			1,958
	Income before provision for income taxes and minority interest				41,799			38,691			74,835			63,782
Provision for income taxes					15,131			13,695			27,090			23,104
Minority interest in consolidated subsidiaries					(834	)		(1,927	)		(1,099	)		(2,694	)
			Net income	$	25,834		$	23,069		$	46,646		$	37,984
Net income per share:
	Basic			$	0.64		$	0.57		$	1.16		$	0.95
	Diluted			$	0.63		$	0.57		$	1.14		$	0.94
Weighted average shares of common stock Basic					40,217			40,188			40,160			40,039
	Diluted				40,908			40,788			40,741			40,615
Dividends per share				$	0.10		$	0.08		$	0.30		$	0.24

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

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Granite Construction Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)

Nine Months Ended September 30,				2003			2002
Operating Activities
	Net income			$	46,646		$	37,984
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, depletion and amortization			51,371			40,024
		Gain on sales of property and equipment			(3,546	)		(1,570	)
		Change in deferred income taxes			—			1,456
		Amortization of unearned compensation			4,496			4,745
		Common stock contributed to ESOP			—			3,989
		Minority interest in income of consolidated subsidiaries			1,099			2,694
		Equity in income of affiliates			(18,088	)		(2,419	)
		Gain on sale of equity investment			(1,853	)		—
	Changes in assets and liabilities, net of the effects of acquisitions:
		Accounts and notes receivable			(60,861	)		(81,725	)
		Inventories			(1,573	)		(1,492	)
		Equity in construction joint ventures			(11,421	)		(500	)
		Other assets			3,801			1,998
		Accounts payable			33,469			14,335
		Billings in excess of costs and estimated earnings, net			3,741			3,043
		Accrued expenses and other liabilities			34,725			34,121
			Net cash provided by operating activities		82,006			56,683
Investing Activities
	Purchases of marketable securities				(149,243	)		(454,196	)
	Maturities of marketable securities				141,153			387,301
	Additions to property and equipment				(54,435	)		(43,804	)
	Proceeds from sales of property and equipment				6,423			4,621
	Proceeds from sale of equity investment				6,033			13,051
	Distributions from affiliates, net				13,660			75
	Acquisitions of businesses, net of cash received				—			(22,100	)
	Other investing activities				(3,632	)		607
			Net cash used in investing activities		(40,041	)		(114,445	)
Financing Activities
	Additions of long-term debt				20,480			21,625
	Repayments of long-term debt				(28,767	)		(35,999	)
	Dividends paid				(11,610	)		(9,894	)
	Proceeds from exercise of warrants				—			2,878
	Repurchase of common stock and other				(717	)		(10,655	)
			Net cash used in financing activities		(20,614	)		(32,045	)
Increase (decrease) in cash and cash equivalents					21,351			(89,807	)
Cash and cash equivalents at beginning of period					52,032			125,174
Cash and cash equivalents at end of period				$	73,383		$	35,367
Supplementary Information
	Cash paid during the period for:
		Interest		$	7,204		$	6,376
		Income taxes			8,819			5,664
	Non-cash investing and financing activity:
		Restricted stock issued for services		$	5,908		$	7,041
		Dividends accrued but not paid			4,153			3,311
		Financed acquisition of long-term asset			4,004			—
		Subsidiary preferred stock exchanged for subsidiary common stock			—			3,299

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

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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, 2002. 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 September 30, 2003 and the results of our operations and cash flows for the periods presented. The December 31, 2002 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 nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.
2.	Newly Effective and Recently Issued Accounting Pronouncements:
	FIN 46
	In January 2003, the Financial Accounting Standards Board (“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 was 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 at the end of the first interim or annual period ending after December 15, 2003. As more fully described in our Annual Report on Form 10-K under the section entitled “Critical Accounting Policies,” we participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. We are currently evaluating whether certain of these jointly controlled entities meet the definition of a Variable Interest Entity in FIN 46. If all of the entities being evaluated met the definition and we were required to consolidate them, the effect on our financial position would be an increase in assets (primarily current assets) of approximately $110.0 million and an increase in current liabilities of approximately $85.0 million. Additionally, consolidation of these entities would increase our revenue and cost of revenue, but there would be no impact on net income.
	SFAS 150
	In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003 the FASB issued FASB Staff Position No. 150-3 (“FSP 150-3”) “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP 150-3 requires that implementation of certain provisions of SFAS 150 be deferred indefinitely, including those provisions that pertain to mandatorily redeemable financial instruments of nonpublic entities and the measurement provisions (but not the classification provisions) for certain mandatorily redeemable noncontrolling interests.
	Substantially all of the non-Granite held common shares of our majority-owned subsidiary, Wilder Construction Company (“Wilder”) are redeemable by the holder upon retirement, voluntary termination, death or permanent disability. Approximately 60% of these shares are outside the scope of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and are therefore subject to the provisions of SFAS 150. Wilder generally has up to eight years to pay the redemption price following a redemption event, as defined in its shareholder agreements, and the redemption price is adjusted each year, primarily for the Wilder net income attributable to the shares. Pursuant to FSP 150-3, we have adopted the classification provisions of SFAS 150 by reclassifying the carrying amount of these Wilder shares from minority interest in consolidated subsidiaries to other long-term liabilities on our balance sheet. If all of these Wilder shares had been redeemed at the September 30, 2003 redemption price, a payment of approximately $13.0 million would have been required.
3.	Inventories:
	Inventories consist primarily of quarry products valued at the lower of average cost or market.
4.	Property and Equipment:

	September 30, 2003
in thousands	(Unaudited)		December 31, 2002
Land	$	51,183	$	50,697
Quarry property		75,830		75,459
Buildings and leasehold improvements		61,951		59,229
Equipment and vehicles		694,215		656,857
Office furniture and equipment		13,363		11,782
		896,542		854,024
Less accumulated depreciation, depletion and amortization		545,095		506,061
	$	351,447	$	347,963

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Intangible Assets:
	The following intangible assets are included in other assets on our condensed consolidated balance sheet:

		September 30, 2003 (Unaudited)
		Gross		Accumulated			Net
in thousands		Value		Amortization			Value
Amortized intangible assets:
	Covenants not to compete	$	1,249	$	(612	)	$	637
	Permits		2,000		(328	)		1,672
	Trade names		1,602		(962	)		640
	Acquired contracts		900		(900	)		—
	Other		622		(167	)		455
	Total amortized intangible assets		6,373		(2,969	)		3,404
Goodwill			19,067		—			19,067
		$	25,440	$	(2,969	)	$	22,471

		December 31, 2002
		Gross		Accumulated			Net
in thousands		Value		Amortization			Value
Amortized intangible assets:
	Covenants not to compete	$	2,249	$	(1,424	)	$	825
	Permits		2,000		(228	)		1,772
	Trade names		1,602		(660	)		942
	Acquired contracts		900		(656	)		244
	Other		622		(104	)		518
	Total amortized intangible assets		7,373		(3,072	)		4,301
Goodwill			19,067		—			19,067
		$	26,440	$	(3,072	)	$	23,368

Goodwill at September 30, 2003 and December 31, 2002 relates primarily to the HCD operating segment.

Additionally, purchased lease rights related to certain aggregate reserves of our Branch Division operating segment with a net book value of $16,361,000 at September 30, 2003 and $15,796,000 at December 31, 2002, are included in property and equipment. These assets are amortized based on the usage of the related reserves.

Aggregate amortization expense related to intangible assets was $316,000 and $383,000 for the three months ended September 30, 2003 and 2002, respectively, and $1,019,000 and $1,092,000 for the nine months ended September 30, 2003 and 2002, respectively.

9

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.	Earnings Per Share:
	A reconciliation of shares used in calculating basic and diluted earnings per share in the accompanying condensed consolidated statements of income is as follows:

					Three Months Ended				Nine Months Ended
					September 30,				September 30,
in thousands					2003		2002		2003		2002
Basic weighted average shares outstanding
	Weighted average common stock outstanding					41,533		41,460		41,443		41,300
	Less weighted average restricted stock outstanding					1,316		1,272		1,283		1,261
			Total			40,217		40,188		40,160		40,039
Diluted weighted average shares outstanding
	Basic weighted shares outstanding					40,217		40,188		40,160		40,039
	Effect of dilutive securities:
		Common stock options				36		21		25		21
		Restricted stock				655		579		556		555
				Total		40,908		40,788		40,741		40,615

	Common stock options, warrants and common stock equivalents representing 30 shares and 24 shares for the three months ended September 30, 2003 and 2002, respectively and 67 shares and 8 shares for the nine months ended September 30, 2003 and 2002, respectively, have been excluded from the calculation of diluted earnings per share because their effects are anti-dilutive.
7.	Comprehensive Income:
	The components of comprehensive income, net of tax, are as follows:

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
in thousands		2003		2002			2003		2002
Net income		$	25,834	$	23,069		$	46,646	$	37,984
Other comprehensive income (loss):
	Changes in net unrealized losses on investments		196		(807	)		810		(1,207	)
Total comprehensive income		$	26,030	$	22,262		$	47,456	$	36,777

8.	Commitments and Contingencies:
	We are a party to a number of 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 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.
9.	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, including our majority owned subsidiary, Wilder Construction Company, that serve local markets, while HCD pursues major

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in our 2002 Annual Report on Form 10-K. We evaluate performance based on operating profit or loss, which does not include income taxes, interest income, interest expense or other income (expense).

Information about Profit and Assets (in thousands):

Three Months Ended September 30,		HCD			Branch		Total
2003
	Revenue from external customers	$	185,124		$	395,076	$	580,200
	Inter-segment revenue transfer		(1,784	)		1,784		—
	Net revenue		183,340			396,860		580,200
	Depreciation, depletion and amortization		4,522			11,041		15,563
	Operating profit	$	4,877		$	48,046	$	52,923
2002
	Revenue from external customers	$	156,782		$	426,946	$	583,728
	Inter-segment revenue transfer		(3,758	)		3,758		—
	Net revenue		153,024			430,704		583,728
	Depreciation, depletion and amortization		3,510			10,784		14,294
	Operating profit	$	6,730		$	42,778	$	49,508

Nine Months Ended September 30,		HCD			Branch		Total
2003
	Revenue from external customers	$	510,494		$	841,271	$	1,351,765
	Inter-segment revenue transfer		(7,218	)		7,218		—
	Net revenue		503,276			848,489		1,351,765
	Depreciation, depletion and amortization		11,259			33,756		45,015
	Operating profit		18,914			64,419		83,333
	Property and equipment	$	43,600		$	288,099	$	331,699
2002
	Revenue from external customers	$	437,306		$	874,577	$	1,311,883
	Inter-segment revenue transfer		(14,915	)		14,915		—
	Net revenue		422,391			889,492		1,311,883
	Depreciation, depletion and amortization		8,771			29,556		38,327
	Operating profit		16,495			77,414		93,909
	Property and equipment	$	39,939		$	271,106	$	311,045

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Profit:
Total profit for reportable segments	$	52,923		$	49,508		$	83,333		$	93,909
Other income (expense)		2,273			1,652			22,054			1,958
Unallocated other corporate expenses		(13,397	)		(12,469	)		(30,552	)		(32,085	)
Income before provision for income taxes and minority interest	$	41,799		$	38,691		$	74,835		$	63,782

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.	Investments in Affiliates:
	On January 3, 2003, the California Private Transportation Company, LP (“CPTC”), of which we are a 22.2% limited partner, closed the sale of the State Route 91 Toll Road 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 partnership since its inception. Included in other income (expense) for the nine months ended September 30, 2003 is $18.4 million related to this sale by CPTC.
	In June 2003, T.I.C. Holdings, Inc. (“TIC”) repurchased 0.3 million shares of the TIC shares held by us for a cash payment of $6.0 million. We account for our investment in TIC using the cost method. This transaction reduced our ownership interest from 15.5% to 10.6% and resulted in a gain of $1.9 million, which is included in other income (expense) for the nine months ended September 30, 2003.
11.	Line of Credit:
	On June 27, 2003, we entered into an agreement for a $100.0 million bank revolving line of credit, which allows for unsecured borrowings for up to three years through June 27, 2006, with interest rate options. Outstanding borrowings under the revolving line of credit are at our choice of selected LIBOR rates plus a margin (1.25% at September 30, 2003) that is recalculated quarterly. This line of credit replaced a $60.0 million line of credit we entered into in June 2001. Additionally, we have standby letters of credit totaling $1.4 million, of which $1.2 million reduces the amount available under the line of credit. The unused and available portion of the line of credit at September 30, 2003 was $98.8 million. Restrictive covenants under the terms of this line of credit include the maintenance of certain financial ratios and tangible net worth (as defined) of approximately $386.0 million. We are in compliance with these covenants and the covenants of our other debt agreements at September 30, 2003.
12.	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.

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Forward-Looking Disclosure:

This Quarterly Report on Form 10-Q 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 our Annual Report on Form 10-K under the section entitled “Risk Factors”. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Granite undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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, Nevada, Arizona, Utah, Washington, Oregon, Alaska, Texas, Florida and New York. 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, 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 from those projects to estimating and bidding activities until another project assignment becomes available, 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 a very profitable year and decreasing expenses in less profitable years.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Results of Operations

			Three Months Ended September 30,										Nine Months Ended September 30,
Revenue			2003					2002					2003					2002
(in thousands)			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Revenue by Division:
	Branch Division		$	396,860		68.4	%	$	430,704		73.8	%	$	848,489		62.8	%	$	889,492		67.8	%
	Heavy Construction Division			183,340		31.6	%		153,024		26.2	%		503,276		37.2	%		422,391		32.2	%
			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%
Revenue by Geographic Area:
	California		$	218,247		37.6	%	$	254,273		43.6	%	$	480,951		35.7	%	$	547,472		41.8	%
	West (excluding California)			205,412		35.4	%		219,138		37.5	%		468,067		34.5	%		448,887		34.2	%
	Midwest			20,313		3.5	%		19,507		3.3	%		44,988		3.4	%		54,941		4.2	%
	Northeast			38,825		6.7	%		25,045		4.3	%		109,151		8.1	%		71,538		5.5	%
	South			97,403		16.8	%		65,765		11.3	%		248,608		18.3	%		189,045		14.3	%
			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%
Revenue by Market Sector:
	Federal Agencies		$	20,535		3.5	%	$	18,972		3.3	%	$	42,747		3.2	%	$	44,438		3.4	%
	State Agencies			241,433		41.6	%		233,109		39.9	%		544,785		40.3	%		535,452		40.8	%
	Local Public Agencies			159,976		27.6	%		177,107		30.3	%		398,924		29.5	%		361,091		27.5	%
		Total Public Sector		421,944		72.7	%		429,188		73.5	%		986,456		73.0	%		940,981		71.7	%
	Private Sector			74,725		12.9	%		79,253		13.6	%		176,078		13.0	%		202,648		15.5	%
	Material Sales			83,531		14.4	%		75,287		12.9	%		189,231		14.0	%		168,254		12.8	%
			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%

Revenue: Total revenue for the three-month period ended September 30, 2003 decreased $3.5 million and for the nine-month period ended September 30, 2003 increased $39.9 million over the corresponding 2002 periods. Branch Division revenue for the nine month period in 2003 includes $161.1 million from our majority-owned Wilder Construction Company (“Wilder”) subsidiary, which was consolidated in our financial statements beginning in May 2002, versus $113.5 million in the nine month period in 2002. Branch Division revenue for the three-month period ended September 30, 2003 decreased over the corresponding 2002 period by $33.8 million and decreased for the nine month period (excluding Wilder revenue) by $88.7 million, due primarily to the continuing effects of a weaker general economy and uncertainty surrounding public funding, particularly in California (see “Outlook”). Revenue from our Heavy Construction Division increased 19.8% and 19.1% in the three and nine months ended September 30, 2003 over the corresponding periods in 2002 due primarily to the results from a higher backlog at the beginning of 2003.

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			September 30,					June 30,					September 30,
Backlog			2003					2003					2002
(in thousands)			Amount		Percent			Amount		Percent			Amount		Percent
Backlog by Division:
	Branch Division		$	482,321		25.4	%	$	536,209		27.8	%	$	529,752		30.4	%
	Heavy Construction Division			1,417,794		74.6	%		1,395,185		72.2	%		1,213,750		69.6	%
			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%
Backlog by Geographic Area:
	California		$	311,264		16.4	%	$	296,469		15.4	%	$	308,185		17.7	%
	West (excluding California)			310,053		16.4	%		401,387		20.8	%		496,460		28.5	%
	Midwest			44,703		2.4	%		65,186		3.3	%		106,743		6.1	%
	Northeast			561,494		29.5	%		426,987		22.1	%		257,605		14.8	%
	South			672,601		35.3	%		741,365		38.4	%		574,509		32.9	%
			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%
Backlog by Market Sector:
	Federal agencies		$	81,616		4.3	%	$	88,997		4.6	%	$	89,981		5.2	%
	State agencies			790,556		41.6	%		847,726		43.9	%		737,691		42.3	%
	Local public agencies			850,163		44.7	%		817,399		42.3	%		773,050		44.3	%
		Total public sector		1,722,335		90.6	%		1,754,122		90.8	%		1,600,722		91.8	%
	Private sector			177,780		9.4	%		177,272		9.2	%		142,780		8.2	%
			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%

Backlog: Our backlog at September 30, 2003 of $1,900.1 million was $156.6 million, or 9.0%, higher than the backlog at September 30, 2002. Branch Division backlog decreased by $47.4 million, or 9.0%, from September 30, 2002 to September 30, 2003. The Branch Division backlog decrease occurred primarily in the public sector, where we have witnessed a decline in public funding in many of the states in which our branches are located.

Heavy Construction Division backlog at September 30, 2003 of $1,417.8 million represents an increase of $204.0 million, or 16.8%, from its backlog at September 30, 2002 and $22.6 million, or 1.6%, from its backlog at June 30, 2003. HCD’s awards for the third quarter of 2003 included a $62.3 million highway contract in New York, a $39.2 million share of a highway joint venture contract in Texas and a $96.4 million share of an elevated train joint venture contract in Pennsylvania.

	Three Months Ended September 30,						Nine Months Ended September 30,
Gross Profit	2003			2002			2003			2002
(in thousands)
Total gross profit	$	82,059		$	77,221		$	168,259		$	167,992
Percent of revenue		14.1	%		13.2	%		12.4	%		12.8	%

Gross Profit: Gross profit as a percent of revenue increased to 14.1% in the third quarter of 2003 from 13.2% in the third quarter of 2002 and decreased to 12.4% in the nine months ended September 30, 2003 from 12.8% in the corresponding 2002 period. Gross profit margins in the quarter ended September 30, 2003 were positively impacted by higher profit margins from both material sales and construction in many branch locations due largely to more effective execution of the work and the inclusion of margin from two large HCD projects that reached the 25% completion threshold for profit recognition during the

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

quarter. These increases were partially offset by lowered profit forecasts on several HCD projects, principally as a result of not performing as anticipated. Gross profit margins in the nine months ended September 30, 2003 were also negatively impacted by a higher volume of revenue from projects less than 25% complete, increased pressure on Branch Division margins due to increased competition resulting from reductions in various state and local transportation funding programs and revised profit forecasts on several HCD projects. We recognize revenue only to the extent of cost, deferring profit recognition, until a project reaches 25% complete. The amount of revenue generated from projects below the 25% completion threshold was approximately $45.0 million and $39.0 million for the three months ended September 30, 2003 and 2002, respectively, and $81.0 million and $58.0 million for the nine months ended September 30, 2003 and 2002, respectively.

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). 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 the first nine months of 2003.

		Three Months Ended September 30,						Nine Months Ended September 30,
General and Administrative Expenses		2003			2002			2003			2002
(in thousands)
Salaries and related expenses		$	19,311		$	18,231		$	60,725		$	52,965
Incentive compensation, discretionary profit sharing and other variable compensation			11,927			10,945			20,962			18,837
Other general and administrative expenses			11,295			11,006			33,791			34,366
	Total	$	42,533		$	40,182		$	115,478		$	106,168
Percent of revenue			7.3	%		6.9	%		8.5	%		8.1	%

General and Administrative Expenses: General and administrative expenses increased by $2.4 million in the quarter ended September 30, 2003 compared with the September 2002 quarter and by $9.3 million in the nine months ended September 30, 2003 from the comparable 2002 period. Included in the increase for the nine months ended September 30, 2003 were costs of approximately $6.6 million associated with our Wilder subsidiary and our expansion into Northern California, both of which were first reflected in our costs in May 2002. Variable compensation increased in the three and nine-month periods ended September 30, 2003 due to higher income than in the comparable 2002 periods. 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.

							Nine Months Ended
	Three Months Ended September 30,						September 30,
Operating Income	2003			2002			2003			2002
(in thousands)
Branch Division	$	48,046		$	42,778		$	64,419		$	77,414
Heavy Construction Division		4,877			6,730			18,914			16,495
Unallocated other corporate expenses		(13,397	)		(12,469	)		(30,552	)		(32,085	)
Total	$	39,526		$	37,039		$	52,781		$	61,824

Operating Income: Our Heavy Construction Division’s contribution to operating income decreased in the third quarter of 2003 compared with the third quarter of 2002 primarily due to lower gross margins as described in “Gross Profit” above and higher general and administrative expenses to support a higher volume of work. For the nine months ended September 30, 2003, HCD’s contribution to operating income increased due to the margin generated from higher 2003 revenue. Our Branch Division’s

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

contribution to operating income increased in the third quarter of 2003 compared with the third quarter of 2002 primarily due to higher gross margins as described in “Gross Profit” above. For the nine months ended September 30, 2003, our Branch Division’s contribution to operating income decreased due to the factors described in “Revenue”, “Gross Profit” and “General and Administrative Expenses” above. Unallocated other corporate expenses principally comprise corporate general and administrative expenses.

		Three Months Ended September 30,						Nine Months Ended September
Other Income (Expense)		2003			2002			2003			2002
(in thousands)
Interest income		$	1,145		$	2,122		$	4,633		$	6,014
Interest expense			(1,939	)		(2,527	)		(6,577	)		(6,703	)
Gain on sales of property and equipment			3,018			939			3,546			1,570
Equity in income (loss) of affiliates			(37	)		466			18,088			2,419
Other, net			86			652			2,364			(1,342	)
	Total	$	2,273		$	1,652		$	22,054		$	1,958

Other Income (Expense): Included in equity in income (loss) of affiliates in the nine months ended September 30, 2003 is $18.4 million recognized in the first quarter of 2003 related to the sale of the State Route 91 toll road franchise by the California Private Transportation Corporation, of which we are a 22.2% limited partner. Additionally, included in other, net is approximately $1.9 million in gain recognized on the sale of a portion of our investment in T.I.C. Holdings, Inc. (“TIC”) back to TIC for a cash payment of approximately $6.0 million.

	Three Months Ended September 30,						Nine Months Ended September 30,
Provision for Income Taxes	2003			2002			2003			2002
(in thousands)
Provision for income taxes	$	15,131		$	13,695		$	27,090		$	23,104
Effective tax rate		36.2	%		35.4	%		36.2	%		36.2	%

Provision for Income Taxes: Our effective tax rate increased to 36.2% for the three month period ended September 30, 2003 from 35.4% in the comparable period in 2002. The third quarter 2002 effective tax rate reflected an adjustment to reduce the 2002 annual rate to 36.2% from 37.5% due to the combined factors of higher percentage depletion deductions related to quarry properties and higher tax credits.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Outlook

We remain cautiously optimistic on our outlook for the remainder of 2003 and into 2004, although we continue to face uncertainty due to a number of unresolved state and federal political issues and the continued strength and timing of the economic recovery in our markets. Nevertheless, we are encouraged by the performance of some of our California-based profit centers in what has been a challenging environment for the Branch Division. In addition, we believe that the Heavy Construction Division (HCD) will have a better year in 2004 than in 2003 – propelled by a healthy backlog of work.

Given the current climate in which we are operating, our Branch Division performed much better than expected in the quarter. We are pleased that despite decreased transportation funding and competitive pressures throughout the West, some of our California branches continue to generate strong performance. Although HCD has been a significant contributor to backlog in 2003, we do not anticipate it will contribute to 2003 earnings at the level that we had expected at the beginning of the year. Therefore, we currently expect earnings for the year 2003 to be in the range of $1.28 to $1.36 per diluted share, which includes the $18.4 million income related to the sale of the State Route 91 Tollroad Franchise by the California Private Transportation Corporation, of which Granite is a 22.2% limited partner, that was recorded in the first quarter of 2003.

Looking ahead to 2004, we do not anticipate a significant improvement in California’s economy as the new administration begins its attempts to turn the state’s fiscal crisis around. We believe that we will likely witness a highly competitive public sector market in most of our California locations. We also anticipate that the private sector market will remain active and be similar to what we have experienced so far in 2003, in most of our locations.

HCD is building momentum across the country and is targeting an additional $14.0 billion of work to bid on over the next 12-18 months. The division is entering the fourth quarter with $1.4 billion of backlog, a 17% increase over the same period last year. HCD continues to seek out new markets throughout the U.S. with healthy long-term transportation programs. As discussed below, these long-term programs are dependent in part on federal funding – making the federal highway bill reauthorization a key driver. Based in part on the strong backlog of work and a number of projects expected to reach the 25% complete stage, we anticipate that 2004 will be a better year for HCD.

On September 30, 2003, President Bush approved the Surface Transportation Extension Act of 2003, a bill to extend authorizations for federal highway, highway safety and transit programs until February 29, 2004. The bill, an extension to the 6-year Transportation Equity Act for the 21^st Century (TEA-21), which expired on September 29, authorizes $14.7 billion for highway programs and $3.0 billion for transit. Although the bill was necessary to enable the Federal Highway Administration to reimburse states for road funding obligations, it does not the provide long-term certainty needed to enable the various state departments of transportations to plan their respective capital improvement programs.

Members of the House and Senate are now focusing on how to provide a significant increase to a long-term authorization bill. Transportation industry lobbyists continue to push for another 6-year bill that will be a substantial increase over the prior level of $218.0 billion. The Bush administration, which favors a $247.0 billion plan, opposes a fuel-tax increase while the House of Representatives’ $375.0 billion plan calls for indexing the fuel tax to inflation in order to raise additional revenues. Members of the House and Senate, and the Bush administration, undoubtedly face a number of difficult decisions, including the prospect of raising taxes in an election year. We understand how difficult an increase in the fuel tax will be to achieve given the pending election in November 2004 and therefore do not anticipate that President Bush would sign a bill that includes a tax increase.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

It also remains to be seen whether Congress will take action on a new 6 year bill or continue the current program and act on a new bill after the November 2004 election. Congress is also wrestling with the tax treatment of ethanol – an issue that has a significant impact on the Highway Trust Fund. Ethanol is being effectively mandated as a gasoline additive in many states, including California. Since ethanol is subject to a lower excise tax than gasoline, and a portion of the tax is retain by the general fund, this mandated displacement of gasoline volume will result in a loss in revenue to the General Fund. Senator Charles Grassley has proposed an overhaul of this tax treatment that would substantially restore lost revenues to the Highway Trust Fund, while retaining ethanol incentives. Although House and Senate conferees have apparently reached some agreement on this proposal, its implementation is being held up pending action on the federal transportation re-authorization legislation now scheduled to be taken up next year.

In California, voters recalled Gray Davis and elected Arnold Schwarzenegger as the state’s new governor. On or about November 17, Mr. Schwarzenegger will be sworn into office and will inherit the task of finding approximately $8.0 billion to sustain public services next year at current levels. Although it is too early to tell how transportation will fare under this new administration, Governor Elect Schwarzenegger has publicly stated, “the first step [to resolving the state’s transportation crisis] is to commit to no more stealing of transportation revenues.” He has also stated that he intends to carefully “review the state’s transportation needs and to create a multilevel transportation plan.” While we are encouraged by these statements, we must take a ‘wait and see’ approach before making any assumptions about the impact of the new administration on our business.

In summary, we are very pleased with our results so far this year in an uncertain economic environment. We feel that our diversification, both by project type and geographic location, has served us very well in this current market – and will continue to do so for the foreseeable future. While it is too early to accurately predict the outcome of the state and federal funding issues, and the extent to which we will be impacted, we are buoyed by a healthy backlog and an outstanding list of large projects on which to bid.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity and Capital Resources

		Nine Months Ended September 30,
(in thousands)		2003			2002
Cash and cash equivalents		$	73,383		$	35,367
Net cash provided (used) by:
	Operating activities		82,006			56,683
	Investing activities		(40,041	)		(114,445	)
	Financing activities		(20,614	)		(32,045	)
Capital expenditures			(54,435	)		(43,804	)

Cash provided by operating activities of $82.0 million for the nine months ended September 30, 2003 represents a $25.3 million increase from the amount provided by operating activities in the same period in 2002. This increase was primarily attributable to a larger growth in accounts payable in the first nine months of 2003 due to costs associated with higher revenue, particularly in the month of September, and a lower increase in accounts receivable in the same period due primarily to improved collections and a change in the mix between billed receivables and unbilled revenue (costs and estimated earnings in excess of billings). Changes in cash from operating activities primarily reflect seasonal variations based on the amount and progress of work being performed.

Cash used by investing activities of $40.0 million for the nine months ended September 30, 2003 represents a $74.4 million decrease from the amount used in investing activities in the same period in 2002. The decrease was largely due to cash received from the sale of the State Route 91 Toll Road franchise by the California Private Transportation Corporation, of which we are a 22.2% limited partner, the absence of cash expended for acquisitions of businesses in 2003 and lower net purchases of marketable securities. We have budgeted approximately $59.0 million for capital expenditures in 2003, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of aggregate reserves.

Cash used by financing activities was $20.6 million for the nine months ended September 30, 2003, a decrease of $11.4 million from the same period in 2002. The decrease was mainly due to lower net repayments of long-term debt by our Wilder subsidiary, and the absence of cash expended to repurchase our common stock in 2003, partially offset by increased cash dividends paid to shareholders and the absence of proceeds from the exercise of warrants in 2003.

On June 27, 2003, we entered into an agreement for a $100.0 million bank revolving line of credit, which allows for unsecured borrowings for up to three years through June 27, 2006, with interest rate options. Outstanding borrowings under the revolving line of credit are at our choice of selected LIBOR rates plus margin (1.25% at September 30, 2003) that is recalculated quarterly. This line of credit replaces a $60.0 million line of credit we entered into in June of 2001. Additionally, we have standby letters of credit totaling $1.4 million, of which $1.2 million reduces the amount available under the line of credit. The unused and available portion of the line of credit at September 30, 2003 was $98.8 million. Restrictive covenants under the terms of this line of credit include the maintenance of certain financial ratios and tangible net worth (as defined) of approximately $386.0 million. We are in compliance with these covenants and the covenants of our other debt agreements at September 30, 2003.

Additionally, our Wilder subsidiary has a bank revolving line of credit of $10.0 million that expires in September 2005; there were no amounts outstanding under that line of credit at September 30, 2003.

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Our cash and cash equivalents and short-term and long-term marketable securities totaled $213.4 million at September 30, 2003. We believe that our current cash and cash equivalents, short-term marketable securities, 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 twelve months.

Recent Accounting Pronouncements:

FIN 46

In January 2003, the Financial Accounting Standards Board (“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 was 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 at the end of the first interim or annual period ending after December 15, 2003. As more fully described in our Annual Report on Form 10-K under the section entitled “Critical Accounting Policies,” we participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. We are currently evaluating whether certain of these jointly controlled entities meet the definition of a Variable Interest Entity in FIN 46. If all of the entities being evaluated met the definition and we were required to consolidate them, the effect on our financial position would be an increase in assets (primarily current assets) of approximately $110.0 million and an increase in current liabilities of approximately $85.0 million. Additionally, consolidation of these entities would increase our revenue and cost of revenue, but there would be no impact on net income.

SFAS 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003 the FASB issued FASB Staff Position No. 150-3 (“FSP 150-3”) “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP 150-3 requires that implementation of certain provisions of SFAS 150 be deferred indefinitely, including those provisions that pertain to mandatorily redeemable financial instruments of nonpublic entities and the measurement provisions (but not the classification provisions) for certain mandatorily redeemable noncontrolling interests.

Substantially all of the non-Granite held common shares of our majority-owned subsidiary, Wilder Construction Company (“Wilder”) are redeemable by the holder upon retirement, voluntary termination,

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death or permanent disability. Approximately 60% of these shares are outside the scope of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and are therefore subject to the provisions of SFAS 150. Wilder generally has up to eight years to pay the redemption price following a redemption event, as defined in its shareholder agreements, and the redemption price is adjusted each year, primarily for the Wilder net income attributable to the shares. Pursuant to FSP 150-3, we have adopted the classification provisions of SFAS 150 by reclassifying the carrying amount of these Wilder shares from minority interest in consolidated subsidiaries to other long-term liabilities on our balance sheet. If all of these Wilder shares had been redeemed at the September 30, 2003 redemption price, a payment of approximately $13.0 million would have been required.

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.

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 $50.0 million, a thirty-month term with six-month settlement periods 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 are 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 initially recorded the interest rate swaps at fair value, and subsequently recorded any changes in fair value in other income, net. Fair value is determined based on quoted market prices, which reflect the difference between estimated future variable-rate payments and future fixed-rate receipts.

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 September 30, 2003, 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 Securities and Exchange Commission’s rules and forms.

23

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART II. OTHER INFORMATION

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Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 1.	LEGAL PROCEEDINGS
	None
Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS
	None
Item 3.	DEFAULTS UPON SENIOR SECURITIES
	None
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	None
Item 5.	OTHER INFORMATION
	None
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K
	a)	Exhibits
		10.1 Granite Construction Incorporated 1999 Equity Incentive Plan as Amended and Restated through September 25, 2003
		31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
		31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
		32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	b)	Reports on Form 8-K
		None

25

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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: November 14, 2003	By:	/s/ William E. Barton
		William E. Barton
		Senior Vice President and Chief Financial Officer

26 EX-10.1 3 f94381exv10w1.txt EXHIBIT 10.1 Exhibit 10.1 GRANITE CONSTRUCTION INCORPORATED 1999 EQUITY INCENTIVE PLAN AS AMENDED AND RESTATED THROUGH SEPTEMBER 25, 2003 TABLE OF CONTENTS

Page ---- SECTION 1. ESTABLISHMENT, PURPOSE, AND TERM OF PLAN......................................... 1 1.1 Establishment.................................................................. 1 1.2 Purpose........................................................................ 1 1.3 Term of Plan................................................................... 1 SECTION 2. DEFINITIONS AND CONSTRUCTION..................................................... 1 2.1 Definitions.................................................................... 1 2.2 Construction................................................................... 5 SECTION 3. ELIGIBILITY AND AWARD LIMITATIONS................................................ 5 3.1 Persons Eligible for Incentive Stock Options................................... 5 3.2 Persons Eligible for Other Awards.............................................. 5 3.3 Section 162(m) Award Limits.................................................... 5 SECTION 4. ADMINISTRATION................................................................... 6 4.1 Administration by Committee.................................................... 6 4.2 Authority of Officers.......................................................... 6 4.3 Administration with Respect to Insiders........................................ 6 4.4 Committee Complying with Section 162(m)........................................ 6 4.5 Powers of the Committee........................................................ 6 SECTION 5. STOCK SUBJECT TO PLAN............................................................ 7 5.1 Maximum Number of Shares Issuable.............................................. 7 5.2 Lapsed Awards.................................................................. 7 5.3 Adjustment in Capitalization................................................... 8 SECTION 6. STOCK OPTIONS.................................................................... 8 6.1 Grant of Options............................................................... 8 6.2 Exercise Price................................................................. 8 6.3 Exercise Period................................................................ 9 6.4 Payment of Exercise Price...................................................... 9 6.5 Effect of Termination of Service............................................... 10 6.6 Transferability of Options..................................................... 12 SECTION 7. RESTRICTED STOCK................................................................. 12 7.1 Grant of Restricted Stock...................................................... 12 7.2 Nontransferability During Period of Restriction................................ 12 7.3 Other Restrictions............................................................. 12 7.4 Voting Rights.................................................................. 12 7.5 Dividends and Other Distribution............................................... 12 7.6 Effect of Termination of Service............................................... 13 SECTION 8. PERFORMANCE SHARES AND PERFORMANCE UNITS......................................... 13 8.1 Grant of Performance Shares or Performance Units............................... 13

-i- TABLE OF CONTENTS (Continued)

Page ---- 8.2 Value of Performance Shares and Performance Units.............................. 13 8.3 Establishment of Performance Goals and Performance Period...................... 14 8.4 Measurement of Performance Goals............................................... 14 8.5 Determination of Value of Performance Shares and Performance Units............. 14 8.6 Dividend Equivalents........................................................... 15 8.7 Form and Timing of Payment..................................................... 15 8.8 Restrictions Applicable to Payment in Shares................................... 15 8.9 Effect of Termination of Service............................................... 15 8.10 Nontransferability............................................................. 16 SECTION 9. DIRECTOR FEE AWARDS.............................................................. 16 9.1 Effective Date and Duration of this Section.................................... 16 9.2 Mandatory and Elective Director Fee Awards..................................... 16 9.3 Time and Manner of Election.................................................... 17 9.4 Automatic Grant of Director Fee Awards......................................... 17 9.5 Option Payment................................................................. 18 9.6 Stock Units Payment............................................................ 19 9.7 Fractional Shares.............................................................. 21 SECTION 10. CHANGE IN CONTROL............................................................... 21 10.1 Effect of Change in Control.................................................... 21 10.2 Termination of Service After a Change in Control............................... 22 10.3 Definition..................................................................... 22 SECTION 11. REQUIREMENTS OF LAW............................................................. 23 11.1 Compliance with Securities Law................................................. 23 11.2 Governing Law.................................................................. 23 SECTION 12. TAX WITHHOLDING................................................................. 23 12.1 Tax Withholding In General..................................................... 23 12.2 Withholding of Shares.......................................................... 23 SECTION 13. AMENDMENT AND TERMINATION OF PLAN............................................... 23 13.1 Amendment and Termination of Plan.............................................. 23 13.2 Effect of Amendment or Termination............................................. 24 SECTION 14. MISCELLANEOUS PROVISIONS........................................................ 24 14.1 Beneficiary Designation........................................................ 24 14.2 Rights as an Employee or Director.............................................. 24 14.3 Rights as a Stockholder........................................................ 24 14.4 Provision of Information....................................................... 24 14.5 Unfunded Obligation............................................................ 24 14.6 Indemnification................................................................ 25

-ii- GRANITE CONSTRUCTION INCORPORATED 1999 EQUITY INCENTIVE PLAN AS AMENDED AND RESTATED THROUGH SEPTEMBER 25, 2003 SECTION 1. ESTABLISHMENT, PURPOSE, AND TERM OF PLAN 1.1 ESTABLISHMENT. Granite Construction Incorporated, a Delaware corporation, hereby establishes the Granite Construction Incorporated 1999 Equity Incentive Plan (the "PLAN") effective as of the date of its approval by the stockholders of the Company, which occurred on May 24, 1999 (the "EFFECTIVE DATE"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Company, by encouraging and providing for the acquisition of an equity interest in the success of the Company by Employee and Directors, by providing additional incentives and motivation toward superior performance of the Company, and by enabling the Company to attract and retain the services of Employees and Directors upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Restricted Stock, Performance Units and Performance Shares, by providing Nonemployee Directors with the opportunity to receive Options or Stock Units in lieu of compensation otherwise payable in cash, and by providing for payments in the form of shares of Stock or cash. 1.3 TERM OF PLAN. The Plan shall remain in effect until the earlier of (i) its termination by the Committee pursuant to Section 13 or (ii) the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Awards shall be granted, if at all, within five (5) years from the Effective Date. SECTION 2. DEFINITIONS AND CONSTRUCTION 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "AWARD" means any Option, Restricted Stock, Performance Unit, Performance Share or Director Fee Award granted under the Plan. (b) "AWARD AGREEMENT" means a written agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Award granted to the Participant. An Award Agreement may be an "Option Agreement," a "Restricted Stock Agreement," a "Performance Share Agreement," a "Performance Unit Agreement," a "Nonemployee Director Option Agreement," or a "Stock Units Agreement." (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. 1 (e) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers. (f) "COMPANY" means Granite Construction Incorporated, a Delaware corporation, or any successor corporation thereto. (g) "DIRECTOR" means a member of the Board. (h) "DIRECTOR FEE AWARD" means any Nonemployee Director Option or Stock Unit granted pursuant to Section 9. (i) "DISABILITY" means a permanent and total disability as defined under the Company's Long Term Disability Plan or any successor plan, regardless of whether the Participant is covered by such Long Term Disability Plan. (j) "DIVIDEND EQUIVALENT" means a credit, made at the discretion of the Committee or as otherwise provided by the Plan, to the account of a Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award of Performance Shares or Stock Units held by such Participant. (k) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any relevant date, the closing sale price of a share of Stock (or the mean of the closing bid and asked prices if the Stock is so quoted instead) on the relevant date on the New York Stock Exchange or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion. If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Committee. (n) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. 2 (o) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (p) "NONEMPLOYEE DIRECTOR" means a Director of the Company who is not an Employee. (q) "NONEMPLOYEE DIRECTOR OPTION" means a Director Fee Award in the form of Nonstatutory Stock Option granted pursuant to the terms and conditions of Section 9. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (s) "OPTION" means the right to purchase Stock at a stated price for a specified period of time pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (t) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (u) "PARTICIPANT" means any eligible person who has been granted one or more Awards. (v) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (w) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (x) "PERFORMANCE GOAL" means a performance goal established by the Committee pursuant to Section 8.3. (y) "PERFORMANCE PERIOD" means a period established by the Committee pursuant to Section 8.3 at the end of which one or more Performance Goals are to be measured. (z) "PERFORMANCE SHARE" means a bookkeeping entry representing a right granted to a Participant pursuant to the terms and conditions of Section 8 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based on performance. (aa) "PERFORMANCE UNIT" means a bookkeeping entry representing a right granted to a Participant pursuant to the terms and conditions of Section 8 to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon performance. (bb) "PERIOD OF RESTRICTION" means the period during which shares of Restricted Stock are subject to restriction as set forth in Section 7.2. 3 (cc) "RESTRICTED STOCK" means Stock granted to a Participant pursuant to the terms and conditions of Section 7. (dd) "RETIREMENT" means (i) with respect to an Employee, termination of employment for retirement under the terms of the Company's defined contribution plans, and (ii) with respect to a Nonemployee Director, resignation from Service on the Board after attaining the age of 55 and after at least ten years of Service on the Board. (ee) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (ff) "SECTION 162(m)" means Section 162(m) of the Code. (gg) "SECURITIES ACT" means the Securities Act of 1933, as amended. (hh) "SERVICE" means a Participant's employment or service with the Participating Company Group, whether in the capacity of an Employee or a Director. A Participant's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service to the Participating Company Group or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant's Service. Furthermore, a Participant's Service with the Participating Company Group shall not be deemed to have terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the one hundred eighty-first (181st) day following the commencement of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option unless the Participant's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant's Award Agreement. A Participant's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether a Participant's Service has terminated and the effective date of such termination. (ii) "STOCK" means the Common Stock of the Company, as adjusted from time to time in accordance with Section 5.3. (jj) "STOCK UNIT" means a Director Fee Award in the form of a bookkeeping entry representing a right granted to a Participant pursuant to the terms and conditions of Section 9 to receive payment of one (1) share of Stock. (kk) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in section 424(f) of the Code. (ll) "TEN PERCENT OWNER" means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total 4 combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, words in the masculine gender, when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. SECTION 3. ELIGIBILITY AND AWARD LIMITATIONS 3.1 PERSONS ELIGIBLE FOR INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted only to Employees. For purposes of the foregoing sentence, the term "Employees" shall include prospective Employees to whom Options are granted in connection with written offers of employment with the Participating Company Group, provided that any such Option shall be deemed granted effective on the date that the Participant commences Service as an Employee, with an exercise price determined as of such date in accordance with Section 6.2. 3.2 PERSONS ELIGIBLE FOR OTHER AWARDS. Awards other than Incentive Stock Options may be granted only to Employees and Directors. For purposes of the foregoing sentence, the terms "Employees" and "Directors" shall include prospective Employees and prospective Directors to whom Awards are granted in connection with written offers of employment or service as a Director with the Participating Company Group, provided that no Stock subject to any such Award shall vest, become exercisable or be issued prior to the date on which the Participant commences Service. A Director Fee Award may be granted only to a person who, at the time of grant, is a Nonemployee Director. Eligible persons may be granted more than one (1) Award. 3.3 SECTION 162(m) AWARD LIMITS. The following limitations (the "SECTION 162(m) AWARD LIMITS") shall apply to the grant of any Award if, at the time of grant, the Company is a "publicly held corporation" within the meaning of Section 162(m). (a) STOCK OPTIONS. Subject to adjustment as provided in Section 5.3, no Employee shall be granted one or more Options within any fiscal year of the Company which in the aggregate are for the purchase of more than one hundred thousand (100,000) shares; provided, however, that the Company may make an additional one-time grant to any newly-hired Employee of an Option for the purchase of up to two hundred fifty thousand (250,000) shares. An Option which is canceled in the same fiscal year of the Company in which it was granted shall continue to be counted against the limits described in this subsection for such period. (b) RESTRICTED STOCK. Subject to adjustment as provided in Section 5.3, no Employee may be granted within any fiscal year of the Company more than one hundred thousand (100,000) shares of Restricted Stock, provided that such limit shall apply only to Awards of Restricted Stock which are granted or with respect to which the Period of Restriction lapses contingent upon the attainment of Performance Goals. 5 (c) PERFORMANCE SHARES AND PERFORMANCE UNITS. Subject to adjustment as provided in Section 5.3, no Employee may be granted (i) Performance Shares which could result in such Employee receiving more than one hundred thousand (100,000) shares of Stock for each full fiscal year of the Company contained in the Performance Period for such Award, or (ii) Performance Units which could result in such Employee receiving more than one million five hundred thousand dollars ($1,500,000) for each full fiscal year of the Company contained in the Performance Period for such Award. No Participant may be granted more than one Performance Share Award or one Performance Unit Award (but not both such Awards) for the same Performance Period. SECTION 4. ADMINISTRATION 4.1 ADMINISTRATION BY COMMITTEE. The Plan shall be administered by the Committee. All questions of interpretation of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final, binding and conclusive for all purposes and upon all persons whomsoever. 4.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 4.3 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 4.4 COMMITTEE COMPLYING WITH SECTION 162(m). If the Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Award which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 4.5 POWERS OF THE COMMITTEE. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion: (a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock or units to be subject to each Award and the value of a unit; (b) to determine the type of Award granted and to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; 6 (d) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise price of any Option, (ii) the method of payment for shares purchased upon the exercise of any Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with any Award, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant's termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to the Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan; (e) to determine whether an Award of Performance Shares or Performance Units will be settled in shares of Stock, cash, or in any combination thereof; (f) to approve one or more forms of Award Agreement; (g) to amend, modify, extend, cancel, renew, or grant a new Award in substitution for, any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto; (h) to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant's termination of Service; (i) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Awards; and (j) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent consistent with the Plan and applicable law. SECTION 5. STOCK SUBJECT TO PLAN 5.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 5.3, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be two million five hundred thousand (2,500,000) and shall consist of authorized but unissued or reacquired shares of Stock not reserved for any other purpose, or any combination thereof. 5.2 LAPSED AWARDS. If any Award granted under the Plan terminates, expires or lapses for any reason without having been exercised or settled in full, or if shares are reacquired pursuant to withholding, or if shares subject to forfeiture or repurchase are forfeited or 7 repurchased by the Company, any shares reacquired or subject to such lapsed Award again shall be available for issuance under the Plan. 5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any stock dividend, stock split, reverse stock split, recapitalization, merger, combination, exchange of shares, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, in the Section 162(m) Award Limits set forth in Section 3.3, and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to a Change in Control, as defined in Section 10.3) shares of another corporation (the "NEW SHARES"), the Committee may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of shares subject to outstanding Awards and the exercise price per share of outstanding Options shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 5.3 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Committee pursuant to this Section 5.3 shall be final, binding and conclusive. SECTION 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the provisions of Sections 1.3 and 5, Options (other than pursuant to a Director Fee Award) may be granted to Participants at any time and from time to time as shall be determined by the Committee. Each Option shall be evidenced by an Option Agreement that shall specify the type of Option granted, the exercise price, the duration of the Option, the number of shares of Stock to which the Option pertains, and such other provisions as the Committee shall determine. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and, except as otherwise set forth in Section 9 with respect to a Nonemployee Director Option, shall comply with and be subject to the terms and conditions set forth in Sections 6.2 through 6.6 below. 6.2 EXERCISE PRICE. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 8 6.3 EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee or prospective Director may become exercisable prior to the date on which such person commences Service. Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 6.4 PAYMENT OF EXERCISE PRICE. The purchase price of Stock upon exercise of any Option shall be paid in full by such methods as shall be permitted by the Committee or as provided in a Participant's Option Agreement, which need not be the same for all Participants, and subject to the following: (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value not less than the exercise price, (iii) by delivery of a properly executed notice together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided that the Participant is an Employee, by cash for a portion of the aggregate exercise price not less than the par value of the shares being acquired and the Participant's promissory note in a form approved by the Company for the balance of the aggregate exercise price, (v) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. The proceeds from payment of the Option exercise prices shall be added to the general funds of the Company and shall be used for general corporate purposes. 9 (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Committee, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (ii) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Committee shall determine at the time the Option is granted. The Committee shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Committee, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.5 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Committee in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after a Participant's termination of Service as follows: (i) DEATH OR DISABILITY. If the Participant's Service is terminated by reason of the death or Disability of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant's Service terminated, may be exercised by the Participant (or the Participant's guardian or legal representative or other person who acquired the right to exercise the Option by reason of the Participant's death) at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Committee, in its discretion) after the date on which the Participant's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION DATE"). If an Option intended to be an Incentive Stock Option is exercised by a Participant more than three (3) months following the Participant's termination of Service by reason of a Disability which is not a "permanent and total 10 disability" as defined in Section 22(e)(3) of the Code, such exercise will be treated as the exercise of a Nonstatutory Stock Option to the extent required by Section 422 of the Code. The Participant's Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months after the Participant's termination of Service. (ii) RETIREMENT. If the Participant's Service is terminated by reason of the Retirement of the Participant, the Option may be exercised at such time (but in any event no later than the Option Expiration Date) and in such amounts as shall be determined by the Committee at the time of grant of the Option and set forth in the Option Agreement. (iii) TERMINATION FOR CAUSE. Notwithstanding any other provision of the Plan to the contrary, if the Participant's Service is terminated for Cause, as defined below, the Option shall terminate and cease to be exercisable immediately upon such termination of Service. For purposes of this subsection, "CAUSE" shall mean any of the following: (1) the Participant's theft, dishonesty, or falsification of any Participating Company documents or records; (2) the Participant's repeated failure to report to work during normal hours, other than for customarily excused absences for personal illness or other reasonable cause; (3) the Participant's conviction (including any plea of guilty or nolo contendere) of theft or felony; (4) the Participant's wrongful disclosure of a Participating Company's trade secrets or other proprietary information; (5) any other dishonest or intentional action by the Participant which has a detrimental effect on a Participating Company; or (6) the Participant's habitual and repeated nonperformance of the Participant's duties. (iv) OTHER TERMINATION OF SERVICE. If the Participant's Service terminates for any reason, except death, Disability, Retirement or termination for Cause, the Option, to the extent unexercised and exercisable by the Participant on the date on which the Participant's Service terminated, may be exercised by the Participant within thirty (30) days (or such longer period of time as determined by the Committee, in its discretion) after the date on which the Participant's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing (except Section 6.5(a)(iii)), if the exercise of an Option within the applicable time periods set forth in Section 6.5(a) is prevented by the provisions of Section 11.1 below regarding compliance with securities laws, the Option shall remain exercisable until thirty (30) days after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing (except Section 6.5(a)(iii)), if a sale within the applicable time periods set forth in Section 6.5(a) of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant's termination of Service, or (iii) the Option Expiration Date. 11 6.6 TRANSFERABILITY OF OPTIONS. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant's guardian or legal representative. No Option shall be assignable or transferable by the Participant, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall be assignable or transferable to the extent permitted by the Committee and set forth in the Option Agreement evidencing such Option. SECTION 7. RESTRICTED STOCK 7.1 GRANT OF RESTRICTED STOCK. Subject to the provisions of Sections 1.3 and 5, Awards of Restricted Stock may be granted to Participants at any time and from time to time as shall be determined by the Committee, including, without limitation, upon the attainment of one or more Performance Goals as described in Section 8.4. If either the grant of Restricted Stock or the lapsing of the Period of Restriction is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 8.3 through 8.5. Shares of Restricted Stock shall be issued for no consideration other than services rendered. Each grant of Restricted Stock shall be evidenced by a Restricted Stock Agreement that shall specify the number of shares of Stock subject to and the other terms, conditions and restrictions of such Award as the Committee shall determine. No Restricted Stock Award or purported Restricted Stock Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Restricted Stock Agreement. Restricted Stock Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the terms and conditions set forth in Sections 7.2 through 7.6 below. 7.2 NONTRANSFERABILITY DURING PERIOD OF RESTRICTION. During such period beginning on the date of grant of a Restricted Stock Award as may be established by the Committee (the "PERIOD OF RESTRICTION"), no shares of such Restricted Stock may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, except by will or the laws or descent and distribution. The Committee, in its discretion, may provide for the lapse of the Period of Restriction, in full or in installments, at such time or times, upon such event or events, or upon satisfaction of such conditions or performance criteria (including, without limitation, Performance Goals as described in Section 8.4) as the Committee may establish and set forth in the Restricted Stock Agreement evidencing the Award. All rights with respect to Restricted Stock granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant. 7.3 OTHER RESTRICTIONS. The Committee may impose such other restrictions on any shares of Restricted Stock granted hereunder as it may deem advisable, including, without limitation, restrictions under applicable Federal securities law and under any blue sky or state securities laws applicable to such shares, and may legend the certificates representing the Restricted Stock to give appropriate notice of such restrictions. 7.4 VOTING RIGHTS. During the Period of Restriction, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those shares. 7.5 DIVIDENDS AND OTHER DISTRIBUTION. During the Period of Restriction, Participants holding shares of Restricted Stock granted hereunder shall be entitled to receive all 12 dividends and other distributions paid with respect to those shares while they are so held. If any such dividends or distributions are paid in shares of stock, the shares shall be subject to the same restrictions on transferability pursuant to Section 7.2 as the shares of Restricted Stock with respect to which they were paid. 7.6 EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided by the Committee in the grant of a Restricted Stock Award and set forth in the Restricted Stock Agreement, the effect of a Participant's termination of Service on his or her Restricted Stock Award shall be as follows: (a) DEATH OR DISABILITY. If the Participant's Service is terminated by reason of the death or Disability of the Participant during the Period of Restriction, the restrictions applicable to the shares of Restricted Stock pursuant to Section 7.2 shall terminate automatically with respect to all such shares. (b) OTHER TERMINATION OF SERVICE. If the Participant's Service terminates during the Period of Restriction for any reason except death or Disability, any shares of Restricted Stock still subject to restrictions pursuant to Section 7.2 at the date of such termination shall be forfeited and automatically reacquired by the Company; provided, however, that, in the event of an involuntary termination of the Participant's Service, the Committee, in its sole discretion, may waive the automatic forfeiture of any or all such shares and/or add such new restrictions to such shares of Restricted Stock as it deems appropriate. SECTION 8. PERFORMANCE SHARES AND PERFORMANCE UNITS 8.1 GRANT OF PERFORMANCE SHARES OR PERFORMANCE UNITS. Subject to the provisions of Sections 1.3 and 5, the Committee, at any time and from time to time, may grant Awards of Performance Shares or Performance Units to such Participants and in such amounts as it shall determine. Each grant of a Performance Share or Performance Unit Award shall be evidenced by a Performance Share Agreement or a Performance Unit Agreement that shall specify the number of Performance Shares or Performance Units subject thereto, the value of each Performance Share or Performance Unit, the Performance Goals and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award as the Committee shall determine. No Performance Share or Performance Unit Award or purported Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Performance Share and Performance Unit Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the terms and conditions set forth in Sections 8.2 through 8.10 below. 8.2 VALUE OF PERFORMANCE SHARES AND PERFORMANCE UNITS. Unless otherwise provided by the Committee in granting an Award, each Performance Share shall have an initial value equal to the Fair Market Value of a share of Stock on the effective date of grant of the Performance Share and each Performance Unit shall have an initial value of one hundred dollars ($100). The ultimate value of a Performance Share or Performance Unit to the Participant will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee. 13 8.3 ESTABLISHMENT OF PERFORMANCE GOALS AND PERFORMANCE PERIOD. The Committee, in its discretion, shall establish the Performance Period applicable to each Performance Share or Performance Unit Award. Prior to the commencement of the applicable Performance Period, or such later date as may be permitted with respect to "performance-based compensation" under Section 162(m), the Committee shall establish one or more Performance Goals which, when measured at the end of the Performance Period, shall determine the ultimate value of the Award to be paid to the Participant. Once established, the Performance Goals shall not be changed during the Performance Period. 8.4 MEASUREMENT OF PERFORMANCE GOALS. Performance Goals shall be established by the Committee on the basis of targets to be attained ("PERFORMANCE TARGETS") with respect one or more measures of business or financial performance (each, a "PERFORMANCE MEASURE"). Performance Measures shall have the same meanings as used in the Company's financial statements, or if such terms are not used in the Company's financial statements, they shall have the meaning applied pursuant to generally accepted accounting principles, or as used generally in the Company's industry. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the ultimate value of a Performance Share or Performance Unit Award determined by the level attained. Performance Targets may be absolute or relative to a standard selected by the Committee. Performance Measures shall be calculated with respect to the Company and each Parent Corporation and Subsidiary Corporation consolidated therewith for financial reporting purposes or such division or other business unit thereof as may be selected by the Committee. For purposes of the Plan, the Performance Measures applicable to an Award shall be calculated before the effect of changes in accounting standards, restructuring charges and similar extraordinary items, determined according to criteria established by the Committee, occurring after the establishment of the Performance Goals applicable to an Award. Performance Measures may be one or more of the following as determined by the Committee: (a) revenue, (b) operating income, (c) pre-tax profit, (d) net income, (e) gross margin, (f) operating margin, (g) earnings per share, (h) return on stockholder equity, (i) return on capital, (j) return on net assets, (k) economic value added and (l) cash flow. 8.5 DETERMINATION OF VALUE OF PERFORMANCE SHARES AND PERFORMANCE UNITS. As soon as practicable following the completion of the Performance Period for each Performance Share and Performance Unit Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting value of the Award earned by the Participant and to be paid upon its settlement in accordance with the terms of the Award Agreement. The Committee shall have no discretion to increase the value of an Award payable upon its settlement in excess of the amount called for by the terms of the Award Agreement on the basis of the degree of attainment of the Performance Goals as certified by the Committee. However, notwithstanding the attainment of any Performance Goal, if permitted under a Participant's Award Agreement evidencing a Performance Share or Performance Unit Award, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of an Award that would otherwise be paid upon its settlement. No such reduction may result in an increase in the amount payable upon settlement of another Participant's Award. As soon as practicable following the Committee's certification, the Company shall notify the Participant of the determination of the Committee. 14 8.6 DIVIDEND EQUIVALENTS. The Committee may, in its discretion, provide that any Performance Share shall include a right to Dividend Equivalents with respect to cash dividends paid on Stock for which the record date is prior to the date on which the Performance Share is settled or forfeited. Dividend Equivalents may be paid currently or may be accumulated and paid to the extent that Performance Shares become nonforfeitable, as determined by the Committee. Settlement of Dividend Equivalents may be in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 8.7. Dividend Equivalents shall not be paid with respect to Performance Units. 8.7 FORM AND TIMING OF PAYMENT. Payment of the ultimate value of a Performance Share or Performance Unit Award earned by a Participant as determined following the completion of the applicable Performance Period pursuant to Sections 8.5 and 8.6 may be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Payments in shares of Stock shall be determined by the Fair Market Value of a share of Stock on the last day of such Performance Period. Payment may be made in a lump sum or installments as prescribed by the Committee. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment of Dividend Equivalents or interest during the deferral period. 8.8 RESTRICTIONS APPLICABLE TO PAYMENT IN SHARES. Shares of Stock issued in payment of any Performance Share or Performance Unit Award may be fully vested and freely transferable shares or may be shares of Restricted Stock subject to a Period of Restriction as provided in Section 7.2. Any such shares of Restricted Stock shall be evidenced by a Restricted Stock Agreement and shall be subject to the terms and conditions set forth in Sections 7.2 through 7.6 above. 8.9 EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided by the Committee in the grant of a Performance Share or Performance Unit Award and set forth in the Award Agreement, the effect of a Participant's termination of Service on his or her Performance Share or Performance Unit Award shall be as follows: (a) DEATH, DISABILITY OR RETIREMENT. If the Participant's Service is terminated by reason of the death, Disability or Retirement of the Participant while he or she is the holder of a Performance Share or Performance Unit Award but before the completion of the applicable Performance Period, the value of the Participant's Award shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on the number of months of the Participant's Service during the Performance Period. Payment shall be made following the end of the Performance Period in any manner permitted by Section 8.7. (b) OTHER TERMINATION OF SERVICE. If the Participant's Service terminates for any reason except death, Disability or Retirement before the completion of the Performance Period applicable to a Performance Share or Performance Unit Award held by such Participant, such Award shall be forfeited in its entirety; provided, however, that in the event of an involuntary termination of the Participant's Service, the Committee, in its sole discretion, may waive the automatic forfeiture of all or any portion of any such Award and provide for payment 15 of such Award or portion thereof on the same basis as if the Participant's Service had terminated by reason of Retirement. 8.10 NONTRANSFERABILITY. No Performance Shares or Performance Units may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution until the termination of the applicable Performance Period. All rights with respect to Performance Shares and Performance Units granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant. SECTION 9. DIRECTOR FEE AWARDS 9.1 EFFECTIVE DATE AND DURATION OF THIS SECTION. This Section 9 shall become effective on the first day (the "SECTION 9 EFFECTIVE DATE") of the first calendar quarter beginning after the Effective Date, provided that elections pursuant to Section 9.2 may be made prior to the Section 9 Effective Date. This Section 9 shall continue in effect for the remainder of the calendar year commencing on the Section 9 Effective Date (the "INITIAL PLAN YEAR") and for each subsequent calendar year commencing during the term (as provided in Section 1.3) of the Plan (a "PLAN YEAR"). Notwithstanding any Participant's prior election pursuant to Section 9.2, no Director Fee Award shall be granted after termination of the Plan, and all Director Fees (as defined below) with respect to which Director Fee Awards have not been granted prior to termination of the Plan shall thereafter be paid in cash in accordance with the Company's normal Director Fee payment procedures. However, subject to compliance with applicable law as provided in Section 11, all Director Fee Awards granted prior to termination of the Plan shall continue to be governed by and may be exercised or settled in accordance with the terms of the Plan and the Award Agreement evidencing such Director Fee Award. 9.2 MANDATORY AND ELECTIVE DIRECTOR FEE AWARDS. Except as otherwise provided below, each Nonemployee Director shall be granted one or more Director Fee Awards in lieu of payment in cash of fifty percent (50%) of such Participant's annual retainer fee, meeting fees and other compensation payable with respect to such Participant's service as a Director ("DIRECTOR FEES") during the Initial Plan Year and each subsequent Plan Year (or the portion of such Plan Year following an individual's initial appointment or election as a Nonemployee Director). In addition, each Participant may elect to receive Director Fee Awards in lieu of payment in cash of all or any portion of the remaining fifty percent (50%) of such Participant's Director Fees for the Initial Plan Year and each subsequent Plan Year or applicable portion thereof. For the Initial Plan Year and each subsequent Plan Year or applicable portion thereof, a Participant shall be entitled to elect one of the following alternative forms of payment of the value of the Participant's Director Fees: (a) OPTION PAYMENT. A minimum of fifty percent (50%), together with such additional portion, if any, elected by the Participant up to a maximum of one hundred percent (100%), of the Participant's Director Fees will be paid in the form of a Nonemployee Director Option (an "OPTION PAYMENT") and the balance will be paid in cash in accordance with the Company's normal Director Fee payment procedures. (b) STOCK UNITS PAYMENT. A minimum of fifty percent (50%), together with such additional portion, if any, elected by the Participant up to a maximum of one hundred 16 percent (100%), of the Participant's Director Fees will be paid in the form of Stock Units (a "STOCK UNITS PAYMENT") and the balance will be paid in cash in accordance with the Company's normal Director Fee payment procedures. In connection with an election to receive a Stock Units Payment, the Participant may elect an "Early Settlement Date" (as defined below) upon which the Stock Units will be settled in accordance with Section 9.6(d); provided, however, that upon termination of the Participant's Service as a Director prior to the Early Settlement Date, settlement shall be made as provided in Section 9.6(d). Any "EARLY SETTLEMENT DATE" elected by the Participant shall become irrevocable as provided in Section 9.3(b) and shall be December 1 of the third Plan Year following the Plan Year of the Stock Units Payment or December 1 of any subsequent Plan Year. 9.3 TIME AND MANNER OF ELECTION. (a) TIME OF ELECTION. Each Nonemployee Director shall make an election pursuant to Section 9.2: (i) for the Initial Plan Year: prior to the earlier of (1) the date thirty (30) days following the Effective Date or (2) the Section 9 Effective Date; (ii) for each subsequent Plan Year: prior to the first day of such Plan Year; and (iii) in the case of a newly appointed or elected Nonemployee Director: on the date of such appointment or election for the remainder of the Initial Plan Year or subsequent Plan Year of appointment or election, as the case may be. (b) ELECTION IRREVOCABLE. An election pursuant to Section 9.2 shall become irrevocable as of the commencement of the Plan Year or portion thereof to which it applies. (c) FAILURE TO TIMELY ELECT. Any Nonemployee Director who fails to make an election in accordance with this Section for any Plan Year (or the Initial Plan Year, as the case may be) shall be deemed to have elected pursuant to Section 9.2 to receive Option Payments for fifty (50%) of the value of such Participant's Director Fees earned during such Plan Year (or Initial Plan Year) and to receive the balance of such Participant's Director Fees in cash in accordance with the Company's normal Director Fee payment procedures. (d) MANNER OF ELECTION. Each election in accordance with this Section shall be made on a form prescribed by the Company for this purpose and filed with the Chief Financial Officer of the Company. 9.4 AUTOMATIC GRANT OF DIRECTOR FEE AWARDS. Subject to the provisions of Sections 1.3 and 5, effective as of the last day of each quarter during any Plan Year (or the Initial Plan Year, as the case may be), each Nonemployee Director shall be granted automatically and without further action of the Committee a Director Fee Award in lieu of that portion of the Director Fees earned by the Participant during such quarter and specified by the Participant's election under Section 9.2 for such Plan Year (or Initial Plan Year) and any fractional share amount carried over from the prior quarter as provided in Section 9.7 (the "QUARTERLY DIRECTOR FEES"). In accordance with the Participant's election under Section 9.2 for the Plan Year (or 17 Initial Plan Year), the Director Fee Award shall be either in the form of an Option Payment pursuant to Section 9.5 or a Stock Units Payment pursuant to Section 9.6. 9.5 OPTION PAYMENT. Each Option Payment shall be in the form of a Nonemployee Director Option and shall be evidenced by a Nonemployee Director Option Agreement that shall specify the exercise price, the duration of the Nonemployee Director Option, the number of shares of Stock to which the Nonemployee Director Option pertains, and such other provisions as the Committee shall determine. No such Nonemployee Director Option or purported Nonemployee Director Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Nonemployee Director Option Agreement. Nonemployee Director Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the terms and conditions of Section 6 to the extent not inconsistent with this Section and the terms and conditions set forth in Sections 9.5(a) through 9.5(d) below: (a) EXERCISE PRICE. The exercise price per share for each Nonemployee Director Option shall be fifty percent (50%) of the average of the Fair Market Values of a share of Stock for the ten (10) trading days preceding the effective date of grant of the Nonemployee Director Option. (b) NUMBER OF SHARES SUBJECT TO NONEMPLOYEE DIRECTOR OPTION. The number of shares of Stock subject to a Nonemployee Director Option shall be determined by the following formula (with any resulting fractional share being disregarded): X = A / (B x 50%) where, X is the number of shares subject to the Nonemployee Director Option; A is the amount of Quarterly Director Fees in lieu of which the Option Payment is made; and B is the average of the Fair Market Values of a share of Stock for the ten (10) trading days preceding the effective date of grant of the Nonemployee Director Option. (c) EXERCISE PERIOD. Each Nonemployee Director Option shall be vested and exercisable on and after the date of grant of the Nonemployee Director Option and shall terminate and cease to be exercisable on the date ten (10) years after the date of grant of the Nonemployee Director Option, unless earlier terminated pursuant to the terms of the Plan or the Nonemployee Director Option Agreement. (d) EFFECT OF TERMINATION OF SERVICE. (i) NONEMPLOYEE DIRECTOR OPTION GRANT. No Participant shall be granted a Nonemployee Director Option following the date on which such 18 Participant's Service as a Director terminates for any reason. All of such Participant's Director Fees with respect to which Director Fee Awards have not been granted prior to the Participant's termination of Service as a Director shall be paid in cash in accordance with the Company's normal Director Fee payment procedures. (ii) NONEMPLOYEE DIRECTOR OPTION EXERCISABILITY. Subject to earlier termination as otherwise provided herein, a Nonemployee Director Option shall remain exercisable after a Participant's termination of Service at any time prior to the expiration of thirty-six (36) months after the date on which the Participant's Service terminated, but in any event no later than the Option Expiration Date. (iii) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of a Nonemployee Director Option within the applicable time period set forth in Section 9.5(d)(ii) is prevented by the provisions of Section 11.1 below, the Nonemployee Director Option shall remain exercisable until thirty (30) days after the date the Participant is notified by the Company that the Nonemployee Director Option is exercisable, but in any event no later than the Option Expiration Date. (iv) EXTENSION IF PARTICIPANT SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time period set forth in Section 9.5(d)(ii) of shares acquired upon the exercise of the Nonemployee Director Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant's termination of Service, or (iii) the Option Expiration Date. 9.6 STOCK UNITS PAYMENT. Each Stock Units Payment shall be evidenced by a Stock Units Agreement that shall specify the number of Stock Units to which such agreement pertains, the form and time of settlement of such Stock Units and such other provisions as the Committee shall determine. No such Stock Units Award or purported Stock Units Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Stock Units Agreement. Stock Units Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the terms and conditions set forth in Sections 9.6(a) through 9.6(f) below: (a) PAYMENT. No additional cash consideration shall be required upon settlement of a Stock Units Award. (b) NUMBER OF STOCK UNITS SUBJECT TO STOCK UNITS AWARD. The number of Stock Units subject to a Stock Units Award shall be determined by the following formula (with any resulting fractional Stock Unit being disregarded): X = A / B where, 19 X is the number of Stock Units subject to the Stock Units Award; A is the amount of Quarterly Director Fees in lieu of which the Stock Units Payment is made; and B is the average of the Fair Market Values of a share of Stock for the ten (10) trading days preceding the effective date of grant of the Stock Units Award. (c) VOTING AND DIVIDEND EQUIVALENT RIGHTS. Participants shall have no voting rights with respect to shares of Stock represented by Stock Units until the date of the issuance of a certificate for such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). Prior to settlement of a Stock Units Award, such Award shall include the right to Dividend Equivalents, pursuant to which the Participant shall be credited with additional whole and/or fractional Stock Units as of the record date of any payment of cash dividends with respect to the Stock occurring prior to such settlement date. Such additional Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Stock Units originally subject to the Stock Units Award. The number of such whole and/or fractional Stock Units to be credited with respect to any Stock Units Award on the record date of any cash dividend paid on the Stock shall be determined by the following formula: X = (A x B) / C where, X is the number of whole and/or fractional Stock Units to be credited with respect to the Stock Units Award; A is the amount of cash dividends paid on one share of Stock; B is the number of whole and fractional Stock Units subject to the Stock Units Award as of the cash dividend record date; and C is the Fair Market Value of a share of Stock on the cash dividend record date. (d) SETTLEMENT OF STOCK UNITS. Subject to the provisions of Section 11.1 below, the Company shall issue to the Participant, within thirty (30) days following the earlier of (i) the Early Settlement Date elected by the Participant with respect to the Stock Units Award or (ii) the date of termination of the Participant's Service as a Director, a number of whole shares of Stock equal to the number of whole Stock Units subject to the Stock Units Award. Such shares of Stock shall not be subject to any restriction on transfer other than any such restriction as may be required pursuant to Section 11.1 or any applicable law, rule or regulation. On the same settlement date, the Company shall pay to the Participant cash in lieu of any fractional Stock Unit subject to the Stock Units Award in an amount equal to the Fair Market Value on the settlement date of such fractional share of Stock. 20 (e) EFFECT OF TERMINATION OF SERVICE. No Participant shall be granted a Stock Units Award following the date on which such Participant's Service as a Director terminates for any reason. All of such Participant's Director Fees with respect to which Director Fee Awards have not been granted prior to the Participant's termination of Service as a Director shall be paid in cash in accordance with the Company's normal Director Fee payment procedures. (f) NONTRANSFERABILITY OF STOCK UNITS. Prior to their settlement pursuant to Section 9.6(d), no Stock Units granted to a Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant's beneficiary, except by will or by the laws of descent and distribution. 9.7 FRACTIONAL SHARES. No fractional shares of Stock shall be issued upon the exercise of any Nonemployee Director Option or settlement of any Stock Units. Any portion of a Participant's Quarterly Director Fees subject to the Participant's election under Section 9.2 representing a fractional share amount that would otherwise be paid in the form of an Option Payment or a Stock Units Payment shall instead be carried over and combined with the Quarterly Director Fees for the following quarter of the Plan Year (or Initial Plan year, as the case may be) or the subsequent Plan Year. Any such fractional share amount remaining upon termination of a Participant's Service as a Director shall be paid to the Participant in cash, without interest. SECTION 10. CHANGE IN CONTROL 10.1 EFFECT OF CHANGE IN CONTROL. In the event of a Change in Control of the Company as defined in Section 10.3 below, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), shall either assume all outstanding Awards or substitute new Awards having an equivalent value for such outstanding Awards. In the event the Acquiring Corporation elects not to assume or substitute for such outstanding Awards, and provided that the Participant's Service has not terminated prior to the effective date of the Change in Control (unless, with respect to Performance Shares or Performance Units, the Participant's Service terminated by reason of the death, Disability or Retirement of the Participant), all unexercisable, unvested or unpaid portions of such outstanding Awards shall become immediately exercisable, immediately payable and vested in full immediately prior to the effective date of the Change in Control. For purposes of the preceding sentence: (a) the value of Performance Shares and Performance Units shall be determined and paid based upon the greater of (i) the extent to which the applicable Performance Goals have been attained during the Performance Period up to the effective date of the Change in Control or (ii) the pre-established 100% of target level with respect to each Performance Target comprising the applicable Performance Goals; (b) any outstanding Stock Units Award not assumed or substituted for by the Acquiring Corporation shall be settled in accordance with Section 9.6(d) immediately prior to the effective date of the Change in Control; and 21 (c) any Director Fees with respect to which the Company has not made either an Option Payment or a Stock Units Payment pursuant to Section 9 prior to the effective date of the Change in Control shall be paid in cash immediately prior to such effective date. Any Options which are neither assumed or substituted for by the Acquiring Corporation nor exercised as of the date of the Change in Control shall terminate as of the effective date of the Change in Control. 10.2 TERMINATION OF SERVICE AFTER A CHANGE IN CONTROL. The Committee may, in its discretion, provide in any Award Agreement that if the Participant's Service is terminated within twelve (12) months (or such other period specified by the Committee) following a Change in Control by reason of (a) the involuntary termination by the Participating Company Group of the Participant's Service for any reason other than "Cause" (as such term is defined in the Award Agreement) or the Participant's death or Disability, or (b) the Participant's resignation for "Good Reason" (as such term is defined in the Award Agreement) from all capacities in which the Participant is then rendering Service to the Participating Company Group, then (i) the exercisability, vesting and payment of the outstanding Award held by such Participant shall be accelerated effective as of the date on which the Participant's Service terminated to such extent, if any, as shall have been specified by the Committee and set forth in the Award Agreement, and (ii) the outstanding Option held by such Participant, to the extent unexercised and exercisable on the date on which the Participant's Service terminated, may be exercised by the Participant (or the Participant's guardian or legal representative) at any time prior to the expiration of six (6) months (or such other period of time specified by the Committee) after the date on which the Participant's Service terminated, but in any event no later than the Option Expiration Date. 10.3 DEFINITION. A "CHANGE IN CONTROL" shall be deemed to have occurred in the event of: (a) an acquisition, consolidation, or merger of the Company with or into any other corporation or corporations, unless the stockholders of the Company retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the surviving or acquiring corporation or corporations; or (b) the sale, exchange, or transfer of all or substantially all of the assets of the Company to a transferee other than a corporation or partnership controlled by the Company or the stockholders of the Company; or (c) a transaction or series of related transactions in which stock of the Company representing more than thirty percent (30%) of the outstanding voting power of the Company is sold, exchanged, or transferred to any single person or affiliated persons leading to a change of a majority of the members of the Board. The Board shall have final authority to determine whether multiple transactions are related and the exact date on which a Change in Control has been deemed to have occurred under subsections (a), (b), and (c) above. 22 SECTION 11. REQUIREMENTS OF LAW 11.1 COMPLIANCE WITH SECURITIES LAW. The granting of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable laws, rules, and regulations, and to such approvals by any governmental agencies, securities exchanges or market systems as may be required. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 11.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of California. SECTION 12. TAX WITHHOLDING 12.1 TAX WITHHOLDING IN GENERAL. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy the Federal, state, local and foreign tax withholding obligations, if any, of any Participating Company with respect to any Award. The Company shall have no obligation to deliver shares of Stock or make any payment of cash under the Plan until such tax withholding obligations have been satisfied. 12.2 WITHHOLDING OF SHARES. To the extent permissible under applicable tax, securities, and other laws, the Company may, in its sole discretion, permit a Participant to satisfy all or a part of his or her tax withholding requirement by directing the Company to apply shares of Stock to which the Participant is entitled as a result of the exercise of an Option or the lapse of a Period of Restriction with respect to a Restricted Stock Award (including, for this purpose, the filing of an election under section 83(b) of the Code), or which would otherwise be issued to the Participant pursuant to an Award, to satisfy such requirement. Shares of Stock so applied shall be valued at their Fair Market Value on the date when the taxes otherwise would be withheld in cash. SECTION 13. AMENDMENT AND TERMINATION OF PLAN 13.1 AMENDMENT AND TERMINATION OF PLAN. The Committee at any time may terminate, and from time to time, may amend, the Plan; provided, however, that no such amendment may be made without approval of the stockholders of the Company to the extent that the Committee deems such stockholder approval to be necessary or advisable for compliance with applicable tax and securities laws or other regulatory requirements, including the requirements of any stock exchange or market system on which the Stock is then listed. 23 13.2 EFFECT OF AMENDMENT OR TERMINATION. No termination or amendment of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. In any event, no termination or amendment of the Plan shall in any manner adversely affect any Award theretofore granted under the Plan, without the consent of the Participant, unless such termination or amendment is necessary to comply with any applicable law, regulation or rule. SECTION 14. MISCELLANEOUS PROVISIONS 14.1 BENEFICIARY DESIGNATION. Each Participant may name, from time to time, any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of such Participant's death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to his or her estate. 14.2 RIGHTS AS AN EMPLOYEE OR DIRECTOR. No individual, even though eligible pursuant to Section 3, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee or Director, or interfere with or limit in any way the right of a Participating Company to terminate the Participant's Service at any time. 14.3 RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares covered by an Award until the date of the issuance of a certificate for such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 5.3 or another provision of the Plan. 14.4 PROVISION OF INFORMATION. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 14.5 UNFUNDED OBLIGATION. Any amounts payable to Participants pursuant to the Plan shall be unfunded obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant's creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company 24 for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan. 14.6 INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Committee or officers or employees of the Participating Company Group, members of the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Granite Construction Incorporated 1999 Equity Incentive Plan as duly adopted by the Board on March 17, 1999 and amended through September 25, 2003. GRANITE CONSTRUCTION INCORPORATED /s/ Michael Futch --------------------------------- Michael Futch, Secretary 25 EX-31.1 4 f94381exv31w1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David H. Watts, Chief Executive Officer, certify that: 1. I have reviewed this report on Form 10-Q of Granite Construction Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Dated: November 14, 2003 /s/ David H. Watts ------------------------------------ David H. Watts Chairman and Chief Executive Officer EX-31.2 5 f94381exv31w2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William E. Barton, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this report on Form 10-Q of Granite Construction Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Dated: November 14, 2003 /s/ William E. Barton ---------------------------- William E. Barton Senior Vice President and Chief Financial Officer EX-32.1 6 f94381exv32w1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Granite Construction Incorporated (the "Company") does hereby certify to such officer's knowledge that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ David H. Watts ---------------------------------- David H. Watts Chairman and Chief Executive Officer EX-32.2 7 f94381exv32w2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Granite Construction Incorporated (the "Company") does hereby certify to such officer's knowledge that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ William E. Barton ---------------------------------- William E. Barton Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    Exhibit 10.1

                        GRANITE CONSTRUCTION INCORPORATED

                           1999 EQUITY INCENTIVE PLAN

               AS AMENDED AND RESTATED THROUGH SEPTEMBER 25, 2003



                                TABLE OF CONTENTS



                                                                                                      Page
                                                                                                      ----
                                                                                                   
SECTION 1. ESTABLISHMENT, PURPOSE, AND TERM OF PLAN.........................................            1
     1.1     Establishment..................................................................            1
     1.2     Purpose........................................................................            1
     1.3     Term of Plan...................................................................            1

SECTION 2. DEFINITIONS AND CONSTRUCTION.....................................................            1
     2.1     Definitions....................................................................            1
     2.2     Construction...................................................................            5

SECTION 3. ELIGIBILITY AND AWARD LIMITATIONS................................................            5
     3.1     Persons Eligible for Incentive Stock Options...................................            5
     3.2     Persons Eligible for Other Awards..............................................            5
     3.3     Section 162(m) Award Limits....................................................            5

SECTION 4. ADMINISTRATION...................................................................            6
     4.1     Administration by Committee....................................................            6
     4.2     Authority of Officers..........................................................            6
     4.3     Administration with Respect to Insiders........................................            6
     4.4     Committee Complying with Section 162(m)........................................            6
     4.5     Powers of the Committee........................................................            6

SECTION 5. STOCK SUBJECT TO PLAN............................................................            7
     5.1     Maximum Number of Shares Issuable..............................................            7
     5.2     Lapsed Awards..................................................................            7
     5.3     Adjustment in Capitalization...................................................            8

SECTION 6. STOCK OPTIONS....................................................................            8
     6.1     Grant of Options...............................................................            8
     6.2     Exercise Price.................................................................            8
     6.3     Exercise Period................................................................            9
     6.4     Payment of Exercise Price......................................................            9
     6.5     Effect of Termination of Service...............................................           10
     6.6     Transferability of Options.....................................................           12

SECTION 7. RESTRICTED STOCK.................................................................           12
     7.1     Grant of Restricted Stock......................................................           12
     7.2     Nontransferability During Period of Restriction................................           12
     7.3     Other Restrictions.............................................................           12
     7.4     Voting Rights..................................................................           12
     7.5     Dividends and Other Distribution...............................................           12
     7.6     Effect of Termination of Service...............................................           13

SECTION 8. PERFORMANCE SHARES AND PERFORMANCE UNITS.........................................           13
     8.1     Grant of Performance Shares or Performance Units...............................           13


                                       -i-


                               TABLE OF CONTENTS
                                  (Continued)



                                                                                                      Page
                                                                                                      ----
                                                                                                   
     8.2     Value of Performance Shares and Performance Units..............................           13
     8.3     Establishment of Performance Goals and Performance Period......................           14
     8.4     Measurement of Performance Goals...............................................           14
     8.5     Determination of Value of Performance Shares and Performance Units.............           14
     8.6     Dividend Equivalents...........................................................           15
     8.7     Form and Timing of Payment.....................................................           15
     8.8     Restrictions Applicable to Payment in Shares...................................           15
     8.9     Effect of Termination of Service...............................................           15
     8.10    Nontransferability.............................................................           16

SECTION 9. DIRECTOR FEE AWARDS..............................................................           16
     9.1     Effective Date and Duration of this Section....................................           16
     9.2     Mandatory and Elective Director Fee Awards.....................................           16
     9.3     Time and Manner of Election....................................................           17
     9.4     Automatic Grant of Director Fee Awards.........................................           17
     9.5     Option Payment.................................................................           18
     9.6     Stock Units Payment............................................................           19
     9.7     Fractional Shares..............................................................           21

SECTION 10. CHANGE IN CONTROL...............................................................           21
     10.1    Effect of Change in Control....................................................           21
     10.2    Termination of Service After a Change in Control...............................           22
     10.3    Definition.....................................................................           22

SECTION 11. REQUIREMENTS OF LAW.............................................................           23
     11.1    Compliance with Securities Law.................................................           23
     11.2    Governing Law..................................................................           23

SECTION 12. TAX WITHHOLDING.................................................................           23
     12.1    Tax Withholding In General.....................................................           23
     12.2    Withholding of Shares..........................................................           23

SECTION 13. AMENDMENT AND TERMINATION OF PLAN...............................................           23
     13.1    Amendment and Termination of Plan..............................................           23
     13.2    Effect of Amendment or Termination.............................................           24

SECTION 14. MISCELLANEOUS PROVISIONS........................................................           24
     14.1    Beneficiary Designation........................................................           24
     14.2    Rights as an Employee or Director..............................................           24
     14.3    Rights as a Stockholder........................................................           24
     14.4    Provision of Information.......................................................           24
     14.5    Unfunded Obligation............................................................           24
     14.6    Indemnification................................................................           25


                                      -ii-


                        GRANITE CONSTRUCTION INCORPORATED
                           1999 EQUITY INCENTIVE PLAN
               AS AMENDED AND RESTATED THROUGH SEPTEMBER 25, 2003

               SECTION 1. ESTABLISHMENT, PURPOSE, AND TERM OF PLAN

         1.1      ESTABLISHMENT. Granite Construction Incorporated, a Delaware
corporation, hereby establishes the Granite Construction Incorporated 1999
Equity Incentive Plan (the "PLAN") effective as of the date of its approval by
the stockholders of the Company, which occurred on May 24, 1999 (the "EFFECTIVE
DATE").

         1.2      PURPOSE. The purpose of the Plan is to advance the interests
of the Company, by encouraging and providing for the acquisition of an equity
interest in the success of the Company by Employee and Directors, by providing
additional incentives and motivation toward superior performance of the Company,
and by enabling the Company to attract and retain the services of Employees and
Directors upon whose judgment, interest, and special effort the successful
conduct of its operations is largely dependent. The Plan seeks to achieve this
purpose by providing for Awards in the form of Options, Restricted Stock,
Performance Units and Performance Shares, by providing Nonemployee Directors
with the opportunity to receive Options or Stock Units in lieu of compensation
otherwise payable in cash, and by providing for payments in the form of shares
of Stock or cash.

         1.3      TERM OF PLAN. The Plan shall remain in effect until the
earlier of (i) its termination by the Committee pursuant to Section 13 or (ii)
the date on which all of the shares of Stock available for issuance under the
Plan have been issued and all restrictions on such shares under the terms of the
Plan and the agreements evidencing Awards granted under the Plan have lapsed.
However, all Awards shall be granted, if at all, within five (5) years from the
Effective Date.

                     SECTION 2. DEFINITIONS AND CONSTRUCTION

         2.1      DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:

                  (a)      "AWARD" means any Option, Restricted Stock,
Performance Unit, Performance Share or Director Fee Award granted under the
Plan.

                  (b)      "AWARD AGREEMENT" means a written agreement between
the Company and a Participant setting forth the terms, conditions and
restrictions of the Award granted to the Participant. An Award Agreement may be
an "Option Agreement," a "Restricted Stock Agreement," a "Performance Share
Agreement," a "Performance Unit Agreement," a "Nonemployee Director Option
Agreement," or a "Stock Units Agreement."

                  (c)      "BOARD" means the Board of Directors of the Company.

                  (d)      "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.

                                        1


                  (e)      "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. If no committee of the Board has been
appointed to administer the Plan, the Board shall exercise all of the powers of
the Committee granted herein, and, in any event, the Board may in its discretion
exercise any or all of such powers.

                  (f)      "COMPANY" means Granite Construction Incorporated, a
Delaware corporation, or any successor corporation thereto.

                  (g)      "DIRECTOR" means a member of the Board.

                  (h)      "DIRECTOR FEE AWARD" means any Nonemployee Director
Option or Stock Unit granted pursuant to Section 9.

                  (i)      "DISABILITY" means a permanent and total disability
as defined under the Company's Long Term Disability Plan or any successor plan,
regardless of whether the Participant is covered by such Long Term Disability
Plan.

                  (j)      "DIVIDEND EQUIVALENT" means a credit, made at the
discretion of the Committee or as otherwise provided by the Plan, to the account
of a Participant in an amount equal to the cash dividends paid on one share of
Stock for each share of Stock represented by an Award of Performance Shares or
Stock Units held by such Participant.

                  (k)      "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company and, with respect to any Incentive Stock
Option granted to such person, who is an employee for purposes of Section 422 of
the Code; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.

                  (l)      "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

                  (m)      "FAIR MARKET VALUE" means, as of any relevant date,
the closing sale price of a share of Stock (or the mean of the closing bid and
asked prices if the Stock is so quoted instead) on the relevant date on the New
York Stock Exchange or such other national or regional securities exchange or
market system constituting the primary market for the Stock, as reported in the
Wall Street Journal or such other source as the Company deems reliable. If the
relevant date does not fall on a day on which the Stock has traded on such
securities exchange or market system, the date on which the Fair Market Value
shall be established shall be the last day on which the Stock was so traded
prior to the relevant date, or such other appropriate day as shall be determined
by the Committee, in its discretion. If, on such date, there is no public market
for the Stock, the Fair Market Value of a share of Stock shall be as determined
by the Committee.

                  (n)      "INCENTIVE STOCK OPTION" means an Option intended to
be (as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.

                                        2


                  (o)      "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to Section
16 of the Exchange Act.

                  (p)      "NONEMPLOYEE DIRECTOR" means a Director of the
Company who is not an Employee.

                  (q)      "NONEMPLOYEE DIRECTOR OPTION" means a Director Fee
Award in the form of Nonstatutory Stock Option granted pursuant to the terms and
conditions of Section 9.

                  (r)      "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement) or which does not qualify
as an Incentive Stock Option.

                  (s)      "OPTION" means the right to purchase Stock at a
stated price for a specified period of time pursuant to the terms and conditions
of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.

                  (t)      "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.

                  (u)      "PARTICIPANT" means any eligible person who has been
granted one or more Awards.

                  (v)      "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.

                  (w)      "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.

                  (x)      "PERFORMANCE GOAL" means a performance goal
established by the Committee pursuant to Section 8.3.

                  (y)      "PERFORMANCE PERIOD" means a period established by
the Committee pursuant to Section 8.3 at the end of which one or more
Performance Goals are to be measured.

                  (z)      "PERFORMANCE SHARE" means a bookkeeping entry
representing a right granted to a Participant pursuant to the terms and
conditions of Section 8 to receive a payment equal to the value of a Performance
Share, as determined by the Committee, based on performance.

                  (aa)     "PERFORMANCE UNIT" means a bookkeeping entry
representing a right granted to a Participant pursuant to the terms and
conditions of Section 8 to receive a payment equal to the value of a Performance
Unit, as determined by the Committee, based upon performance.

                  (bb)     "PERIOD OF RESTRICTION" means the period during which
shares of Restricted Stock are subject to restriction as set forth in Section
7.2.

                                        3


                  (cc)     "RESTRICTED STOCK" means Stock granted to a
Participant pursuant to the terms and conditions of Section 7.

                  (dd)     "RETIREMENT" means (i) with respect to an Employee,
termination of employment for retirement under the terms of the Company's
defined contribution plans, and (ii) with respect to a Nonemployee Director,
resignation from Service on the Board after attaining the age of 55 and after at
least ten years of Service on the Board.

                  (ee)     "RULE 16b-3" means Rule 16b-3 under the Exchange Act,
as amended from time to time, or any successor rule or regulation.

                  (ff)     "SECTION 162(m)" means Section 162(m) of the Code.

                  (gg)     "SECURITIES ACT" means the Securities Act of 1933, as
amended.

                  (hh)     "SERVICE" means a Participant's employment or service
with the Participating Company Group, whether in the capacity of an Employee or
a Director. A Participant's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Participant renders
Service to the Participating Company Group or a change in the Participating
Company for which the Participant renders such Service, provided that there is
no interruption or termination of the Participant's Service. Furthermore, a
Participant's Service with the Participating Company Group shall not be deemed
to have terminated if the Participant takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the one hundred eighty-first
(181st) day following the commencement of such leave any Incentive Stock Option
held by the Participant shall cease to be treated as an Incentive Stock Option
and instead shall be treated thereafter as a Nonstatutory Stock Option unless
the Participant's right to return to Service with the Participating Company
Group is guaranteed by statute or contract. Notwithstanding the foregoing,
unless otherwise designated by the Company or required by law, a leave of
absence shall not be treated as Service for purposes of determining vesting
under the Participant's Award Agreement. A Participant's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Participant performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its discretion,
shall determine whether a Participant's Service has terminated and the effective
date of such termination.

                  (ii)     "STOCK" means the Common Stock of the Company, as
adjusted from time to time in accordance with Section 5.3.

                  (jj)     "STOCK UNIT" means a Director Fee Award in the form
of a bookkeeping entry representing a right granted to a Participant pursuant to
the terms and conditions of Section 9 to receive payment of one (1) share of
Stock.

                  (kk)     "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in section 424(f) of the
Code.

                  (ll)     "TEN PERCENT OWNER" means a Participant who, at the
time an Option is granted to the Participant, owns stock possessing more than
ten percent (10%) of the total

                                        4


combined voting power of all classes of stock of a Participating Company within
the meaning of Section 422(b)(6) of the Code.

         2.2      CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, words in
the masculine gender, when used in the Plan shall include the feminine gender,
the singular shall include the plural, and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.

                  SECTION 3. ELIGIBILITY AND AWARD LIMITATIONS

         3.1      PERSONS ELIGIBLE FOR INCENTIVE STOCK OPTIONS. Incentive Stock
Options may be granted only to Employees. For purposes of the foregoing
sentence, the term "Employees" shall include prospective Employees to whom
Options are granted in connection with written offers of employment with the
Participating Company Group, provided that any such Option shall be deemed
granted effective on the date that the Participant commences Service as an
Employee, with an exercise price determined as of such date in accordance with
Section 6.2.

         3.2      PERSONS ELIGIBLE FOR OTHER AWARDS. Awards other than Incentive
Stock Options may be granted only to Employees and Directors. For purposes of
the foregoing sentence, the terms "Employees" and "Directors" shall include
prospective Employees and prospective Directors to whom Awards are granted in
connection with written offers of employment or service as a Director with the
Participating Company Group, provided that no Stock subject to any such Award
shall vest, become exercisable or be issued prior to the date on which the
Participant commences Service. A Director Fee Award may be granted only to a
person who, at the time of grant, is a Nonemployee Director. Eligible persons
may be granted more than one (1) Award.

         3.3      SECTION 162(m) AWARD LIMITS. The following limitations (the
"SECTION 162(m) AWARD LIMITS") shall apply to the grant of any Award if, at the
time of grant, the Company is a "publicly held corporation" within the meaning
of Section 162(m).

                  (a)      STOCK OPTIONS. Subject to adjustment as provided in
Section 5.3, no Employee shall be granted one or more Options within any fiscal
year of the Company which in the aggregate are for the purchase of more than one
hundred thousand (100,000) shares; provided, however, that the Company may make
an additional one-time grant to any newly-hired Employee of an Option for the
purchase of up to two hundred fifty thousand (250,000) shares. An Option which
is canceled in the same fiscal year of the Company in which it was granted shall
continue to be counted against the limits described in this subsection for such
period.

                  (b)      RESTRICTED STOCK. Subject to adjustment as provided
in Section 5.3, no Employee may be granted within any fiscal year of the Company
more than one hundred thousand (100,000) shares of Restricted Stock, provided
that such limit shall apply only to Awards of Restricted Stock which are granted
or with respect to which the Period of Restriction lapses contingent upon the
attainment of Performance Goals.

                                        5


                  (c)      PERFORMANCE SHARES AND PERFORMANCE UNITS. Subject to
adjustment as provided in Section 5.3, no Employee may be granted (i)
Performance Shares which could result in such Employee receiving more than one
hundred thousand (100,000) shares of Stock for each full fiscal year of the
Company contained in the Performance Period for such Award, or (ii) Performance
Units which could result in such Employee receiving more than one million five
hundred thousand dollars ($1,500,000) for each full fiscal year of the Company
contained in the Performance Period for such Award. No Participant may be
granted more than one Performance Share Award or one Performance Unit Award (but
not both such Awards) for the same Performance Period.

                            SECTION 4. ADMINISTRATION

         4.1      ADMINISTRATION BY COMMITTEE. The Plan shall be administered by
the Committee. All questions of interpretation of the Plan or of any Award shall
be determined by the Committee, and such determinations shall be final, binding
and conclusive for all purposes and upon all persons whomsoever.

         4.2      AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.

         4.3      ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.

         4.4      COMMITTEE COMPLYING WITH SECTION 162(m). If the Company is a
"publicly held corporation" within the meaning of Section 162(m), the Board may
establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Award which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).

         4.5      POWERS OF THE COMMITTEE. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Committee shall
have the full and final power and authority, in its discretion:

                  (a)      to determine the persons to whom, and the time or
times at which, Awards shall be granted and the number of shares of Stock or
units to be subject to each Award and the value of a unit;

                  (b)      to determine the type of Award granted and to
designate Options as Incentive Stock Options or Nonstatutory Stock Options;

                  (c)      to determine the Fair Market Value of shares of Stock
or other property;

                                        6


                  (d)      to determine the terms, conditions and restrictions
applicable to each Award (which need not be identical) and any shares acquired
pursuant thereto, including, without limitation, (i) the exercise price of any
Option, (ii) the method of payment for shares purchased upon the exercise of any
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with any Award, including by the withholding or delivery
of shares of stock, (iv) the timing, terms and conditions of the exercisability
or vesting of any Award or any shares acquired pursuant thereto, (v) the
Performance Goals applicable to any Award and the extent to which such
Performance Goals have been attained, (vi) the time of the expiration of any
Award, (vii) the effect of the Participant's termination of Service on any of
the foregoing, and (viii) all other terms, conditions and restrictions
applicable to the Award or shares acquired pursuant thereto not inconsistent
with the terms of the Plan;

                  (e)      to determine whether an Award of Performance Shares
or Performance Units will be settled in shares of Stock, cash, or in any
combination thereof;

                  (f)      to approve one or more forms of Award Agreement;

                  (g)      to amend, modify, extend, cancel, renew, or grant a
new Award in substitution for, any Award or to waive any restrictions or
conditions applicable to any Award or any shares acquired pursuant thereto;

                  (h)      to accelerate, continue, extend or defer the
exercisability or vesting of any Award or any shares acquired pursuant thereto,
including with respect to the period following a Participant's termination of
Service;

                  (i)      to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Committee deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted Awards;
and

                  (j)      to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Award as the Committee may deem advisable to the extent consistent with the Plan
and applicable law.

                        SECTION 5. STOCK SUBJECT TO PLAN

         5.1      MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 5.3, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two million five hundred thousand
(2,500,000) and shall consist of authorized but unissued or reacquired shares of
Stock not reserved for any other purpose, or any combination thereof.

         5.2      LAPSED AWARDS. If any Award granted under the Plan terminates,
expires or lapses for any reason without having been exercised or settled in
full, or if shares are reacquired pursuant to withholding, or if shares subject
to forfeiture or repurchase are forfeited or

                                        7


repurchased by the Company, any shares reacquired or subject to such lapsed
Award again shall be available for issuance under the Plan.

         5.3      ADJUSTMENT IN CAPITALIZATION. In the event of any stock
dividend, stock split, reverse stock split, recapitalization, merger,
combination, exchange of shares, reclassification or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number and class of shares subject to the Plan and to any outstanding Awards, in
the Section 162(m) Award Limits set forth in Section 3.3, and in the exercise
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Awards are
exchanged for, converted into, or otherwise become (whether or not pursuant to a
Change in Control, as defined in Section 10.3) shares of another corporation
(the "NEW SHARES"), the Committee may unilaterally amend the outstanding Awards
to provide that such Awards are for New Shares. In the event of any such
amendment, the number of shares subject to outstanding Awards and the exercise
price per share of outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Committee, in its discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 5.3 shall be rounded down to the nearest whole number, and in no event
may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined by
the Committee pursuant to this Section 5.3 shall be final, binding and
conclusive.

                            SECTION 6. STOCK OPTIONS

         6.1      GRANT OF OPTIONS. Subject to the provisions of Sections 1.3
and 5, Options (other than pursuant to a Director Fee Award) may be granted to
Participants at any time and from time to time as shall be determined by the
Committee. Each Option shall be evidenced by an Option Agreement that shall
specify the type of Option granted, the exercise price, the duration of the
Option, the number of shares of Stock to which the Option pertains, and such
other provisions as the Committee shall determine. No Option or purported Option
shall be a valid and binding obligation of the Company unless evidenced by a
fully executed Option Agreement. Option Agreements may incorporate all or any of
the terms of the Plan by reference and, except as otherwise set forth in Section
9 with respect to a Nonemployee Director Option, shall comply with and be
subject to the terms and conditions set forth in Sections 6.2 through 6.6 below.

         6.2      EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Committee; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Incentive
Stock Option granted to a Ten Percent Owner shall have an exercise price per
share less than one hundred ten percent (110%) of the Fair Market Value of a
share of Stock on the effective date of grant of the Option. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock
Option) may be granted with an exercise price lower than the minimum exercise
price set forth above if such Option is granted pursuant to an assumption or
substitution for another option in a manner qualifying under the provisions of
Section 424(a) of the Code.

                                        8


         6.3      EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria and restrictions as shall be determined by the Committee
and set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner shall be exercisable after the expiration of five
(5) years after the effective date of grant of such Option, and (c) no Option
granted to a prospective Employee or prospective Director may become exercisable
prior to the date on which such person commences Service. Subject to the
foregoing, unless otherwise specified by the Committee in the grant of an
Option, any Option granted hereunder shall have a term of ten (10) years from
the effective date of grant of the Option.

         6.4      PAYMENT OF EXERCISE PRICE. The purchase price of Stock upon
exercise of any Option shall be paid in full by such methods as shall be
permitted by the Committee or as provided in a Participant's Option Agreement,
which need not be the same for all Participants, and subject to the following:

                  (a)      FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of shares
of Stock being purchased pursuant to any Option shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company, or attestation to the
ownership, of shares of Stock owned by the Participant having a Fair Market
Value not less than the exercise price, (iii) by delivery of a properly executed
notice together with irrevocable instructions to a broker providing for the
assignment to the Company of the proceeds of a sale or loan with respect to some
or all of the shares being acquired upon the exercise of the Option (including,
without limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of Governors of the
Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided that the
Participant is an Employee, by cash for a portion of the aggregate exercise
price not less than the par value of the shares being acquired and the
Participant's promissory note in a form approved by the Company for the balance
of the aggregate exercise price, (v) by such other consideration as may be
approved by the Committee from time to time to the extent permitted by
applicable law, or (vi) by any combination thereof. The Committee may at any
time or from time to time grant Options which do not permit all of the foregoing
forms of consideration to be used in payment of the exercise price or which
otherwise restrict one or more forms of consideration. The proceeds from payment
of the Option exercise prices shall be added to the general funds of the Company
and shall be used for general corporate purposes.

                                        9


                  (b)      LIMITATIONS ON FORMS OF CONSIDERATION.

                           (i)      TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock to the extent such tender or
attestation would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Committee, an Option may not be exercised by
tender to the Company, or attestation to the ownership, of shares of Stock
unless such shares either have been owned by the Optionee for more than six (6)
months or were not acquired, directly or indirectly, from the Company.

                           (ii)     CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.

                           (iii)    PAYMENT BY PROMISSORY NOTE. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on such
terms as the Committee shall determine at the time the Option is granted. The
Committee shall have the authority to permit or require the Optionee to secure
any promissory note used to exercise an Option with the shares of Stock acquired
upon the exercise of the Option or with other collateral acceptable to the
Company. Unless otherwise provided by the Committee, if the Company at any time
is subject to the regulations promulgated by the Board of Governors of the
Federal Reserve System or any other governmental entity affecting the extension
of credit in connection with the Company's securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the unpaid
principal and accrued interest, if any, to the extent necessary to comply with
such applicable regulations.

         6.5      EFFECT OF TERMINATION OF SERVICE.

                  (a)      OPTION EXERCISABILITY. Subject to earlier termination
of the Option as otherwise provided herein and unless otherwise provided by the
Committee in the grant of an Option and set forth in the Option Agreement, an
Option shall be exercisable after a Participant's termination of Service as
follows:

                           (i)      DEATH OR DISABILITY. If the Participant's
Service is terminated by reason of the death or Disability of the Participant,
the Option, to the extent unexercised and exercisable on the date on which the
Participant's Service terminated, may be exercised by the Participant (or the
Participant's guardian or legal representative or other person who acquired the
right to exercise the Option by reason of the Participant's death) at any time
prior to the expiration of six (6) months (or such longer period of time as
determined by the Committee, in its discretion) after the date on which the
Participant's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "OPTION EXPIRATION DATE"). If an Option intended to be an
Incentive Stock Option is exercised by a Participant more than three (3) months
following the Participant's termination of Service by reason of a Disability
which is not a "permanent and total

                                       10


disability" as defined in Section 22(e)(3) of the Code, such exercise will be
treated as the exercise of a Nonstatutory Stock Option to the extent required by
Section 422 of the Code. The Participant's Service shall be deemed to have
terminated on account of death if the Participant dies within three (3) months
after the Participant's termination of Service.

                           (ii)     RETIREMENT. If the Participant's Service is
terminated by reason of the Retirement of the Participant, the Option may be
exercised at such time (but in any event no later than the Option Expiration
Date) and in such amounts as shall be determined by the Committee at the time of
grant of the Option and set forth in the Option Agreement.

                           (iii)    TERMINATION FOR CAUSE. Notwithstanding any
other provision of the Plan to the contrary, if the Participant's Service is
terminated for Cause, as defined below, the Option shall terminate and cease to
be exercisable immediately upon such termination of Service. For purposes of
this subsection, "CAUSE" shall mean any of the following: (1) the Participant's
theft, dishonesty, or falsification of any Participating Company documents or
records; (2) the Participant's repeated failure to report to work during normal
hours, other than for customarily excused absences for personal illness or other
reasonable cause; (3) the Participant's conviction (including any plea of guilty
or nolo contendere) of theft or felony; (4) the Participant's wrongful
disclosure of a Participating Company's trade secrets or other proprietary
information; (5) any other dishonest or intentional action by the Participant
which has a detrimental effect on a Participating Company; or (6) the
Participant's habitual and repeated nonperformance of the Participant's duties.

                           (iv)     OTHER TERMINATION OF SERVICE. If the
Participant's Service terminates for any reason, except death, Disability,
Retirement or termination for Cause, the Option, to the extent unexercised and
exercisable by the Participant on the date on which the Participant's Service
terminated, may be exercised by the Participant within thirty (30) days (or such
longer period of time as determined by the Committee, in its discretion) after
the date on which the Participant's Service terminated, but in any event no
later than the Option Expiration Date.

                  (b)      EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing (except Section 6.5(a)(iii)), if the exercise of
an Option within the applicable time periods set forth in Section 6.5(a) is
prevented by the provisions of Section 11.1 below regarding compliance with
securities laws, the Option shall remain exercisable until thirty (30) days
after the date the Participant is notified by the Company that the Option is
exercisable, but in any event no later than the Option Expiration Date.

                  (c)      EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing (except Section 6.5(a)(iii)), if a sale within the
applicable time periods set forth in Section 6.5(a) of shares acquired upon the
exercise of the Option would subject the Participant to suit under Section 16(b)
of the Exchange Act, the Option shall remain exercisable until the earliest to
occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the Participant would no longer be subject to such suit, (ii) the one
hundred and ninetieth (190th) day after the Participant's termination of
Service, or (iii) the Option Expiration Date.

                                       11


         6.6      TRANSFERABILITY OF OPTIONS. During the lifetime of the
Participant, an Option shall be exercisable only by the Participant or the
Participant's guardian or legal representative. No Option shall be assignable or
transferable by the Participant, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall
be assignable or transferable to the extent permitted by the Committee and set
forth in the Option Agreement evidencing such Option.

                           SECTION 7. RESTRICTED STOCK

         7.1      GRANT OF RESTRICTED STOCK. Subject to the provisions of
Sections 1.3 and 5, Awards of Restricted Stock may be granted to Participants at
any time and from time to time as shall be determined by the Committee,
including, without limitation, upon the attainment of one or more Performance
Goals as described in Section 8.4. If either the grant of Restricted Stock or
the lapsing of the Period of Restriction is to be contingent upon the attainment
of one or more Performance Goals, the Committee shall follow procedures
substantially equivalent to those set forth in Sections 8.3 through 8.5. Shares
of Restricted Stock shall be issued for no consideration other than services
rendered. Each grant of Restricted Stock shall be evidenced by a Restricted
Stock Agreement that shall specify the number of shares of Stock subject to and
the other terms, conditions and restrictions of such Award as the Committee
shall determine. No Restricted Stock Award or purported Restricted Stock Award
shall be a valid and binding obligation of the Company unless evidenced by a
fully executed Restricted Stock Agreement. Restricted Stock Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the terms and conditions set forth in Sections 7.2
through 7.6 below.

         7.2      NONTRANSFERABILITY DURING PERIOD OF RESTRICTION. During such
period beginning on the date of grant of a Restricted Stock Award as may be
established by the Committee (the "PERIOD OF RESTRICTION"), no shares of such
Restricted Stock may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, except by will or the laws or descent and
distribution. The Committee, in its discretion, may provide for the lapse of the
Period of Restriction, in full or in installments, at such time or times, upon
such event or events, or upon satisfaction of such conditions or performance
criteria (including, without limitation, Performance Goals as described in
Section 8.4) as the Committee may establish and set forth in the Restricted
Stock Agreement evidencing the Award. All rights with respect to Restricted
Stock granted to a Participant hereunder shall be exercisable during his or her
lifetime only by such Participant.

         7.3      OTHER RESTRICTIONS. The Committee may impose such other
restrictions on any shares of Restricted Stock granted hereunder as it may deem
advisable, including, without limitation, restrictions under applicable Federal
securities law and under any blue sky or state securities laws applicable to
such shares, and may legend the certificates representing the Restricted Stock
to give appropriate notice of such restrictions.

         7.4      VOTING RIGHTS. During the Period of Restriction, Participants
holding shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those shares.

         7.5      DIVIDENDS AND OTHER DISTRIBUTION. During the Period of
Restriction, Participants holding shares of Restricted Stock granted hereunder
shall be entitled to receive all

                                       12


dividends and other distributions paid with respect to those shares while they
are so held. If any such dividends or distributions are paid in shares of stock,
the shares shall be subject to the same restrictions on transferability pursuant
to Section 7.2 as the shares of Restricted Stock with respect to which they were
paid.

         7.6      EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided by
the Committee in the grant of a Restricted Stock Award and set forth in the
Restricted Stock Agreement, the effect of a Participant's termination of Service
on his or her Restricted Stock Award shall be as follows:

                  (a)      DEATH OR DISABILITY. If the Participant's Service is
terminated by reason of the death or Disability of the Participant during the
Period of Restriction, the restrictions applicable to the shares of Restricted
Stock pursuant to Section 7.2 shall terminate automatically with respect to all
such shares.

                  (b)      OTHER TERMINATION OF SERVICE. If the Participant's
Service terminates during the Period of Restriction for any reason except death
or Disability, any shares of Restricted Stock still subject to restrictions
pursuant to Section 7.2 at the date of such termination shall be forfeited and
automatically reacquired by the Company; provided, however, that, in the event
of an involuntary termination of the Participant's Service, the Committee, in
its sole discretion, may waive the automatic forfeiture of any or all such
shares and/or add such new restrictions to such shares of Restricted Stock as it
deems appropriate.

               SECTION 8. PERFORMANCE SHARES AND PERFORMANCE UNITS

         8.1      GRANT OF PERFORMANCE SHARES OR PERFORMANCE UNITS. Subject to
the provisions of Sections 1.3 and 5, the Committee, at any time and from time
to time, may grant Awards of Performance Shares or Performance Units to such
Participants and in such amounts as it shall determine. Each grant of a
Performance Share or Performance Unit Award shall be evidenced by a Performance
Share Agreement or a Performance Unit Agreement that shall specify the number of
Performance Shares or Performance Units subject thereto, the value of each
Performance Share or Performance Unit, the Performance Goals and Performance
Period applicable to the Award, and the other terms, conditions and restrictions
of the Award as the Committee shall determine. No Performance Share or
Performance Unit Award or purported Award shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Award Agreement.
Performance Share and Performance Unit Agreements may incorporate all or any of
the terms of the Plan by reference and shall comply with and be subject to the
terms and conditions set forth in Sections 8.2 through 8.10 below.

         8.2      VALUE OF PERFORMANCE SHARES AND PERFORMANCE UNITS. Unless
otherwise provided by the Committee in granting an Award, each Performance Share
shall have an initial value equal to the Fair Market Value of a share of Stock
on the effective date of grant of the Performance Share and each Performance
Unit shall have an initial value of one hundred dollars ($100). The ultimate
value of a Performance Share or Performance Unit to the Participant will depend
on the extent to which Performance Goals established by the Committee are
attained within the applicable Performance Period established by the Committee.

                                       13


         8.3      ESTABLISHMENT OF PERFORMANCE GOALS AND PERFORMANCE PERIOD. The
Committee, in its discretion, shall establish the Performance Period applicable
to each Performance Share or Performance Unit Award. Prior to the commencement
of the applicable Performance Period, or such later date as may be permitted
with respect to "performance-based compensation" under Section 162(m), the
Committee shall establish one or more Performance Goals which, when measured at
the end of the Performance Period, shall determine the ultimate value of the
Award to be paid to the Participant. Once established, the Performance Goals
shall not be changed during the Performance Period.

         8.4      MEASUREMENT OF PERFORMANCE GOALS. Performance Goals shall be
established by the Committee on the basis of targets to be attained
("PERFORMANCE TARGETS") with respect one or more measures of business or
financial performance (each, a "PERFORMANCE MEASURE"). Performance Measures
shall have the same meanings as used in the Company's financial statements, or
if such terms are not used in the Company's financial statements, they shall
have the meaning applied pursuant to generally accepted accounting principles,
or as used generally in the Company's industry. Performance Targets may include
a minimum, maximum, target level and intermediate levels of performance, with
the ultimate value of a Performance Share or Performance Unit Award determined
by the level attained. Performance Targets may be absolute or relative to a
standard selected by the Committee. Performance Measures shall be calculated
with respect to the Company and each Parent Corporation and Subsidiary
Corporation consolidated therewith for financial reporting purposes or such
division or other business unit thereof as may be selected by the Committee. For
purposes of the Plan, the Performance Measures applicable to an Award shall be
calculated before the effect of changes in accounting standards, restructuring
charges and similar extraordinary items, determined according to criteria
established by the Committee, occurring after the establishment of the
Performance Goals applicable to an Award. Performance Measures may be one or
more of the following as determined by the Committee: (a) revenue, (b) operating
income, (c) pre-tax profit, (d) net income, (e) gross margin, (f) operating
margin, (g) earnings per share, (h) return on stockholder equity, (i) return on
capital, (j) return on net assets, (k) economic value added and (l) cash flow.

         8.5      DETERMINATION OF VALUE OF PERFORMANCE SHARES AND PERFORMANCE
UNITS. As soon as practicable following the completion of the Performance Period
for each Performance Share and Performance Unit Award, the Committee shall
certify in writing the extent to which the applicable Performance Goals have
been attained and the resulting value of the Award earned by the Participant and
to be paid upon its settlement in accordance with the terms of the Award
Agreement. The Committee shall have no discretion to increase the value of an
Award payable upon its settlement in excess of the amount called for by the
terms of the Award Agreement on the basis of the degree of attainment of the
Performance Goals as certified by the Committee. However, notwithstanding the
attainment of any Performance Goal, if permitted under a Participant's Award
Agreement evidencing a Performance Share or Performance Unit Award, the
Committee shall have the discretion, on the basis of such criteria as may be
established by the Committee, to reduce some or all of the value of an Award
that would otherwise be paid upon its settlement. No such reduction may result
in an increase in the amount payable upon settlement of another Participant's
Award. As soon as practicable following the Committee's certification, the
Company shall notify the Participant of the determination of the Committee.

                                       14


         8.6      DIVIDEND EQUIVALENTS. The Committee may, in its discretion,
provide that any Performance Share shall include a right to Dividend Equivalents
with respect to cash dividends paid on Stock for which the record date is prior
to the date on which the Performance Share is settled or forfeited. Dividend
Equivalents may be paid currently or may be accumulated and paid to the extent
that Performance Shares become nonforfeitable, as determined by the Committee.
Settlement of Dividend Equivalents may be in cash, shares of Stock, or a
combination thereof as determined by the Committee, and may be paid on the same
basis as settlement of the related Performance Share as provided in Section 8.7.
Dividend Equivalents shall not be paid with respect to Performance Units.

         8.7      FORM AND TIMING OF PAYMENT. Payment of the ultimate value of a
Performance Share or Performance Unit Award earned by a Participant as
determined following the completion of the applicable Performance Period
pursuant to Sections 8.5 and 8.6 may be made in cash, shares of Stock, or a
combination thereof as determined by the Committee. Payments in shares of Stock
shall be determined by the Fair Market Value of a share of Stock on the last day
of such Performance Period. Payment may be made in a lump sum or installments as
prescribed by the Committee. If any payment is to be made on a deferred basis,
the Committee may, but shall not be obligated to, provide for the payment of
Dividend Equivalents or interest during the deferral period.

         8.8      RESTRICTIONS APPLICABLE TO PAYMENT IN SHARES. Shares of Stock
issued in payment of any Performance Share or Performance Unit Award may be
fully vested and freely transferable shares or may be shares of Restricted Stock
subject to a Period of Restriction as provided in Section 7.2. Any such shares
of Restricted Stock shall be evidenced by a Restricted Stock Agreement and shall
be subject to the terms and conditions set forth in Sections 7.2 through 7.6
above.

         8.9      EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided by
the Committee in the grant of a Performance Share or Performance Unit Award and
set forth in the Award Agreement, the effect of a Participant's termination of
Service on his or her Performance Share or Performance Unit Award shall be as
follows:

                  (a)      DEATH, DISABILITY OR RETIREMENT. If the Participant's
Service is terminated by reason of the death, Disability or Retirement of the
Participant while he or she is the holder of a Performance Share or Performance
Unit Award but before the completion of the applicable Performance Period, the
value of the Participant's Award shall be determined by the extent to which the
applicable Performance Goals have been attained with respect to the entire
Performance Period and shall be prorated based on the number of months of the
Participant's Service during the Performance Period. Payment shall be made
following the end of the Performance Period in any manner permitted by Section
8.7.

                  (b)      OTHER TERMINATION OF SERVICE. If the Participant's
Service terminates for any reason except death, Disability or Retirement before
the completion of the Performance Period applicable to a Performance Share or
Performance Unit Award held by such Participant, such Award shall be forfeited
in its entirety; provided, however, that in the event of an involuntary
termination of the Participant's Service, the Committee, in its sole discretion,
may waive the automatic forfeiture of all or any portion of any such Award and
provide for payment

                                       15


of such Award or portion thereof on the same basis as if the Participant's
Service had terminated by reason of Retirement.

         8.10     NONTRANSFERABILITY. No Performance Shares or Performance Units
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and distribution
until the termination of the applicable Performance Period. All rights with
respect to Performance Shares and Performance Units granted to a Participant
hereunder shall be exercisable during his or her lifetime only by such
Participant.

                         SECTION 9. DIRECTOR FEE AWARDS

         9.1      EFFECTIVE DATE AND DURATION OF THIS SECTION. This Section 9
shall become effective on the first day (the "SECTION 9 EFFECTIVE DATE") of the
first calendar quarter beginning after the Effective Date, provided that
elections pursuant to Section 9.2 may be made prior to the Section 9 Effective
Date. This Section 9 shall continue in effect for the remainder of the calendar
year commencing on the Section 9 Effective Date (the "INITIAL PLAN YEAR") and
for each subsequent calendar year commencing during the term (as provided in
Section 1.3) of the Plan (a "PLAN YEAR"). Notwithstanding any Participant's
prior election pursuant to Section 9.2, no Director Fee Award shall be granted
after termination of the Plan, and all Director Fees (as defined below) with
respect to which Director Fee Awards have not been granted prior to termination
of the Plan shall thereafter be paid in cash in accordance with the Company's
normal Director Fee payment procedures. However, subject to compliance with
applicable law as provided in Section 11, all Director Fee Awards granted prior
to termination of the Plan shall continue to be governed by and may be exercised
or settled in accordance with the terms of the Plan and the Award Agreement
evidencing such Director Fee Award.

         9.2      MANDATORY AND ELECTIVE DIRECTOR FEE AWARDS. Except as
otherwise provided below, each Nonemployee Director shall be granted one or more
Director Fee Awards in lieu of payment in cash of fifty percent (50%) of such
Participant's annual retainer fee, meeting fees and other compensation payable
with respect to such Participant's service as a Director ("DIRECTOR FEES")
during the Initial Plan Year and each subsequent Plan Year (or the portion of
such Plan Year following an individual's initial appointment or election as a
Nonemployee Director). In addition, each Participant may elect to receive
Director Fee Awards in lieu of payment in cash of all or any portion of the
remaining fifty percent (50%) of such Participant's Director Fees for the
Initial Plan Year and each subsequent Plan Year or applicable portion thereof.
For the Initial Plan Year and each subsequent Plan Year or applicable portion
thereof, a Participant shall be entitled to elect one of the following
alternative forms of payment of the value of the Participant's Director Fees:

                  (a)      OPTION PAYMENT. A minimum of fifty percent (50%),
together with such additional portion, if any, elected by the Participant up to
a maximum of one hundred percent (100%), of the Participant's Director Fees will
be paid in the form of a Nonemployee Director Option (an "OPTION PAYMENT") and
the balance will be paid in cash in accordance with the Company's normal
Director Fee payment procedures.

                  (b)      STOCK UNITS PAYMENT. A minimum of fifty percent
(50%), together with such additional portion, if any, elected by the Participant
up to a maximum of one hundred

                                       16


percent (100%), of the Participant's Director Fees will be paid in the form of
Stock Units (a "STOCK UNITS PAYMENT") and the balance will be paid in cash in
accordance with the Company's normal Director Fee payment procedures. In
connection with an election to receive a Stock Units Payment, the Participant
may elect an "Early Settlement Date" (as defined below) upon which the Stock
Units will be settled in accordance with Section 9.6(d); provided, however, that
upon termination of the Participant's Service as a Director prior to the Early
Settlement Date, settlement shall be made as provided in Section 9.6(d). Any
"EARLY SETTLEMENT DATE" elected by the Participant shall become irrevocable as
provided in Section 9.3(b) and shall be December 1 of the third Plan Year
following the Plan Year of the Stock Units Payment or December 1 of any
subsequent Plan Year.

         9.3      TIME AND MANNER OF ELECTION.

                  (a)      TIME OF ELECTION. Each Nonemployee Director shall
make an election pursuant to Section 9.2:

                           (i)      for the Initial Plan Year: prior to the
earlier of (1) the date thirty (30) days following the Effective Date or (2) the
Section 9 Effective Date;

                           (ii)     for each subsequent Plan Year: prior to the
first day of such Plan Year; and

                           (iii)    in the case of a newly appointed or elected
Nonemployee Director: on the date of such appointment or election for the
remainder of the Initial Plan Year or subsequent Plan Year of appointment or
election, as the case may be.

                  (b)      ELECTION IRREVOCABLE. An election pursuant to Section
9.2 shall become irrevocable as of the commencement of the Plan Year or portion
thereof to which it applies.

                  (c)      FAILURE TO TIMELY ELECT. Any Nonemployee Director who
fails to make an election in accordance with this Section for any Plan Year (or
the Initial Plan Year, as the case may be) shall be deemed to have elected
pursuant to Section 9.2 to receive Option Payments for fifty (50%) of the value
of such Participant's Director Fees earned during such Plan Year (or Initial
Plan Year) and to receive the balance of such Participant's Director Fees in
cash in accordance with the Company's normal Director Fee payment procedures.

                  (d)      MANNER OF ELECTION. Each election in accordance with
this Section shall be made on a form prescribed by the Company for this purpose
and filed with the Chief Financial Officer of the Company.

         9.4      AUTOMATIC GRANT OF DIRECTOR FEE AWARDS. Subject to the
provisions of Sections 1.3 and 5, effective as of the last day of each quarter
during any Plan Year (or the Initial Plan Year, as the case may be), each
Nonemployee Director shall be granted automatically and without further action
of the Committee a Director Fee Award in lieu of that portion of the Director
Fees earned by the Participant during such quarter and specified by the
Participant's election under Section 9.2 for such Plan Year (or Initial Plan
Year) and any fractional share amount carried over from the prior quarter as
provided in Section 9.7 (the "QUARTERLY DIRECTOR FEES"). In accordance with the
Participant's election under Section 9.2 for the Plan Year (or

                                       17


Initial Plan Year), the Director Fee Award shall be either in the form of an
Option Payment pursuant to Section 9.5 or a Stock Units Payment pursuant to
Section 9.6.

         9.5      OPTION PAYMENT. Each Option Payment shall be in the form of a
Nonemployee Director Option and shall be evidenced by a Nonemployee Director
Option Agreement that shall specify the exercise price, the duration of the
Nonemployee Director Option, the number of shares of Stock to which the
Nonemployee Director Option pertains, and such other provisions as the Committee
shall determine. No such Nonemployee Director Option or purported Nonemployee
Director Option shall be a valid and binding obligation of the Company unless
evidenced by a fully executed Nonemployee Director Option Agreement. Nonemployee
Director Option Agreements may incorporate all or any of the terms of the Plan
by reference and shall comply with and be subject to the terms and conditions of
Section 6 to the extent not inconsistent with this Section and the terms and
conditions set forth in Sections 9.5(a) through 9.5(d) below:

                  (a)      EXERCISE PRICE. The exercise price per share for each
Nonemployee Director Option shall be fifty percent (50%) of the average of the
Fair Market Values of a share of Stock for the ten (10) trading days preceding
the effective date of grant of the Nonemployee Director Option.

                  (b)      NUMBER OF SHARES SUBJECT TO NONEMPLOYEE DIRECTOR
OPTION. The number of shares of Stock subject to a Nonemployee Director Option
shall be determined by the following formula (with any resulting fractional
share being disregarded):

                                    X = A / (B x 50%)

                           where,

                                    X is the number of shares subject to the
                                    Nonemployee Director Option;

                                    A is the amount of Quarterly Director Fees
                                    in lieu of which the Option Payment is made;
                                    and

                                    B is the average of the Fair Market Values
                                    of a share of Stock for the ten (10) trading
                                    days preceding the effective date of grant
                                    of the Nonemployee Director Option.

                  (c)      EXERCISE PERIOD. Each Nonemployee Director Option
shall be vested and exercisable on and after the date of grant of the
Nonemployee Director Option and shall terminate and cease to be exercisable on
the date ten (10) years after the date of grant of the Nonemployee Director
Option, unless earlier terminated pursuant to the terms of the Plan or the
Nonemployee Director Option Agreement.

                  (d)      EFFECT OF TERMINATION OF SERVICE.

                           (i)      NONEMPLOYEE DIRECTOR OPTION GRANT. No
Participant shall be granted a Nonemployee Director Option following the date on
which such

                                       18


Participant's Service as a Director terminates for any reason. All of such
Participant's Director Fees with respect to which Director Fee Awards have not
been granted prior to the Participant's termination of Service as a Director
shall be paid in cash in accordance with the Company's normal Director Fee
payment procedures.

                           (ii)     NONEMPLOYEE DIRECTOR OPTION EXERCISABILITY.
Subject to earlier termination as otherwise provided herein, a Nonemployee
Director Option shall remain exercisable after a Participant's termination of
Service at any time prior to the expiration of thirty-six (36) months after the
date on which the Participant's Service terminated, but in any event no later
than the Option Expiration Date.

                           (iii)    EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of a Nonemployee Director Option
within the applicable time period set forth in Section 9.5(d)(ii) is prevented
by the provisions of Section 11.1 below, the Nonemployee Director Option shall
remain exercisable until thirty (30) days after the date the Participant is
notified by the Company that the Nonemployee Director Option is exercisable, but
in any event no later than the Option Expiration Date.

                           (iv)     EXTENSION IF PARTICIPANT SUBJECT TO SECTION
16(b). Notwithstanding the foregoing, if a sale within the applicable time
period set forth in Section 9.5(d)(ii) of shares acquired upon the exercise of
the Nonemployee Director Option would subject the Participant to suit under
Section 16(b) of the Exchange Act, the Option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which a sale
of such shares by the Participant would no longer be subject to such suit, (ii)
the one hundred and ninetieth (190th) day after the Participant's termination of
Service, or (iii) the Option Expiration Date.

         9.6      STOCK UNITS PAYMENT. Each Stock Units Payment shall be
evidenced by a Stock Units Agreement that shall specify the number of Stock
Units to which such agreement pertains, the form and time of settlement of such
Stock Units and such other provisions as the Committee shall determine. No such
Stock Units Award or purported Stock Units Award shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Stock Units
Agreement. Stock Units Agreements may incorporate all or any of the terms of the
Plan by reference and shall comply with and be subject to the terms and
conditions set forth in Sections 9.6(a) through 9.6(f) below:

                  (a)      PAYMENT. No additional cash consideration shall be
required upon settlement of a Stock Units Award.

                  (b)      NUMBER OF STOCK UNITS SUBJECT TO STOCK UNITS AWARD.
The number of Stock Units subject to a Stock Units Award shall be determined by
the following formula (with any resulting fractional Stock Unit being
disregarded):

                                    X = A / B

                           where,

                                       19


                                    X is the number of Stock Units subject to
                                    the Stock Units Award;

                                    A is the amount of Quarterly Director Fees
                                    in lieu of which the Stock Units Payment is
                                    made; and

                                    B is the average of the Fair Market Values
                                    of a share of Stock for the ten (10) trading
                                    days preceding the effective date of grant
                                    of the Stock Units Award.

                  (c)      VOTING AND DIVIDEND EQUIVALENT RIGHTS. Participants
shall have no voting rights with respect to shares of Stock represented by Stock
Units until the date of the issuance of a certificate for such shares (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company). Prior to settlement of a Stock Units
Award, such Award shall include the right to Dividend Equivalents, pursuant to
which the Participant shall be credited with additional whole and/or fractional
Stock Units as of the record date of any payment of cash dividends with respect
to the Stock occurring prior to such settlement date. Such additional Stock
Units shall be subject to the same terms and conditions and shall be settled in
the same manner and at the same time as the Stock Units originally subject to
the Stock Units Award. The number of such whole and/or fractional Stock Units to
be credited with respect to any Stock Units Award on the record date of any cash
dividend paid on the Stock shall be determined by the following formula:

                                    X = (A x B) / C

                           where,

                                    X is the number of whole and/or fractional
                                    Stock Units to be credited with respect to
                                    the Stock Units Award;

                                    A is the amount of cash dividends paid on
                                    one share of Stock;

                                    B is the number of whole and fractional
                                    Stock Units subject to the Stock Units Award
                                    as of the cash dividend record date; and

                                    C is the Fair Market Value of a share of
                                    Stock on the cash dividend record date.

                  (d)      SETTLEMENT OF STOCK UNITS. Subject to the provisions
of Section 11.1 below, the Company shall issue to the Participant, within thirty
(30) days following the earlier of (i) the Early Settlement Date elected by the
Participant with respect to the Stock Units Award or (ii) the date of
termination of the Participant's Service as a Director, a number of whole shares
of Stock equal to the number of whole Stock Units subject to the Stock Units
Award. Such shares of Stock shall not be subject to any restriction on transfer
other than any such restriction as may be required pursuant to Section 11.1 or
any applicable law, rule or regulation. On the same settlement date, the Company
shall pay to the Participant cash in lieu of any fractional Stock Unit subject
to the Stock Units Award in an amount equal to the Fair Market Value on the
settlement date of such fractional share of Stock.

                                       20


                  (e)      EFFECT OF TERMINATION OF SERVICE. No Participant
shall be granted a Stock Units Award following the date on which such
Participant's Service as a Director terminates for any reason. All of such
Participant's Director Fees with respect to which Director Fee Awards have not
been granted prior to the Participant's termination of Service as a Director
shall be paid in cash in accordance with the Company's normal Director Fee
payment procedures.

                  (f)      NONTRANSFERABILITY OF STOCK UNITS. Prior to their
settlement pursuant to Section 9.6(d), no Stock Units granted to a Participant
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or garnishment by creditors of the Participant
or the Participant's beneficiary, except by will or by the laws of descent and
distribution.

         9.7      FRACTIONAL SHARES. No fractional shares of Stock shall be
issued upon the exercise of any Nonemployee Director Option or settlement of any
Stock Units. Any portion of a Participant's Quarterly Director Fees subject to
the Participant's election under Section 9.2 representing a fractional share
amount that would otherwise be paid in the form of an Option Payment or a Stock
Units Payment shall instead be carried over and combined with the Quarterly
Director Fees for the following quarter of the Plan Year (or Initial Plan year,
as the case may be) or the subsequent Plan Year. Any such fractional share
amount remaining upon termination of a Participant's Service as a Director shall
be paid to the Participant in cash, without interest.

                          SECTION 10. CHANGE IN CONTROL

         10.1     EFFECT OF CHANGE IN CONTROL. In the event of a Change in
Control of the Company as defined in Section 10.3 below, the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be (the "ACQUIRING CORPORATION"), shall either assume all
outstanding Awards or substitute new Awards having an equivalent value for such
outstanding Awards. In the event the Acquiring Corporation elects not to assume
or substitute for such outstanding Awards, and provided that the Participant's
Service has not terminated prior to the effective date of the Change in Control
(unless, with respect to Performance Shares or Performance Units, the
Participant's Service terminated by reason of the death, Disability or
Retirement of the Participant), all unexercisable, unvested or unpaid portions
of such outstanding Awards shall become immediately exercisable, immediately
payable and vested in full immediately prior to the effective date of the Change
in Control. For purposes of the preceding sentence:

                  (a)      the value of Performance Shares and Performance Units
shall be determined and paid based upon the greater of (i) the extent to which
the applicable Performance Goals have been attained during the Performance
Period up to the effective date of the Change in Control or (ii) the
pre-established 100% of target level with respect to each Performance Target
comprising the applicable Performance Goals;

                  (b)      any outstanding Stock Units Award not assumed or
substituted for by the Acquiring Corporation shall be settled in accordance with
Section 9.6(d) immediately prior to the effective date of the Change in Control;
and

                                       21


                  (c)      any Director Fees with respect to which the Company
has not made either an Option Payment or a Stock Units Payment pursuant to
Section 9 prior to the effective date of the Change in Control shall be paid in
cash immediately prior to such effective date.

Any Options which are neither assumed or substituted for by the Acquiring
Corporation nor exercised as of the date of the Change in Control shall
terminate as of the effective date of the Change in Control.

         10.2     TERMINATION OF SERVICE AFTER A CHANGE IN CONTROL. The
Committee may, in its discretion, provide in any Award Agreement that if the
Participant's Service is terminated within twelve (12) months (or such other
period specified by the Committee) following a Change in Control by reason of
(a) the involuntary termination by the Participating Company Group of the
Participant's Service for any reason other than "Cause" (as such term is defined
in the Award Agreement) or the Participant's death or Disability, or (b) the
Participant's resignation for "Good Reason" (as such term is defined in the
Award Agreement) from all capacities in which the Participant is then rendering
Service to the Participating Company Group, then (i) the exercisability, vesting
and payment of the outstanding Award held by such Participant shall be
accelerated effective as of the date on which the Participant's Service
terminated to such extent, if any, as shall have been specified by the Committee
and set forth in the Award Agreement, and (ii) the outstanding Option held by
such Participant, to the extent unexercised and exercisable on the date on which
the Participant's Service terminated, may be exercised by the Participant (or
the Participant's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such other period of time specified by the
Committee) after the date on which the Participant's Service terminated, but in
any event no later than the Option Expiration Date.

         10.3     DEFINITION. A "CHANGE IN CONTROL" shall be deemed to have
occurred in the event of:

                  (a)      an acquisition, consolidation, or merger of the
Company with or into any other corporation or corporations, unless the
stockholders of the Company retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the surviving or acquiring
corporation or corporations; or

                  (b)      the sale, exchange, or transfer of all or
substantially all of the assets of the Company to a transferee other than a
corporation or partnership controlled by the Company or the stockholders of the
Company; or

                  (c)      a transaction or series of related transactions in
which stock of the Company representing more than thirty percent (30%) of the
outstanding voting power of the Company is sold, exchanged, or transferred to
any single person or affiliated persons leading to a change of a majority of the
members of the Board.

         The Board shall have final authority to determine whether multiple
transactions are related and the exact date on which a Change in Control has
been deemed to have occurred under subsections (a), (b), and (c) above.

                                       22


                         SECTION 11. REQUIREMENTS OF LAW

         11.1     COMPLIANCE WITH SECURITIES LAW. The granting of Awards and the
issuance of shares of Stock pursuant to any Award shall be subject to compliance
with all applicable laws, rules, and regulations, and to such approvals by any
governmental agencies, securities exchanges or market systems as may be
required. In addition, no Option may be exercised unless (a) a registration
statement under the Securities Act shall at the time of exercise of the Option
be in effect with respect to the shares issuable upon exercise of the Option or
(b) in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the issuance of any Stock, the Company may require the Participant
to satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.

         11.2     GOVERNING LAW. The Plan, and all agreements hereunder, shall
be construed in accordance with and governed by the laws of the State of
California.

                           SECTION 12. TAX WITHHOLDING

         12.1     TAX WITHHOLDING IN GENERAL. The Company shall have the power
to withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy the Federal, state, local and foreign tax withholding
obligations, if any, of any Participating Company with respect to any Award. The
Company shall have no obligation to deliver shares of Stock or make any payment
of cash under the Plan until such tax withholding obligations have been
satisfied.

         12.2     WITHHOLDING OF SHARES. To the extent permissible under
applicable tax, securities, and other laws, the Company may, in its sole
discretion, permit a Participant to satisfy all or a part of his or her tax
withholding requirement by directing the Company to apply shares of Stock to
which the Participant is entitled as a result of the exercise of an Option or
the lapse of a Period of Restriction with respect to a Restricted Stock Award
(including, for this purpose, the filing of an election under section 83(b) of
the Code), or which would otherwise be issued to the Participant pursuant to an
Award, to satisfy such requirement. Shares of Stock so applied shall be valued
at their Fair Market Value on the date when the taxes otherwise would be
withheld in cash.

                  SECTION 13. AMENDMENT AND TERMINATION OF PLAN

         13.1     AMENDMENT AND TERMINATION OF PLAN. The Committee at any time
may terminate, and from time to time, may amend, the Plan; provided, however,
that no such amendment may be made without approval of the stockholders of the
Company to the extent that the Committee deems such stockholder approval to be
necessary or advisable for compliance with applicable tax and securities laws or
other regulatory requirements, including the requirements of any stock exchange
or market system on which the Stock is then listed.

                                       23


         13.2     EFFECT OF AMENDMENT OR TERMINATION. No termination or
amendment of the Plan shall affect any then outstanding Award unless expressly
provided by the Committee. In any event, no termination or amendment of the Plan
shall in any manner adversely affect any Award theretofore granted under the
Plan, without the consent of the Participant, unless such termination or
amendment is necessary to comply with any applicable law, regulation or rule.

                      SECTION 14. MISCELLANEOUS PROVISIONS

         14.1     BENEFICIARY DESIGNATION. Each Participant may name, from time
to time, any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of such
Participant's death before he or she receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Company, and will be effective only when filed by
the Participant in writing with the Company during the Participant's lifetime.
In the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to his or her estate.

         14.2     RIGHTS AS AN EMPLOYEE OR DIRECTOR. No individual, even though
eligible pursuant to Section 3, shall have a right to be selected as a
Participant, or, having been so selected, to be selected again as a Participant.
Nothing in the Plan or any Award granted under the Plan shall confer on any
Participant a right to remain an Employee or Director, or interfere with or
limit in any way the right of a Participating Company to terminate the
Participant's Service at any time.

         14.3     RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as
a stockholder with respect to any shares covered by an Award until the date of
the issuance of a certificate for such shares (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company). No adjustment shall be made for dividends, distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 5.3 or another provision of the Plan.

         14.4     PROVISION OF INFORMATION. Each Participant shall be given
access to information concerning the Company equivalent to that information
generally made available to the Company's common stockholders.

         14.5     UNFUNDED OBLIGATION. Any amounts payable to Participants
pursuant to the Plan shall be unfunded obligations for all purposes, including,
without limitation, Title I of the Employee Retirement Income Security Act of
1974. No Participating Company shall be required to segregate any monies from
its general funds, or to create any trusts, or establish any special accounts
with respect to such obligations. The Company shall retain at all times
beneficial ownership of any investments, including trust investments, which the
Company may make to fulfill its payment obligations hereunder. Any investments
or the creation or maintenance of any trust or any Participant account shall not
create or constitute a trust or fiduciary relationship between the Committee or
any Participating Company and a Participant, or otherwise create any vested or
beneficial interest in any Participant or the Participant's creditors in any
assets of any Participating Company. The Participants shall have no claim
against any Participating Company

                                       24


for any changes in the value of any assets which may be invested or reinvested
by the Company with respect to the Plan.

         14.6     INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Committee or officers or
employees of the Participating Company Group, members of the Committee and any
officers or employees of the Participating Company Group to whom authority to
act for the Committee or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.

         IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the Granite Construction Incorporated 1999 Equity
Incentive Plan as duly adopted by the Board on March 17, 1999 and amended
through September 25, 2003.

                                             GRANITE CONSTRUCTION INCORPORATED

                                                     /s/ Michael Futch
                                             ---------------------------------
                                             Michael Futch, Secretary

                                       25

EX-31.1

                                                                    Exhibit 31.1

                      CERTIFICATION PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, David H. Watts, Chief Executive Officer, certify that:

      1.    I have reviewed this report on Form 10-Q of Granite Construction
      Incorporated;

      2.    Based on my knowledge, this 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 report;

      3.    Based on my knowledge, the financial statements, and other financial
      information included in this 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 report;

      4.    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-15(e) and 15d-15(e)) for the registrant
      and have:

            a)    Designed such disclosure controls and procedures, or caused
            such disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

            b)    Evaluated the effectiveness of the registrant's disclosure
            controls and procedures and presented in this report our conclusions
            about the effectiveness of the disclosure controls and procedures,
            as of the end of the period covered by this report based on such
            evaluation; and

            c)    Disclosed in this report any change in the registrant's
            internal control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

      5.    The registrant's other certifying officer and I have disclosed,
      based on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      function):



            a)    All significant deficiencies and material weaknesses in the
            design or operation of internal control over financial reporting
            which are reasonably likely to adversely affect the registrant's
            ability to record, process, summarize and report financial
            information; 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 over financial reporting.

Dated: November 14, 2003                         /s/ David H. Watts
                                            ------------------------------------
                                            David H. Watts
                                            Chairman and Chief Executive Officer

EX-31.2

                                                                    Exhibit 31.2

                      CERTIFICATION PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, William E. Barton, Senior Vice President and Chief Financial Officer, certify
that:

      1.    I have reviewed this report on Form 10-Q of Granite Construction
      Incorporated;

      2.    Based on my knowledge, this 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 report;

      3.    Based on my knowledge, the financial statements, and other financial
      information included in this 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 report;

      4.    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-15(e) and 15d-15(e)) for the registrant
      and have:

            a)    Designed such disclosure controls and procedures, or caused
            such disclosure controls and procedures to be designed under our
            supervision, 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 report is being prepared;

            b)    Evaluated the effectiveness of the registrant's disclosure
            controls and procedures and presented in this report our conclusions
            about the effectiveness of the disclosure controls and procedures,
            as of the end of the period covered by this report based on such
            evaluation; and

            c)    Disclosed in this report any change in the registrant's
            internal control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

      5.    The registrant's other certifying officer and I have disclosed,
      based on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      function):



            a)    All significant deficiencies and material weaknesses in the
            design or operation of internal control over financial reporting
            which are reasonably likely to adversely affect the registrant's
            ability to record, process, summarize and report financial
            information; 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 over financial reporting.

Dated: November 14, 2003                               /s/ William E. Barton
                                                   ----------------------------
                                                   William E. Barton
                                                   Senior Vice President
                                                   and Chief Financial Officer

EX-32.1

                                                                    Exhibit 32.1

                      CERTIFICATION PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Granite Construction Incorporated (the "Company") does
hereby certify to such officer's knowledge that:

         The Quarterly Report on Form 10-Q for the quarter ended September 30,
2003 of the Company fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and information contained in the
Form 10-Q fairly presents in all material respects the financial condition and
results of operations of the Company.

Dated: November 14, 2003                          /s/ David H. Watts
                                            ----------------------------------
                                            David H. Watts
                                            Chairman and Chief Executive Officer

EX-32.2

                                                                    Exhibit 32.2

                      CERTIFICATION PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Granite Construction Incorporated (the "Company") does
hereby certify to such officer's knowledge that:

         The Quarterly Report on Form 10-Q for the quarter ended September 30,
2003 of the Company fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and information contained in the
Form 10-Q fairly presents in all material respects the financial condition and
results of operations of the Company.

Dated: November 14, 2003                          /s/ William E. Barton
                                            ----------------------------------
                                            William E. Barton
                                            Senior Vice President
                                            and Chief Financial Officer