form10q.htm

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 quarterly period ended: June 30, 2008 Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___ to ___
Commission file number 1-31993
STERLING CONSTRUCTION COMPANY, INC. (Exact name of registrant as specified in its charter)
DELAWARE	25-1655321
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

20810 Fernbush Lane Houston, Texas	77073
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (281) 821-9091

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [√] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [√] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [√] No
At August 1, 2008, there were 13,117,748 shares outstanding of the issuer’s common stock, par value $0.01 per share

STERLING CONSTRUCTION COMPANY, INC.

Quarterly Report on Form 10-Q for the period ended June 30, 2008

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PART I. FINANCIAL INFORMATION	3

ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS	3

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK	22

ITEM 4. CONTROLS AND PROCEDURES	22

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES	22
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING	23
INHERENT LIMITATIONS OF EFFECTIVENESS OF CONTROLS	23

PART II – OTHER INFORMATION	23

ITEM 6. EXHIBITS	23

SIGNATURES	24

PART I

Item 1 Condensed Consolidated Unaudited Financial Statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

(Unaudited)

	June 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	85,197		$	80,649
Short-term investments		--			54
Contracts receivable, including retainage		63,617			54,394
Costs and estimated earnings in excess of billings on uncompletedcontracts		5,904			3,747
Inventories		1,147			1,239
Deferred tax asset, net		1,088			1,088
Deposits and other current assets		1,392			1,779
Total current assets		158,345			142,950
Property and equipment, net		76,245			72,389
Goodwill		57,232			57,232
Other assets, net		1,795			1,944
Total assets	$	293,617		$	274,515
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	30,739		$	27,190
Billings in excess of costs and estimated earnings on uncompleted contracts		33,349			25,349
Current maturities of long term obligations		73			98
Income taxes payable		1,246			1,102
Other accrued expenses		7,720			7,148
Total current liabilities		73,127			60,887
Long-term liabilities:
Long-term debt, net of current maturities		60,519			65,556
Deferred tax liability, net		5,593			3,098
Minority interest in subsidiary		7,063			6,362
		146,302			75,016
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized 1,000,000shares, none issued		--			--
Common stock, par value $0.01 per share; authorized 19,000,000shares, 13,117,748 and 13,006,502 shares issued		131			130
Additional paid-in capital		148,231			147,786
Accumulated deficit		(1,047	)		(9,304	)
Total stockholders’ equity		147,315			138,612
Total liabilities and stockholders’ equity	$	293,617		$	274,515

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share data)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007

Revenues	$	106,728		$	71,275		$	191,654		$	140,163
Cost of revenues		94,988			63,229			171,813			126,485
Gross profit		11,740			8,046			19,841			13,678
General and administrative expenses		(3,442	)		(2,876	)		(6,889	)		(5,476	)
Other income (expense)		(91	)		108			(102	)		416
Operating income		8,207			5,278			12,850			8,618
Interest income		223			475			510			941
Interest expense		(152	)		(42	)		(282	)		(42	)
Income before income taxes and minority interest		8,278			5,711			13,078			9,517
Income tax expense		(2,781	)		(1,914	)		(4,372	)		(3,209	)
Minority interest in earnings ofsubsidiary		(357	)		--			(449	)		--

Net income	$	5,140		$	3,797		$	8,257		$	6,308

Net income per share:
Basic	$	0.39		$	0.35		$	0.63		$	0.58
Diluted	$	0.37		$	0.32		$	0.60		$	0.54

Weighted average number of common shares outstanding used in computing per share amounts:
Basic		13,110,500			10,969,513			13,089,682			10,944,654
Diluted		13,783,307			11,783,284			13,695,000			11,768,881

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance at January 1, 2008		13,007	$	130	$	147,786		$	(9,304	)	$	138,612

Net income		--		--		--			8,257			8,257

Stock issued upon option exercises		90		1		122			--			123

Excess tax benefits from exercise of stock options		--		--		233			--			233

Issuance and amortization of restricted stock		21		0		125			--			125

Stock-based compensation expense		--		--		108			--			108

Expenditures related to 2007 equity offering		--		--		(143	)		--			(143	)

Balance at June 30, 2008		13,118	$	131	$	148,231		$	(1,047	)	$	147,315

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six months ended June 30,
	2008			2007
Net income	$	8,257		$	6,308
Adjustments to reconcile income from operations to
net cash provided by operating activities:
Depreciation and amortization		6,552			4,661
Loss (gain) on sale of property and equipment		102			(377	)
Deferred tax expense		2,495			3,078
Stock-based compensation expense		233			858
Excess tax benefits from exercise of stock options		(233	)		--
Interest expense accreted on minority interest		252			--
Minority interest in net earnings of subsidiary		449			--
Other changes in operating assets and liabilities:
Increase in contracts receivable		(9,222	)		(8,011	)
Increase in costs and estimated earnings
in excess of billings on uncompleted contracts		(2,157	)		(3,404	)
(Increase) decrease in other current assets		380			(418	)
Increase in accounts payable		3,549			6,700
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts		8,001			3,260
Increase (decrease) in other accrued expenses		949			(1,486	)
Net cash provided by operating activities		19,607			11,169
Cash flows from investing activities:
Additions to property and equipment		(11,056	)		(16,634	)
Proceeds from sale of property and equipment		671			865
Purchases of short-term securities, available for sale		--			(49,512	)
Sales of short-term securities, available for sale		54			45,975
Net cash used in investing activities		(10,331	)		(19,306	)
Cash flows from financing activities:
Cumulative daily drawdowns – Credit Facility		120,000			25,000
Cumulative daily reductions – Credit Facility		(125,062	)		(30,062	)
Payments received on note receivable		121			154
Excess tax benefits from exercise of stock options		233			--
Issuance of common stock pursuant to the exercise of options		123			175
Expenditures related to 2007 equity offering		(143	)		--
Net cash used by financing activities		(4,728	)		(4,733	)
Net increase (decrease) in cash and cash equivalents		4,548			(12,870	)

Cash and cash equivalents at beginning of period		80,649			28,466
Cash and cash equivalents at end of period	$	85,197		$	15,596
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	97		$	44
Cash paid during the period for taxes	$	1,500		$	90

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

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STERLING CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

1. Basis of Presentation

Sterling Construction Company, Inc. (“Sterling” or “the Company”) is a leading heavy civil construction company that specializes in the building, reconstruction and repair of transportation and water infrastructure in large and growing markets in Texas and Nevada. Our transportation infrastructure projects include highways, roads, bridges and light rail, and our water infrastructure projects include water, wastewater and storm drainage systems. We provide general contracting services primarily to public sector clients utilizing our own employees and equipment for activities including excavating, paving, pipe installation, and asphalt and concrete placement. We purchase the necessary materials for our contracts, perform approximately three-quarters of the work required by our contracts with our own crews, and generally engage subcontractors only for ancillary services.

Although we describe our business in this report in terms of the services we provide, our base of customers and the geographic areas in which we operate, we have concluded that our operations comprise one reportable segment, heavy civil construction, pursuant to Statement of Financial Accounting Standards No. 131 – "Disclosures about Segments of an Enterprise and Related Information." In making this determination, we considered that each project has similar characteristics, includes similar services, has similar types of customers and is subject to the same regulatory environment. We organize, evaluate and manage our financial information around each project when making operating decisions and assessing our overall performance.

The condensed consolidated financial statements included herein have been prepared by Sterling, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2008 and the results of operations and cash flows for the periods presented. Certain information and note disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. Interim results may be subject to significant seasonal variations and the results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

The accompanying condensed consolidated financial statements include the accounts of subsidiaries in which the Company has a greater than 50% ownership interest, and all intercompany balances and transactions have been eliminated in consolidation. For all periods presented, the Company had no subsidiaries with ownership interests less than 50%.

Certain insignificant reclassifications of prior year amounts have been made to conform to current year presentation.

2. Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates.

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On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to:

●	revenue recognition
●	contracts and retainage receivables
●	inventories
●	impairment of long-term assets
●	income taxes
●	self-insurance; and
●	stock-based compensation

The Company’s significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. There have been no material changes to such significant accounting policies.

3. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) revised Statement of Accounting Standards No. 141, “Business Combinations” (SFAS 141(R)). This Statement establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Also, under SFAS 141(R), all direct costs of the business combination must be charged to expense on the financial statements of the acquirer at the time of acquisition. SFAS 141(R) revises previous guidance as to the recording of post-combination restructuring plan costs by requiring the acquirer to record such costs separately from the business combination. This statement is effective for acquisitions occurring on or after January 1, 2009, with early adoption not permitted. Unless the Company enters into another business combination, there will be no effect on future financial statements of SFAS 141(R) when adopted.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) which establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement which was effective for financial statements issued after November 15, 2007, applies whenever other statements require or permit assets or liabilities to be measured at fair value, and does not expand the use of fair value accounting in any new circumstances. In February 2008, the FASB delayed the effective date by which companies must adopt certain provisions of SFAS 157 related to non-financial assets and liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment to FASB Statement No. 115 (“SFAS No. 159”). This statement allows a company to irrevocably elect fair value as a measurement attribute for certain financial assets and financial liabilities with changes in fair value recognized in the results of operations. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. While the Company is required by other generally accepted accounting principles to measure certain assets and liabilities at fair value, it has elected not to apply the provisions of SFAS No. 159.

In December 2007, the FASB issued Statement of Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 clarifies previous guidance on how consolidated entities should account for and report non-controlling interests in consolidated subsidiaries. The statement standardizes the presentation of non-controlling ("minority interests") for both the consolidated balance sheet and income statement. This Statement is effective for fiscal years beginning on or after January 1, 2009, and all interim periods within that fiscal year, with early adoption not permitted. While the Company is currently assessing the impact of this SFAS on its financial statements, it believes that when this Statement is adopted, the Minority Interest in RHB and any similar subsequent acquisitions will be retrospectively reported as a separate component of stockholders equity instead of a liability and net income will be segregated between net income attributable to common stock-holders and non-controlling interests.

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4. Cash and Cash Equivalents and Short-term Investments:

The Company considers all highly liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents. Included in cash and cash equivalents at June 30, 2008 and December 31, 2007 are uninsured temporary cash investments of $84.9 million and $21.9 million, respectively, in money market funds stated at fair value. Additionally, the Company maintains cash in bank deposit accounts that at times, including June 30, 2008, may exceed federally insured limits.

The Company classifies any short-term investments as securities available for sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. At June 30, 2008, the Company had no short-term securities available for sale.

5. Inventories

The Company’s inventories are stated at the lower of cost or market as determined by the average cost method. Inventories consist of raw materials, such as broken concrete, millings, and quarried stone which are expected to be utilized in construction projects in the future. The cost of inventory includes labor, trucking and equipment costs.

6. Property and Equipment (in thousands)

	June 30, 2008			December 31, 2007
Construction equipment	$	91,595		$	83,739
Transportation equipment		11,104			9,279
Buildings		1,562			1,573
Office equipment		563			602
Construction in progress		2,342			856
Land		2,718			2,718
Water rights		200			200
		110,084			98,967
Less accumulated depreciation		(33,839	)		(26,578	)
	$	76,245		$	72,389

Construction in progress at June 30, 2008 consists of third-party costs incurred in construction of an office addition and shop buildings.

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7. Income per Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed giving effect to all potentially dilutive common stock options and warrants using the treasury stock method. At June 30, 2008 and 2007, there were 82,300 and 81,300, respectively, common stock options with a weighted average exercise price per share of $24.90 and $25.02, respectively, that were excluded from the calculation of diluted income per share as they were anti-dilutive. The following table reconciles the numerators and denominators of the basic and diluted net income per common share computations for the three and six months ended June 30, 2008 and June 30, 2007, respectively, (in thousands, except per share data):

	Three months ended June 30,
	2008		2007
Numerator:
Net income	$	5,140	$	3,797

Denominator:
Weighted average common shares outstanding – basic		13,111		10,970
Shares for dilutive stock options, restricted stock andwarrants		673		813
Weighted average common shares outstanding and assumedconversions – diluted		13,783		11,783

Basic earnings per common share:	$	0.39	$	0.35

Diluted earnings per common share:	$	0.37	$	0.32

	Six months ended June 30,
	2008		2007
Numerator:
Net income	$	8,257	$	6,308

Denominator:
Weighted average common shares outstanding – basic		13,090		10,945
Shares for dilutive stock options, restricted stock andwarrants		605		824
Weighted average common shares outstanding and assumedconversions – diluted		13,695		11,769

Basic earnings per common share:	$	0.63	$	0.58

Diluted earnings per common share:	$	0.60	$	0.54

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8. Stock-Based Compensation Plans and Warrants

The Company has five stock plans, only two of which currently have stock options outstanding, which are administered by the Compensation Committee of the Board of Directors. In general, the plans provide for all options to be issued with a per-share exercise price equal to the fair market value of a share of common stock on the date of grant. The original terms of the options typically do not exceed 10 years. Stock options generally vest over a three to five year period. Note 8 – Stock Options and Warrants of the Notes to the Consolidated Financial Statements contained in the Annual Report on Form 10-K for the year ended December 31, 2007 should be referred to for additional information regarding the stock-based incentive plans.

We recorded compensation expense of $233,000 and $858,000 for the six-month periods ended June 30, 2008 and 2007, respectively, (including $125,000 and $93,000, respectively, related to restricted stock grants to independent directors and certain employees discussed below). For the quarters ended June 30, 2008 and 2007, we recorded $128,000 and $308,000, respectively, (including $73,000 and $50,000, respectively, related to restricted stock grants to non-employee directors and certain employees). Unrecognized compensation expense related to stock options at June 30, 2008 and 2007 was $435,000 and $556,000, respectively, to be recognized over a weighted average period of approximately 2.4 and 2.2 years, respectively. Proceeds received by the Company from the exercise of 3,000 and 90,190 options for the three and six months ended June 30, 2008, respectively were approximately $3,000 and $123,000, respectively. No options were granted in the six months ended June 30, 2008 or 2007.

Unrecognized compensation expense related to restricted stock awards at June 30, 2008 and 2007 was $348,000 and $175,000, respectively, to be recognized over a weighted average period of 1.6 and 0.8 years. In May 2008 and 2007, the six non-employee directors of the Company were each granted 2,564 and 1,598 shares of restricted stock, respectively, at the market price on the date of grant, or $19.50 and $21.90, respectively, which will be recognized ratably over the one year restriction period. In March 2008, five employees were granted an aggregated total of 5,672 shares of restricted stock at $18.16 per share resulting in an expense of $103,000 to be recognized ratably over the five year restriction period.

At June 30, 2008, there were 453,106 shares covered by outstanding stock options and 356,266 shares covered by outstanding stock warrants.

9. Income Taxes

The Company and its subsidiaries file consolidated income tax returns in the United States federal jurisdiction and in certain states. With few exceptions, the Company is no longer subject to federal tax examinations for years prior to 2004. The Company’s policy is to recognize interest related to any underpayment of taxes as interest expense, and penalties as administrative expenses. No interest or penalties have been accrued at June 30, 2008 and 2007.

In its 2005 tax return, the Company used net operating tax loss carryforwards (“NOL”) that would have expired during that year instead of deducting compensation expense that originated in 2005 as the result of stock option exercises. Whether the Company can choose not to take deductions for compensation expense in the tax return and to instead use otherwise expiring NOLs is considered by management to be an uncertain tax position. In the event that the IRS examines the 2005 tax return and determines that the compensation expense is a required deduction in the tax return, then the Company would deduct the compensation expense instead of the NOL used in the period; however there would be no cash impact on tax paid due to the increased compensation deduction. In addition, there would be no interest or penalties due as a result of the change. Based on the Company’s detailed analysis, management has determined that it is more likely than not this position will be sustained upon examination, and this uncertain tax position was determined to have a measurement of $0.

The effective income tax rates were 33.6% and 33.4% of income before income taxes and minority interest for the three and six months ended June 30, 2008 and 33.5% and 33.7% for the comparable periods in 2007. The difference between the effective tax rates and the statutory rate of 35% is the result of various miscellaneous permanent differences, including the portion of earnings of subsidiary taxed to the minority interest owner, offset by the revised Texas franchise tax effective since July 1, 2007.

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10. Acquisition of Road and Highway Builders, LLC

On October 31, 2007, the Company purchased a 91.67% interest in Road and Highway Builders, LLC (“RHB”) and all of the outstanding capital stock of Road and Highway Builders Inc. ("RHB Inc.") then an inactive Nevada Corporation. The results of RHB and RHB Inc. are included in the Company's consolidated results for the three and six months ended June 30, 2008, but not in the comparable periods for 2007 as the acquisition was made after June 30, 2007.

RHB is a heavy civil construction business located in Reno, Nevada that builds roads, highways and bridges for state and local governmental agencies. Its assets consist of construction contracts, road and bridge construction and aggregate mining machinery and equipment, and land with improvements. RHB Inc’s sole asset is its right as a co-lessee with RHB under a long-term, royalty-based lease of a Nevada quarry on which RHB can mine aggregates for use in its own construction business and for sale to third parties. During the first quarter of 2008, RHB Inc. began crushing stone for the operations of RHB.

The Company paid an aggregate purchase price for the RHB entities of $53.0 million to the sellers. Additionally, the Company incurred $1.1 million of direct costs related to the acquisition. Ten percent of the purchase price has been placed in escrow for eighteen months as security for any breach of representations and warranties made by the sellers.

The minority interest owner of RHB has the right to put, or require the Company to buy, his remaining 8.33% interest in RHB and, concurrently, the Company has the right to require that owner to sell his 8.33% interest to the Company, beginning in 2011. The purchase price in each case is 8.33% of the product of six times the simple average of RHB's income before interest, taxes, depreciation and amortization for the calendar years 2008, 2009 and 2010. The minority interest was recorded at its estimated fair value at the date of acquisition and the difference between the minority owner's interest in the historical basis of RHB and the estimated fair value of that interest was recorded as a liability to minority interest and a reduction in additional paid-in-capital.

Any changes to the estimated fair value of the minority interest will be recorded as a corresponding change in additional paid-in-capital. Additionally, interest expense ($252,000 and $126,000 for the six and three months ended June 30, 2008) has been accreted to the minority interest liability based on the discount rate used to calculate the fair value of the put at the date of the acquisition.

The following table summarizes the allocation of the purchase price, including related direct acquisition costs for the RHB entities (in thousands):

Tangible assets acquired at estimated fair value, includingapproximately $10,000 of property, plant and equipment	$	19,334
Current liabilities assumed		(9,686	)
Goodwill		44,496
Total	$	54,144

The goodwill is deductible for tax purposes over 15 years. The purchase price allocation has been finalized and there were no separately identifiable intangible assets, other than goodwill. No material adjustments have been made to the initial allocation of the purchase price. For more detail regarding this acquisition, see Notes 13 and 15 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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11. Subsequent Events

On July 16, 2008, the Company filed a "shelf" registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"). Under this shelf registration statement, the Company may offer from time to time any combination of securities described in the prospectus in one or more offerings up to a total amount of $80.0 million. The securities described in the prospectus include common and preferred stock, debt securities, warrants, units, and guarantees of debt securities. Net proceeds from the sales of the offered securities may be used for working capital needs, capital expenditures and other expenditures related to general corporate purposes, including future acquisitions.

On July 23, 2008, an oil supplier, SemMaterials, L.P., filed a Chapter 11 bankruptcy petition. SemMaterials had contracted to supply a particular grade of oil directly to the Company to produce asphalt for one of our projects in Nevada and to an asphalt subcontractor on another of our projects in Nevada; however, SemMaterials has indicated that it will be unable to do so. The supply of this particular grade of oil in Nevada is currently limited and the price of the oil is higher than the contracted price. The Nevada Department of Transportation ("NDOT") recognizes the magnitude of problems caused by SemMaterials' defaults and has expressed a willingness to work with contractors on the redesign of affected projects. Until the redesign of these projects is resolved with NDOT, it is too early to predict the effect, if any, of this issue on estimated profitability on these projects. In addition, the redesign of the affected projects will have an effect on our ability to complete portions of these projects in 2008 which we had planned on installing this year and, therefore, we estimate 2008 revenue could be as much as $25.0 million less than we had planned.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q includes certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These forward-looking statements may be found throughout this report, including in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors”, below and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, contract backlog, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We use the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.

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Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise could materially affect our financial condition, results of operations and cash flows.

Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

changes in general economic conditions, reductions in federal, state and local government funding for infrastructure services and changes in those governments laws and regulations;

adverse economic conditions in our markets in Texas and Nevada and the availability, cost and skill level of workers in those geographic locations;

delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment of liquidated damages or obtaining required governmental permits and approvals;

actions of suppliers, subcontractors, customers, competitors and others which are beyond our control including suppliers' and subcontractors' failure to perform;

cost escalations associated with our fixed-unit-price contracts, including changes in availability, proximity and cost of materials such as steel, concrete, aggregates, fuel and other construction materials;

our dependence on a few significant customers;

adverse weather conditions; although we prepare our budgets and bid for contracts based on historical rain and snowfall patterns, the incidence of rain and snowfall may differ materially from these expectations;

the presence of competitors with greater financial resources and the impact of competitive services and pricing;

our ability to successfully identify, finance, complete and integrate acquisitions;

the effects of estimates inherent in our percentage-of-completion accounting policies including onsite conditions that differ from those assumed in the original bid, contract modifications, mechanical problems with our machinery or equipment and the effects of other risks discussed above; and

citations issued by any governmental authority, including the Occupational Safety and Health Administration.

Stockholders and potential investors are urged to carefully consider these factors and the other factors described under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements that we make in this report are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved.

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Any forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to any forward-looking statements that may be made to reflect events or circumstances that occur, or that we become aware of, after the date of this report, except as may be required by applicable securities laws.

Overview

Sterling Construction Company, Inc. (“Sterling” or “the Company”) operates in one segment, heavy civil construction, through Texas Sterling Construction Co., ("TSC"), Road and Highway Builders, LLC ("RHB") and Road and Highway Builders Inc. that specialize in the building, reconstruction and repair of transportation and water infrastructure in large and growing population markets in Texas and Nevada. Road and Highway Builders of California, Inc., an 80% owned subsidiary, was recently formed to bid and perform work in California. Our transportation infrastructure projects include highways, roads, bridges and light rail, and our water infrastructure projects include water, wastewater and storm drainage systems. We provide general contracting services primarily to public sector clients utilizing our own employees and equipment for activities including excavating, paving, pipe installation and asphalt and concrete placement. We purchase the necessary materials for our contracts, perform approximately three-quarters of the work required by our contracts with our own crews, and generally engage subcontractors only for ancillary services.

For a more detailed discussion of the Company's business, readers of this report are urged to review Item 1, Business, of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

Material Changes in Financial Condition

At June 30, 2008, there had been no material changes in the Company’s financial condition since December 31, 2007, as discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Three months ended June 30, 2008 compared with three months ended June 30, 2007

(dollar amounts in thousands) (unaudited):	2008			2007			% change

Revenues	$	106,728		$	71,275			49.7	%
Gross profit		11,740			8,046			45.9	%
Gross margin		11.0	%		11.3	%		(2.7	%)
General, administrative and other expenses		3,442			2,768			24.3	%
Operating income		8,207			5,278			55.5	%
Operating margin		7.7	%		7.4	%		4.1	%
Interest income, net		71			433			(83.6	%)
Income before taxes and minority interest		8,278			5,711			44.9	%
Income taxes		2,781			1,914			45.3	%
Minority interest in earnings of subsidiary		357			--		Nm
Net income	$	5,140		$	3,797			35.4	%

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Revenues

Revenues increased $35.5 million. The majority of the increase was due to the revenues earned by our Nevada operations which were included in the consolidated results of operations for the six months of 2008 after being acquired in late 2007. Also contributing to the increased volume of work performed was the improved weather conditions in our Texas markets, and an increase in crews and equipment since the prior year. Rainfall decreased an average of 69% quarter over quarter in our Texas markets and we had a year-over-year increase in the average number of employees of 20% and a total increase of $25.9 million of property and equipment including that acquired with RHB.

Backlog

At the end of the second quarter of the current year, our backlog of construction projects was $514 million, as compared to $485 million at the end of the first quarter of 2008. In the second quarter of 2008, we were awarded $136 million of new contracts. The backlog at June 30, 2008 includes approximately $379 million and $135 million of backlog applicable to Texas and Nevada, respectively, and approximately $252 million expected to be completed in the last six months of 2008. At June 30, 2008, we included in backlog approximately $31 million of contracts on which we were the apparent low bidder and expect to be awarded the contracts, but as of the quarter end these contracts had not been officially awarded. Historically, subsequent non-award of such low bids has not had an adverse effect on the Company’s backlog or financial condition.

Gross profit

Gross profit increased $3.7 million and $6.1 million in the second quarter and first six months of 2008, respectively, over the comparable periods in 2007. This was due to the contribution of our Nevada operations in 2008 and better weather in Texas than last year, which allowed our crews and equipment to be more productive, offset by disappointing results on certain Texas highway projects as discussed below.

During the second quarter of 2008, a long-standing vendor in our Houston market advised us that it would be unable to fulfill its commitment to furnish us steel on a project at contracted terms, which had a negative impact of $1.0 million on estimated total gross profit on this project. Approximately $600,000 of the impact was recorded in the second quarter of 2008 for this matter based on the percentage of completion of the project.

In addition, due to the unanticipated significant increases this year in the prices of gasoline and diesel fuel across all of our markets, we have incurred additional costs of approximately $1.0 million, primarily in the second quarter of 2008. We have revised our estimated total cost on projects for currently anticipated additional costs of gasoline and diesel fuel.

We achieved less than satisfactory execution on three projects in our Dallas market, which we attribute primarily to that market’s recent significant growth in operations. As a result, we recorded a reduction in gross profit of approximately $1.0 million on those three projects in the second quarter of 2008 and will realize reduced gross profit on those projects through completion. We have taken steps to improve communication and oversight on all projects in that market and believe these steps will enable us to maintain or improve margins on these projects.

Subsequent to June 30, 2008, an oil supplier, SemMaterials, L.P., filed a Chapter 11 bankruptcy petition. SemMaterials had contracted to supply a particular grade of oil directly to the Company to produce asphalt for one of our projects in Nevada and to an asphalt subcontractor on another one of our projects in Nevada; however, SemMaterials has indicated that it will be unable to do so. The supply of this particular grade of oil in Nevada is currently limited and the price of the oil is higher than the contracted price. The Nevada Department of Transportation ("NDOT") recognizes the magnitude of the problems caused by SemMaterials' defaults and has expressed a willingness to work with contractors on the redesign of affected projects. Until the redesign of these projects is resolved with NDOT, it is too early to predict the effect, if any, of this issue on estimated profitability on these projects. In addition, the redesign of the affected projects will have an effect on our ability to complete portions of these projects in 2008 which we had planned on installing this year and, therefore, we estimate 2008 revenue could be as much as $25.0 million less than we had planned.

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General and administrative expenses, net of other income

General and administrative expenses, net, increased by $0.7 million in the second quarter of 2008 versus 2007, primarily due to higher compensation expense and the addition of our Nevada operations. As a percent of revenues, G&A was 3.2% for the second quarter of 2008 versus 3.9% of revenues for the comparable prior year quarter. These expenses do not vary directly with the volume of work performed on contracts.

Operating income

Operating income increased $2.9 million in the second quarter of 2008 over 2007, due to the factors discussed above regarding gross profit and general and administrative expenses.

Interest income and expense

Net interest income was $362,000 less in the second quarter of 2008 than 2007, due to a decrease in interest rates on cash and short-term investments plus the imputed interest expense of $126,000 on the put related to the minority interest in RHB.

Income taxes

Our effective income tax rate for the first quarter of 2008 was 33.6% compared to 33.5% for the second quarter of 2007.

Six months ended June 30, 2008 compared with six months ended June 30, 2007

(dollar amounts in thousands) (unaudited):	2008			2007			% change

Revenues	$	191,654		$	140,163			36.7	%
Gross profit		19,841			13,678			45.1	%
Gross margin		10.4	%		9.8	%		6.1	%
General, administrative and other expenses		6,991			5,060			38.2	%
Operating income		12,850			8,618			49.1	%
Operating margin		6.7	%		6.1	%		9.8	%
Interest income, net		228			899			(74.7	%)
Income before taxes and minority interest		13,078			9,517			37.4	%
Income taxes		4,372			3,209			36.2	%
Minority interest in earnings of subsidiary		449			--		Nm
Net income	$	8,257		$	6,308			30.9	%

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Revenues

Revenues increased $51.5 million. The majority of the increase was due to the revenues earned by our Nevada operations. Also contributing to the increased volume of work performed was the improved weather conditions in our Texas markets, and an increase in crews and equipment since the prior year. Rainfall decreased an average of 54% year over year in our Texas markets and we had a year-over-year increase in the average number of employees of 20% and a total increase of $25.9 million of property and equipment including that acquired with RHB.

Backlog

At the end of the second quarter of the current year, our backlog of construction projects was $514 million, as compared to $450 million at December 31, 2007. We were awarded approximately $256 million of new contracts in the first six months of 2008.

Gross profit

Gross profit increased $6.1 million for the six-month period-over-period comparison. This was due to the contribution of our Nevada operations in 2008 and better weather in Texas than last year, which allowed our crews and equipment to be more productive, offset by the factors discussed above under "Gross Profit" for the second quarter of 2008.

General and administrative expenses, net of other income

General and administrative expenses, net, increased by $1.9 million for the first xis months of 2008 from 2007 primarily due to higher compensation expense and the addition of our Nevada operations.

Operating income

Operating income increased $4.2 million due to the factors discussed above regarding gross profit and general and administrative expenses.

Interest income and expense

Net interest income was $671,000 less for the six-month period-over-period comparison due to a decrease in interest rates on cash and short-term investments plus the imputed interest expense of $252,000 on the put related to the minority interest in RHB.

Income taxes

Our effective income tax rate for the first six months of 2008 was 33.4% compared to 33.7% for the first six months of 2007. The difference between the effective tax rate and the statutory tax rate is the result of various miscellaneous permanent differences, including the portion of earnings of subsidiary taxed to the minority interest owner, offset by the revised Texas franchise tax which became effective July 1, 2007.

Liquidity and Capital Resources

Cash Flows

The following table sets forth our cash flows for the six months ended June 30, 2008 and June 30, 2007 (in thousands) (unaudited):

	Six months ended
	June 30
	2008			2007
Cash and cash equivalents at end of period	$	85,197		$	15,596
Net cash provided by (used in):
Operating activities		19,607			11,169
Investing activities		(10,331	)		(19,306	)
Financing activities		(4,728	)		(4,733	)
Increase (decrease) in cash and cash equivalents	$	4,548		$	(12,870	)

Capital expenditures	$	11,056		$	16,634
Working capital at end of period	$	85,218		$	53,906

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Operating Activities

Significant non-cash items included in operating activities are:

●

depreciation and amortization, which for the first six months of the current year totaled $6.6 million, an increase of $1.9 million from last year, as a result of the continued increase in the size of our construction fleet in recent years and the RHB acquisition;

●

deferred tax expense in 2008 and 2007 of $2.5 and $3.1 million, respectively, mainly attributable to accelerated depreciation methods used on equipment for tax purposes

Besides net income of $8.3 million and the non-cash items discussed above, significant components of the changes in working capital are as follows:

●

contracts receivable increased by $11.0 million as of June 30, 2008 due to the increase in year to date revenues of $51.5 million, including those of the Nevada operations, as compared to an increase of $8.0 million in 2007 in contract receivables which was due to an increase in revenue and a higher level of customer retentions;

●

cost and estimated earnings in excess of billings on uncompleted contracts increased by $2.2 million as of June 30, 2008, which was due to the timing of billings to customers, compared to an increase of $3.4 million as of June 30, 2007, which was principally due to the start up of several new jobs;

●

billings in excess of costs and estimated earnings on uncompleted contracts increased by $8.0 million as of June 30, 2008, compared with an increase of $3.3 million as of June 30, 2007. These changes principally reflect increased billings as a result of increased volume of work-in-progress;

●

accounts payable increased by $5.3 million in the first six months of this year due to the increased volume of work-in-progress. Accounts payable increased $6.7 million in the first six months of 2007 as a result of changes in the volume of materials and sub-contractor services purchased in that period.

Investing activities

Expenditures for the replacement of certain equipment and to expand our construction fleet and office and shop facilities totaled $11.1 million in the first six months of 2008, compared with a total of $16.6 million of property and equipment purchases in the same period last year. Capital equipment is acquired as needed to support our work crews and backlog and to replace retiring equipment. We plan to continue the expansion of our equipment fleet over the remainder of the year, in line with the increase during the first six months of 2008.

Financing activities

Financing activities in the first six months of 2008 primarily reflect a reduction of $5.0 million in borrowings under our $75.0 million Credit Facility as compared to a $5.0 million reduction in borrowings under the predecessor $35.0 million credit facility in the first six months of 2007. The amount of borrowings under the Credit Facility is based on the Company's expectations of working capital requirements.

Liquidity

The level of working capital for our construction business varies due to fluctuations in:

customer receivables and contract retentions;

costs and estimated earnings in excess of billings;

billings in excess of costs and estimated earnings;

the size and status of contract mobilization payments and progress billings;

the amounts owed to suppliers and subcontractors.

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Some of these fluctuations can be significant.

As of June 30, 2008, we had working capital of $85.2 million, an increase of $3.2 million over December 31, 2007. Working capital is an important element in expanding our bonding capacity, which enables us to bid on larger and longer-lived projects. The increase in working capital was mainly the result of cash provided by operations of $19.6 million offset by purchases of property and equipment of $11.0 million and net repayment of debt of $5.0 million.

The increase of $31.3 million in our working capital at June 30, 2008 versus June 30, 2007 was due to earnings for the trailing 12 months, the net proceeds of $34.5 million from our public offering in December 2007 and the increase in borrowings of $35.0 million under our Credit Facility partially offset by our purchase of the RHB entities in October 2007 and capital expenditures during that twelve-month period.

The Company believes that it has sufficient liquid financial resources, including the unused portion of its Credit Facility, to fund its requirements for the next twelve months of operations, including its bonding requirements, and expects no other material changes in its liquidity.

Sources of Capital

In addition to our available cash and cash equivalents balances and cash provided by operations, we use borrowings under our Credit Facility with Comerica Bank to finance our capital expenditures and working capital needs.

In October 2007, we entered into a new Credit Facility with Comerica Bank which matures October 31, 2012. The Credit Facility allows for borrowings of up to $75.0 million and is secured by all assets of the Company, other than proceeds and other rights under our construction contracts which are pledged to our bond surety. At June 30, 2008, the aggregate borrowings outstanding under the Credit Facility were $60.0 million, and the aggregate amount of letters of credit outstanding under the Credit Facility was $1.8 million, which reduces availability under the Credit Facility. Availability under the Credit Facility was $13.2 million at June 30, 2008.

The Credit Facility requires the payment of a quarterly commitment fee of 0.25% per annum of the unused portion of the Credit Facility. At our election, the loans under the new Credit Facility bear interest at either a LIBOR-based interest rate or a prime-based interest rate. The average interest rate on funds borrowed under the Credit Facility during the three and six months ended June 30, 2008 was approximately 5.38% and 6.25%, respectively. The Credit Facility is subject to our compliance with certain covenants, including financial covenants at quarter-end relating to fixed charges, leverage, tangible net worth, asset coverage and consolidated net losses. We were in compliance with all of these covenants at June 30, 2008.

In addition, as discussed in Note 11 to the accompanying financial statements, the Company has filed a "shelf" registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") and, in one or more offerings, may sell equity and/or debt securities up to a total amount of $80.0 million, the proceeds of which may be used for working capital, capital expenditures and general corporate purposes, including future acquisitions.

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Inflation

Until recently, inflation has not had a material impact on our financial results; however, this year increases in oil, fuel and steel product prices have affected the costs of operating our construction fleet, producing and installing concrete and asphalt, transporting materials and the purchase price of certain other materials. Anticipated cost increases, such as those discussed above, are considered in our bids to customers on proposed new construction projects.

Where we are the successful bidder on a project, we execute purchase orders with material suppliers and contracts with subcontractors covering the prices and quantities of most materials and services, other than oil and fuel products, thereby mitigating future price increases and supply disruptions. This year there have, however, been two vendors that had contracted to furnish materials on two of our 60 jobs who have indicated that they would not be able to fulfill their supply commitments or that they would need a price increase.

There can be no assurance that oil, fuel, steel or other materials used in our business will be adequately covered by the estimated escalation we have included in our bids or that all of our vendors will fulfill their pricing and supply commitments under their purchase orders and contracts with the Company. We adjust our total estimated costs on our projects where we believe it is probable that we will have cost increases which will not be recovered from customers, vendors or re-engineering.

Construction Markets

We operate in the heavy civil construction segment for infrastructure projects in Texas and Nevada, specializing in transportation and water infrastructure. Demand for this infrastructure depends on a variety of factors, including overall population growth, economic expansion and the vitality of the market areas in which we operate, as well as unique local topographical, structural and environmental issues. In addition to these factors, demand for the replacement of infrastructure is driven by the general aging of infrastructure and the need for technical improvements to achieve more efficient or safer use of infrastructure and resources. Funding for this infrastructure depends on Federal, state and local authorizations.

According to the 2006 census, Texas is the second largest state in population in the U.S. with 23.5 million people and a population growth of 12.7% since 2000, almost double the 6.4% growth rate for the U.S. as a whole over the same period. Three of the largest 10 cities in the U.S. are located in Texas and we have operating divisions in each of those cities: Houston, Dallas/Ft. Worth and San Antonio. Nevada has undergone even more rapid growth, with the state’s population expanding 24.9% since 2000 to 2.5 million people in 2006.

Our highway and bridge work is generally funded through federal and state authorizations. The federal government enacted the SAFETEA-LU bill, which authorized $286 billion for transportation spending through 2009. Of this total, the Texas Department of Transportation (“TXDOT”) and the Nevada Department of Transportation (“NDOT”) were originally allocated approximately $14.5 billion and $1.3 billion, respectively, over the five years of the authorization. Actual SAFETEA-LU appropriations have been somewhat reduced from the original allocations. While recent public statements by TXDOT officials indicate potential TXDOT funding shortfalls and reductions in spending, transportation leaders have identified $188 billion in needed construction projects to create an acceptable transportation system in Texas by 2030. NDOT expenditures totaled $740 million in 2006 and have had an annual increase of 9.9% since 2001. Recent reductions in driving in the U.S. and the resultant effect on federal and state gasoline taxes collected may further limit spending by both federal and state authorities.

Our water and wastewater, underground utility, light-rail transit and non-highway paving work is generally funded by municipalities and other local authorities. While the size and growth rates of these markets is difficult to compute as a whole, given the number of municipalities, the differences in funding sources and variations in local budgets, management estimates that the municipal markets in which we operate are providing funding of in excess of $1 billion annually.

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While our business does not include residential infrastructure work, the slow-down in housing demand in Nevada, and to a lesser extent in Texas, has caused a softer bidding climate in our infrastructure markets and has caused some residential infrastructure contractors to bid on transportation and water infrastructure projects, thus increasing competition and creating downward pressure on bid prices. In addition, the nationwide declines in home sales and increase in foreclosures and the resultant decrease in property and sales taxes could adversely affect expenditures by state and local governments.

As discussed above, our backlog of construction projects was $514 million at June 30, 2008, including $252 million that we estimate will be completed by December 31, 2008, versus backlog of $450 million at December 31, 2007—this increase in backlog is after recognizing revenues earned of $192 million in the first half of 2008.

To date this year, the Company has had only one project scope reduction as a result of reduced funding authorization and the amount of such scope reduction was not material to our backlog. The Company had no project cancellations for any reason. The bidding climate varies somewhat by locality; however, we continue to bid projects that fit our expertise and criteria for potential revenues and gross margins and, while our markets are softer and more competitive in the current economic climate, management believes the Company has the resources and experience to continue to compete successfully for available projects.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

Changes in interest rates are our primary sources of market risk. At June 30, 2008, $60 million of our outstanding indebtedness was at floating rates. An increase of 1% in the market rate of interest would have increased our interest expense for the six months ended June 30, 2008 by approximately $8,000.

Because we derive no revenues from foreign countries and have no obligations in foreign currency, we experience no direct foreign currency exchange rate risk. However, prices of certain raw materials, construction equipment and consumables, such as oil, steel and cement, may be affected by currency fluctuations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at June 30, 2008 to ensure that the information required to be disclosed by the Company in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the

Company's management including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.

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Changes in Internal Control over Financial Reporting

There were no changes during the three months ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal controls over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any material legal proceedings.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Date of Meeting: May 8, 2008
Type of Meeting: Annual Meeting of Stockholders
Election of Directors.	For		Against		Abstain		Broker Non-Votes
Patrick T. Manning		7,260,875		3,697,071		14,491		-0-
Joseph P. Harper, Sr.		7,619,176		3,698,564		14,696		-0-
Adoption of an Amended and Restated Certificate of Incorporation.		7,493,031		3,809,141		30,263		-0-
Adoption of an amendment to Article FOURTH of the Certificate of Incorporation to increase the number of shares of common stock that the Company is authorized to issue from 14 million shares to 19 million shares.		10,759,947		555,524		16,963		-0-
Ratification of the selection of Grant Thornton LLP as the Company's independent registered public accounting firm for 2008.		11,304,309		18,296		9,829		-0-

Item 5. Other Information

None

Item 6. Exhibits

Exhibit No. Description

3.1

Certificate of Incorporation of Sterling Construction Company, Inc. incorporating all amendments made through May 8, 2008.

10.1#*

Summary of Compensation for Non Employee Directors of Sterling Construction Company, Inc.

31.1

Certification of Patrick T. Manning, Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

31.2

Certification of James H. Allen, Jr., Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a)

32.0

Certification of Patrick T. Manning, Chief Executive Officer and James H. Allen, Jr., Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STERLING CONSTRUCTION COMPANY, INC.

Date: August 11, 2008	By:	/s/ Patrick T. Manning.
		Patrick T. Manning.
		Chairman and Chief Executive Officer


Date: August 11, 2008	By:	/s/ James H. Allen, Jr.
		James H. Allen, Jr.
		Chief Financial Officer

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STERLING CONSTRUCTION COMPANY, INC...

Quarterly Report on Form 10-Q for Period Ended June 30, 2008

Exhibit Index


Exhibit No.		Description

3.1		Certificate of Incorporation of Sterling Construction Company, Inc. incorporating all amendments made through May 8, 2008.

10.1#*		Summary of Compensation for Non Employee Directors of Sterling Construction Company, Inc.

*31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32		Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith

Exhibit 3.1

STERLING CONSTRUCTION COMPANY, INC.

CERTIFICATE OF INCORPORATION

(Incorporating all amendments made through May 8, 2008)

FIRST:

The name of the Corporation is Sterling Construction Company, Inc. (hereinafter sometimes referred to as the "Corporation").

SECOND:

The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of the registered agent at that address is The Corporation Trust Company.

THIRD:

The nature of the business or purposes to be transacted, conducted or promoted by the Corporation is exclusively —

(a)

purchasing, acquiring, owning, holding, investing in, selling, trading and exchanging Required Assets (as may be defined from time to time by the Board of Directors) in accordance with the provisions of this Certificate of Incorporation;

(b)

purchasing, acquiring, owning, holding, investing in, selling, trading and exchanging securities and other ownership interests in any corporation or other entity, other than a general partnership interest in any partnership or joint venture;

(c)

incurring any secured or unsecured indebtedness, and guaranteeing or assuming any obligation or debt of any person or entity, provided that each rating agency, if any, that has assigned a rating to the Company's outstanding securities shall advise the Company in writing that its then current rating assigned to such securities will not be adversely affected thereby; and

(d)

engaging in any other lawful act or activity which is necessary or desirable in connection with any of the foregoing for which a corporation may be organized under the General Corporation Law of Delaware. The Company shall operate in such a manner so as not to be an investment company within the meaning of the Investment Company Act of 1940, as amended.

FOURTH:

Section 1. Capitalization. The total number of shares of all classes of stock which the Corporation has authority to issue is 20,000,000, consisting of:

(a)

One million (1,000,000) shares of Preferred Stock, par value one cent ($0.01) per share (the "Preferred Stock"); and

(b)

Nineteen million (19,000,000) shares of Common Stock, par value one cent ($0.01) per share (the "Common Stock").

Section 2. Series of Preferred Stock. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance from time to time of the shares of Preferred Stock in one or more series, and by adopting resolutions to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. Upon adopting such resolution or resolutions the Board of Directors shall cause a certificate of designation setting forth such resolution or resolutions and the number of shares of stock of such class or series as to which such resolution or resolutions shall apply to be executed and filed in accordance with applicable Delaware law. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock.

FIFTH:

The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

Section 1. Powers of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things which are not by statute or by this Certificate of Incorporation to be exercised or done by the stockholders of the Corporation.

Section 2. Written Ballot. All elections of directors shall be by vote of stockholders entitled to vote thereon made by written ballot at a meeting called for such purpose pursuant to Delaware law. In no case shall a director be elected or removed by written consent of stockholders without a meeting. Notwithstanding the preceding, vacancies and newly created directorships may be filled by directors then in office pursuant to the provisions of Delaware law and Section 3 of Article SEVENTH below.

Section 3. Stockholders Must Meet to Act. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any written consent by such stockholders without a meeting.

Section 4. Call of Special Meeting of Stockholders. Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption).

Section 5. Arrangement Between Corporation and its Creditors. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders, of this Corporation, as the case may be, and also on this Corporation.

SIXTH:

Section 1. Certain Restrictions on the Transfer of Stock. In order to preserve the net operating loss carryovers, capital loss carryovers, and business credit carryovers (the "Tax Benefits") to which the Corporation is entitled pursuant to the Internal Revenue Code of 1986, as amended, or any successor statute (collectively, the "Code") and the regulations thereunder, the following restrictions shall apply until June 30, 1999, unless the Board of Directors shall fix an earlier or later date in accordance with Section 6 of this Article SIXTH (such date is sometimes referred to herein as the "Expiration Date"):

(a)

From and after the date of the adoption of this Article SIXTH, no person other than the Corporation shall transfer any shares of stock of the Corporation (other than stock described in Section 1504(a)(4) of the Code or any successor statute, or stock that is not so described solely because it is entitled to vote as a result of dividend arrearages) to any person to the extent that such transfer, if effective, would cause (x) the Ownership Interest Percentage of the transferee or any other person to exceed four and one-half (4.5%) percent, or (y) any increase in the Ownership Interest Percentage of the transferee or any other person if the Ownership Interest Percentage of such transferee or of such other person exceeded four and one-half (4.5%) percent before such transfer. For purposes of this Article SIXTH, (i) "person" shall mean any individual, corporation, estate, trust, association, company, partnership, joint venture, or similar organization; (ii) a person's Ownership Interest Percentage shall be the sum of such person's direct ownership interest in the Corporation and/or in Steel City Products, Inc. (formerly known as Hallwood Industries Incorporated), a Delaware corporation ("SCPI"), as determined under Treasury Regulation Section 1.382-2T(f)(8) or any successor regulation and such person's indirect ownership interest in the Corporation and/or in SCPI as determined under Treasury Regulation Section 1.382-2T(f)(15) or any successor regulation, except that, for purposes of determining a person's direct ownership interest in the Corporation or in SCPI any ownership interest held by such person in the Corporation or in SCPI respectively, described in Treasury Regulation Section 1.382-2T(f)(18)(iii)(A) or any successor regulation shall be treated as stock of the Corporation or of SCPI as the case may be, and for purposes of determining a person's indirect ownership interest in the Corporation or in SCPI Treasury Regulations Sections 1.382-2T(g)(2), 1.382-2T(g)(3), 1.3822T(h)(2)(iii) and 1.382-2T(h)(6)(iii) or any successor regulations shall not apply and any stock that would be attributed to such person pursuant to the option attribution rule of Treasury Regulation Section 1.382-2T(h)(4) or any successor regulation, if to do so would result in an ownership change, shall be attributed to such person without regard to whether such attribution results in an ownership change; (iii) "transfer" shall mean any means of conveying legal or beneficial ownership of shares of stock of the Corporation, whether such means is direct or indirect, voluntary or involuntary, including, without limitation, the granting of options with respect to shares of stock or the transfer of ownership of any entity that owns shares of stock of the Corporation, and "transferee" shall mean any person to whom stock of the Corporation is transferred.

(b)

Any transfer of shares of stock of the Corporation that would otherwise be prohibited pursuant to the preceding subparagraph shall nonetheless be permitted if information relating to a specific proposed transaction is presented to the Board of Directors of the Corporation and the Board determines that such transaction will not jeopardize the Tax Benefits, based upon an opinion to that effect of legal counsel selected by the Board of Directors of the Corporation. Nothing in this subparagraph shall be construed to limit or restrict the Board of Directors in the exercise of its fiduciary duties under applicable law.

Section 2. Attempted Transfer in Violation of Transfer Restrictions.

(a)

Unless approval of the Board of Directors is obtained as provided in Section l(b) of this Article SIXTH, any attempted or purported transfer of shares of stock of the Corporation in excess of the shares that could be transferred to the transferee without restriction under Section 1(a) of this Article SIXTH is not and shall not be effective to transfer ownership of such excess shares (the "Prohibited Shares") to the purported acquiror thereof (the "Purported Acquiror"), who shall not be entitled to any rights as a shareholder of the Corporation with respect to the Prohibited Shares (including, without limitation, the right to vote or to receive dividends with respect thereto). All rights with respect to the Prohibited Shares shall remain the property of the person who initially purported to transfer the Prohibited Shares (the "Initial Transferor") to the Purported Acquiror until such time as the Prohibited Shares are resold as set forth in Section 2(a) or Section 2(b) of this Article SIXTH. The Purported Acquiror, by acquiring ownership of any shares of stock of the Corporation whether or not they are Prohibited Shares, shall be deemed to have consented to all the provisions of this Article SIXTH, and to have agreed to act as provided in the following Section 2(b).

(b)

Upon demand by the Corporation, the Purported Acquiror shall transfer any certificate or other evidence of purported ownership of the Prohibited Shares within the Purported Acquiror's possession or control, along with any dividends or other distributions paid by the Corporation with respect to the Prohibited Shares that were received by the Purported Acquiror (the "Prohibited Distributions"), to an agent designated by the Corporation (the "Agent"). If the Purported Acquiror has sold the Prohibited Shares to a bona fide purchaser (as such term is defined in Section 8-302 of the Uniform Commercial Code as adopted by the State of Delaware) in an arm's-length transaction after purportedly acquiring them, the Purported Acquiror shall be deemed to have sold the Prohibited Shares as agent for the Initial Transferor, and in lieu of transferring the Prohibited Shares and Prohibited Distributions to the Agent, shall transfer to the Agent the Prohibited Distributions and the proceeds of such sale (the "Resale Proceeds") except to the extent that the Agent grants written permission to the Purported Acquiror to retain a portion of the Resale Proceeds not exceeding the amount that would have been payable by the Agent to the Purported Acquiror pursuant to the following Section 2(c) if the Prohibited Shares had been sold by the Agent rather than by the Purported Acquiror. Any purported transfer of the Prohibited Shares by the Purported Acquiror other than a transfer described in one of the two preceding sentences shall not be effective to transfer any ownership of the Prohibited Shares.

(c)

The Agent shall sell in an arm's length transaction (to the extent possible, on the principal national securities exchange, if any, on which the Corporation's stock is listed) any Prohibited Shares transferred to the Agent by the Purported Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or the Resale Proceeds, if applicable, shall be allocated to the Purported Acquiror up to the following amount: (i) where applicable, the purported purchase price paid or value of consideration surrendered by the Purported Acquiror for the Prohibited Shares, or (ii) where the purported transfer of the Prohibited Shares to the Purported Acquiror was by gift, inheritance, or any similar purported transfer, the fair market value of the Prohibited Shares at the time of such purported transfer. Subject to the succeeding provisions of this subparagraph, any Resale Proceeds or Sales Proceeds in excess of the amount allocable to the Purported Acquiror pursuant to the preceding sentence, together with any Prohibited Distributions, shall be the property of the Initial Transferor. If the identity of the Initial Transferor cannot be determined by the Agent through inquiry made to the Purported Acquiror, the Agent shall publish appropriate notice (in the Wall Street Journal, if possible) for seven (7) consecutive business days in an attempt to identify the Initial Transferor in order to transmit any Resale Proceeds or Sales Proceeds or Prohibited Distributions due to the Initial Transferor pursuant to this subparagraph. The Agent may also take, but is not required to take, other reasonable actions to attempt to identify the Initial Transferor. If after ninety (90) days following the final publication of such notice the initial Transferor has not been identified, any amounts due to the Initial Transferor pursuant to this subparagraph may be paid over to a court or governmental agency, if applicable law permits, or otherwise shall be transferred to any entity designated by the Corporation that is described in Section 501(c)(3) of the Code. In no event shall any such amounts due to the Initial Transferor inure to the benefit of the Corporation or the Agent, but such amounts may be used to cover expenses (including but not limited to the expenses of publication) incurred by the Agent in attempting to identify the Initial Transferor.

Section 3. Prompt Enforcement Against Purported Acquiror. Within forty-five (45) days of learning of a purported transfer of Prohibited Shares to a Purported Acquiror, the Corporation through its Secretary shall demand that the Purported Acquiror surrender to the Agent the certificates representing the Prohibited Shares, or any Resale Proceeds, and any Prohibited Distributions, and if such surrender is not made by the Purported Acquiror within forty-five (45) days from the date of such demand the Corporation shall (unless otherwise directed by the Board of Directors) institute legal proceedings to compel such transfer; provided, however, that nothing in this Section 3 shall preclude the Corporation in its discretion from immediately bringing legal proceedings without a prior demand, and also provided that failure of the Corporation to act within the time periods set out in this Section 3 shall not constitute a waiver of any right of the Corporation to compel any transfer required by Section 2(a) of this Article SIXTH.

Section 4. Additional Actions to Prevent Violation or Attempted Violation. Upon a determination by the Board of Directors that there has been or is threatened a purported transfer of Prohibited Shares to a Purported Acquiror, the Board of Directors may take such action in addition to any action required or permitted by the preceding Section as it deems advisable to give effect to the provisions of this Article SIXTH, including, without limitation, refusing to give effect on the books of this Corporation to such purported transfer or instituting proceedings to enjoin such purported transfer.

Section 5. Obligation to Provide Information. The Corporation may require as a condition to the registration of the transfer of any shares of its stock that the proposed transferee furnish to the Corporation all information reasonably requested by the Corporation with respect to all the proposed transferee's direct or indirect ownership interests in, or options to acquire, stock of the Corporation.

Section 6. Further Actions.

(a)

Nothing contained in this Article SIXTH shall limit the authority of the Board of Directors to take such other action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and the interests of the holders of its securities in preserving the Tax Benefits. The Board of Directors may, to the extent permitted by law, from time to time establish, modify, amend or rescind, by Bylaw, resolution or otherwise, regulations and procedures not inconsistent with the provisions of this Article SIXTH for determining whether any acquisition of the Corporation's stock would jeopardize the Corporation's ability to preserve and use the Tax Benefits, and for the orderly application, administration and implementation of the provisions of this Article SIXTH. Such procedures and regulations shall be kept on file with the Secretary of the Corporation and, upon request, shall be made available for inspection and mailed to any holder of the Corporation's stock.

(b)

Without limiting the generality of the foregoing, the Board of Directors may (i) accelerate or extend the Expiration Date, (ii) modify the Ownership Interest Percentage in the Corporation specified in the first sentence of Section 1(a) of this Article SIXTH, or (iii) modify the definitions of any terms set forth in this Article SIXTH; provided that the Board of Directors shall determine in writing that such acceleration, extension, change or modification is in the best interests of the Corporation and its stockholders and, based upon an opinion of counsel of the Corporation, that such acceleration, extension, change or modification is reasonably necessary or desirable to preserve the Tax Benefits under the Code and the regulations thereunder or that the continuation of these restrictions is no longer reasonably necessary for the preservation of the Tax Benefits, which determination shall be filed with the Secretary of the Corporation and mailed by the Secretary to all stockholders of this Corporation within ten (10) days after the date of any such determination.

Section 7. Severability. Any provision in this Article SIXTH which is prohibited or unenforceable under Delaware law shall be ineffective to the extent of such prohibition or un-enforceability without invalidating the remaining provisions of this Article SIXTH and of this Certificate of Incorporation.

SEVENTH:

Section 1. Number of Director[s]. The number of directors of the Corporation which shall constitute the entire Board of Directors shall be such number as is initially fixed by the Incorporator and thereafter as fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption).

Section 2. Classification of Directors. At the first annual meeting of stockholders of the Corporation, the directors shall be divided into three classes, as nearly equal in number as reasonably possible, with the initial term of office of directors of the first class to expire at the second annual meeting of stockholders of the Corporation, the initial term of office of directors of the second class to expire at the third annual meeting of stockholders of the Corporation, and the initial term of office of directors of the third class to expire at the fourth annual meeting of stockholders of the Corporation. At each annual meeting of stockholders following such initial classification and election, directors shall be chosen for a full term of three years, to succeed those directors whose terms expire. All directors shall hold office until the expiration of their respective terms and until their respective successors are elected, except in the case of death, resignation or removal of any director.

Section 3. Filling Vacancies on the Board. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, removal from office, disqualification or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 4. Removal of Directors. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, but only for cause, and only by the affirmative vote of the holders of at least three-quarters of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class by ballot at a meeting of stockholders duly called for such purpose.

EIGHTH:

Power to Amend Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. In addition to any vote of the holders of any class or series of stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five (75) percent of the combined voting power of the outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provisions of the Bylaws of the Corporation.

NINTH:

The Corporation shall maintain a separate office and separate corporate records and books of accounts. The Corporation shall not commingle its assets or funds with those of any other corporations or other entities.

TENTH:

Section 1. Elimination of Certain Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

Section 2. Indemnification and Insurance.

(a)

Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in subparagraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers

(b)

Right of Claimant to Bring Suit. If a claim under subparagraph (a) of this Section is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has no met the applicable standard of conduct.

(c)

Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

(d)

Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

ELEVENTH:

Future Amendments. The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five (75%) percent of the combined voting power of the outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with Article FIFTH, SIXTH, SEVENTH, EIGHTH, TENTH, or this Article ELEVENTH.

Annual Fees
Annual Fees — Each Non-Employee Director:
$17,500 (payable in quarterly installments)
An award on the date of each Annual Meeting of Stockholders of shares of restricted common stock that has an accounting income charge under FAS 123R of $50,000 and that is subject to the following basic terms:
Restrictions: The shares may not be sold, assigned, transferred, pledged or otherwise disposed of until they vest. In addition, as a condition to the award, the recipient must agree that so long as he is a director of the Company, he will retain and not sell or otherwise dispose of at least that number of shares of the Company's common stock that have been awarded to him as director compensation that is equal in market value to the sum of the cash fees paid to him in the previous two calendar years. Vesting: Vesting of the restricted stock award shares shall occur on the trading day immediately preceding the following year's Annual Meeting of Stockholders, but earlier upon the death of the director; upon the director becoming permanently disabled; and upon a change in control of the Company as defined in the Company's 2001 Stock Incentive Plan. Forfeiture: The shares of restricted stock shall be forfeited in the event that prior to vesting, the director ceases to be a director other than by reason of his death, permanent disability or a change in control of the Company.
Additional Annual Fees — Committee Chairmen: (payable in quarterly installments)
Chairman of the Audit Committee	$	12,500
Chairman of the Compensation Committee	$	7,500
Chairman of the Corporate Governance & Nominating Committee	$	7,500
Meeting Fees
In-Person Meetings	Per Director/Per Meeting
Board Meetings	$	1,500
Committee Meetings
Audit Committee Meetings
in connection with a Board meeting	$	1,000
not in connection with a Board meeting	$	1,500
Other Committee Meetings
in connection with a Board meeting	$	500
not in connection with a Board meeting	$	750
Telephonic Meetings (Board & committee meetings)
One hour or longer	$	1,000
Less than one hour	$	300