UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 ____________
  FORM
10-K
  (Mark
One)
  x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the year ended December 31, 2008
  OR
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from ______________ to ______________
  Commission
file number:  001-32865
  _________________
  KSW,
INC.
 (Exact
Name of Registrant as Specified in its Charter)
  Delaware
                  (State
      or Other Jurisdiction
                  of
      Incorporation or Organization)
                11-3191686
                  (I.R.S.
      Employer
                  Identification
      No.)37-16
      23rd Street, Long Island City, New York
                11101(Address
      of Principal Executive Offices)
                (Zip
      Code)
  Registrant’s
telephone number, including area code:  (718) 361-6500
  Securities
registered pursuant to Section 12(b) of the Act:
  TITLE OF EACH CLASS
                    
                    NAME OF EACH EXCHANGE ON WHICH
      REGISTEREDCOMMON
      STOCK
                      $.01
      par value
                    
                    NASDAQ
      GLOBAL MARKET
 
  SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  NONE
  Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  o  No x
  Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  Yes  o  No x
  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 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  xNo o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.  o
  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 definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
  Large
Accelerated Filer   o        Accelerated
Filer   o       
Non-Accelerated Filer   o         
Smaller Reporting Company  x
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).  Yes  o    No 
x
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on June 30, 2008 was $26,623,044 (based on a
price of $4.76 per share).
  As of
March 23, 2009, there were 6,235,125 shares of Common Stock, $.01 par value per
share, outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE:
  The
Registrant’s definitive proxy statement to be filed with the Securities and
Exchange Commission (the “Commission”) pursuant to Regulation 14A within 120
days after the end of the Registrant’s last fiscal year is incorporated by
reference into Part III of this Annual Report on Form 10-K.
  
  FORWARD-LOOKING
      STATEMENTS.
                    
                    
                    
                    2PART
      I.
                    
                    
                    
                    3ITEM
      1.
                    BUSINESS
                    
                    
                    3ITEM
      1A.
                    RISK
      FACTORS
                    
                    
                    8ITEM
      1B.
                    UNRESOLVED
      STAFF COMMENTS
                    
                    
                    10ITEM
      2.
                    PROPERTIES
                    
                    
                    10ITEM
      3.
                    LEGAL
      PROCEEDINGS
                    
                    
                    10ITEM
      4.
                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    
                    
                    10PART
      II
                    
                    
                    
                    12ITEM
      5.
                    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED   STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                    
                    
                    12ITEM
      6.
                    SELECTED
      FINANCIAL DATA
                    
                    
                    13ITEM
      7.
                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    
                    
                    14ITEM
      7A.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    
                    
                    27ITEM
      8.
                    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                    
                    
                    27ITEM
      9.
                    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                    
                    
                    27ITEM
      9A (T).
                    CONTROLS
      AND PROCEDURES
                    
                    
                    27ITEM
      9B.
                    OTHER
      INFORMATION
                    
                    
                    28PART
      III
                    
                    
                    
                    28ITEM
      10.
                    DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                    
                    
                    28ITEM
      11.
                    EXECUTIVE
      COMPENSATION
                    
                    
                    29ITEM
      12.
                    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                    
                    
                    29ITEM
      13.
                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE29ITEM
      14.
                    PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                    
                    
                    29PART
      IV
                    
                    
                    
                    30ITEM
      15.
                    EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                    
                    
                    30SIGNATURES
                    
                    
                    
                    32
  
  FORWARD
LOOKING STATEMENTS
  Certain
statements contained under “Item 1 - Business”, “Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this Form 10-K regarding matters that are not historical facts,
constitute “forward-looking statements” (as such term is defined in the Private
Securities Litigation Reform Act of 1995). These forward-looking statements
generally can be identified as statements that include phrases such as
“believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “may”,
“will” or other similar words or phrases. Such forward-looking statements
concerning management’s expectations, strategic objectives, business prospects,
anticipated economic performance and financial condition and other similar
matters involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements to
differ materially from any expected results, performance or achievements
discussed or implied by such forward-looking statements. Many of the risks,
uncertainties and other important factors that could cause actual results to
differ materially from expectations of the Company are described under “Item 1A
- Risk Factors” in this Form 10-K. All written and oral forward-looking
statements attributable to the Company or persons acting on behalf of the
Company are qualified in their entirety by such factors.
 
 There is
no assurance that any of the actions, events or results of the forward-looking
statements will occur, or if any of them do, what impact they will have on our
results of operations or financial condition.  Because of these
uncertainties, you should not put undue reliance on any forward-looking
statements.  Other than as required by applicable law, we disclaim any
obligation to update or to announce publicly the result of any revisions to any
of the forward-looking statements to reflect future events or
developments.
  2
 
 PART
I
  ITEM
1.                      BUSINESS
  General.  KSW,
Inc., a Delaware corporation (the “Company” or “KSW”), furnishes and installs
heating, ventilating and air conditioning (“HVAC”) systems and process piping
systems for institutional, industrial, commercial, high-rise residential and
public works projects.  The Company does not actively pursue projects
under $3,000,000.  The Company also serves as a mechanical trade
manager, performing project management services relating to the mechanical
trades.  The Company conducts operations through its wholly-owned
subsidiary, KSW Mechanical Services, Inc. (“KSW Mechanical”). The Company’s
common stock is traded on the Nasdaq Global Market Exchange (“NASDAQ”) under the
symbol “KSW”.
  During
the current recession, banks have been less likely to lend money for
construction projects, and investors appear to be less likely to contribute
capital to new construction projects.  New York City, with its
dependency on the financial institutions and markets, has been affected by this
crisis.  Two of the Company’s contracts, with an aggregate contract
value of approximately $56 million, have been put on hold.  Three
contracts, together having an original contract value of $8.7 million, have been
terminated.  Based on discussions with the respective developers, the
Company is hopeful that it will have a role in these projects when and if they
resume, although there is no assurance that this will occur.
  The
federal government’s stimulus package is expected to increase construction
spending in the future.  While there is no guarantee that the Company
will receive any of this new work as a result of the stimulus package, the
Company has successfully competed for public work in the past.  The
Company feels it has an advantage over its competitors, since it has
historically worked with its customers to help save them money, which is a
benefit to owners, especially in a time of financial crisis.  The
Company believes its high cash reserves and strong balance sheet should help it
weather this economic crisis.
  Some of
the Company’s ongoing projects include: Cardiovascular Center at New York
Presbyterian Hospital, a hotel/rental building in Manhattan at 839 Sixth Avenue,
an apartment building at 320 West 38th Street,
a hotel/condominium complex at 123 Washington Street, the Trump project at 246
Spring Street, and several residential condominium projects along Brooklyn’s
waterfront.  The Company is not currently performing work on projects
in the public sector.  However, the Company has begun to bid on public
projects, as it has done in the past.  The Company is also providing
pre-construction trade management services on the following
projects:  Mount Sinai Center for Science and Medicine, Blythedale
Children’s Hospital and the Morgan Stanley Children’s Hospital of New York
Pediatric Emergency Department Renovation.
  The
Company’s primary strategic objectives are to increase its revenues and
profitability in its present business.  While cash reserves are
important in this economic climate, the Company may look to expand its business
into new geographic areas in the Northeastern United States or acquire
businesses which would be complementary to its current line of
business.  The Company may also pursue acquisitions outside its
current lines of business for greater diversification.
  3
  The
Company’s primary business is providing HVAC and process piping systems under
direct contracts with owners of buildings or subcontracts with general
contractors or construction managers.  Historically, some of these
contracts were awarded through competitive bids.
  For the
past few years, the Company has focused on the New York City private
construction market and has been successful in obtaining projects from private
owners and construction companies by utilizing its value engineering and trade
management skills.  Many of these projects are obtained from repeat
customers, who invite the Company to participate in the project while the
project is still in the design phase, or to assist in bringing a project’s
budget in line with the customer’s requirements.
  The
Company provides value engineering assistance, whereby the Company uses its
experienced staff to recommend economical changes to streamline HVAC and process
piping systems.  These changes reduce costs, but still yield the same
results as the original plans.  The Company’s ability to provide this
service has become increasingly recognized in the industry and has resulted in
the Company’s ability to secure projects without competitive bidding. The
Company believes that this service will provide additional opportunities in the
future, since bad economic times, create an even greater need for a project to
be less costly for both the owner and the project’s lending
institution.  Certain governmental agencies have begun to incorporate
value engineering provisions in their bid documents.
  The
Company’s management pioneered the concept of managing the mechanical trade
portion of large construction projects.  On larger complex projects
(generally those having a mechanical portion valued at over $10,000,000), it is
often beneficial for a construction manager to lock in the costs of the
mechanical portion of the contract prior to completion of the contract
documents.  By engaging the services of a trade manager, the Company
believes owners can more accurately evaluate design alternatives so that the
completed construction documents balance costs and project
objectives.  As a mechanical trade manager, the Company performs a
construction manager function for the mechanical trade portion of a
project.  The Company divides the mechanical portion of the contract
into bid packages for subcontractors and equipment, negotiates subcontracts and
coordinates the work. The Company believes that this coordination provides a
significant benefit in keeping a project on schedule and within
budget.
  As a
mechanical trade manager, the Company may subcontract parts of a large project
to different subcontractors, thereby increasing competition on projects and
reducing costs by allowing smaller contractors to compete for the subcontract
work.  On some projects, the Company may self-perform a portion of the
work for a fixed price.  The Company believes customers benefit by
having a single source responsible for the cost, coordination and progress of
the mechanical portion of the projects. Although trade management is typically
available only on large jobs, the Company believes there is opportunity for
expanding this line of business.
  On trade
management projects, the Company provides a guaranteed maximum price (“GMP”) to
its customer for its scope of responsibility.  The Company controls
the GMP by obtaining price quotes from potential suppliers and subcontractors,
requiring payment or performance bonds from major subcontractors and adding a
contingency allowance to these price quotes before the Company submits its
GMP.  The Company also works to control costs because it is a
mechanical contractor and can perform some of the guaranteed work on its own
should bid
   4
  prices
exceed its estimate. These costs are subject to certain risk factors discussed
in “Item 1A – Risk Factors”.
  While
trade management projects provide a net profit margin lower than that for
construction projects, the Company believes there is generally less risk
associated with trade management projects because there is a contingency fund,
which can be drawn from if necessary.  A contingency fund is a line
item which the Company includes in the GMP to account for any contingencies the
Company may not have anticipated in estimating the GMP.  In the event
the Company’s costs exceed the relevant line items quoted in the GMP, the
Company may draw from the contingency fund to cover such
expenses.  The Company is at risk for any costs in excess of the
GMP.  There is no assurance that potential cost overruns will not
exceed this contingency.
  Operations.  Historically,
the Company has obtained projects primarily through negotiations with private
owners, construction managers and general contractors and by competitive bidding
and negotiations in response to advertisements by federal, state and local
governmental agencies.  During 2008 and 2007, the Company has not bid
on public projects, but has obtained projects in the private sector by working
with owners, developers, construction companies and design professionals on a
cooperative basis.  The Company’s ability to suggest alternative
design concepts has allowed its customers to reduce their cost of
projects.  By providing value engineering and trade management
services, the Company has been able to secure contracts without participating in
the competitive bidding process.
  For all
projects, the Company develops a comprehensive project budget using what it
believes is a proven cost estimating system.  Projects are divided
into phases and line items indicating separate labor, equipment, material,
subcontractor and overhead cost estimates.  As a project progresses,
the Company’s project managers are responsible for planning, scheduling and
overseeing operations and reviewing project costs compared to the estimates.
These costs are tracked on a monthly basis. The Company’s costs have been and
may in the future be impacted by lower than expected labor productivity and
higher than expected material costs.
  Recently,
the Company has begun to bid on public projects.  It has previously
received letters of approval as an authorized bidder by various government
agencies, including the New York City Transit Authority, the New York City
Health and Hospitals Corporation, the New York City School Construction
Authority, the New York City Housing Authority and the New York State Dormitory
Authority.
  Markets.The Company competes for
business primarily in the New York City metropolitan area.  However,
the Company has performed work outside of that area in the past.
  Backlog.The Company
has a backlog (anticipated revenue from the uncompleted portions of awarded
contracts) totaling approximately $62,500,000 as of December 31, 2008, compared
to approximately $111,300,000 as of December 31, 2007, and approximately
$110,200,000 as of December 31, 2006.  The Company’s backlog at
December 31, 2008 does not include the contract values for the 42nd Street
and Tenth Avenue project and the 56 Leonard Street project in
Manhattan.  These two projects, whose aggregate contract amount is in
excess of $56,000,000, have been put on hold by their respective
owners.  The December 31, 2008 backlog does include three contracts,
together having an original contract value of approximately
  5
  $8.7
million, which were terminated by the developer for convenience.  At
December 31, 2008, these three contracts were approximately 25%
complete.   The developer is seeking assistance from its
contractors and their unions in order to reduce construction
costs.  The Company is having discussions with the developer in an
effort to reduce costs, and towards keeping the Company involved in the
projects.  The Company is hopeful that its role in the construction of
these projects will resume.
  The
Company believes its remaining backlog is firm, but in this unsettled economic
time, delays or postponement of additional projects is not within the Company’s
control.
  The
Company’s backlog at December 31, 2008 does not include the Mount Sinai Hospital
Center for Science and Medicine trade management contract, where the Company is
providing value engineering, estimating, and scheduling services.  The
Company has not furnished a GMP nor entered into a contract to construct this
project, which is currently valued at approximately $58,000,000.
  A portion
of the Company’s anticipated revenue in any year is not reflected in its backlog
at the start of the year because some projects are awarded and performed in the
same year.  The Company believes that approximately $9,000,000 of the
existing backlog at December 31, 2008 is not reasonably expected to be completed
during the next fiscal year.  The schedule for each project is
different and subject to change due to circumstances outside the control of the
Company. Accordingly, it is not reasonable to assume that the performance of
backlog will be evenly distributed throughout a year. The Company believes that
its backlog is firm, notwithstanding provisions contained in the contracts which
allow customers to modify or cancel the contracts at any time, subject to
certain conditions, including reimbursement of costs incurred in connection with
the contracts and the possible payment of cancellation fees.
  The
Company is actively seeking new contracts to add to its
backlog.  Management believes that its value engineering services will
continue to assist the Company in obtaining new contracts.
  Competition.  The
mechanical contracting market is highly competitive. There are many larger
regional and national companies with resources greater than those of the
Company.  However, some of these large competitors are unfamiliar with
the New York City metropolitan area.  The Company believes it competes
favorably with such companies because of its reputation in the New York City
area and its knowledge of the local labor force and its ability to value
engineer projects.  There are also many smaller contractors and
subcontractors in the New York City metropolitan area, who may also compete for
work.  The Company believes there are barriers to entry for smaller
competitors, including bonding requirements, relationships with subcontractors,
suppliers and unions.
  Regulations.  The
construction industry is subject to various governmental regulations from local,
state and federal authorities, such as the Occupational Safety and Health
Administration (“OSHA”) and environmental agencies.  The Company is
also governed by state and federal requirements regarding the handling and
disposal of lead paint, but the financial impact of complying with such
requirements cannot be predicted at this time because it varies from project to
project.  The Company must also comply with regulations as to the use
and disposal of solvents and hazardous wastes, compliance with which are a
normal part of its
  6
  operations.  The
Company does not perform asbestos abatement, but has occasionally subcontracted
that part of a contract to duly licensed asbestos abatement companies with the
Company being named as an additional insured on the asbestos abatement company’s
liability insurance policy.  The Company has not incurred any
liability for violations of environmental laws.
  Employees.  At
December 31, 2008, the Company had approximately 43 full-time office and project
support employees.  The Company also employs field employees, who are
union workers.  The number of field union workers employed varies at
any given time, depending on the number and types of ongoing projects and the
scope of projects under contract.  The Company hires union labor for
specific work assignments and can reduce the number of union workers hired at
will with no penalty.
  The
Company pays benefits to union employees through payments to trust funds
established by the unions.  The Company’s obligation is to pay a
percentage of the wages of union workers to these trust funds.  The
Company is not liable for under funding of these union plans.  The
Company provides its full-time office employees, not subject to collective
bargaining agreements, with medical insurance benefits and a discretionary
matching 401(k) plan.  In 2008, the Company matched 25% of its
employees’ yearly 401(k) contributions.
  Dependence Upon
Customers.   At any given time, a material portion of the
Company’s contract revenue may be generated from a single customer through one
large contract or various contracts.  The Company’s customer base can
vary each year based on the nature and scope of the projects undertaken in that
year.
  For the
year ended December 31, 2008, work under contracts with Bovis Lend Lease LMB,
Inc., Gotham Construction Co., LLC and Newmark Construction Services, LLC and
related entities, constituted 27%, 16% and 11% of the Company’s total revenues,
respectively.
  For the
year ended December 31, 2007, work under contracts with Bovis Lend Lease LMB,
Inc., Newmark Construction Services, LLC and related entities, and Plaza
Construction Corporation constituted 46%, 20% and 13% of the Company’s total
revenues, respectively.
  For the
year ended December 31, 2006, work under contracts with Bovis Lend Lease LMB,
Inc., Newmark Construction Services, LLC, Glenwood Management Corporation and
related entities, and Skanska USA Building Inc. constituted 40%, 18%, 10% and
10% of the Company’s total revenues, respectively.
  Historically,
a portion of the Company’s revenue has been generated from contracts with
federal, state and local governmental authorities.  The Company’s
current revenue and backlog does not include any contracts directly with these
governmental authorities.
  As is
customary and required in the industry, the Company is often requested to
provide a surety bond.  The Company’s ability to obtain bonding, and
the amount of bonding required, is solely at the discretion of the surety and is
primarily based upon the Company’s net worth, working capital, the number and
size of projects under construction and the surety’s relationship with
management.  The larger the project and/or the number of projects
under contract, the greater the requirements are for bonding, net worth and
working capital.  The Company
  7
  generally
pays a fee to the bonding company of an amount approximately 1% of the amount of
the contract to be performed.  Since inception, the Company has
neither been denied any request for payment or performance bonds, nor has a
bonding company been required to make a payment on any bonds issued for the
Company.  At December 31, 2008, approximately $16,800,000 of the
Company’s backlog was bonded.
  Other
Matters.
The Company does not own any patents or patent rights.  The Company’s
business is not subject to large seasonal variations. The Company did not expend
funds for research and development during 2008, 2007 and 2006, and anticipates
no research and development expenses in 2009.
  ITEM
1A.                                RISK
FACTORS
  The Company is subject to a variety of
risks, including the risks described below as well as adverse business
conditions.  The risks and uncertainties described below are not the
only ones facing the Company.  Additional risks and uncertainties, not
known or described below, which have not been determined to be material may also
impair the Company’s business operations.  You should carefully
consider the risks described below together with all other information in this
report, including information contained in the “Forward-Looking Statements,”
“Business”, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Quantitative and Qualitative Disclosure about Market
Risk” sections.  If any of the following risks occur, the Company’s
financial condition and results of operations could be adversely
affected.  Such events may cause actual results to differ materially
from expected and historical results, and the trading price of the Company’s
stock could decline.
  The
economic downturn, specifically in the New York City metropolitan area, has
resulted in a decrease in construction spending in the private and public
sectors in the market the Company serves.  Several of the Company’s
projects have been put on hold or terminated, and there is no assurance as to if
and when work on those projects will resume.  Additional projects
could be delayed or cancelled, which would reduce the Company’s future
revenues.
  The Company has a written employment
agreement with Floyd Warkol, its Chairman and CEO, which expires on December 31,
2009. The Company has no other current employment or non-competition agreements
with senior management.  Because the Company relies on senior
management’s relationships with its customers and in the construction industry
in New York City, the failure to retain senior management would have a material
adverse effect on the Company’s business.
  The Company’s continued ability to
obtain bonding is critical to its ability to bid on most public work and on
certain private projects.  The surety’s provision of bonding pursuant
to its arrangement with the Company is solely at the surety’s discretion, and
the arrangement with the surety is an at-will arrangement subject to
termination.  If the Company is unable to obtain surety bonds as
needed, this could have a material adverse effect on the Company.
  The Company has in the past experienced
erosion in gross profit margins due to lower than anticipated labor productivity
and higher labor costs related to shortages of skilled labor and unforeseen
jobsite conditions.  There can be no assurance that these factors will
not affect productivity and profitability in the future.
  8
  The Company has in the past experienced
significant increases in the cost of steel piping materials, which is the
primary material used by the Company on projects.  Future increases
may impact the Company’s profit margins to the extent the Company is not able to
pass such increased costs on to its customers or lock-in prices under long-term
purchase agreements.
  The Company relies on a relatively
small number of customers for a significant share of its
revenues.  The loss of business from any of these significant
customers could have a material adverse effect on the Company’s business and its
operating results.
  The Company faces intense competition
due to the highly competitive nature of the mechanical contracting market that
could limit its ability to increase its market share and its
revenues.
  During the construction period, owners
or general contractors may require the Company to perform certain work which is
a change to or in addition to the original contract.  Such work often
requires months to obtain formal change orders (including dollar
amounts).  Change orders are often the subject of dispute and
sometimes litigation.  The failure of an owner or general contractor
to issue change orders or make payments could delay receipt of receivables and
require litigation to collect sums due the Company.
  Slow receipt of collections may also
result from financial difficulties of a general contractor or an
owner.  The Company’s inability to collect its contract balance on a
project could have a material adverse effect on its operating
results.
  Although the Company’s operations are
not directly affected by inflation, both New York City and New York State have
large debt service burdens.  Inflationary pressures historically have
tended to result in a reduction in capital spending by both state and local
agencies; such capital expenditure reductions in turn could have a negative
impact on the Company’s revenues.
  Failure of the Company’s subcontractors
or providers of equipment to perform as anticipated could have a negative impact
on the Company’s results.  The Company subcontracts a portion of its
contracts to specialty subcontractors, and the Company is ultimately responsible
for the successful completion of their work.  The Company also
utilizes equipment manufacturers and suppliers which are responsible for
delivering specified products on a timely basis.  Although the Company
utilizes highly respected companies and sometime requires performance bonds,
there is no guarantee that the Company will not incur a material loss due to
performance issues related to these arrangements.
  Accounting for contract related
revenues and costs as well as other cost items requires management to make a
variety of significant estimates and assumptions.  Although the
Company believes it has sufficient experience and processes to enable it to
formulate appropriate assumptions and produce reliable estimates, these
assumptions and estimates may change significantly in the future, and these
changes could have a material adverse effect on the Company’s financial position
and results of operations.
  The Company’s success depends on
attracting and retaining qualified personnel in a competitive
environment.  The single largest factor in the Company’s ability to
profitably execute its work is its ability to attract, develop and retain
qualified personnel.  The Company’s
  9
  success
in attracting qualified personnel is dependent on the resources available, the
impact of general economic conditions on the labor supply, and the ability to
provide competitive compensation.
  ITEM
1B.                                UNRESOLVED
STAFF COMMENTS
  Not Applicable.
  ITEM
2.                      PROPERTIES
  Pursuant
to a Modification of Lease Agreement, dated as of May 1, 1998, the Company
leases office and warehouse space in Long Island City, New York, consisting of
18,433 square feet.  The lease had an initial annual base rent of
$173,000, with yearly rent increases of approximately 2%.  The lease
is a triple net lease and thus the Company will pay any increases in real estate
taxes over base year taxes, maintenance, insurance and utilities.  The
current lease expires on June 30, 2009.  The Company and the landlord
have agreed to renew the lease for an additional five years, with a tenant’s
option to cancel after one year.
  The
Company also occupies a building and a storage yard in Bronx, New York,
consisting of a 14,000 square foot building, including 4,000 square feet of
offices and 10,000 square feet of shop space.  It also occupies an
adjacent 5,000 square foot storage yard.   This property was
jointly owned by the Company’s Chief Executive Officer and a charitable
foundation he controls. The Company purchased this building and storage yard
during December 2008 for a purchase price of $2,500,000.  Prior to the
December 2008 purchase of this building and yard, the Company rented this
property from its owners.  This tenancy was on a triple net
basis.  The Company paid rent of approximately $8,500 per month, plus
taxes (approximately $2,000 per month), maintenance, insurance and
utilities.
  The
properties are well maintained, adequate and suitable for their
purposes.
  ITEM
3.                      LEGAL PROCEEDINGS
  There are
no material pending legal proceedings to which the Company is a
party.
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS
  No
matters were submitted to a vote of stockholders during the fourth quarter of
2008.
  10
  EXECUTIVE
OFFICERS OF THE REGISTRANT
 
 Officers
of the Company serve at the pleasure of the Board of Directors. The name, age
and offices held by each of the executive officers of the Company as of December
31, 2008 were as follows:
 
 Name
                
                Age
                
                TitleFloyd
      Warkol
                
                
                61
                
                Chief
      Executive Officer, President, Secretary and Chairman of the Board of
      DirectorsRichard
      W. Lucas
                
                
                42
                
                Chief
      Financial OfficerJames
      F. Oliviero
                
                
                62
                
                General
      CounselVincent
      Terraferma
                
                
                58
                
                Chief
      Operating Officer of KSW
Mechanical
 
  Mr. Floyd
Warkol has been employed as Chairman of the Board since December 1995 and as
President, Secretary and Chief Executive Officer of the Company and as Chairman
and Chief Executive Officer of KSW Mechanical since January 1994.
  Mr.
Richard W. Lucas has been employed as the Chief Financial Officer of the Company
and KSW Mechanical since August 2002.  Since February 2006, Mr. Lucas
has been a Director of KSW Mechanical.
  Mr. James
F. Oliviero has been employed as General Counsel of the Company and KSW
Mechanical since February 1998.  From January 1994 until February
1998, he was employed as Director of Contract Administration of KSW
Mechanical.
  Mr. Vincent Terraferma has been
employed as Chief Operating Officer of KSW Mechanical since January
2003.  From December 1995 to December 2002, he was KSW Mechanical’s
Executive Vice President.
  11
  PART
II
 
 ITEM
5.                      MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
  Since
November 2007, the Company’s Common Stock has been quoted on the NASDAQ Stock
Market LLC’s Global Market under the symbol “KSW”.  Prior to November
2007, the Company’s Common Stock was quoted on the American Stock
Exchange.
  At March
23, 2009, the Company had 6,235,125 shares of Common Stock issued and
outstanding held by approximately 3,200 shareholders of record based on
shareholder lists provided by the Company’s stock transfer agent and Broadridge
Financial Solutions, Inc.
  On April
30, 2008, the Company’s Board of Directors declared a cash dividend of $.20 per
common share.  The aggregate amount of the dividend was approximately
$1,258,000 and was paid on June 17, 2008 to shareholders of record as of May 26,
2008.
  On May 8,
2007 the Company’s Board of Directors declared a 5% stock dividend pursuant to
which 293,265 additional shares were issued on June 11, 2007 to shareholders of
record as of May 24, 2007.  Cash was paid in lieu of issuing
fractional shares based on the last sales price of the Company’s stock on the
record date.  All references in the accompanying consolidated
financial statements to the weighted average number of common shares outstanding
and per share amounts are based on the retroactive effect of the stock
dividend.
  The
following information on high and low bid data is provided for 2008 and 2007
based on intraday quotations:
  2008
                  
                  
                  2007Quarter
                  
                  High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  LowFirst
                  
                  $
                  7.04
                  
                  
                  $
                  5.54
                  
                  
                  $
                  7.69
                  
                  
                  $
                  6.01Second
                  
                  $
                  5.95
                  
                  
                  $
                  4.61
                  
                  
                  $
                  8.13
                  
                  
                  $
                  6.23Third
                  
                  $
                  5.19
                  
                  
                  $
                  3.00
                  
                  
                  $
                  8.65
                  
                  
                  $
                  6.25Fourth
                  
                  $
                  5.30
                  
                  
                  $
                  1.79
                  
                  
                  $
                  7.40
                  
                  
                  $
                  5.76
 These
prices represent bid prices, which are prices paid by broker dealers, and do not
include retail markups, markdowns or broker dealer commissions.
  On
December 19, 2008, the Company announced that its Board of Directors had
approved a stock repurchase program that authorizes the Company to buy up to
$1,000,000 of its Common Stock through open market purchases in compliance with
Rule 10b-18 under the Exchange Act.  The program will be effective
through June 30, 2009.  The following table sets forth information
regarding the shares of Common Stock purchased pursuant to the program during
December 2008.  No other purchases of Common Stock were made by the
Company during the fourth quarter of 2008.  Securities laws limit the
amount of stock which the Company may repurchase daily to 25% of the average
daily trading volume over the preceding four calendar weeks.
  12
  Period
                                    
                                    Total
      Number of
                                      Shares
      Purchased
                                    
                                    
                                    Average
      Price
                                      Paid
      per Share
                                    
                                    
                                    Total
      Number of Shares Purchased as Part of Publicly Announced Plans
      or Programs
                                    
                                    
                                    Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet be
      Purchased Under the Plans or ProgramsDecember
      19, 2008 through December 31, 2008
                                    
                                    
                                    6,600
                                    
                                    
                                    $
                                    2.31
                                    
                                    
                                    
                                    6,600
                                    
                                    
                                    $
                                    984,000
  ITEM
6.                      SELECTED FINANCIAL
DATA
  The
following information for the years ended December 31, 2008 and 2007 is derived
from and qualified in its entirety to, the consolidated financial statements for
the years audited by J.H. Cohn LLP, which are presented elsewhere
herein.  The following information for the years ended December 31,
2006, 2005, and 2004 is derived from and qualified in its entirety to the
consolidated financial statements for those years audited by  Marden,
Harrison & Kreuter CPAs P.C., of which 2006 is presented elsewhere
herein.  Each of the previously mentioned consolidated financial
statements is included herein or in prior years’ annual reports on
Form  10-K, and should be read in conjunction with such financial
information.
  As Of And For The Year Ended December
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      in thousands, except share and per share amounts)Income
      Statement:Revenues
                  
                  $
                  93,027
                  
                  
                  $
                  77,266
                  
                  
                  $
                  77,128
                  
                  
                  $
                  53,378
                  
                  
                  $
                  26,281Costs
      of revenues
                  
                  
                  80,910
                  
                  
                  
                  66,771
                  
                  
                  
                  67,155
                  
                  
                  
                  46,897
                  
                  
                  
                  24,139Gross
      profit
                  
                  
                  12,117
                  
                  
                  
                  10,495
                  
                  
                  
                  9,973
                  
                  
                  
                  6,481
                  
                  
                  
                  2,142Selling,
      general and administrative expenses
                  
                  
                  5,283
                  
                  
                  
                  4,427
                  
                  
                  
                  4,511
                  
                  
                  
                  3,657
                  
                  
                  
                  3,452Operating
      income (loss)
                  
                  
                  6,834
                  
                  
                  
                  6,068
                  
                  
                  
                  5,462
                  
                  
                  
                  2,824
                  
                  
                  
                  (1,310
                  )Other
      income
                  
                  
                  370
                  
                  
                  
                  682
                  
                  
                  
                  361
                  
                  
                  
                  39
                  
                  
                  
                  52Income
      (loss) before provision for income taxes
                  
                  
                  7,204
                  
                  
                  
                  6,750
                  
                  
                  
                  5,823
                  
                  
                  
                  2,863
                  
                  
                  
                  (1,258
                  )Provision
      for income taxes
                  
                  
                  2,965
                  
                  
                  
                  3,088
                  
                  
                  
                  2,715
                  
                  
                  
                  152
                  (a)
                  
                  
                  22Net
      income (loss)
                  
                  
                  4,239
                  
                  
                  
                  3,662
                  
                  
                  
                  3,108
                  
                  
                  
                  2,711
                  
                  
                  
                  (1,280
                  )Net
      income (loss) per share – Basic
                  
                  
                  .68
                  
                  
                  
                  .59
                  
                  
                  
                  .52
                  
                  
                  
                  .47
                  
                  
                  
                  (.22
                  )Diluted
                  
                  
                  .67
                  
                  
                  
                  .59
                  
                  
                  
                  .51
                  
                  
                  
                  .47
                  
                  
                  
                  (.22
                  )Number
      of shares used in earnings (loss) per share computation :Basic
                  
                  
                  6,278,555
                  
                  
                  
                  6,162,034
                  
                  
                  
                  5,950,445
                  
                  
                  
                  5,743,827
                  
                  
                  
                  5,743,827Diluted
                  
                  
                  6,334,329
                  
                  
                  
                  6,242,607
                  
                  
                  
                  6,077,127
                  
                  
                  
                  5,743,827
                  
                  
                  
                  5,743,827Dividends
      per share
                  
                  
                  .20
                  
                  
                  
                  -
                  
                  
                  
                  .06
                  
                  
                  
                  -
                  
                  
                  
                  -
  13
  Balance
      Sheet Data:Total
      assets
                  
                  $
                  50,499
                  
                  
                  $
                  40,937
                  
                  
                  $
                  35,545
                  
                  
                  $
                  22,710
                  
                  
                  $
                  13,913Working
      capital
                  
                  
                  18,331
                  
                  
                  
                  16,822
                  
                  
                  
                  12,361
                  
                  
                  
                  8,056
                  
                  
                  
                  3,181Current
      liabilities
                  
                  
                  29,251
                  
                  
                  
                  23,548
                  
                  
                  
                  22,422
                  
                  
                  
                  13,192
                  
                  
                  
                  7,127Long-term
      liabilities
                  
                  
                  1,118
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      equity
                  
                  
                  20,130
                  
                  
                  
                  17,389
                  
                  
                  
                  13,123
                  
                  
                  
                  9,518
                  
                  
                  
                  6,786Other
      Data:Current
      ratio
                  
                  1.63:1
                  
                  
                  1.71:1
                  
                  
                  1.55:1
                  
                  
                  1.61:1
                  
                  
                  1.45:1
  (a)
During the year ended December 31, 2005, the outstanding deferred tax valuation
allowance was reversed, after the Company’s management re-evaluated the
likelihood that these assets would be realized in their entirety, and concluded
the valuation allowance was not required.
  ITEM
7.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  The
following discussion and analysis explains the general financial condition and
the results of operations for the Company for the years ended December 31, 2008,
2007 and 2006 including:
 
 • factors
that affect its business;
 • its
earnings and costs in the periods presented;
 • changes
in earnings and costs between periods;
 • sources of earnings; and
 • impacts of these factors on its
overall financial condition.
 
 As you
read this discussion and analysis, please refer to the Company’s consolidated
financial statements and the notes thereto for the years ended 2008, 2007 and
2006 included in this report.
 
 Overview
 
 The Company, through its wholly-owned
subsidiary, furnishes and installs HVAC systems and process piping systems for
institutional, industrial, commercial, high-rise residential and public works
projects.  The Company does not actively pursue projects under
$3,000,000. Some larger company projects involve multi-year contracts, which can
account for more than 10% of the Company’s revenue in any given
year.  The Company also serves as a mechanical trade manager,
performing project management services relating to the mechanical
trades.
 
 The
Company obtains projects through both competitive and negotiated bidding
processes submitted to project owners or construction managers, many with whom
the Company has long standing commercial relationships.
 
 The
Company is awarded many of its contracts by providing value engineering
assistance, whereby the Company recommends changes to project plans, subject to
the approval of the design professional.  This assistance reduces
costs and yields the same results as the original designs.  As a
result, during 2008 and 2007, the Company obtained most of its
contracts
  14
  without
being required to participate in a competitive bidding process.  The
Company has recently resumed bidding on public contracts, some of which
incorporate value engineering provisions.
 
 The
Company’s profitability is dependent on its ability to continue to maintain its
commercial relationships and provide quality services necessary to obtain
projects.  The Company’s costs of revenues include field labor,
equipment, material, subcontractor and overhead costs.  Overhead costs
include project supervision and drafting salaries, as well as insurance
costs.  The Company must control costs of revenues by having the
ability to manage material costs, purchase equipment at or below original
estimated amounts and control labor costs throughout the duration of each
project.
 
 For the
year ended December 31, 2008, the Company’s earnings were the result of
increased revenues, increased gross profit earned from projects, increased
selling, general and administrative expenses and a reduction in other
income.
 
 The
Company’s revenue for 2008 increased 20.4%, as compared to revenue in 2007, as a
result of the Company’s performance on its December 31, 2007 backlog, as well as
contracts received during 2008.  During 2008, the Company had two jobs
whose start dates have been postponed.  These projects, whose
aggregate contract value is in excess of $56 million, are not included in the
Company’s backlog.  The postponement of these projects also affected
the amount of revenue and gross profit the Company could have earned in
2008.
 
 The gross
profit for 2008 was higher than 2007 as a result of the increased acceptance of
the Company’s value engineering services in the market place.  A
number of projects experienced general construction delays which reduced
revenues.  While the Company is typically compensated for costs
associated with delays, there is no assurance that such claims will be
successful in the future. The effect of a delay in
construction is to postpone revenue recognition until a later
period.
 
 The
Company’s selling, general and administrative expenses increased primarily as a
result of increased employment costs, auto expenses, professional fees, costs
associated with the Company’s public filings and costs associated with the
hiring of an investor relations firm.
 
 The
Company’s other income was lower in 2008 as compared to 2007, as a result of a
reduction in the interest rates that investments were able to earn.
 
 The
majority of the Company’s contracts are awarded on a fixed-price
basis.  Subcontractor and equipment purchases are awarded on a
fixed-price basis, near the time the Company’s contract is
awarded.  The Company purchases most materials throughout the project
on a price in effect basis.  The Company includes allowances in its
estimates for future escalations in steel prices.  The Company had an
agreement with a supplier of piping materials, whereby the Company was committed
to purchase certain piping products normally used in its operations at set
prices through October 2008.  Based on the current pricing of piping
material, the Company has determined that it was not necessary to renew this
agreement.
  15
 
 For the
year ended December 31, 2007, the Company’s earnings were affected by increased
gross profit earned from projects, reduced selling, general and administrative
expenses and increased other income.
 
 The gross
profit for 2007 was higher than 2006 as a result of the Company’s ability to
pick and choose projects and the increased acceptance of the Company’s value
engineering services in the market place.
 
 A number
of projects experienced general construction delays in the early stages of
construction, which reduced revenues in 2007.  While the Company is
typically compensated for costs associated with these delays, the effect is to
postpone revenue recognition until a later period.
 
 The
Company’s selling, general and administrative expenses were reduced as a result
of the allocation of overhead costs to trade management contracts.
 
 The
Company’s other income was higher as a result of interest income earned on a
higher cash position and realized gains on the sales of marketable
securities.
 
 For the
year ended December 31, 2006, the Company’s earnings were affected by increased
volume compared to 2005, an increase in corporate income tax expense and the
reversal of the allowance for doubtful accounts.
 
 The
Company’s revenues for 2006 increased 44.5%, as a result of the Company’s
performance on its backlog as of December 31, 2005, as well as contracts
received during 2006.
 
 The
corporate income tax expense for the year ended December 31, 2006 was higher
than 2005, due to increased earnings.
 
 During
the fourth quarter of 2006, the Company reversed the allowance for doubtful
accounts, which increased net income by approximately $107,000.
 
 Management
believes that the future success of the Company lies in its ability to obtain
new projects, maintain proper cost controls related to this work, pursue new
trade management contracts and continue controlling office expenditures. The
Company is dependant on outside factors such as the general health of the New
York City metropolitan area economy, lending institutions willingness to make
loans, and continued low interest rates, all of which contribute to the strength
of the building industry and the type of projects the Company has the ability to
obtain.  Even though there are increasing governmental deficits, the
Government’s stimulus package could also affect the amount of new governmental
financed projects which the Company could pursue. The Company must also continue
to obtain surety bonds, when required on projects. The Company’s management has
experience in expanding into new geographic areas; however, to date the Company
has conducted its operations primarily in the New York metropolitan
area.
  16
 
 Results
of Operations
 
 The
following table sets forth the amounts of, and as a percentage of total
revenues, certain items of the Company’s consolidated statements of operations
for the periods indicated (dollar amounts in thousands):
 
 2008
                    
                    
                    2007
                    
                    
                    2006Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentRevenues
                    
                    $
                    93,027
                    
                    
                    
                    100.0
                    
                    
                    $
                    77,266
                    
                    
                    
                    100.0
                    
                    
                    $
                    77,128
                    
                    
                    
                    100.0Costs
      of revenues
                    
                    
                    80,910
                    
                    
                    
                    87.0
                    
                    
                    
                    66,771
                    
                    
                    
                    86.4
                    
                    
                    
                    67,155
                    
                    
                    
                    87.1Gross
      profit
                    
                    
                    12,117
                    
                    
                    
                    13.0
                    
                    
                    
                    10,495
                    
                    
                    
                    13.6
                    
                    
                    
                    9,973
                    
                    
                    
                    12.9Selling,
      general and administrative expenses
                    
                    
                    5,283
                    
                    
                    
                    5.7
                    
                    
                    
                    4,427
                    
                    
                    
                    5.7
                    
                    
                    
                    4,511
                    
                    
                    
                    5.9Operating
      income
                    
                    
                    6,834
                    
                    
                    
                    7.3
                    
                    
                    
                    6,068
                    
                    
                    
                    7.9
                    
                    
                    
                    5,462
                    
                    
                    
                    7.0Other
      income
                    
                    
                    370
                    
                    
                    
                    .4
                    
                    
                    
                    682
                    
                    
                    
                    .8
                    
                    
                    
                    361
                    
                    
                    
                    .5Income
      before provision for income taxes
                    
                    
                    7,204
                    
                    
                    
                    7.7
                    
                    
                    
                    6,750
                    
                    
                    
                    8.7
                    
                    
                    
                    5,823
                    
                    
                    
                    7.5Provision
      for income taxes
                    
                    
                    2,965
                    
                    
                    
                    3.2
                    
                    
                    
                    3,088
                    
                    
                    
                    4.0
                    
                    
                    
                    2,715
                    
                    
                    
                    3.5Net
      income
                    
                    $
                    4,239
                    
                    
                    
                    4.5
                    
                    
                    $
                    3,662
                    
                    
                    
                    4.7
                    
                    
                    $
                    3,108
                    
                    
                    
                    4.0
  Year
Ended December 31, 2008 compared to Year Ended December 31, 2007
  Revenues
  Revenues increased $15,761,000 or
20.4%, to $93,027,000 for the year ended December 31, 2008, as compared to
$77,266,000 for the year ended December 31, 2007.  Revenues for the
fourth quarter of 2008 were $25,011,000, an increase of $6,083,000 or 32.1%, as
compared to $18,928,000 in the fourth quarter of 2007.
  During 2008 and 2007, the Company had a
number of projects which experienced general construction delays in the early
stages of construction, which reduced revenue for each year.
  At December 31, 2008, the Company had
backlog of approximately $62,500,000.  The December 31, 2008 backlog
includes the remaining contract value of three contracts, which have been
terminated for convenience by the developer, effective March 6,
2009.  The backlog at December 31, 2008 does not include contract
values totaling approximately $56,000,000 for two other projects which have been
delayed by their respective owners.
  Approximately $9,000,000 of the
December 31, 2008 backlog is not reasonably expected to be completed in the next
fiscal year.  New contracts secured by the Company during 2008, and if
work resumes on the delayed contracts, will also increase 2009
revenues.  The amount of backlog not reasonably expected to be
completed in the next fiscal year is subject to various uncertainties and
risks.  The Company is actively seeking new projects to add to its
backlog.
  During the year ended December 31,
2008, the Company had earned 27%, 16%, and 11% of revenues, respectively, from
its three largest customers.  The Company bids on large multi-year
contracts, which can account for more than 10% of its contract revenue in any
given year.
  17
 
 Costs of
Revenues
 
 Costs of revenues increased by
$14,139,000 or 21.2%, to $80,910,000 for the year ended December 31, 2008, as
compared to $66,771,000 for the year ended December 31, 2007.  Costs
of revenues for the fourth quarter of 2008 were $22,082,000, an increase of
$5,506,000 or 33.2%, as compared to $16,576,000 for the fourth quarter of
2007.  Costs of revenues include subcontractor costs, field labor,
material, equipment and overhead expenses.  Overhead costs include
project supervision and drafting salaries as well as insurance
costs.  Higher revenues generally require higher expenditures of
costs, but high revenues have allowed the Company to allocate the cost of
project supervision and drafting salaries over multiple projects and more
effectively utilize its experienced field labor personnel.  In
addition, the Company took steps to reduce pricing volatility of piping
materials by entering into agreements to purchase these products at fixed
prices, which expired October 2008.  Based on the current pricing of
piping material, the Company has determined that it was not necessary to renew
this agreement.
 
 Gross
Profit
 
 For the year ended December 31, 2008,
the Company had a gross profit of $12,117,000 or 13.0% of revenues, as compared
to $10,495,000 or 13.6% of revenues for the year ended December 31,
2007.  In the fourth quarter of 2008, the gross profit was $2,929,000
or 11.7% of revenues, as compared to $2,352,000 or 12.4% of revenues for the
fourth quarter of 2007.  The change in dollar amount in gross profits
was primarily a result of the mix of self-performed and trade management
contracts during the periods.
 
 Selling, General and
Administrative Expenses
 
 For the
year ended December 31, 2008, selling, general and administrative (“S,G&A”)
expenses increased $856,000, or 19.3%, to $5,283,000, as compared to $4,427,000
for the year ended December 31, 2007.  In the fourth quarter of 2008,
S,G&A expenses were $1,136,000, an increase of $246,000, or 27.6%, as
compared to $890,000 for the fourth quarter of 2007.
 
 For the above yearly and quarterly
periods, a portion of these changes were a result of the increases in employment
costs, auto expenses, professional fees, costs associated with the public
filings and expenses related to the hiring of an investor relations
firm.  Professional fees, related to the Company’s public filings with
the Securities and Exchange Commission, together with costs associated with
investor relations firm, increased approximately $100,000 during the year ended
December 31, 2008, as compared to the year ended December 31, 2007.
 
 The remaining changes in 2008 S,G&A
expenses were primarily a result of increases in employment costs and office
expenses.  In 2007, the Company was able to allocate some of these
overhead costs to trade management contracts.
 
 Other
Income
 
 Other income for the year ended
December 31, 2008 decreased $312,000 or 45.7%, to $370,000, as compared to other
income of $682,000 for the year ended December 31, 2007.
  18
  This
change in other income was primarily a result of the Company’s ability to earn
greater interest income on its cash position and gains on sales of marketable
securities in 2007.  Net interest income for the year ended December
31, 2007 was $359,000, as compared to $569,000 for the year ended December 31,
2007.  During the years ended December 31, 2008 and 2007, the Company
realized gains on the sales of marketable securities totaling $11,000 and
$113,000, respectively.
 
 Provision for Income
Taxes
 
 The income tax expense for the year
ended December 31, 2008 was $2,965,000, or 41.2% of income before the provision
for income taxes, compared to $3,088,000, or 45.7% of income before the
provision for income taxes for the year ended December 31, 2007.
 
 The provision for income taxes was
lowered in 2008 by the Company’s ability to utilize the Domestic Production
Activities Deduction, a credit available to qualifying entities in construction
and other industries.
 
 Net
income
 
 As a result of all the items above, the
Company reported net income of $4,239,000, or $.68 per share-basic and $.67 per
share-diluted, for the year ended December 31, 2008.
 
 As a result of all the items above, the
Company reported net income of $3,662,000, or $.59 per share-basic and diluted,
for the year ended December 31, 2007.
 
 Year
Ended December 31, 2007 compared to Year Ended December 31, 2006
  Revenues
 
 Revenues increased $138,000, or .2%, to
$77,266,000 for the year ended December 31, 2007, as compared to $77,128,000 for
the year ended December 31, 2006.  Revenues for the fourth quarter of
2007 were $18,928,000, a decrease of $663,000, or 3.4%, as compared to
$19,591,000 in the fourth quarter of 2006.
 
 During 2007, a number of projects
experienced general construction delays in the early stages of construction,
which reduced revenues for the year.
 
 During the year ended December 31,
2007, the Company had earned 46%, 20%, and 13% of revenues, respectively, from
its three largest customers.  The Company bids on large multi-year
contracts, which can account for more than 10% of its contract revenue in any
given year.
  Costs of
Revenues
 
 Costs of revenues decreased by
$384,000, or .6%, to $66,771,000 for the year ended December 31, 2007, as
compared to $67,155,000 for the year ended December 31, 2006.  Costs
of revenues for the fourth quarter of 2007 were $16,576,000, a decrease of
$90,000 as compared
  19
  to
$16,666,000 for the fourth quarter of 2006.  Costs of revenues include
subcontractor costs, field labor, material, equipment and overhead
expenses.  Overhead costs include project supervision and drafting
salaries as well as insurance costs.  Higher revenues generally
require higher expenditures of costs, but high revenues have allowed the Company
to allocate the cost of project supervision and drafting salaries over multiple
projects and more effectively utilize its experienced field labor
personnel.  In addition, the Company took steps to reduce pricing
volatility of piping materials by entering into agreements to purchase these
products at fixed prices.
 
 Gross
Profit
 
 For the year ended December 31, 2007,
the Company had a gross profit of $10,495,000 or 13.6% of revenues, as compared
to $9,973,000 or 12.9% of revenues for the year ended December 31,
2006.  In the fourth quarter of 2007, the gross profit was $2,352,000
or 12.4% of revenues, as compared to $2,925,000 or 14.9% of revenues for the
fourth quarter of 2006.  The change in dollar amount in gross profits
was primarily a result of the mix of contracts the Company has performed on
during the periods.
 
 Selling, General and
Administrative Expenses
 
 For the
year ended December 31, 2007, S,G&A expenses decreased $84,000, or 1.9%, to
$4,427,000, as compared to $4,511,000 for the year ended December 31,
2006.  In the fourth quarter of 2007, S,G&A expenses were
$890,000, a decrease of $104,000, as compared to $994,000 for the fourth quarter
of 2006.
 
 For the above yearly and quarterly
periods, a portion of these changes were a result of the professional fees and
employment costs.  Professional fees, related to the Company’s public
filings with the Securities and Exchange Commission, together with American
Stock Exchange fees decreased approximately $175,000 during the year ended
December 31, 2007.  In addition, during the fourth quarter of 2006,
the Company reversed the allowance for doubtful accounts totaling $200,000,
which reduced S,G&A expenses.
 
 The remaining changes in S,G&A
expenses were primarily a result of decreases in employment costs and office
expenses related to the allocation of overhead costs to trade management
contracts.
  Other
Income
 
 Other income for the year ended
December 31, 2007 increased $321,000 or 88.9%, to $682,000, as compared to other
income of $361,000 for the year ended December 31, 2006.  This change
in other income was primarily a result of the Company’s ability to earn interest
income on its increased cash position and gains on sales of marketable
securities.  Net interest income for the year ended December 31, 2007
was $569,000, as compared to $317,000 for the year ended December 31,
2006.  During the years ended December 31, 2007 and 2006, the Company
realized gains on the sales of marketable securities totaling $113,000 and
$44,000, respectively.
  20
 
 Provision for Income
Taxes
 
 The income tax expense for the year
ended December 31, 2007 was $3,088,000, or 45.7% of income before the provision
for income taxes compared to $2,715,000, or 46.6% of income before the provision
for income taxes for the year ended December 31, 2006.
 
 Net
Income
 
 As a result of all the items above, the
Company reported net income of $3,662,000, or $.59 per share-basic and diluted,
for the year ended December 31, 2007.
 
 As a result of all the items above, the
Company reported net income of $3,108,000, or $.52 per share-basic and $.51 per
share-diluted, for the year ended December 31, 2006.
 
 During the fourth quarter of 2006, the
Company reversed the allowance for doubtful accounts, which increased net income
by approximately $107,000 or $.02 per share-basic and diluted.
  Liquidity
and Capital Resources
  General
  The
Company’s principal capital requirement is to fund its work on construction
projects.  Projects are billed on a monthly basis based on the work
performed to date.  These project billings, less a withholding of
retention which is received as the project nears completion, are collectible
based on the respective contract terms.  The Company has historically
relied primarily on internally generated funds.  The Company has not
relied on bank borrowings to finance its operations since July
2003.  The Company has a line of credit, which is subject to certain
conditions.  See discussion of Credit Facility below.
  As of
December 31, 2008, the Company’s cash and cash equivalents balances totaled
$16,611,000, an increase of $379,000 from the $16,232,000 reported as of
December 31, 2007. The cash position as of December 31, 2008 was reduced by the
purchase of the Bronx fabrication shop, which the Company had previously
rented.
  In
addition, at December 31, 2008, the Company held marketable securities totaling
$1,223,000, a decrease from the $1,892,000 balance at December 31,
2007.
  Net cash provided by
Operating Activities
  Net cash provided by operating
activities was $3,016,000, $2,804,000 and $8,510,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.  The cash provided by
operations was primarily due to income provided by operations, and during 2008
and 2007, it was reduced by corporate income taxes paid totaling $3,045,000 and
$3,922,000, respectively.  Cash provided by operations for the years
ended December 31, 2006 include receipts on the Co-Op City litigation settlement
of $1,700,000.
  21
  Cash used in Investing
Activities
  Net cash
used in investing activities was $1,450,000 in 2008, $1,322,000 in 2007, and
$51,000 in 2006.  The Company purchased marketable securities of
$39,000, $1,737,000, and $12,000 during 2008, 2007 and 2006,
respectively.  The Company received proceeds on the sales of
marketable securities of $32,000, $489,000, and $171,000 during 2008, 2007 and
2006, respectively.  The Company purchased property and equipment
totaling $2,630,000, $74,000 and $210,000 during 2008, 2007 and 2006,
respectively.  Included in the 2008 total is the purchase price of the
Bronx building and adjacent yard. $1,176,000 of the purchase price was
financed.
  Cash (used in) provided by
Financing Activities
  Net cash
used in financing activities was $1,187,000 during 2008.  Net cash
provided by financing activities was $665,000 and $427,000 during 2007 and 2006,
respectively.
  During
December 2008, the Company’s Board of Directors authorized through June 2009,
the purchase of up to $1,000,000 of the Company’s common stock on the open
market. During 2008, the Company purchased 6,600 shares at a cost of
$16,000.
  During
the year ended December 31, 2008, four individuals exercised options to purchase
an aggregate of 43,501 shares of the Company’s common stock, contributing cash
proceeds of $68,000 to the Company.
  During
the year ended December 31, 2007, eight individuals exercised options to
purchase an aggregate of 192,916 shares contributing cash proceeds of $309,000
to the Company.
  During
the year ended December 31, 2006, six individuals exercised options to purchase
an aggregate of 287,832 shares contributing cash proceeds of $475,000 to the
Company.
  Prior to
adopting SFAS 123-R, the Company presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the statement of cash
flows.  SFAS 123-R requires cash flows resulting from excess tax
benefits to be classified as a part of cash flows from financing
activities.  Excess tax benefits represent tax benefits related to
exercised options in excess of the associated deferred tax assets for such
options.  As a result of adopting SFAS 123-R, $63,000, $356,000 and
$293,000 of excess tax benefits for the years ended December 31, 2008, 2007 and
2006, respectively, have been classified as an operating cash outflow and a
financing cash inflow.
  On April
30, 2008, the Company’s Board of Directors declared a cash dividend of $.20 per
share.  The aggregate amount of the dividend was $1,258,000, and was
paid on June 17, 2008 to shareholders of record as of May 26, 2008.
  On May 8,
2006, the Company’s Board of Directors declared a special cash dividend of $.06
per share to shareholders of record as of May 24, 2006.  The aggregate
amount of the dividend was $341,000, and this dividend was paid on June 15,
2006.
  22
 
 Credit
Facility
  The
Company has a line of credit facility from Bank of America, N.A., which provides
borrowings for working capital purposes up to $2,000,000.  This
facility is secured by the Company’s assets and is guaranteed by the Company’s
subsidiary, KSW Mechanical Services, Inc.  On January 26, 2009, the
Company’s bank extended the working capital credit facility through April 1,
2010.  There have been no borrowings against this facility during 2008
and 2007.
  Advances
bear interest, based on the Company’s option, at either the bank’s prime lending
rate plus one percent per annum (4.25% at December 31, 2008), or the London
Interbank Offered Rate (“LIBOR”) plus two and one-half percent per annum (2.94%
at December 31, 2008).
  Payment
may be accelerated by certain events of default such as unfavorable credit
factors, the occurrence of a material adverse change in the Company’s business,
properties or financial condition, a default in payment on the line, impairment
of security, bankruptcy, or the Company ceasing operations or being unable to
pay its debts.  The line of credit must be paid in full at the end of
the term.
  The
Company currently has no significant capital expenditure
commitments.
  Surety
  On some
of its projects, the Company is required to provide a surety
bond.  The Company’s ability to obtain bonding, and the amount of
bonding available, is solely at the discretion of the surety and is primarily
based upon the Company’s net worth, working capital, the number and size of
projects under construction and the surety’s relationship with
management.  The Company is contingently liable to the surety under a
general indemnity agreement.  The Company agrees to indemnify the
surety for any payments made on contracts of suretyship, guaranty or indemnity
as a result of the Company not having the financial capacity to complete
projects.  Management believes the likelihood of the surety having to
complete projects is remote.  The contingent liability is the cost of
completing all bonded projects, which is an undeterminable amount because it is
subject to bidding by third parties.  Management believes that all
contingent liabilities will be satisfied by the Company’s performance on the
specific bonded contracts involved.  The surety provides bonding
solely at its discretion, and the arrangement with the surety is an at-will
arrangement subject to termination.
  As of
December 31, 2008, approximately $16,800,000 of the Company’s backlog of
approximately $62,500,000 was bonded.  The Company provides its surety
with a detailed schedule of backlog on a quarterly basis.  The Company
believes its bonding limits are sufficient based on the Company’s revenue,
volume and size of the Company’s bonded contracts.
  23
 
 Critical
Accounting Policies and Estimates
 
 The
Company’s consolidated financial statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of consolidated 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, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.
 
 The
Company continually evaluates the accounting policies and estimates it uses to
prepare the consolidated financial statements.  In general,
management’s estimates are based on historical experience, on information from
third party professionals and on various other assumptions that are believed to
be reasonable under the facts and circumstances.  Actual results could
differ from those estimates made by management.
 
 The
Company believes the following accounting policies represent critical accounting
policies. Critical accounting policies are those that are both most important to
the portrayal of a company’s financial condition and results and require
management’s most difficult, subjective, or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. We discuss our significant
accounting policies in Note 2to the Company’s
consolidated financial statements, including those that do not require
management to make difficult, subjective, or complex judgments or
estimates.
 
 Accounting for revenue
recognition for construction contracts
 
 The
Company recognizes revenue for long-term construction contracts not yet
completed using the percentage-of-completion method, measured by the percentage
of total costs incurred to date as compared to total estimated costs at the
completion of each contract.  When the Company bids on projects, a
comprehensive budget is prepared dividing the project into line items indicating
separate labor, equipment, material, subcontractor and overhead cost
estimates.  As projects progress, the Company’s project managers plan,
schedule and oversee operations and review project costs compared to the
estimates.  Management reviews on a bi-weekly basis the progression of
the contract with the project manager.  An analysis is prepared and
reviewed monthly by management comparing the costs incurred to the budgeted
amounts.  The results of these procedures help update the anticipated
total costs at completion, based on facts and circumstances known at the
time.  Any revisions in cost and profit estimates are reflected in the
accounting period in which the facts, which require the revisions, become known.
These estimates are subject to revisions due to unanticipated increases in
labor, material and equipment costs as well as project scope
changes.  The Company receives change orders for project scope
changes.  For some project cost overruns, the Company can make a claim
to the project owner or general contractor to seek reimbursement of these
overruns. In the past, the Company has been successful in the pursuit of such
claims.  Such claims are not recorded on the books until they are
acknowledged by the owner or contractor.
  24
 
 Accounts and retainage
receivable
 
 Judgment
is required to estimate the collectibility of accounts and retainage
receivable.  The Company has in the past established an allowance for
uncollectible trade accounts and retainage receivable based upon historical
collection experience and management’s periodic evaluation of the collectibility
of outstanding accounts and retainage receivable on an account-by-account
basis.  Accounts receivable and contract retentions are due based on
contract terms.  Amounts are deemed delinquent when they are not
received within their contract terms.  Delinquent receivables are
written-off based on individual credit evaluation and specific circumstances of
the customer.
 
 During
the years ended December 31, 2008 and 2007, the Company has not written off any
receivables and therefore has not recorded an allowance for uncollectible trade
accounts and retainage receivable at December 31, 2008 and 2007.
 
 Accounting for income
taxes
 
 Judgment
is required in developing the Company’s provision for income taxes, including
the determination of deferred tax assets and valuation allowances that might be
required against the deferred tax assets and liabilities.  The
Company’s consolidated balance sheets at December 31, 2008 and 2007 include
deferred tax assets totaling $394,000 and $311,000, respectively.
 
 Accounting for share-based
compensation
 
 Since
January 1, 2006, the Company accounts for share-based compensation in accordance
with the fair value recognition provisions of SFAS 123-R. The Company uses the
Black-Scholes option – pricing model, which requires the input of subjective
assumptions.  These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them
(“expected term”), the estimated volatility of the Company’s common stock price
over the expected term and the number of options that will ultimately not
complete their vesting requirements (“forfeitures”).  Changes in the
subjective assumptions can materially affect the estimate of fair value
share–based compensation and the related amount recognized in the consolidated
statements of income.
  NEW
ACCOUNTING PRONOUNCEMENTS
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 141 (revised 2007), “Business Combinations” (“SFAS
141-R”).  SFAS 141-R changes the accounting for acquisitions
specifically eliminating the step acquisition model, changing the recognition of
contingent consideration from being recognized when it is probable to being
recognized at the time of acquisition, disallowing the capitalization of
transaction costs and changes when restructurings related to acquisition can be
recognized.  The standard is effective for fiscal years beginning on
or after December 15, 2008 and will only impact the accounting for acquisitions
that are made after adoption.
  25
  In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited.  SFAS 160
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from the Company’s
equity.  The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the
consolidated income statement.  It also amends certain of ARB No. 51’s
consolidation procedures for consistency with the requirements of SFAS 141-R.
SFAS 160 also includes expanded disclosure requirements regarding the interests
of the parent and its noncontrolling interest.  The Company believes
the adoption of SFAS 160 will not have an effect on the Company’s consolidated
financial position or results of operations.
  In May
2008, FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 provides a consistent
framework for determining what accounting principles should be used when
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America.  Previous guidance
did not properly rank the accounting literature.  SFAS 162 is
effective 60 days following the Securities and Exchange Commission’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  The adoption of SFAS 162 did not have a material effect
on the Company’s consolidated financial position or results of
operations.
  CONTRACTUAL
OBLIGATIONS
  As of
December 31, 2008, outstanding contractual obligations are as
follows:
  Payments Due by
Period
 Contractual Obligations
                
                Total
                
                
                Less than 1 year
                
                
                1-3 years
                
                
                4-5 years
                
                
                After 5 yearsLong-
      term debt  (a)
                
                $
                1,176,000
                
                
                $
                58,000
                
                
                $
                116,000
                
                
                $
                116,000
                
                
                $
                886,000Capital
      leases
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      leases (b)
                
                
                1,224,000
                
                
                
                208,000
                
                
                
                442,000
                
                
                
                458,000
                
                
                
                116,000Purchase
      obligations under construction contracts
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      long-term obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                $
                2,400,000
                
                
                $
                266,000
                
                
                $
                558,000
                
                
                $
                574,000
                
                
                $
                1,002,000
  (a)
                The
      long-term debt is related to the financing of the purchase of a pipe
      fabrication shop and adjacent yard located in Bronx,
  N.Y.
  (b)
                The Company is
      currently obligated to pay monthly rental payments of approximately
      $16,000 on its lease for office space in Long Island City, New
      York.  The current lease expires in June 2009.  During
      March 2009, the Company and the landlord agreed to extend the lease for
      five years, with a tenant’s option to cancel after one
    year.
  26
  OFF
-BALANCE SHEET ARRANGEMENTS
  No
disclosures are required pursuant to Item 303 (a) (4) of Regulation
S-K.
  ITEM
      7A.QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  The
Company does not utilize futures, options or other derivative instruments. As of
December 31, 2008, the Company has $1,223,000 in marketable
securities.
  ITEM
8.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
  Information
required by this item, including the consolidated financial statements and
related notes, is incorporated herein by reference to pages F-1 through F-36 of
this Annual Report on Form 10-K.
  ITEM
9.                      CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ONACCOUNTING
AND FINANCIAL DISCLOSURE
  No
disclosure required.
 
 ITEM 9A
(T).           CONTROLS AND
PROCEDURES
 
 The
Company carried out an evaluation, under the supervision and with the
participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2008. Based on that evaluation, its Chief Executive Officer
and Chief Financial Officer concluded that, the Company’s disclosure controls
and procedures were effective as of December 31, 2008.
 
 MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANICAL REPORTING
 
 The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and
Exchange Act of 1934). Our internal control over financial reporting is a
process designed with the participation of our Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with accounting principles generally accepted
in the United States of America.
 
 Our internal control over financial
reporting includes policies and procedures that: (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of assets; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that our receipts
  27
  and
expenditures are being made only in accordance with authorizations of our
management and Board of Directors; and (c) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial
statements.
 
 Because of its inherent limitations,
our disclosure controls and procedures may not prevent or detect
misstatements.  A control system, no matter how well conceived and
operated, can only provide reasonable, not absolute, assurance that the control
system objectives are met.  Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been
detected.  Also, projections of any evaluation of effectiveness 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.
 
 As of December 31, 2008, our management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework established in INTERNAL CONTROL –
INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  Based on this assessment, management
determined that, as of December 31, 2008, the Company’s internal control over
financial reporting was effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
 
 There
have been no changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), during the
quarter ended December 31, 2008, that have materially affected or are reasonably
likely to materially affect the Company’s internal control over financial
reporting.
 
 This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
  ITEM
9B.                                OTHER INFORMATION
 
 None.
  PART
III
  ITEM
      10.
              DIRECTORS, EXECUTIVE OFFICERS AND
      CORPORATE GOVERNANCE
  Other
than information with respect to the Company’s executive officers, which is set
forth after Item 4 of Part I of this Form 10-K, and information regarding the
Company’s Code of Ethics, as set forth below, the information required to be
disclosed pursuant to Item 10 is
  28
  incorporated
in its entirety herein by reference to the Company’s definitive proxy statement
to be filed with the Commission pursuant to Regulation 14A within 120 days after
the end of the Company’s last fiscal year.
  CODE OF ETHICS
  The
Company has adopted a written Code of Business Conduct and Ethics (the “Code of
Ethics”) that applies to its principal executive officer, principal financial
and accounting officer, directors, officers and employees.  Copies of
the Company’s Code of Ethics will be provided free of charge upon written
request directed to the Company’s Director of Investor Relations, at 37-16
23rd
Street, Long Island City, New York 11101.
  ITEM
11.                                EXECUTIVE
COMPENSATION
  The
information required to be disclosed pursuant to Item 11 is incorporated in its
entirety herein by reference to the Company’s definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A within 120 days after the
end of the Company’s last fiscal year.
  ITEM
12.                                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  The
information required to be disclosed pursuant to Item 12 is incorporated in its
entirety herein by reference to the Company’s definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A within 120 days after the
end of the Company’s last fiscal year.
  ITEM
13.                                CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  a.           The
information required to be disclosed pursuant to Item 13 is incorporated in its
entirety herein by reference to the Company’s definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A within 120 days after the
end of the Company’s last fiscal year.
  b.           Any
transaction required to be disclosed under this item must be approved by the
Board of Directors as being in the Company’s interest.
  ITEM
14.                                PRINCIPAL ACCOUNTING FEES AND
SERVICES
  The
information required to be disclosed pursuant to Item 14 is incorporated in its
entirety herein by reference to the Company’s definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A within 120 days after the
end of the Company’s last fiscal year.
  29
  PART
IV
  ITEM
15.                                EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
  (a)
Documents filed as part of this report:
  1. and 2.
Financial statement and financial statement schedules.
  See Index
to consolidated financial statements and financial statement schedules on page
F-1 of this Form 10-K.
  3.
              Exhibits
  No.
                            Description3.1
                            Amended
      and Restated Articles of Incorporation of KSW, Inc. (incorporated herein
      by reference to Exhibit 3.1 to the Company’s Registration Statement on
      Form S-8 (No. 333-217350), filed with the Commission on February 13,
      1997).3.2
                            Amended
      and Restated By-Laws of KSW, Inc. (incorporated herein by reference to
      Exhibit 3.2 to the Company’s Registration Statement on Form S-8 (No.
      333-217350), filed with the Commission on February 13,
    1997).10.1
                            Form
      of Modification of Lease Agreement dated as of May 1, 1998 by and between
      KSW, Inc, Irvjoy Partners, L.P. and I BLDG Co., Inc. (incorporated herein
      by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 1998 (Commission File No.
      001-32865), filed with the Commission on March 30,
  1999).10.2
                            1995
      Stock Option Plan of KSW, Inc. (incorporated herein by reference to
      Exhibit 10.3 to the Company’s Registration Statement on Form 10
      (Commission File No. 001-32865), filed with the Commission on November 24,
      1995).10.3
                            Employment
      Agreement, dated September 12, 2005 by and between the Company, KSW
      Mechanical Services, Inc. and Floyd Warkol (incorporated herein by
      reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K
      (Commission File No. 001-32865), filed with the Commission on September
      12, 2005).10.4
                            Amendatory
      Employment Agreement, dated as of March 6, 2007, by and between the
      Company, KSW Mechanical Services, Inc., and Floyd Warkol (incorporated
      herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form
      10-K for the year ended December 31, 2006, filed with the Commission on
      March 14,
2007).
  30
 
 10.5
                                      Line
      of Credit Agreement Letter, dated March 14, 2006, between KSW, Inc. and
      Bank of America, N.A. together with forms of a Line of Credit Note, Rider
      to Line of Credit Note, a pledge security agreement and guaranty
      (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual
      Report on Form 10-K for the year ended December 3, 2005, filed with the
      Commission on March 16, 2006).10.6
                                      Line
      of Credit Agreement Letter, dated March 8, 2007, between KSW, Inc. and
      Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2006, filed with the Commission on March 14, 2007).10.7
                                      Line
      of Credit Agreement Letter, dated January 28, 2008, between KSW, Inc. and
      Bank of America, N.A.10.8
                                      Line
      of Credit Agreement Letter, dated January 26, 2009, between KSW, Inc. and
      Bank of America, N.A.10.9
                                      KSW,
      Inc. 2007 Stock Option Plan (incorporated herein by reference to Appendix
      E to the Company’s definitive proxy statement on Schedule 14A for the 2008
      annual meeting of stockholders, filed with the Commission on April 4,
      2008).11.1
                                      Statement
      Regarding Computation of Net Earnings Per Share.21.1
                                      Subsidiaries
      of Registrant23.1
                                      Consent
      of J.H. Cohn LLP23.2
                                      Consent
      of Marden, Harrison & Kreuter CPAs P.C.31.1
                                      Certification
      of Chief Executive Officer required by Rule 13a-14(a).31.2
                                      Certification
      of Chief Financial Officer required by Rule 13a-14(a).32.1
                                      Certification
      of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C.
      Section 1350.32.2
                                      Certification
      of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C.
      Section
1350.
  31
  SIGNATURES
 
 Pursuant to the requirements of Section
13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  KSW, INC.
  By:
              /s/
      Floyd Warkol
 Floyd
      Warkol
 President,
      Chief Executive Officer,
 Secretary
      and Chairman of the Board of Directors (Principal Executive
      Officer)
 March
      23, 2009
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following person on behalf of the registrant and in the capacities and on the
dates indicated.
  /s/ Floyd
Warkol
 Floyd
Warkol
 President,
Chief Executive Officer,
 Secretary
and Chairman of the Board of Directors (Principal Executive
Officer)
 March 23,
2009
 
 /s/ Stanley
Kreitman
 Stanley
Kreitman
 Director
 March 23,
2009
 
 /s/ Innis
O’Rourke
 Innis
O’Rourke
 Director
 March 23,
2009
 
 /s/ Warren O.
Kogan
 Warren O.
Kogan
 Director
 March 23,
2009
 
 /s/ John A.
Cavanagh
 John A.
Cavanagh
 Director
 March 23,
2009
 
 /s/ Richard W.
Lucas
 Richard
W. Lucas
 Chief
Financial Officer
 (Principal
Financial Officer and
 Principal
Accounting Officer)
 March 23,
2009
  32
  INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
 
 PageReports
      of Independent Registered Public Accounting Firms
                  
                  
                  F-2-3Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                  
                  
                  F-4-5Consolidated
      Statements of Income
                  
                  
                  F-6Consolidated
      Statements of Comprehensive Income
                  
                  
                  F-7Consolidated
      Statements of Stockholders’ Equity
                  
                  
                  F-8-9Consolidated
      Statements of Cash Flows
                  
                  
                  F-10-11Notes
      to Consolidated Financial Statements
                  
                  
                  F-12-35Schedule
      II- Schedule of Valuation and Qualifying Accounts
                  
                  
                  F-36
  F-1
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and
 Stockholders
of KSW, Inc. and Subsidiary
  We have
audited the accompanying consolidated balance sheets of KSW, Inc. and Subsidiary
as of December 31, 2008 and 2007, and the related consolidated statements of
income, comprehensive income, stockholders’ equity, and cash flows for the years
then ended.  Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15.  These consolidated
financial statements and schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An also audit includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KSW, Inc. and
Subsidiary as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the years then ended in conformity with
accounting principles generally accepted in the United States of
America.  Also, in our opinion, the consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
  /s/ J.H.
Cohn, LLP
 White
Plains, New York
 March 23,
2009
  F-2
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and
 Stockholders
of KSW, Inc. and Subsidiary
  We have
audited the accompanying consolidated statements of income, comprehensive
income, stockholders’ equity, and cash flows of KSW, Inc. and Subsidiary for the
year ended December 31, 2006. These consolidated financial statements and
schedules are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based upon our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of operations
and cash flows of KSW, Inc. and Subsidiary for the year ended December
31, 2006 in conformity with accounting principles generally accepted in the
United States of America.
  Our audit
was conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole.  The accompanying consolidated
financial statement Schedule II is presented for additional analysis and is not
a required part of the basic financial statements.  Such information
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
  /s/
      Marden, Harrison, & Kreuter
                Certified
      Public Accountants, P.CWhite
      Plains, New YorkFebruary
      15, 2007, except for certain subsequent events previously reported, as to
      which the dates are March 6, 2007 and  March 8, 2007,
      respectively
  F-3
 
 KSW,
INC. AND SUBSIDIARY
  CONSOLIDATED
BALANCE SHEETS
  DECEMBER
31, 2008 AND 2007
 (in
thousands, except share data)
  ____________________________
  2008
                
                
                2007A S S E T SCurrent
      assets:Cash
      and cash equivalents
                
                $
                16,611
                
                
                $
                16,232Marketable
      securities
                
                
                1,223
                
                
                
                1,892Accounts
      receivable
                
                
                19,448
                
                
                
                14,133Retainage
      receivable
                
                
                9,097
                
                
                
                6,647Costs and estimated earnings in excess of billings on uncompleted
      contracts
                
                
                229
                
                
                
                1,107Prepaid
      income taxes
                
                
                326
                
                
                
                -Prepaid
      expenses and other receivables
                
                
                349
                
                
                
                359Deferred
      income taxes
                
                
                299
                
                
                
                -Total
      current assets
                
                
                47,582
                
                
                
                40,370Property
      and equipment, net
                
                
                2,778
                
                
                
                254Deferred
      income taxes and other
                
                
                139
                
                
                
                313Total assets
                
                $
                50,499
                
                
                $
                40,937
  (continued)
  F-4
 
 KSW,
INC. AND SUBSIDIARY
  CONSOLIDATED
BALANCE SHEETS
  DECEMBER
31, 2008 AND 2007
 (in
thousands, except share data)
  ____________________________
  2008
                      
                      
                      2007LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of mortgage payable
                      
                      $
                      58
                      
                      
                      $
                      -Accounts
      payable
                      
                      
                      14,442
                      
                      
                      
                      14,182Retainage
      payable
                      
                      
                      4,982
                      
                      
                      
                      3,636Accrued
      payroll and benefits
                      
                      
                      1,654
                      
                      
                      
                      1,519Accrued
      expenses
                      
                      
                      165
                      
                      
                      
                      175Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                      
                      
                      7,950
                      
                      
                      
                      4,031Income
      taxes payable
                      
                      
                      -
                      
                      
                      
                      5Total
      current liabilities
                      
                      
                      29,251
                      
                      
                      
                      23,548Mortgage
      payable, net of current portion
                      
                      
                      1,118
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      30,369
                      
                      
                      
                      23,548Commitments
      and contingencies (Note 12)Stockholders’
      equity:Preferred
      stock: $.01 par value, 1,000,000 shares authorized,no
      shares issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock:  $.01 par value, 25,000,000 shares authorized, 6,287,825
      and 6,244,324 shares issued, 6,281,225 and 6,244,324 shares outstanding at
      2008 and 2007, respectively
                      
                      
                      63
                      
                      
                      
                      62Additional
      paid-in capital
                      
                      
                      13,293
                      
                      
                      
                      13,139Retained
      earnings
                      
                      
                      7,142
                      
                      
                      
                      4,161Accumulated
      other comprehensive income (loss):Net
      unrealized holding gains (losses) on available-for-sale
      securities
                      
                      
                      (352
                      )
                      
                      
                      27Less  treasury
      stock at cost, 6,600 shares at 2008
                      
                      
                      (16
                      )
                      
                      
                      -Total
      stockholders’ equity
                      
                      
                      20,130
                      
                      
                      
                      17,389Total
      liabilities and stockholders’ equity
                      
                      $
                      50,499
                      
                      
                      $
                      40,937
  See notes
to consolidated financial statements.
  F-5
 
 KSW,
INC. AND SUBSIDIARY
  CONSOLIDATED
STATEMENTS OF INCOME
  YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except per share data)
  ________________________________________________
  2008
                  
                  
                  2007
                  
                  
                  2006Revenues
                  
                  $
                  93,027
                  
                  
                  $
                  77,266
                  
                  
                  $
                  77,128Costs
      of revenues
                  
                  
                  80,910
                  
                  
                  
                  66,771
                  
                  
                  
                  67,155Gross
      profit
                  
                  
                  12,117
                  
                  
                  
                  10,495
                  
                  
                  
                  9,973Selling,
      general and administrative expenses
                  
                  
                  5,283
                  
                  
                  
                  4,427
                  
                  
                  
                  4,511Operating
      income
                  
                  
                  6,834
                  
                  
                  
                  6,068
                  
                  
                  
                  5,462Other
      income :Interest
      income, net
                  
                  
                  359
                  
                  
                  
                  569
                  
                  
                  
                  317Gain
      on sale of marketable securities
                  
                  
                  11
                  
                  
                  
                  113
                  
                  
                  
                  44Total
      other income
                  
                  
                  370
                  
                  
                  
                  682
                  
                  
                  
                  361Income
      before provision for income
                    taxes
                  
                  
                  7,204
                  
                  
                  
                  6,750
                  
                  
                  
                  5,823Provision
      for income taxes
                  
                  
                  2,965
                  
                  
                  
                  3,088
                  
                  
                  
                  2,715Net
      income
                  
                  $
                  4,239
                  
                  
                  $
                  3,662
                  
                  
                  $
                  3,108Basic
      earnings per common share
                  
                  $
                  .68
                  
                  
                  $
                  .59
                  
                  
                  $
                  .52Diluted
      earnings per common share
                  
                  $
                  .67
                  
                  
                  $
                  .59
                  
                  
                  $
                  .51Weighted
      average common shares outstanding –Basic
                  
                  
                  6,278,555
                  
                  
                  
                  6,162,034
                  
                  
                  
                  5,950,445Diluted
                  
                  
                  6,334,329
                  
                  
                  
                  6,242,607
                  
                  
                  
                  6,077,127Cash
      dividend declared and paid per share
                  
                  $
                  .20
                  
                  
                  $
                  -
                  
                  
                  $
                  .06
  See notes
to consolidated financial statements.
  F-6
  KSW,
INC. AND SUBSIDIARY
  CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
  YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands)
  ________________________________________________
  2008
                  
                  
                  2007
                  
                  
                  2006Net
      income
                  
                  $
                  4,239
                  
                  
                  $
                  3,662
                  
                  
                  $
                  3,108Other
      comprehensive income (loss) before tax:Net
      unrealized holding gains (losses) arising during the year
                  
                  
                  (676
                  )
                  
                  
                  (19
                  )
                  
                  
                  73Less:
      reclassification adjustment for gains included in net
    income
                  
                  
                  (11
                  )
                  
                  
                  (113
                  )
                  
                  
                  (44
                  )Other
      comprehensive income (loss) before income tax
    (benefit)
                  
                  
                  (687
                  )
                  
                  
                  (132
                  )
                  
                  
                  29Income
      tax (benefit) related to items of other comprehensive income
      (loss)
                  
                  
                  308
                  
                  
                  
                  (61
                  )
                  
                  
                  13Other
      comprehensive income (loss), net of  income tax
      (benefit)
                  
                  
                  (379
                  )
                  
                  
                  (71
                  )
                  
                  
                  16Total
      comprehensive income
                  
                  $
                  3,860
                  
                  
                  $
                  3,591
                  
                  
                  $
                  3,124
  See notes
to consolidated financial statements.
  F-7





KSW,
INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY




YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006


(in
thousands, except share data)









Common
      Stock
                              
                              
                              Additional
                                Paid-In
                              
                              
                              Retained
                                Earnings
                              
                              
                              Accumulated
                                Other
                                Comprehensive
                              
                              
                              TreasuryShares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              (Deficit)
                              
                              
                              Income(Loss)
                              
                              
                              Stock
                              
                              
                              TotalBalances,
      January 1, 2006
                              
                              
                              5,470,311
                              
                              
                              $
                              54
                              
                              
                              $
                              9,729
                              
                              
                              $
                              (347
                              )
                              
                              $
                              82
                              
                              
                              $
                              -
                              
                              
                              $
                              9,518Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,108
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,108Share
      transactions under employeestock
      option plan
                              
                              
                              287,832
                              
                              
                              
                              4
                              
                              
                              
                              471
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              475Amortization
      of share-basedcompensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              54
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              54Cash
      dividend paid - $.06 per share
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (341
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (341
                              )Tax
      benefits from exercise of employeestock
      option plan
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              293
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              293Net
      unrealized gains on available forsale
      securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              16
                              
                              
                              
                              -
                              
                              
                              
                              16Balances,
      December 31, 2006
                              
                              
                              5,758,143
                              
                              
                              
                              58
                              
                              
                              
                              10,547
                              
                              
                              
                              2,420
                              
                              
                              
                              98
                              
                              
                              
                              -
                              
                              
                              
                              13,123Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,662
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,662Share
      transactions under employeestock
      option plan
                              
                              
                              192,916
                              
                              
                              
                              1
                              
                              
                              
                              308
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              309Amortization
      of share-based compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10Stock
      dividend
                              
                              
                              293,265
                              
                              
                              
                              3
                              
                              
                              
                              1,918
                              
                              
                              
                              (1,921
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Tax
      benefits from exercise of employeestock
      option plan
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              356
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              356Net
      unrealized losses on available forsale
      securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (71
                              )
                              
                              
                              -
                              
                              
                              
                              (71
                              )Balances,
      December 31, 2007
                              
                              
                              6,244,324
                              
                              
                              $
                              62
                              
                              
                              $
                              13,139
                              
                              
                              $
                              4,161
                              
                              
                              $
                              27
                              
                              
                              $
                              -
                              
                              
                              $
                              17,389





F-8





KSW,
INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(CONCLUDED)


YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006


(in
thousands, except share data)





Common
      Stock
                                      
                                      
                                      Additional
                                        Paid-In
                                      
                                      
                                      Retained
                                        Earnings
                                      
                                      
                                      Accumulated
                                        Other
                                        Comprehensive
                                      
                                      
                                      TreasuryShares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      (Deficit)
                                      
                                      
                                      Income(Loss)
                                      
                                      
                                      Stock
                                      
                                      
                                      TotalBalances,
      December 31, 2007
                                      
                                      
                                      6,244,324
                                      
                                      
                                      $
                                      62
                                      
                                      
                                      $
                                      13,139
                                      
                                      
                                      $
                                      4,161
                                      
                                      
                                      $
                                      27
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      17,389Net
      income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,239
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,239Share
      transactions under employee stock option plans
                                      
                                      
                                      43,501
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      67
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      68Cash
      dividend paid - $.20 per share
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,258
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,258
                                      )Tax
      benefits from exercise of employee stock option plan
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      63
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      63Amortization
      of share-based compensation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      24
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      24Purchase
      of treasury stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (16
                                      )
                                      
                                      
                                      (16
                                      )Net
      unrealized losses on available-for-sale securities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (379
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (379
                                      )Balances,
      December 31, 2008
                                      
                                      
                                      6,287,825
                                      
                                      
                                      $
                                      63
                                      
                                      
                                      $
                                      13,293
                                      
                                      
                                      $
                                      7,142
                                      
                                      
                                      $
                                      (352
                                      )
                                      
                                      $
                                      (16
                                      )
                                      
                                      $
                                      20,130




See notes
to consolidated financial statements.





F-9





KSW,
INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF CASH FLOWS




YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006


(in
thousands)









2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income
              
              $
              4,239
              
              
              $
              3,662
              
              
              $
              3,108Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
              
              
              98
              
              
              
              76
              
              
              
              66Deferred
      income taxes
              
              
              226
              
              
              
              254
              
              
              
              856Tax
      benefits from exercise of stockoptions
              
              
              (63
              )
              
              
              (356
              )
              
              
              (293
              )Reduction
      in allowance for doubtful accounts
              
              
              -
              
              
              
              -
              
              
              
              (200
              )Realized
      gains on sale ofmarketable
      securities
              
              
              (11
              )
              
              
              (113
              )
              
              
              (44
              )Gain
      on sale of property and equipment
              
              
              (3
              )
              
              
              -
              
              
              
              -Share-based
      compensation expenserelated
      to stock option plan
              
              
              24
              
              
              
              10
              
              
              
              54Changes
      in operating assets (increase) decrease:Accounts
      receivable
              
              
              (5,315
              )
              
              
              (928
              )
              
              
              (1,118
              )Retainage
      receivable
              
              
              (2,450
              )
              
              
              (1,081
              )
              
              
              (2,802
              )Costs
      and estimated earnings in excess ofbillings
      on uncompleted contracts
              
              
              878
              
              
              
              (90
              )
              
              
              (537
              )Prepaid
      expenses and other receivables
              
              
              10
              
              
              
              (112
              )
              
              
              (103
              )Prepaid
      income taxes
              
              
              (263
              )
              
              
              -
              
              
              
              -Other
              
              
              1
              
              
              
              -
              
              
              
              -Changes
      in operating liabilities increase (decrease):Accounts
      payable
              
              
              260
              
              
              
              2,222
              
              
              
              2,427Retainage
      payable
              
              
              1,346
              
              
              
              838
              
              
              
              1,222Accrued
      payroll and benefits
              
              
              135
              
              
              
              587
              
              
              
              390Accrued
      expenses
              
              
              (10
              )
              
              
              (121
              )
              
              
              90Billings
      in excess of costs and estimatedearnings
      on uncompleted contracts
              
              
              3,919
              
              
              
              (956
              )
              
              
              3,652Income
      taxes payable
              
              
              (5
              )
              
              
              (1,088
              )
              
              
              1,742Net
      cash provided by operating activities
              
              
              3,016
              
              
              
              2,804
              
              
              
              8,510




(continued)





F-10





KSW,
INC. AND SUBSIDIARY




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(CONCLUDED)


YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006


(in
thousands)







2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Cash
      flows from investing activities:Proceeds
      received on sale of marketable securities
                                    
                                    $
                                    32
                                    
                                    
                                    $
                                    489
                                    
                                    
                                    $
                                    171Proceeds
      received on sale of property and equipment
                                    
                                    
                                    11
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Purchases
      of marketable securities
                                    
                                    
                                    (39
                                    )
                                    
                                    
                                    (1,737
                                    )
                                    
                                    
                                    (12
                                    )Purchases
      of property and equipment
                                    
                                    
                                    (1,454
                                    )
                                    
                                    
                                    (74
                                    )
                                    
                                    
                                    (210
                                    )Net
      cash used in investing activities
                                    
                                    
                                    (1,450
                                    )
                                    
                                    
                                    (1,322
                                    )
                                    
                                    
                                    (51
                                    )Cash
      flows from financing activities:Proceeds
      from the exercise of employee stock option plan
                                    
                                    
                                    68
                                    
                                    
                                    
                                    309
                                    
                                    
                                    
                                    475Tax
      benefits from exercise of stock options
                                    
                                    
                                    63
                                    
                                    
                                    
                                    356
                                    
                                    
                                    
                                    293Purchase
      of treasury stock
                                    
                                    
                                    (16
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other
                                    
                                    
                                    (44
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cash
      dividends paid
                                    
                                    
                                    (1,258
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (341
                                    )Net
      cash (used in) provided by financing activities
                                    
                                    
                                    (1,187
                                    )
                                    
                                    
                                    665
                                    
                                    
                                    
                                    427Net
      increase in cash and cash equivalents
                                    
                                    
                                    379
                                    
                                    
                                    
                                    2,147
                                    
                                    
                                    
                                    8,886Cash
      and cash equivalents, beginning of year
                                    
                                    
                                    16,232
                                    
                                    
                                    
                                    14,085
                                    
                                    
                                    
                                    5,199Cash
      and cash equivalents, end of year
                                    
                                    $
                                    16,611
                                    
                                    
                                    $
                                    16,232
                                    
                                    
                                    $
                                    14,085Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
                                    
                                    $
                                    11
                                    
                                    
                                    $
                                    16
                                    
                                    
                                    $
                                    13Income
      taxes
                                    
                                    $
                                    3,045
                                    
                                    
                                    $
                                    3,922
                                    
                                    
                                    $
                                    142




Schedule
of non cash investing and financing activities:





In 2008,
the Company financed $1,176 to purchase property and equipment.





In 2007,
the Company’s Board of Directors declared and issued a stock dividend of 293,265
common shares resulting in a transfer from retained earnings to additional paid
in capital and common stock.




See notes
to consolidated financial statements.





F-11




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)





(1)
                Principles
      of consolidation and nature of
operations




The
accompanying consolidated financial statements as of December 31, 2008 and 2007,
and for the years ended December 31, 2008, 2007 and 2006 include the accounts of
KSW, Inc. and its wholly-owned subsidiary, KSW Mechanical Services, Inc.,
collectively “the Company”, and have been prepared in conformity with accounting
principles generally acceptable in the United States of America.  All
material intercompany accounts and transactions have been eliminated in
consolidation.




The
Company furnishes and installs heating, ventilating and air conditioning systems
and processes piping systems for institutional, industrial, commercial,
high-rise residential and public works projects, primarily in the State of New
York.  The Company also serves as a mechanical trade manager,
performing project management services relating to the mechanical trades, and as
a constructability consultant.  The Company considers itself to be one
operating segment.




(2)
              Summary
      of significant accounting
policies




(A)
            Revenue
      and cost recognition




Revenue
is primarily recognized on the percentage-of-completion method for long-term
construction contracts not yet completed, measured by the percentage of total
costs incurred to date to estimated total costs at completion for each
contract.  This method is utilized because management considers the
cost-to-cost method the best method available to measure progress on these
contracts.  Revenues and estimated total costs at completion are
adjusted monthly as additional information becomes available and based upon the
Company’s internal tracking systems.  Because of the inherent
uncertainties in estimating revenue and costs, it is reasonably possible that
the estimates used will change within the near term.




Contract
costs include all direct material and labor costs and those other indirect costs
related to contract performance including, but not limited to, indirect labor,
subcontract costs and supplies.  General and administrative costs are
charged to expense as incurred.




The
Company has contracts that may extend over more than one year; therefore,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which the facts, which require the
revisions, become known.




Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.





F-12


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(2)
              Summary
      of significant accounting policies –
cont’d




(A)
            Revenue
      and cost recognition – cont’d




The
Company does not record any income from claims until the claims have been
received or awarded.




Revenues
recognized in excess of amounts billed are recorded as a current asset under the
caption “Costs and estimated earnings in excess of billings on uncompleted
contracts.”  Billings in excess of revenues recognized are recorded as
a current liability under the caption “Billings in excess of costs and estimated
earnings on uncompleted contracts.”




In
accordance with construction industry practice, the Company reports in current
assets and liabilities those amounts relating to construction contracts
realizable and payable over a period in excess of one year.




Fees for
the management of certain contracts are recognized when services are
provided.




(B)
            Cash
      and cash equivalents




The
Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.  At December 31, 2008 and
2007, cash equivalents consist of money market accounts.




(C)
            Marketable
      securities




Marketable
securities, consisting of equity securities and mutual funds, are classified as
“available-for-sale” securities and are stated at fair market value based on
quoted market prices.  Realized gains and losses, determined using the
specific identification method, are included in earnings.  Unrealized
holding gains and losses are reported as comprehensive income (loss) in a
separate component of stockholders’ equity.




(D)
            Accounts
      and retainage receivable




Accounts
and retainage receivable from furnishing and installing heating, ventilating and
air conditioning systems and process piping systems are based on contracted
prices.  The Company may establish an allowance for uncollectible
trade accounts and retainage receivable based upon historical collection
experience and management’s periodic evaluation of the collectibility of
outstanding accounts and retainage receivable on an account-by-account
basis.  Accounts receivable and contract retentions are due based on
contract terms.  Amounts are deemed delinquent when





F-13


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(2)
                Summary
      of significant accounting policies –
cont’d




(D)
              Accounts
      and retainage receivable – cont’d




they are
not received within their contract terms. Delinquent receivables are written-off
based on individual credit evaluation and specific circumstances of the
customer.





(E)
            Credit
      risk




Financial
instruments, which potentially expose the Company to concentrations of credit
risk, consist primarily of cash and trade accounts and retainage
receivables.




The
Company maintains its cash accounts at balances which exceed Federally insured
limits for such accounts.  The Company limits its credit risk by
selecting financial institutions considered to be highly
creditworthy.  At December 31, 2008, amounts in excess of federally
insured limits totaled approximately $1,518.




Trade
accounts and retainage receivables, at times, are due from government agencies,
municipalities and private owners located in the New York metropolitan
area.  The Company does not require collateral in most cases, but may
file claims or statutory liens against the construction projects if a default in
payment occurs.  Trade accounts and retainage receivables from the
Company’s three largest customers totaled approximately $12,846 and $16,097 at
December 31, 2008 and 2007, respectively.




(F)
            Property
      and equipment




Property
and equipment is stated at cost.  Depreciation is computed over the
estimated useful lives, generally five years, except for building and
improvements which is thirty-nine years, of the assets using the straight-line
method.  Leasehold improvements are amortized over the lesser of the
estimated useful lives of the assets to which they apply or the related lease
term.  Repairs and maintenance are charged to operations in the period
incurred.




(G)
            Income
      taxes




The
Company uses the asset and liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (“SFAS”) SFAS No.
109, “Accounting for Income Taxes.”  Deferred taxes are recognized for
temporary differences between the bases of assets and liabilities for financial
statement and income tax purposes.  The temporary differences relate
primarily to different accounting methods used for depreciation and amortization
of property and equipment, goodwill and unrealized gains and losses on
marketable securities.  A valuation allowance is recorded for deferred
tax assets when it is more likely than not that some





F-14


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(2)
              Summary
      of significant accounting policies –
cont’d




(G)
            Income
      taxes – cont’d




or all of
the deferred tax assets will not be realized through future
operations.





The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
an interpretation of SFAS No. 109 on January 1, 2007.  The Company had
no adjustment as a result of FIN 48.




(H)
            Earnings
      per share




Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding for the period.  Diluted earnings
per share reflect, in periods in which they have a dilutive effect, the effect
of common shares issuable upon the exercise of stock options.  The
difference between reported basic and diluted weighted average common shares
results from the assumption that all dilutive stock options outstanding were
exercised.  The weighted average common shares outstanding have been
adjusted to reflect the 2007 stock dividend.




(I)
            Use
      of estimates




The
preparation of consolidated 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 consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates and such differences could be
material.




(J)
            Stock
      options




On
January 1, 2006, the Company adopted SFAS No. 123-R, “Share Based Payment”
(“SFAS 123-R”).  SFAS 123-R requires all share based payments to
employees and non-employee directors, including grants of stock options, to be
recognized in the financial statements based on the awards fair value at the
date of grant (pro forma disclosure is no longer an alternative to financial
statement recognition).  The Company has elected to adopt SFAS 123-R
on the modified prospective method.





F-15


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(2)
            Summary
      of significant accounting policies –
cont’d




(J)
            Stock
      options – cont’d




The
Company uses the Black-Scholes option – pricing model, which requires the input
of subjective assumptions.  These assumptions include estimating the
length of time employees will retain their vested stock options before
exercising them (“expected term”), the estimated volatility of the Company’s
common stock price over the expected term and the number of options that will
ultimately not complete their vesting requirements
(“forfeitures”).  Changes in the subjective assumptions can materially
affect the estimate of fair value of share-based compensation and consequently,
the related amount recognized on the consolidated statements of
income.





(K)
            Financial
      instruments




The
carrying value of marketable securities approximates fair value as determined by
market quotes. The carrying value of receivables and payables and other amounts
arising out of normal contract activities, including retentions, which may be
settled beyond one year, approximates fair value.





(L)
            Fair
      value measurements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157 “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  In early 2008, the FASB issued Staff Position (“FSP”)
FAS-157-2, “Effective Date of FASB Statement No 157”, which delays by one year,
the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial
liabilities.  The Company has adopted the portion of SFAS 157 that has
not been delayed as of the beginning of its 2008 fiscal year and plans to adopt
the balance of its provisions as of the beginning of its 2009 fiscal
year.





(M)
            Impact
      of recently issued accounting
standards




In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS 141-R”).  SFAS 141-R changes the accounting for
acquisitions specifically eliminating the step acquisition model, changing the
recognition of contingent consideration from being recognized when it is
probable to being recognized at the time of acquisition, disallowing the
capitalization of





F-16


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(2)
            Summary
      of significant accounting policies –
cont’d




(M)
            Impact
      of recently issued accounting standards-
cont’d




transaction
costs and changes when restructurings related to acquisition can be
recognized.  The standard is effective for fiscal years beginning on
or after December 15, 2008 and will only impact the accounting for acquisitions
that are made after adoption.




In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited.  SFAS 160
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from the Company’s
equity.  The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the
consolidated income statement.  It also amends certain of ARB No. 51’s
consolidation procedures for consistency with the requirements of SFAS
141-R.  SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interest.  The Company believes the adoption of SFAS 160 will not have
an effect on the Company’s consolidated financial position or results of
operations.




In May
2008, FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 provides a consistent
framework for determining what accounting principles should be used when
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America.  Previous guidance
did not properly rank the accounting literature.  SFAS 162 is
effective 60 days following the Securities and Exchange Commission’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  The adoption of SFAS 162 did not have a material effect
on the Company’s consolidated financial position or results of
operations.





F-17


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(3)
              Marketable
      securities




The cost
and fair values of the marketable securities, classified as available-for-sale
securities at December 31, 2008 and 2007, are as follows:





Cost
                  
                  
                  Gross
                    Unrealized
                    Holding
                    Gains
                  
                  
                  Gross
                    Unrealized
                    Holding Losses
                  
                  
                  Fair
                    ValueDecember
      31, 2008:Mutual
      funds and marketable equity securities
                  
                  $
                  1,860
                  
                  
                  $
                  50
                  
                  
                  $
                  (687
                  )
                  
                  $
                  1,223December
      31, 2007:Mutual
      funds and marketable equity securities
                  
                  $
                  1,842
                  
                  
                  $
                  141
                  
                  
                  $
                  (91
                  )
                  
                  $
                  1,892




At
December 31, 2008 and 2007, gross unrealized holding losses on
available-for-sale securities were $687 and $91, respectively.  At
December 31, 2008 and 2007, gross unrealized holding gains on available-for-sale
securities were $50 and $141, respectively. The change in net unrealized holding
gains is a decrease of $379 and $71 respectfully for the years ended December
31, 2008 and 2007, respectively.  During the years ended December 31,
2008, 2007, and 2006, available-for-sale securities were sold for total proceeds
of approximately $32, $489, and $171.  The gross realized gains on
these sales totaled approximately $11, $113, and $44 for the years ended
December 31, 2008, 2007, and 2006, respectively.




SFAS 157
establishes a fair value hierarchy that prioritizes observable and unobservable
inputs used to measure fair value into three broad levels which are described
below:





Level
      1:
            Quoted
      prices (unadjusted) in active markets that are accessible at the
      measurement date for identical assets or liabilities.  The fair
      value hierarchy gives the highest priority to Level 1
    inputs.





Level
      2:
            Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in inactive  markets; or
      model-derived valuations in which all significant inputs are observable or
      can be derived principally from or corroborated with observable market
      data.





F-18


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(3)
              Marketable
      securities – cont’d




Level
      3:
            Unobservable
      inputs are used when little or no market data is available.  The
      fair value hierarchy gives the lowest priority to Level 3
      inputs.





In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs to the extent possible as well as considers
counterparty credit risk in its assessment of fair value.





Financial
assets carried at fair value at December 31, 2008 are classified in the table
below in one of the three categories described above.





Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalMutual
      funds and marketableequity
      securities
                      
                      $
                      1,223
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,223





Mutual
funds and marketable equity securities are valued using market prices on active
markets (Level 1).  Level 1 instrument valuations are obtained from
real-time quotes for transactions in active exchange markets involving identical
assets.




(4)
                Accounts
      and retainage receivable








2008
                  
                  
                  2007Accounts
      and retainage receivable:BilledContracts
      in progress
                  
                  $
                  16,682
                  
                  
                  $
                  10,458Completed
      contracts
                  
                  
                  2,252
                  
                  
                  
                  3,253Unbilled
                  
                  
                  514
                  
                  
                  
                  422$
                  19,448
                  
                  
                  $
                  14,133Retainage
      receivable
                  
                  $
                  9,097
                  
                  
                  $
                  6,647




At
December 31, 2008, retained contract receivables totaling $1,100 are not
expected to be realized within one year.




During
the year ended December 31, 2006, the Company reversed the allowance for
doubtful accounts totaling $200.  At December 31, 2008 and 2007, there
was no allowance required for accounts and retainage receivable.





F-19


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(5)
              Costs
      and estimated earnings on uncompleted
contracts




Costs and
estimated earning on uncompleted contracts consists of the following at December
31, 2008 and 2007:




2008
                
                
                2007Costs
      incurred on uncompleted contracts
                
                $
                80,603
                
                
                $
                42,786Estimated
      earnings
                
                
                12,119
                
                
                
                7,05592,722
                
                
                
                49,841Less
      billings to date
                
                
                100,443
                
                
                
                52,765$
                (7,721
                )
                
                $
                (2,924
                )




The above
amounts are included in the accompanying consolidated balance sheets under the
following captions:





2008
                  
                  
                  2007Costs
      and estimated earnings in excess of billings onuncompleted
      contracts
                  
                  $
                  229
                  
                  
                  $
                  1,107Billings
      in excess of costs and estimated earnings onuncompleted
      contracts
                  
                  
                  (7,950
                  )
                  
                  
                  (4,031
                  )$
                  (7,721
                  )
                  
                  $
                  (2,924
                  )





(6)
              Property
      and equipment




Property
and equipment at December 31, 2008 and 2007 consists of the
following:




2008
                  
                  
                  2007Land
                  
                  $
                  694
                  
                  
                  $
                  -Building
                  
                  
                  1,718
                  
                  
                  
                  -Machinery
      and equipment
                  
                  
                  798
                  
                  
                  
                  657Furniture
      and fixtures
                  
                  
                  896
                  
                  
                  
                  843Leasehold
      improvements
                  
                  
                  845
                  
                  
                  
                  8454,951
                  
                  
                  
                  2,345Less
      accumulated depreciation and amortization
                  
                  
                  2,173
                  
                  
                  
                  2,091$
                  2,778
                  
                  
                  $
                  254





F-20


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(6)
              Property
      and equipment – cont’d




Depreciation
and amortization expense relating to property and equipment was approximately
$98, $76 and $66 for the years ended December 31, 2008, 2007 and 2006,
respectively.




(7)
            Mortgage
      payable




During
December 2008, the Company purchased a pipe fabrication shop and an adjacent
storage yard in Bronx, New York, from the Company’s Chief Executive Officer and
a charitable foundation he controls for $2,500.





The
Company financed a portion of this purchase using a $1,176 mortgage with Bank of
America, N.A.  This mortgage has a ten year term, with interest
amortized over twenty years, with unpaid principal is due in a balloon payment
during December 2018.  Monthly payments are approximate $5 plus
interest at 5%.  This mortgage is collateralized by the real
estate.





Future
principal maturities of this mortgage payable are as follows as of December 31,
2008:




Year
      Ending
                              December
      31,
                            
                            
                            Amount2009
                            
                            
                            $
                            582010
                            
                            
                            
                            582011
                            
                            
                            
                            582012
                            
                            
                            
                            582013
                            
                            
                            
                            58Thereafter
                            
                            
                            
                            886Total
                            
                            $
                            1,176





Costs
related to obtaining the mortgage debt are capitalized and amortized over the
term of the related debt using the straight-line method.  When the
loan is paid in full, any unamortized finance costs are removed from the related
accounts and charged to operations.  At December 31, 2008, the
deferred mortgage costs total $44 and are included in the consolidated balance
sheet under the caption “Deferred income taxes and other”.  There was
no amortization expense charged to operations during the year ended December 31,
2008.





F-21


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(8)
            Income
      taxes




For the
years ended December 31, 2008, 2007 and 2006, components of the provision for
income taxes are as follows:




2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006CurrentFederal
                                    
                                    $
                                    1,674
                                    
                                    
                                    $
                                    1,740
                                    
                                    
                                    $
                                    1,049State
      and local
                                    
                                    
                                    1,065
                                    
                                    
                                    
                                    1,094
                                    
                                    
                                    
                                    8102,739
                                    
                                    
                                    
                                    2,834
                                    
                                    
                                    
                                    1,859DeferredFederal
                                    
                                    
                                    141
                                    
                                    
                                    
                                    144
                                    
                                    
                                    
                                    540State
      and local
                                    
                                    
                                    85
                                    
                                    
                                    
                                    110
                                    
                                    
                                    
                                    316226
                                    
                                    
                                    
                                    254
                                    
                                    
                                    
                                    856Totals
                                    
                                    $
                                    2,965
                                    
                                    
                                    $
                                    3,088
                                    
                                    
                                    $
                                    2,715




A
reconciliation of the provision for income taxes with amounts determined by
applying the statutory U.S. federal income tax rate to income before taxes is as
follows:




2008
                  
                  
                  2007
                  
                  
                  2006Computed
      tax at the federal statutory rate of 34%
                  
                  $
                  2,449
                  
                  
                  $
                  2,295
                  
                  
                  $
                  1,980State
      and local taxes, net of federal benefit
                  
                  
                  781
                  
                  
                  
                  751
                  
                  
                  
                  705Other
      items, net
                  
                  
                  (265
                  )
                  
                  
                  42
                  
                  
                  
                  30Provision
      for income taxes
                  
                  $
                  2,965
                  
                  
                  $
                  3,088
                  
                  
                  $
                  2,715





F-22


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(8)
            Income
      taxes – cont’d




The
details of deferred tax assets and liabilities at December 31, 2008 and 2007 are
as follows:




2008
                                
                                
                                2007Deferred
      income tax assets:Amortization
      of goodwill
                                
                                $
                                14
                                
                                
                                $
                                155Property
      and equipment
                                
                                
                                77
                                
                                
                                
                                163Unrealized
      losses on marketable securities
                                
                                
                                285
                                
                                
                                
                                -Other
      tax carryforwards
                                
                                
                                18
                                
                                
                                
                                15Total
      deferred income tax assets
                                
                                
                                394
                                
                                
                                
                                333Deferred
      income tax liabilities:Unrealized
      gains on marketable securities
                                
                                
                                -
                                
                                
                                
                                22-
                                
                                
                                
                                22Deferred
      income tax assets, net
                                
                                $
                                394
                                
                                
                                $
                                311




At
December 31, 2005, the Company had net operating loss carry forwards remaining
of approximately $1,500, which was utilized during the year ended December 31,
2006.  At December 31, 2008, the Company had net current deferred tax
assets totaling $299.  At December 31, 2008 and 2007, the net
non-current deferred tax assets total $95 and $311, respectively, and are
included in the accompanying consolidated balance sheets under the caption
“Deferred income taxes and other”.




(9)
            Stockholders’
      equity




(A)
            Stock
      option plans




The
Company has outstanding stock options under two plans, the KSW, Inc. 1995 Stock
Option Plan (“1995 Plan”) and the KSW Inc. 2007 Stock Option Plan (“2007
Plan”).





In 1995,
the Board of Directors of the Company adopted the 1995 Plan.  This
plan enabled the Company to make incentive-based compensation awards to its
employees, officers, directors and consultants.  On August 8, 2005,
the Board of Directors extended the expiration date of the 526,667 outstanding
options to December 2010





F-23


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(9)
            Stockholders’
      equity- cont’d




(A)
              Stock
      option plans- cont’d




from
December 2005, and increased the exercise price to $1.66 from $1.50. In
addition, on August 8, 2005, the Company issued 80,000 options, at $1.66 per
share, to an officer and three Directors.  The plan expired December
2005; therefore, no new options can be granted under this plan.




On
January 1, 2006, the Company adopted FASB Statement No. 123-R, “Share-Based
Payment” (“SFAS 123-R”).  SFAS 123-R requires all share-based payments
to employees and non-employee directors, including grants of stock options, to
be recognized in the financial statements based on the awards fair value at the
date of grant (pro forma disclosure is no longer an alternative to financial
statement recognition).  The Company elected to adopt SFAS 123-R on
the modified prospective method.




Under the
modified prospective method of transition under SFAS 123-R, compensation costs
in 2006 include costs for options granted prior to, but not vested as of
December 31, 2005, and options vested in 2006.  Therefore, results for
prior periods have not been restated.




On
November 6, 2006, the Company corrected the vesting dates for options issued to
three outside directors to comply with the plan requirement that options be
issued when a director is elected to the Board.




For the
year ended December 31, 2006, the Company incurred compensation expense related
to the vesting of stock options totaling approximately $54.




At
December 31, 2006, the Company had 30,000 outstanding options at an exercise
price of $1.50 and 338,835 outstanding options at an exercise price of
$1.66.  During the year ended December 31, 2006, 53,333 stock options
that were not vested as of December 31, 2005 vested, and 13,332 of these stock
options were exercised.  At December 31, 2006, 26,667
options of the 338,835 outstanding options exercisable at $1.66 have not
vested.




For the
year ended December 31, 2007, the Company incurred compensation expense related
to the vesting of stock options totaling approximately $10.




During
2007, the Company’s Board of Directors declared a 5% stock dividend which
increased the total outstanding options to be issued under the Plan by
13,083.  During





F-24


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(9)
            Stockholders’
      equity- cont’d




(A)
            Stock
      option plans- cont’d




2007,
192,916 stock options were exercised.  At December 31, 2007,
outstanding options totaled 189,002 of which 7,000 were not vested.





During
2008, 43,501 stock options were exercised under the 1995 plan.  At
December 31, 2008 there were 145,501 outstanding and fully vested options under
the 1995 plan.





The 2007
Plan was adopted and approved by the Company’s Board of Directors on May 8, 2007
and was approved by the shareholders at the May 2008 Annual Meeting of
Stockholders.  Pursuant to the 2007 Plan, 300,000 shares of common
stock of the Company are reserved for issuance to employees, consultants and
Directors of the Company.  The primary purpose of the 2007 Plan is to
reward and retain key employees.  No options have been issued to
officers or employees under the 2007 Plan.  Under this plan the
Company has issued to a Company director options to purchase 20,000 shares of
the Company’s common stock at an exercise price of $6.95 per
share.  At December 31, 2008, there were 20,000 options outstanding of
which 6,666 were vested under the 2007 Plan.





As of
December 31, 2008, there is approximately $23 of unrecognized compensation
expense related to unvested stock-based compensation awards.  That
cost is expected to be recognized over the next 1.6 years.





Under
both plans, options were granted to certain employees, executives and Directors
at prices equal to the market value of the stock on the dates the options were
issued.  The options granted generally have a term of 10 years from
the grant date and granted options vest ratably over a three year
period.  The fair value of each option is amortized into compensation
expense on a straight-line basis between the grant date or the option and each
vesting date.  The Company estimates the fair value of all stock
option awards as of the date of the grant  by applying the
Black-Scholes pricing valuation model.  The application of this
valuation model involves assumptions that are judgmental and sensitive in the
determination of compensation expense which would include the expected stock
price volatility, risk-free interest rate, weighted-average expected life of the
options and the dividend yield.





Historical
information is the primary basis for the selection of the expected volatility,
expected dividend yield and the expected lives of options.  The
risk-free interest rate was selected based upon yields of U.S. Treasury issues
with a term equal to the expected life of the option being valued.





F-25


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(9)
            Stockholders’
      equity- cont’d




(A)
            Stock
      option plans- cont’d





Changes
that occurred in options outstanding during 2008, 2007 and 2006 for both plans
are summarized below:




Number
                of Shares
              
              
              2008
                Weighed
                Average
                Exercise
                Price
              
              
              Number of
                Shares
              
              
              2007
                Weighed
                Average
                Exercise
                Price
              
              
              Number of
                Shares
              
              
              2006
                Weighed
                Average
                Exercise
                PriceOutstanding at beginning ofyear
              
              
              189,002
              
              
              $
              1.58
              
              
              
              368,835
              
              
              $
              1.65
              
              
              
              656,667
              
              
              $
              1.65Expired/
      canceled
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -Effect of stock
      dividend
              
              
              -
              
              
              
              
              
              
              
              13,083
              
              
              
              
              
              
              
              -Granted
              
              
              20,000
              
              
              $
              6.95
              
              
              
              -
              
              
              
              
              
              
              
              -Exercised
              
              
              (43,501
              )
              
              $
              1.58
              
              
              
              (192,916
              )
              
              $
              1.60
              
              
              
              (287,832
              )
              
              $
              1.65Outstanding at end of
      year
              
              
              165,501
              
              
              $
              2.23
              
              
              
              189,002
              
              
              $
              1.58
              
              
              
              368,835
              
              
              $
              1.65Exercisable at end of
      year
              
              
              152,167
              
              
              $
              1.81
              
              
              
              182,002
              
              
              $
              1.58
              
              
              
              342,168
              
              
              $
              1.65





F-26


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(9)
              Stockholders’
      equity – cont’d




(A)
            Stock
      option plans- cont’d




The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for 20,000 grants in 2008:  dividend yield of 0%;
expected volatility of 54.86%; risk-free interest rate of 3.265%; and expected
lives of five years.





Cash
proceeds, tax benefits and intrinsic value related to total stock options
exercised under both plans during the years end December 31, 2008, 2007 and 2006
respectively, are as follows:





2008
                        
                        
                        2007
                        
                        
                        2006Proceeds
      from stock options exercised
                        
                        $
                        68
                        
                        
                        $
                        309
                        
                        
                        $
                        475Tax
      benefits related to stock options exercised
                        
                        $
                        63
                        
                        
                        $
                        356
                        
                        
                        $
                        293Intrinsic
      value of stock options exercised
                        
                        $
                        201
                        
                        
                        $
                        790
                        
                        
                        $
                        636





The
following table summarizes information about stock options outstanding at
December 31, 2008:




Exercise
      Price
                                
                                Shares
                                
                                Contractual
      Life$1.58
                                
                                
                                126,000
                                
                                1.9
      years$1.58
                                
                                
                                19,501
                                
                                6.6
      years$6.95
                                
                                
                                20,000
                                
                                8.6
      yearsTotal
                                
                                
                                165,501





Shares
                    
                    
                    Average Price
                    
                    
                    Term
      in
                      Years
                    
                    
                    Intrinsic
                      ValueOutstanding
      Options
                    
                    
                    165,501
                    
                    
                    $
                    2.23
                    
                    
                    
                    3.31
                    
                    
                    $
                    218Exercisable
      Options
                    
                    
                    152,167
                    
                    
                    $
                    1.81
                    
                    
                    
                    2.84
                    
                    
                    $
                    178





F-27


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(9)
              Stockholders’
      equity – cont’d





(B)
            Dividend
      distributions




On April
30, 2008, the Company’s Board of Directors declared a cash dividend of $.20 per
share.  The aggregate amount of the dividend was $1,258, and was paid
on June 17, 2008 to shareholders of record as of May 26, 2008.





On May 8,
2007, the Company’s Board of Directors declared a 5% stock dividend pursuant to
which 293,265 additional shares were issued on June 11, 2007 to shareholders of
record as of May 24, 2007.  Cash was paid in lieu of issuing
fractional shares based on the last sales price of the Company’s stock on the
record date.





On May 8,
2006, the Company’s Board of Directors declared a special cash dividend of $.06
per share to shareholders of record as of May 24, 2006.  The aggregate
amount of the dividend was $341 and such dividend was paid on June 15,
2006.





(C)
            Preferred
      stock





The
Company is authorized to issue 1,000,000 shares of preferred
stock.  As of December 31, 2008, no shares of preferred stock have
been issued by the Company.





(D)
            Treasury
      stock





During
December 2008, the Company’s Board of Directors authorized the purchase, through
June 2009, of up to $1,000 of the Company’s common stock on the open
market.  As of December 31, 2008, the Company purchased 6,600 shares
at a cost of $16.





F-28


KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)








(10)
            Earnings
      per share




2008
                  
                  
                  2007
                  
                  
                  2006Net
      earnings
                  
                  $
                  4,239
                  
                  
                  $
                  3,662
                  
                  
                  $
                  3,108Earnings
      per share – basic:Weighted
      average sharesoutstanding
      during the year
                  
                  
                  6,278,555
                  
                  
                  
                  6,162,034
                  
                  
                  
                  5,950,455Earnings
      per common share – basic
                  
                  $
                  .68
                  
                  
                  $
                  .59
                  
                  
                  $
                  .52Earnings
      per share – diluted:Weighted
      average sharesoutstanding
      during the year
                  
                  
                  6,278,555
                  
                  
                  
                  6,162,034
                  
                  
                  
                  5,950,445Effect
      of stock option dilution
                  
                  
                  55,774
                  
                  
                  
                  80,573
                  
                  
                  
                  126,682Total
      shares outstanding forpurposes
      of calculating dilutedearnings
      per share
                  
                  
                  6,334,329
                  
                  
                  
                  6,242,607
                  
                  
                  
                  6,077,127Earnings
      per common sharesand
      common share equivalent –diluted
                  
                  $
                  .67
                  
                  
                  $
                  .59
                  
                  
                  $
                  .51




(11)
            Accumulated
      other comprehensive income (loss)




At
December 31, 2008 and 2007, accumulated other comprehensive income and loss,
which consists of net unrealized holding gains (losses) on available-for-sale
securities, is as follows:




2008
                        
                        
                        2007Beginning
      balance
                        
                        $
                        27
                        
                        
                        $
                        98Current
      period change
                        
                        
                        (379
                        )
                        
                        
                        (71
                        )Ending
      balance
                        
                        $
                        (352
                        )
                        
                        $
                        27




F-29




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)





(12)
            Commitments
      and contingencies




(A)
            Performance
      and payment bonds




The
Company is contingently liable to a surety under a general indemnity
agreement.  The Company agrees to indemnify the surety for any
payments made on contracts of suretyship, guaranty or indemnity as a result of
the Company not having the financial capacity to complete
projects.  Management believes the likelihood of the surety having to
complete projects is remote.  The contingent liability is the cost of
completing all bonded projects, subject to bidding by third parties, which is an
undeterminable amount. Management believes that all contingent liabilities will
be satisfied by performance on the specific bonded contracts
involved.




(B)
            Operating
      lease




The
      Company is obligated under a non-cancelable operating lease, for office
      space with minimum future rental payments at December 31, 2008 as
      follows:




Year
      EndingDecember 31,2009
                      
                      $
                      100




Under the
terms of the lease agreement, the Company is obligated to pay monthly rental
amounts of approximately $16.  The Company has exercised two options,
each for a period of one year for the periods July 2004 through June 2005 and
July 2005 through June 2006.  The Company also exercised a three-year
option that extended the lease through June 2009(See Note
18(c)).




Rent
expense for the years ended December 31, 2008, 2007 and 2006 amounted to
approximately $199, $195, and $191, respectively.





(C)
            Operating
      lease- related party




The
Company had an operating lease for rental of office, shop and warehouse space,
which expired on December 31, 2002.  Prior to December 2008, the
Company rented this space on a month-to-month basis at approximately $8.5 per
month.  The Company purchased this building and adjacent yard in
December 2008 for a total purchase price of $2,500.




F-30




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)




(12)
            Commitments
      and contingencies - cont’d




(C)
            Operating
      lease- related party- cont’d




Rent
expense, for the years ended December 31, 2008, 2007 and 2006, amounted to
approximately, $97, $103 and $103, respectively.




(D)
            Environmental
      regulation




The
Company must comply with certain Federal, state and local regulations involving
contract compliance as well as the disposal of certain toxins.  In
management’s opinion, there are no environmental contingencies or violations of
environmental laws or regulations, which would have a material adverse impact on
the results of operations or on the Company’s financial condition.




(E)
              Legal




Other Proposals and
Claims.  During the course of its work on construction
projects, the Company may incur expenses for work outside the scope of its
contractual obligations, for which no acknowledgment of liability exists from
the owner or general contractor for such additional work.  These
claims may include change proposals for extra work or requests for an equitable
adjustment to the Company’s contract price due to unforeseen disruptions to its
work. In accordance with accounting principles generally accepted in the United
States of America for the construction industry, until written acknowledgment of
the validity of the claims are received, claim recoveries are not recognized in
the accompanying financial statements.  No accruals have been made in
the accompanying consolidated financial statements related to these proposals
for which no acknowledgment of liability exists. While the Company has been
generally successful in obtaining a favorable resolution of such claims, there
is no assurance that the Company will be successful in the future.





(F)
            Employment
      agreement




The
Company’s Chief Executive Officer has a written employment agreement, which
expires on December 31, 2009.  This agreement provides a base annual
compensation of $450 based on a five-day work week, medical insurance,
disability insurance with payments equal to 60% of base compensation, a $1
million policy of life insurance payable as directed by him and a car with a
chauffeur.  His estate is entitled to two months pay in the event of
his death.  In addition, for the period January 1, 2006 through
December 31, 2009, he will receive a bonus equal to 9.5% of the Company’s
adjusted annual operating profits before taxes, which are in excess of
$250.  For the years ended December 31, 2008, 2007 and 2006 bonus
expense related to this





F-31




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(12)
            Commitments
      and contingencies - cont’d




(F)
            Employment
      agreement- cont’d




agreement
was $733, $683 and $570, respectively.  At December 31, 2008, 2007 and
2006, accrued bonus payable included in the accompanying consolidated balance
sheets related to this agreement was approximately $233, $683 and $570,
respectively.





(13)
            Credit
      facility




The
Company has a line of credit facility from Bank of America, N.A. which provides
borrowings for working capital purposes up to $2,000.  There have been
no borrowings against this credit facility.  This facility expires on
April 1, 2009, is secured by the Company’s assets and is guaranteed by the
Company’s subsidiary, KSW Mechanical Services, Inc.  (See Note
18(A)).





Advances
bear interest, based on the Company’s option, at either the bank’s prime lending
rate plus one percent per annum, or the London Interbank Offered Rate (“Libor”)
plus two and one-half percent per annum.





(14)
            Concentration
      risks




(A)
            Labor
      concentrations




The
Company’s direct labor is supplied primarily by one union through a collective
bargaining agreement, which expires in June 2011.  Although the
Company’s past experience was favorable with respect to resolving conflicting
demands with unions, it is always possible that a protracted conflict may occur
which will impact the renewal of the collective bargaining
agreements.




(B)
            Contract
      revenue/significant customers




Revenues
from the Company’s largest customers were approximately 27%, 16% and 11% of its
contract revenue in 2008; 46%,  20%, and 13% of its contract revenue
in 2007; and 40%, 18%, 10%, and 10% of its contract revenue in
2006.




F-32




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)


(15)
            Retirement
      plans




(A)
            Profit-sharing/401(k)
      plan




The
Company sponsors a profit-sharing/401(k) plan covering employees not covered
under collective bargaining agreements who meet the age and length of service
requirements of the plan.  The Company may make discretionary
contributions to the plan.  The total of employee contributions may
not exceed Federal government limits.  The Company expensed
approximately $89, $87 and $72 as a 25% matching contribution for the years
ended December 31, 2008, 2007 and 2006, respectively.




(B)
              Multiemployer
      pension plans




Employees
of the Company who are parties to a collective bargaining (union) agreement are
covered by union pension plans. The Company makes contributions to multiemployer
pension plans that cover its various union employees.  These plans
provide benefits based on union members’ earnings and periods of coverage under
the respective plans.  The Company has expensed approximately
$2,770,  $2,059 and $2,524 for the years ended December 31, 2008, 2007
and 2006, respectively, related to multi-employer pension plans for its union
employees.




(16)
            Backlog




At
December 31, 2008, the Company had a backlog of approximately
$62,500.  Backlog represents the amount of revenue the Company expects
to realize from work to be performed on uncompleted contracts in progress at
year end and from contractual agreements on work which has not commenced (See
Note 18(B)).




F-33




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)




(17)
            Selected
      Quarterly Data (unaudited)




The
following is unaudited selected quarterly data for the years ended December 31,
2008 and 2007:




Year ended December 31,
2008First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  FourthQuarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  TotalRevenues
                  
                  $
                  20,491
                  
                  
                  $
                  21,998
                  
                  
                  $
                  25,527
                  
                  
                  $
                  25,011
                  
                  
                  $
                  93,027Gross
      profit
                  
                  $
                  2,317
                  
                  
                  $
                  3,162
                  
                  
                  $
                  3,709
                  
                  
                  $
                  2,929
                  
                  
                  $
                  12,117Net
      income
                  
                  $
                  840
                  
                  
                  $
                  1,074
                  
                  
                  $
                  1,321
                  
                  
                  $
                  1,004
                  
                  
                  $
                  4,239Per
      share:Basic
                  
                  $
                  .13
                  
                  
                  $
                  .17
                  
                  
                  $
                  .21
                  
                  
                  $
                  .17
                  
                  
                  $
                  .68Diluted
                  
                  $
                  .13
                  
                  
                  $
                  .17
                  
                  
                  $
                  .21
                  
                  
                  $
                  .16
                  
                  
                  $
                  .67Dividends
                  
                  $
                  -
                  
                  
                  $
                  .20
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  .20Stock
      prices:High
                  
                  $
                  7.04
                  
                  
                  $
                  5.95
                  
                  
                  $
                  5.19
                  
                  
                  $
                  5.30Low
                  
                  $
                  5.54
                  
                  
                  $
                  4.61
                  
                  
                  $
                  3.00
                  
                  
                  $
                  1.79




Year
      ended December 31, 2007First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthQuarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    TotalRevenues
                    
                    $
                    17,991
                    
                    
                    $
                    19,320
                    
                    
                    $
                    21,027
                    
                    
                    $
                    18,928
                    
                    
                    $
                    77,266Gross
      profit
                    
                    $
                    2,490
                    
                    
                    $
                    2,808
                    
                    
                    $
                    2,845
                    
                    
                    $
                    2,352
                    
                    
                    $
                    10,495Net
      income
                    
                    $
                    898
                    
                    
                    $
                    860
                    
                    
                    $
                    964
                    
                    
                    $
                    940
                    
                    
                    $
                    3,662Per
      share:Basic
                    
                    $
                    .15
                    
                    
                    $
                    .14
                    
                    
                    $
                    .15
                    
                    
                    $
                    .15
                    
                    
                    $
                    .59Diluted
                    
                    $
                    .15
                    
                    
                    $
                    .14
                    
                    
                    $
                    .15
                    
                    
                    $
                    .15
                    
                    
                    $
                    .59Dividends
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Stock
      prices:High
                    
                    $
                    7.69
                    
                    
                    $
                    8.13
                    
                    
                    $
                    8.65
                    
                    
                    $
                    7.40Low
                    
                    $
                    6.01
                    
                    
                    $
                    6.23
                    
                    
                    $
                    6.25
                    
                    
                    $
                    5.76




F-34




KSW,
INC. AND SUBSIDIARY
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (CONCLUDED)
 YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 (in
thousands, except share data)




(18)
              Subsequent
      events




(A)
            Line
      of Credit





On
January 26, 2009, the Company extended the working capital credit facility with
Bank of America, N.A for a term expiring April 1, 2010.





(B)
            Backlog





The
Company has received notice from the developer of three partially completed
projects that it has terminated, for convenience, all of its trade contracts,
effective March 6, 2009, due to financial considerations.  At December
31, 2008, these projects were approximately 25% complete.




(C)
            Operating
      Lease





During
      March 2009, the Company and its landlord agreed to extend its operating
      lease for its Long Island City office space for an additional five years,
      with a tenant’s option to cancel after one
year.




F-35





SCHEDULE
II




KSW,
INC.


SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS


000’s




Description
                              
                              Balance
      at
                                Beginning
                                of year
                              
                              
                              Charged
      to
                                costs and
                                expenses
                              
                              
                              Charged
      to
                                other
                                accounts
                              
                              
                              Deductions
                              
                              
                              Balance
                                at
      end
                                of yearYear
      ended December 31, 2008
                                allowance
      for doubtful accounts and returns
                              
                              $
                              -------
                              
                              
                              $
                              --------
                              
                              
                              $
                              -------
                              
                              
                              $
                              -------
                              
                              
                              $
                              -------Year
      ended December 31, 2007
                                allowance
      for doubtful accounts and returns
                              
                              $
                              .....
                              
                              
                              $
                              --------
                              
                              
                              $
                              -------
                              
                              
                              $
                              ....
                              
                              
                              $
                              -------Year
      ended December 31, 2006
                                allowance
      for doubtful accounts and returns
                              
                              $
                              200
                              
                              
                              $
                              --------
                              
                              
                              $
                              -------
                              
                              
                              $
                              200
                              
                              
                              $
                              ...




Year
      ended December 31, 2008
                deferred
      income tax valuation allowance
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------Year
      ended December 31, 2007
                deferred
      income tax valuation allowance
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------
              
              
              $
              -------Year
      ended December 31, 2006
                deferred
      income tax valuation allowance
              
              $
              .........
              
              
              $
              -------
              
              
              $
              -------
              
              
              $
              .........
              
              
              $
              -------





F-36




EXHIBIT
INDEX
 Exhibit No.
            
            Description3.1
            
            Amended
      and Restated Articles of Incorporation of KSW, Inc. (incorporated herein
      by reference to Exhibit 3.1 to the Company’s Registration Statement on
      Form S-8 (No. 333-217350), filed with the Commission on February 13,
      1997).3.2
            
            Amended
      and Restated By-Laws of KSW, Inc. (incorporated herein by reference to
      Exhibit 3.2 to the Company’s Registration Statement on Form S-8 (No.
      333-217350), filed with the Commission on February 13,
    1997).10.1
            
            Form
      of Modification of Lease Agreement dated as of May 1, 1998 by and between
      KSW, Inc, Irvjoy Partners, L.P. and I BLDG Co., Inc. (incorporated herein
      by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 1998 (Commission File No.
      001-32865), filed with the Commission on March 30,
  1999).10.2
            
            1995
      Stock Option Plan of KSW, Inc. (incorporated herein by reference to
      Exhibit 10.3 to the Company’s Registration Statement on Form 10
      (Commission File No. 001-32865), filed with the Commission on November 24,
      1995).10.3
            
            Employment
      Agreement, dated September 12, 2005 by and between the Company, KSW
      Mechanical Services, Inc. and Floyd Warkol (incorporated herein by
      reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K
      (Commission File No. 001-32865), filed with the Commission on September
      12, 2005).10.4
            
            Amendatory
      Employment Agreement, dated as of March 6, 2007, by and between the
      Company, KSW Mechanical Services, Inc., and Floyd
      Warkol.  (incorporated herein by reference to Exhibit 10.4 to
      the Company’s annual report on Form 10-K for the year ended December 31,
      2006, filed on March 14, 2007).10.5
            
            Line
      of Credit Agreement Letter, dated March 14, 2006, between KSW, Inc. and
      Bank of America, N.A. together with forms of a Line of Credit Note, Rider
      to Line of Credit Note, a pledge security agreement and guaranty
      (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual
      Report on Form 10-K for the year ended December 3, 2005, filed with the
      Commission on March 16, 2006).










10.6
                                            
                                            Line
      of Credit Agreement Letter, dated March 8, 2007, between KSW, Inc. and
      Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2006, filed with the Commission on March 14, 2007).10.7
                                            
                                            Line
      of Credit Agreement Letter, dated January 28, 2008, between KSW, Inc. and
      Bank of America, N.A.10.8
                                            
                                            Line
      of Credit Agreement Letter, dated January 26, 2009, between KSW, Inc. and
      Bank of America, N.A.10.9
                                            
                                            KSW,
      Inc. 2007 Stock Option Plan (incorporated herein by reference to Appendix
      E to the Company’s definitive proxy statement on Schedule 14A for the 2008
      annual meeting of stockholders, filed with the Commission on April 4,
      2008).11.1
                                            
                                            Statement
      Regarding Computation of Net Earnings Per Share.21.1
                                            
                                            Subsidiaries
      of Registrant23.1
                                            
                                            Consent
      of J.H. Cohn LLP23.2
                                            
                                            Consent
      of Marden, Harrison & Kreuter CPAs P.C.31.1
                                            
                                            Certification
      of Chief Executive Officer required by Rule 13a-14(a).31.2
                                            
                                            Certification
      of Chief Financial Officer required by Rule 13a-14(a).32.1
                                            
                                            Certification
      of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C.
      Section 1350.32.2
                                            
                                            Certification
      of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C.
      Section
1350.